Cost accounting

Cover
Contents
List of Abbreviations
Part 1 Conceptual Framework
	1. Financial Accounting, Cost Accounting and Management Accounting
		Learning Obj ectives
		Financial Accounting
			Objectives
			Contents
			Accounting System
			Measurement Unit
			Users of Financial Accounting Infonnation
		Limitation of Financial Accounting
		Cost Accounting
		Cost Accountancy
		Costing
		Cost Accounting and Management
		Objectives of Cost Accounting
			Product Costing
			Planning and Control
			Infonnation for Decisions
		Cost Accounting Vs. Financial Accounting
		Management Acconnting
		Cost Accounting and Management Accounting
		Differences Between Management Accounting and Financial Accounting
		Cost Accounting, Financial Accounting and Management Accounting
		Role of Management Accountant
		Advantages of Cost accounting
		Methods of Costing
			Job Costing
			Process Costing
		Techniques (Types) of Costing
			(1) Historical Costing
			(2) Standard Costing
			(3) Absorption or Full Costing
			(4) Variable or Marginal Costing
			(5) Uniform Costing
		Costing System
		Throughput Costing
		Backflush Costing
		Installation of a Cost Accounting System
			Factors Influencing the Cost Accounting System
			Fealures of Cost Accounting System
			Difficulties in Installation of a Costing System
		Arguments Against Cost Accounting
		Cost Centres
			Impersonal Cost Centre
			Personal Cost Centre
			Operation Cost Centre
			Process Cost Centre
		Cost Units
		Cost Accounting Department
		Theory Questions
		Self Evaluation Questions
	2. Cost: Concepts and Classifications
		Learning Objectives
		Cost
		Expenses
		Loss
		Classification ofCosts
		Natural Classification of Costs
		Cost Behaviour (In Relation to Changes in Output or Activity or Volume)
			Fixed Cost
			Variable Cost
			Mixed Cost
		Degree of Traceability to the Product
			Direct Cost
			Indirect Cost
		Association with the Product
			Product Cost
			Period Cost
		Functional Classification of Costs
		Relationship with Accounting Period
			Capital Cost and Revenue Cost
		Costs for Decision Making and Planning
			Opportunity Cost
			Sunk Cost
			Relevant Cost
			Differential Cost
			Imputed Cost
			Out-of-Pocket Cost
			Fixed, Variable and Mixed Costs
			Shut Down Cost
		Costs for Control
			Controllable and Uncontrollable Cost
			Standard Cost
			Fixed, Variable and Mixed Costs
		Other Costs
			Joint Cost
			Common Cost
		Cost Control, Cost Rednction, Cost Management
			Cost Control
			Cost Reduction
			Cost Management
		Cost Statement or Cost Sheet
		Theory Questions
		Self Evaluation Questions
		Problems
Part 2 Elements of Cost
	3. Materials Control
		Learning Objectives
			Materials
			Concept and Objectives of Materials Control
			Purchasing and Receiving Procedure
				Creating a Purchase Department
				Qualities of Purchase Manager
			Some Issues in Materia1s Procurement
				Economic Order Quantity (EOQ) (Reorder Quantity)
				When to Order (Reorder Level)
				Determination of Safety or Minimum Stock Level
				Maximum Stock Level
			Stores Organisation
				Storage Layout
				Classification and Codification of Materials
				Issue of Materials
				Materials Returned to the Storeroom
				Matelials Returned to Supplier
			Inventory Systems
			Inventory Shortages (Losses) and Overages
			Inventory Control
				Nature ofInventory
				Meaning ofInventory Control
				Importance ofInventory Control
				Inventory Control Techniques
				Pareto or ABC Analysis
				Classification of the Items ofInventory as per ABC Analysis
				Kanban
				Just-In-Time (JIT) Method
			Inventory Turnover
				Detection of Slow-moving and Non-moving or Obsolete Materials
			Accounting for Material Losses
				Scrap
				Spoilage
				Spoilage Report
				Defectives
				Waste ( or Wastage)
			Theory Questions
			Self Evaluation Questions
			Problems
	4. Materials Costing
		Learning Objectives
		Costing M.aterials Received
			Discounts
			Carriage Inwards on Raw Materials
			Material Handling Charges
		Costing MaterialS Issued
			First-in, First-out (FIFO)
			Last-in, First-out (LIFO)
			Highest-in, First-out (HIFO)
			Base Stock Price
			Simple Average
			Weighted Average
			Periodic Simple Average
			Periodic Weighted Average
			Moving Simple Average
			Moving Weighted Average
			Standard Price
			Inflated Price
			Replacement Price or Market Price
		Pricing of MateriaIs Retumed to Vendor
		Pricing of Materials Returned to Storeroom
		Selection of a Materials Pricing Method
		Theory Questions
		Self Evaluation Questions
		Problems
	5. Labour Costs: Accouuting and Control
		Learning Objectives
		Introduction
		Direct Labour and Indirect Labour
			Direct Labour
			Indirect Labour
		Organisation for Labour Control
			Personnel Department
			Engineering Department
			Time-keeping Department
			Time-booking
			Payroll Department
			Cost Accounting Department
		Wage Systems
			Straight Time
		Incentive Wage Plans
			Rowan Plan
			Profit Sharing and Co-partnership
			Bonus Schemes for Indirect Workers
		Workstudy
			Method Study
			Work Measurement
		Job Evaluation and Merit Rating
			Job Evaluation
			Methods of Job Evaluation
			Merit Rating
			Differences Between Job Evaluation and Merit Rating
		Time and Motion stndy
			Objectives
			Benefits
		Labour turnover
			Causes of Labour Turnover
			Cost of Labour Turnover
			Measures to Reduce Labour Turnover
		Treatment of Labour Cost-Related Items
			Overtime
			Treatment of Overtime Premium
			Idle Time
			Fringe Benefits
			Shift Premium
			Holiday and Vacation Pay
			Learner's or Apprentices' Wages
			Attendance Bonuses
			Leave with Pay
			Employer's Contribution to Insurance
			Casual Workers
			Out-Workers
			Outside Workers
		Theory Questions
		Problems
	6. Factory Overheads: Distribution
		Learning Objectives
		Concept
		Factory Overhead-Fixed, Semi-Variable and Variable
		Factory Overheads-Accounting and Distribution
		Collection and Codification of Factory Overheads
			Methods of Codification
		Allocation and Apportiomnent of Factory Overheads
			Departmentalisation of Overhead
			Benefits ofDepartmentalisation
			Primary Distribution
		Apportionment of Service Departments Overheads to Producing Departments
			Secondary Distnbution
			Bases for Secondary Distribution
			Inter-departmental Services
			Methods
		Absorption of Factory Overheads
			Meaning of Absorption
			Methods of Absorption
			Machine Hour Rate
			Types of Machine Hour Rate
		Selecting an Absorption Rate
			Arguments in Favour of Apportionment and Absorption of Overheads
			Limitations of Apportiomnent and Absorption
		Computation of Total Machine Hours Utilised
		Overhead Rates: Actual vs Predetermined (Standard)
			Actual Overhead Rate
			Predetermined Overhead Rate or Standard Rate
			Under- or Over-absorption of Overhead
		Theory Questions
		Self Evaluation Questions
		Problems
	7. Administrative and Selling and Distribution Overheads
		Learning Objectives
		Administrative Overheads
			Distribution of Administrative Overheads
		Selling and Distribution Overheads
			Apportiomnent of Selling and Distribution Overheads
		Treatment of Some Items of Expenses
		Interest on Capital
			Depreciation
			Rent
			Capacity
			Idle Capacity
			Set-upTime
			Packing Expenses
			Research and Development
			Bad Debts
			Catalogues and Price Lists
			Tools
			Patterns
			Designs
			BluePrints
			Advertising
			Royalties
		Theory Questions
		Problems
	8. Activity-Based Costing (ABC)
		Learning Objectives
		Meaning of Activity-Based Costing (ABC)
		Stages and Flow of Costs in ABC
		Cost Drivers
			Classification of Activities in Manufacturing Organisations
			Comparing ABC with Traditional Costing System
			Traditional Costing and Activity-Based Costing System
		Target Costing
		Kaizen Costing
		Life-Cycle Costing
		Activity-Based Management (ABM)
		Theory Questions
		Self Evaluation Questions
		Problems
Part 3 Costing Methods and Accounting of Costs
	9. Single or Output Costing
		Learning Objectives
		Nature
		Production Statement
		Operation Costing
		Estimated Cost Sheet
		Theory Questions
		Problems
	10. Job, Contract an!! Batcb Costing
		Leaming Objectives
		Nature ofJob Costing
		Job Cost Sheet and Job Ledger
		Recording Costs on Jobs
			Materials Costs
			Labour Costs
			Direct Expenses
			Overhead
		Recording Completed Jobs
		Contract Costing
		Recording Costs on Contract
			Materials
			Wages
			Expenses
			Plant and Machinery
			Sub-Contract
		Value and Profit of Contract
			First Method
			Second Method
		Work-in-Progress
		Profit on incomplete Contracts
		Cost-Plus Contract
		Computation of a Conservative Estimate ofthe Profit to be Taken to Profit and Loss Account
		Batch Costing
		Economic Batch Quantity
		Theory Questions
		Self Evaluation Questions
		Problems
	11. Process Costing
		Learning Objectives
		Nature of Process Costing
			Characteristics
			Process Costing and Job Costing
		Costing Procedures Under Process Costing
			Materials
			Labour
			Direct Expenses
			Factory Overhead
		Preparation of Process Cost Accounts
			Process Costing Having No Process Loss/Gain and No Opening and Closing Work-in-Progress
			Process Costing Having Process Losses and/or Gains
			Waste
			Scrap
			Abnormal Gain (Effectives)
			Increase in Cost
			Decrease in Cost
			Process Costing Having Work-in-Progress at Different Stages of Completion
			ClosingWork-in-Progress
			Equivalent Production Analysis
			Situation I (Only Closing Work-in-Progress)
			Situation 2 (Closing Work-in-Progress and Process Loss or Gain)
			Situation 3 (Opening and Closing Work-in-Progress without Process Loss or Gain)
			Situation 4 (Opening and Closing Work-in-Progress with Process Losses or Gains)
		Inter-Process Profits
		Joint Product and By-Product
			Joint Product
			By-product
		Accounting for Joint Product Cost
			Physical Quantity Method
			Relative Market or Sales Value Method
			Average Unit Cost Method
			Weighted Average Cost Method
		Accounting for By-Products
		Theory Questions
		Self Evaluation Questions
		Problems
	12. Service Costing
		Learning Objectives
		Service Costing
		Nature of Service costing
		Transport costing
			Composition of Costs
			Standing Charges
			Running (Variable) Costs
			Maintenance Charges
			Cost Units
			Ascertainment of Costs
		Power House Costing
		Canteen Costing
		Theory Questions
		Problems
	13. Cost Control Accounts
		Learning Objectives
		Non-Integrated System
		Accounting for Cost Items
			Materials
			Labour Cost
			Overhead
		Joumal Entries
		Theory Questions
		Problems
	14. Integrated Acconnting System
		Learning Objectives
		Meaning and Features ofrntegrated Accounting System
		Principal Accotmts
			Stock Control Account
			Cost of Sales Account
			Assets Account
			Debtors and Creditors Control Account
			Prepayments Account and Outstanding Account
			Direct Wages and Overhead Costs Control Account
			Departmental or Cost Centre Account
			Cash Account
		Journal Entries
			Distinction between 'Interlocking' and 'Integration' of Cost and Financial Accounts
		Theory Questions
		Problems
	15. Reconciliation of Cost and Financial Accounts
		Learning Objectives
		Need For Reconciliation
		Reasons for Differences in Profit
			Items Appropliated or Charged to Profit but Not Found in Cost Accounts
			Pruely Financial Matters Not Found in Cost Accounts
			Treatment of Items in Cost Books and Financial Books
			Differences in the Valuation of Stock and Work-in-progress
			Depreciation
			Abnormal Losses and Gains
		Reconciliation Procedure
		Theory Questions
		Problems
Part 4 Cost Analysis for Decision Making and control
	16. Marginal (Variable) Costing
		Learning Objectives
		Concept of Marginal Cost, Marginal Costing
			Absorption Costing
		Difference Between Marginal Costing and Absorption Costing
		Income Statements Under Absorption Costing And Marginal Costing
			Income Statement under Absorption Costing
			Income Statement under Marginal Costing
			Reconciliation of Net Income
			Inventory Values
		Applications (Advantages) of Marginal Costing
			Profit Planning
			Product Pricing Decisions
			Cost Control
			Impact afFixed Costs
			Managerial Decision Making
		Limitations of Marginal Costing
		Cost Behavionr
		Methods of Determining Cost Behavionr
			High and Low Points Method
			Scattergraph Method
			Least Squares Regression Method
			Accounting or Analytical Approach
		Cost-Volume-Profit (CVP) AnaJysis
			Break-even Analysis
			Cash Break-Even Point
			Curvilinear Break-even Analysis
			ProfitiVoJume (PIV) Analysis
		Desired or Target Profit
		Multi-Product Situations
		Sales Mix and Break-even Point
		Desired Profit and Tax
		Improving Profit-Volume Ratio .
		Cost Indifference Point
		Limitations of CVP AnaJysis
		Theory Questions
		Self Evaluation Questions
		Problems
	17. Alternative Choices Decisions
		Learning Objectives
		Decision-Making
		Relevant Information
		Relevant Revenues
		Relevant Costs
		Qualitative Factors
		Types of Choices Decisions
		Make or Buy (Outsourcing Decision)
			Add or Drop Products
			Sell or Process Further
			Operate or Shutdown
			Special Orders .
			Replace or Retain
		Theory Questions
		Self Evaluation Questions
		Problems
	18. Pricing Decisions
		Learning Objectives
		Factors Influencing Pricing Decisions
		Different Methods of Pricing
		Fixing Selling Price Below Variable Cost
		Target Pricing
		Prices Indifference Point
		Theory Questions
		Problems
	19. Standard Costing
		Learning Objectives
		Historical Costing and its Limitations
		Definition of Standard Cost, Standard Costing
		Standard Costs and Estimated Costs
		Advantages of Standard Costing
		Different Types of Standards
			Ideal, Perfect, Maximum Efficiency or Theoretic Standards
			Normal Standards
			Basic Standards
			Currently Attainable or Expected Actual Standards
		How Tight should Standards be
			High Standards
			Low (Loose) Standards
		Developing or Setting Standard
			Materials Standards
			Labour Standards
			Factory Overhead Cost Standards
		Revision of Standards
		Variance Analysis
		Materials Variance
		Labour Variances
			Labour Cost Variance
			Labour Rate Variance
		Overhead variances
			1. Total Overhead Cost Variance
			2. Variable Overhead Variance
			3. Fixed Overhead Variance
			4. Variable Overhead Expenditure (Spending or Budget) Variance
			5. Variable Overhead Efficiency Variance
			6. Fixed Overhead Expenditure (Spending or Budget) Variance
			7. Fixed Overhead Volume Variance
			8. Fixed Overhead Calendar Variance
			9. Fixed Overhead Efficiency Variance
			10. Fixed Overhead Capacity Variance
			Two-way, Three-way and Four-way Variance Analysis
		Sales Variances
			(A) Sales Variance based on Turnover
			(B) Sales Variance based on Margin (that is Contribution Margin or Profit)
			Revision Variance
		Disposition of Variance
		Managerial Uses of Variances
			Analysis of Variances by Responsibilities
			Analysis of Variances by Causes
			Possible Causes of Standard Cost Variances
		Overhead Efficiency Variane:e
			Analysis of Variances by Products
			Variance Reports to Management
		Limitations of Standard Costing
		Control Ratios
		Theory Questions
		Self Evaluation Questions
		Problems
	20. Budgetiug
		Learning Objectives
		Concept Of Budgeting
			BUdgeting and Forecasting
		Concept Of Budgetary Control
		Objectives and Functions of BUdgeting
			Planning
			Coordination
			Control and Perfonnance Evaluation
		Advantages of Budgeting
		Limitations of Budgeting
		Budgeting Process
		Organisation for Budgeting (The Budget Committee)
		Budget Manual
		The Budget Period
			Short-range Budget
			Long-range Budget
		Elements ofa Successful Budgeting Plan
		Budget Centres
		Limiting or Principal Budget Factor
		Budgets and Standard Costs
		Fixed and Flexible Budgeting
			Fixed Bndgeting
			Flexible Budgeting
		Types of Budgets
			Sales Budget
			Production Budget
			Prodnction Cost Budget
			Cost of Goods Sold Budget
			Selling Expenses Budget
			Administrative Expenses Budget
			Budgeted Income Statement
			Capital Expenditure Budget
			Research and Development Budget
			Cash Budget
			Budgeted or Projected Balance Sheet
			Budgeted Statement of Changes in Financial Position
			Master Budget
		Revision of Budgets
		Zero Base Budgeting (ZBB)
			Application of ZBB
			Advantages of ZBB
			Disadvantages of ZBB
		Planning, Programming and Budgeting System (PPBS)
		Performance Budgeting
		Themy Questions
		Self Evaluation Questions
		Problems
	21. Responsibility Accounting and Divisional Performance Measurement
		Learning Objectives
		Need ofDecentralisationlDivisionalisation
		Types of Responsibility Centres
			Cost Centre
			Revenue Centre
			Profit Centre
			Investment Centre
		Meaning of Responsibility Accounting
		Measuring Divisional Perfonnance
		Transfer Pricing
			Objectives in Sound Transfer Pricing System
			Methods of Transfer Pricing
		Theory Questions
		Problems
Part 5 Specialised Topics
	22. Uniform Costing and Inter-firm Comparison
		Learning Objectives
		Uniform Costing
			Advantages of Un if ann Costing
			Disadvantages
		Establishing A Uniform Costing System
		Areas ofUnifonnity
		Unifonn Cost Manual
		Inter-finn Comparison
		Essentials of Inter-finn Comparison
		Benefits ofInter-finn Comparison
		Limitations of Inter-finn Comparison
		TheOlY Questions
	23. Cost Audit
		Learning Objectives
		Meaning of Cost Audit
		Advantages of Cost Audit
		Financial Audit and Cost Audit
		Efficiency Audit and Cost Audit
		Management Audit
			Scope of Management Audit
			Potent Tool for Managerial Control
			Cost Rednction through Improvement in the Perfonnance Efficiency
		Preparation Of Cost Audit
		Scope ofthe Cost Audit
		Value Analysis
			Advantages of Value Analysis
			Procedure of Value Analysis
		Theory Questions
Appendix: Objective Type Questions
	Section I: TruelFalse Statements
	Section II: Fill in the Blanks
	Section III: Matching Statements
	Section IV: Multiple Choice Questions
Index