Part 1 Conceptual Framework Part 2 Elements of Cost Part 3 ...novella.mhhe.com/sites/dl/free/9353168384/1023817/... · Degree of Traceability to the Product 40 Direct Cost 40 Indirect

Brief Contents

Preface to the Fifth Edition vPreface to the First Edition ixList of Abbreviations xi

Part 1 Conceptual Framework

1. Financial Accounting, Cost Accounting and Management Accounting 3

Part 2 Elements of Cost

3. Materials Control 91

4. Materials Costing 147

5. Labour Costs: Accounting and Control 184

6. Factory Overheads: Distribution 237

7. Administrative and Selling and Distribution Overheads 316

8. Activity-Based Costing (ABC) 337

Part 3 Costing Methods and Accounting of Costs

9. Single or Output Costing 365

10. Job, Contract and Batch Costing 381

11. Process Costing 440

12. Service Costing 547

13. Cost Control Accounts 579

14. Integrated Accounting System 603

15. Reconciliation of Cost and Financial Accounts 623

Brief Contentsxiv

Part 4 Cost Analysis for Decision Making and Control

16. Marginal (Variable) Costing 663

17. Alternative Choices Decisions 764

18. Pricing Decisions 834

19. Standard Costing 845

20. Budgeting 935

21. Responsibility Accounting and Divisional Performance Measurement 1002

Part 5 Specialised Topics

23. Cost Audit 1035

Index 1045

Detailed Contents

Preface to the Fifth Edition vPreface to the First Edition ixList of Abbreviations xi

Part 1 Conceptual Framework

1. Financial Accounting, Cost Accounting and Management Accounting 3

Financial Accounting 3

Contents 4

Accounting System 4

Limitations of Financial Accounting 4

Cost Accounting 5

Cost Accountancy 5

Costing 6

Cost Accounting and Management 6

Product Costing 8

Planning and Control 8

Information for Decisions 8

Cost Accounting vs. Financial Accounting 9

Management Accounting 10

Cost Accounting and Management Accounting 12

Differences Between Management Accounting and Financial Accounting 13

Cost Accounting, Financial Accounting and Management Accounting 14

Role of Management Accountant 14

Advantages of Cost Accounting 15

Methods of Costing 15

Job Costing 16

Detailed Contentsxvi

Process Costing 16

Techniques (Types) of Costing 17

Historical Costing 17

Standard Costing 17

Absorption or Full Costing 17

Variable or Marginal Costing 17

Costing System 18

Throughput Costing 18

Installation of a Cost Accounting System 20

Features of Cost Accounting System 21

Arguments Against Cost Accounting 22

Cost Centre 23

Impersonal Cost Centre 23

Personal Cost Centre 23

Operation Cost Centre 23

Process Cost Centre 23

Cost Accounting Department 25

Theory Questions 26Self-Evaluation Questions 29

Cost 30

Expenses 31

Loss 31

Cost Behaviour (in Relation to Changes in Output or Activity or Volume) 35

Fixed Cost 36

Variable Cost 38

Mixed Cost 39

Degree of Traceability to the Product 40

Direct Cost 40

Indirect Cost 41

Association with the Product 41

Product Cost 41

Period Cost 41

Detailed Contents xvii

Relationship with Accounting Period 42

Capital Cost and Revenue Cost 42

Costs for Decision Making and Planning 43

Opportunity Cost 43

Sunk Cost 43

Relevant Cost 43

Differential Cost 44

Imputed Cost 45

Out-of-Pocket Cost 45

Fixed, Variable and Mixed Costs 45

Shut Down Cost 45

Costs for Control 46

Standard Cost 46

Fixed, Variable and Mixed Costs 47

Other Costs 47

Joint Cost 47

Common Cost 47

Cost Control, Cost Reduction, Cost Management 47

Cost Control 47

Cost Reduction 48

Cost Management 51

Cost Statement or Cost Sheet 53

Theory Questions 79Self-Evaluation Questions 82Problems 84

Part 2 Elements of Cost

3. Materials Control 91

Materials 91

Purchasing and Receiving Procedure 92

Creating a Purchase Department 95

Some Issues in Materials Procurement 96

EOQWhen to Order (Reorder Level) 98

Determination of Safety or Minimum Stock Level 99

Maximum Stock Level 99

Stores Organisation 121

Storage Layout 122

Detailed Contentsxviii

Issue of Materials 123

Materials Returned to the Storeroom 124

Materials Returned to Supplier 125

Inventory Systems 126

Perpetual Inventory System 126

Periodic Inventory System 126

Inventory Shortages (Losses) and Overages 127

Inventory Control 128

Nature of Inventory 128

Meaning of Inventory Control 128

Importance of Inventory Control 128

Inventory Control Techniques 128

Pareto or ABC Analysis 129

Just-In-Time (JIT) Method 132

Inventory Turnover 133

Detection of Slow-moving and Non-moving or Obsolete Materials 134

Accounting for Material Losses 137

Scrap 137

Spoilage 138

Spoilage Report 138

Defectives 139

Waste (or Wastage) 140


4. Materials Costing 147

Costing Materials Received 147

Discounts 147

Carriage Inwards on Raw Materials 148

Material Handling Charges 148

Costing Materials Issued 153

First-in, First-out (FIFO) 154

Last-in, First-out (LIFO) 156

Highest-in, First-out (HIFO) 158

Base Stock Price 159

Simple Average 160

Weighted Average 160

Periodic Simple Average 161

Detailed Contents xix

Periodic Weighted Average 162

Moving Simple Average 162

Moving Weighted Average 163

Standard Price 163

Replacement Price or Market Price 164

Pricing of Materials Returned to Vendor 177

Pricing of Materials Returned to Storeroom 177

Selection of a Materials Pricing Method 178


5. Labour Costs: Accounting and Control 184

Introduction 184

Direct Labour and Indirect Labour 185

Direct Labour 185

Indirect Labour 185

Organisation for Labour Control 185

Personnel Department 185

Engineering Department 186

Time-keeping Department 187

Time-booking 188

Payroll Department 189

Cost Accounting Department 190

Wage Systems 190

Straight Time 190

Incentive Wage Plans 191

Rowan Plan 194

Bonus Schemes for Indirect Workers 196

Work Study 196

Method Study 196

Work Measurement 197

Job Evaluation and Merit Rating 197

Job Evaluation 197

Methods of Job Evaluation 198

Merit Rating 199

Differences Between Job Evaluation and Merit Rating 200

Time and Motion Study 200

Detailed Contentsxx

Labour Turnover 201

Causes of Labour Turnover 201

Cost of Labour Turnover 202

Measures to Reduce Labour Turnover 203

Treatment of Labour Cost-Related Items 203

Overtime 203

Treatment of Overtime Premium 204

Idle Time 204

Shift Premium 205

Holiday and Vacation Pay 205

Attendance Bonuses 206

Leave with Pay 206

Casual Workers 206

Out-Workers 207

Outside Workers 207

Theory Questions 229Problems 231

6. Factory Overheads: Distribution 237

Concept 237

Factory Overhead—Fixed, Semi-Variable and Variable 237

Factory Overheads—Accounting and Distribution 238

Allocation and Apportionment of Factory Overheads 240

Difference between Allocation and Apportionment 240

Departmentalisation of Overhead 240

Primary Distribution 240

Apportionment of Service Departments Overheads to Producing Departments 244

Secondary Distribution 244

Bases for Secondary Distribution 244

Inter-departmental Services 245

Methods 245

Absorption of Factory Overheads 259

Meaning of Absorption 259

Methods of Absorption 259

Machine Hour Rate 263

Types of Machine Hour Rate 263

Detailed Contents xxi

Selecting an Absorption Rate 264

Arguments in Favour of Apportionment and Absorption of Overheads 264

Limitations of Apportionment and Absorption 265

Blanket and Departmental Overhead Rate 265

Overhead Rates: Actual vs Predetermined (Standard) 289

Actual Overhead Rate 289

Predetermined Overhead Rate or Standard Rate 290


7. Administrative and Selling and Distribution Overheads 316

Administrative Overheads 316

Distribution of Administrative Overheads 317

Selling and Distribution Overheads 318

Apportionment of Selling and Distribution Overheads 318

Treatment of Some Items of Expenses 326

Interest on Capital 326

Depreciation 327

Rent 328

Capacity 328

Idle Capacity 329

Set-up Time 330

Packing Expenses 330

Research and Development 331

Bad Debts 331

Catalogues and Price Lists 331

Tools 331

Patterns 332

Designs 332

Blue Prints 332

Advertising 332

Carriage & Freight 333

Royalties 333


8. Activity-Based Costing (ABC) 337

Meaning of Activity-Based Costing (ABC) 337

Stages and Flow of Costs in ABC 338

Detailed Contentsxxii

Cost Drivers 338

Comparing ABC with Traditional Costing System 340

Traditional Costing and Activity-based Costing System 341

Target Costing 344

Life-Cycle Costing 345

Activity-Based Management (ABM) 346


Part 3 Costing Methods and Accounting of Costs

9. Single or Output Costing 365

Nature 365

Production Statement 365

Operation Costing 365

Estimated Cost Sheet 366


Nature of Job Costing 381

Job Cost Sheet and Job Ledger 382

Recording Costs on Jobs 383

Materials Costs 383

Labour Costs 383

Direct Expenses 383

Overhead 383

Recording Completed Jobs 383

Contract Costing 388

Recording Costs on Contract 389

Materials 389

Wages 389

Expenses 389

Plant and Machinery 390

Sub-Contract 390

First Method 390

Second Method 391

Detailed Contents xxiii

Work-in-Progress 391

Retention Money in Contract Costing 393

Cost-Plus Contract 394

Batch Costing 426


Nature of Process Costing 440

Characteristics 440

Process Costing and Job Costing 441

Materials 442

Labour 442

Direct Expenses 442

Factory Overhead 442

Preparation of Process Cost Accounts 442

Process Costing having no Process Loss/Gain and no Opening and Closing

Work-in-Progress 442

Process Costing having Process Losses and/or Gains 445

Waste (Spoilage) 445

Scrap 446

Abnormal Gain (Effectives) 447

Process Costing Having Work-in-Progress at Different Stages of Completion 471

Closing Work-in-Progress 471

Equivalent Production Analysis 472

Situation 1 (Only Closing Work-in-Progress) 472

Situation 2 (Closing Work-in-Progress and Process Loss or Gain) 475

Situation 3 (Opening and Closing Work-in-Progress without Process Loss or Gain) 481

Situation 4 (Opening and Closing Work-in-Progress with Process Losses or Gains) 494

Joint Product and By-Product 511

Joint Product 511

By-product 512

Accounting for Joint Product Cost 512

Relative Market or Sales Value Method 512

Weighted Average Cost Method 513

Detailed Contentsxxiv

Accounting for By-Products 514


12. Service Costing 547

Service Costing 547

Nature of Service Costing 548

Transport Costing 548

Composition of Costs 548

Standing Charges 548

Running (Variable) Costs 548

Maintenance Charges 548

Ascertainment of Costs 549

Power House Costing 549

Canteen Costing 550


13. Cost Control Accounts 579

Non-Integrated System 579

Accounting for Cost Items 581

Materials 581

Labour Cost 581

Overhead 581

Journal Entries 582


Meaning and Features of Integrated Accounting System 603

Principal Accounts 604

Stock Control Account 604

Cost of Sales Account 605

Assets Account 605

Debtors and Creditors Control Account 605

Prepayments Account and Outstanding Account 605

Direct Wages and Overhead Costs Control Account 605

Departmental or Cost Centre Account 605

Cash Account 605

Detailed Contents xxv

Journal Entries 605


15. Reconciliation of Cost and Financial Accounts 623

Need for Reconciliation 623

Purely Financial Matters Not Found in Cost Accounts 624

Treatment of Items in Cost Books and Financial Books 624

Differences in the Valuation of Stock and Work-in-Progress 624

Depreciation 625

Abnormal Losses and Gains 625

Reconciliation Procedure 625


Part 4 Cost Analysis for Decision Making and Control

16. Marginal (Variable) Costing 663

Concept of Marginal Cost, Marginal Costing 663

Absorption Costing 664

Difference Between Marginal Costing and Absorption Costing 664

Income Statement under Absorption Costing 664

Income Statement under Marginal Costing 665

Reconciliation of Net Income 669

Inventory Values 670

Applications (Advantages) of Marginal Costing 671

Product Pricing Decisions 671

Cost Control 671

Impact of Fixed Costs 671

Managerial Decision Making 671

Limitations of Marginal Costing 672

Cost Behaviour 672

Methods of Determining Cost Behaviour 672

High and Low Points Method 673

Scattergraph Method 673

Detailed Contentsxxvi

Least Squares Regression Method 673

Accounting or Analytical Approach 674

Break-even Analysis 675

Cash Break-even Point 677

Curvilinear Break-even Analysis 679

Multi-Product Situations 684

Sales Mix and Break-even Point 685

Cost Indifference Point 689

Limitations of CVP Analysis 691


17. Alternative Choices Decisions 764

Decision-Making 764

Relevant Information 765

Relevant Revenues 765

Relevant Costs 766

Types of Choices Decisions 767

Make or Buy (Outsourcing Decision) 767

Add or Drop Products 769

Sell or Process Further 771

Operate or Shutdown 772

Special Orders 773

Replace or Retain 775


18. Pricing Decisions 834

Different Methods of Pricing 835

Fixing Selling Price Below Variable Cost 837

Target Pricing 837

Detailed Contents xxvii

Prices Indifference Point 838


19. Standard Costing 845

Historical Costing and its Limitations 845

Standard Costs and Estimated Costs 846

Advantages of Standard Costing 846

Different Types of Standards 847

Normal Standards 848

Basic Standards 848

Currently Attainable or Expected Actual Standards 848

How Tight Should Standards be 848

High Standards 848

Low (Loose) Standards 849

Developing or Setting Standard 849

Materials Standards 849

Labour Standards 849

Factory Overhead Cost Standards 849

Revision of Standards 850

Variance Analysis 850

Materials Variance 850

Labour Variances 869

Labour Cost Variance 870

Labour Rate Variance 870

Overhead Variances 884

Total Overhead Cost Variance 885

Variable Overhead Variance 885

Fixed Overhead Variance 885

Variable Overhead Expenditure (Spending or Budget) Variance 886

Fixed Overhead Expenditure (Spending or Budget) Variance 886

Fixed Overhead Volume Variance 886

Fixed Overhead Calendar Variance 887

Fixed Overhead Capacity Variance 887

Two-way, Three-way and Four-way Variance Analysis 888

Sales Variances 899

Sales Variances Based on Turnover 900

Detailed Contentsxxviii

Revision Variance 911

Disposition of Variance 911

Analysis of Variances by Responsibilities 913

Analysis of Variances by Causes 913

Possible Causes of Standard Cost Variances 913

Analysis of Variances by Products 915

Variance Reports to Management 915

Limitations of Standard Costing 915

Control Ratios 916


Concept Of Budgeting 935

Budgeting and Forecasting 935

Concept of Budgetary Control 936

Planning 936

Coordination 936

Control and Performance Evaluation 937

Advantages of Budgeting 937

Limitations of Budgeting 938

Budgeting Process 938

Organisation for Budgeting (the Budget Committee) 939

Budget Manual 939

The Budget Period 940

Short-range Budget 940

Long-range Budget 940

Elements of a Successful Budgeting Plan 940

Budget Centres 941

Limiting or Principal Budget Factor 941

Budgets and Standard Costs 942

Fixed and Flexible Budgeting 943

Fixed Budgeting 943

Flexible Budgeting 944

Types of Budgets 963

Sales Budget 964

Production Budget 965

Detailed Contents xxix

Production Cost Budget 966

Cost of Goods Sold Budget 968

Selling Expenses Budget 969

Administrative Expenses Budget 970

Budgeted Income Statement 970

Capital Expenditure Budget 971

Research and Development Budget 971

Cash Budget 971

Budgeted Statement of Changes in Financial Position 973

Master Budget 973

Revision of Budgets 973

Zero Base Budgeting (ZBB) 988

Application of ZBB 989

Advantages of ZBB 989

Disadvantages of ZBB 989

Planning, Programming and Budgeting System (PPBS) 990

Performance Budgeting 991


Need of Decentralisation/Divisionalisation 1002

Types of Responsibility Centres 1002

Cost Centre 1003

Revenue Centre 1003

Investment Centre 1003

Meaning of Responsibility Accounting 1003

Measuring Divisional Performance 1004

Transfer Pricing 1015

Methods of Transfer Pricing 1016


Part 5 Specialised Topics

Detailed Contentsxxx

Disadvantages 1030

Inter-Firm Comparison 1032

Essentials of Inter-Firm Comparison 1032

Limitations of Inter-Firm Comparison 1033

Theory Questions 1034

Meaning of cost Audit 1035

Advantages of Cost Audit 1035

Financial Audit and Cost Audit 1036

Management Audit 1037

Scope of Management Audit 1037

Potent Tool for Managerial Control 1038

Preparation of Cost Audit 1038

Scope of the Cost Audit 1038

Cost Audit Report Rules 1039

Value Analysis 1043

Advantages of Value Analysis 1043

Procedure of Value Analysis 1044

Theory Questions 1044

Documents

Part 1 Conceptual Framework Part 2 Elements of Cost Part 3 ...novella.mhhe.com/sites/dl/free/9353168384/1023817/... · Degree of Traceability to the Product 40 Direct Cost 40 Indirect