PROCESS COSTING

Unit Structure 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning of process costing 1.3 Distinction between job costing and process costing 1.4 Costing rocedure 1.! "o#ved i##ustrations 1.$ %a#uation of &or'(in(progress 1.) *uestions 1.+ ,-ercise

t0e distin ction betw een job costi ng and proc ess costi ng

1.0 LEARNING OBJECTIVES

.fter stud/ing t0is c0apter /ou s0ou#d ab#e to understand t0e 1eaning of rocess Costing and its i1portance t0e accounting procedure of process costing inc#uding nor1a# #oss abnor1a# #oss 2or3 gain t0e va#uation of wor'(in(progress4 using 5I5O4 LI5O average and weig0ted average 1et0ods t0e steps invo#ved in inter process transfer

1.1 INTRODUCTION:
rocess costing is a for1 of operations costing w0ic0 is used w0ere standardi6ed 0o1ogeneous goods are produced. 70is costing 1et0od is used in industries #i'e c0e1ica#s4 te-ti#es4 stee#4 rubber4 sugar4 s0oes4 petro# etc. rocess costing is a#so used in t0e asse1b#/ t/pe of industries a#so. It is assu1ed in process costing t0at t0e average cost presents t0e cost per unit. Cost of production during a particu#ar period is divided b/ t0e nu1ber of units produced during t0at period to arrive at t0e cost per unit.

1.2 MEANING O PROCESS COSTING

rocess costing is a 1et0od of costing under w0ic0 a## costs are accu1u#ated for eac0 stage of production or process4 and t0e

cost per unit of product is ascertained at eac0 stage of production b/ dividing t0e cost of eac0 process b/ t0e nor1a# output of t0at process. 1.2.1 De!initi"n: CIM. London defines process costing as 8t0at for1 of operation costing w0ic0 app#ies w0ere standardi6e goods are produced9 1.2.2 e#ture$ "! Pr"ce$$ C"$tin%: 2a3 70e production is continuous 2b3 70e product is 0o1ogeneous 2c3 70e process is standardi6ed 2d3 Output of one process beco1e raw 1ateria# of anot0er process 2e3 70e output of t0e #ast process is transferred to finis0ed stoc' 2f3 Costs are co##ected process(wise 2g3 :ot0 direct and indirect costs are accu1u#ated in eac0 process 203 If t0ere is a stoc' of se1i(finis0ed goods4 it is e-pressed in ter1s of e;ua#ent units 2i3 70e tota# cost of eac0 process is divided b/ t0e nor1a# output of t0at process to find out cost per unit of t0at process. 1.2.& A'(#nt#%e$ "! )r"ce$$ c"$tin%: 1. Costs are be co1puted periodica##/ at t0e end of a particu#ar period 2. It is si1p#e and invo#ves #ess c#erica# wor' t0at job costing 3. It is eas/ to a##ocate t0e e-penses to processes in order to 0ave accurate costs. 4. <se of standard costing s/ste1s in ver/ effective in process costing situations. 5. rocess costing 0e#ps in preparation of tender4 ;uotations 6. "ince cost data is avai#ab#e for eac0 process4 operation and depart1ent4 good 1anageria# contro# is possib#e. 1.2.* Li+it#ti"n$: 1. Cost obtained at eac0 process is on#/ 0istorica# cost and are not ver/ usefu# for effective contro#. 2. rocess costing is based on average cost 1et0od4 w0ic0 is not t0at suitab#e for perfor1ance ana#/sis4 eva#uation and 1anageria# contro#. 3. &or'(in(progress is genera##/ done on esti1ated basis w0ic0 #eads to inaccurac/ in tota# cost ca#cu#ations. 4. 70e co1putation of average cost is 1ore difficu#t in t0ose cases w0ere 1ore t0an one t/pe of products is 1anufactured and a division of t0e cost e#e1ent is necessar/. 5. &0ere different products arise in t0e sa1e process and co11on costs are prorated to various costs units. "uc0 individua# products costs 1a/ be ta'en as on#/ appro-i1ation and 0ence not re#iab#e.

1.& DISTINCTION BET,EEN JOB COSTING AND PROCESS COSTING

=ob order costing and process costing are two different s/ste1s. :ot0 t0e s/ste1s are used for cost ca#cu#ation and attac01ent of cost to eac0 unit co1p#eted4 but bot0 t0e s/ste1s are suitab#e in different situations. 70e basic difference between job costing and process costing are Di$tincti"n 1. "pecific order erfor1ed against specific orders roduction is contentious 2. >ature ,ac0 job 1an/ be different. roduct is 0o1ogeneous and standardi6ed. 3. Cost deter1ination Cost is deter1ined for eac0 job Costs are co1p#ied for separate#/. eac0 process for depart1ent on ti1e basis i.e. for a given accounting period. Cost is ca#cu#ated 4. Cost ca#cu#ations Cost is co1p#ied w0en a job is at t0e end of t0e cost co1p#eted. period. roper contro# is 5. Contro# roper contro# is co1parative#/ difficu#t co1parative#/ easier as as eac0 product unit is t0e production is different and t0e production is standardi6ed and is 1ore not continuous. suitab#e. 6. 7ransfer 70ere is usua##/ not transfer fro1 one job to anot0er un#ess t0ere is 70e output of one process so1e surp#us wor'. is transferred to anot0er 7. &or'(in( rogress 70ere 1a/ or 1a/ not be wor'( process as input. in(progress. 70ere is a#wa/s so1e wor'(in(progress because 8. "uitabi#it/ "uitab#e to industries w0ere production is of continuous production. inter1ittent and custo1er "uitab#e4 w0ere goods are orders can be identified in t0e 1ade for stoc' and va#ue of production. productions is continuous.

1.* COSTING PROCEDURE

5or eac0 process an individua# process account is prepared. ,ac0 process of production is treated as a distinct cost centre. 1.*.1 Ite+$ "n t-e De.it $i'e "! Pr"ce$$ A/c. ,ac0 process account is debited wit0 ? a. Cost of 1ateria#s used in t0at process. b. Cost of #abour incurred in t0at process. c. Direct e-penses incurred in t0at process. d. Over0eads c0arged to t0at process on so1e pre deter1ined. e. Cost of ratification of nor1a# defectives. f. Cost of abnor1a# gain 2if an/ arises in t0at process3 1.*.2 Ite+$ "n t-e Cre'it $i'e: ,ac0 process account is credited wit0 a. "crap va#ue of >or1a# Loss 2if an/3 occurs in t0at process. b. Cost of .bnor1a# Loss 2if an/ occurs in t0at process3 1.*.& C"$t "! Pr"ce$$: 70e cost of t0e output of t0e process 27ota# Cost #ess "a#es va#ue of scrap3 is transferred to t0e ne-t process. 70e cost of eac0 process is t0us 1ade up to cost broug0t forward fro1 t0e previous process and net cost of 1ateria#4 #abour and over0ead added in t0at process after reducing t0e sa#es va#ue of scrap. 70e net cost of t0e finis0ed process is transferred to t0e finis0ed goods account. 70e net cost is divided b/ t0e nu1ber of units produced to deter1ine t0e average cost per unit in t0at process. "peci1en of rocess .ccount w0en t0ere are nor1a# #oss and abnor1a# #osses. Dr. Pr"ce$$ I A/c. Cr. P#rticu0#r$ Unit$ R$.

P#rticu0#r$ Unit$ R$. 7o :asic Materia# --- -- :/ >or1a# Loss -- -- 7o Direct Materia# -- :/ .bnor1a# Loss -- -- 7o Direct &ages -- :/ rocess II .@c. -- -- 7o Direct ,-penses -- 2output transferred to -- >e-t process3 7o roduction Over0eads -- :/ rocess I -- -7oCost of "toc' .@c. Aectification of >or1a# Defects 7o .bnor1a# Bains -11 111 11 11

1.* In 1an/ process4 so1e #oss is inevitab#e. Certain production tec0ni;ues are of suc0 a nature t0at so1e #oss is in0erent to t0e production. &astages of 1ateria#4 evaporation of 1ateria# is un avoidab#e in so1e process. :ut so1eti1es t0e Losses are a#so occurring due to neg#igence of Labourer4 poor ;ua#it/ raw 1ateria#4 poor tec0no#og/ etc. 70ese are nor1a##/ ca##ed as avoidab#e #osses. :asica##/ process #osses are c#assified into two categories 2a3 >or1a# Loss 2b3 .bnor1a# Loss 1. N"r+#0 L"$$: >or1a# #oss is an unavoidab#e #oss w0ic0 occurs due to t0e in0erent nature of t0e 1ateria#s and production process under nor1a# conditions. It is nor1a##/ esti1ated on t0e basis of past e-perience of t0e industr/. It 1a/ be in t0e for1 of nor1a# wastage4 nor1a# scrap4 nor1a# spoi#age4 and nor1a# defectiveness. It 1a/ occur at an/ ti1e of t0e process. >o of units of nor1a# #ossC Input - ,-pected percentage of >or1a# Loss. 70e cost of nor1a# #oss is a process. If t0e nor1a# #oss units can be so#d as a crap t0en t0e sa#e va#ue is credited wit0 process account. If so1e rectification is re;uired before t0e sa#e of t0e nor1a# #oss4 t0en debit t0at cost in t0e process account. .fter adjusting t0e nor1a# #oss t0e cost per unit is ca#cu#ates wit0 t0e 0e#p of t0e fo##owing for1u#aC C"$t "! %""' unit: 7ota# cost increased ? "a#e %a#ue of "crap Input ? >or1a# Loss units 2. A.n"r+#0 L"$$: .n/ #oss caused b/ une-pected abnor1a# conditions suc0 as p#ant brea'down4 substandard 1ateria#4 care#essness4 accident etc. suc0 #osses are in e-cess of pre(deter1ined nor1a# #osses. 70is #oss is basica##/ avoidab#e. 70us abnor1a# #osses arrive w0en actua# #osses are 1ore t0an e-pected #osses. 70e units of abnor1a# #osses in ca#cu#ated as underC .bnor1a# Losses D .ctua# Loss ? >or1a# Loss 70e va#ue of abnor1a# #oss is done wit0 t0e 0e#p of fo##owing for1u#aC V#0ue "! A.n"r+#0 L"$$:
7ota# Cost increase ? "crap %a#ue of nor1a# Loss - <nits of abnor1a# #oss Input units ? >or1a# Loss <nits

2 .bnor1a# rocess #oss s0ou#d not be a##owed to affect t0e cost of production as it is caused b/ abnor1a# 2or3 une-pected conditions. "uc0 #oss representing t0e cost of 1ateria#s4 #abour and over0ead c0arges ca##ed abnor1a# #oss account. 70e sa#es va#ue of t0e abnor1a# #oss is credited to .bnor1a# Loss .ccount and t0e ba#ance is written off to costing E L .@c.

Dr.

A.n"r+#0 L"$$ A/c. Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

Unit$ R$. 7o rocess .@c. -- -- :/ :an' -- -11 111 11 11 3. A.n"r+#0 G#in$: 70e 1argin a##owed for nor1a# #oss is an esti1ate 2i.e. on t0e basis of e-pectation in process industries in nor1a# conditions3 and s#ig0t differences are bound to occur between t0e actua# output of a process and t0at anticipates. 70is difference 1a/ be positive or negative. If it is negative it is ca##ed ad abnor1a# Loss and if it is positive it is .bnor1a# gain i.e. if t0e actua# #oss is #ess t0an t0e nor1a# #oss t0en it is ca##ed as abnor1a# gain. 70e va#ue of t0e abnor1a# gain ca#cu#ated in t0e si1i#ar 1anner of abnor1a# #oss. 70e for1u#a used for abnor1a# gain isC A.n"r+#0 G#in
7ota# Cost incurred ? "crap %a#ue of >or1a# Loss - .bnor1a# Bain <nites Input units ? >or1a# Loss <nits

70e sa#es va#ues of abnor1a# gain units are transferred to >or1a# Loss .ccount since it arrive out of t0e savings of >or1a# Loss. 70e difference is transferred to Costing E L .@c. as a Aea# Bain.

Dr.

A.n"r+#0 G#in A/c.

Cr. P#rticu0#r$

Unit$ R$. P#rticu0#r$ Unit$ R$. 7o >or1a# Loss .@c. -- -- :/ rocess .@c. -- -- -- -7o Costing E L .@c. 11 11 11 11

C-ec3 4"ur Pr"%re$$:

Define t0e fo##owing ter1s a. rocess costing 2. Bive t0e for1u#as of fo##owing a. Cost of good @ nor1a# unit b. %a#ue of .bnor1a# Loss 1.

b. 5 # Loss c. 1a# Los

1.6 SOLVED ILLUSTRATIONS

I00u$tr#ti"n 1: 2>or1a# @ .bnor1a# Loss3 repare a rocess .ccount4 .bnor1a# Loss .ccount and >or1a# Loss .ccount fro1 t0e fo##owing infor1ation. Input of Aaw 1ateria# 1000 units F As. 20 per unit Direct Materia# As. 44200@( Direct &ages As. $4000@( roduction Over0eads As. $4000@( .ctua# output transferred to process II G00 units >or1a# Loss !H %a#ue of "crap per unit As. +@( S"0uti"n : Dr. Pr"ce$$ 7 I A/c. Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

Unit$ R$. 1000 20000 :/ >or1a# Loss 7oAaw1ateria# F 20 7o Direct 4200 2!H on !0 400 Materia# 10003 7o 7o Direct &ages $000 :/ .bnor1a# Loss .@c. Over0eads $000 G00 2output 1000 3$200 transferred3 1000 3$200

Dr.

A.n"r+#0 L"$$ A/c.

Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

Unit$ R$. 7o rocess ? I .@c.

!0 :/ :an' .@c. !0 400 :/ Costing Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

EL

Dr.

N"r+#0 L"$$ A/c.

Unit$ R$. 7o rocess ? I .@c. 213 Cost of abnor1a# Loss C = 7ota# Cost increased ? "a#es va#ue of "crap - abnor1a# units
Input units ? >or1a# Loss <nits

3$200 I 400 - !0 1000 ? !0

223 It 0as been assu1ed t0at units of abnor1a# #oss 0ave a#so been so#d at t0e sa1e rate i.e. of >or1a# "crap I00u$tr#ti"n 2: 2>or1a# @ .bnor1a# Loss and .bnor1a# Bain3 70e product of a co1pan/ passes t0roug0 3 distinct process. 70e fo##owing infor1ation is obtained fro1 t0e accounts for t0e 1ont0 ending =anuar/ 314 200+. P#rticu0#r$ Pr"ce$$ 7 A Pr"ce$$ 7 B Pr"ce$$ 7 C Direct Materia# )+00 !G40 +++$ Direct &ages $000 G000 12000 roduction Over0eads $000 G000 12000 3000 units F As. 3 eac0 were introduced to process ? I. 70ere was no stoc' of 1ateria#s or wor' in progress. 70e output of eac0 process passes direct#/ to t0e ne-t process and fina##/ to finis0ed stoc' .@c.

70e fo##owing additiona# data is obtained C Pr"ce$$ Out)ut Percent#%e "! N"r+#0 L"$$ t" In)ut rocess ? I 2+!0 ! H 2 rocess ? II 2!20 10 H 4 rocess ? III 22!0 1! H !

V#0ue "! Scr#) )er unit 8R$.9

repare rocess Cost .ccount4 >or1a# Cost .ccount and .bnor1a# Bain or Loss .ccount. S"0uti"n: Dr. Pr"ce$$ 7 A A/c. Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

Unit$ R$. 1!0 300 7o <nits 3000 G000 :/ >or1a# Loss introduced .@c. 2+!0 7o Direct )+00 :/ rocess ? : 2+!00 Materia# .@c. 7o Direct &ages $000 2<nits transferred 7o roduction F As. 10@(3 Over0eads $000 &000 2::00 &000 2::00 Dr. Pr"ce$$ 7 B A/c. Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

Unit$ R$. 2+! 1140 7o rocess ? I 2+!0 2+!00 :/ >or1a# Loss .@c. .@c. 4! G000 7o Direct !G40 :/ .bnor1a# Materia# Loss .@c. 7o Direct &ages G000 :/ rocess ? C .@c. 7o roduction Over0eads G000 2:60 62**0 2:60 62**0

2!20 !0400

10 Dr. Pr"ce$$ 7 C A/c. Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

Unit$ R$. 3)+ 1+G0 7o rocess ? II 2!20 !0400 :/ >or1a# Loss .@c. .@c. 22!0 7o Direct +++$ :/ 5inis0ed +!!00 Materia# .@c "toc' .@c. 7o Direct &ages 12000 7o roduction Over0eads 12000 7o .bnor1a# 10+ 4104 Bain .@c. 222: :5&;0 222: :5&;0

Dr.

A.n"r+#0 G#in A/c.

Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$

Unit$ R$. 7o >or1a# Loss .@c. 7o Costing EL .@c.

10+ !40 :/ rocess ? C .@c. 3!$4 10: *10* 10: *10*

10+ 4104

Dr.

N"r+#0 L"$$ A/c.

Cr. P#rticu0#r$ Unit$ R$. P#rticu0#r$ 1!0 300 :/ :an' .@c. 2"a#es3 2+! 1140 rocess ? . .@c. 3)+ 1+G0 1!0 300

Unit$ R$. 7o rocess ? . .@c. 7o rocess ? : .@c. 7o rocess ? C .@c.

rocess ? : .@c. 2+! 1140 rocess ? C 2)0 13!0 .@c. :/ .bnor1a# 10+ !40 Bain .@c. :1& &&&0 :1& &&&0

1.2 INTER PROCESS PRO ITS:

>or1a##/ t0e output of one process is transferred to anot0er process at cost but so1eti1es at a price s0owing a profit to t0e transfer process. 70e transfer price 1a/ be 1ade at a price corresponding to current w0o#esa#e 1ar'et price or at cost p#us an agreed percentage. 70e advantage of t0e 1et0od is to find out

11 w0et0er t0e particu#ar process is 1a'ing profit 2or3 #oss. 70is wi## 0e#p t0e 1anage1ent w0et0er to process t0e product or to bu/ t0e product fro1 t0e 1ar'et. If t0e transfer price is 0ig0er t0an t0e cost price t0en t0e process account wi## s0ow a profit. 70e co1p#e-it/ broug0t into t0e accounting arises fro1 t0e fact t0at t0e inter process profits introduced re1ain a part of t0e prices of process stoc's4 finis0ed stoc's and wor'(in(progress. 70e ba#ance cannot s0ow t0e stoc' wit0 profit. 7o avoid t0e co1p#ication a provision 1ust be created to reduce t0e stoc' at actua# cost prices. 70is prob#e1 arises on#/ in respect of stoc' on 0and at t0e end of t0e period because goods so#d 1ust 0ave rea#i6ed t0e interna# profits. 70e unrea#i6ed profit in t0e c#osing stoc' is e#i1inated b/ creating a stoc' reserve. 70e a1ount of stoc' reserve is ca#cu#ated b/ t0e fo##owing for1u#a.
"toc' Aeserve D 7ransfer %a#ue of stoc' 7ransfer rice rofit inc#uded in transfer price

I00u$tr#ti"n & : . product passes t0roug0 t0ree processes before its co1p#etion. 70e output of eac0 process s c0arged to t0e ne-t process at a price ca#cu#ated to give a profit of 20H on transfer price. 70e output of rocess III is transferred to finis0ed stoc' account on a si1i#ar basis. 70ere was no wor'(in(progress at t0e beginning of t0e /ears. "toc' in eac0 process 0as been va#ued at pri1e cost of t0e process. 70e fo##owing data is avai#ab#e at t0e end of 31st Marc04 200G. Pr"ce$$ Pr"ce$$ Pr"ce$$ ini$I II III e' St"c3 R$. Direct Materia# 20000 30000 10000 (( Direct &ages 30000 20000 40000 (( "a#e during t0e /ear (( (( (( 1+0000 5ro1 above infor1ation prepareC 1. rocess Cost .ccount s0owing t0e profit at eac0 stage. 2. .ctua# rea#i6ed profit and 3. "toc' %a#uation as wou#d appear in t0e ba#ance s0eet

12 S"0uti"n: Dr. Pr"ce$$ 7 I A/c. Cr.

P#rticu0#r$ T"t#0 C"$t Pr"!it P#rticu0#r$ T"t#0 C"$t Pr "!it R$. R$. R$. R$. R$. R 10000 7o Materia#s 20000 20000 (( :/ rocess II.@c. !0000 40000 27ransfer3 7o &ages 30000 30000 (( 7ota# !0000 !0000 (( Les C#osing "toc' c@d 10000 10000 (( ri1e Cost 40000 40000 (( 7o Bross rofit 10000 (( 10000 220H on 7ransfer rice3 !0000 40000 10000 !0000 40000 10000 7o"toc':@d. 10000 10000 ((

Dr.
P#rticu0#r$

Pr"ce$$ 7 II A/c.
T"t#0

Cr.
Pr" !it R$. R$.

7o "toc' :@d.

P#rticu0#r$ C"$t Pr"!it T"t#0 C"$t R$. R$. R$. R$. 7o Materia# 30000 30000 (( 27ransfer3 7o &ages 20000 20000 (( 100000 G0000 10000 Less C C#osing C@d. ri1e Cost +0000 )2000 +000 7o Bross rofit 220H on 7ransfer 20000 (( 20000 rice3 100000 )2000 2+000 100000 )2000 2+000 20000 1+000 2000

1&

Pr"ce$$ III A/c

P#rticu0#r$ T"t#0 R$.

100000 7oprocessII 10000 .@c 40000 7o Materia# 1!0000 7o &ages 30000 7O7.L 120000 Less.C#osing 30000 stoc' 7o Bross profit 220Hof transfer price3 1!0000 G)$00 !2400 1!0000 G)$00 !2400 7o "toc' b@d 30000 24000 !$00

C"$t R$. )2000 10000 40000 122000 24400 G)$00 ((((((((

Pr" Pr"!it P#rticu0#r$ T"t#0 C"$t !it R$. R$. R$. R$ 2+000 :/5inis0ed 1!0000 G)$00 !2400 (((((( stoc' .@c ( 2+000 !$00 22400 30000

ini$-e' $t"c3 A/c

P#rticu0#r$ T"t#0 R$. 7o process III .@c 2(3"toc' 7o gross profit 7o "toc' .@c 11!000 1!000 C"$t R$. G)$00 G)$0 Pr"!it R$. !2400 !240 P#rticu0#r$ T"t#0 C"$t Pr" !it R$. R$. R$ :/ "a#es 1+0000 +)+40 G21$0

13!000 +)+40 G21$0 4!000 ((( 4!000 1+0000 +)+40 G21$01+0000 +)+40 G21$0 1!000 G)$0 !240

Ca#cu#ation of profit on c#osing stoc'

rofit inc#uded in stoc' D rofit inc#uded in transfer price - %a#ue of stoc' 7ransfer price

rocess I rocess Ii

D >o profit D10000-20000D2000 100000

rocess Iii D2+000-30000D!$00 1!0000 5inis0ed stoc'D !2400-1!000D!240 1!0000

1* I00u$tr#ti"n * : . product process t0roug0 t0ree process .4 : and C. 70e detai#s of e-penses incurred on t0e t0ree process during t0e /ear 200+ were as under C Pr"ce$$ A Pr"ce$$ B <nits introduced 10000 Cost per unit is As. !0@( As. As. As. "undr/ Materia# $000 G000 3233 Labour 1+000 4+000 3G000 Direct ,-penses 3000 11000 1+000 "e##ing price per unit of output )0 100 200 Manage1ent e-penses during t0e /ear were As. +0000 and se##ing were As. !000. 70ere are not a##ocab#e to t0e processes. .ctua# output of t0e t0ree process were . ? G300 units4 : ? !400 units and C 2100 units. 7wo(t0irds of t0e output of process . and one 0a#f of t0e output of process : was passed on to t0e ne-t process . and one(0a#f of t0e output of process : was passed on to t0e ne-t process and t0e ba#ance was so#d. 70e entire output of process C was so#d. 70e nor1a# #osses of t0e t0ree process4 ca#cu#ated on t0e input of ever/ process was C rocess . ? !H4 : ? 1!H and C ? 20H. 70e #oss of process . was so#d F As. 3 per unit4 t0at of : F As. ! per unit and of process C F As. 10 per unit. repare process .4 : and C account and t0e rofit and Loss .ccount. S"0uti"n : Dr. Pr"ce$$ A A/c. Cr.

Pr"ce$$ C

7o<nits Introduced 7o"undr/ Materia#s

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. :/ >or1a# Loss !00 14!00

As. !0 10000 !4004000 :/ .bnor1a# 200 110$3 $4000 Loss .@c. $4200 342G!+ rocess : .@c. 34100 1)14)G

7o Labour 1+4000 :/

7oDirect ,-penses

34000 :/ E L .@c. 2F !!.323 10000 !42)4000 !42)4000

16 Dr. Pr"ce$$ B A/c. Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o Labour 4+000 :/ E L .@c. 2)00 240+41$! 11000 7o Direct ,-penses 100221 7o.bnor1a# Bains .@c. 2F )).1G3 2&&0 *20;:0 2<&&0 *<20<;:0

Dr.

Pr"ce$$ C A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o Labour 3G000 :/ E L .@c. 2100 2!!$G3 1+000 2 F 12.)$3 7o Direct ,-penses 2500 22:&;: 2500 22:&;:

Dr.

Pr"!it = L"$$ A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o rocess . .@c. 3100 1)14)G :/ "a#es2 F As. )03 3100 21)000 2)00 20+1$! :/ 7o rocess : .@c. 7o rocess C .@c. !0000 7o "a#es2FAs. 1003 2)00 2)0000 2)00 2$!$G3 :/"a#es2FAs.20003 Manage1ent 1)1$+ ,-penses .@c. 2)00 420000 +0000 :J .bnor1a# Bain G3)2 7o"e##ing ,-penses .@c. 7o .bnor1a# Loss .@c. 7o >et rofit 133+$) ;12&52 ;12&52

12 Dr. A.n"r+#0 L"$$ A/c. Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o rocess . .@c. 200 110$3 :/ :an' "a#es 7o rocess : .@c. $0 )30! 2F As. 303 200 $00 :/ :an' 2F As. 103 $0 $00 :/ E L .@c. 1)1$+ 220 1:&2: 220 1:&2:

Dr.

A.n"r+#0 G#in A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o >or1a# Loss .@c. 130 $!0 :/ rocess : @c. 130 10022 G3)2 7o Costing E L .@c. 1&0 10022 1&0 10022 I00u$tr#ti"n 6 Ma0es0 Ltd process a 1ateria# w0ic0 passes t0roug0 t0ree processes. 5igures re#ating to production for t0e first $ 1ont0s of 200G are as fo##ows. Pr"ce$$ A Pr"ce$$ B Pr"ce$$ C Aaw 1ateria# used 1000 tones F As. 200 Manufacturing &ages As. 40000 As. 30000 As. )000 ,-penses As. 32!00 As. 10+00 As. 3)10 !0 tones 30 tones !1 tones "crap so#d F As. !0 per tone "e##ing price per tone As. 320 As. 4!0 As. +00 &eig0t Loss !H 10H 20H

Manage1ent e-penses were As. 10!004 se##ing e-penses As. +000 and interest on borrowed capita# As. 2000. 7wo t0ird of process I and one 0a#f of process 2 are passed on to t0e ne-t process and t0e ba#ance are so#d. repare rocess .ccount4 rocess "toc' .ccount and Costing rofit E Loss .@c.

15 S"0uti"n Dr. Pr"ce$$ N". 1 A/c. Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o &ages 40000 :/ &eig0t Loss !0 (( 7o ,-penses 32!00 :/ rocess I "toc' .@c.2F300per tone3 1000 252600 1000 252600

G00 2)0000

Dr.

Pr"ce$$ N". 1 St"c3 A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o rocess I .@c. G00 2)0000 :/ :an' 2F 3203 300 G$000 $00 1+0000 7o Costing rofit $000 :/ rocess>o.2 E Loss .@c. .@c. ;00 252000 ;00 252000

Dr.

Pr"ce$$ N". 2 A/c. Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o wages 30000 7o ,-penses 10+00 :/ &ig0t Loss $0 (( :/ rocess 2 "toc' .@c2F As. 4303 !10 21G300 200 220:00 200 220:00

Dr.

Pr"ce$$ N". 2 St"c3 A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o rocess 2 .@c. !10 21G300 :/ :an' 7oCosting EL !100 2sa#e F 4!03 2!! 114)!0 .@c. :/ rocess 3 2!! 10G$!0 .@c. 610 2***00 610 2***00

1: Dr. Pr"ce$$ N". & A/c. Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o wages )000 :/ &eig0t Loss !1 (( 7o ,-penses 3)10 :/ rocess 3 stoc' .@c 266 120&20 266 120&20

1!3 11)+10

Dr.

Pr"ce$$ N". & St"c3 A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o rocess 3 .@c. 1!3 11)+10 :/ :an'

Dr.

C"$tin% Pr"!it = L"$$ A/c.

Cr.

P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Manage1ent ,-penses 10!00 :/ rocess 1 "toc' .@c. $000 7o "e##ing ,-penses +000 :/ rocess 2 "toc' .@c. !100 7o Interest on Capita# 2000 :/ rocess 3 "toc' .@c. 4!G0 :/ >et Loss 4+10 20600 20600

1.5 VALUATION O ,OR>?IN?PROGRESS

1.5.1 Me#nin% "! ,"r3?in?Pr"%re$$: "ince production is a continuous activit/4 t0ere 1a/ be so1e inco1p#ete production at t0e end of an accounting period. Inco1p#ete units 1ean t0ose units on w0ic0 percentage of co1p#etion wit0 regu#ar to a## e#e1ents of cost 2i.e. 1ateria#4 #abour and over0ead3 is not 100H. "uc0 inco1p#ete production units are 'nown as &or'(in( rogress. "uc0 &or'(in( rogress is va#ued in ter1s of e;uiva#ent or effective production units. 1.5.2 Me#nin% "! e@ui(#0ent )r"'ucti"n unit$ : 70is represents t0e production of a process in ter1s of co1p#ete units. In ot0er words4 it 1eans converting t0e inco1p#ete production into its e;uiva#ent of co1p#ete units. 70e ter1 e;uiva#ent unit 1eans a notiona# ;uantit/ of co1p#eted units substituted for an actua# ;uantit/ of inco1p#ete p0/sica# units in progress4 w0en t0e aggregate wor' content of t0e inco1p#ete units is dee1ed to be e;uiva#ent to t0at of t0e substituted ;uantit/. 70e princip#e app#ies w0en operation costs are apportioned between wor' in progress and co1p#eted units.

1;
,;uiva#ent units of wor' in progress D .ctua# no. of units in progress ercentage of wor' co1p#eted

,;uiva#ent unit s0ou#d be ca#cu#ated separate#/ for eac0 e#e1ent of cost 2vi6. 1ateria#4 #abour and over0eads3 because t0e percentage of co1p#etion of t0e different cost co1ponent 1a/ be different. 1.5.& Acc"untin% Pr"ce'ure: 70e fo##owing procedure is fo##owed w0en t0ere is &or'(in( rogress 213 5ind out e;uiva#ent production after ta'ing into account of t0e process #osses4 degree of co1p#etion of opening and @ or c#osing stoc'. 223 5ind out net process cost according to e#e1ents of costs i.e. 1ateria#4 #abour and over0eads. 233 .scertain cost per unit of e;uiva#ent production of eac0 e#e1ent of cost separate#/ b/ dividing eac0 e#e1ent of costs b/ respective e;uiva#ent production units. 243 ,va#uate t0e cost of output finis0ed and transferred wor' in progress 70e tota# cost per unit of e;uiva#ent units wi## be e;ua# to t0e tota# cost divided b/ effective units and cost of wor'(in( progress wi## be e;ua# to t0e e;uiva#ent units of wor'(in( progress 1u#tip#/ b/ t0e cost per unit of effective production. In s0ort t0e fo##owing fro1 steps an invo#ved. "tep 1 ? prepare state1ent of ,;uiva#ent production "tep 2 ? repare state1ent of cost per ,;uiva#ent unit "tep 3 ? repare of ,va#uation "tep 4 ? repare process account 70e prob#e1 on e;uiva#ent production 1a/ be divided into four groups. I. w0en t0ere is on#/ c#osing wor'(in(progress but wit0out process #osses II. w0en t0ere is on#/ c#osing wor'(in(progress but wit0 process #osses III. w0en t0ere is on#/ opening as we## as c#osing wor'(in( progress wit0out process #osses I%. w0en t0ere is opening as we## as c#osing wor'(in( progress wit0 process #osses

Situ# On0A c0"$in% B"r3?in?)r"%re$$ Bit-"ut )r"ce$$ 0"$$e$ C In t0is case4 t0e e-istence of process #oss is ignored. C#osing wor'( in(progress is converted into e;uiva#ent units on t0e basis of esti1ates on degree of co1p#etion of 1ateria#s4 #abour and production over0ead. .fterwards4 t0e cost pr e;uiva#ent unit is ca#cu#ated and t0e sa1e is used to va#ue t0e finis0ed output transferred and t0e c#osing wor'(in(progress Situ#ti"n II: ,-en t-ere i$ c0"$in% B"r3?in?)r"%re$$ Bit- )r"ce$$ 0"$$ "r %#in. If t0ere are process #osses t0e treat1ent is sa1e as a#read/ discussed in t0is c0apter. In case of nor1a# #oss not0ing s0ou#d be added to e;uiva#ent production. If abnor1a# #oss is t0ere4 it s0ou#d be considered as good units co1p#eted during t0e period. If units scrapped 2nor1a# #oss3 0ave an/ re#iab#e va#ue4 t0e a1ount s0ou#d be deducted fro1 t0e cost of 1ateria#s in t0e cost state1ent before dividing b/ e;uiva#ent production units. .bnor1a# gain wi## be deducted to obtain e;uiva#ent production. Situ#ti"n III: O)enin% #n' c0"$in% B"r3?in?)r"%re$$ Bit-"ut )r"ce$$ 0"$$e$. "ince t0e production is a continuous activit/ t0ere is possibi#it/ of opening as we## as c#osing wor'(in(progress. 70e procedure of conversion of opening wor'(in(progress wi## var/ depending on t0e 1et0od of apportion1ent of cost fo##owed vi64 5I5O4 .verage cost Met0od and LI5O. Let us discuss t0e 1et0ods of va#uation of wor'(in(progress one b/ one. 2a3 I O Met-"': 70e 5I5O 1et0od of costing is based on t0e assu1ption of t0at t0e opening wor'(in(progress units are t0e first to be co1p#eted. ,;uiva#ent production of opening wor'(in(progress can be ca#cu#ated as fo##owsC
,;uiva#ent roduction D <nits of Opening &I - ercentage of wor' needed to finis0 t0e units

2b3 A(er#%e C"$t Met-"': 70is 1et0od is usefu# w0en price f#uctuate fro1 period to period. 70e c#osing va#uation of wor'( in(progress in t0e o#d period is added to t0e cost of

21 new period and an average rate obtained. In ca#cu#ating t0e e;uiva#ent production opening units wi## not be s0own separate#/ as units of wor'(in( progress but inc#uded in t0e units co1p#eted and transferred. 2c3 ,ei%-te' A(er#%e C"$t Met-"': In t0is 1et0od no distinction is 1ade between co1p#eted units fro1 opening inventor/ and co1p#eted units fro1 new production. .## units finis0ed during t0e current accounting period are treated as if t0e/ were started and finis0ed during t0at period. 70e weig0ted average cost per unit is deter1ined b/ dividing t0e tota# cost 2opening wor'(in(progress cost K current cost3 b/ e;uiva#ent production.

2d3 LI O Met-"': In LI5O 1et0od t0e assu1ption is t0at t0e units entering into t0e process is t0e #ast one first to be co1p#eted. 70e cost of opening wor'(in(progress is c0arged to t0e c#osing wor'(in(progress and t0us t0e c#osing wor'(in( progress appears cost of opening wor'(in( progress. 70e co1p#eted units are at t0eir current cost. 213 5or1at of state1ent of ,;uiva#ent roduction C
In)ut Out)ut E@ui(#0ent Pr"'ucti"n articu#ars <nits articu#ars <nits Materia# Labour Over0eads H<nits H <nits H <nits

Opening "toc' <nits Introduced

-- <nits co1p#eted -- >or1a# Loss .bnor1a# Loss -- ,;uiva#ent <nits

-- -- -- -- --- (( (( (( (( -- -- -- -- --- -- -- -- -- -- L-

223 "tate1ent of cost per ,;uiva#ent <nits C E0e+ent "! c"$tin% C"$t E@ui(#0ent R$. Unit$

C"$t )er E@ui(#0e nt Materia# Cost 2>et3 L- L- L- Labour Cost L- L- LOver0eads Cost L- -- L- -- L-

22 233 "tate1ent of ,va#uation

P#rticu0#r$ E0e+ent "! c"$t

C"$t )er C"$t e@ui(#0ent R$. unit$ R$. <nits co1p#eted Materia# -- -- -- Labour -- -Over0eads -- -- -- L- C#osing &I Materia# -- -- -- Labour

E@ui(#0ent Unit$

T"t #0 C" $t R$ --

-- --Over0eads -- -- -- L- .bnor1a# Loss Materia# -- -- -- Labour --- -Over0eads -- -- -- L-

I00u$tr#ti"n 2: 8A(er#%e C"$tin%9 repare a state1ent of e;uiva#ent production4 state1ent of cost4 process account fro1 t0e fo##owing infor1ation using average costing 1et0od. Opening "toc' !0000 <nits Materia# As. 2!000 Labour As. 10000 Over0eads As. 2!000 <nits Introduced 2000000 <nits Materia# As. 100000 &ages As. )!000 Over0eads As. )0000 During t0e period 14!04000 units were co1p#eted and transferred to rocess II. C#osing stoc' 14004000 units. Degree of co1p#etion. Materia# 100 H Labour !0 H Over0eads 40 H S"0uti"n :
In)ut Out)ut E@ui(#0ent Pr"'ucti"n
articu#ars <nits articu#a rs <nits Materia# Labour Over0eads H <nits H <nits H <nits

Opening <nits "toc' !04000 roduced 1!0000 100 1!0000 100 1!0000 100 1!0000 Introduced 2004000 C#osing "toc' 100000 100 100000 !0 !0000 40 40000 2!0000 2!0000 2!0000 200000 1G0000

2& St#te+ent "! C"$t : ,#e1ent Opening cost As. Co st pe r un it Materia# 2!4000 14004000 142!4000 24!04000 0.!00 Labour 104000 )!4000 +!4000 24004000 0.42! Over0eads 2!4000 )04000 G!4000 14G04000 0.!00 $04000 244!4000 340!4000 1.42! Current cost As. 7ota# Cost As. ,;uiva#ent units

St#te+ent "! A))"rti"n+ent "! C"$t

P#rticu0#r$ Unit$ C"$t )er

C"$t T"t#0

c" unit $t 14!04000 1.42! 213)!0 1. <nits introduced E transferred 2. C#osing wor'(in(progress Materia# 14004000 0.!00 !04000 Labour !04000 0.42! 2142!0 Over0eads 404000 0.!00 204000 G142!0 340!4000

Dr.

Pr"ce$$ I A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 7o Opening !04000 $04000 :/ <nits "toc' co1p#eted 7o Materia#s 24004000 14004000 E transfer !04000 )!4000 :/ C#osing "toc' !04000 G142!0 7o )04000 Over0eads 24!04000 340!4000 24!04000 340!4000

24134)!0 7o Labour

I00u$tr#ti"n 5: 8 I O Met-"'9 5ro1 t0e fo##owing infor1ation re#ating to MM> Co1pan/ Ltd. repare rocess Cost .ccount for rocess III for t0e /ear 200+. Opening "toc' I> rocess III !000 units of As. 3$4000 7ransfer fro1 rocess II 24134000 units of As. +42)4000 Direct Materia# added in rocess III As. 44014+00 Direct &ages As. 14G+4100 roduction Over0ead As. GG40!0 <nits "crap 114000 units 7ransferred to rocess I% 14+G4000 units C#osing "toc' 1+4000 units 2* De%ree "! C"+)0eti"n : "cr Opening C#osing ap "toc' "toc' Materia# )0 H +0 H 100 H Labour !0 H $0 H +0 H Over0ead !0 H $0 H +0 H 70ere was a nor1a# #oss of !H production and unit scraped were so#d at As. 1.!0 S"0uti"n :
In)ut Out)ut E@ui(#0ent Pr"'ucti"n articu#ar <nits articu#ars <nits Materia# Labour Over0eads <nits H <nits H <nits

Opening >or1a# "toc' !4000 Loss 10000 rocess II Op. "toc' 7ransfer 2134000 rocessed !000 ( ( 30 1!00 !0 2!00 Introduces E Co1p#eted 1+4000 100 1+4000 100 1+4000 100 1+4000 .bnor1a# Loss 1000 100 1000 100 1000 +0 +00 C#osing "toc' 1+000 100 1+000 +0 14400 $0 10+00 21+000 21+000 203000 200G00 1G+100

N"te : <nits roduced C Opening stoc' K units introduced ? c#osing stoc'

: !000 K213000 I 1+000 D 200000 >or1a# Loss C ! H of 200000 D 10000 units St#te+ent "! C"$t
articu#ars Cost As. ,;uiva#ent <nits As. Co st er <

Materia# ? I 7ransfer fro1 revious process +42)4000 1!4000 +4124000 24034000 4.00 Less ? %a#ue of scrap 2nor1a#3 Materia# ? II .dedK in t0e process 44014+00 24004G00 2.00 Direct &ages 14G+4100 14G+4100 1.00 Over0eads GG40!0 14G+4100 0.!0 ).!0

26 St#te+ent "! A))"rti"n+ent "! C"$t

articu#ars ,#e1ents ,;uiva#ent <nits Cost er <nit As. Cost As. 7ota# cost As.

Op. "toc' rocessed

Materia# I (( (( Materia# II 14!00 2.00 34000 &ages 24!00 1.00 24!00 Over0eads 24!00 0.!0 142!0 $4)!0

Materia# I 14+44000 4.00 )43$4000 <nits introduced and Co1p#eted Materia# II 14+44000 2.00 34$+4000 &ages 14+44000 1.00 14+44000 Over0eads 14+44000 0.!0 G24000 134+04000 C#osing stoc' Materia# I 1+4000 4.00 )24000 134+$4)!0 Materia# II 144400 2.00 2+4+00 &ages 104+00 1.00 104+00 Over0eads 104+00 0.!0 !4400 141)4000 .bnor1a# #oss Materia# I 14000 4.00 44000 Materia# II 14000 2.00 24000 &ages +00 1.00 +00 Over0eads +00 0.!0 400 )4200 TOTAL 16<10<;60

Dr.

Pr"ce$$ III A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 104000 1!4000 7o :a#ance !4000 3$4000 :/ >or1a# b@d. Loss 14+G4000 144224)!0 7o rocess 24134000 +42)4000 :/ rocess II .@c. I% .@c. 14000 )4200 7o Materia#s 44014+00 :/ .bnor1a# Loss 1+4000 141)4000 7o &ages 14G+4100 :/ C#osing "toc' 7o GG40!0 Over0eads 2<1:<000 16<21<;60 2<1:<000 16<21<;60

N"te : Cost of goods transferred to rocess I% C %a#ue of Opening "toc' 3$4000 Cost incurred in t0is process for Opening "toc' $4)!0 Cost incurred for t0e units introduced E rocessed 134+04000

I00u$t 70e fo##owing infor1ation is given in respect of rocess costing 10 C 3 for t0e 1ont0 of =anuar/ 200G. Opening stoc' ? 24000 units 1ade up of R$. Direct Materia# ? I 1243!0 Direct Materia# ? II 134200 Direct Labour 1)4!00 Over0eads 114000 7ransferred fro1 rocess 2 ? 204000 units F As. $ per unit. 7ransferred to rocess 4 ? 1)4000 units ,-penditure incurred in process ? 3 R$. Direct Materia# 304000 Direct Labour Over0eads $04000 $04000

"crapC14000 units(Direct Materia#s 100H4Direct Labour $0H4 Over0eads 40H. >or1a# Loss 10 H of roduction. "crapped units rea#i6ed As. 4@( per unit C#osing stoc' C 44000 units ? Degree of co1p#etion. Direct Materia#s +0 H4 Direct Labour $0 H and Over0eads 40 H. repare rocess 3 .ccount using average price 1et0od a#ong wit0 necessar/ supporting state1ents. NC. .. ? Inter4 Ma/ 2001O S"0uti"n : "tate1ent of ,;uiva#ent Materia#3
articu#ars 7ota# <nits <nits Co1p#ete#/

roduction 2weig0ted .verage cost

Materia# ? II Labour Over0eads H <nits H <nits H <nits

Materia# ? I

rocessed 1)000 100 1)000 100 1)000 100 1)000 100 1)000 >or1a# Loss 1+00 ((

10.

of 22000 K 20000 ? 40003 .bnor1a# Bain +00 100 +00 100 +00 100 +00 100 +00 C#osing "toc' 4000 100 4000 +0 3200 $0 2400 40 1$00 22000 20200 1G400 1+$00 1)+00

25 St#te+ent "! C"$t

articu#ars Cost As.

,;uiva#ent <nits

M#teri#0 7 I : Opening ba#ance 2000 units 1243!0 Cost of 20000 units F As. $ er unit 14204000 142!41!0 204200 $.1G!! M#teri#0 7 II : Opening "toc' 134200 In rocess II 304000 434200 1G4400 2.22$+ L#."ur : Opening Labour 1)4!00 In rocess II $04000 ))4!00 1+4$00 4.1$$) O(er-e#'$ : Opening "toc's 114000 In rocess II $04000 )14000 1)4+00 3.G+++ T"t#0 c"$t )er unit 12.655:

Aate @ ,;uiva#ent <nits As.

%a#uation of ,;uiva#ent <nit

5inis0ed goods 21)000 units - As. 1$.!))+3 units - As. 1$.!))+3 1342$2 &or'inprogress Materia# I 24000 units - As. $.1G!!3 244)+2 Materia# II 23200 units - As. 2.22$+3 )412$ Labour 22400 units - As. 4.1$$)3 104000 Over0eads 21$00 units - As. 3.G+++3 $43+2 4+42G0 As. 24+14+22 .bnor1a# <nits 2+00

Dr.

Pr"ce$$ III A/c.

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 24000 !)40!0 :/ >or1a# Loss 14+00 )4200 7o Opening &I 7o rocess 2 204000 14204000 :/ 5inis0ed Boods 7o Direct <nits 1)4000 24+14+22 Materia# II 304000 :/ C#osing :a#ance 44000 4+42G0 $04000 7o Direct Labour 7o Over0eads $04000 7o .bnor1a# +00 1342$2 Bain 22<:00 &<&5<&12 22<:00 &<&5<&12

I00u$ 70e finis0ed product of a factor/ pass t0roug0 two processes C t0e entire 1ateria# being p#aced in process at t0e beginning of t0e first process. 5ro1 t0e fo##owing production and #ast data re#ating to t0e first process4 wor' out t0e va#ue of t0e c#osing inventor/ and t0e va#ue of t0e 1ateria#s transferred to t0e second process. Pr"ce$$ I R$. Opening inventor/ 104000 Materia# 2)4!00 Labour !04000 Manufacturing Over0eads 404000 Opening inventor/ 22! percent co1p#ete3 44000 ut into rocess 124000 7ransferred to II rocess 104000 C#osing inventor/ 220 percent co1p#eted3 !4000 "poi#age during process 14000 NI.C.&...4 5ina#O S"0uti"n : Pr"ce$$ I A/c
Opening Inventor/ 44000 104000 7ransferred to rocess II Materia# 124000 2)4!00 >or1a# Loss 14000 (( Labour !04000 C#osing Inventor/ Manufacturing Over0eads 404000 12<000 1<25<600 12<000 1<25<600 104000 141!4)!0

!4000 114)!0

,"r3in% N"te : "tate1ent of ,;uiva#ent roduction <nits

articu#ars Output Mg. Materia# Labour Over0eads *t/. H *t/. H *t/. H 44000 34000 )! 34000 )! 34000 )!

Opening "toc' rocessed $4000 $4000 100 $4000 100 $4000 100 Co1p#ete#/ rocessed >or1a# Loss 14000 (( (( (( (( (( (( C#osing Inventor/ !4000 14000 20 14000 20 14000 20 12<000 10<000 10<000 10<000

2; St#te+ent "! E0e+ent "! C"$t "n t-e .#$i$ "! E@ui(#0ent Pr"'ucti"n C"$t )er P#rticu0#r$ C"$t E@ui(#0ent Unit R$. Unit$ R$. Materia# 2)4!00 104000 2.)! Labour !04000 104000 !.00 Over0eads 404000 104000 4.00 7ota# 11.)! St#te+ent "! A))"rti"n+ent "! C"$t articu#ars ,#e1ents ,;uiva#ent <nits Cost As. 7ot a# co st As

Cost er <nit As.

Op. "toc' rocessed

Materia# 34000 2.)! +42!0 Labour 34000 !.00 1!4000 Over0eads 34000 4.00 124000 3!42!0 Materia# $4000 2.)! 1$4!00 Labour $4000 !.00 304000 Over0eads $4000 4.00 244000 )04!00 Materia# 14000 2.)! 24)!0 Labour 14000 !.00 !4000 Over0eads 14000 4.00 44000 114)!0

Co1p#ete#/ rocessed

C#osing Inventor/

TOTAL 1<15<600 V#0ue "! %""'$ tr#n$!erre' t" ne1t )r"ce$$ As. <nits %a#ue of opening stoc' 2given3 104000 .dditiona# cost on opening stoc' 3!42!0 44000 %a#ue of co1p#ete#/ processed units )04!00 $4000 141!4)!0 104000 I00u$tr#ti"n 10 .:C Li1ited 1anufactures a product P2LQ b/ using t0e process nor1a##/ A. 7. for t0e 1ont0 of Ma/ 200G4 t0e fo##owing data is avai#ab#e.

&0 rocess A. 7. Materia# Introduced 1$4000 units 7ransfer to ne-t process 144000 units &or'(in( rocess 44000 units .t t0e beginning of t0e 1ont0 24@! co1p#eted3 34000 units .t t0e end of t0e 1ont0 22@3 co1p#eted3 Cost recordsC &or'(n( rocess at t0e beginning of t0e 1ont0 Materia# As. 304000 Conversion cost As. 2G4200 Cost during t0e 1ont0 Materia#s As. 14204000 Conversion cost As. 14$04+00 >or1a# spoi#ed units are 10H of goods finis0ed output transferred to ne-t process. Defects in t0ese units are identified in t0eir finis0ed state. Materia#s for t0e product is put in t0e process at t0e beginning of t0e c/c#e of operation4 w0ereas #abour and ot0er indirect cost f#ow even#/ over t0e /ear. It 0as no rea#i6ab#e va#ue for spoi#ed units. Ae;uired C 213 "tate1ent of e;uiva#ent production 2average cost 1et0od3 223 "tate1ent of cost and distribution of cost 233 rocess accounts NC... C,. >ov. 200)O S"0uti"n : "tate1ent of ,;uiva#ent roduction 2average cost 1et0od3
Input units H co1p#eted ,;uiva#ent <nits 4000 Opening &I (( (( articu#ars Output <nits ,;uiva#ent roduction Materia#s Conversion cost H Co1p#et ed ,;uiva#e nt <nits

>or1a# spoi#age .bnor1a# spoi#age

1$000 Introduced and 144400 100 144400 100 144400 Co1p#eted to ne-t 14440 100 14440 100 14440 141$0 100 141$0 100 141$0 C#osing &I 34000 100 34000 $$.$) 24000 20000 20000 20000 1G000

&1 St#te+ent $-"Bin% c"$t "! e#c- e0e+ent articu#ars Materia#s Conversion cost Opening 304000 2G4200 Cost in process 14204000 14$04+00 7ota# 2a3 14!04000 14G04000 ,;uiva#ent <nits 2b3 204000 1G4000 Cost per unit 2a R b3 ).!0 10.00 St#te+ent $-"Bin% 'i$tri.uti"n "! c"$t 2A articu#ars ,;uiva#ent Cost per s.3 <nits unit <nits co1p#eted Materia#s 144400 ).!0 140+4000 Conversion cost 144400 10.00 14444000 24!24000 >or1a# spoi#age 210 H3 14440 1).!0 2!4200 C0"$in% $t"c3 : Materia# 34000 ).!0 224!00 Conversion cost 24000 10.00 204000 424!00 A.n"r+#0 St"c3: Materia# 141$0 ).!0 +4)00 Conversion "toc' 141$0 10.00 114$00 204300 Dr. Pr"ce$$ A/c. Cr. P#rticu0#r$ R$. P#rticu0#r$

R$. 7o Opening &I

!G4200 :/ rofit and Loss .@c. 7o Materia# Introduced 7o 14204000 2abnor1a#3 204300 14$04+00 :/ 7ransfer Conversion cost Incurred to >e-t 24))4200 rocess :/ C#osing &I 424!00 &*0000 &<*0<000 BS E Co. 1anufactures a product. 70e process costing is fo##owed and wor'(in(progress stoc's at t0e end of eac0 1ont0 are va#ued at 5I5O basis. I00u$tr#ti"n.11 .t t0e beginning of t0e 1ont0 of =une4 t0e inventor/ of wor'( in( progress s0owed 400 units4 40H co1p#ete4 va#ued as fo##owsC

&2 R$. Materia# 34$00 Labour 34400 Over0eads 14000 7ota# +4000 In t0e 1ont0 of =une4 1ateria#s were purc0ased for As. )!4000. &ages and over0eads in t0e 1ont0 a1ounted to As. )G4+00 and As. 2142+0 respective#/. .ctua# issue of 1ateria# to production was As. $+4!00. 5inis0ed stoc' in t0e 1ont0 was 2!00 units. 70ere was no #oss in process. .## t0e end of t0e 1ont04 t0e wor'(in(process inventor/ was !00 units4 $0 percent co1p#ete as to #abour and over0eads and +0 % co1p#ete as to 1ateria#s. repare a rocess .ccount for recording t0e 1ont0Qs transactions and prepare a rocess Cost "0eet s0owing tota# and units costs NI.C.&...4 5ina#O S"0uti"n: Dr. Pr"ce$$ A/c. Cr.

7o Opening "toc'

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. 400 +4000 :J 7ransfer to 7o Materia# 24$00 $+4!00 5inis0ed stoc' 24!00 14!$40G4 7o Labour )G4+00 :/ &or'(in( 7o Over0eads 2142+0 rogress !00 2144+$ &000 1<55<6:0 &000 1<55<6:0

,"r3in% N"te : "tate1ent of ,;uiva#ent roduction 2<nits3

Input articu#ars Outp ut 400 Opening "toc' 2$00 &or'(in( rogress Materia# Labour Over0ead *t/. H *t/. H *t/. H 400 240 $0 240 $0 240 $0

Co1p#ete#/ rocessed 24100 24100 100 24100 100 24100 100 !00 400 +0 300 $0 300 $0

3000 34000 24)40 24$40 24$40

&& ,"r3in% N"te : 213 5or opening stoc' a#so e;uiva#ent production 0as been ca#cu#ated as it was part#/ co1p#ete and it 0as to be converted into finis0ed product in t0is period. 70e/ were co1p#eted $0 H in t0is period. 223 7ota# units produced in a 1ont0 are 24!0 units. Out of t0is 400 units of opening stoc' 0as been deducted because t0e/ 0ave been part#/ processed in t0is particu#ar 1ont0 and we 0ave a#read/ ca#cu#ated e;uiva#ent units of opening stoc'. On#/4 24100 units 0ave been introduced and co1p#eted in t0e particu#ar period. 233 5or c#osing stoc' a#so e;uiva#ent production in ter1s of tota# units co1p#eted 0as been ca#cu#ated. Cost As. St#te+ent "! E0e+ent "! c"$t "n t-e .#$i$ "! E@ui(#0ent Unit$ ,;uiva#ent Cost <nits per unit As. Materia# $+4!00 2.)40 2!.000 Labour )G4+00 2.$40 30.22)3 Over0eads 2142+0 2.$40 +.0$0$ St#te+ent "! A))"rti"n+ent "! C"$t
articu#ars ,;uiva#ent <nits Op. "toc' rocessed Co1p#ete#/ rocessed &or'(in( rocess Cost er <nit As. Detai#s As. 7ot a# A s.

Materia# 240 2!.0000 $4000 Labour 240 30.22)3 )42!! Over0eads 240 +.0$0$ 14G3! 1!41G0 Materia# 24100 2!.0000 !24!00 Labour 24100 30.22)3 $344)) Over0eads 24100 +.0$0$ 1$4G2) 14324G04 Materia# 400 2!.0000 104000 Labour 300 30.22)3 G40$+ Over0eads 300 +.0$0$ 2441+ 2144+$ TOTAL 1<2;<6:0

T"t#0 C"$t "! 2600 unit$ As. Cost of opening stoc' +4000 .dditiona# cost of opening stoc' processed 1!41G0 Cost of co1p#ete#/ processed 14324G04 1<62<0;*

70e fo##owing data is avai#ab#e in respect of rocess I for 5ebruar/ 1GG0. 213 Opening stoc' of wor'(in(process +00 units at a tota# cost of As. 44000. 223 Degree of co1p#etion of opening wor' in process Materia#s 100 H Labour $0 H Over0eads $0 H 233 Input of 1ateria#s at a tota# cost of As. 3$4+00 for G4200 units 243 Direct wages incurred As. 1$4)!40 2!3 roduction over0eads As. +43)0 2$3 <nits scrapped 14200 units. 70e stage of co1p#etion of t0ese units was Materia#s 100 H Labour +0 H Over0eads +0 H 2)3 C#osing wor'(in(process C G00 units. 70e stage of co1p#etion of t0ese units was C Materia#s 100 H Labour )0 H Over0eads )0 H 2+3 )4G00 units were co1p#eted and transferred to t0e ne-t process. 2G3 >or1a# Loss is +0 H of t0e tota# input 2opening stoc' p#us units put in3 2103 "crap va#ue is As. 4 per unit Jou are re;uired to C 2a3 Co1pute e;uiva#ent production 2b3 Ca#cu#ate t0e cost per e;uiva#ent unit for eac0 e#e1ent 2c3 Ca#cu#ate t0e cost of abnor1a# #oss 2or gain34 c#osing wor' in process and t0e units transferred to t0e ne-t process using t0e 5I5O 1et0od. 2d3 "0ow t0e rocess .ccount for 5ebruar/ 1GG0 NC...4 InterO

I00u$

&6 8#9 St#te+ent "! E@ui(#0ent Pr"'ucti"n 8 I O Met-"'9

articu#ars Op. "toc' of input Output ,;uiva#ent units articu#ars <nits co1p#eted <nits Materia# Labour E Over0ea <nits H <nits H ds

.bnor1a# Loss

&.I. . +00 &or' on Op. stoc' +00 (( 320 40 <nits >ew units )100 )100 100 )4100 100 G4200 C#osing stoc' G00 G00 100 $30 )0 Introduced >or1a# Loss +00 (( (( 400 400 100 320 100 104000 104000 +4400 +43)0

8.9 St#te+ent "! c"$t )er e@ui(#0ent unit$ !"r e#c- e0e+ent
articu#ars Cost As. Materia# 3$4+00 Less C "crap rea#i6ation 2+00 units F As. 43 34200 334$00 +4400 4.00 Labour 1$4)40 +43)0 2.00 Over0eads +43)0 +43)0 1.00 ,;uiva#ent <nit Cost er <nit

I "tate1ent s0owing cost of abnor1a# #oss4 c#osing &I transferred to t0e ne-t process C
articu#ars Cost per

and units

,;uiva#ent 7ota# cost unit As. unit As. $40 .bnor1a# Loss Materia#s 4.00 400 14$00 Labour 2.00 320 Over0eads 1.00 320 320 24!$0 C#osing &I Materia# 4.00 G00 34$00 Labour 2.00 $30 142$0 Over0eads 1.00 $30 $30 2i3 Cost of opening &I 2+0 units3 44000 2ii3 Cost incurred on opening &I Materia# (( (( Labour 2.00 320 $40 Over0eads 1.00 320 320 G$0

&2
2iii3 Cost of co1p#eting )100 units Labour 2.00 )100 14200 Materia# 4.00 )100 2+400 Over0eads 1.00 )100 )100 4G)00 6*200

7ota# 2I K ii K iii3

Dr.

Pr"ce$$ A/c. !"r e.ru#rA 1;;0

Cr.

P#rticu0#r$ Unit$ R$. P#rticu0#r$ Unit$ R$. )G00 !4$$0 7o Opening +00 4000 :/ 5inis0ed &I Boods 7o Materia#s G200 3$+00 :/ C#osing &I G00 !4G0 7o Labour (( 1$)40 :/ >or1a# Loss +00 3200 400 2!$0 7o Over0eads (( +3)0 :/ .bnor1a# Loss 10000 $!G10 10000 26;10

1.: ECERCISE
1.:.1 O.Decti(e tA)e: An$Ber in Brie! 1. 2. "tate an/ four features of process costing. Define process costing4

3. &0at do /ou 1ean b/ nor1a# #oss I Sow is it treated in process cost accountsI 4. &0at do /ou 1ean b/ abnor1a# #oss I Sow is it treated in process cost accountsI 5. Distinguis0 between nor1a# #oss and abnor1a# #oss. 6. &0at do /ou 1ean b/ abnor1a# effectiveI Sow is it treated in process cost accountsI 7. &0at do /ou 1ean b/ inter process profitI &0at purpose does it serveI 8. &0at do /ou 1ean be e;uiva#ent productionI 9. >a1e an/ four industries in w0ic0 process costing is app#icab#eI 10. 11. 12. ,nu1erate an/ two advantages of process costing. ,nu1erate an/ two disadvantages of process costing. &0at do /ou 1eant b/ e;uiva#ent unitsI

&5 Mu0ti)0e C-"ice Eue$ti"n$ 1. 70e t/pe of spoi#age t0at s0ou#d not affect t0e cost of inventories is 2a3 .bnor1a# spoi#age 2c3 "easona# spoi#age 2b3 >or1a# spoi#age 2d3 Indirect spoi#age 2. Materia#s 1a/ not be put into process 2a3 .t t0e beginning of an operation 2b3 Continuous#/ 2c3 .t t0e end of t0e operation 2d3 In t0e s0ipping depart1ent. 3. rocess cost 1et0od is especia##/ suitab#e for 2a3Custo1 production 2c3 5I5O 2b3 "tandard costs 2d3 LI5O In process costing4 costs fo##ow 2a3 rice rise 2c3 roduct f#ow 2b3 rice dec#ines 2d3 5inis0ed goods &0en average costing is used4 t0e opening inventor/ costs are 2a3 Mept separate fro1 t0e costs for t0e new period 2b3 .dded to t0e costs of t0e new period 2c3 "ubtracted fro1 t0e new costs 2d3 .veraged wit0 ot0er costs to arrive at tota# cost. 6. . disadvantage of 5I5O costing is t0at 2a3 70e first units produced cannot be distinguis0ed fro1 #ater production. 2b3 "evera# units costs are used at t0e sa1e ti1e. 2c3 70e units 0ave to be 'ept separate 2d3 70e s0ipping costs are 0ig0er

4.

5.

7. &0ic0 of t0e fo##owing 1et0od of costing can be used in a #arge oi# refiner/I 2a3 rocess costing 2c3 <nit costing 2b3 Operating costing 2d3 =ob costing

&: 8. &0ic0 of t0e fo##owing paid is odd C 2a3 Construction(Contract costing 2b3 "0ip(bui#ding(=ob costing 2c3 :ric' 1anufacturing ? rocess costing 2d3 7ransport underta'ing ? Operating costing

9. . product w0ic0 0as practica##/ no sa#es or uti#it/ va#ue is 2a3 &aste 2c3 "poi#age 2b3 "crap 2d3 Defectives 10. 7ri11ings in ti1ber industr/ s0ou#d be treated as a C 2a3 &aste 2c3 "poi#age 2b3 "crap 2d3 Defectives 11. 70e t/pe of process #oss t0at s0ou#d not affect t0e cost of inventor/ is 2a3 .bnor1a# #oss 2c3 "easona# #oss 2b3 nor1a# #oss 2d3 standard #oss 12. 70e stage w0ere joint products are separated fro1 eac0 ot0er is 'nown as 2a3 brea'(even point point 2b3 ang#e of incidence 2c3 sp#it(off

13. 5ift/ units are put in a process at a tota# cost of As. G0. &astage is nor1a##/ 10H wit0out an/ scrap va#ue. If output is 40 units t0e a1ount of abnor1a# #oss wou#d be 2a3 As. +0 2c3 As. 10 2b3 As. + 2d3 As. G 14. .bnor1a# #oss is c0arged to 2a3 process account >or1a# #oss account 2b3 costing profit and #oss account 2c3

2.nswersC 12a34 2 2d34 3 2b34 42c34 !2a34 $2b34 )2a34 +2c34 G2a34 102b3.311 2a34 122c34 13 2c34 142b3 3

1. 1. 2. 3. 4. 5. 6. &rite a s0ort note(Inter process profits.2.pr(0+3 &rite a "0ort >ote(7reat1ent of #osses in rocess.2.pr 0)3 &rite a s0ort >ote(,;uiva#ent roduction. 2.pr(0)3 Describe t0e 1ain features of process costing. ,-p#ain t0e features of process costing Sow wou#d /ou treat abnor1a# gain I

1.:.&. L"n% @ue$ti"n$ 2. &0at do /ou 1ean b/ inter(process profits in process cost accounts. 3. ,-p#ain t0e 1et0ods to be adopted in t0e treat1ent of joint products and b/(products in process account. 4. &0at do /ou understand b/ T>or1a#I and T.bnor1a#I &astage during t0e process of 1anufactureI 5. Describe brief#/ t0e 1et0od 'nown as rocess Costing4 stating four t/pes of 1anufactures w0ic0 wou#d be suitab#e for its app#ication. . description of t0e 1et0od of dea#ing wit0 b/( products is not re;uired. 6. ,-p#ain t0e concept of ,;uiva#ent roduction. Discuss t0e two 1et0ods of its va#uation. 1.:.* Pr#ctic#0 Pr".0e+$ I00u$tr#ti"n 1: During a particu#ar period 24000 units at a cost of T $04000 were introduced into rocess P.Q 2at t0e beginning3. 70e nor1a# #oss was esti1ated at !H of t0e input. .t t0e end4 14400 units were produced and transferred to t0e rocess P:Q4 4$0 units being partia##/ co1p#eted and 140 units scrapped. 70e partia##/ co1p#eted units 0ad reac0ed t0e fo##owing state of productionC Materia#s 100H co1p#ete Labour !0H co1p#ete Over0eads !0H co1p#ete .dditiona# costs incurred during t0e process wereC Materia#s As. 1)4000 Labour As.334 400 Over0eads As. 1$4)00 70e units scrapped rea#ised As.10 per unit. repare rocess P.Q .@c wit0 a## re#evant state1ents.
2.ns.C ,;uiva#ent <nits4 Materia#C 14G004 LabourC 1$)04 Over0eadsC 14$)0 7ransfer to rocess : 14400 units FAs. )0 p.u.3 2M.Co1. Mar. 20023

I00u$tr#ti"n 2 : LJU Ltd. is engaged in process industr/. During t0e 1ont0 .ugust 2000. 2000 <nits were introduced in process ILI. 70e nor1a# #oss was esti1ated at !H of input. .t t0e end of t0e 1ont0 14400 units 0ad been produced and transferred to process PJQ. 4$0 units were inco1p#ete and 140 units4 after passing t0roug0 fu##/ t0e entire process 0ad to be scrapped. 70e inco1p#ete units 0ad reac0ed t0e fo##owing state of co1p#etionC Materia#s )!H Co1p#eted Labour !0H Co1p#eted Over0eads !0H Co1p#eted 5o##owing are t0e furt0er infor1ation on t0e process PLQ C Cost of t0e 2000 units As. !+4000 .dditiona# Direct 1ateria#s As. 144400 Direct Labour As. 334400 Direct Over0eads As. 1$4)00 <nits scrapped rea#ised As. 10 eac0 repare state1ent of e;uiva#ent production4 state1ent of cost4 state1ent of eva#uation and process PLQ account. 2M.Co1. Mar. 200!3
An$. 2,;uiva#ent <nits4 Materia#C 14)+!4 LabourC 14$)04 Over0eadsC 14$)03

* 0

I00u$tr#ti"n & : 8 I O9 70e fo##owing infor1ation is avai#ab#e for rocess I% of "wasti' 5abrications Ltd. for t0e 1ont0 of Marc0 200!. Opening "toc'C 44+00 units F As.1$4!00 Degree of Co1p#etionC Materia# )0H Labour $0H Over0eads $0H 7ransfer fro1 rocess IIIC 304$00 units F As. 304$00 7ransfer to rocess %C 2)4$00 units Direct Materia# introduced in rocess I%C T 134440 Direct Labour introduced in rocess I%C T 3G4420 roduction over0eads incurred T !24!$0 <nits scrappedC 24400 Degree of co1p#etionC Materia# 100H Labour )0H Over0eads )0H

*1 C#osing stoc' !400 units Degree of co1p#etionC Materia# $0H Labour 40H Over0eads 40H

70ere was a nor1a# #oss of 10H of production in t0e process. <nites scrapped were rea#ised at Ae. 1 per unit. 5ro1 t0e above infor1ation prepareC 1. "tate1ent of e;uiva#ent production 2. Cost of e;uiva#ent unit for eac0 e#e1ent of t0e cost4 t0e #oss4 t0e wor'(in(process4 etc. 3. rocess account using 5I5O 1et0od. 2M.Co1. Oct. 200!3
An$. 2,;uiva#ent <nits4 Materia# IC 2)4$004 Materia# IIC 2$4++04 LabourC 2$44$04 Over0eadsC 2$44$03

I00u$tr#ti"n * : 8 I O9 70e fo##owing data pertains to Li1ited C rocess I for Marc0 2003 of :eta

articu#ars <nits As. Opening &or'(in( rogress F F F F ... 14!00 1!4000 Degree of co1p#etion C Materia#s 100HV Labour and over0eads 33WH Input of Materia#s F F F F ...1+4!00 !24000 Direct Labour F F F F ... 144000 Over0eads F F F F ... 2+4000 C#osing &or'(in( rogress F F F F ...!4000 Degree of Co1p#etion Materia#s G0H and Labour and Over0eads 30H. >or1a# rocess Loss is 10H of tota# input 2opening wor' in progress units K units put in3. "crap va#ue 2.00 per unit. <nits transferred to t0e ne-t process 1!4000 units. Jou are re;uired toC 1. Co1pute e;uiva#ent units of production. 2. Co1pute cost per e;uiva#ent unit for eac0 cost e#e1ent i.e.4 1ateria#s4 #abour and over0eads. 3. Co1pute t0e cost of finis0ed output and c#osing wor'(in( progress. 4. repare t0e process and ot0er .ccount.

A$$u+ i. 5I5O Met0od is used b/ t0e Co1pan/. ii3 70e cost of opening wor'(in(progress is fu##/ transferred to t0e ne-t process. 2M.Co1. Mar.200$3

An$. 2,;uiva#ent <nits4 Materia#C 1$0004 LabourC1440004 Over0eadsC 1440003

I00u$tr#ti"n 6: 8,ei%-te' A(er#%e9 5ro1 t0e fo##owing detai#s prepare "tate1ent at ,;uiva#ent roduction4 state1ent of Cost and find t0e va#ue ofC 2a3 Output transferred and 2b3 C#osing wor' in progress Opening wor' in progress 2units3 24000 Materia#s 2100H Co1p#ete3 )4!00 Labour 2$0 H Co1p#ete3 34000 Over0eads 2$0H Co1p#ete3 14!00 <nits introduced into t0is process +4000 70ere are 24000 units in process at t0e end and t0e stage of co1p#etion is esti1ated to be C Materia#s 100H Labour !0H Over0eads !0H +4000 units are transferred to ne-t process. 70e process costs for t0e period areC Materia#s As. 14 004000 Labour As.)+4000 Over0eads As. 3G4000
(M.Com. Oct. 2006)
An$. 2,;uiva#ent <nits4 Materia#C1040004 LabourC G40004 Over0eadsC G40003

I00u$tr#ti"n 2 : 8A(er#%e9 "0ete and "0ete vt. Ltd. gives t0e fo##owing particu#ars re#ating to process P Q in its p#ants for t0e 1ont0 of =anuar/ 200) C

*& R$. R$. P#rticu0#r$ ,"r3?in?Pr"%re$$ 8600 unit$9 "n 01? 01?2005 Degree of Co1p#etion Labour 2!0H3 FFF )4200 ( Over0eads 2!0H3 F F F F 1$4000 3!4200 Unit$ intr"'uce' 'urin% t-e M"nt=anuar/4 200) ? <nits ? 1G4!00 FFFF(( F F F F 44$!4!00 ( Pr"ce$$in% C"$t incurre' 'urin% t-e M"nt=anuar/4 200) Materia#s Labour F F F F 14+04000 ( Over0eads F F F F 24$44+00 G4104300 articu#ars <nits Output transferred to rocess * FFFF <nits "crapped 2Degree of Co1p#etion Materia# 100H4 Labour +0H and Over0eads +0H3 FFFF &or'(in( rogress 2C#osing :a#ance3 FFFF 2Degree of Co1p#etion(Materia#s 100H4 Labour and Over0eads !0H3 1+42 00 144 00 4 0 0

>or1a# #oss in processing is !H of tota# input and scrapped units fetc0 2.!0 eac0. repare t0e fo##owing state1ents for rocess P Q for =anuar/4 200) C a. "tate1ent of ,;uiva#ent roduction b. "tate1ent of Cost and "tate1ent of ,va#uation c. rocess I I .@c d. .bnor1a# Loss .@c <se .verage Met0od 2Mar. 0)4 adapted)
An$. 2,;uiva#ent <nits4 Materia#C 1G40004 LabourC 1+4)204 Over0eadsC 1+4)203

I00u$tr#ti"n 22 : 8 I O 7 N" L"$$e$9 .vdoot Ltd.4 a 1anufacturer of a specia#i6ed product4 is 0ave a process costing s/ste1. 70e stoc' of wor'(in(progress at t0e end of eac0 1ont0 is va#ued on 5irst in 5irst Out 25I5O3 basis. .t t0e beginning of =anuar/ 200+ t0e stoc' of wor'(in(progress was 2000 units 240H co1p#eted3 w0ic0 was va#ued as C

As. *

Materia#
As. 1+4000

Labour During t0e 1ont0 of =anuar/ 200+4 actua# issue of 1ateria#s for t0e production purpose was As. 34424!00. wages and over0eads in t0e 1ont0 of =anuar/4 200+ a1ounted to As. 44024$00 and As. 14124200 respective#/. 5inis0ed production ta'en into t0e stoc' in t0e 1ont0 was 124!00 units. 70ere was no #oss in t0e process. .t t0e end of t0e 1ont0 of =anuar/4 200+ t0e stoc' of &or'(in( rogress was 2!00 units 2$0H co1p#ete as to Labour and Over0eads and +0H co1p#ete as to 1ateria#s3. repare t0e fo##owing state1ents for =anuar/4 200+.
a) No. of units introduced in the process c) Statement of Cost e) !rocess "ccount. b) Statement of Equiva ent !roduction d) Statement of Eva uation

* Over 0ead s
As.

2.pr. 0+4 adapted3 2,;uiva#ent <nits4 Materia#C 134)004 LabourC 1342004 Over0eadsC 1342003 I00u$tr#ti"n 25 : 8 I O 7 Pr"ce$$ A/c Bit- A.n"r+#0 L"$$9 5ro1 t0e fo##owing infor1ation prepare rocess account as per 5I5O assu1ptionC Opening stoc' Degree of co1p#etion +0 units F T $ per unit As. 44+00 Materia# $0H Labour 40H Over0eads 40H 7ransfer fro1 previous process C 124000 units costing As. 1$43!0 7ransfer to ne-t process C G4)00V <nits scrapped 14300 units >or1a# #oss 10HV C#osing stoc' C 14+00 units Degree of co1p#etion 5or units scrapped C 5or c#osing stoc' C Materia# 100H Materia# $0H Labour !0H Labour !0H Over0eads !0H Over0eads !0H "crap rea#ised Ae. 1.00 per unit Ot0er infor1ation T Materia# 104!00 Labour 204)$0 Over0eads 1$44)0 2M.Co14 Oct. 200+4 adapted3 ( An$. ,;uiva#ent <nits4 Materia# IC 104G004 Materia# IIC 104!004 LabourC 1043+04
Over0eadsC 1043+03

*6 70e 1ean ing of opera ting costin g. roce ss to se#ect cost #i1it in opera ting costin g.

OPERATING COSTING
Unit Structure 2.0 Learning objectives 2.1 Introduction 2.2 Meaning of Operating Costing 2.3 7ransport Costing 2.4 "o#ved rob#e1s of Operating Costing 2.! Sospita# Costing 2.$ "o#ved rob#e1s on Sospita# Costing 2.) Sote# Costing 2.+ "o#ved rob#e1s on Sote# Costing 2.G ,-ercise 2.10 *uestions

2.0 LEARNING OBJECTIVES

.fter stud/ing t0is c0apter one s0ou#d ab#e to understandC rocedure in operating costing according to t0e procedure of a transporter .ccounting procedure of a Sote# .ccounting procedure of a Sospita#

2.1 INTRODUCTION
Operating Costing 1et0od is nor1a##/ used in service sector. &0en t0e service is not co1p#ete#/ standardi6ed4 it is t0e cost of producing and 1onitoring a service. It is a 1et0od of costing app#ied to underta'ings w0ic0 provide service rat0er t0an production of co11odities. "ervice 1a/ be perfor1ed interna##/ and e-terna##/. "ervices are ter1ed as interna# w0en t0e/ 0ave to be perfor1ed on inter(depart1enta# basis in factor/ itse#f e.g. ower 0ouse services4 canteen service etc. "ervices are ter1ed as e-terna# w0en t0e/ are to be rendered to outside parties. ub#ic uti#it/ services #i'e transport4

*2 water supp#/4 e#ectricit/ supp#/4 0ospita#s are t0e best e-a1p#e for t0e service costing. 70us operating costing is a 1et0od of cost accu1u#ation w0ic0 is designed to deter1ine t0e cost of services. Operating costing is just a variant of unit or output costing. Operating costs are co##ected periodica##/ #i'e process cost. 70e cost of rendering t0e service for particu#ar period is re#ated to ;uantu1 of services rendered during t0e particu#ar period to arrive at cost per unit of service rendered. "o t0e principa# of unit costing is used in operating costing.

2.2 MEANING O OPERATING COSTING

Operating costing is a 1et0od of ascertaining t0e cost of providing or operating a service. It is a#so 'nown as service costing CIM. London4 defines Operating Costing as 8t0at for1 of operation costing w0ic0 app#ies w0ere standardi6ed services are rendered eit0er b/ an underta'ing or b/ a service cost renter wit0 in an underta'ing9. 2.2.1 C"$t Unit: Deter1ining t0e suitab#e cost unit to be used for cost ascertain1ent is a 1ajor prob#e1 in service costing. "e#ection of a proper cost unit is a difficu#t tas'. . proper unit of cost 1ust be re#ated wit0 reference to nature of wor#d and t0e cost objectives. 70e cost unit re#ated 1ust be si1p#e i.e. per bed in a 0ospita#4 per cup of tea so#d in a canteen and per c0i#d in a sc0oo#. In a certain cases a co1posite unit is used i.e. assenger ? Mi#o1eter in a transport co1pan/. 70e fo##owing are so1e of e-a1p#e of cost units used in different organi6ations ,nterprises Cost per unit assenger transport Mi#o1eter Boods transport 7on ? Mi#o1eter Sote# er roo1 per da/ Sospita# er bed per da/ Canteen er ite14 per 1ea# &ater supp#/ er 1000 #iters ,#ectricit/ er 'i#owatt 2.2.2 C"00ecti"n "! c"$tin% '#t#: .fter deter1ining t0e cost unit4 t0e cost re#ating to t0e service is co##ected. 70e co##ected cost is a presented under t0e 0eads suitab#e for contro# purpose i.e. fi-ed e-penditure and variab#e e-penditure. 70e presentation of cost data under difficu#t categories 0e#ps to i1prove 1anageria# contro# over cost.

*5

2.& TRANSPORT COSTING

2.&.1 Me#nin% 7ransport costing is 1et0od of ascertaining t0e cost of providing service b/ a transport underta'ing. 70is inc#udes air4 water4 road and rai#wa/sV 1otor transport inc#udes private cars4 carriers for owners4 buses4 ta-ies4 carrier Lorries etc. 70e objective of 1otor transport costing 1a/ be su11ari6ed as fo##owsC to ascertain t0e operation cost of running a ve0ic#e to provide and accurate basis for ;uotation and fi-ing of rates to provide cost co1panion between own transport and a#ternative e.g. 0iring to co1pare t0e cost of 1onitoring one group of ve0ic#e wit0 anot0er group to deter1ine t0e cost to be c0anged against depart1ents using t0e service to ensure t0e cost of 1aintenance and repairs is not e-cessive 2.&.2 C0#$$i!ic#ti"n "! c"$t$: C"$t$ #re c0#$$i!ie' int" t-e !"00"Bin% t-ree -e#'$: 1. "tanding or 5i-ed C0argesC 70ese c0arges are inc#udes w0et0er ve0ic#e is operating or not. Insurance4 ta-4 depreciation and part of driver wages. Interest on capita#4 genera# supervision4 and sa#ar/ of operating 1anagers is ite1s co1e under t0e categor/ of fi-ed or standing c0arges. 2. Maintenance c0argesC 70ere are se1i variab#e e-penses in nature and inc#ude wear on tires4 repairs and over0eads painting etc. 3. Operating and running c0argesC Aunning costs are t0e cost of operations. 70ese c0arges var/ 1ore or #ess in direct proportion to 'i#o1eters etc. 70ese e-penses are variab#e in nature because t0e/ are dependent on distance covered and trips 1ade. 70oug0 t0e above t0ree c#assification is done4 in practica# it is difficu#t to distribute. It depends basica##/ on t0e circu1stances of eac0 case e.g. if t0e sa#ar/ paid to driver is on 1ont0#/ basis t0en it is a fi-ed c0arged but if t0e sa1e is #i1ited to 'i#o1eter run t0en it is a running cost. 2.&.& C"00ecti"n "! C"$t D#t#: ,ac0 ve0ic#e is given a separate uni;ue nu1ber and a## t0e basic docu1ents wi## contain t0e assigned nu1ber of t0e respective ve0ic#es. . separate dai#/ #og s0eet for eac0 ve0ic#e is 1aintains to

*: record t0e detai#s of trips4 running ti1e4 capacit/4 distance cover4 cost of petro# @ diese#4 #ubricants4 #oading and un#oading ti1e etc on dai#/ basis. . speci1en of #og s0eet is given be#owC D#i0A 0"% $-eet T#.0e %e0ic#e >o.C XXXXXXX Aoute >o.C(((((((((((((( Date of urc0aseC XXXXXX.. DriverC XXXXXX Ma'e and "pecificationC XXXX. 7i1e of LeavingC XX License >o.C XXXXXXX 7i1e of AeturningC XXX.
7rip no. 5ro1 7o ac'ages 7i1e Mi#o1eters Out Co##ected Out In Srs Ae1ar 's

"upp#ies &or'erQs ti1e abnor1a# de#a/s etro# @ diese# XXXXXX Driver XXXX..Loading @ un#oadingXXXX Oi# XXXXXXXX.conductor XXX..ccident XXXXXXXXXX. Brease XXXXXC#eaner XXX..7raffic De#a/s XXXOt0ers XXX

"r+#t "! tr#n$)"rt ")er#tin% c"$t $-eet: Operating cost s0eet %e0ic#e >o. C XXXXXXX.. eriod XXXXXXXXXXX.. Cost <nitC XXXXXXXXX >o. of Cost units XXXXXXX. articu#ars As. 7ota# As. A. 5i-ed Cost 2or "tanding c0arges3 1. Aoad 7a- -- -2. Insurance -- -3. DriverIs "a#ar/ -- -4. ConductorIs "a#ar/ -- -5. Depreciation -- -6. Interest on Capita# -- -7. Barage Aent -- --- -- -- -8. Office E .d1inistration Over0eads B. %ariab#e 2Aunning3 costs Depreciation -- -- etro# Diese# -- -- Oi# E Brease -- -- Aepairs and 1aintenance -- -- 7/res and tubes -- -- -- -7ota# operating cost 111 111 N"te: Maintenance e-penses can be s0own separate#/ a#so depends on cases.

er M1 As.

*;

C-ec3 4"ur Pr"%re$$:

1. 2. Bive t0e for1at of 7ransport Operating cost(s0eet give t0e Cost <nit of t0e fo##owing a. assenger 7ransport b. Bood 7ransport c. ,#ectricit/ d. Sospita# e. Sote#

2.* SOLVED PROBLEMS O OPERATING COSTING

I00u$tr#ti"n 1: 5ro1 t0e fo##owing infor1ation ca#cu#ate fare for passenger MM. 70e cost of t0e :us As. 4!0000 Insurance c0arges 3 H p.a. .nnua# taAs. 4!00 Barage rent As. !00 p.1. .nnua# repairs As. 4+00 ,-pected #ife of t0e bus ! /rs %a#ue of scrap at t0e end of ! /ears As. 3000 Aoute distance 20 '1 #ong DriverQs sa#ar/ As. !!0 p.1. ConductorQs "a#ar/ A. !00 p.1. Co11ission to Driver E conductor 2s0ared e;ua##/3 10 H of t0e ta'ings "tationar/ As. 2!0 p.1. Manager(cu1(accountantQs "a#ar/ As. 1)!0 p.1. Diese# and Oi# 2for 100 '1s3 12! 70e bus wi## 1a'e 3 rounds trips for carr/ing on t0e average 40 passengerQs in eac0 trip. .ssu1e 1! H profit on ta'ings. 70e bus wi## wor' on t0e average 2! da/s in a 1ont0.

60 S"0uti"n : :us >o. Capacit/C 40 persons articu#ars er .nnu1 As. Operating Cost "tate1ent er .nnu1 As. er .nnu 1 As.

A. "tanding C0arges Depreciation +44000

7a- 44!00 Insurance 134!00 "tationer/ 34000 ManagerQs "a#ar/ 214000 142$4000 00.0+)!0 B. Maintenance C0arges Barage Aent $4000 Aepairs 44+00 104+00 00.00)!0 C. Operating 2or3 Aunning C0arges Diese# E Oi# 34)!0 DriverQ "a#ar/ $4$00 ConductorQs "a#ar/ $4000 1$43!0 00.0113! T"t#0 14!341!0 00.10$3! .dd C Co11ission and rofit 2!@)! 00.03!4! 5are per passenger '1. 00.141+0 ,"r3in% N"te: 213 >o. of M1 run in a 1ont0 C 3 - 2 - 20 - 2! D 3000 '1 223 >o. of passenger '1 per annu1 C 3000 - 40 - 12D 144404000 233 Diese# and oi# C 3000 - 12! @ 100 D As. 3)!0 243 Co11ission E rofitsC Co11ission 10 H of ta'ing K profit 1! H of 7a'ing tota# D 2! H of ta'ing so t0e cost Cost is on#/ )! H

61 I00u$tr#ti"n 2 : 5ro1 t0e fo##owing data re#ating to two different ve0ic#es . and :4 co1pute cost per running 1i#e. Ve-ic0e A Ve-ic0e B Mi#age run 2annua#3 1!000 $000 Cost of ve0ic#es As. 2!000 As. 1!000 Aoad License 2.nnua#3 )!0 )!0 I11une 2.nnua#3 )00 400 Barage rent 2.nnua#3 $00 !00 "upervision and "a#aries 2.nnua#3 1200 1200 DriverQs wage per 0our 3 3 Cost of fue# per ga##on 3 3 Mi#es runs per ga##on 20 1! Aepairs and 1aintenance per 1i#e 2As.3 1.$! 2.00 7ire a##ocation per 1i#e 0.+0 0.$0 ,sti1ated #ife of ve0ic#e 21i#es3 14004000 )!4000 C0arge interest F ! H p.a. on cost of ve0ic#es. 70e ve0ic#es run 20 1i#es per 0our on an average NM. Co1. Madurai Ma1rajO S"0uti"n : O)er#tin% c"$t $-eet 8c"$t )er +i0e9 P#rticu0#r$ Ve-ic0e? A A. Operating and Maintenance C0arges Depreciation . ? 2!000 @ 100000 0.2! (( : ? 1!000 @ )!000 (( 0.20 Aepairs and 1aintenance 1.$! 0.20 7ire a##ocation 0.+0 2.00 5ue# 23 @ 20 1i#es3 0.1! 0.$0 DriverQs wages 2. ? 3 @ 203 23 ? 3 @ 1!3 0.1! 0.1! 3.00 3.1! B. "tanding C0arges AB

Ve-ic0e? B

Aoad #icense As.

A s. )!0 ) !00 "upervision 1200 Insurance )00 400 C0arges $00 1200 Interest F ! H p.a. 12!0 )!0 4!00 3$00 Mi#eage run per annu1 1!000 $000 0.30 0.$0 0.30 0.$0 5i-ed standing c0arge per 1i#e Operating cost per 1i#e 3.30 3.)!

62 N"te : 213 Depreciation is #in'ed wit0 1i#eage so operating cost. 223 Driver wage is ta'en as operating since it is paid per 0our. I00u$tr#ti"n & : . co1pan/ present#/ brings coa# to its factor/ fro1 a nearb/ /ard and t0e rate paid for transportation of coa# fro1 t0e /ard #ocated $ '1s. .wa/ to factor/ is As. !0 per ton. 70e tota# coa# to be 0and#ed in a 1ont0 is 244000 tones. 70e co1pan/ is considering proposa# to bu/ its own truc's and 0as t0e option of bu/ing eit0er a 10 ton capacit/ or a + ton capacit/ truc's. 70e fo##owing infor1ation is avai#ab#eC 10 T"n Truc3 urc0ase rice As. : T"n Truc3 104004000 +4!04000 Life 2Jears3 ! ! "crap va#ue at t0e end f !t0 /ear >i# >i# MM er #iter of diese# 3 4 $04000 4+4000 Aepair and 1aintenance p.a. per truc' 2As.3 Ot0er fi-ed e-penses p.a. 2As.3 $04000 3$4000 20 20 Lubricants and sundries per 100 '1 2As.3 ,ac0 truc' wi## dai#/ 1a'e ! trips 2to and fro3 on an average for 24 da/s in a 1ont0. Cost of diese# As. 1!@( per #iter. "a#ar/ of driver As. 34000@(4 p.a. 1ont0. 7wo drivers wi## be re;uired per truc'. Ot0er staff e-penses As. 140+4000 p.a. resent a co1parative cost s0eet on t0e basis of above data s0owing transport cost per ton of operating 10 ton and + ton 7ruc' at fu## capacit/ uti#i6ation. NC... 5ina#O

S"0uti Co1parative state1ent of operating cost s0eet C 10 T"n Truc3 R$. : T"n Truc3 R$. 5i-ed C0arges 2p.1.3 DriverQs "a#ar/ 2wor'ing no. 13 124000 1!4000 "taff e-penses G4000 G4000 Ot0er fi-ed e-penses !4000 34000 Operating E Maintenance C0arges 2p.1.3 Depreciation 2>ote >o. 23 34334333 34!441$) Diese# Cost 2>ote >o. 33 14444000 143!4000 Lubricants E "undries2>ote >o. 33 !4)$0 )4200 Aepairs E Maintenance 14004000 14004000 7ota# Cost 2.3 )41)40G3 )4!+43$) 7ons Carried 2:3 244000 244000 Cost per ton 2.@:3 2G.+) 31.!G C"nc0u$i"n : . co1parison of cost per ton b/ using 10 ton truc's is 1ore econo1ica#. 70e cost paid for bringing coa# per ton present#/ vi6. As. !0@( is t0e 0ig0est. ,"r3in% N"te :
10 t"n : t"n 7ota# nu1ber o truc's and drivers re;uired Coa# broug0t to t0e factor/ per 1ont0 2! - 24 - 103 1200 (( 2! - 24 - +3 G$0 >o. of truc' re;uired to bring244000 tons is 24000@1200D20 24000@G$0D2! 7ota# nu1ber of drivers re;uired 20 - 2 D 40 2! - 2 D !0 2 7ota# 1ont0#/ depreciation Depreciation per truc' per annu1 24004000 14)04000 Depreciation per truc' per 1ont0 14$$$.$$ 1441$$.$$ 7ota# depreciation 1$$$$.$$ - 20 141$$.$$ - 2! = 34334333 = 34!441$) 3 Diese# re;uires 7ota# M1 run per truc' p.1. 2$ '1 - 10 trips - 24 da/s3 1440 1440 7ota# MM run b/ a## truc's 2++00 3$000 M1 per #iter of diese# 3 4 G0 Diese# re;uired #iters G$00 00 22++00 @ 33 23$000 @

6* I00u$tr#ti"n.* : Jou are re;uired to ca#cu#ate a suggested fare per passenger ? '1 fro1 t0e fo##owing infor1ation for a 1ini bus. 2i3 Lengt0 of route 30 '1 2ii3 urc0ase price As. 44004000. 2iii3 art of above cost 1eet b/ #oan4 annua# interest As. 104000 p.a. 2iv3 Ot0er annua# c0arges C Insurance As. 1!40004 Barage Aent As. G40004 Aoad 7a-es As. 340004 Aepairs and Maintenance As. !4000. .d1inistrative c0arges As. !000. 2v3 Aunning e-penses C Driver E Conductor As. !000 p.1.4 Aepairs @ Aep#ace1ent of t/re tube As. 3$00 p.a. Diese# and Oi# cost per M1 As. !@( 2vi3 ,ffective #ife of ve0ic#e is esti1ated at ! /ears at t0e end of w0ic0 it wi## 0ave a scrap va#ue of As. 104000. 2vii3 Mini :us 0as 20 seats and is p#anned to 1a'e si- two wa/ trips for 2! da/s @ p.1. 2viii3 rovide profit F 20 H of tota# revenue. NC...4 5ina#O S"0uti"n : P#rticu0#r$ C"$t )er C"$t Per Annu+ M"nt R$. - Aoad 5i-ed ,-penses C Insurance 1!4000 Barage Aent G4000 7a- 34000 .d1inistrative c0arges !4000 Depreciation 244004000?104000 Interest on Loan 104000 7ota# 14204000 104000 Aunning ,-penses C Aepairs E Maintenance 1!4000 142!0 Aep#ace1ent of t/re tube 34$00 300 Driver E ConductorQs "a#ar/ !4000 7ota# Cost per 1ont0 $14!!0 .dd C rofit 20 H of tota# 1!43+). Aevenue 2! H 7ota# cost !0 52<;&5. 7ota# Aevenue 60 '1 D Aate per passenger '1 C As. 3$G3).!0 @ 14+04000 passenger 0.42)430! or 0.43 paise

66 ,"r3in%$: 7ota# distance trave##ed b/ 1ini bus in 2! da/s D $0 '1 - $ trips - 2! da/s D G000 '1 7ota# passenger '1 D G000 '1 - 20 seats D 14+04000 passengers '1 I00u$tr#ti"n 6 : Mris0na 7ransport Ltd. C0arges As. 1!0 per ton for its 10 ton #orr/ #oad fro1 cit/ . to cit/ :. t0e c0arges for t0e return journe/ are As. 140 per ton. >o concession is 1ade for an/ de#iver/ of goods at inter1ediate station QCQ in =anuar/ 200+. 70e truc' 1ade 10 outward journe/s for cit/ : wit0 fu## #oad of w0ic0 2 ton were un#oaded twice at cit/ PCQ. 70e truc' carried a #oad of 12 ton in its return journe/ for 4 ti1es but once caug0t b/ po#ice and As. 1!00 was paid as fine. 5or t0e re1aining trips it carried fu## #oad out of w0ic0 a## t0e goods on #oad were un#oaded once at cit/ PCQ. 70e distance fro1 cit/ . to cit/ . and cit/ P:Q are 1!0 '1 and 2!0 '1 respective#/. .nnua# fi-ed cost are As. 14204000 and 1aintenance cost is As. 1!4000. Aunning c0arges spent during =anuar/ 200+ are As. 3!00. Ca#cu#ate t0e cost per tone('i#o1eter and t0e profit for =anuar/ 200+. S"0uti"n: Operating Cost and rofit "tate1ent of Mris0na 7ransport Ltd. P#rticu0#r$ R$. 1. 5i-ed cost 212000 @ 123 2. Maintenance c0arges 1!000 @ 12 3. Aunning c0arges 7ota# operating cost Cost per ton '1 >et revenue received 2wor'ing note3 Less C 7ota# operating cost rofit ,"r3in% n"te: 819 T"ne 3+ "n "utB#r' D"urneA$
5ro1 cit/ . to C?10 journe/s -10 ton - 1!0 '1 D 1!4000 5ro1 cit/ C to :?+ journe/s - 10 ton - 100 '1 D +4000 2 journe/ - + ton - 100 '1 D 14$00 7ota# 244$00 7one ? '1

62 829 T"ne 3+ "n return D"urneA

5ro1 cit/ : to . ? 4 journe/s - 2!0 '1 - 12ton D 124000 5ro1 cit/ : to . ? ! journe/s - 2!0 '1 - 10ton D 124!00 5ro1 cit/ : to C ( 1 journe/ - 100 '1 10 ton D 14000 7ota# 2!4!00 7one ? '1

7ota# tone '1 D 244$00 K 2!4!00 D !04100 ton( '1 8&9 Net re(enue recei(e'
5ro1 cit/ . to :?10 journe/s -10 ton L As.1!0 D 1!4000 5ro1 cit/ : to .?4 journe/s - 12 ton L As. 140 D $4)20 5ro1 cit/ : to . (! journe/s - 10 ton L As. 140 D )4000 5ro1 cit/ : to C (1 journe/s - 10 ton L As. 140 2G4)20 7one ? '1 Less C 5ine aid 14!00 >et revenue received 2+4220 14000 7ota#

I00u$tr#ti"n 2 : Mr. "a1pat0 owns a f#eet of ta-ies and t0e fo##owing infor1ation is avai#ab#e fro1 t0e records 1aintained b/ 0i1. 1. 2. 3. 4. 5. 6.
>u1ber of 7a-is I 10 ). Barage Aent As )000 p.1. Cost of eac0 7a-i I As. 24004000 +. Insurance pre1iu1 ! H "a#ar/ of 1anager As. $000 p.1. G. .nnua# 7a- As. $000 per ta-i "a#ar/ of .ccountant As. !000 p.1 10. Drivers "a#ar/ As. 4000 p.1. "a#ar/ of c#eaner As. 3000 p.1. 11. .nnua# Aepairs As. 1!4000 per ta-i "a#ar/ of Mec0anic As. 4000 p.1.

7ota# #ife of a ta-i is about 24004000 '1s. . ta-i runs in a## 3000 '1s. in a 1ont0 of w0ic0 2! H its runs e1pt/. etro# consu1ption is one #iter for 10 '1s F As. 40 per #iter. Oi# and ot0er sundries are As. 10 per 100 '1s. Ca#cu#ate t0e cost of running a ta-i per '1. 65 S"0uti"n: O)er#tin% c"$t $-eet P#rticu0#r$ A+"unt )er +"ntR$. 5i-ed ,-penses 2for t0e w0o#e f#eet3 "a#ar/ of 1anager $000 "a#ar/ of accountant !000 "a#ar/ of C#eaner 3000 "a#ar/ of 1ec0anic 4000 Barage Aent )000 Insurance pre1iu1 ! H on As. 2400000 - 10 7a- $000 - 10 @ 12 40000 7ota# 5i-ed ,-penses C"$t )er >+ R$.

+333

!000 ,ffective 'i#o1eter 3000-10- )! H D 224!00 5i-ed e-penses per '1 3.4+14) Aunning e-penses 2per ta-i3 Depreciation 224004000R200000 - 10 - 30003 Aepairs 21!4000 - 10 R 123 0.!!!!! etro# 23000 - 403 R 210 22!003 0.!3333 Oi# and ot0er sundries 210 - 30003 R 2100222!003 C"$t )er 3+ 2.0&501

1.33333 0.13333

2.6 GOSPITAL COSTING

Sospita#s co1es under service sector4 big co1panies a#so 1aintain 0ospita#s. 5or costing purpose t0e 0ospita# service can be divided in two fo##owing categories 213 Outpatient depart1ent 223 &ards 233 Medica# service depart1ents suc0 as radio t0erap/ PLQ ra/ etc. 243 Benera# "ervices suc0 as 0eating4 #ig0ting4 catering #aundr/ etc. 2!3 Ot0er services suc0 as transport4 dispensar/4 c#eaning etc. 2.6.1 C"$t St#te+ent: 70e e-penses of 0ospita# can be broad#/ divided into two categories i.e. 213 Capita# ,-penditure and 223 Maintenance ,-penditure ? t0is inc#udes sa#aries and wages4 provision4 staff unifor1s c#ot0ing4 1edica# and surgica# app#iances and e;uip1ents4 fue# #ig0t and power4 #aundr/4 water etc.

6: 2.6.2 "r+#t "! # c"$t S-eet "! # G"$)it#0: P#rticu0#r$ R$. R$. A. 5i-ed standing c0arges Aent -- Aepairs and 1aintenance -- Benera# ad1inistrative e-penses -- Depreciation -"a#aries to staff -Cost of O-/gen4 L ra/ etc. -- 11 B. Aunning or 1aintenance costs DoctorQs fees -- 5ood -Medicines -- Laundr/ -1 Sire c0arges -1 7ota# operating cost 1 C"$t )er )#tient '#A H T"t#0 O)er#tin% c"$t N" "! P#tient D#A$

2.2 SOLVED PROBLEMS ON GOSPITAL COSTING

I00u$tr#ti"n 5: 70e fo##owing infor1ation is avai#ab#e fro1 a intensive care unit. Aent 2inc#uding repairs3 As. 10000 p.1. 70e unit cost consists of 2! beds and ! 1ore beds can be acco11odate w0en t0e occasion de1ands. 70e per1anent staff attac0ed to t0e unit is as fo##owsC 2 4 2 supervisors eac0 at a sa#ar/ or As. 2000 per 1ont0. nurse eac0 at a sa#ar/ of As. 1!00 per 1ont0. ward bo/s eac0 at a sa#ar/ of As. 1000 per 1ont0.

70oug0 t0e unit was open for t0e patients a## t0e 3$! da/s in a /ear4 securit/ of accounts of 200+ revea#ed t0at on#/ 1!0 da/s in a /ear t0e unit 0ad t0e fu## capacit/ of 2! patients per da/ and for anot0er +0 da/s it 0ad on an average 20 beds on#/ occupied per da/. :ut t0ere were occasions w0en t0e beds were fu##4 e-tra beds were 0ired fro1 outside at a c0arge of As. 10 per bed per da/ and t0is did not co1e to 1ore t0an ! beds e-tra above t0e nor1a# capacit/ an/ one da/. 70e tota# 0ire c0arges for t0e w0o#e /ear were As. 4000. 70e unit engaged e-pert doctor fro1 outside to attend on t0e patients and t0e fees were paid on t0e basis of nu1ber of patients

6; attended at ti1e spent b/ t0e1 on an average wor'ed out to As. 2000 per 1ont0 in 200+. 70e ot0er e-penses for t0e /ear were as under. R$. Aepairs and 1aintenance +4000 5ood supp#ied to patients 14004000 =anitor and ot0er services for patients 2!4000 Laundr/ c0arges for bed #inens 404000 Medicines supp#ied )04000 Cost of o-/gen4 - ra/ etc ot0er t0an direct#/ born for treat1ent of patients 25i-ed3 G04000 Benera# ad1inistration c0arges a##ocated to t0e unit 14004000 213 If t0e unit recovered an overa## a1ount of As. 200 per da/ on an average fro1 eac0 patient w0at is t0e profit per patient da/ 1ade b/ t0e unit in 200+. 223 70e unit wants to wor' out a budget for 200G4 since t0e nu1ber of patients is ver/ uncertain4 annuit/ t0e sa1e revenue and e-penses prevai# in 200G4 wor' out t0e nu1ber of patient da/s re;uired brea'(even. S"0uti"n: St#te+ent "! c"$t #n' )r"!it P#rticu0#r$ R$. R$. A. Inco1e received 2As. 200 - $1!03 14234000 B. %ariab#e cost 2per annu13 5ood 14004000 =anitor and ot0er services 2!4000 Laundr/ c0arges 404000 Medicines )04000 Doctors fees 2204000 - 123 24404000 Sire c0arges for e-tra bed 44000 2:3 44)G4000 C. 5i-ed Costs "a#aries "upervisor 44+00 >urses )24000 &ard bo/s 244000 Aent 210000 - 123 14204000 Aepairs E Maintenance +4000 Benera# ad1inistration 14004000 Cost of o-/gen4 L ra/ etc. G04000 2C3 44$24000 7ota# cost 2: K C3 G4414000 Pr"!it 2<:;<000

20
rofit per patient da/ D 2+G00 D 4$.G1 #oss As. 4)@( $1!0 &or'ing >oteC Ca#cu#ation of >o. of patient da/s in 200+ 2! beds - 1!0 da/s D 3)!0 20 beds - +0 da/s D 1$00 ,-tra beds 4000 R ! D +00 2160
:rea'even point D 5i-ed Cost - inco1e D 4$200 Inco1e ? %ariab#e cost )!1000 1230000

= As. )!$$)1 2or3 )!$$)1

da/s 200

D 3)+3.2! patient

2.5 GOTEL COSTING

Sote# industr/ is a service industr/ and covers various activities suc0 as provision for food and acco11odation. It a#so provides ot0er co1forts #i'e recreations4 business faci#ities4 s0opping areas etc. 70e e-penses incurred in a 0ote# are fi-ed or variab#e. 5i-ed e-penses co1prises of staff sa#aries4 repairs4 interior decoration4 #aundr/ contract cost4 sundries and depreciation on fi-ed assets. 70e variab#e e-penses incurred are #ig0ting4 attendantsQ sa#aries4 power etc. 7o find out roo1 rent to be c0arged fro1 custo1ers a notiona# profit is added wit0 t0e cost and divided b/ t0e nu1ber of roo1s avai#ab#e. 70e nu1ber of roo1s avai#ab#e is ca#cu#ated after for considering avai#abi#it/ of suits and occupanc/. Aoo1s rent 1a/ be different fro1 season to season. "o1eti1e besides acco11odation t0e/ a#so provide food. 70en t0e cost of 1ea#s4 ot0er direct and indirect costs are considered to wor' out t0e costs to be c0arged fro1 custo1ers. O)er#tin% c"$t $-eet "! # G"te0: P#rticu0#r$ R$. R$. A. 5i-ed C0arge "a#aries to "taff -- Aepairs and Aenovation -- Depreciation -- Interior decoration -- "undries -Laundr/ contract cost -- Aent -- -B. Aunning c0arges 2%ariab#e cost3 ower -- .ttendant sa#aries -- -- 7ota# Operating Cost ->o. of Aoo1 Da/s -- Cost per Aoo1 Da/s --

21

2.: SOLVED PROBLEMS ON

I00u$tr#ti"n ::

GOTEL COSTING

. co1pan/ runs a 0o#ida/ 0o1e for t0is purpose it 0ired a bui#ding at a rent of As. 104000 per 1ont0 a#ong wit0 !H of tota# ta'ings. It 0as t0ree t/pes of suites for its custo1erQs vi6. sing#e roo14 doub#e roo1 and trip#e roo1s. 5o##owing infor1ation is givenC TA)e$ "! $uite Nu+.er Occu)#ncA )ercent#%e "ing#e roo1s 100 100 H Doub#e roo1s !0 +0 H 7rip#e roo1s 30 $0 H 70e rent of doub#e roo1Qs suite is to be fi-ed at 2.! ti1es of t0e sing#e roo1 and t0at of trip#e roo1s at twice of t0e doub#e roo1 suite. 70e ot0er e-penses for t0e /ear 200G are as fo##owsC R$. "taff sa#aries 1442!4000 Aoo1 attendants wages 44!04000 Lig0ting 0eating and powers 241!4000 Aepairs and renovations 14234!00 Laundr/ c0arges +04!00 Interior decoration )44000 "undries 14!34000 rovide profit F 20 H on tota# ta'ings and assu1e 3$0 da/s in a /ear. Jou are re;uired to ca#cu#ate t0e rent to be c0arged for eac0 t/pe of suite NC. .. , IIO S"0uti"n: Ca#cu#ation of roo1 occupanc/ 7/pe of suite >u1ber Occupanc/ H "ing#e Aoo1 100 100 3$0 3$000 Doub#e Aoo1 !0 +0 3$0 14400 >o. of da/s in a /ear Aoo1 occupan c/ da/s

7rip#e Aoo1 30 $0 3$0 $4+0 Ca#cu#ation of e;ua#ant sing#e

roo1 suits occupanc/ 3$4000 - 1 K 14400 - 2.! K $4+0 - ! D 104400

22 C#0cu0#ti"n "! T"t#0 C"$t : R$. "taff sa#aries 1442!4000 Aoo1 attendant wages 44!04000 Lig0ting 0eating and power 241!4000 Aepair and renovation 14234!00 Laundr/ c0arges +04!00 Interior decoration )44000 "undries 14!34000 7ota# cost e-c#uding bui#ding rent 2!4214000 :ui#ding rent D 10000 - 12 K !H of ta'ing 24G$40$$ 7ota# cost 2+41)40$$ rofit 20 H of ta'ings )40442$) T"t#0 t#3in%$ 3!4214333 Aent for a sing#e roo1 D 3!21333 R 104400 D As. 33.)3 Aent for a doub#e roo1 D 33.)3 - 2.! D As. +4.32! Aent for a trip#e roo1 D +4.32! - 2 D As. 1$+.$! I00u$tr#ti"n ;: . #odging 0o1e is being run in a s1a## 0i## station wit0 !0 sing#e roo1s. 70e 0o1e offers concessiona# rate during si- off season 1ont0s in a /ear. During t0is period4 0a#f of t0e fu## roo1 rent is c0arged. 70e 1anage1ent profit 1argin is targeted at 20H of t0e roo1 rent. 70e fo##owing are t0e cost esti1ates and ot0er detai#s for t0e /ear ending 31st Marc04 1GG$ 2assu1e a 1ont0 to be of 30 da/s3 2a3 Occupanc/ during t0e season is +0H4 w0i#e in t0e off season is 40H on#/. 2b3 ,-penses C 2i3 "taff "a#ar/ 2e-c#uding roo1 attendants3 As. 24)!4000 2ii3 Aepairs to bui#dings As. 14304000 2iii3 Laundr/ and #inen As. 404000 2iv3 Interior and tapestr/ As. +)4!00 2v3 "undr/ e-penses As. G!4400 2c3 .nnua# depreciation is to be provided for bui#ding at !H and on furniture and e;uip1ents at 1!H on straig0t #ine basis. 2d3 Aoo1 attendants are paid As. !@( per roo1(da/ on t0e basis of occupanc/ of t0e roo1s in a 1ont0. 2e3 Mont0#/ #ig0ting c0arges are As. 120 per roo14 e-pect in four 1ont0s of winter w0en it is As. 30 per roo1 and t0is cost is on t0e basis of fu## occupanc/ for a 1ont0 and

2& 2f3 7ota# invest1ents in t0e 0o1e are As. 100 #a'0s of w0ic0 As. +0 #a'0s re#ate to bui#dings and ba#ance for furniture and e;uip1ents. Jou are re;uired to wor' out t0e roo1 rent c0argeab#e per da/ bot0 during t0e season and t0e off(season 1ont0s4 on t0e basis of t0e foregoing infor1ation. NI.C.&...4 Inter1ediateO S"0uti"n: 7ota# esti1ated costs for t0e /ear ending 31.03.1GG$ Per P#rticu0#r$ T"t#0 r""+ R$. '#A "a#ar/ 24)!4000 Aepairs 14304000 Laundr/ and #inen 404000 Interior decoration +)4!00 DepreciationC As. :ui#ding !H on +0 #a'0s D 44004000 5urniture 1! H on 20 #a'0s D 34004000 )4004000 Misce##aneous e-penses G!4400 .ttendantQs sa#ar/ !44000Y Lig0ting c0arges 3$4000YY 7ota# cost 1441+4400 @ G000 1!).$0 YYY fu## roo1 da/s .dd C rofit 1argin at 20H on rent or 1G).00 25. of cost During season roo1 rent is As. 1G) and during off(season roo1 rent is As. G+.!0 .ttendantI sa#ar/ 5or 104+00 roo1 da/s F As. ! per da/ D As. !44000 YY 7ota# #ig0t bi## Lig0t bi## during + 1ont0s at As. 120 per 1ont0 or 120 R 30 D As. 4 er roo1 da/. Lig0t bi## during 4 1ont0s of winter at As. 30 per 1ont0 or 30 R 30 D Ae. 1 per Aoo1 da/. T"t#0 0i%-t .i00 !"r !u00 "ne Ae#r R$. # During season F As. 4 for )4200 da/s # During 2 1ont0s of off(season F As. 4 for 14200 da/s 22 R $ - 34$003 # During 4 1ont0s of winter at Ae. 1 5or 24400 da/s 24 R $ - 34$003 2+4+ 00 44+ 00 244 00 T"t#0 &2<000

2* YYY >u1ber of roo1 da/s in a /ear C "easons occupanc/ for $ 1ont0sF+0H 2!0 - 0.+ - $ - 303 D )4200 roo1 da/s Off seasonQs occupanc/ for $ 1ont0s F 40 H 2!0 - 0.4 - $ - 303 D 34$00 roo1 da/s
7ota# roo1 da/s during t0e Jear 104+00 7ota# fu## roo1 da/s in ter1s of rate "eason )4200 Off "eason 2in ter1s of !0 H rate on 34$00 da/s3 14+00 7ota# 5u## roo1 da/s G4000 per annu1

I00u$tr#ti"n 10: ,#egant Sote# 0as a capacit/ of 100 sing#e roo1s and 20 doub#e roo1s. It 0as a sports centre wit0 a swi11ing poo# w0ic0 is a#so used b/ persons ot0er t0an residents of t0e 0ote#. 70e 0ote# 0as a s0opping arcade at t0e base1ent and a specia#t/ restaurant at t0e roof top. 70e fo##owing infor1ation is avai#ab#eC 213 .verage occupanc/ C )! H for 3$! da/s of t0e /ear 223 Current costs are C %ariab#e cost 5i-ed cost "ing#e roo1 400 200 Doub#e roo1 !00 2!0 233 .verage sa#es per da/ of restaurant As. 14 004000V contribution is at 30 H. 5i-ed cost As. 104 004000 per annu1. 243 70e sports centre @ swi11ing poo# is #i'e#/ to be used b/ !0 non ?residents dai#/V average contribution per da/ per non( resident is esti1ated at As. !0V fi-ed cost is As. !4004000 per annu1. 2!3 .verage contribution per 1ont0 fro1 t0e s0opping arcade is As. !04000V fi-ed cost is As. $4 004000 per annu1. 4"u #re re@uire' t" !in' "ut: 2a3 Aent c0argeab#e for sing#e and doub#e roo1 per da/4 so t0at t0ere is a 1argin of safet/ of 20 H on 0ire of roo1s and t0at t0e rent for a doub#e roo1 s0ou#d be 'ept at 120 H of a sing#e roo1. 2b3 ,va#uate t0e profitabi#it/ of restaurant4 sports centre and s0opping arcade separate#/. NC. .. 5ina#O

26 S"0uti"n: 2a3 "tate1ent for ca#cu#ating t0e rent c0argeab#e for sing#e and doub#e roo1 per da/.
Occupanc/ da/s in a /ear Aefer to wor'ing note 213 "ing#e roo1 Doub#e roo1 %ariab#e cost As @ Da/s 223 5i-ed cost As @ Da/s 233 7ota# variab#e cost 4 D 213 -223 7ota# fi-ed cost 2As.3 !D213-233 7ota# cost 2As.3 $D 243 2!3

2)43)! 400 200 140G4!04000 !44)!4000 14$442!4000 !44)! !00 2!0 2)43)4!00 134$+4)!0 4140$42!0 .dd C 20 H 1argin of safet/ on 0ire of roo1 or 2! H of tota# cost !14324+12 7ota# a1ount of roo1 rent to be received 24!$4$440$2

Aent per da/ of sing#e roo1 Gin As.3 )!$ 2appro-3 2Aefer to wor'ing note 23 2As. 24 !$4$440$2 @ 334G4!3 Aent per da/ of doub#e roo1 2in As.3 G0) 2appro-3 2As. )!$ - 1.2 ti1es3 b.
rofitabi#it/ of restaurant Contribution per annu1 R$. 34$!4004000 140G4!04000 230 H of 7ota# "a#es3 C 2.3

7ota# sa#es per annu1 3$! da/s - As. 14004000

5i-ed cost per annu1 C 2:3 104004000 rofit N 2.3 ? 2:3O GG4!04000 rofitabi#it/ of sports centre C R$. 24! Contribution of sports centre per da/ C 2!0 persons 00 As. !03 G4124! 7ota# contribution per annu1 2As. 24!00 - 3$! da/s3 00 C 2.3 5i-ed cost per annu1 C 2:3 !4004000 rofit C N2.3 ? 2:3O 44124!00 rofitabi#it/ of s0opping arcade C 5i-ed Cost $4004000 R$. Contribution per annu1 2As. !04000 - 12 1ont0s3 $4004000 Less C

22 ,"r3in% N"te : 1. "ing#e roo1 occupanc/ da/s in a /ear D 100 roo1 - 3$! da/s
- )! H

= 2)43)! Doub#e roo1 occupanc/ da/s in a /ear D 20 roo1s - 3$! da/s )! H = !44)! 2. In ter1s of sing#e roo1 tota# roo1 occupanc/ da/s in a /ear = 2)43)! K 1.20 H - !44)! D 2)43)! K $4!)0 = 334G4! I00u$tr#ti"n 11: 5o##owing are t0e infor1ation given b/ an owner of a 0ote#. Jou are re;uested to advice 0i1 t0at w0at rent s0ou#d be c0arge fro1 0is custo1ers per da/ so t0at 0e is ab#e to earn 2! H on cost ot0er t0an interest. 1. "taff sa#aries As. +04000 per annu1 2. Aoo1 attendantIs sa#ar/ As. 2 per da/. 70e sa#ar/ is paid on dai#/ basis and services of roo1 attendant are needed on#/ w0en t0e roo1 is occupied. 70ere is one roo1 attendant for one roo1. 3. Lig0ting4 0eating and power. 70e nor1a# #ig0ting e-penses for a roo1 if it is occupied for t0e w0o#e 1ont0 is As. !0. ower is used on#/ in winter and nor1a# c0arge per 1ont0 if occupied for a roo1 is As. 20. 4. Aepairs to bui#ding As. 104000 per annu1 5. Linen etc. As. 44+00 per annu1 6. "undries As. $4$00 per annu1 7. Interior decoration and furnis0ing As. 104000 annua##/ 8. Cost of bui#ding As. 44004000V rate of depreciation ! H 9. Ot0er e;uip1ents As. 14004000V rate of depreciation 10 H 10. Interest F !H 1a/ be c0arged on its invest1ent of !4004000 in t0e bui#ding and e;uip1ent 11. 70ere are 100 roo1s in t0e 0ote# and +0 H of t0e roo1s are nor1a##/ occupied in su11er and 30 H of t0e roo1s are bus/ in winter. Jou 1a/ assu1e t0at period of su11er and winter is si- 1ont0 eac0. >or1a# da/s in a 1ont0 1a/ be assu1ed to be 30.

As.

25 S"0uti"n : O)er#tin% c"$t $-eet R$. Per #nnu+ R$. 1. "taff sa#aries +04000 Aoo1 attendantQs sa#aries "u11er 2 - 2100 - +0 R 1003 - 30 - $ 2+4+00 &inter 2 - 2100 - 30 R 1003 - 30 - $ 104+00 3G4$00 Lig0ting4 0eating and power "u11er !0 - $ - 2100 - +0 R 1003 244000 &inter !0 - $ - 100 - 230 R 1003 G4000 ower 20 - $ - 100 - 230 R 1003 34$00 3$4$00 Aepairs to bui#ding 104000 Linen etc. 44+00 "undries $4$00 Interior decoration and furnis0ing 104000 Depreciation C :ui#ding 204000 Ot0er e;uip1ents 104000 304000 Interest on invest1ent 2!H on As. !40040003 2!4000 24424$00 .dd C 2! H profit on cost ot0er t0an interest As. 24424$00 ? As. 2!4000 interest D As. 241)4$00 As. 241)4$00 - 2! R 100 !44400 T"t#0 c"$t 2<;5<000 Aent per roo1 for one da/ D 7ota# Cost R >o. of roo1 da/s = 24 G)4000 R 1G4+00 = As. 1! per da/ &or'ing >otesC Ca#cu#ation of roo1 da/s >o. of Aoo1s - ercentage - da/s in a 1ont0 - no. of 1ont0s "u11erC 100 - 2+0 R1003 - 30 - $ +0 - 30 - $ D 144400 &interC 100 - 230 R 1003 - 30 - $ 30 - 300 - $ D !4400 7ota# roo1 da/s D 1G4+00 I00u$tr#ti"n 12: ".I7A.%,L" owns a bus and operates a tourist service on dai#/ basis. 70e bus starts fro1 >ew Cit/ to Aest vi##age and returns bac' to >ew Cit/ t0e sa1e da/. Distance between >ew cit/ and Aest vi##age is 2!0 '1s. 70is trip operates for 10 da/s in a 1ont0. 70e bus a#so p#ies for anot0er 10 da/s between >ew cit/ and "0ivapur and returns bac' to >ew cit/ t0e sa1e da/4 distance

Aen t per da/

2: between t0ese two p#aces is 200 '1s. 70e bus 1a'es #oca# sig0tseeing trips for ! da/s in a 1ont04 earning a tota# distance of $0 '1s per da/. 70e fo##owing data are given. Cost of bus As. 34!04000 Depreciation 2! ! DriverQs sa#ar/ As. 14200 p.1. ConductorQs "a#ar/ As. 14000 p.1. art ti1e c#er'Qs sa#ar/ As. 400 p.1. Insurance As. 14+00 As. + per #itre Diese# consu1ption 4 '1s per #itre F 7o'en ta- As. 24400 p.1. er1it fee As. 14000 p.1. Lubricant oi# As. 100 for ever/ 200 '1s Aepairs and 1aintenance As. 14!00 p.1. >or1a# capacit/ As. !0 persons &0i#e p#a/ing to and for Aest vi##age4 t0e bus occupies G0H of t0e capacit/ and +0H w0en it p#ies between >ew cit/ to "0ivapur 2bot0 wa/s3. In t0e cit/ t0e bus runs fu## capacit/ passenger ta- is 20 H of net ta'ings of t0e 87rave#s9 fir1. Ca#cu#ate t0e rate to be c0arged to Aest vi##age and "0ivaupr fro1 >ew cit/4 per passenger4 if t0e profit re;uired to be earned is 33 H of net ta'ing of fir1. NI.C.&...4 Inter1ediateO S"0uti"n: Operating cost state1ent for t0e 1ont0
7ota# As. er passenger '1 2tota# cost K 440040003

As. As. As. 5i-ed c0arges DriverQs sa#ar/ 14200 ConductorQs sa#ar/ 14000 C#er'Qs sa#ar/ 400 Insurance 214+00 R 123 1!0 7o'en 7a- 224400 R 123 200 er1it fees 14000 Depreciation 22!H of 3.!#a'0sR 123 )42G2 Aepairs and Maintenance 14!00 124)42 0.031+! Aunning c0arges Diese# cost G4300 '1 R4D2432! #iters F As. + 1+4$00 0.04$!0 Lubricant oi# G4300'1R200D4!.! #itersF As.100 44$!0 0.011$3 7ota# 3!4GG2 0.0+GG+

2;
.dd C 33 H profit on net ta'ing or 4G.2!H on cost 1)4)2$ 0.04432 >et ta'ings !34)1+ 0.13430 .dd C 20 H for passenger ta- 104)44 0.02$+$ 7ota# $444$2 0.1$11$ or sa/ 0.1$1 C0arges per passengerC 2a3 to Aest vi##age fro1 >ew cit/ C 2!0 - 0.1$1 i.e. As. 40.2! 2b3 to "0ivapur fro1 >ew cit/ C 200 - 0.1$1 i.e. As. 32.20 tota# '1s covered p.1. Aest vi##age and bac' 2 - 2!0 - 10 da/s !4000 "0ivapur and bac' 2 - 200 - 10 da/s 44000 Loca# trips F $0 '1s for ! da/s 300 G4300 YY 7ota# effective passenger ? '1 per 1ont0 C Aest vi##age 2 - 2!0 - G0 H of !0 - 10 da/s D242!4000 passenger '1 "0ivapur 2 - 200 - +0 H of !0 - 10 da/s D14$04000 8 8 Loca# 7rips ! - $0 - !0 D 1!4000 8 8 44004000 8 8

I00u$tr#ti"n: 1&: 8Ser(ice c"$tin% 7 u$e "Bn / c"+)#nA c#r$ "r -ire c#r$9 . co1pan/ is considering t0ree a#ternative proposa#s for conve/ance faci#ities for its sa#es persona# w0o 0ave to do considerab#e trave##ing4 appro-i1ate#/ 204000 'i#o1eters ever/ /ear. 70e proposa#s are as fo##ows C 213 urc0ase and 1aintain its own f#eet of cars. 70e average cost of car is As. 14004000. 223 .##ow t0e e-ecutive use 0is own car and rei1burse e-penses at t0e rate of As. 1.$0 paise per 'i#o1eter and a#so bear insurance costs. 233 Sire cars fro1 an agenc/ at As. 204000 per /ear per car. 70e co1pan/ wi## 0ave to bear costs of petro#4 ta-es and t/res. 70e fo##owing furt0er detai#s are avai#ab#e C etro# Ae. 0.$0 per '1. Aepairs and 1aintenance Ae. 0.20 per '1 7/re Ae. 0.12 per '1 Insurance As. 14200 per car annu1V 7a-es As. +00 per car per annu1 Life of a car C ! /ears wit0 .nnua# 1i#age of 204000 '1s. Aesa#e va#ueC As. 204000 at t0e end of t0e fift0 /ear. &or' out t0e re#ative costs of t0ree proposa#s and ran' t0e1 NC...4 InterO

S
I II III <se of concern car <se of own car As. er annu1 <se of 0ired As.

As. er As. er er '1 '1 Aei1burse1ent 2.3 (( (( 1.$0 1.00 F 5i-ed cost 2:3 er car per '1 annu1 Insurance 14200 7a-es +00 Depreciation 2As.14004000?204000R !3 1$4000 7ota# 1+4000 5i-ed cost per '1 0.G0 (( (( 2As.1+4000 R 204000 '13 Aunning and 1aintenance cost 2C3 er car per '1 etro# 0.$0 (( 0.$0 Aepairs E Maintenance 0.20 (( (( 7/re 0.12 (( 0.12 7ota# cost per '1 2.K:KC3 1.+2 1.$$ 1.)$ 334200 3!4200 Cost of 204000 '1 As. 3$4400 Aan'ing of a#ternating proposa#s III I II

Decision II a#ternating i.e.4 use of own car wi## be t0e best a#ternative fro1 co1pan/Qs point of view. III a#ternative i.e. 0iring t0e card is 2nd best a#ternative. I a#ternative i.e. 1aintaining t0e f#eet wi## be cost#iest a#ternative. As. 14200 R 204000 '1s D Ae. 0.0$V 2As. +00 R 204000 '1s3 D Ae. 0.04 F As. 204000 R 204000 '1s D Ae. 1@( I00u$tr#ti"n 1*: 70e <nion 7ransport Co1pan/ 0as been given a twent/ 'i#o1eter #ong route to p#/ a bus. 70e bus costs t0e co1pan/ As. 14004000. It 0as been insured at 3 H per annu1. 70e annua# road ta- a1ounts to As. 24000. Barage rent is As. 400 per 1ont0. .nnua# repair is esti1ated to cost As. 243$0 and t0e bus is #i'e#/ to #ast for five /ears. 70e sa#ar/ of t0e driver and conductor is As. $00 and As. 200 per 1ont0 respective#/ in addition to 10H of t0e ta'ing as co11ission to be s0ared e;ua##/ b/ t0e1. 70e 1anagers sa#ar/ is As. 14400 per 1ont0 and stationer/ wi## cost As. 100 per 1ont0.

51 etro# and oi# wi## cost As. !0 per 100 'i#o1eters. 70e bus wi## 1a'e t0ree round trips per da/ carr/ing on an average 40 passengers in eac0 trip. .ssu1ing 1!H profit on ta'ings and t0at t0e bus wi## p#/ on an average 2! da/s in a 1ont0. repare operating cost state1ent on a fu## /ear basis and a#so ca#cu#ate t0e bus fare to be c0arged fro1 eac0 passenger per 'i#o1eter NC...4 InterO S"0uti"n: <nion 7ransport Co1pan/ "tate1ent s0owing operating cost of t0e bus per annu1 A. standing c0arges
Managers sa#ar/ 2As. 14400 - 123 D As.

1$4+00 DriverQs sa#ar/ 2As. $00 - 123 D As. )4200 ConductorQs "a#ar/ 2As. 200 - 123 D As. 24400 Aoad 7a- D As. 24000 Insurance 23H of As. 140040003 D As. 34000 Barage rent 2As. 400 - 123 D As. 44+00 "tationer/ 2As. 100 - 123 D As. 14200 Depreciation 2As. 14004000 R ! /ears3 D As. 204000 !)4400 B. Maintenance Cost I Aepairs D As. 243$0

C. Aunning c0arges

etro# and oi# 23$4000 '1 - As. !003 R 100 D As. As.

1+4000 7ota# costs 2. K : K C3 D As. ))4)$0 = .dd C 10 H of ta'ings for co11ission of driver E conductor 1! H profit ? desired on ta'ings D As. 2!4G20 2! H on tota# ta'ings D 33 ? 1@30 of cost D As. 14034$+0

Ca#cu#ation of bus fare to be c0argedC ,ffective passenger 'i#o1etersC 22 - 20 '1 - 3 trips - 40 passengers - 2! da/s - 12 1ont0s3 D 144 404000 Aate to be c0arged per '1 fro1 eac0 passenger As. 14 034$+0 R 144404000 D Ae. 0.0)2 Ca#cu#ation of tota# distance covered 220 '1 2 - 3 - 2! - 123 D 3$4000 '1 per annu1

52 I00u$tr#ti"n 16: 8Tr#n$)"rt C"$tin%9 ra'as0 .uto1obi#es distributes its goods to a regiona# dea#er using a sing#e #orr/. 70e dea#ersQ pre1ises are 40 'i#o1eters awa/ b/ road. 70e #orr/ 0as a capacit/ of 10 tons and 1a'es t0e journe/ twice a da/ fu##/ #oaded on t0e outward journe/s and e1pt/ on return journe/. 70e fo##owing infor1ation is avai#ab#e for a four wee'#/ period during t0e /ear 1GG0. etro# consu1ption + '1 per #iter etro# Cost As. 13 per #iter Oi# As. 100 per wee' DriverQs wages As. 400 per wee' Aepairs As. 100 per wee' Barage Aent As. 1!0 per wee' Cost of Lorr/ 2e-c#uding t/res3 As. 44!04000 Life of Lorr/ +04000 'i#o1eters Insurance As. $4!00 per annu1 Cost of t/res As. $42!0 Life of t/res 2!4000 'i#o1eters As. !04000 ,sti1ated sa#e va#ue of #orr/ at end of its #ife %e0ic#e #icense cost As. 14300 per annu1 70e #orr/ operates on five da/ wee' As. 414$00 per annu1

Ae;uiredC 2a3 . state1ent to s0ow t0e tota# cost of operating t0e ve0ic#e for four(wee'#/ period ana#/6ed into running costs and fi-ed costs. 2b3 Ca#cu#ate t0e ve0ic#e cost per 'i#o1eter and per ton 'i#o1eter NC...4 InterO S"0uti"n: 2a3 :efore co1puting t0e tota# cost4 it is necessar/ to find out t0e basic data s under C 1. Distance trave##ed in 4 wee' periodV 40 '1 one wa/ - 2 2return3 - 2 trips - ! da/s - 4 wee's D 3200 '1 2. 5or tone '1 wor'ing D e1pt/ on return and as suc0 for tone '1 D 3200 R 2 D 14$00 3. 4. 5. 7ota# consu1ption in wee's D 34200 '1 R + '1 D 400 #t 7/re cost D 2As. $42!0 R 2!4000 '13 - 34200 '1 D As. +00 Depreciation of #orr/ in 4 wee's = 2As. 44 !04000 I As. !04000 '13 R +04000 - 34200 D As. 1$4000

5& Operating cost state1ent f a #orr/ of M@s. ra'as0 .uto1obi#es 2for t0e 4 wee' period3 Runnin% c"$t$ R$. Cost of petro# 2400 #iters - As. 133 !4200 Oi# 2As. 100 per wee' - 43 400 Drivers wages 2As. 400 per wee' - 43 14$00 Aepairs 2As. 100 - 43 400 Cost of t/ers 2as at 4 above3 +00 Depreciation 2as at ! above3 1$4000 7ota# running costs ? 2i3 244400 i1e' c"$t$ R$. Barage ret 2As. 1!0 - 43 $00 Insurance 2As. $4!00 R !23 - 4 !00 License cost 2As. 14300 R !23 - 4 100 Ot0er over0eads 2As. 414$00 R !23 - 4 34200 7ota# fi-ed cost ( 2ii3 44400 7ota# 2i3 K 2ii3 2+4000 2b3 Cost per tone ? '1 D As. 2+4+00 R 21$00 - 10 tons3 As. 1.+0

2.; ECERCISE
2.;.1. O.Decti(e TA)e C0oose t0e correct answer for t0e 1u#tip#e c0oice ;uestions 1. C#assification and accu1u#ation of costs b/ fi-ed and variab#e costs is a distinctive feature of 2a3 rocess costing 2b3 <nit costing 2c3 Operating costing 2d3 :atc0 costing 2. Co1posite unit is distinctive feature of 2a3 "ing#e or output costing 2b3 rocess costing 2c3 =ob costing 3. 2d3 Operating costing

,#ectricit/ generating co1pan/ s0ou#d e1p#o/ 2a3 <nit costing costing 2b3 rocess costing 2c3 Operating 2d3 Mu#tip#e costing

5* 4. Cine1a 0ouses 1ust adopt 2a3 Operating costing 2b3 =ob costing 2c3 :atc0 costing 2d3 Contract costing 5or a #ibrar/ t0e best 1et0od of costing suitab#e is 2a3 Output costing costing 6. 2b3 Operating costing 2c3 rocess 2d3 Mu#tip#e costing

5.

5or an educationa# institutes t0e rig0t 1et0od of costing is 2b3 =ob costing 2d3 rocess costing 2c3 Operating costing

2a3 Output costing

7.

Sospita#s 1ust 1a'e use of 2a3 Operating costing costing 2b3 :atc0 costing 2c3 rocess 2d3 Mu#tip#e costing

8.

5or 0ote#s t0e best 1et0od of costing is 2a3 "ing#e or output costing 2b3 Contract costing 2c3 rocess 2d3 Operating costing

9.

.ir India Co. 1ust 1a'e use of 2a3 =ob costing costing 2b3 Operating costing 2c3 :atc0 2d3 rocess costing

10. Indian Aai#wa/s 1ust adopt 2a3 Operating costing 2b3 <nit costing 2c3 :atc0 costing 2d3 Mu#tip#e costing 11. ub#ic uti#it/ underta'ings 1ust invariab#/ adopt 2a3 Operating costing Contract costing 2b3 Output costing 2c3 2d3 Mu#tip#e costing

12. Marnata'a ,#ectricit/ :oard 1ust 1a'e use of 2a3 "ing#e or output costing 2b3 =ob costing 2c3 rocess costing 2d3 Operating cost

56 13. 70e 1et0od of costing used in case of a gas co1pan/ is ter1ed as 2a3 =ob costing 2b3 rocess costing 2c3 Operating costing 14. Mines T.I and T:I are at a distance of 10 '1s and 1! '1s fro1 t0e factor/. 70e cost per tone('1 in case of 1ine . is As. 3 w0i#e it is A. 2.! in case of 1ine :. 70e factor/ s0ou#d procure coa# fro1 2a3 Mine . on#/ 2b3 Mine : on#/ 2c3 :ot0 fro1 1ines . and : in t0e ration of 3 C 2 15. In case of stea1 co1pan/4 t0e cost per unit is ca#cu#ated on t0e basis of 2a3 7ota# ;uantit/ of #bs. produced 2b3 7ota# ;uantit/ of 'w0. generated 2c3 7ota# ;uantit/ of tones produced.
An$Ber$: 1312c34 22d34 32c34 42a34 !2b34 $ 2b34 )2a34 +2d34 G2b34 102a34 112d34 122a3 2c34 14 2a34 1!2a3

2.;.2

Si+)0e Eue$ti"n$

1. Define operating cost 2. Define operating costing 3. Distinguis0 between operating cost and operating costing 4. &0at do /ou 1ean b/ a co1posite unitI 5. List out an/ eig0t underta'ings w0ic0 1a'es use of operating costing. 6. Bive t0e co1posite unit of t0e fo##owing underta'ings C 2a3 Aoadwa/s carr/ing passenger 2b3 Aai#wa/s carr/ing goods 2c3 Sospita# and 2d3 Co##ege. 7. Mention t0e basis of c#assif/ing t0e cost under operating costing. 8. Mention t0e basis of c#assif/ing t0e costs under transport costing. 9. &0at is a #og s0eet I 10. &0at do /ou 1ean b/ cost su11ar/ perfor1ance state1entI 11. &0at do /ou 1ean b/ abso#ute tone('i#o1eterI 12. &0at do /ou 1ean b/ a co11ercia# tone('i#o1eterI 13. Distinguis0 between abso#ute tone('i#o1eter and co11ercia# tone 'i#o1eter.

52 14. &0at do /ou 1ean b/ I'i#o1eter runII 15. &0at do /ou 1ean b/ Icost per 0ourI under operating costingI 2.;.& St#te B-et-er e#c- "! t-e !"00"Bin% $t#te+ent i$ ITrueJ "r I #0$eJ 1. Operating costing is used in case of service underta'ing. 2. Log s0eet is prepared in case of power 0ouse costing. 3. 70e unit of cost for production of stea1 1a/ be per #b. 4. er 1an s0ow cost is ca#cu#ated in case of Canteen costing. 5. 5are in case of ta-is is genera##/ based on cost per passenger4 '1
An$Ber : 213 7rue 223 5a#se 233 7rue 243 5a#se 2!3 5a#se

2.;.*. L"n% #n$Ber tA)e. 1. &0at is service costing I Mention t0e t/pes of business in w0ic0 t0e s/ste1 wou#d be suitab#e. Describe brief#/ a s/ste1 of service costing w0ic0 /ou wou#d reco11end for use b/ a passenger ta-i service. 2. &0at are t0e 1ain objects of 1otor transport costingI . co1pan/ owns a f#eet of vans and wis0es to e-a1ine t0e cost of 2a3 eac0 van4 2b3 t0e f#eet as a w0o#e. repare a report on t0e accounting arrange1ents t0at are needed and draft speci1en of t0e for1s t0at /ou reco11end for presentation to t0e directors. "0ow separate rates for fi-ed and variab#e e-penditure and state 0ow t0ese s0ou#d be used. 3. Draw up a profor1a cost state1ent for a canteen serving 14000 wor'ers in a factor/. 70e canteen is subsidi6ed b/ t0e factor/. 4. &0at is IOperating CostingI I "tate t0e industries w0ere it is to be usedI 5. 6. &0at is a ILog s0eetII Bive its profor1a. Jour c#ient running a canteen tends to introduce costing s/ste1 in 0is organi6ation. Sow s0ou#d 0e c#assif/ 0is costs for t0e purpose of preparing an Operating Cost "tate1ent I

2. . Minera# is transported fro1 two 1ines ? 8.9 and 8:9 and un#oaded at p#ots in a Aai#wa/ "tation. Mine . is at a distance of 10'1s. .nd : is at a distance of 1!'1s. fro1 t0e 1ines. Aecords revea# t0at t0e #orries average a speed of 30 '1s. per 0our4 w0en running and regu#ar#/ ta'e 10 1inutes to un#oad at t0e rai#0ead. .t 1ine 8.9 #oading ti1e averages 30 1inutes per #oad w0i#e at 1ine 8:9 #oading ti1e averages 20 1inutes per #oad. DriversQ wages4 depreciation4 insurance and ta-es are found to cost ! G per 0our operated. 5ue#4 oi#4 t/res4 repairs and 1aintenance cost ! 1.20 per '1. Draw up a state1ent4 s0owing t0e cost per tonne('i#o1eter of carr/ing 1inera# fro1 eac0 1ine. 2M.Co1. Oct. 01)
("ns.$ Cost per tonne %m. Mine "$ &s. 0.'2( Mine )$ &s.0.66)

I00u$tr#ti"n 2 : . transport co1pan/ 1aintains a f#eet of bus as fo##ows C >u1ber of :uses Carr/ing Capacit/ 20 10 !0 passengers eac0 40 passengers eac0

,ac0 bus 1a'es ! trips a da/4 covering a distance of 10 M1. in eac0 trip. On an average +0H of t0e seats are occupied in eac0 trip and ! buses are under repair ever/ da/. .ssu1ing t0at t0e co1pan/ operates its f#eet dai#/4 ascertain t0e operating cost per passenger( M1. fro1 t0e fo##owing C &ages of 30 Drivers T 34000 eac0 per 1ont0 &ages of 30 C#eaners 14000 eac0 per 1ont0 etro# T 204000 per 1ont0 Oi#4 Brease etc. T !4000 per 1ont0 7/res4 7ubes etc. T 24000 per 1ont0 Aepairs T 304000 per /ear Barage Aent T 404000 per /ear Aoad Licences T 204000 per /ear

5: 7a-es T !4000 per 0a#f /ear er1it 5ee T 2!4000 per /ear "a#ar/ of Operating Manager T !4000 per 1ont0 Office Over0eads T 104000 per /ear 2M.Co14 Oct 20003

.nsC 27ota# Operating CostC As. 1G4!G40004 Cost per passenger M1.C As.0.11!3

I00u$tr#ti"n & : . co1pan/ present#/ brings coa# to its factor/ fro1 a nearb/ /ard w0ic0 is #ocated $ '1s. awa/ to factor/ and t0e rate paid T !0 per ton for transportation. 70e tota# coa# to be 0and#ed in 1ont0 in 244000 tons. 70e co1pan/ is considering proposa# to bu/ its own truc's and 0as t0e option of bu/ing eit0er a 10 ton or a + ton capacit/ truc's. 70e f#owing infor1ation is avai#ab#e C articu#ars 10 7on 7ruc' + ton 7ruc' +40040 00 ! >i# 4 4+4000 3$4000 20

urc0ase rice 2T3 Life 2Jears3 "crap va#ue at end of !t0 /ear M1s. per #itre of diese# Aep@Maint p.a. per 7ruc' 2T3 Ot0er ,-penses fi-ed p.a. 2T3 Lubricants and "undries per 100 '1. 2T3

FF FF FF FF FF FF FF

104004000 ! >i# 3 $04000 $04000 20

,ac0 7ruc' wi## dai#/ 1a'e ! trips 2to and fro3 on an average for 24 da/s in a 1ont0. Cost of Diese# T1$ per #itre. "a#ar/ of Drivers T 34000 per 1ont0 and two drivers wi## be re;uired for a 7ruc'. Ot0er staff e-penses T 140+4000 p.a.

5; resent a Co1parative Cost "0eet on t0e basis of above data s0owing transport cost per ton of operating 10 ton and + ton 7ruc' at fu## capacit/ uti#i6ation. 2M.Co1. Mar. 024 adapted3 .nsC 27ota# Operating CostC 10 7on 7ruc'C As. 4G4$3! + 7on 7ruc' As.4143+14 Cost per 7onC 10 7on 7ruc'C As. 41.3$4 + 7on 7ruc'C As.43.113 I00u$tr#ti"n * : 70e fo##owing were t0e e-penses incurred b/ C.LL and M.LL Co1pan/ in operating two #orries 2for t0e conve/ance of Aaw Materia#s3 and a bus 2for t0e conve/ance of "taff3 during t0e 1ont0 of 5ebruar/4 200$ C
Mont0#/ Cost Lorr/ C Lorr/ M :us DriverQs "a#aries C#eanerQs &ages Diese# Oi# Aepairs Depreciation Office Over0eads "ervicing C0arges Aoad and &0ee# 7a"undr/ ,-penses FFFFF FFFFF FFFFF FFFFF FFFFF FFFFF FFFFF FFFFF FFFFF FFFFF 110 120 1)0 1+ 1!0 330 )0 130 4! 3! 11! 120 240 2! 1!0 220 )0 110 4! 40 1 2 0 $ 0 1 1 0 2 0

70e above ve0ic#es carried t0e assengers during t0e 1ont0 C Lorr/ C

fo##owing Aaw 1ateria#s and

100 7onnes of Aaw Materia# Lorr/ M

120 7onnes dai#/ for 2! da/s Aespective 1i#eage of t0e ve0ic#es during t0e 1ont0 C Lorr/ C 34000 Lorr/ M 24000 5ro1 t0e above statistics prepare an Operating Cost "0eet in su11ar/ for t0e t0ree ve0ic#es. .#so e-p#ain t0e unit of costing se#ected.
(M.Com.( "pri 06( adapted)

44!00 :us

:0
.nsC 27ota# Operating CostC Lorr/ CC As. 141)+4 Lorr/ MC As. 1413!4 :usC As. G!!47ota# 7onnes or assenger Mi#esC Lorr/ CC 1240004 Lorr/ MC 214$004 :usC !040003

I00u$tr#ti"n 6: .n entrepreneur owns a bus w0ic0 runs fro1 Mu1bai to une and bac' for 2! da/s in a 1ont0. 70e distance fro1 Mu1bai to une is 1)0 '1s. 70e bus co1p#etes t0e trip fro1 Mu1bai to une and bac' on t0e sa1e da/. Ca#cu#ate t0e fare to be c0arged to passengers if a profit of 33WH on cost is e-pected. 70e fo##owing furt0er infor1ation is avai#ab#e C articu#ars As. Cost of :us "a#ar/ of Driver per F 1ont0 "a#ar/ of Conductor F 5i-ed Office Over0eads Insurance p.a. Diese# consu1ption 1$ '1s. per #itre costing Loca# F 7a-es p.a. F Oi# and Lubricants per 100 '1s. Aepairs and Maintenance p.a. Licence F 5ees p.a. >or1a# "eating Capacit/ F Depreciation Aate F F F F F F 70e bus usua##/ runs fu## upto G0H of its capacit/ bot0 fee is pa/ab#e on t0e cost of bus at 10H p.a. FFF FFF FFF FFF FFF FFF FFF FFF FFF FFF FFF FFF wa/s. er1it 34004000 140!0 )00 4+0 $4)20 2! per #itre 1.200 20 1.000 2.+40 !0 passengers 20. p.a.

2M.Co1. .pri# 0!3

.nsC 27ota# Operating CostC As. 340+42G!4 7ota# passenger M1.C 4!4G040003

I00u$tr#ti"n 2 : MMM .uto1obi#es distributes its goods to a regiona# trader using a

sing#e #orr/. 70e traderQs pre1ises are 40 '1s awa/ b/ road. 70e #orr/ 0as a capacit/ of 10 tonnes and 1a'es t0e journe/ twice a da/ fu##/ #oaded on t0e outward journe/s and e1pt/ on return journe/s.

:1 Jour are given data for 4 wee'#/ periods during t0e /ear 2003. etro# consu1ption + '1s per #itre etro# cost As. 13 per #itre Oi# As. 100 per wee' DriverQs wages As. 400 per wee' Aepairs As. 100 per wee' Barage rent As. 1!0 per wee' Cost of #orr/ As. 44!04000 2e-c#uding t/res3 Life of #orr/ +04000 '1s. Insurance As. $4!00 p.a. Cost of t/res As. $42!0 Life of t/res 24!00 '1s ,sti1ated "crap va#ue of #orr/ at t0e end of its #ife T !04000 %e0ic#e #icence cost As. 14300 p.a. Ot0er over0ead cost As. 414$00 p.a. 70e #orr/ operates on a 5ive(da/ wee' Re@uire' : a. . state1ent to s0ow t0e tota# cost of operating t0e ve0ic#e for t0e 4 wee'#/ periods ana#/sed into running costs and fi-ed costs. b. Ca#cu#ate ve0ic#e cost per '1. and per tonne '1. 2M. Co14 Oct. 044 adapted3
.nsC 27ota# Operating CostC As. 2+4+004 ,ffective M1( 7onne .C1$4000 ,ffective M1. 1$003

I00u$tr#ti"n 5 : . person owns a bus w0ic0 runs between De#0i and C0andigar0 and bac' for 10 da/s in a 1ont0. 70e distance between De#0i and C0andigar0 is 1!0 '1s. 70e bus co1p#etes t0e trip fro1 De#0i and C0andigar0 and bac' on t0e sa1e da/. 70e bus goes to .gra for anot0er 10 da/s. 70e distance between De#0i and .gra is 120 '1s. 70e trip is a#so co1p#eted on t0e sa1e da/. 5or t0e rest 4 da/s of its operation4 it runs in De#0i. 70e dai#/ distance covered is 40 '1s.

:2 Ca#cu#ate t0e c0arges to be 1ade if a profit of 3321@33H is to be earned on 0is ta'ings. 70e ot0er avai#ab#e infor1ation given to /ou is C Cost of t0e bus As. $04000. Depreciation 20H p.a. "a#ar/ of Driver As. 3!0 p.1. "a#ar/ of Conductor As. 3!0 p.1. "a#ar/ of C#eaner As. 1$0 p.1. Insurance As. 14$+0 p.a. Diese# consu1ption is 4 '1s per #itre. Diese# costs As. one per #itre. 70e to'en ta- is As. $00 p.a. Lubricants As. p.1.V per1it fee As. persons. 10 per 100 '1sV repairs and 1aintenance 2+4 p.1. and t0e nor1a# capacit/ is !0
As.

300

70e bus genera##/ 0as G0H of its capacit/ occupied w0en it goes to C0andigar04 +0H w0en it goes to .gra. It is a#wa/s fu## w0en it runs wit0in t0e cit/. assenger ta- is 20H of 0is net ta'ings. 2M. Co14 Oct. 044 adapted3
.nsC 27ota# Operating Cost per 1ont0C As. 44!+04 Cost per passenger M1. As.0.0343

I00u$tr#ti"n : : . person owns a bus t0at runs between Mu1bai and Lonava#a and bac'4 for 10 da/s in a 1ont0. 70e distance fro1 Mu1bai to Lonava#a is 1!0 '1s. 70e bus co1p#etes t0e trip fro1 Mu1bai to Lonava#a and return in t0e sa1e da/. 70e bus goes anot0er 10 da/s in a 1ont0 towards .#ibag0. 70e distance fro1 Mu1bai to .#ibag0 is 120 '1s. 70e trip is a#so co1p#eted on t0e sa1e da/. 5or t0e rest 4 da/s of its operation in a 1ont0 it runs #oca##/ in Mu1bai4 covering dai#/ distance of 40 '1s. Ca#cu#ate t0e rate t0at t0e person s0ou#d c0arge fro1 passenger w0en 0e wants to earn t0e profit of 2!H on 0is ta'ings and a#so ca#cu#ate t0e c0arge per passenger for bot0 t0e out(station trips. 70e ot0er infor1ation is given as fo##ows C

:& Cost of t0e bus 2Depreciation F 20H p.a.V >or1a# Capacit/ C !0 persons3 $4004000 "a#ar/ C Driver !4000 per 1ont0 "a#ar/ C Conductor 24000 per

!4000 per 1ont0 5i-ed Office Over0eads 1ont0 Insurance 4 '1s@#itre3 A.7.O. ta-

)4200 per 1ont0 5ue# 2Consu1ed F

3! per #itre $00 per annu1 Lubricant Oi# 10

per 100 '1s Aepairs and Maintenance er1it 5ee 300 per 1ont0

!00 per 1ont0

assenger ta- is 20H of t0e net ta'ings. 70e bus is occupied G0H of its capacit/ w0i#e on Lonava#a trip and +0H of its capacit/ w0i#e on .#ibag0 trip4 but is fu##/ occupied in its #oca# journe/. 2M. Co14 .pri# n0+4 adapted)
.nsC 27ota# Operating CostC As. )24$!$4 7ota# assenger M1. 243G.0004 Cost per passenger M1.C As.4+.$43

I00u$tr#ti"n ; . transport co1pan/ supp#ies t0e fo##owing detai#s in respect of a truc' of ! tonne capacit/ w0ic0 carries goods to an fro1 t0e cit/ covering a distance of !0 '1s eac0 wa/.
As.

Cost of truc' eac0 wa/3 1ont03

14 +04000 Diese#4 oi#4 grease 2per trip 30 Aepairs and 1aintenance 2per 14!00 DriverQs 21ont0#/3 wages 14!00 )!0 $4000

C#eaner(cu1(attendantQs wages 21ont0#/3 Insurance 2per /ear3 ,sti1ated #ife 2/ears3 34000 Benera# "upervision c0arges 2per /ear3 10

G4000 Aoad #icense 2per /ear3

:* &0i#e going to t0e cit/4 freig0t is avai#ab#e for a fu## #oad of t0e truc' and on its return journe/ it can fetc0 freig0t on#/ upto 20 percent of its capacit/. On t0e assu1ption t0at t0e truc's runs on an average 2! da/s a 1ont04 /ou are re;uired to deter1ine t0e fo##owing C i. Operating cost per tone('14

ii3 Aate per tone per trip t0at t0e co1pan/ s0ou#d c0arge if profit if !0 percent on cost is to be earned4 and iii3 &0at freig0t s0ou#d t0e co1pan/ c0arge if one wants to engage t0e truc' for one da/ for a trip to t0e cit/ and bac'I 2M.Co1 4 .pri# 0G4 adapted3
An$: 27ota# Operating CostC As. +42!04 Cost per 7onne M1.C As.1.1003

I00u$tr#ti"n 10 : 5ro1 t0e fo##owing infor1ation re#ating to a Sote#4 ca#cu#ate t0e roo1 rent to be c0arged to give a profit of 2!H on cost e-c#uding interest c0arged on Loan for t0e /ear ended 31st Marc04 200+ C "a#aries of office staff As. !04000 per 1ont0. &ages of t0e roo1 attendantC As. 20 per da/ per roo1 w0en t0e roo1 is occupied. 3. #ig0ting4 Seating and ower C a. 70e nor1a# #ig0ting e-penses for a roo1 for t0e fu## 1ont0 is As. !004 w0en occupied. 1. 2. b. ower is used on#/ in winter and t0e c0arges are 200 for a roo14 w0en occupied. 4. Aepairs to :eds and ot0er furnitureC As. 304000 per annu1. 5. Aepairs to Sote# bui#dingC As. !04000 per annu1. 6. Licence feesC As. 124400 per annu1. 7. "undriesC T 104000 per 1ont0. 8. Interior decoration and furnis0ingC As. 14004000 per annu1. 9. Depreciation F !H p.a. is to be c0arged on :ui#ding costing 204004000@( and F 10H p.a. on ,;uip1ents. 10. 70ere are 200 roo1s in t0e Sote#4 +0H of t0e roo1s are genera##/ occupied in su11er4 $0H in winter and 30H in rain/ season.

:6 70e period of su11er4 winter and rain/ season 1a/ be considered to be of 4 1ont0s in eac0 case. . 1ont0 1a/ be assu1ed of 30 da/s of an average 2M. Co1. Oct. 0+4 adapted3
An$: 27ota# ,arningsC As. 3341+40004 7ota# Aoo1 Da/sC 404+00.Cost per Da/C As.+1.323

I00u$tr#ti"n 11: Ae#a- Sote# 0as a capacit/ of 100 sing#e roo1s and 20 doub#e roo1s. 70e average occupanc/ of bot0 sing#e and doub#e roo1s is e-pected to be +0H t0roug0out t0e /ear of 3$! da/s. 70e rent for t0e doub#e roo1 0as been fi-ed at 12!H of t0e rent of t0e sing#e roo1. 70e costs are as underC %ariab#e Costs C "ing#e roo1s
As. 220 eac0 per da/

Doub#e roo1s As. 3!0 eac0 per da/ 5i-ed Costs C "ing#e roo1s
As. 120 eac0 per da/

Doub#e roo1s As. 2!0 eac0 per da/ Ca#cu#ate t0e rent c0argeab#e for sing#e and doub#e roo1s per da/ in suc0 a wa/ t0at t0e 0ote# earns on overa## profit of 20H on 0ire c0arges of roo1s. 2M. Co1. .pri# 0G4 adapted3
An$: 27ota# ,arningsC As. 14$)4G040004 7ota# Aoo1 Da/sC "ing#e roo1C 2G4200 Doub#e roo1 C !4+40.3

I00u$tr#ti"n 12: . 0ospita# is run b/ a Co1pan/. 5or t0is purpose it 0as 0ired a bui#ding at a rent of As. !4000 per 1ont0 p#us it wou#d bear t0e repair c0arges a#so. 70e 0ospita# is 0aving 2! beds and ! 1ore beds can be acco11odated w0en t0e need arises. 70e staff of t0e 0ospita# is as fo##ows C 2 4 2 "upervisors eac0 at a sa#ar/ ofAs. !00 per 1ont0 >urses eac0 at a sa#ar/ ofAs. 300 per 1ont0 &ard bo/s4 eac0 at a sa#ar/ ofAs. 1!0 per 1ont0

.#t0oug0 t0e 0ospita# is open for patients a## t0e 3$! da/s in a /ear4 records for t0e /ear 2004 disc#ose t0at on#/ for 120 da/s in t0e /ear4 t0e unit 0ad t0e fu## capacit/ of 2! patients per da/ and

:2 w0en t0e beds were fu##4 e-tra beds were 0ired at a c0arge of T ! per bed per da/ and t0is did not co1e to 1ore t0an ! beds e-tra above t0e nor1a# capacit/ on an/ one da/. 70e tota# 0ire c0arges for t0e e-tra beds incurred for t0e w0o#e /ear were As. 24000. 70e <nit engaged e-pert doctors fro1 outside to attend on t0e patients and t0e fees was paid on t0e basis of t0e nu1ber of patients attended and ti1e spent b/ t0e1 w0ic0 on an average wor'ed out to As. 104000 per 1ont0 in 2004. 70e ot0er e-penses for t0e /ear were as underC Aepair and Maintenance As. 34$00 5ood supp#ied to patients As. 444000 "anitar/ and Ot0er services for patients As. 124!00 Laundr/ C0arges As. 2+4000 As. Medicines supp#ied 3!4000 Cost of o-/gen4 L(ra/4 etc. ot0er t0an direct#/ borne for treat1ent of patients As. !44000. Benera# .d1inistration C0arges a##ocated to 0ospita#
As. 4G4!!0.

If t0e 0ospita# recovered an a1ount of As. 100 per da/ on an average fro1 eac0 patient4 co1pute t0e profit per patient ? da/ 1ade b/ t0e 0ospita# as per operating cost s0eet for t0e /ear 2004. 2M. Co1. Oct.0$4 adapted3
An$: 27ota# ,arningsC As.$143!04 7ota# >u1ber of atient da/sC !000.3

:5

&
INTEGRATED AND NON 7 INTEGRATED ACCOUNTS

Unit Structure 3.0 Learning Objectives. 3.1 Introduction 3.2 >on(Integra# or cost #edger accounting s/ste1 2inter#oc'ing s/ste1 3 3.3 Ledger Maintained under Inter#oc'ing "/ste1 3.4 "o#ved rob#e1s 3.! Integra#2or Integrated3 accounting 3.$ .dvantages of Integra# accounting 3.) ,ssentia# features of Integra# .ccounting 3.+ *uestions 3.G ,-ercise

&.0

LEARNING OBJECTIVES

A!ter $tu'Ain% t-i$ c-#)ter "ne $-"u0' #.0e un'er$t#n' 70e need for integrated and non integrated account Distinguis0 between t0e two cost boo' 'eeping s/ste1s 70e re;uired journa# and #edger accounts to be prepared 70e advantages of t0ese s/ste1s .

&.1 INTRODUCTION
=ust as financia# accounting s/ste1 is 1aintained wit0 certain objectives in view4 cost accounting s/ste1 is often distinctive#/ 1aintained wit0 a view to ac0ieve its objectives. .## transactions are co##ected fro1 t0e sa1e invoices vouc0ers or receipts w0ic0 are a#so co11on for financia# account. Costs are t0en c#assified according to functions4 depart1ents4 or products. 70oug0 rea# accounts and no1ina# accounts are of direct re#evance in ascertaining t0e cost of products. ersona# accounts and cas0 or ban' account are not direct#/ re#ated to cost ascertain1ent. &0en cost accounting s/ste1 is 1aintained it invo#ves 1aintenance of certain bu#'s for recording da/ to da/ transactions. It is not necessar/ to 1aintain cost accentsQ under doub#e entr/ stated of boo' 'eeping. Sowever4 in order to ensure arit01etica# accurac/ of data often t0e princip#es of doub#e entr/ s/ste1 of bu#' 'eeping is fo##owed.

::

&.2

NON?INTEGRAL OR COST LEDGER ACCOUNTING S4STEM 8 INTERLOC>ING S4STEM9

70ere are two s/ste1s of 1aintaining cost records vi6.4 inter#oc'ing s/ste1 and integra# accounting s/ste1. <nder inter#oc'ing s/ste1 cost records are 1aintained in a separate set of boo's independent of financia# accounts. 70e ICM. ter1ino#og/ defines inter#oc'ing s/ste1 of accounting as 8a s/ste1 in w0ic0 t0e cost accounts are distinct fro1 t0e financia# accounts4 t0e two sets of accounts being 'ept continuous#/ in agree1ent or readi#/ recogni6ab#e9 70e fo##owing are so1e of t0e advantages of inter#oc'ing accounting s/ste1C a. &0en separate set of costing boo's are 1aintained it faci#itates read/ acco1p#is01ent of its objectivesQ3 If avoids t0e co1p#ications or recording t0e entries if it is integrated wit0 financia# accounts. b. It can be 1aintained according to convenience as it need not be statutori#/ 1aintained 70e fo##owing are so1e of t0e #i1itations a. &0en cost accounts are independent#/ 1aintained4 it a1ounts to dup#ication of e-penses a#ong wit0 financia# accounts. b. 70e profit s0own b/ cost boo's 1a/ var/ wit0 t0at s0own b/ financia# accounts. 70is re;uires reconci#iation w0ic0 invo#ves ti1e and effort

&.& LEDGER MAINTAINED UNDER INTERLOC>ING S4STEM

&.&.1 Su.$i'i#rA .""3$ +#int#ine' un'er inter0"c3in% $A$te+ "! #cc"untin%: 70e fo##owing are so1e of t0e subsidiar/ boo's 1aintained under inter#oc'ing s/ste1 of accountingC 1. "tores #edgerV t0is #edger is used to record bot0 t0e ;uantit/ and a1ount of receipts4 issues and ba#ance of 1ateria#s and supp#ies. 70e basis for recording t0e transactions are 2a3 Materia#s received note 2b3 Materia# transfer note4 and 2d3 Materia# returned note.

:; 2. a/ro## and wage ana#/sis boo'V t0is #edger is used to record t0e wages. 70e basis for recording t0e transactions are 2a3c#oc' cards42b3ti1e tic'ets4 and 2c3piece wor' tic'ets 3. =ob #edgerC t0is #edger is used to record t0e 1ateria# cost4 wages4 and over0eads incurred in respect of a job. 4. 5inis0ed goods stoc' #edgerC 70is #edger is used to record t0e receipt of finis0ed goods fro1 production depart1ent4 t0e sa#e and stoc' of finis0ed goods bot0 in ter1s of ;uantit/ and va#ue. 70e basis for recording t0e transactions is de#iver/ note issued b/ t0e production depart1ents4 sa#es returns note and sa#es order re;uisitions. 5. "tanding order #edgerC 70is #edger is used to record over0eads incurred. &.&.2 Acc"unt$ M#int#ine' Un'er C"$t B""3$ 70e fo##owing i1portant accounts are 1aintained under cost boo'sC 1. Benera# #edger adjust1ent accountC 70is #edger is a#so 'nown as cost #edger contro# account or no1ina# #edger contro# account. In t0is accounts transactions wit0 on#/ one entr/ is recorded and contra appears in financia# boo'. On t0e credit side of t0is account are recorded a. Opening :a#ance of 1ateria#s4 wor' in progress and finis0ed stoc'4 2b3e-penses of 1ateria#4 wages and over0eads on t0e credit side4 2c3on t0e debit side returns of 1ateria#s to t0e supp#ier4 2d3 sa#es inco1eC and 2e3on t0e debit side ba#ancing entries of EL accountant c#osing stoc'. 2. "tores #edger contro# accountC entered in t0is account. t0e tota# of stores #edger is

3. &ages contro# accountC In t0is account t0e wages accrued and paid and a##ocation of wages in t0is account are recorded. 4. &or' in progress contro# accountC 70is account represents cost #edger in su11ar/ for1. 5. 5inis0ed goods stoc' #edger contro# accountC 70is account represents finis0ed goods stoc' #edger transactions in tota# for1. 6. "e##ing4 distribution4 and ad1inistration over0ead contro# accountC 970is account represents se##ing4 distribution and ad1inistration over0eads

;0 7. Capita and repair accountC 70is account represents capita#i6ed and repair e-penses 8. Cost of sa#es accountC 70e tota# cost to 1a'e and se## t0e finis0ed goods is recorded in t0is account 9. Costing rofit and #oss accountC 70is account revea#s t0e profit or #os as per cost accounts. 10. Materia# contro# accountC 70is account serves as a transitiona# account w0ic0 is c#osed subse;uent#/ to stores #edger contro# account. It 0e#ps in reconci#ing invoiced stoc' and accepted stoc' accounted in stores. 11. Over0ead adjust1ent accountC 70is account is used to record over or under absorption of over0eads. ,ntries to Aecord 7ransactions under Inter#oc'ing "/ste1 1.
Materia#s purc0ased for stoc' "tores #edger contro# account 7o Benera# #edger adjust1ent a@c Materia# purc0ased for a specia# job &or' in progress contro#a@c 7o genera# #edger adjust1ent a@c Dr

2.

Dr.

3.

5or issue of direct 1ateria#s to production depart1ent &or' in progress contro# a@c Dr 7o stores #edger contro# account 5or issue of indirect 1ateria#s to production depart1ents Over0ead contro# a@c Dr. 7o stores #edger contro# a@c 5or returning 1ateria#s to supp#ier Benera# #edger adjust1ent a@c Dr 7o stores #edger contro# a@c 5or 1ateria#s returned fro1 production depart1ent "tores #edger contro# a@c Dr 7o &or' in progress contro# a@c 5or 1ateria#s transferred fro1 job to job >o entr/ is passed in contro# account. In wor' in progress #edger t0e fo##owing ,ntr/ is passed 7ransferee job a@c Dr 7o transferor job a@c

4. 5.

6.

7.

8. 9.

;1
5or tota# sa#ar/ and wages paid &ages contro# a@c Dr. 7o genera# #edger adjust1ent a@c 5or a##ocation of direct and indirect #abour &or' in progress contro# a@c Over0ead contro# a@c wages a@c Dr. Dr. 7o

10 5or recording direct e-penses &or' in progress contro# a@c 11 5or recording over0ead incurred and accrued Over0ead contro# a@c

7o gene

7o gene

12 &0en over0ead s are received &or' in progress contro# a@c Cost of sa#es a@c 7o over0ead contro# a@c 13 5or adjusting under or over absorption over0eads 70e over0ead contro# account is c#osed b/ transferring to over0ead suspense account. 14 5or recording finis0ed stoc' produced 5inis0ed goods stoc' #edger contro# account 7o &or' in progress contro# a@c 1! &0en finis0ed goods are so#d at cost Cost of sa#es a@c 7o finis0ed goods are so#d at cost 1$ &0en finis0ed goods are so#d at tota# sa#es va#ue Benera# #edger adjust1ent a@c 7o Costing rofit and #oss a@c 1) 5or recording sa#es returns Costing rofit and #oss a@c 7o genera# #edger adjust1ent a@c 1+ 5or recordings repair wor' Aepair order a@c 7o wor' in progress contro# a@c 1G 5or a##ocation of repare wor' Over0ead contro# a@c 7o Aepair order a@c 20 5or recording specia# orders co1p#eted and so#d at tota# sa#es va#ue Cost of sa#es a@c 7o &or' in progress contro# a@c

D r D r. D r.

D r D r D r. D r D r. D r

;2 Benera# #edger adjust1ent a@c 7o costing profit and #oss a@c 5or recording tota# cost to 1a'e and se## Cost of sa#es 7o costing profit and #oss a@c 5or recording under absorption of over0eads w0ic0 5or recording over absorption of over0eads w0ic0 is 5or recording profit Costing profit and #oss a@c 7o Benera# #edger adjust1ent a@c Dr

22 23 24 2!

Dr

C-ec3 4"ur Pr"%re$$:

1. &0ic0 #edgers 0ave been 1aintained under >on(integra# .ccounting s/ste1I 2. Bive =ourna# entries for fo##owing transactions under. Inter#oc'ing s/ste1. a. b. c. d. e. f. ". Materia# urc0ased for stoc' Issue of Direct Materia# to roduction Depart1ent Aeturn Materia#s to supp#iers Materia# transferred fro1 =ob . to =ob :. 7ota# "a#ar/ E &ages paid. Aecording sa#es return Aecording over0eads incurred E accrued.

&.* SOLVED PROBLEMS

I00u$tr#ti"n 1 : 70e profit and Loss .ccount as s0own in t0e financia# boo's of a co1pan/ for t0e /ear ended 30.0G.2002 toget0er wit0 a state1ent of reconci#iation between t0e profit as per financia# and cost accounts is given be#owC

;& Pr"!it #n' L"$$ Acc"unt !"r t-e Ae#r en'e' &0.0;.2002
Opening stoc' &or'(in( progress 5inis0ed goods "a#es 1!4004000 Aaw Materia# G04000 C#osing "toc' !04000 Aaw Materia# G+4000

R$. R$ R$. R$

5actor/ over0eads

)04000 24104000 &or'(in !34000 rogress Aaw 1ateria# 5inis0ed goods !4004000 urc0ased Direct wages 24004000 Misce##aneous 24004000 Aeceipts 4!4000 .d1inistration ,-p. re#i1inar/ ,-p. &ritten off )!4000 Debenture Interest 304000 ,-penses 14)04000

)24000 24234000

"e##ing and

>et profit

14$34000

1)4$+4000 1)4$+4000

Less C

St#te+ent "! Rec"nci0i#ti"n "! Pr"!it #$ )er in#nci#0 #n' C"$t Acc"unt$ R$. R$. rofit as per financia# accounts 14$34000 2a3 Difference in va#uation of stoc' .dd C Aaw 1ateria#s ? c#osing stoc' 14200 5inis0ed goods ? opening stoc' 24000 C#osing stoc' 14000 7ota# 2.3 !4!00 Aaw 1ateria#s ? opening 14$!0 stoc's )!0 &or' in progress ? c#osing stoc' 7ota# 2:3 24400

;* 2b3 Ot0er ite1s 2. ? :3 34100 )!4000 .dd C re#i1inar/ e-penses written off Debenture interest 304000 140!4000 Less Misce##aneous receipts 4!4000 $04000 C rofit as per Cost .ccounts 242$4100 Jou are re;uired to prepare t0e fo##owing accounts as t0e/ were appearing in t0e cost #edgerC 213 Aaw Materia# Contro# .@c. 223 &or'(in( rogress Contro# .@c. 233 5inis0ed Boods Contro# .@c. 243 Cost of "a#e .@c. and 2!3 Costing rofit and Loss .@c. NIC&.4 InterO S"0uti"n: B#$i$ c#0cu0#ti"n C"+)ut#ti"n "! ite+$ #$ )er C"$t Acc"unt$ articu#ars .s per financia# %a#uation .s per accounts difference cost accounta As. As. nts G+000 K Opening "toc' G0000 K 1$!0 G1$!0 C#osing "toc' 1200 GG200 ,"r3 7 in 7 Pr"ce$$ Opening "toc' !0000 ( 1300 4+)00 C#osing stoc' !3000 ( )!0 !22!0 ini$-e' G""'$ Opening "toc' )0000 ( 2000 $+000 C#osing "toc' )2000 K 1000 )3000 R#B M#teri#0 C"ntr"0 Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. 7o :a#ance b@d G1$!0 :/ &I Contro# .@c. 4G24!0 7o B. L. .dj. .@c. !00000 2ba#ance figure3 :/ :a#ance c@d. GG200 6;1260 6;1260

7o :a#ance b@d. 4+)00 :/ 5inis0ed Boods 7o Aaw Materia# Contro# .@c. Contro# .@c. 4G24!0 2ba#ancing figure3 +++G00 200000 :/ :a#ance C@d. !22!0 7o &ages Contro# .@c. 7o 5actor/ Over0eads Contro# .@c. 200000 ;*1160 ;*1160 ini$-e' G""'$ C"ntr"0 Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. 7o :a#ance b@d. $+000 :/ Costing "a#es .@c. 7o &I Contro# .@c. +++000 2ba#ancing figure3 10!3G00 :/ :a#ance C@d. )3000 7o .d1in. Over0eads Contro# .@c. 1)0000 1122;00 1122;00 C"$t "! S#0e$ Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. 7o 5inis0ed goods :/ Benera# Ledger Contro# .@c. 10!3GG0 .djust1ent .@c. 1!00000 7o "e##ing and Distribution Contro# .@c. 220000 7o rofit 7a'en to .@c. 1600000 1600000 C"$tin% Pr"!it = L"$$ Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. :/ Cost of "a#es .@c. 22$100 7o :a#ance 7ransferred 7o Benera# Ledger .djust1ent .@c. 22$100 222100 222100

;2 I00u$tr#ti"n 2: 70e fo##owing figures 0ave been e-tracted fro1 t0e cost records of a 1anufacturing unitC R$. "tores C Opening ba#ance 304000 urc0ases 14$04000 7ransfers fro1 &or'(in( rogress +04000 Issues to wor'(in(progress 14$04000 Issues to repairs and 1aintenance 204000 Deficiencies found in stoc' ta'ing $4000 ,"r3?In?Pr"%re$$ : Opening :a#ances $04000 Direct wages app#ied $04000 Over0eads app#ied 24404000 C#osing ba#ance 404000 5inis0ed products C ,ntire output is so#d at a profit of 10H on actua# cost fro1 wor'(in(progress. Ot0er wages incurred As. )04000V over0eads incurred As. 24!04000. Ite1s not inc#uded in cost recordsC Inco1e fro1 Invest1ents As. 104000V #oss in sa#e of capita# assets As. 204000. Draw up stores contro# account4 &or'(In( rogress Contro# .ccount4 Costing rofit and Loss .@c.4 rofit and Loss .ccount and Aeconci#iation "tate1ent. NIC&.4 InterO S"0uti"n: 8#9 C"$tin% B""3 8i9 St"re$ C"ntr"0 Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. 7o :a#ance b@d. 30000 :/ &or'(in( rogress Contro# .ccount 1$0000 20000 7o Benera# Ledger 1$0000 :/ &or' Over0ead Contro# .djust1ent .@c. .@c. 7o &or' ? in ? rogress +0000 :/ "tores Contro# .@c. $000 :/ Costing rofit Contro# .@c. E Loss +4000 c@d. 250000 250000

;5 8ii9 ,"r3?in?)r"%re$$ C"ntr"0 Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. 7o :a#ance b@d. $0000 :/ "tores Contro# .@c. +0000 7o "tores Contro# .@c. 1$0000 :/ Costing rofit and Loss .@c. 7o Direct &ages Contro# $0000 2cost of sa#es3 400000 240000 :/ .@c. 7o &or' Over0eads contro# :a#ance c@d. 40000 .@c 620000 620000 8iii9 C"$tin% Pr"!it #n' L"$$ Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. 7o &or'(in( rocess :/ Benera# Ledger Contro# .@c. 2cost of 400000 .djust1ent sa#es3 .@c. 7o &or's Over0eads 2sa#es3 400000 Contro# .@c. 30000 :/ Cost of "a#es 40000 440000 7o "tores Contro# 10 H .@c. profit 2s0ortage3 $000 7o rofit 4000 **0000 **0000 8i(9 ,"r3$ "(er-e#'$ c"ntr"0 Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Benera# #edger :/ &or'(in(progress .ccount .djust1ent .@c. 2!0000 :/ Costing rofit E Loss .@c. 7o "tores Ledger 2400 00 300 00 Contro# .@c.

N"te: It 0as been presu1ed t0at under recover/ of over0eads 0as been transferred to Costing rofit and Loss .ccount

8 Pr"!it = L"$$ Acc"unt P#rticu0#r$ R$. R$. P#rticu0#r$ R$. R$.

7o Opening "toc' "tores 30000 :/ C#osing &or'(in( progress $0000 G0000

:/ "a#es

440000

"toc' C "tores +4000

7o urc0ases 1$0000 &or'(in( rogress 40000 124000 7o &ages Incurred )0000 :/ Inco1e fro1 100 7o Over0eads 00 Invest1ents Incurred 2!0000 :/ Loss 1$000 7o Loss on sa#es of Capita# .ssets 20000 !G0000 !G0000 Rec"nci0i#ti"n St#te+ent ( R$. K 9 8R$. 7 9 rofit as per costing records 4000 Less C <nder absorption of wages 10000 Ite1s not inc#uded in cost accounts 10000 .dd C Inco1e fro1 invest1ent 20000 Less C Loss on sa#e of capita# assets 14000 Loss as per financia# boo's 1$000 30000 30000 I00u$tr#ti"n &: . co1pan/ operates on 0istoric job cost accounting s/ste14 w0ic0 is not integrated wit0 t0e financia# accounts. .t t0e beginning of a 1ont04 t0e opening ba#ances in cost #edger wereC R$. 80#3-$9 "tores Ledger Contro# .@c. +0 &or' ? In ? rogress Contro# .@c. 20 5inis0ed Boods Contro# .@c. 430 :ui#ding Construction .@c. 10 Cost Ledger Contro# .@c. !40 During t0e 1ont0 t0e fo##owing transactions too' p#ace R$.

;; 80#3-$9 M#teri#0$ : ( urc0ased 40 Issued to production !0 Issued to genera# 1aintenance $ Issued to bui#ding construction 4 &ages ( Bross &ages paid 1!0 Indirect wages 40 5or bui#ding construction 10 &or' over0ead ( .ctua# a1ount incurred 2e-c#uding ite1s s0own above3 1$0 .bsorbed in bui#ding construction 20 <nder absorbed + Ao/a#t/ paid ! "e##ing4 distribution and ad1inistration over0eads sa#es 2! "a#es 4!0 .t t0e end of t0e 1ont04 t0e stoc' of raw 1ateria# and wor'( in( progress was As. !! #a'0s and As. 2! #a'0s respective#/. 70e #oss arising in t0e raw 1ateria# account is treated as factor/ over0eads. 70e bui#ding under construction was co1p#eted during t0e 1ont0. Co1pan/Qs gross profit 1argin is 20 H on sa#es. repare t0e re#evant contro# account to record t0e above transactions in t0e cost #edger of t0e co1pan/. NC... InterO S"0uti"n: C"$t Le'%er C"ntr"0 A/c. LR$. L#3-$M P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Costing rofit E Loss 4!0 :/ :a#ance b@d. !40 !! :/ "tores Ledger .@c. 40 7o "tores Ledger Contro# Contro# .@c. .@c. 7o &I Contro# .@c. 2! :/ &ages Contro# .@c. 1!0 44 :/ &or' Over0eads 7o :ui#ding Construction .@c. 7o 5inis0ed Boods Contro# .@c. 1$0 Contro# .@c. 403 :/ Ao/a#t/ a@c. ! :/ " E D and ad1in. Over0eads .@c. 2! ;55 ;55

7o :a#ance b@d. +0 :/ &I Contro# .@c. $0 7o Cost Ledger Contro# .@c.

40 :/ &or's Over0eads Contro# .@c. $ :/ :ui#ding 4 Construction .@c. :/ C#osing :a#ance !! :/ &or's Over0eads Contro# .@c. 2#oss3 ! 120 120 ,"r3 7 in 7 Pr"%re$$ C"ntr"0 A/c.

P#rticu0#r$ R$. P#rticu0#r$ R$. !0 :/ C#osing :a#ance 2! 7o "tores Ledger Contro# .@c. 7o &ages Contro# .@c. 100 7o &or's Over0ead Contro# .@c. 1+3 7o Ao/a#t/ .@c. ! &6: &6: ini$-e' G""'$ C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o &I Contro# .@c. 333 :/ :a#ance c@d. 403 52& 52& C"$t "! S#0e$ A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Cost of Boods "o#d .@c. 3$0 :/ Costing rofit and Loss 7o "e##ing4 Distribution .@c. E .d1inistration Over0eads .@c. 2! &:6 &:6 3+!

101 C"$tin% Pr"!it = L"$$ A/c. P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Cost of "a#es .@c. 4!0 3+! :/ Cost Ledger Contro# .@c. 8 7o &or' Over0ead Contro# .@c. 7o Cost Ledger Contro# .@c. 2profit3 !) *60 *60 Bui0'in% C"n$tructi"n A/c. P#rticu0#r$ R$. P#rticu0#r$ R$. 7o :a#ance b@d. 10 :/ Cost Ledger Contro# .@c. 7o &age Contro# .@c. 10 7o &or's Over0ead ** ** ,"r3$ O(er-e#' C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o "tores Ledger Contro# $:/ :ui#ding Construction .@c. .@c. 7o &age Contro# .@c. 40 :/ &I Contro# .@c. 1+3 7o Cost Ledger Contro# .@c. 1$0 :/ :a#ance 2Costing rofit ELoss + .@c.3 211 211 ,#%e$ C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Cost Ledger Contro# 1!0 :/ &or's Over0ead .@c. Contro# .@c. :/ :ui#ding Construction .@c. :/ &I Contro# .@c. 110 160 160 4 0 1 0 20 44 Contro# .@c. 20

7o Cost Ledger Contro# .@c.

!:/ &I Contro# .@c. !

5 6 C"$t "! G""'$ S"0' A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o 5inis0ed Boods Contro# 3$0 :/ Cost of "a#es .@c. 3$0 3$0 3$0 .@c. Se00in% Di$tri.uti"n #n' A'+ini$tr#ti"n O(er-e#'$ A/c. P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Cost Ledger Contro# .@c. 2! :/ Cost of "a#es .@c. 2! 2! 2! Tri#0 B#0#nce P#rticu0#r$ Dr. Cr. "tores Ledger Contro# .@c. !! &I Contro# .@c. 2! 5inis0ed Boods Contro# .@c. 403 Cost Ledger .djust1ent .@c. 4+3 *:& *:& ,"r3in% N"te :
If se##ing price is As. 100 t0en cost price D As. +0@( If se##ing price is As. 4!0 t0en cost price D As. +0@As. 100 - As. 4!0 #a'0s = As. 3$0 #a'0s

I00u$tr#ti"n * : . co1pan/ operates separate cost accounting and financia# s/ste1. 70e fo##owing is t0e #ist of opening ba#ances as on 1(4(200G in t0e cost #edgerC Cre P#rticu0#r$ De.it 'it R$. "tores Ledger Contro# .ccount !343)! &I Contro# R$. .ccount 14044!G! 5inis0ed Boods Contro# .ccount 304)+0 Benera# Leger .djust1ent .ccount (( 14++4)!0

10& 7ransactions for t0e ;uarter ended 30($(200G are as underC R$. Materia# purc0ased 2$4)00 Materia# issued to production 404000 Materia#s issued for factor/ repairs G00 5actor/ wagespaid2inc#uding indirect wages As. 2340003 roduction over0eads incurred G!4200 roduction over0eads under ? absorbed and written ? off "a#es 24!$4000 70e co1pan/Qs gross profit is 2!H on factor/ cost at t0e end of t0e ;uarter4 &I stoc's increased b/ As. )4!00@(. repare t0e re#evant Contro# .ccount4 Costing rofit and Loss .ccount and Benera# Ledger .djust1ent .ccount to record t0e above transactions for t0e ;uarter ended 30($(200G. NC... InterO S"0uti"n: Gener#0 Le'%er A'Du$t+ent A/c. P#rticu0#r$ R$. P#rticu0#r$ R$. 7o "a#es 24!$4000 :/ :a#ance b@d 14++4)!0 7o :a#ance C@d. 14+041!0 :/ "tores Ledger Contro# .@c. :/ &ages Contro# .@c. :/ Over0eads Contro# .@c. :/ Costing rofit E Loss .@c.

))4!00 34200

2$4) 00 ))4! 00 G!42 00 4+40 00

*&2160 *<&2<160 St"re$ Le'%er C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o :a#ance b@d. !343)! :/ &I Contro# .@c. 404000 7o Benera# Ledger 2$4)00 :/ 5actor/ Over0eads .djust1ent .@c. Contro# .@c. G00 :/ :a#ance C@d. 3G41)! +040)! +040)!

10* ,IP C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 24024G00 7o :a#ance b@d. 14044!G! :/ 5inis0ed Boods Contro# .@c. 7o "tores Ledger 404000 :/ :a#ance c@d 141240G! !44000 Contro# .@c. 7o &ages Contro# .@c. 7o 5actor/ over0eads Contro# .@c. 141!4G00 &<1*<;;6 &<1*<;;6 ini$-e' G""'$ C"ntr"0 A/c. P#rticu0#r$ R$. P#rticu0#r$ R$. 7o "tores Ledger Contro# G00 :/ Costing rofit E Loss .@c. .@c. 234000 :/ &I Contro# .@c. 141!4G00 7o &ages Contro# .@c. 7o Benera# Ledger .djust1ent .@c. G!000 1<1;<100 1<1;<100 C"$t "! S#0e$ A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o 5inis0ed Boods :/ Benera# #edger Contro# .@c. 24044+00 .djust1ent .@c. 24044+00 S#0e$ A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Costing rofit E Loss 24!$4000 :/ Benera# Ledger .@c. .djust1ent .@c. ,#%e$ C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Benera# Ledger :/ 5actor/ Over0eads .djust1ent .@c. ))4!00 Contro# .@c. 234000 :/ &I Contro# .@c. !44!00 55<600 55<600 24!$4000 3200

106 C0"$in% Pr"!it = L"$$ A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 34200 :/ "a#es .@c. 24!$4000 7o 5actor/ O.S. Contro# .@c. 7o Cost of sa#es .@c. 24044+00 7o Benera# Ledger 4+4000 .dj. .@c. 262000 2<62<000 Tri#0 B#0#nce 8#$ "n &0?2?200;9 P#rticu0#r$ Dr. Cr. "tores Ledger Contro# .@c. 3G41)! &I Contro# .@c. 141240G! 5inis0ed Boods Contro# .@c. 2+4++0 Benera# Ledger .djust1ent .@c. 14+041!0 14+041!0 14+041!0 I00u$tr#ti"n 6: .s of 31st Marc04 200+ t0e fo##owing ba#ances e-isted in a fir1Qs cost #edger4 w0ic0 is 1aintained separate#/ on a doub#e entr/ basis C P#rticu0#r$ De.it Cre'it "tores Ledger Contro# .@c. 34004000 &or' ? in ? rogress Contro# .@c. 14!04000 5inis0ed Boods Contro# .@c. 24!04000 Manufacturing over0eads Contro# .@c. 1!4000 Cost Ledger Contro# $4+!4000 )4004000 )4004000 During t0e ne-t ;uarter4 t0e fo##owing ite1s aroseC R$. 5inis0ed product 2at cost3 242!4000 Manufacturing over0ead incurred +!4000 Aaw 1ateria# purc0ased 142!4000 5actor/ wages 404000 Indirect Labour 204000 Cost of sa#es 14)!4000 Materia#s issued to production 143!4000 "a#es returned 2at cost3 G4000 Materia#s returned to supp#iers 134000 Manufacturing over0ead c0arged to production +!4000 Jou are re;uired to prepare t0e cost #edger contro# .@c.4 "tores Ledger Contro# .@c.4 &or'(in( rogress Contro# .@c.4 5inis0ed "toc' Ledger Contro# .@c. Manufacturing Over0eads Contro# .@c.

102 &ages Contro# .@c. Cost of "a#es .@c. and t0e 7ria# :a#ance at t0e end of t0e ;uarter. NC...4 C,O S"0uti"n: C"$t Le'%er C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o :a#ance c@d G4424000 :/ "tores Ledger Contro# .@c. :/ Mfg. Over0eads Contro# .@c. :/ &ages Contro# .@c. 142!40 00 +!40 00 $040 00

;<66<000 ;<66<000 St"re$ Le'%er C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Opening :a#ance 34004000 :/ &I Contro# .@c. 143!4000 7o Cost Ledger 142!4000 :/ Cost Ledger Contro# .@c. Contro# .@c. 2returns3 134000 :/ :a#ance c@d. 24))4000 *<26<000 *<26<000 ,IP C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Opening :a#ance 14!04000 :/ 5inis0ed "toc' Ledger 7o &ages Contro# .@c. 404000 Contro# .@c. 242!4000 143!4000 :/ :a#ance 7o "tores Ledger Contro# .@c. c@d. 14+!4000 7o Mfg. Over0eads Contro# .@c. +!4000 *<10<000 *<10<000

105 ini$-e' St"c3 Le'%er C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Opening :a#ance 24!04000 :/ Costs of "a#es 14)!4000 7o &I Contro# .@c. 242!4000 :/ :a#ance c@d. 340G4000 7o Cost of "a#es .@c. 2"a#es returns3 G4000 *<:*<000 *<:*<000 M#nu!#cturin% O(er-e#' C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. P#rticu0#r$ R$. P#rticu0#r$ R$. 7o Cost Ledger :/ &I Contro# .@c. 404000 Contro# .@c. $04000 :/ Mfg. Over0eads 204000 2transfer3 Contro# .@c. 20<000 20<000 C"$t "! S#0e$ A/c

P#rticu0#r$ R$. P#rticu0#r$ R$. 7o 5inis0ed "toc' Ledger :/ 5inis0ed stoc' Contro# .@c. 14)!4000 Contro# .@c. 2sa#es return3 :/ :a#ance c@d. 14$$4000 1<56<000 156000

Ledger G4000

10: Tri#0 B#0#nce P#rticu0#r$ R$. P#rticu0#r$ R$. 7o "tores Ledger 24))4000 :/ Cost Ledger Contro# Contro# .@c. .@c. 7o &I Contro# .@c. 14+!4000 7o 5inis0ed Boods 340G4000 Ledger Contro# .@c. 7o Mfg. Over0eads Contro# .@c. !000 7o Cost of "a#es .@c. 1$$000 ;*2000 ;*2000 I00u$tr#ti"n 2: L LtdV operates batc0 costing s/ste1 fu##/ integrated wit0 financia# accounts. 70e infor1ation is furnis0ed to /ouC :a#ance at beginning of t0e 1ont0C R$. "tores Ledger Contro# .@c. 2441)! &or' ? in ? rogress Contro# .@c. 1G4210 5inis0ed goods Contro# .@c. 3441)0 re(pa/1ent of factor/ over0eads broug0t fro1 t0e #ast 1ont0 Tr#n$#cti"n$ 'urin% t-e +"nt- : Materia#s purc0ased )$41!0 Issued to production 2$43!0 Issued for 1aintenance 342+0 7ransferred between batc0es 144!0 De.it Cre'it 7ota# wages paid ? net 1)4$00 34300 ,1p#o/ees deduction 44400 +2! Direct wages c0arged to batc0es fro1 wor' tic'ets 1!4400 Aecorded non( productive ti1e of direct wor'ers $4$00 &ages paid to wor'ers engaged in production of capita# e;uip1ent 24$)0 "e##ing and distribution over0eads incurred !4240 Ot0er production over0eads incurred 124200 "a#es )!4400 Cost of finis0ed goods so#d !G4+30 Cost of goods co1p#eted and transferred to finis0ed G4424000

24100

10; 70e production over0ead absorption rate is 1!0 H of direct wages. 70is over0ead absorption orate wou#d a#so be c0arged to cost of production of capita# e;uip1ent in t0e factor/. Ae;uiredC 1. "tores #edger contro# account 2. &or'(in(progress contro# account 3. 5inis0ed goods contro# account 4. roduction over0ead contro# account 5. rofit and Loss .ccount S"0uti"n : St"re$ Le'%er C"ntr"0 A/c. P#rticu0#r$ R$. P#rticu0#r$ R$. :a#ance b@d 241)! &or'(in(progress contro# .@c. Creditors ? 1ateria# roduction over0eads urc0ased )$1!0 Contro# .@c. 32+0 :a#ance c@d. )0$G! 100&26 100&26 ,"r3?in?Pr"%re$$ C"ntr"0 A/c. P#rticu0#r$ R$. P#rticu0#r$ R$. :a#ance b@d. 1G210 5inis0ed goods Contro# .@c. &ages Contro# .@c. # Direct &ages 1!400 roduction Over0eads Contro# .@c. 23100 2As. 1!400 - 1! H3 :*020 :*020 ini$-e' G""'$ C"ntr"0 A/c P#rticu0#r$ R$. P#rticu0#r$ R$. :a#ance b@d. 341)0 rofit E Loss .@c. cost of sa#es &or'(in( rogress :a#ance c@d. 3$4)0 Contro# a@c. $2130 ;2&00 ;2&00 !G+30 2$3!0

$2130

110 Pr"'ucti"n O(er-e#' C"ntr"0 Acc"unt P#rticu0#r$ R$. P#rticu0#r$ R$.

a/1ent :@d. 2100 &or'(in(progress 32+0 Contro# .@c. 23100 "tores Ledger Contro# .@c. &ages Contro# .@c. 21!H of As. 1!4003 # Indirect &ages 412! Capita# e;uip1ent I under &ages Contro# .@c. .bsorbed production $$00 Over0eads 400! Id#e ti1e of direct wor'ers Cas0 creditors ? ot0er 21!0 H of As. 1!4003 roduction over0eads 12 12200 rofit and Loss .@c. incurred 00 2under .bsorbed over0eads ? ba# 5igure3 Pr"!it #n' L"$$ A/c P#rticu0#r$ R$. P#rticu0#r$ R$. Cost of goods so#d !G+30 "a#es )!400 Bross profit c@d 1!!)0 )!400 )!400 "e##ing and Distribution Bross rofit b@d. 1!!)0 Over0eads !240 roduction Over0eads Contro# .@c. 1200 <nabsorbed Over0eads >et profit c@d G130 16650 16650

&.6 INTEGRAL8OR INTEGRATED9 ACCOUNTING

70e reconci#iation of cost and financia# accounts is fre;uent#/ a tas' ca##ing for considerab#e e-penditure of tie and effort4 1uc0 of w0ic0 can be avoided if boo's are suitab#e designed and t0e concept of separate rofit and #oss accounts for financia# and costing purposes discarded in favour of a unified account w0ic0 wi## serve bot0 financia# and costing purposes. "uc0 a s/ste1 of accounting is referred to as integra# or integrated. 70us 4integra# accounting is a s/ste1 of recording financia# and costing transactions in one se#f contained #edger4 ca##ed t0e integrated Ledger.

111

&.2 ADVANTAGES O INTEGRAL ACCOUNTING

70e fo##owing are t0e 1ain advantages of integra# accountingC 1. 70ere is no need to reconci#e t0e profit ascertained b/ t0e cost accounts wit0 t0at of financia# accounts since on#/ one profit and #oss account is prepared fro1 t0e infor1ation recorded in t0e cost accounts. 2. 70ere is no dup#ication of recording and effort as in non integra# s/ste1 and as suc0 t0is s/ste1 is si1p#e and econo1ica#. 3. 70is s/ste1 tends to coordinate t0e functions of different se#ections of t0e accounts depart1ent since a## efforts are integrated and directed towards ac0ieve1ent of one ai1 t0at is providing a 0ig0 #eve# of efficienc/. 4. 70e accounting procedures can be si1p#ified and t0e s/ste1 can be centra#ised wit0 t0e object of ac0ieving a greater contro# over t0e organi6ation. 5. 70e s/ste1 creates conditions w0ic0 are e1inent#/ suitab#e for t0e introduction of 1ec0ani6ed accounting. 6. 70ere is no possibi#it/ of over#oo'ing an/ e-pense under t0e s/ste1 . 7. .s cost accounts are posted straig0t fro1 t0e boo's of origina# entr/4 t0ere is no de#a/ in obtaining t0e data. 8. 70ere is auto1atic c0ec' on t0e correctness of t0e cost data. It ensures t0at a## #egiti1ate e-penditure is inc#uded in Cost accounts and re#iab#e and proved data is provided to t0e 1anage1ent for its decisionsQ. 9. Integrated accounting widens t0e out#oo' of t0e accountant and 0is staff ad t0e/ can ta'e broader view of t0ings. 10. 5ro1 ps/c0o#ogica# point of view4 it s0ows t0e co1p#i1entar/ status of cost and financia# accountant w0ic0 need to be considered as separate water #ig0t co1part1ents. rincip#es of 2or re re;uisites for3 an Integra# accounting "/ste1 70e fo##owing princip#es s0a## be designing suc0 a s/ste1C ta'en into consideration w0i#e

112 1. 70e degree of integration 1ust be deter1ined. "o1e underta'ings find it satisfactor/ 1ere#/ to integrate upto t0e stage of pri1e cost or factor/ cost w0i#e ot0er concerns integrate t0e w0o#e of t0e records in w0ic0 cost and financia# accounts cannot be distinguis0ed. 2. 70e degree of integration wi## deter1ine t0e c#assification of e-penditure. 70e e-penditure c#assified 0ere according to function as office e-penses4 se##ing e-penses etc.4 and not according to nature. Sowever4 contro# accounts are 1aintained for eac0 e#e1ent of cost. . suitab#e coding s/ste1 s0ou#d be avai#ab#e to serve t0e accounting purposes of financia# and cost accounts. 3. 5u## detai#s of ite1s posted to t0e contro# accounts are supp#ied to t0e cost office at convenient interva#s. 70is infor1ation is t0en dea#t wit0 b/ t0e cost office in accordance wit0 t0e s/ste1 of costing in force. 4. 70e a1ount of detai# recorded in t0e #edger is usua##/ 'ept to a 1ini1u1. 5u## infor1ation regard in eac0 depart1ent or process being contained in tabu#ators prepared b/ t0e cost office. 70ese tabu#ations are so1eti1es referred to as t0ird entries to e1p0asi6e t0at t0e/ are not part of doub#e entr/ s/ste1. 5. 5or preparation of interi1 accounts t0ere 1ust be an agreed routine for treat1ent after accrua#s4 prepaid e-penses and ot0er necessar/ adjust1ents. 6. 70ere s0ou#d be perfect coordination between t0e staff responsib#e for t0e financia# and cost aspects to ensure an efficient processing of accounting docu1ents.

&.5 ESSENTIAL EATURES O INTEGRAL ACCOUNTING

&.5.1 T-e !"00"Bin% #re t-e e$$enti#0 !e#ture$ "! #n inte%r#0 #n #cc"untin% $A$te+: 1. 70is s/ste1 records financia# transitions not nor1a##/ re;uired for cost accounting be sided recording interna# costing transaction prepa/1ents and accrua#s are opened. 2. "tores transactions are recorded in t0e stores contro# account. 70is account is debited wit0 t0e cost of stores purc0ased corresponding credit being given to cas0 or sundr/ creditors depending w0et0er t0e purc0ase is 1ade for cas0 or on credit.

11& 3. wages contro# account is debited wit0 t0e wages paid4 contra credit is ta'en in cas0 or ban' account 4. Over0ead e-penses are debited to t0e over0ead contro# account4 corresponding credit being given to cas0 or band account or t0e sundr/ creditors. 5. 7transactions re#ating to 1ateria#4 #abour cost over0eads are posted in t0e stores wages and over0ead contro# account after 1a'ing suitab#e cost ana#/sis and tat t0e end of t0e period transfer of t0e tota#s is 1ade to t0e wo' in progress accounts b/ crediting various contro# accounts. 70e da/ to da/ cost ana#/sis 1ade for t0is purpose is 'nown as 1a'ing t0ird etc. 70ese entries do not 1ean entries in t0e sa1e sense a entr/ of transaction in t0e #edger but suc0 entries are si1p#/ a sort of cas0 ana#/sis. 6. a## advance pa/1ents are credited and accrua#s debited to t0e respective contro# account b/ contra entries in t0e prepa/1ents and accrua# accounts. ).Capita# asset account is debited and respective contro# accounts are credited in t0e process of cost ana#/sis of capita# e-penditure &.5.2 J"urn#0 entrie$ un'er inte%r#0 $A$te+ 70e entries to be passed for various transactions under integra# s/ste1 are su11ari6ed be#owC 7ransactions =ourna# entries under integra# s/ste1 1.
M#teri#0 )urc-#$e' "n cre'it 2a3 5or "toc' "tores Contro# .@c Dr. 7o "undr/ Creditors .@c. 2b3 5or =obs &or'(in(progress .@c. Dr. 7o "undr/ Creditors .@c. Materia# issued 2a3 Direct Materia# &or'(in(progress .@c. 7o "tores Contro# .@c. 2b3 Indirect Materia# Ae#evant over0ead .@c 7o "tores Contro# .@c.

2.

Dr. Dr "tores Contro# .@c. Creditors .@c. Dr. f#oors Dr. 7o "tores

3. 4.

Materia# returned fro1 s0op 7o wor'(in(progress .@c. Materia# returned to supp#ier Contro# .@c.

11* 5. 6. 7. 8.
Materia# transferred fro1 one 7ransferee job .@c. anot0er job 7o 7ransferor job .@c. &ages contro# .@c. Dr. =ob to Dr. and Dr. 7 o C a s 0 Dr. 7 o c a s 0

"a#ar/ and wages paid(direct indirect 7o Cas0 Direct e-penses Over0ead incurred

&or'(in(progress .@c. Ae#evant over0ead .@c

9.

Over0ead recovered

&or'(in(progress .@c Dr. 25or production over0ead recovered3 5inis0ed "toc' .@c Dr. 2for .d1n. over0ead recovered3 Cost of "a#es .@c. Dr. 25or se##ing and Distribution over0ead Aecovered3 7o re#evant over0ead .@c &or'(in(progress .@c Dr. 7o

10. Over0ead on wor'(in(progress

production over0ead .@c

11. 5inis0ed goods produced

progress .@c

5inis0ed good .@c. Cost of "a#es .@c

Dr. 7o wor'(in( Dr. 7o finis0ed

12. Boods so#d 2.t cost3

goods .@c.

13. 5or "a#es 14. "a#es returned 15. Capita# &or'

.@c

Debtors .@c "a#es .@c

Dr. 7 o " a # e s . @ c Dr. 7o Debtors .@c Dr. 7o wor'(in(progress Dr. 7o wor'(in( Dr. 7o Dr. 7 o

"undr/ .ssets .@c Ae#evant over0ead .@c E L .@c.

16. Aepair wor'

progress .@c

17. <nder(absorbed over0ead

re#evant over0ead .@c E L .@c.

18. Over(absorbed over0ead

Ae#evant over0ead .@c

C-ec3 4"ur Pr"%re$$:

1. &0ic0 are t0e pre re;uisites of an Integra# .ccounting "/ste1. 2. Bive t0e =ourna# entries for t0e fo##owing transactions under Integra# .ccounting "/ste1. a. Direct Materia# issued to production

116 b. c. d. e. f. ". roduction over0eads c0arged to production &ages paid "e##ing and Distribution ,-penses incurred Cost of production of Co1p#eted job. .1ount received fro1 custo1ers. Office E .d1inistration e-penses c0arged to production

&.: SOLVED PROBLEMS O INTEGRAL ACCOUNTING

I00u$tr#ti"n?1 5o##owing transactions too' p#ace in &i##u E Co. during t0e 1ont0 of Marc04 1GG3 C 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Aaw 1ateria# purc0ased on credit As. 404000 Direct 1ateria# issued to production 304000 &age paid 230H indirect3 244000 Manufacturing e-penses incurred 2cas03 1$4+00 Manufacturing over0ead c0arged to production 1$4000 "e##ing and distribution cost 2cas03 44000 5inis0ed goods at cost 404000 "a#es !+4000 Aeceipts fro1 debtors 134+00 a/1ents to creditors 224000

Jou are re;uired to journa#ise t0e above transactions presu1ing t0at integrated s/ste1 of accounting is fo##owed b/ &i##u E Co. S"0uti"n J"urn#0 ,i00u = C". 8Inte%r#0 Acc"untin% SA$te+9 Dr. Cr. 1.
"tores Contro# .@c 7o Creditors .@c credit Dr. 404000 404000 2:eing t0e raw 1ateria# purc0ased on

2.

&or'(in(progress .@c Dr. 304000 7o "tores Contro# .@c 304000 2:eing t0e 1ateria# issued to jobs3 7o Cas0 paid3 Dr. 244000 244000 2:eing t0e entr/ for direct and indirect wages

3. 2a3 &ages Contro# .@c

112
2b3 &or'(in(progress .@c Dr. 1$4+00 roduction over0ead .@c Dr. )4200 7o &ages Contro# .@c 244000 2:eing t0e entr/ for direct and indirect wages3 roduction over0ead .@c Dr. 1$4+00 7o Cas0 1$4+00 2:eing t0e production over0ead incurred3 &or'(in(progrees .@c Dr. 1$4000 7o roduction over0ead .@c 1$4000 2:eing t0e ovre0ead c0arged to production3 "e##ing and Distribution over0ead .@c Dr. 44000 7o Cas0 44000 2:eing t0e se##ing and distribution e-penses Incurred3 5inis0ed goods .@c Dr. 404000 7o wor'(in(progress .@c 404000 2:eing t0e cost of production of finis0ed goods3 Debtors .@c Dr. !+4000 7o "a#e .@c !+4000 2:eing t0e a1ount of sa#e3 :an' .@c Dr. 134+00 7o Debtors .@c 134+00 2:eing t0e receipt fro1 debtors3 7o Cas0 Dr. 224000 224000 2:eing t0e a1ount paid to creditors3

4. 5.

6.

7.

8. 9.

10. "undr/ Creditors .@c I00u$tr#ti"n?2:

.:C Manufacturing Co1pan/ 0as t0e fo##owing ba#ances in its integrated #edger as on 1st =anuar/4 1GG3 C R$. "0are Capita# 24004000 Aeserves !04000 "undr/ debtors 404000 #ant and 1ac0iner/ 24!04000 "undr/ creditors $04000 :an' overdraft +04000 Aaw 1ateria#s 14004000

115 7ransactions during t0e /ear ended 31st Dece1ber4 1GG3 were as fo##ows C Aaw 1ateria# purc0ased on credit 14$04000 Aaw 1ateria# issued to production 24004000 Aaw 1ateria#s on 0and on 31@12@G3 !24000 Direct wages ? incurred 14G04000 # c0arged production 14+$4000 Manufacturing e-penses ? incurred 14)!4000 # c0arged to production 14+$4000 "e##ing and distribution e-penses 204000 5inis0ed "toc' ( roduction 2at cost3 34+24000 # "a#es 2at se##ing price3 !4)24000 a/1ent to creditors 14)04000 Aeceipts fro1 debtors $4004000 Jou are re;uired to ? 2a3 &rite up and c#ose off t0e #edger accounts. 2b3 repare a tria# ba#ance of t0e c#osing ba#ances4 and 2c3 repare profit and #oss account and a ba#ance s0eet. Inter%r#0 Le'%er Dr St"re C"ntr"0 A/c. As. As. Cr.

7o :a#ance b@d 14004000 :/ &or'(in(progress .@c 24004000 7o Creditors .@c 14$04000 :/ Inventor/ .dj. .@c +4000 :/ :a#ance c@d !24000 24$04000 24$04000 7o :a#ance b.d !24000

Dr.

,"r3?in?)r"%re$$ A/c

Cr.

As. As.

7o "tores Contro# .@c 24004000 :/ 5inis0ed stoc' .@c 34+24000 7o &ages Contro# .@c 14+$4000 :/ :a#ance c@d 14G04000 7o roduction over0ead .@c 14+$4000 !4)24000 !4)24000 7o :a#ance b@d 14G04000 Dr. ini$-e' G""'$ A/c Cr.

7o &or'(in(progress .@c 34+24000 :/ Cost of sa#es .@c 34+24000 34+24000 34+24000

11:
Dr. 7o :an' 14G04000 Dr. 7o :an' 114000 ,#%e$ C"ntr"0 A/c 14G04000 :/ &.I. . .@c 14+$4000 ZZZZZZZ :/ :a#ance c@d 14G04000 7o :a#ance b@d 44000 Cr. 44000

As. As.

Pr"'ucti"n O(er-e#' A/c Cr. 14)!4000 :/ &or'(in(progress .@c 14+$4000 7o :a#ance c@d 14+$4000 14+$4000 :/ ba#ance b@d 114000 204000

As.

7o :an' Dr.

204000

:/ cost of "a#es .@c 204000 204000

C"$t "! S#0e$ A/c Cr. As. As. 7o 5inis0ed stoc' .@c 34+24000 :/ :a#ance c@d "e##ing and Distribution Over0ead .@c 204000 44024000 Dr. 7o :a#ance c@d Dr. 44024000 7o :a#ance b@d 44024000

44024000 7o

S#0e$ A/c As. As. !4)24000 :/ Debtors .@c !4)24000 !4)24000 !4)24000 :/ :a#ance b@d !4)24000 S-#re C#)it#0 A/c Cr. As. As. :/ :a#ance b@d 24004000 Re$er(e A/c As. Cr. As. :/ :a#ance b@d

Cr.

Dr.

!04000 Cr.

Dr. 7o :a#ance b@d 24!04000

P0#nt #n' M#c-inerA A/c As. As.

11;
Dr. 7o :a#ance 7o :a#ance b@d Dr. Sun'rA De.t"r$ A/c Cr. As. As. 404000 :/ :an' .@c $4004000 7o "a#es !4)24000 :/ :a#ance c@d 124000 $4124000 $412400 124000

Sun'rA Cre'it"r$ A/c Cr. As. As. 7o :an' 14)04000 :/ :a#ance b@d $04000 7o :a#ance c@d !04000 :/ "troes Contro# .@c 14$04000 24204000 24204000 :/ :a#ance b@d !04000 Dr. B#n3 Acc"unt Cr. As. As. 7o "undr/ DebtorQs .@c $4004000 :/ :a#ance b@ +04000 7o :a#ance c@d 3!4000 :/ &ages contro# .@ 14G04000 :/ &ages Contro# .@c 14)!4000 :/ &ages Contro# .@ 204000 :/ "undr/ CreditorQs .@c 14)04000 $43!4000 $43!4000 7o :a#ance b@d 3!4000 Dr. In(ent"rA A'Du$t+ent A/c 7o "tore Ledger contro# .@c Cr. As. As.

+4000 :/ :a#ance c@d +4000 +4000 +4000

7o :a#ance b@d +4000 1. "0are Capita# 24004000 2. Aeserve .ccount !04000 3. "undr/ Debtors 124000 4. "undr/ Creditors !04000 5. #aint and Mac0iner/ .@c 24!04000 6. :an' .ccount 3!4000 7. "tores Ledger Contro# .@c !24000 8. &or'(in(progress .@c. 14G04000 9. &ages Contro# .ccount 44000 10. roduction Over0ead .@c 114000 11. Inventor/ .djust1ent .@c +4000 12. Cost of "a#es .ccount 44024000 13. "a#es .ccount (((((((((((((( !4)24000 ;<1:<000

;<1:<000

120
Dr. Cr. 7o Cost of "a#es .@c 44024000 :/ "a#es .@c !4)24000 7o Inventor/ .djust1ent .@c +4000 :/ roduction over0ead 114000 7o &ages contro# .@c 44000 .@c 7o >et profit 14$G4000 ((((((((((( ((((((((((( 6<:&<000 6<:&<000 B#0#nce S-eet

A$ #t &1$t Dece+.er< 1;;& Li#.i0itie$ A+"unt A$$et$ A+"unt "0are Capita# 24004000 #ant and 1ac0iner/ 24!04000 Aeserve !04000 St"c3 "! : rofit 14$G400 441G4000 5inis0ed good !24000 "undr/ Creditors !04000 &.I. . 14G04000 24424000 :an' overdraft 3!4000 "undr/ Debtors 124000 ((((((((((( ((((((((((( !4044000 !4044000

I00u$tr#ti"n 7 & =ourna#ise t0e fo##owing transactions assu1ing t0at cost and financia# accounts are integrated. R$.
Aaw 1ateria# purc0ased 14!04000 Direct 1ateria#s issued to production 14124!00 &ages paid 230H Indirect3 G04000 &ages c0arged to production )!4000 Manufacturing e-penses incurred $34000 Manufacturing over0ead c0arged to production $G4000 "e##ing and Distribution costs 1!4000 5inis0ed roduct at cost 14!04000 "a#es 242!4000 Aeceipts fro1 custo1ers !24!00 aid to creditors +24!00 C#osing "toc' >IL

121
Sr. N" P#rticu0#r$ A+"unt A+"unt 1 "tores Ledger Contro# .@c Dr 7o :oug0t Ledger Contro# .@c 2:eing raw 1ateria#s boug0t3 2 &or'(in(progress Ledger Contro# .@c Dr 7o "tores Ledger Contro# .@c 2:eing 1ateria#s issued for production3 3 &ages Contro# .@c 5actor/ Over0ead Contro# .@c 7o :an' .@c 2:eing wages paid3 Dr Dr. 14!04000 14!040 00 14124!00 14124! 00 G040 00

$34000 2)4000

&or'(in(progress Ledger Contro# .@c Dr. 7o &ages Contro# .@c 7o 5actor/ Over0ead Contro# .@c 2:eing a##ocation of wages to production3 5 5actor/ Over0ead Contro# .@c Dr. 7o :an' .@c 2:eing t0e 1anufacturing e-penses incurred 6 &or'(in(progress Ledger Contro# .@c Dr. 7o 5actor/ Over0ead Contro# .@c 2:eing over0eads c0arged to production3 7 "e##ing E Distribution over0ead Contro# .@c 7o :an' .@c 2:eing se##ing and distribution cost incurred3 8 5inis0ed "tores Ledger Contro# .@c Dr. 7o &or'(in( progress Ledger Contro# .@c 2:eing cost of production of co1p#eted jobs3 9 Cost of "a#es .@c Dr. 7o 5inis0ed "toc' Ledger Contro# .@c 7o se##ing E Distribution over0ed Contro# .@c 2:eing t0e cost of production so#d3 10 "a#es Ledger Contro# .@c Dr. 7o "a#es 2:eing t0e a1ount of sa#es3 11 :an' .@c Dr. 7o "a#es Ledger Contro# .@c 2:eing a1ount received fro1 custo1ers3 12 :oug0t Ledger Contro# .@c Dr. 7o :an' .@c 2:eing a1ount paid to Creditors3

)!4000 !24!00 224!00 $34000 $34000 $G4000 $G4000 1!4000 1!4000 14!04000 14!04000 14$!4000 14!04000 1!4000 242!4000 242!4000 !24!00 !24!00

+ 2 4 ! 0 0 + 2 4 ! 0 0

122 I00u$tr#ti"n ? * : 5ro1 t0e fo##owing infor1ation /ou are re;uested to pass journa# entries and prepare necessar/ accounts under t0e s/ste1 of integrated accounts. Materia# purc0ased on credit 144+4000 &ages paid 14$+4000 &ages productive 144+4000 &ages unproductive 204000 Materia# issued to production 142+4000 &or's e-penses incurred $!4000 &or's e-penses c0arged to production +$4000 Office and ad1inistration e-penses paid 444000 Office and ad1inistration e-penses c0arged to production "e##ing over0ead paid 4!4000 "e##ing ovre0eads c0arged to sa#es 4!4000 "a#es Credit 34G04000 J"urn#0
P#rticu0#r$ R$. R$. "tores #edger contro# .@c Dr. 7o Creditors 2:eing t0e stores purc0ased on credit3 &ages contro# .@c 7o cas0 2:eing wages paid3 Dr. 144+4000 144+40 00 14$+4000 14$+40 00 144+4000 144+40 00 204000 2040 00 142+4000 142+40 00 $!4000 $!40 00

434!00

&or'(in(progress contro# .@c Dr. 7o &ages contro# .@c 2:eing t0e wages c0arged to production3 &or's e-penses contro# .@c Dr. 7o &ages contro# .@c 2:eing t0e wages c0arged to wor' e-penses "ince t0ese are indirect pa/1ents3 &or'(in(progress contro# .@c Dr. 7o "tores #edger contro# .@c 2:eing 1ateria#s issued to production3 &or's e-penses contro# .@c Dr. 7o cas0 2:eing wor's e-penses paid during t0e /ear

12&

&or'(in(progress contro# .@c Dr. 7o wor's e-penses contro# .@c 2:eing t0e wor's e-penses c0arged to production3 Office and ad1. ,-penses contro# .@c Dr. 7o cas0 2:eing a1ount paid for office e-penses3 &or'(in(progress contro# .@c Dr. 7o office and .d1. ,-penses contro# .@c 2:eing office and ad1. ,-p. c0arged to production3 Cost of sa#es .@c 7o wor'(in(progress contro# .@c 2:eing t0e finis0ed product transferred3 "e##ing e-penses contro# .@c 7o cas0 2:eing t0e se##ing e-penses incurred3 Dr

+$4000 +$40 00 444000 4440 00 434!00 434!0 0 34004000 340040 00

Dr.

4!4000 4!400 0 4!4000 4!400 0 34G04000 34G040 00

Cost of sa#es .@c Dr. 7o "e##ing e-penses contro# .@c 2:eing se##ing e-penses c0arged to sa#es3 Debtors .@c 7o "a#es .@c 2:eing sa#es 1ade on credit3 Dr.

St"re$ Le'%er C"ntr"0 A/c As. As. 7o Creditors 144+4000 :/ &or'(in(progress contro# .@c 142+4000 :/ :a#ance c@d 204000 ((((((((((( ((((((((((( 144+4000 144+4000 ((((((((((( (((((((((((

As.

,#%e$ C"ntr"0 A/c As. 7o Creditors 14$+4000 :/ &or'(in( progress contro# .@c 144+4000 :/ wor' e-pense contro# .@c 204000 (((((((((( (((((((((((( 14$+4000 14$+4000 (((((((((( (((((((((((((

12*
,"r3$ E1)en$e$ C"ntr"0 A/c As. As. 7o &ages contro# .@c 204000 :/ wor'(in(progress contro# .@c +$4000 7o Cas0 $!4000 7o :a#ance c@d 14000 (((((((((( ((((((((( +$4000 +$4000 O!!ice = A'+ini$tr#ti(e E1)en$e$ C"ntr"0 A/c As. As. 7o Cas0 .@c 444000 :/ wor'(in( progress contro# .@c 434!00 :/ :a#ance c@d !00 ((((((((( (((((((((( 444000 444000 Se00in% E1)en$e$ C"ntr"0 A/c As. As. 7o Cas0 .@c 4!4000 .@c 4!4000 :/ Cost of "a#es

,"r3 7 in? Pr"%re$$ C"ntr"0 A/c As. As. 7o &ages contro# .@c 144+4000 :/ cost of sa#es .@c 34004000 7o "tores #edger .@c 142+4000 :/ :a#ance c@d 140!4!00 7o &or's e-penses .@c +$4000 7o office E ad1. ,-penses 434!00 (((((((((((( (((((((((((( 440!4!00 440!4!00

In addition to t0ese4 Cas0 .@c4 Creditors .@c and Cost of "a#es .@c are to be prepared 0u$tr#ti"n 6 : 5ro1 t0e fo##owing particu#ars4 pass journa# entries in an integrated s/ste1 of accounting in t0e boo's of :ig T:Q Ltd. R$. Aaw 1ateria#s purc0ased 2+0H on credit3 !4G04000 Materia#s issued to production 444!4000 7oo#s wages paid 24!04000 &ages c0arged to production 14+04000 5actor/ over0eads incurred 14G04000 5actor/ over0eads c0arged to production 14$04000 Office ovre0ead incurred 14104000 Office over0eads app#ied to 5inis0ed Boods +!4000 "e##ing and Distribution over0eads incurred 4+4000 "e##ing and Distribution over0eads app#ied to cost of sa#es 3$4000 5inis0ed goods produced !4004000 Materia#s #ost b/ fire 104000 Materia#s issued for construction of bui#ding 404000

126 J"urn#0 Entrie$ in t-e .""3$ "! Bi% B Lt'.

"r.>o. articu#ars Dr. As. Cr. As. 1 "tores Ledger Contro# .@c Dr. 7o Creditors .@c 7o :an' .@c 2:eing raw 1ateria#s purc0ased3 2 &I Contro# .@c Dr. 7o "tores Ledger Contro# .@c 2:eing direct 1ateria#s issued for production3 3 &ages Contro# .@c Dr. 7o Cas0 @ :an' @ .@c 2:eing pa/1ent of wages3 4 &I Contro# .@c Dr. 7o &ages Contro# .@c 2:eing wages c0arged to production3 ! 5actor/ Over0ead Contro# .@c Dr. 7o Cas0 @ :an' .@c 2:eing factor/ over0ead incurred3 $ &I Contro# .@c Dr. 7o 5actor/ Over0ead Contro# .@c 2:eing factor/ over0ead c0arged to production3 ) Office Over0ead Contro# Dr. 7o Cas0 @ :an' .@c 2:einf ad1inistrative over0ead incurred3 + 5inis0ed Boods Contro# .@c Dr. 7o office over0ead Contro# .@c 2:eing office over0ead app#ied to finis0e goods3 G "e##ing and Distribution Contro#.@c Dr 7o Cas0 @ :an' .@c 2:eing se##ing and distribution over0ead paid3 10 Cost of "a#es .@c Dr. 7o "e##ing and Distribution over0ead contro# .@c 2:eing cost se##ing over0ead c0arged to cost of sa#es .@c3

!4G04000 44)240 00 141+40 00 444!4000 444!400 0 24!04000 24!040 00 14+04000 14+040 00 14G04000 14G040 00 14$04000 14$040 00 14104000 141040 00 +!4000 +!400 0 4+4000 4+400 0 3$4000 3$400 0

122

11 5inis0ed Boods Contro# .@c Dr. 7o &I Contro# .@c 2:eing production cost of finis0ed goods transferred to finis0ed stoc' .@c3 12 Costing E L .@c Dr. 7o "tores Ledger Contro# .@c 2:eing 1ateria# #ost b/ fire3

!4004000 !4004 00 104000 10400 0 404000 4040 00

13 :ui#ding .@c Dr. 7o "tores Ledger Contro# .@c 2:eing 1ateria# issued for construction of bui#ding3

&.; ECERCISE
A. O.Decti(e tA)e. C0oose t0e correct answers for ;uestions t0e fo##owing 1u#tip#e c0oice

1. Materia#s Ae;uisition >ote 2a3 .ut0ori6es and records t0e issue of 1ateria#s for use 2b3 Aecords t0e return of unused 1ateria#s. 2c3 Aecords t0e transfer of 1ateria#s fro1 one store to anot0er 2d3 . c#assified record of 1ateria#s4 issues4 returns and transfers. 2. Materia#s 7ransfer >ote 2a3 .ut0ori6es and records t0e issue of 1ateria#s for use 2b3 Aecords t0e return of unused 1ateria#s. 2c3 Aecords t0e s0ifting of 1ateria#s fro1 one store to anot0er. 2d3 . c#assified record of 1ateria#s4 issues4 returns and transfers.

3. . docu1ent w0ic0 is a c#assified record of 1ateria# issues4 returns and transfers. 2a3 Materia#s Ae;uisition >ote 2b3 Materia# Aeturn >ote 4. 70is is essentia# to 1a'e t0e cost #edger Tse#f(ba#ancingI 2a3 Benera# Ledger .djust1ent .ccount 2b3 "tores Ledger Contro# .ccount 2c3 &or'(in(progress Ledger 2d3 5inis0ed Boods Contro# .ccount

125 5. 70is is debited wit0 a## purc0ases of 1ateria#s for t0e stores and credited wit0 a## issues of 1ateria#s. 2a3 Benera# Ledger .djust1ent .ccount 2b3 "tores Ledger Contro# .ccount 2c3 &or'(in(progress Ledger 2d3 5inis0ed Boods Contro# .ccount 6. In t0is4 cost of 1ateria#s4 wages and over0eads of eac0 job underta'en is posted. 2a3 Benera# Ledger .djust1ent .ccount 2b3 "tores Ledger Contro# .ccount 2c3 &or'(in(progress Ledger 2d3 5inis0ed Boods Contro# .ccount 7. In non(integrated s/ste1 of accounting4 t0e e1p0asis is on 2a3 ersona# accounts 2b3 Aea# accounts 2c 3 >o1ina# accounts 2d3 .## of t0ese 8. Cost and financia# accounts are re;uired to be reconci#ed under 2a3 Integra# s/ste1 2b3 Cost contro# accounts s/ste1 2c3 <nder bot0 2a3 and 2b3 2d3 >one of t0ese urc0ases for specia# jobs is debited to 2a3 &or'(in(progress #edger contro# account 2b3 Cost #edger contro# account 2c3 "tores #edger contro# account

9.

10. >otiona# costs 2a3 Ma/ be inc#uded in inter#oc'ing accounts 2b3 Ma/ be inc#uded in integrated accounts 2c3 Cannot be inc#uded in inter#oo'ing accounts 2d3 >eit0er 2a3 nor 2b3 or 2c3
An$Ber : 1 2a34 22c34 32d34 42a34 !2b34 $2c34 )2c34 +2b34 G2a34 102a3

B. S-"rt n"te$ 1. &rite s0ort notes on TIntegrated .ccountsI. 2. &rite s0ort notes on TCost Ledger Contro# .ccount.I 3. "tate t0e essentia# pre(re;uisites of integrated accounting s/ste1. 4. List t0ree 1ain advantages of integrated accounts. 5. &rite s0ort notes on TIntegrated accountingI 6. &0at are t0e advantages of integrated accounting I

C. 1. Define integrated accounting s/ste1 and brief#/ e-p#ain t0e sa1e 0ig0#ig0ting t0e advantages of t0e s/ste1. 2. &0at are t0e advantages of 1aintaining a cost #edgerI 3. ,nu1erate t0e principa# #edgers t0at are to be 1aintained in a s/ste1 of cost contro# accounting. 4. &rite s0ort notes on Integrated accounting s/ste1. 5. &rite s0ort notes in TIntegrated .ccounting s/ste1I. I00u$tr#ti"n 1: Cost1an Ltd. 1aintains separate set of boo's for financia# accounts and cost accounts. 70e fo##owing infor1ation is furnis0ed for t0e /ear 2003. P#rticu0#r$ As. FFFFF $040 Materia# Contro# .@c 00 G040 &or'(in(progress Contro# .@c FFFFF 00 5inis0ed Bood Contro# .@c F F F F F 14404000 Cost Ledger Contro# .@c F F F F F 24G04000 7ransactions for t0e /ear are C Materia#s purc0ased F F F F F $4$04000 Materia#s issued as C Direct 1ateria#s F F F F F 44!04000

Indirect 1ateria#s F F F F F 14204000 &ages paid a##ocated as C Direct cost F F F F F 24)04000 Indirect cost FFFFF G04000 roduction e-penses F F F F F 24404000 %a#ue of finis0ed goods produced F F F F F 104+04000 C#osing "toc' of finis0ed goods F F F F F 14204000 .d1inistration e-penses "e##ing e-penses "a#es F F F F F 24404000 14+040 00 F F F F F F 1+4004000

repare t0e necessar/ contro# accounts in boo's of costing records. 2M.Co1. Oct. 044 adapted3

I00u$tr#t

On 31st Marc0 200! t0e fo##owing ba#ances were e-tracted fro1 t0e boo's of 7urf and "urf Co1pan/. P#rticu0#r$ "tores Ledger Contro# .@c &or'(in( rogress Contro# .@c Dr. As. Cr. FFFFF 34!04000 ( F F F F F 34+04000 (
As.

5inis0ed Boods Contro# .@c F F F F F 24!04000 ( Cost Ledger Contro# .@c FFFFF G4+04000 G4+04000 T"t#0 70e fo##owing transactions too' p#ace in Marc04 200! C P#rticu0#r$ Aaw 1ateria#s C urc0ased Aeturned to "upp#iers Issued to roduction Aeturned to stores

(( G4+04000

As.

FFF G4!04000 304000 FFF F F F G4+04000 304000 FFF

roductive &ages Indirect Labour 5actor/ Over0eads "e##ing and Distribution Over0eads Cost of finis0ed goods transferred to ware0ouse Cost of goods so#d "a#es

F F F 44004000 F F F 24!04000 F F F !4004000 F F F 44004000 F F F 214304000 F F F 214004000 F F F 304004000

5actor/ Over0eads are app#ied to production at 1!0H of Direct &ages4 an/ under @ over absorbed over0ead being carried forward

1&0 for adjust1ent in t0e subse;uent 1ont0s. .## se##ing and distribution over0eads are treated as period costs and c0arged off to t0e rofit and Loss .ccount of t0e 1ont0 in w0ic0 t0e/ are incurred. "0ow t0e necessar/ Contro# .ccounts4 Costing and t0e 7ria# :a#ance. rofit and Loss .@c

2M.Co1. Oct. 0!4 adapted3 I00u$tr#ti"n &: .s on 31st Marc04 200!4 t0e fo##owing ba#ances e-isted in "0arad Co. Ltd.Qs Cost Ledger. P#rticu0#r$ Dr. As. Cr. As. FFF "tores Ledger Contro# .@c $4024+)0 ( &or'(in( rogress Contro# .@c 5inis0ed "toc' Ledger Contro# .@c F F F Manufacturing Over0ead Contro# .@c F F F Cost Ledger Contro# .@c T"t#0 P#rticu0#r$ FFF FFF 24444)30 ( !4034+G0 ( ( 2140!0 ( 134304440 134!144G0 134!144G0
As.

During t0e ne-t t0ree 1ont0s4 t0e fo##owing ite1s aroseC

5inis0ed roduct 2.t Cost3 Manufacturing Over0ead incurred Aaw Materia#s urc0ased 5actor/ &ages Indirect Labour Cost of "a#es Materia#s issued to roduction "a#es return at cost Materia#s returned to "upp#iers Manufacturing Over0ead C0arged to roduction

F F F F F 44214$)0 F F F F F 14+34020 F F F F F 244$4000 F F F F F 140140$0 4343 30F F F F F F 34)14)+0 F F F F F 24!44$30 FFFFF 104)$0 FFFFF !4+00

14!444 00F

4 a. b. c. d. e. f. ". Cost Ledger Contro# .ccount "tores Ledger Contro# .ccount Over0ead Contro# .ccount &or' in rogress Contro# .ccount 5inis0ed "toc' Ledger Contro# .ccount 7ria# :a#ance 2indicating4 in brief4 w0at eac0 ba#ance represents3 Cost of sa#es .@c 2M.Co1.4 Mar. 0$4 .dapted3

I00u$tr#ti"n * : . Ltd. fo##ows non(integrated s/ste1 of .ccounting. 5o##owing is t0e 7ria# :a#ance as on 01(01(2004 C P#rticu0#r$ Dr. As. Cr. "tores Ledger Contro# .@c FFFFF 24!04000 ( &or'(in( rogress Contro# .@c F F F F F 24004000 ( 5inis0ed Boods Contro# .@c F F F F F 34!04000 ( 5inancia# Ledger Contro# .@c FFFFF ( +4004000 T"t#0 F F F F F +4004000 +4004000
5o##owing were t0e transactions during t0e 1ont0 of =anuar/ C

As.

Materia# urc0ased Materia#s issued to roduction 5actor/ Office 7ota# &ages aid Direct &ages c0arged to roduction Indirect &ages Office Over0eads aid Office Over0eads app#ied to 5inis0ed Boods "e##ing and Distribution Over0eads incurred "e##ing and distribution Over0eads app#ied to Cost of "a#es 5actor/ Over0eads c0arged to roduction F 3!H of Direct

As.

)4!04000
As.

34004000
As.

404000
As. As. As.

104000

34004000 24!04000
As. As. As. As. As.

!04000 304000 3+4000 304000 314000

1&2 &ages 5inis0ed Boods roduced Cost of 5inis0ed Boods "o#d

As. As. As.

+4004000

104004000 124004000 "a#es repare t0e fo##owing accounts for t0e 1ont0C a. "tore Ledger Contro# .@C b. &or'(in( rogress Contro# .@c c. 5inis0ed Boods Ledger Contro# .@c d. 5actor/ Over0eads Contro# .@c e. 5inancia# Ledger Contro# .@c f. Office Over0ead Contro# .@c g. "e##ing and Distribution Over0ead Contro# .@c 0. rofit and Loss .@c 2M.Co1. Oct. 0)4 adapted3

I00u$tr#ti"n 6: .s on 31st Marc04 200)4 t0e fo##owing ba#ances were e-tracted fro1 boo's of t0e "upre1e Manufacturing Co1pan/4 w0ic0 fo##ows >on( integrated "/ste1 of Cost .ccounting C P#rticu0#r$ Dr. As. Cr. As. FFFFF "tores Ledger Contro# .@c !$4000 ( &or'(in( rogress Contro# .@c F F F F F $04+00 ( 5inis0ed Boods Contro# .@c FFFFF 404000 ( 14!$4+0 0

Benera# Ledger Contro# .@c F F F F F T"t#0 F F F F F 14!$4+00 14!$4+00

1&& 70e fo##owing transactions too' p#ace in .pri# 200) C articu#ars As. articu#ars Indirect #abour 404000 R#B M#teri#0$ :
As.

i3 urc0ased 14!24000 5actor/ over0ead e-penses incurred ii3 Aeturned to supp#iers 44+00 "e##ing and ad1inistrative e-penses iii3 Issued to production 14!$4+00 Cost of finis0ed goods transferred to ware0ouse

+040 00 $440 00

34404+ 00

iv3 Aeturned to stores 44+00 Cost of goods so#d 343$4000 roductive wages $44000 "a#es 44+04000

5actor/ over0eads are app#ied to production at 1!0H of direct wages4 an/ under@over(absorbed over0eads being carried forward for adjust1ent in t0e subse;uent 1ont0s. .## ad1inistrative and se##ing e-penses are treated as period costs and c0arged off to t0e rofit and Loss .ccount of t0e 1ont0 in w0ic0 t0e/ are incurred. "0ow t0e fo##owing accounts in t0e Co1pan/Qs boo'sC a. b. c. d. e. f. ". Benera# Ledger Contro# .@c "tores Ledger Contro# .@c &or'(in(progress Contro# .@c 5inis0ed Boods "toc' Contro# .@c 5actor/ Over0ead Contro# .@c Costing rofit and Loss .@c 7ria# :a#ance as at 30t0 .pri#4 200) 2M. Co1.4 Oct. 0+4 adapted3

I00u$tr#ti"n 2: :anga#ore etro (C0e1ica#s Co. 'eeps boo's on Integra# .ccounting "/ste1. 70e fo##owing ba#ances appear in t0e boo's of t0e co1pan/ as on 1st =anuar/ 2004.

"tores Contro# .@c &or'(in( rogress 5inis0ed Boods .@c :an' .@c Creditors .@c 5i-ed .ssets .@c Debtors .@c "0are Capita# .@c

FFFFF FFFFF FFFFF FFFFF

1+4000 ( 1)4000 ( 134000 ( 104000 (

FFFFF (+4000 F F F F F !!4000 ( F F F F F 124000 ( FFFFF (+04000 (!4000 (324000

Depreciation rovision .@c F F F F F rofit and Loss .@c FFFFF T"t#0 F F F F F 142!4000 142!4000 7ransactions for t0e /ear ended 31st underC P#rticu0#r$ &ages Indirect ? Direct

Dece1ber4 2004 were as

As. As.

F F F F +)4000 F F F F !4000

G24000

urc0ase of 1ateria#s 2on Credit3 F F F F Materia#s issued to production Materia#s for repairs Boods finis0ed during t0e /ear 2.t cost3 "a#es 2on Credit3 Cost of Boods so#d roduction over0eads absorbed roduction over0eads incurred "e##ing over0eads incurred a/1ents to Creditors a/1ents fro1 Debtors Depreciation of Mac0iner/ FFFF FFFF FFFF FFFF FFF F FFFF FFFF FFFF FFFF FFFF F F F F 14300

14004000 141040 00 24000 241!4000 34004000 242040 00 4+4000 404000 124000 144000 140140 00 24G04000

.d1inistration over0eads incurred F F F F

FFFF 300 repaid Aent 2inc#uded in factor/ over0eads3 &rite up accounts in t0e integrated #edger and prepare a tria# ba#ance. 2M. Co1.4 Mar. 0!4 adapted3

1&6 I00u$tr#ti"n 5: Octega Ltd. 1aintains integrated .ccounts of Cost and 5inancia# .ccounts. 5ro1 t0e fo##owing detai#s write up Contro# .ccounts in t0e genera# #edger of t0e factor/ and prepare a 7ria# :a#anceC P#rticu0#r$ As. FFF 3040040 "0are Capita# 00 2040040 Aeserves FFF 00 !040040 "undr/ Creditors FFF 00 !)4!040 #ant and Mac0iner/ FFF 00 2040040 "undr/ Debtors FFF 00 1!40040 C#osing "toc' FFF 00 )4!040 Cas0 and :an' :a#ances FFF 00 Tr#n$#cti"n$ Durin% t-e Ae#r As. "tores urc0ased "tores issued to production "tores in Sand Direct &ages incurred Direct &ages c0arged to production Manufacturing ,-penses incurred Manufacturing ,-penses c0arged to production "e##ing and Distribution ,-penses 5inis0ed "toc' roduction 2at cost3 "a#es C#osing "toc' a/1ent to Creditors Aeceipt fro1 Debtors F F F 14004004000 F F F 140!4004000 F F F G4!04000 F F F $!4004000 F F F $04004000 F F F 304004000 2)4!040 00F F F F F F 104004000 F F F 14+04004000 F F F 24204004000 F F F G4!04000 F F F 14104004000 F F F 24104004000 2M.Co1. Oct. 0$4 adapted3 I00u$tr#ti"n :: 5ro1 t0e fo##owing particu#ars4 pass journa# entries in an integrated s/ste1 of accounting in t0e boo's of .:C Ltd.

1&2
R$.

Aaw 1ateria#s purc0ased 2)!H on credit3 T G4+04000 Materia#s issued to production T )4404000 7ota# wages paid T 44004000 &ages c0arged to production T 34004000 5actor/ over0eads incurred T 34104000 5actor/ over0eads c0arged to production T 24$04000 Office over0eads incurred T 14+04000 Office over0eads app#ied to finis0ed goods T 14404000 "e##ing and Distribution over0eads incurred T )$4000 "e##ing and Distribution over0eads app#ied to cost of sa#es

! $04000

5inis0ed goods produced T +4004000 Materia#s issued for construction of :ui#ding T !04000 2M.Co1. Oct. 0)4 adapted3 I00u$tr#ti"n 2;: Dutta ,nterprises operates an integra# s/ste1 of accounting. Jou are re;uired to pass t0e =ourna# ,ntries for t0e fo##owing transactions t0at too' p#ace for t0e /ear ended 30($(2003. 2>arrations are not re;uired3. P#rticu0#r$ As. Aaw 1ateria#s purc0ased 2!0H on credit3 Materia#s issued to production &ages paid 2!0H Direct3 &ages c0arged to production 5actor/ over0eads incurred 5actor/ over0eads c0arged to production F F F "e##ing and Distribution over0eads FFF incurred 5inis0ed goods at cost FFF "a#es 2!0H Credit3 FFF C#osing "toc' FFF Aeceipts fro1 Debtors FFF a/1ents to Creditors

FFF FFF FFF FFF FFF

$4004000 440040 00 240040 00 140040 00 +040 00 140040

00 4040 00 !40040 00 )4!040 00 > IL 240040 00 240040 FFF 00 2M.Co1. .pr. 0G4 adapted3

1&5

*
MARGINAL COSTING AND ABSORPTION COSTING

Unit Structure 4.0 Learning objectives 4.1 .bsorption Costing 4.2 Li1itations of absorption costing 4.3 Margina# Costing 4.4 Margina# v@s .bsorption costing 4.! Contribution ana#/sis 4.$ "o#ved I##ustrations 4.) *uestions

*.0 LEARNING OBJECTIVES

.fter stud/ing t0is c0apter4 t0e student s0ou#d ab#e to understand ( Meaning of absorption costing 70e distinction between 1argina# costing and absorption costing 70e 1eaning of t0e ter1s( brea'even point4 1argin of safet/4 p@v ration4 ang#e of incidence and cost indifference point. Sow to prepare profit state1ents based on 1argina# costing and absorption costing. t0e assu1ptions under#/ing C% ana#/sis Sow to Ca#cu#ate brea'(even points for 1u#ti(product situations.

*.1 ABSORPTION COSTING

.bsorption costing is princip#es w0ereb/ fi-ed as we## as variab#e costs are a##ocated to cost units and tota# over0eads are absorbed according to activit/ #eve#. It is t0e practice of c0arging a## costs irrespective of fi-ed and variab#e and direct and indirect e-penses are c0arged. It is a si1p#e and funda1enta# 1et0od of asserting t0e cost of a product or service. 70is 1et0od is fa1i#iar since 1an/ co1panies sti## fo##ow t0is approac0 for pricing

1&: decisions. 70is t0e o#dest and wide#/ used s/ste1. 70is 1et0od is a#so ca##ed as cost plus costing.

*.2

LIMITATIONS O ABSORPTION COSTING

.bsorption costing suffers fro1 t0e fo##owing #i1itations. In practice t0is 1et0od e1p#o/s 0ig0#/ arbitrar/ 1et0od of apportion1ent of over0ead. 70is reduces t0e practica# uti#it/ of cost data for contro# purposes.

<nder absorption costing4 fi-ed cost re#ating to c#osing stoc' is carried forward to t0e ne-t /ear. "i1i#ar#/4 fi-ed cost re#ating to opening stoc' is c0arged to current /ear instead of previous /ear. 70us under t0is 1et0od4 a## t0e fi-ed cost is not c0arged against t0e revenue of t0e /ear in w0ic0 t0e/ are incurred. It is unsound practice. <nder absorption costing co##ection and presentation of cost data is not ver/ usefu# for decision 1a'ing4 because process of assigning product cost a reasonab#e s0are of fi-ed over0ead obscures cost vo#u1e profit re#ations0ip. <nder absorption costing4 be0aviora# pattern of costs is not 0ig0#ig0ted and t0us 1an/ situations4 w0ic0 can be uti#i6ed under 1argina# costing4 are #i'e#/ to go unnoticed in absorption costing. 70e co1p#aint is so1eti1es 1ade t0at absorption costing often dea#s on#/ wit0 production costs and ignores se##ing and ad1inistration costs. 70e decision 1a'er needs to 'now t0e costs t0at wi## var/ as a resu#t of 0is decision4 and t0e costs t0at wi## re1ain unc0anged. .bsorption costing does not provide a convenient basis for 1a'ing suc0 ca#cu#ations. Its 1ain purpose is to provide cost infor1ation for stoc' va#uation and t0e 1easure1ent of reported profits

*.& MARGINAL COSTING

70e ter1Q Margina# CostQ is defined as t0e a1ount at an/ given vo#u1e of output b/ w0ic0 aggregate costs are c0anged if t0e vo#u1e of output is increased or decreased b/ one unit. It is a variab#e cost of one unit of a product or a service i.e. a cost w0ic0 wou#d be avoided if t0at unit was not produced or provided.

1&; *.&.1 De!initi"n #n' Me#nin% C Margina# costing is a princip#e w0ereb/ variab#e costs are c0arged to cost units and fi-ed costs attributab#e to t0e re#evant period is written off in fu## against t0e contribution for t0at period. Margina# Costing is t0e ascertain1ent of 1argina# cost and t0e effect on profit of c0anges in vo#u1e or t/pe of output b/ differentiating between fi-ed costs and variab#e cost. CIM. defines 1argina# as 8t0e accounting s/ste1 in w0ic0 variab#e cost are c0arged to t0e cost units and fi-ed costs of t0e period are written off in fu## against t0e aggregate contribution. Margina# Costing is not a distinct 1et0od of costing #i'e job costing or process costing. It is a tec0ni;ue w0ic0 provides presentation of cost data in suc0 a wa/ t0at true cost vo#u1e profit re#ations0ip is revea#ed. <nder t0is tec0ni;ue4 it is presu1ed t0at costs can be divided in two categories4 i.e.4 fi-ed cost and variab#e cost. 5i-ed cost is c0arged to contribution of t0e period in w0ic0 it is incurred and is considered period cost. *.&.2 e#ture$ "! +#r%in#0 c"$tin%:

a. Costs are divided into two categories4 i.e. fi-ed costs and variab#e costs. b. 5i-ed cost is considered period cost and re1ains out of consideration for deter1ination of product cost and va#ue of inventories. c. rices are deter1ined wit0 reference to 1argina# cost and contribution 1argin. d. rofitabi#it/ of depart1ent and products is deter1ined wit0 reference to t0eir contribution 1argin. e. In presentation of cost data4 disp#a/ of contribution assu1es do1inant ro#e. f. C#osing stoc' is va#ued on 1argina# cost *.&.& A'(#nt#%e$ "! M#r%in#0 c"$tin% a. It avoids t0e co1p#ications of over or under absorption of fi-ed cost b/ e-c#uding it fro1 cost of production. b. 70e tec0ni;ue provides usefu# data for 1anageria# decision 1a'ing. c. :/ not carr/ing forward fi-ed cost fro1 period to period4 it faci#itates cost co1parison. d. 70e i1pact of profit on sa#es f#uctuations are c#ear#/ s0own under 1argina# costing. e. 70e tec0ni;ue is f#e-ib#e in t0e sense it can be used a#ong wit0 ot0er tec0ni;ues suc0 as budgetar/ contro# and standard costing.

1*0 f. It estab#is0es a c#ear re#ations0ip between cost4 sa#es and vo#u1e of put and brea' even ana#/sis w0ic0 s0ows t0e effect of increasing an decreasing production activit/ on t0e profitabi#it/ of t0e co1pan/. ". It provides usefu# data for t0e 1anage1ent in deter1ination of po#icies regarding future $. te production and sa#es. i. "toc' of wor' in progress and finis0ed goods are va#ued at 1argina# cost4 w0ic0 is unifor1. *.&.* Li+it#ti"n$: a. 70e segregation of se1i variab#e costs often poses a prob#e1 b. C#osing stoc' of wor' in progress and finis0ed goods are understated w0ic0 is not acceptab#e to ta- aut0orities. c. &it0 t0e c0ange tec0no#og/ and owing to auto1ation of industries4 it resu#ts in 1ore fi-ed cost. Margina# costing fai#s to ref#ect t0e e-act c0ange because of adoption of new tec0no#og/. d. It does not provide an/ /ardstic' to e-ercise contro#. "o an effective 1eans of contro# cannot be e-ercised. e. 70e tec0ni;ue is not suitab#e under cost p#us contract because of tec0ni;ue ignores fi-ed cost in ca#cu#ating tota# cost. f. % ariab#e cost per unit re1ains constant on#/ in t0e s0ort run but not in t0e #ong run. ". Cost co1parison of two jobs wi## be difficu#t. 70oug0 1argina# costing 1a/ be sa1e for bot0 t0e jobs. $. &0en sa#es are based on 1argina# cost or 1argina# cost wit0 so1e contribution4 it 1a/ resu#t in #osses or #ow profit.

*.* MARGINAL V/S ABSORPTION COSTING

A.$"r)ti"n C"$tin% M#r%in#0 c"$tin% 1..## costs are c0arged to t0e cost of 1. On#/ variab#e cost is c0arged to production cost of production. 5i-ed costs are recovered fro1 contribution. 2. "toc' of wor' in(progress and finis0ed goods are va#ued at fu## or tota# cost. 5i-ed cost is carried over fro1 one period to anot0er period w0ic0 distorts cost co1parison. 2. "toc' of wor' in progress and finis0ed goods are va#ued at 1argina# cost. 70is faci#itates cost co1parison.

3. 70e e-cess of sa#es revenue over variab#e cost is 'nown as 3. 70e difference between sa#es and tota# contribution w0en fi-ed cost is deducted cost constitute profit. fro1 contribution4 it resu#ts in profit.

4. .s on#/ variab#e costs are c0arged to products4 it does not give rise 4. 70e apportion1ent of fi-ed costs to over or under absorption of on an arbitrar/ basis gives rise to under over0eads or over absorption of over0eads. 5. Costs are c#assified according to 5. Costs are c#assified according to variabi#it/. functiona# basis suc0 as production cost4 ad1inistration cost4 se##ing and distribution cost.

1*1

*.6 CONTRIBUTION ANAL4SIS

*.6.1 C"ntri.uti"n Contribution is t0e e-cess of se##ing price over variab#e costs. It is 'nown as contribution because it contributes towards recover/ of t0e fi-ed costs and profits. : / e;uation4 t0e concept of contribution can be stated as fo##owsC C"ntri.uti"nH S#0e$?V#ri#.0e c"$t Or C"ntri.uti"nH KP *.6.2 C"$t V"0u+e )r"!it 8CVP9 An#0A$i$: It is an i1portant too# of profit p#anning. It provides infor1ation about t0e fo##owing 1attersC i. 70e be0avior of cot in re#ation to vo#u1e ii. %o#u1e of production or sa#es4 w0ere t0e business wi## brea' even iii. "ensitivit/ of profits due to variation in output iv. .1ount of profit for a projected sa#es vo#u1e %. *uantit/ of production and sa#es for a target profit #eve# Cost vo#u1e profit ana#/sis 1a/ t0erefore be defined as a 1anageria# too# s0owing t0e re#ations0ip between various ingredients of profit p#anning vi64 cost se##ing price and vo#u1e of activit/4 etc Pr"!it 7V"0u+e 8P/V9 R#ti" #9 H C"ntri.uti"n S#0e$ .9HDi!!erence in Pr"!it$ Di!!erence in $#0e$ i. P/V R#ti"H C"ntri.uti"n 1 100 S#0e$ ii9 P/V R#ti"n H100N??M#r%in#0 C"$tN

1*2 rofit at a given sa#es vo#u1e Contribution D "a#es - @% Aatio rofit D Contribution( 5i-ed Cost rofit at a given sa#es #eve# D 2"a#es Aevenue - @v Aatio3( 5i-ed cost. *.6.& Bre#3e(en P"int: 70e point w0ic0 brea's t0e tota# cost and t0e se##ing price even#/ to s0ow t0e #eve# of output or sa#es at w0ic0 t0ere s0a## be neit0er profit nor #oss4 is regarded as brea' even point. .t t0is point4 t0e inco1e of t0e business e-act#/ e;ua#s its e-penditure. If production is en0anced be/ond t0is #eve#4 profit s0a## accrue to t0e business4 and it is decreased fro1 t0is #eve#4 #oss s0a## be suffered b/ t0e business. :rea'even point 2in units3D 5i-ed cost Contribution per unit :rea'?even oint 2in As.3 D 5i-ed Cost - sa#es Contribution per unit *.6.* M#r%in "! $#!etA: 7ota# sa#es 1inus t0e sa#es at brea'even point is 'nown as t0e 1argin of safet/ 70us4 t0e for1u#a isC Margin of "afet/ D 7ota# "a#es(:rea' even sa#es Margin of "afet/ can a#so be co1puted according to t0e fo##owing for1u#aC Margin of safet/ @% Aatio D >et profit

Margin of safet/ can a#so be e-pressed as a percentage of sa#esC = Margin of "afet/ -100 7ota# "a#es

C-ec3 4"ur Pr"%re$$:

1. Define t0e fo##owing ter1s. a. .bsorption Costing b. Margina# costing c. Contribution d. :rea' ,ven oint e. Margin of "afet/

1*& 2. Bive 5or1u#as a. Contribution b. rofit %o#u1e Aatio c. rofit at a given sa#es #eve#s d. :rea' ,ven point in units e. Margin of safet/.

*.2 SOLVED ILLUSTRATIONS

I00u$tr#ti"n?1: repare Inco1e state1ents under .bsorption Costing and under Margina# costing fro1 t0e fo##owing infor1ation re#ating to t0e /ear 2001(02C
Opening "toc' D 14000 units va#ued at As. )04000 inc#uding variab#e cost of As. !0 per unit. 5i-ed cost D As. 14 204000 %ariab#e cost D As. $0 per unit roduction D 104000 units "a#es D )4000 units F As. 100 unit "toc' is va#ued on t0e basis of 5I5O

S"0uti"n: INCOME STATEMENT 8Un'er A.$"r)ti"n C"$tin%9

R$. R$. "a#es 2)4000 units F As. 100 per unit3 )4004000 Less C Cost of Boods Manufactured C %ariab#e cost 2104000 unit 3 14204000 )04000 .dd C Less C %a#ue of Opening "toc' )4G04000 %a#ue of C#osing "toc' 244000 units F As. )2 24++4000 per unit3 F As. $0 per unit3 $4004000

As. 14204000

5i-ed cost 2 104000 units D As. 12 per unit 3 )4204000

!402400 Pr"!it

1** INCOME STATEMENT 8Un'er M#r%in#0 C"$tin%9

R$. R$. "a#es )4004000 %ariab#e cost $4004000

.ddC %a#ue of Opening "toc' 214000 units F As. !0 per unit3 Less C %a#ue of C#osing "toc' 244000 units F As. $0 per unit3 Contribution Less C 5i-ed Cost 24G04000

!04000 $4!04000 24404000 441040 00

14204000 Pr"!it 1<50<000

I00u$tr#ti"n? 2 Jour Co1pan/ 0as a production capacit/ of 124!00 units and nor1a# capacit/ uti#isation is +0H. Opening inventor/ of finis0ed goods on 1(1(1GGG was 14000 units. During t0e /ear ending 31(12(1GGG4 it produced 114000 units w0i#e it so#d on#/ 104000 units. "tandard variab#e cost per unit is As4 $.!0 and standard fi-ed factor/ cost per unit is As. 1.!0. 7ota# fi-ed se##ing and ad1inistration over0ead a1ounted to As. 104000. 70e co1pan/ se##s its product at As. 10 per unit. repare Inco1e "tate1ents under .bsorption Costing and Margina# Costing. ,-p#ain t0e reasons for difference in profit4 if an/. S"0uti"n: INCOME STATEMENT 8A.$"r)ti"n C"$tin%9
R$. R$. "a#es 2104000 units F As. 103 %ariab#e factor/ cost 2114000 units F As. $.!03 5i-ed factor/ cost 2114000 units F As. 1.!03 1$4!00 ++4000 +4000

14004000 )14!00

1*6
.dd C Opening stoc' 214000 units F As. +3 G$4000 1$4000 Less C C#osing sto' 224000 units F As. +3 +04000 Less Over(absorption 214000 units F As. 1.!03 C .dd C "e##ing and ad1inistration over0ead 104000 7ota# cost Pr"!it 11<600 ++4!00

14!00 )+4!00

INCOME STATEMENT 8M#r%in#0 C"$tin%9

R$. R$. "a#es 2104000 units F As. 103 14004000 %ariab#e cost 2114000 units F As. $.!03 )14!00 .dd C Opening "toc' 214000 units F As. $.!03 Manufacture $!4000 Contribution 3!4000 Less C 5i-ed cost ? 5actor/ 2104000 - As. 1.!03 1!4000 "e##ing and .d1inistration 104000 2!4000 Pr"!it 10<000 $4!00 )+4000

Less C C#osing "to' 224000 units F As. $.!03 134000 %ariab#e cost of

70e difference in profits As. 14!00 2i.e. As. 114!00 ? As. 1040003 as arrived at under absorption costing and 1argina# costing is due to t0e e#e1ent of fi-ed factor/ cost inc#uded in t0e va#uation of opening stoc' and c#osing stoc' as s0own be#ow C
Opening "toc' As. C#osing "toc' As.

.bsorption Costing +4000 1$4000 Margina# Costing $4!00 134000 (((((((( ((((((((( 14!00 34000 (((((((( (((((((((( >et Difference D As. 34000 ? As. 14!00 As. 14!00 ((((((((((

1*2 I00u$tr#ti"n & : If t0e :udgeted output is +04000 units4 5i-ed cost is As. 440040004 "e##ing price per unit is As. 20 and variab#e cost per unit is As. 104 find out :, sa#es4 :, in units4 @% ratio and indicate t0e 1argin of safet/. S"0uti"n C
As. "e##ing rice 20 Le$$ C %ariab#e Cost Contribution @% Aatio 10 D (((((((((((((( D (((( Contribution 10 D 0.! "a#es 20 10 (((( er <nit

5 i - e d C o s t :rea' ,ven "a#es 2As.3 D (((((((((((((( @ % A a t i o As. 44004000 (((((((((((((((( 0.! As. +4004000

= =

5i-ed Cost :rea' ,ven "a#es 2<nits3 D ((((((((((((((((((( Contribution er <nit

As. 44004000 (((((((((((((((((( As. 10

404000 <nits

Margin of "afet/ "a#es D :udgeted Output? :rea' ,ven "a#es Margin of "afet/ 2<nits3 D +04000 ? 404000 D 404000 <nits Margin of "afet/ "a#es 2As.3 D Margin of "afet/ <nits - "e##ing rice <nit = 404000 - 10 = As. 44004000

I00u$tr 2a3 5ro1 t0e fo##owing infor1ation ca#cu#ate C 2a3 :rea' ? ,ven oint. 2b3 @% Aation 2c3 rofit 2d3 rofit at )!H capacit/4 2e3 rofit at 100H capacit/ 213 :udgeted "a#es As. 24004000 2+0H capacit/3 223 Direct Materia#s 30H of "a#es. 233 Direct #abor 20H on sa#es. 243 %ariab#e Over0eads 25actor/3 10H on sa#es. 2!3 %ariab#e Over0eads 2.d1inistration3 1!H of sa#es. 2$3 5i-ed Cost As. 304000 S"0uti"n : .ctivit/ Leve# articu#ars )!H As. +0H As. "a#es 14+)4!000 24004000 24!04000 Le$$ : V#ri#.0e C"$t : 100 H As

Direct Materia# 230H3 !$42!0 $04000 )!4000 Direct Labour 220H3 3)4!00 404000 !04000 5actor/ Over0eads 210H3 1+4)!0 204000 2!4000 2+412! 304000 3)4!00 .d1inistration Over0eads 21!H3 T"t#0 V#ri#.0e E1)en$e$ 1<*0<226 1<60<000 1<:5<600 Contribution 4$4+)! !04000 $24!00 Le$$ : i1e' C"$t 304000 304000 304000 8&9 Pr"!it 12<:56 20<000 &2<600 819 &0<000 &0<000 &0<000 8in R$.9 P/V R#ti" BEP i1e' C"$t 0.2! 0.2! 0.2! 14204000 14204000 14204000

829

P/V R#ti"

C"ntri.uti"n 4$4+)! !04000 $24!00 14+)4!00 24004000 24!04000 S#0e$ = 0.2! D 0.2! D 0.2!

I00u$tr Co1pan/ L and Co1pan/ J4 bot0 under t0e sa1e 1anage1ent4 1a'es and se##s t0e sa1e t/pe of product. 70is budgeted rofit and Loss .ccounts for =anuar/ ? =une4 200!4 are as under C C"+)# C"+)#nA nA ICJ I4J P#rticu0#r$ R$. R$. R$. R$. "a#es $4004000 $4004000 44+04000 44004000 Less C %ariab#e Cost 5i-ed Cost $04000 !4404000 14404000 !4404000 rofit $04000 $04000 4"u #re re@uire' t" : 2i3 Ca#cu#ate t0e :rea'(,ven oint for eac0 co1pan/. 2ii3 Ca#cu#ate t0e sa#es vo#u1e at w0ic0 eac0 of t0e two co1panies wit0 profit of As. 204000. 2iii3 Ca#cu#ate 1argin of "afet/ for bot0 t0e co1panies. M#r%in#0 C"$t S-eet P#rticu0#r$ C 4 "a#es $4004000 $4004000 Le$$ : %ariab#e Cost 44+04000 44004000 Contribution 14204000 24004000 Le$$ : 5i-ed Cost $04000 14404000 rofit $04000 $04000
Contribution 213 @% Aation D "a#es L J 14204000 24004000 $4004000 $4004000 = 0.2 D 0.33 5i-ed Cost 223 :, 2As.3 D @% Aatio L J $04000 14404000 0.2 0.33 As. 34004000 D As. 44204000

1*;
233 "a#es re;uited to earn a desired profit D L $04000 K 204000 0.33 5i-ed cost K 7arget rofit @ % Aatio

J 14404000 K 204000 0.2 D As. 44+04000

As. 44004000

243

rofit MO" 2As.3 D

@ % Aatio L J $04000 $04000 0.2 0.33 As. 34004000 D As. 14+04000

= I00u$tr#ti"n? 2.

2a3 L Ltd. 0as earned contribution of As. 24004000 and net profit of As. 14!04000 on sa#es of As. +4004000. &0at is its 1argin of safet/ I 2b3 If 1argin of safet/ is As. 24404000 240H of sa#es3 and @% Aatio is 30H of .: Ltd.4 ca#cu#ate its 2i3 :rea' even sa#es and 2ii3 .1ount of profit on sa#es of As. G4004000. 2c3 . co1pan/ se##s its product at As. 1! per unit. In a period4 if it produces and se##s +4000 units4 in incurs a #oss of As. ! per unit. If t0e vo#u1e is raised to 204000 units4 it earns a profit of As. 4 per unit. Ca#cu#ate brea'( even point bot0 in ter1s of rupees as we## as in units. 2d3 . co1pan/ earned a profit of As. 304000 during t0e /ear 1GG4(G!. If t0e 1argina# cost and se##ing price of a product are As. + and As. 10 per unit respective#/4 find out t0e a1ount of TMargin of "afet/Q. 2e3 70e profit vo#u1e 2 @%3 ration of : : E Co. dea#ing in precision instru1ents is !0H and t0e 1argin of safet/ is 40H. Jou are re;uired to wor' out t0e brea'(even point and t0e net profit if t0e sa#e vo#u1e is As. !0 #a'0s.

160 2f3 Co11ent on t0e econo1ic soundness of t0e fo##owint fir1s C ir+ A ir+ B Current "a#es %o#u1e 34004000 34004000 :rea' ,ven "a#es %o#u1e 24004000 24004000 Margin of "afet/ 14004000 14004000 5i-ed Cost 14004000 $04000 2g3 . co1pan/ 0as a @% Aatio of 40 per cent. :/ w0at percentage 1ust sa#es be increased to offset C 2i3 10 per cent reduction in se##ing price and 2ii3 20 per cent SOLUTION
Contribution As. 24004000 2a3 @% Aatio ((((((((((((((((( L 100 ((((((((((((((((((( L 100 D 2!H "a#es As. +4004000

reduc tion in se##in g price

Margin of "afet/

rofit As. 14!04000 (((((((((( (((((((((( D R$. 2<00<000 @% Aatio 2!H

2b3 Margin of "afet/

rofit @ % Aatio

or rofitD Margin of "afet/ - @% Aatio D As. 24404000 - 30H D R$. 52<000 Margin of "afet/ As. 24404000 40. D 40H D R$. 2<00<000

Contribution D "a#es - @% Aatio D As. $4004000 - 30H D R$. 1<:0<000 5i-ed cost D Contribution ? rofit D As. 14+04000 ? As. )24000 = R$. 1<0:<000 2i3 :rea' ,ven "a#es @% Aatio 30H R$. &<20<000

2ii3 rofit D 2"a#es - @% Aatio3?5i-ed CostD 2As. G4004000 - 30H3 ? As. 140+4000

= As. 24)04000 ? As. 140+4000 DR$. 1<22<000

2c3 .verage cost at +4000 units vo#u1e = "e##ing price per unit K #oss co1ponent per unit D As. 1! K As. ! D As. 20 .verage cost at 204000 units vo#u1e D As. 1! ? As. 4 D As. 11 7ota# cost at +4000 units vo#u1e D As. +4000 - As. 20 D As. 14$04000 7ota# cost at 204000 units vo#u1e D As. 11 - 204000 D As. 24204000

161
C0ange in tota# cost As. $04000 %ariab#e cost per unit C0ange in vo#u1e of production124000 D As. ! 5i-ed costD 7ota# cost ? %ariab#e cost D As. 14$04000 ? As. 404000 = As. 14204000 Contribution 100 D $$ 3 H As. 10 2 @% Aatio "a#es L 100 As. 1! L

Contribu 1

5i-ed cost :rea' ,ven oint 2Aupees3 units3 @ % Aatio

D As. 14204000 D R$. 1<:0<000 $$ 2 @ 3 H :rea' ,ven oint 2in

5i-ed Cost As. 14204000

A0tern#ti(e S"0uti"n : &e 'now t0e fo##owing re#ations0ip C "a#es D 7C K @L C "a#es D 7C K @L As. 1! D - K As. 2!3 C As. 1! D - K As. 4 As. 20 D As. 11 D 7C D +4000 - As. 20 per unit D 14$04000V 7C D 204000 - As. 11 per unit D As. 24204000 Difference in cost As. $04000 %ariab#eCost per unit Difference in .ctivit/ 124000 units = As. ! per unit 7C D 5i-ed Cost K %C per unit - .ctivit/ As. 14$04000 D - K As. ! - +4000 As. 14204000 D 5i-ed cost As. 14204000 D 124000 units :.,. . 2unit3 Contribution per unit 2As. 1! ? As. !3 " :.,. . 2"a#es As.3 D 5i-ed Cost - C er unit = As. 14+04000 2d3 "e##ing price 1! As. 14204000 - 10

As. 10 Less C Margina# cost + Contribution 2 ((( As. 2 @% Aatio As. 10 - 100 D 20H Margin of "afet/ rofit As. 304000 @% Aatio 20H R$. 1<60<000

162
2e3 Ca#cu#ation of "a#es at :rea'(even point "a#es As. !04004000 Less C Margin of "afet/ 40H 2i.e. !04004000 - 40 3 100 3 204004000 ((((((((((((( "a#es at :rea' ,ven oint D 304004000 @% Aatio !0H 70erefore4 Contribution or fi-ed ,-penses at :.,. . 2!0H of As. 3040040003 D As. 1!4004000 A s .

Ca#cu#ation of >et

rofit at "a#es %o#u1e of As.!04004000

Contribution on As. !04004000 "a#es 2"a#es - @% Aatio i.e. As. !04004000 - !0 3 DAs.2!4004000

100.

Less C 5i-ed ,-penses

D1!4004000 rofit D104004000

2f3

ir+ A ir+ B :rea' ,ven "a#es Contribution 1400400 ,;ua# to 5i-ed Cost3 Contribution L 100 D

24004000 24004000 5i-ed cost or $04000 2.t :.,. . contribution is !0H 30H 14004000 - 100 $04000

@% Aatio D "a#es 24004000 24004000 As. Current "a#es %o#u1e 34004000 34004000 Contribution on Current "a#es %o#u1e 14!04000 G04000 2i.e. "a#es - @% Aatio3 234004000 !0H3 234004000 - 30H3 Less C 5i-ed cost 14004000 $04000 rofit !04000 304000

C"++ent : 5ir1 . is 1ore sound as co1pared to 5ir1 : because it gives e-cess profit of As. 204000 2i.e. As. !04000 ? As. 3040003. It is beause of 0ig0er @% ratio of !0H. Siger t0e @% ratio4 better it is. 5ir1 . wi## start earning profit F !0H on sa#es after :.,. . w0ereas fir1 : wi## earn profit F 30H on sa#es in e-cess of brea' even sa#es.

16& 2g3 "uppose se##ing price per unit is Ae. 1 and units so#d are 100. resent .fter reduction .fter osition of reduction 10H in se##ing of price 20H in se##ing As. As. As. "a#es 100 G0 +0 Less C %ariab#e cost $0 $0 $0 Contribution 40 30 20 # 7ota# sa#es in order to offset decrease in se##ing price "a#es - resent Contribution >ew Contribution G0 30 - 40 +0 20 - 40 % Increase in "a#es = As. 120 = As. 1$0 20H $0H I00u$tr#ti"n? 5 : . co1pan/ 0as annua# fi-ed costs of As. 144004000. In 2001 sa#es a1ounted to As4 $04004000 as co1pared wit0 As. 4!4004000 in 2000 and profit in 2001 was As. 44204000 0ig0er t0an in 2000 C 2i3 .t w0at #eve# of sa#es does t0e co1pan/ brea'(even I 2ii3 Deter1ine profit or #oss on a present sa#es vo#u1e of +04004000. As.

2iii3 If t0ere is reduction in se##ing price in 2002 b/ 10H and t0e co1pan/ desires to earn t0e sa1e profit as in 20014 w0at wou#d be t0e re;uired sa#es vo#u1e I S"0uti"n C0ange in profit As. 44204000 C0ange in sa#es - 100 As. 1!4004000 - 100 D 2+H 2i3 :rea'

,ven oint D 5i-ed cost As. 144004000 @% ratio 2+ - 100 = R$. 60<00<000 2ii3 rofit D 2"a#es - @% ratio3 ? 5i-ed cost 2As. +04004000 - 2+H 3 ? As. 144004000 = R$. :<*0<000

16* 2iii3 Contribution in 2001 D 2+H - As. $04004000 D As. 1$4+04000 70is 0as to be 1aintained. In 20024 t0e sa#es vo#u1e and contribution conse;uent upon 10. reduction in price are C As. "a#es 2As. $04004000 ? 10H3 !44004000 Contribution As. 104+04000 2As. 1$4+04000 ? 10H of As. $040040003 As. 104+04000 @% ratio As. !44004000 - 100 D 20H Contribution D As. 1$4+04000 Ae;uired "a#es %o#u1e D Aatio 20H = R$. :*<00<0 @%

*.5 E1erci$e
*.5.1 Si+)0e Eue$ti"n$ 1. Define cost(vo#u1e(ana#/sis. 2. "tate an/ four objectives of cost vo#u1e profit ana#/sis. 3. "tate an/ four assu1ptions of cost vo#u1e profit ana#/sis. 4. "tate an/ four #i1itations of cost vo#u1e profit ana#/sis. 5. &0at is Contribution I Sow is it different fro1 profit I 6. Bive Margina# Costing ,;uation. 7. Bive t0ree wa/s b/ w0ic0 @% Aatio can be i1proved. 8. &0at is Margin of "afet/I Sow can it be i1provedI 9. &0/ are @% Aatio and Margina# of "afet/ ca#cu#atedI 10. Distinguis0 :, c0arts fro1 @% c0arts. 11. &rite a note on Cas0 :rea'(even c0art. *.5.2 O.Decti(e @ue$ti"n$ 5ro1 t0e fo##owing c0oose t0e 1ost appropriate answerC i. Contribution 1argin is a#so 'nown as a3%ariab#e cost b. Bross rofit c. >et Inco1e ii3

eriod cost 1eans a3%ariab#e cost b. 5i-ed cost4 c. ri1e cost iii3 70e brea' even point is t0e point at w0ic0C a370ere is no profit no #oss

2a3 ,-cess b. Contribution 1argin is e;ua# to tota# fi-ed costC of c. 7ota# revenue is e;ua# to tota# costC actua# sa#es d. .## of t0e above over fi-ed iv3 roduction cost under 1argina# costing inc#ude 2a3 ri1e cost e-pens on#/ es 2b3 2b3 ri1e cost and variab#e over0ead ,-cess 2c3 rice cost and fi-ed over0ead of 2d3 rice cost4 variab#e over0ead and fi-ed over0ead actua# %. One of t0e pri1ar/ difference between 1argina# costing and absorption sa#es over costing is regarding t0e treat1ent of C variab# 2a3 Direct 1ateria# 2c3 5i-ed over0ead e 2b3 %ariab#e over0ead 2d3 Over0ead costs vi3 eriod costs are C e-pens es 2c3 2a3 %ariab#e costs 2c3 ri1e cost ,-cess 2b3 5i-ed cost 2d3 Over0ead cost of actua# vii3 .bsorption costing differs fro1 1argina# costing in t0e 2a3 5act t0at sa#es standard costs can be used wit0 absorption costing but not wit0 1argina# over costing. brea'( 2b3 .1ount of fi-ed costs t0at wi## be incurred 2c3 Mind of activities for w0ic0 eac0 can be use 2d3 .1ount of costs assigned to individua# units even sa#es of products. 2d3 ,-cess viii37o obtain t0e brea'(even point in rupee sa#es va#ue4 tota# fi-ed costs are of divided b/ C budget 2a3 %ariab#e cost per unit ed 2b3 Contribution 1argin per unit 2c3 5i-ed cost per unit sa#es 2d3 rofit @ vo#u1e ration. over fi-ed i-3 70e brea'(even point is t0e point at w0ic0 2a3 70ere is costs. no profit no #oss 2b3 Contribution 1argin is e;ua# to tota# fi-ed cost4 2c3 7ota# revenue is e;ua# to tota# cost 2d3 .## of t0e above. 166 &. Margin of safet/ is referred to as C
i- 2d34 -2c3. An$Ber : i 2b34 ii2a34 iii 2a34 iv 2b34 v2c34 vi 2c34 vii 2d34 viii2d34

*. 1. &0at do /ou 1ean b/ differentia# costs and incre1enta# revenueI 2. "tate t0e 1anageria# decision w0ic0 can be ta'en wit0 t0e 0e#p of Differentia# cost .na#/sisI 3. ,-p#ain t0e i1portance of t0e 1argina# cost tec0ni;ue in 1anageria# decision 1a'ing. 4. In t0e conte-t of cost vo#u1e profit ana#/sis4 w0at is 1eant an/ #i1iting factorI Discuss its uti#it/. 5. ,-p#ain brief#/ t0e circu1stances under w0ic0 se##ing prices be#ow 1argina# cost 1a/ be justified. 6. Sow does cost vo#u1e profit ana#/sis 0e#p contro# of costI 7. 8Cost %o#u1e rofit ana#/sis is 0e#pfu# for profit p#anning9. ,-p#ain. 8. &0at is Tana#/sis of 1argin of contributionQ I Discuss t0e need for it. 9. Define 1argina# costing4 &0at are t0e features of 1argina# costing I 10. 8Cost(vo#u1e profit ana#/sis is a ver/ usefu# tec0ni;ue to 1anage1ent for cost contro#4 profit p#anning and decision 1a'ing9. ,-p#ain. 11. In t0e conte-t of cost(vo#u1e profit ana#/sis4 w0at is 1eant b/ #i1iting factorI Discuss its uti#it/. 12. Define cost(vo#u1e profit ana#/sis and e-p#ain its 1ain features and usefu# contribution to t0e 1anage1ent in decision 1a'ing. 13. Sow does cost(vo#u1e profit ana#/sis 0e#p contro# of costI *.5.* Pr#ctic#0 Pr".0e+$ I00u$tr#ti"n 1: Jou are supp#ied wit0 t0e infor1ation re#ating to sa#es and costs of sa#es of a 1anufacturing co1pan/. /our are re;uired to find out C 1. a3 . %. Aatio. b. :rea' even oint. c. Margin of safet/ in 2002. d. rofit w0en sa#es are As. 14 204000. e. "a#es re;uired earning a profit of As. )!4000

2. Ca#cu#ate t0e revised . %. ratio4 brea' even point in eac0 of t0e fo##owing cases C a. Decrease of 10H in se##ing price. b. Increase of 10H in variab#e costs. c. Increase of sa#es vo#u1e to 4000 units and increase in fi-ed costs b/ As. 404000.

165 d. e. Increase of As. 1+4000 in fi-ed costs. Increase of 20H in se##ing price and increase of
As. +4000 in

fied co sts .

3. 70e sa#es and cost of sa#es during t0e two /ears were as fo##owsC Jear "a#es 2001 2002 ( FFFF FFFF
As. Costs of "a#es As. <nits

$4004000 )4!04000

244 00 340 2M.Co1.4 .pr. 034 .dapted3 !4$04000 $4+04000

An$: @% Aatio 20H4 5i-ed Cost( As. +040003

I00u$tr#ti"n 2 : Jou are given t0e fo##owing infor1ation for t0e ne-t /ear. Jear <nits "a#es 2104000 units3 %ariab#e Cost 5i-ed Cost 142040 00 4+40 00 $040 1. 5ind out t0e . %. Aatio4 :rea'(even point and t0e 1argin of safet/. FFFFF FFFFF FFFFF 2. ,va#uate t0e effect of fo##owing on . %. Aatio4 :rea'(even point and t0e 1argin of safet/. a. b. c. d. e. f. ". $. i. 10H increase in %ariab#e Cost. 10H decrease in %ariab#e Cost. 10H increase in 5i-ed Cost. 10H decrease in 5i-ed Cost. 10H increase in 0/sica# "a#es %o#u1e. 10H decrease in 0/sica# "a#es %o#u1e. !H increase in "e##ing rice. !H decrease in "e##ing rice.

10H increase in "e##ing rice and 10H decrease in 0/sica# "a#es %o#u1e. '. !H decrease in "e##ing rice and 10H increase in 0/sica# "a#es %o#u1e. 2M.Co1.4 Oct G$4 .dapted3 (
.nsC @% Aatio $0H4 :, ( As.140040004 MO"( As. 2040003

16: I00u$tr#ti"n &: .: Ltd. and LM Ltd. are 1anufacturing t0e sa1e product. 70e rofit E Loss detai#s are as under C articu#ars .: Ltd.
As.

LM Ltd.
As.

"a#es Less C %ariab#e Cost

FFFFF FFFFF

104004000

104004000 $4004000 44004000 14004000

Less C 5i-ed Cost rofit

44004000 FFFF $4004000 FFFFF 34004000 F F F F F 34004000 34004000

Jou are re;uired toC 1. Ca#cu#ate Contribution @ "a#es ratio for eac0 co1pan/. 2. Ca#cu#ate :, for eac0 co1pan/. 3. rofits of eac0 co1pan/ if sa#es increase b/ 20H. 4. rofits of eac0 co1pan/ if sa#es decrease b/ 20H. 5. Co11ent on t0e profitabi#it/ of bot0 co1panies. 2M.Co1. .pr 044 .dapted3
8An$: @% Aatio .: Ltd. $0H4 LM Ltd. 40H :, ( .: Ltd. As. !40040004 LM.Ltd( As. 24!040003

I00u$tr#ti"n *: 70e %ija/a ,#ectronics Co. furnis0es /ou t0e fo##owing inco1e infor1ation of t0e /ear 1GG!. articu#ars 5irst Sa#f "econd Sa#f "a#es rofit FFFFF FFFFF 440!4000 104+00 !41340 00 3244

5ro1 t0e above tab#e /ou are re;uired to co1pute t0e fo##owing assu1ing t0at t0e fi-ed cost re1ains t0e sa1e in bot0 t0e periods. a. b. c. d. e. f. @% Aatio 5i-ed Cost :rea'(even point %ariab#e Cost for first and second 0a#f of t0e /ear 70e a1ount of rofit or Loss w0ere sa#es are As. 34244000. 70e a1ount of sa#es re;uired to earn a profit of As. !44000. 2M.Co1. .pr 0+4 .dapted3

8An$: @% Aatio 20H4 5i-ed Cost As. 14 4040004 :, ( As. )4 0240003

16; I00u$tr#ti"n 6: >ationa# #astic Ltd. 1anufacturing c0airs provides t0e fo##owing infor1ationC 5i-ed cost As. !04000 for t0e /ear %ariab#e cost As. 20 per c0air Capacit/ As. 24000 c0airs per /ear "e##ing price As. )0 per c0air 5ro1 t0e above 1entioned infor1ationC i. 5ind t0e :rea'even point ii3 5ind t0e nu1ber of c0airs to be so#d to get a profit of As. 304000 iii3 5ind out :rea'even point and sa#es if t0e se##ing price c0anges to As. $0 per c0air. iv3 If t0e co1pan/ can 1anufacture $00 c0airs 1ore per /ear wit0 an additiona# fi-ed cost of As. 240004 w0at s0ou#d be t0e se##ing price to 1aintain profit per c0air as at 2ii3 aboveI 2M.Co1. Oct 044 .dapted3
8An$: @% Aatio )1.43H :, ( 14000 C0airs3

I00u$tr#ti"n 2 : "uni# Ltd. 0ad prepared t0e fo##owing budget esti1ates for t0e /ear 2004 C "a#es <nits 5i-ed ,-penses "a#es %a#ue %ariab#e Costs Jou are re;uired toC
As. 1!4000 As. 344000 As. 14

!04000 As. $ per unit

i. 5ind out t0e @% Aatio4 :rea' ,ven oint and Margin of "afet/. ii3 Ca#cu#ate t0e revised @% Aatio4 :rea' ,ven oint and Margin of "afet/ in eac0 of t0e fo##owing cases C a. Decrease of 10H in t0e se##ing price b. Increase of 10H in t0e variab#e costs c. Increase of sa#es vo#u1e b/ 24000 units d. Increase of T $4000 in fi-ed costs. 2M.Co1. Oct 0!4 .dapted3
8An$: @% Aatio 40H4 :, ( As.+!4 0004 MO"( As. $!40003

120

6
MANAGERIAL DECISIONS
Unit Structure !.0 Learning Objectives !.1 Introduction !.2 Long ?ter1 and "0ort(ter1 decisions !.3 .pp#ication s of Margina# Costing !.4 "o#ved rob#e1s !.4 I##ustration !.! *uestions

6.0 LEERING OBJECTIVES

.fter "tud/ing t0is c0apter4 /ou s0ou#d be ab#e toC ,-p#ain distinction between a3 re#evant cost and irre#evant costQs3 1argina# cost and differentia# cost c3 brea'even point and cost indifference pointV d3 re#evant cost and opportunit/ cost and g3 traceab#e cost and co11on cost. ,-p#ain t0e i1portance of ;ua#itative factors in decision 1a'ing Construct t0e state1ents of re#evant costs and re#evant revenues for suc0 rob#e1 asC A. De#eting a seg1entV b3 specia# se##ing price decisionsV c. 1a'e or bu/ decision and d3accepting or rejecting an e-port order. ,-p#ain and consider t0e i1pact of opportunit/ cost4 s0adow price or incre1enta# opportunit/ cost and i1puted cost on decision 1a'ing. Distinguis0 between situation of decision 1a'ing 2i.e. c0oice a1ong t0e a#ternatives3 and perfor1ance eva#uation 2i.e. eva#uation of 1anageria# perfor1ance wit0 reference to overa## contribution to co1paniesQ profit.3 ,-p#ain t0e s0ort ter1 decision 1a'ing and #ong ter1 decision 1a'ing .dvise t0e 1anage1ent t0e best course of action after proper eva#uation of a## t0e avai#ab#e infor1ation

121

6.1 INTRODUCTION
Decision 1a'ing invo#ves c0oice between a#ternatives. Man/ ;uantitative and ;ua#itative factors 0ave to be ta'en into account in decision 1a'ing. 70e ter1 cost is ver/ e#usiveV it 0as different 1eanings in different situations. . cost accountant e-a1ines eac0 situation in dept0 to decide t0e 'ind of cost concepts to be used and p#a/s an i1pGrtant ro#e in decision 1a'ing b/ 1a'ing precise and re#evant data avai#ab#e to 1anage1ent. In cost studies4 a cost accountant s0ou#d a#wa/s consider four points for decision 1a'ingsV 2i3 0e 1ust estab#is0 w0/ a c0oice is necessar/ 2ii3 0e 1ust separate#/ ana#/6e eac0 avai#ab#e a#ternatives42iii3 specific effort s0ou#d be 1ade to deter1ine 0ow ever/ a#ternative a#ters or inf#uences decision 1a'ers c0oice4 and 2iv3c0oice of a particu#ar course of action fro1 a1ong t0e a#ternatives. Decision 1a'ing invo#ves prediction4 w0ic0 cannot c0ange t0e past4 but it is e-pected to inf#uence t0e future.

6.2 LONG 7TERM AND SGORT?TERM DECISIONS

Decision 1a'ing invo#ves two t/pes of decisions i.e. #ong ter1 decisions and s0ort ter1 operating decisions. 70e #ong ter1 decisions force 1anage1ent to #oo' be/ond t0e current /ear. 7i1e va#ue of 1one/ and return on invest1ent are 1ajor considerations in #ong ter1 decisions. "0ort run operating decisions invo#ves t0e se#ection of a#ternatives t0at can be i1p#e1ented wit0in a one /ear period. 70ese s0ort run operating decisions invo#ve 1an/ specia# non recurring decisions suc0 asC i3 1a'e or bu/C ii3se## or process furt0erV iii3 accept or reject an order and count#ess ot0er decisions

6.& APPLICATION S O MARGINAL COSTING

70e tec0ni;ue of 1argina# costing is #arge#/ use in t0e 1anageria# decision 1a'ing process. 70e app#ication of 1argina# costing I t0e da/ to da/ decision 1a'ing process are as fo##ows. 6.&.1 M#3e "r BuA 'eci$i"n: %er/ often 1anage1ent is confronted wit0 t0e prob#e1 of deciding w0et0er to bu/ a co1ponent or product fro1 an outside source or to 1anufacture t0e sa1e if it is econo1ica# as co1pared to t0e price ;uoted b/ a supp#ier. In deciding t0e absorption costing wou#d 1is#ead. If t0e decision is to bu/ fro1 an e-terna# source t0e price ;uoted b/ t0e supp#ier s0ou#d be #ess t0an 1argina# cost. If t0e decision is to 1a'e wit0in t0e organi6ation4 t0e cost of production s0ou#d inc#ude a## additiona# cost suc0 as depreciation on new p#ant interest on capita4 etc.4 If t0is cost of production is #ess t0an t0e ;uotation price4 it s0ou#d be decided 1a'ing t0e product rat0er t0an procure it fro1 an e-terna# source.

122 #ct"r$ t-#t in!0uence +#3e "r .uA 'eci$i"n: In a 1a'e or bu/ decision t0e fo##owing cost and non cost factors 1ust be considered specifica##/. a. C"$t !#ct"r$ 1. .vai#abi#it/ of p#ant faci#it/. 2. *ua#it/ and t/pe of ite1 w0ic0 affects t0e production sc0edu#e 3. 70e space re;uired for t0e production of ite1. 4. .n/ specia# 1ac0iner/ or e;uip1ent re;uired. 5. .n/ transportation invo#ved due to t0e #ocation of production 6. Cost of ac;uiring specia# 'now 0ow re;uired for t0e ite1. b. Re)0#cin% e1i$tin% +#c-inerA Bit- neB +#c-inerA "o1eti1es wit0 a view to derive 1a-i1u1 efficienc/ an e-isting p#ant 1a/ 0ave to be rep#aced b/ a new one. .gain t0e guiding factors 1entioned ear#ier wi## 0e#p in suc0 decision 1a'ing process. Ite1s of differentia# costs i. Capita# e;uip1ent and associated costs4 vi6.4 interest4 depreciation.4 etc.4 ii3 Loss on sa#e of o#d e;uip1ent iii3 Increased in fi-ed over0ead costs. Ite1s of differentia# benefits i. "aving in operating costs. ii3 Increased vo#u1e and va#ue of production iii3 Aea#i6ab#e va#ue of o#d 1ac0ine iv3 7a- benefits4 if an/. c. A0tern#ti(e u$e "! )0#nt "r )r"'ucti(e !#ci0itA? 7o ta'e advantage of a#ternative use of production faci#it/ or a#ternative use of p#ant it is necessar/ to 'now t0e contribution 1argin. 70at a#ternative w0ic0 /ie#ds 0ig0est contribution 1argin s0a## be se#ected. d. Pr"'uct Mi1< Pr"!it )0#nnin% #n' )r"!it +#1i+iO#ti"n? Co1panies 1anufacturing varieties of products often 0ave to decide w0ic0 product 1i+-c is 1ore profitab#e. 70at product 1i- w0ic0 gives 1a-i1u1 contribution is to be considered as best product 1i-es. "i1i#ar#/4 profit p#anning is often considered so as to earn reasonab#e profit if not 1a-i1u1 profit. 70e profit p#anning is affected b/ factors suc0 as i3 vo#u1e of output4 ii3 roduct 1i-4 iii3costs to be incurred4 iv3 rices to be c0arged and so on. Margina# costing tec0ni;ues guide t0e 1anage1ent in t0is regard.

12& e. A("i'#.0e #n' un#("i'#.0e c"$t .voidab#e costs are t0ose w0ic0 can be e#i1inated if a particu#ar product or depart1ent wit0 w0ic0 t0e/ are direct#/ re#ated4 is discontinued. <navoidab#e cost is t0at cost w0ic0 wi## not be e#i1inated wit0 t0e discontinuation of a product or depart1ent. f. Re0e(#nt C"$t #n' Irre0e(#nt C"$t . cost t0at is re#evant to a decision is ca##ed re#evant cost. ast costs are not genera##/ re#evant costs because t0e/ are sun' costs or costs a#read/ incurred. 70us t0e boo' va#ue of an asset or depreciation c0arged in accounts in respect of an asset is not re#evant cost. On t0e ot0er 0and4 t0e fa## in t0e resa#e va#ue of an asset as a resu#t of using it4 as a#so t0e running e-penses incurred to 1a'e use of t0e asset are re#evant costs. ". Pr"!it#.i0itA "! t-e 'e)#rt+ent " r )r"'uct$P 70e preparation of a depart1enta# profit and #oss account under 1argina# costing is usefu# in deter1ining w0ic0 depart1ent is 1a'ing profit and w0ic0 depart1ent is incurring a #oss. 70is enab#es t0e 1anage1ent to decide w0et0er a particu#ar depart1ent4 1ust continue operation or it s0ou#d be e#i1inated. 70e decision is ta'en b/ referring to t0e contribution 1ade or #oss incurred b/ t0e depart1ent or product. 6.&.2 Se00in% #t "r .e0"B +#r%in#0 c"$t C "o1e ti1e it 1a/ beco1e necessar/ to se## t0e goods at a price be#ow t0e 1argina# cost so1e suc0 situations are as fo##owsC a. &0ere 1ateria#s are of peris0ab#e nature b. &0ere #arge ;uantities of stoc' are accu1u#ated and w0ose 1ar'et prices 0ave fa##en. 70is wi## save t0e carr/ing cost of stoc's. c. In order to popu#ari6e a new product. d. In order to increase sa#es of t0ose products 0aving 0ig0er 1argin or profits. If t0e se##ing price is be#ow t0e tota# cost but above t0e 1argina# cost4 t0e contribution wi## #eave on under recovering of fi-ed cost. If t0e se##ing price fi-ed is e;ua# to 1argina# cost4 t0ere wi## be a #oss w0ic0 is e;ua# to fi-ed cost. Sowever4 w0ere t0e se##ing price is fi-ed is #esser t0an t0e 1argina# cost4 t0e #oss wi## be greater t0an fi-ed cost. 6.&.& Deter+in#ti"n "! $e00in% )rice #n' ("0u+e "! "ut)ut : 70e deter1ination of se##ing price and vo#u1e of output is based on differentia# costing. 70e difference is tota# cost due to difference in sa#es vo#u1e is 'nown as differentia# costing. 70e increase in sa#es vo#u1e is 'nown as incre1enta# revenue. 70e ana#/sis of differentia# cost and incre1enta# revenue 0e#ps in deter1ining se##ing price w0ic0 wi## /ie#d t0e opti1u1 profit. "o #ong as incre1enta# revenue is 1ore t0an t0e differentia# cost it is

12* advantages to increase t0e output. :ut as soon as incre1enta# revenue e;ua#s t0e differentia# cost furt0er increase in output is not advantages. Different cost ana#/sis t0us 0e#ps to deter1ine t0e se##ing price and t0e #eve# of activit/ w0ic0 are e-pected to /ie#d t0e 0ig0est profit. 6.&.* S-ut D"Bn "r C"ntinue: . business is so1eti1es confronted wit0 t0e prob#e1 of suspending its business operations for a te1porar/ period or per1anent#/ c#osing down. er1anent c#osure of t0e business is a ver/ drastic decision and s0ou#d be carried out on#/ in e-tre1e circu1stances. 7e1porar/ s0ut down 70e fo##owing ite1s of costs and benefi$ts s0ou#d be considered w0i#e deciding about t0e te1porar/ s0utdown of p#ant. Ite+$ "! c"$t i. ,ffect on fi-ed over0ead costs. Ii3 ac'ing and storing of p#ant and e;uip1ent costs. iii3 "etting up costs. I%3 Loss of goodwi##@1ar'et. %. La/ off or retrenc01ent co1pensation to wor'ers C-ec3 4"ur Pr"%re$$: 1. &0/ t0e goods are so#d at or be#ow t0e Margina# CostI 2. Distinguis0 between a. Long 7er1 Decisions and s0ort 7er1 Decisions. b. Ae#evant Cost and Irre#evant cost

6.* SOLVED PROBLEMS

I00u$tr#ti"n: 1 . co1pan/ w0ic0 se##s four products4 so1e of t0e1 unprofitab#e proposes discontinuing t0e sa#es of one of t0e1. 70e fo##owing infor1ation is avai#ab#e regarding its inco1e4 cost and activities for a /ear. Pr"'uct$ A B C D R$. R$. R$. R$. "a#es 34004000 !4004000 24!04000 44!04000 Cost of sa#es at purc0ase price 24004000 44!04000 24104000 242!4000 .rea of storage 2s;. ft.3 !04000 404000 +04000 304000 >o. of parce#s sent 14004000 14!04000 )!4000 14)!4000 >o. of invoices sent +04000 14404000 $04000 14204000

126 Its over0ead cost and basis of a##ocation are C i1e' c"$t$ R$. B#$i$ "! #00"c#ti"n Aent and insurance 304000 ";. ft. Depreciation 104000 arce# "a#es1anQs sa#aries and e-penses $04000 "a#es vo#u1e !04000 .d1inistrative wages and sa#aries invoices %ariab#e costs ac'ing4 wages and 1ateria#s Co11issions 4 H of sa#es 20 p. per parce#

>o. of

"tationer/ 10 p. per invoice Jou are re;uired toC 2a3 repare a profit and #oss state1ent s0owing percentage profit or #oss to sa#es for eac0 product. 2b3 Co1pare t0e profit in t0e co1pan/ discontinues sa#es of product : wit0 t0e profit if it discontinues product C. NI.C.&...4 InterO S"0uti"n: 2a3 rofit and Loss "tate1entC

"a#es 2.3 34004000 !4004000 24!04000 44!04000 1!4004000 %ariab#e costs C Cost of sa#es at urc0ase rice 24004000 44!04000 24104000 242!4000 104+!4000 124000 Co11ission F 4H of sa#es ac'ing4 wages E 1ateria#s 204000 104000 1+4000 $04000 @ 20 p. per parce# 204000 304000 1!4000 3!4000 14104000 +4000 144000 $4000 124000 404000 "tationer/ F 10 p. per invoice 7ota# variab#e costs 2:3 24404000 !4144000 24414000 24G04000 124+!4000 G4000 14$04000 241!4000 Contribution 2.3 ? 2:3 $04000 2(3 144000

122
5i-ed Costs C Aent and insurance @ 1! p. per s;. ft. )4!00 $4000 124000 44!00 304000 Depreciation F 2 p. per 24000 34000 14!00 34!00 104000 parce# "a#es1enQs sa#aries E e-penses @ 4 p. per Ae. of sa#es 124000 204000 104000 1+4000 $04000 .d1inistrative wages E 7ota# 5i-ed Cost 2 J 3 314!00 4$4!00 314000 414000 14!04000

rofit E Loss 2 L 3?2 J 3 2+4!00 2(3 $04!00 ercentage of on sa#es rofit or #oss

2( 141G4000 $!4000 3 224000 G.! 2(3 12.1 2(3 +.+ 2$.4 4.3

2b3 If eit0er product : or product C is discontinued t0en t0e resu#t wi## be as fo##owsC C"ntri.uti"n i! i! 'i$c"ntinue' R$. 'i$c"ntinue' R$. roduct . $04000 $04000 roduct : (( (( roduct C G4000 2(3 144000 roduct D 14$04000 14$04000 7ota# Contribution 242G4000 240$4000 Less C 5i-ed Costs 14!04000 14!04000 7ota# rofit As. )G4000 As. !$4000 70us4 if product : is discontinued t0e tota# profit 1a/ rise to As. )G4000 w0ereas if product C is discontinued t0e tota# profit 1a/ fa## to As. !$4000. I00u$tr#ti"n ? 2 . co1pan/ produces and se##s four t/pes of do##s for c0i#dren. It a#so produces and sa#es a set of dress 'it for t0e do##s. 70e co1pan/ 0as wor'ed out t0e fo##owing esti1ates for t0e ne-t /ear. 125 D"00 E$ti+#te' 'e+#n' E$ti+#te' $#0e )rice )er unit 8R$.9 . !04000 20 1! $0 : 404000 2! 1! +0 C 3!4000 32 1+ 100 D 304000 !0 20 120 24004000 1! ! !0 St#n'#r' M#teri#0 c"$t 8R$.9 St#n'#r' L#."ur C"$t 8R$.9

Dress Mit

7o encourage t0e sa#e of dress 'its4 a discount of 20 H in its price is offered it it were to be purc0ased a#ong wit0 t0e do##. It is e-pected t0at a## t0e custo1ers bu/ing do##s wi## a#so bu/ t0e dress 'it. 70e co1pan/Qs factor/ 0as effective capacit/ of 24 004000 #abour 0ours per annu1 on a sing#e s0ift basis and it produces a## t0e products on t0at basis t0e #abour 0our rate is As. 1!. Overti1e of #abour 0as to be paid at doub#e t0e nor1a# rate. %ariab#e cost wor's out to 40H of direct #abour cost fi-ed costs are As. 30 #a'0s per annu1. 70ere wi## be no inventor/ at t0e end of t0e /ear. Jou are draw a conservative esti1ate of t0e /earQs profitabi#it/. NC...4 InterO

S"0uti"n : "tate1ent of conservative esti1ate of t0e /earQs profitabi#it/

D"00 A D"00 B D"00 C D"00 D Dre$$ >it ,sti1ated De1and 2<nits3 !04000 404000 3!4000 304000 24004000 As. As. As. As. As. "e##ing rice per unit 2.3 $0 +0 100 120 !0 Margina# cost per unit Materia# Cost 20 2! 32 !0 1! Labour Cost 1! 1! 1+ 20 ! %ariab#e Cost 240H of #abour cost3 $ $ ).20 + 2 7ota# 1argina# cost C 2:3 41 4$ !).20 )+ 22 Contribution per unitC 2C3 1G 34 !).20 )+ 22

N2.3 ? 2:3O

7ota# contribution on G4!04000 134$04000 144G+4000 124$04000 !$4004000 ,sti1ated de1and 2!04000 - 2404000 - 23!4000 - 2304000 - 224004000 As. 1G3 As. 343 As.42.+0 As. 423 - As. 2+3

12:
Less C Discount on dress 'its (( (( (( (( 1!4!04000 >et contribution G4!04000 134$04000 144G+4000 124$04000 404!04000 G14+14000 7ota# net contribution 2As.3 !4)G4GG0 LessCOverti1e re1iu1 2As.323+4$$$ 0rs - As. 1!3 Less C 5i-ed Cost 2As.3 304004000 rofit 2As.3 !!43+4000

D"00 8#9

7ota# #abour 0ours re;uired to 1eet esti1ated de1and of four t/pes of do##s and t0eir dress 'it. E$ti+#te' T"t#0 St'. 0#."ur ti+e 'e+#n' 0#."ur P.U. 8Unit$9 -"ur$ 8St'. 0#."ur c"$t 8.9 8'9 H 8.9 Q 169 7 8c9 8c9 . !04000 1 0r. !04000.00 : 404000 1 0r. 404000.00 C 3!4000 1.2 0rs 424000.00 D 304000 1.3333 0rs. 404000.00 Dress 'it 24004000 0.33333 0rs. $$4$$$.00 7ota# #abour 0ours to 1eet esti1ated de1and 243+4$$$.00 "ince t0e tota# avai#ab#e 0ours are on#/ 2040004 t0erefore 3+4$$$ 0ours wi## be uti#i6ed b/ e1p#o/ing t0e #abour on overti1e basis. YY 7ota# discount on t0e sa#e of dress 'it. Out of 24 004000 dress 'its4 14 !!4000 were so#d a#ong wit0 four t/pes of do##s. ,ac0 unit of sa#e of dress 'it a#ong wit0 a unit of do## is entit#ed for a discount of 20 H of As. !0 i.e.4 As. 10. 70e tota# discount a1ount on t0e sa#e of 14!!4000 dress 'it co1es to As. 1!4!04000.

12; I00u$tr#ti"n :& 70e fo##owing particu#ars are e-tracted fro1 t0e records of ,LLOA. ".L," L7D. Direct wages per 0our is As. !. P#rticu0#r$ Pr"'uct A Pr"'uct B "a#es 2per unit3 As. 100 As. 120 Consu1ption of 1ateria# 2 'gs 3 'gs Materia# cost As. 10 As. 1! Direct wage cost As. 1! As. 10 Direct e-penses As. ! As. $ Mac0ine 0ours used 3 0rs 2 0rs. Over0ead e-penses 5i-ed As. ! As. 10 %ariab#e As. 1! As. 20 2a3 Co11ent on t0e profitabi#it/ of eac0 product 2bot0 use t0e sa1e raw 1ateria#3 w0en 2i3 7ota# "a#es potentia# in units is #i1itedV 2ii3 7ota# sa#es potentia# in va#ue is #i1itedV 2iii3 Aaw 1ateria# is in s0ort supp#/V and Giv3 roduction capacit/ 2in ter1 of 1ac0ine 0ours3 is t0e #i1iting factor. 2b3 .ssu1ing raw 1ateria# as t0e 'e/ factor4 avai#abi#it/ of w0ic0 is 104000 'g and 1a-i1u1 sa#es potentia# of eac0 product being 34!00 units4 find out t0e product 1i- w0ic0 wi## /ie#d t0e 1a-i1u1 profit. NI.C.&...4 InterO S"0uti"n : 2a3 Margina# Cost "tate1ent roduct . : As @ er <nit As @ er <nit

"e##ing rice 100 120 Direct Materia#s 10 1! Direct &ages 1! 10 Direct ,-penses ! $ %ariab#e Over0eads 1! 20 Margina# Cost 4! !1 Contribution 1argin !! $G @% ratio !! H !).! H Contribution per 'g. of 1ateria# 2).! 23 Contribution per 1ac0ine 0our 1+.3 34.!

150 C"++ent$: 213 &0en tota# sa#es potentia# in units is a #i1iting factor4 : is 1ore profitab#e as it is 1a'ing a #arger contribution 1argin per unit as co1pared to .. 223 &0en tota# sa#es potentia# in va#ue is a #i1iting factor4 sti## : is 1ore profitab#e as its @ % ratio is 1ore t0an t0at of .. 233 &0en raw 1ateria# is in s0ort supp#/4 . is 1ore profitab#e as its contribution per 'g of 1ateria# is 1ore t0an t0at of product :. 243 &0en production capacit/ is #i1ited4 : is 1ore profitab#e as it 1a'es #arger contribution per 1ac0ine 0our t0an .. 2>oteC :est position is reac0ed w0en contribution per unit of 'e/ factor is 1a-i1u13 2b3 &0en raw 1ateria# is a 'e/ factor4 . is 1ore profitab#e to produce as its contribution per 'g of 1ateria# is 0ig0er t0an :. If 34!00 units of . are 1anufactured4 tota# 1ateria# consu1ption wi## be )4000 'g 2i.e. 3!400 - 2 'g3. 70e ba#ance 34000 'g of 1ateria# can be used to 1anufacture 14000 units 23000 'g R 33 of :. 70e tota# contribution b/ t0is product 1i- wi## be C Contribution roduct .4 34!00 units F As. !! eac0 As. 14 G24!00 roduct :4 14000 units F As. $G eac0 As. $G4000 7ota# As. 24 $14!00 70is sa#es(1i- wou#d give 1a-i1u1 contribution4 t0erefore 1a-i1u1 profit. rofit figure cannot be ca#cu#ated as tota# fi-ed cost is not given in t0e ;uestion. I00u$tr#ti"n: * . co1pan/ produces a sing#e product w0ic0 is so#d b/ it present#/ in t0e do1estic 1ar'et at As. )! per unit. 70e present production and sa#es is 404000 units per 1ont0 representing !0 H of t0e capacit/ avai#ab#e. 70e cost data of t0e product are as underC %ariab#e costs per unit As. !0 5i-ed costs per 1ont0 As. 10 #a'0s 7o i1prove t0e profitabi#it/4 t0e 1anage1ent 0as 3 proposa#s on 0and as under C 2a3 to accept an e-port supp#/ order for 304000 units per 1ont0 at a reduced price of As. $0 per units4 incurring additiona# variab#e costs of As. ! per unit towards e-port4 pac'ing4 duties etc.

151 2b3 to increase t0e do1estic 1ar'et sa#es b/ se##ing to a do1estic c0ain stores 304000 units at As. !! per unit4 retaining t0e e-isting sa#es at t0e e-isting price. 2c3 to reduce t0e se##ing price for t0e increased do1estic sa#es as advised b/ t0e sa#es depart1ent as under C roduce se##ing price per unit b/ Increase in sa#es e-pected As. 2in units3 5 104000 8 304000 11 3!4000 repare a tab#e to present t0e resu#ts of t0e above proposa#s and give /our co11ents and advice on t0e proposa#s. NI.C.&...4 Inter1ediateO S"0uti"n : roposa# 2c3 roposa# 2a3 roposa# 2b3 rice reduction resent K resent K over e-port e-port present #eve#s Leve# Leve# I or II or order order III "e##ing price per )! $0 )! !! )0 $) $4 unit 2As.3 Less C %ariab#e cost er unit !0 !! !0 !0 !0 !0 !0 2As.3 Contribution 2! ! 2! ! 20 1) 14 per unit 2As.3 404000 304000 404000 304000 !04000 )04000 )!4000 "a#es 2inunits3 Contribution 2As. In #a'03 10 1.! 10 1.! 10 11.G 10.! 7ota# As. In

1 1 . ! 1 1 . ! 1 0 1

#a'0s3 N"te: 5i-ed cost 0as been e-c#uded as t0e/ wou#d re1ain t0e sa1e under a## a#ternatives.

152 C"++ent = A'(i$e: 213 roposa# to se## )04000 units 2under proposa# PCQ II3 at a reduced price of As. $) is 1ost profitab#e4 as it wou#d give 1a-i1u1 contribution of As. 11.G #a'0s. 223 :etween proposa# 2a3 and 2b3 t0ere is no difference in profitabi#it/. Sowever4 it is advisab#e to accept to accept e-port order as t0ere is no danger of co1petition in t0e do1estic 1ar'et. It 1a/ 0appen t0at do1estic c0ain stores 1a/ starts se##ing at #ower price. 233 70ere is a profitabi#it/ of going wrong in esti1ating sa#e de1and at reduced pricesV we 1a/ not be ab#e to ac0ieve sa#es of )04000 units at reduced price of As. $). 70erefore4 it is advisab#e to go for e-port order. I00u$tr#ti"n ? 6 "ports "pecia#ists Ltd. are fa1ous for specia#i6ed 1anufacture of ;ua#it/ c0es boards sets. resent#/4 t0e co1pan/ is wor'ing be#ow c0ess boards sets in t0e nationa# 1ar'et at As. 1!0 per unit. During .pri#4 1GG44 $00 units were so#d w0ic0 is t0e regu#ar sa#es vo#u1e for eac0 1ont0 a## t0roug0 t0e /ear. 70e unit cost of production is C Direct Materia#s As. $0 Direct Labour As. 30 5actor/ Over0ead As. 30 "e##ing and ad1inistration Over0ead As. 1! 70e co1pan/ 0as received an e-port order on 20(4(1GG4 for supp#/ of $00 units to be dispatc0ed b/ 30($(1GG4. Sowever4 t0e order stipu#ates t0e price per unit at As. 100 on#/. 70e cost ana#/sis indicated t0at t0e cost of direct 1ateria# and direct #abour t0at are to be incurred on t0e e-port order wou#d be sa1e a1ount per unit as t0e regu#ar #ine of production. Sowever an a1ount of As. 24000 wi## 0ave to be incurred on specia# pac'ing4 #abe#ing get up etc. >o additiona# factor/ se##ing or ad1inistrative over0ead costs wou#d be incurred in e-ecuting t0e e-port order since t0e fir1s is operating be#ow nor1a# capacit/. <sing differentia# cost ana#/sis 1et0od4 prepare t0e inco1e state1ent to s0ow w0et0er t0e acceptance of t0e e-port order wou#d be profitab#e to t0e co1pan/. .ssu1ptions and co11ents if an/ 1a/ be given separate#/. NI.C.&...4 Inter1ediateO 15& S"0uti"n :

,-isting osition wit0out e-port order <nits for 2 1ont0s 2nos.3 14200

,-port order differentia# figures

ropose d position wit0 e-port order

As. As. As. "e##ing price per unit 1!0 100 (( "a#es 2.3 14+04000 $04000 24404000 Direct Materia#F As. $0 p.u. )24000 3$4000 140+4000 Direct Labour F As. 30 p.u. 3$4000 1+4000 !44000 5actor/ Over0eads 3$4000Y (( 3$4000 "pecia# pac'ing4 #abe#ing etc. (( 24000 24000 "e##ing E .d1in. Over0eads @ As. 1! p.u. 2for 2 1ont0s3 1+4000 (( 1+4000 7ota# Cost 2:3 14$24000 !$4000 241+4000 rofit 2 . ? : 3 1+4000 44000 224000 $00 units p.1. - As. 30 - 2 1ont0s D As. 3$4000 A$$u+)ti"n$ = C"++ent$ : 213 .s t0ere is no c0ange in factor/4 se##ing or ad1inistrative over0eads costs4 t0ese over0eads 0as been ta'en as fi-ed. Sence4 t0e/ are irre#evant to t0e decision of accepting e-port order. 223 70e co1pan/ can 1anufacture $00 units for e-port order in Ma/ and =une 1GG4 as it 0as a spare capacit/ of +00 units in two 1ont0s. C"nc0u$i"n: 70e e-port order s0ou#d be accepted as it wou#d give additiona# profit of As. 4000. I00u$tr#ti"n: 2 L Ltd. 0as two factories4 one at Luc'now and anot0er at une producing )4200 tons and 104+00 tonnes of a product against t0e 1a-i1u1 production capacit/ of G4000 and 114++0 tons respective#/ at Luc'now and une. 10. of t0e raw 1ateria# introduced is #ost in t0e production process. 70e 1a-i1u1 ;uantit/ of raw 1ateria# avai#ab#e #oca##/ is $4000 and 134000 tons at As. )20 and As. )2G per tones at Luc'now and une respective#/. 5or t0e additiona# needs a supp#ier of :0opa# is read/ to supp#/ raw 1ateria# at a factor/ site at As. )G2 ton.

#a'0s and As. 32.G4 #a'0s and fi-ed costs are As. 1+ #a'0s and As. 24.+4 #a'0s respective#/ for Luc'now and une factor/. 70e output is so#d at a se##ing price of As. 144!0 and As. 144$0. Jou are re;uired to co1pute t0e cost per tone and net profit earned in respect of eac0 factor/. Can /ou suggest an/ ot0er a#ternative production p#an for bot0 t0e factories wit0out an/ c0ange in present tota# output of 14+04000 tons w0ereb/ t0e co1pan/ 1a/ earn opti1u1 profit. NC... 5ina#O S"0uti"n : "tate1ent of cost per tone and net profit earned in respect of eac0 factor/ Luc3n"B Pune resent roduction 2tones3 )4200 R$. R$. Cost of raw 1ateria# 2As. In #a'0s3 !G.04 +).4+ 2Aefer to wor'ing note 13 Ot0er variab#e costs 2As. In #a'0s3 22.32 32.G4 5i-ed costs 2As. In #a'0s3 1+.00 24.+4 7ota# cost 2As. In #a'0s3 GG.3$ 14!.2$ Cost per ton2As.3Ctota# cost@production 143+0 1434! in tones "e##ing price 2As.3 per tone 144!0 144$0 )0 11! >et profit per ton 2As.3 C 2". .?cost per ton3 7ota# net profit 2As. In #a'0s3 As.2)0 - )4200 tons3 2As. 11! 104+00 tons3 7ota# profit of t0e co1pan/ 2As. !.04 #a'0s K As. 12.42 #a'0s3 = As. 1).4$ #a'0s

156 Co1putation of contribution per ton of output Luc3n"B Pune Ma-i1u1 production capacit/ 2tones3 G4000 114++0 resent production 2tones3 )4200 104+00 Cost per ton of output C As. As. Cost per ton of output 1anufactured fro1 Loca##/ purc0ased raw 1ateria# +00 +10 2Aefer to wor'ing note 23 Cost per ton of output 1anufactured fro1 Materia# purc0ased fro1 :0opa# ++0 ++0 2Aefer to wor'ing note 33 Ot0er variab#e cost 2As.3 310 30! 2As. 2As.22.32 32.G4 #a'0s R #a'0s R )4200tons3 104+00 7ota# variab#e cost 14110 1411! 2w0en 1ateria# is purc0ased #oca##/3 7ota# variab#e cost 141G0 141+! 2w0en 1ateria# is purc0ased fro1 :0opa#3 "e##ing rice per ton 2As.3 144!0 144$0 Contribution per ton of output C 2" ? %3 340 34! 2144$0 2Loca##/ purc0ased raw 1ateria#3 2144!0 ? ? 141103 1411 Contribution per ton of output 2" ? %3 2$0 2)! 2144$0 2w0en 1ateria# was purc0ased fro1 2144!0 ? ? :0opa#3 141G03 70e priorit/ to produce 1+4000 of tota# output depends on141+ contribution per ton fro1 Pri"ri C"ntri.uti"n tA )er unit une factor/ 2#oca# purc0ase of raw 1ateria#3 34! I 340 II Luc'now factor/ 2#oca# purc0ase of raw 1ateria#3 2)! III une factor/ 2raw 1ateria# purc0ased fro1 :0opa#3 2$0 I% Luc'now factor/ 2raw 1ateria# purc0ased fro1 :0opa#3

152 "uggested a#ternative production p#an to earn opti1a# profit roduction Output 2in tones3 Aaw priorit/ Luc'now une 7ota# 1ateria# input 2in tones3 I 114)00 tons 134000 (( 114)00 114)00 II !4400 tons $4000 !4400 (( !4400 III 211+00 ? 200 1+0 1 + 0 I% )20 tons 2ba#ancing figure3 +00 )42+0 tons3 )20

11)003 1+0 tons

((

) 2 0

20<000 2<120 11<::0 1:<000 ,"r3in% N"te : 1.

Luc3n"B Pune resent production output 2for1a#3 )4200 104+00 7ota# raw 1ateria# re;uired for resent production 2tons3 +4000 124000 N)4200 - 100 R G0O N104+00 - 100 R G0O Aaw 1ateria# procured #oca##/ 2tones3 $4000 124000 Aaw 1ateria# procured fro1 :0opa# 24000 (( Cost of raw 1ateria# purc0ased Loca##/ and fro1 :0opa# !G.04 +).4+ 2124000 - As. )2G3 2As. In #a'0s3 2As. )20 -$4000K As. )G2 - 240003 Cost per ton of output Manufactured fro1 #oca##/ +00 +10 urc0ased raw 1ateria# 2in As.3 NAs.)20 - 100RG0O NAs.)2G - 100RG0O Cost per ton of output Manufactured fro1 1ateria# ++0 ++0

2. 3.

155 I00u$tr#ti"n ? 5 U,D Ltd. 1anufacturing two products and * and se##s t0e1 at As. 21! and As. 320 per unit respective#/. 70e variab#e costs per unit are as underC Pr"'uct P#rticu0#r$ Pr"'uct P E R$. R$. R#B M#teri#0$ : Materia# ? L 22.00 2+.00 Materia# ? J +.00 32.00 Direct B#%e$ 8R$. 2 )er 0#."ur -"ur9 Depart1ent ? . 3$.00 !4.00 Depart1ent ? : Depart1ent ? c !4.00 (( Depart1ent ? D (( )2.00 1+.00 3$.00

%ariab#e over0eads 23.00 14.30 70e co1pan/ procures raw 1ateria#s against i1port #icense. 70e co1pan/ operates at sing#e s0ift a da/ of + 0ours for 300 da/s in a /ear. 70e nu1ber of wor'1en engaged is 304 1$4 1+ and 24 in depart1ent .4 :4 C and D respective#/. >eit0er t0e wor'ers are subject to transfer fro1 one depart1ent to anot0er nor is an/ new recruit1ent possib#e at present. 5i-ed costs are As. 124000 per 1ont0. Jou are re;uired to find out t0e fo##owing C 2a3 t0e product 1i- to /ie#d 1a-i1u1 profit. 2b3 70e 1ost profitab#e product if on#/ one product is to be 1anufactured. &0et0er t0e answer wi## differ if #icense to i1port raw 1ateria# is re#eased on#/ for As. 14+04000 NC...4 5ina#O S"0uti"n: roduct wise contribution per direct #abour 0our Pr"'uct Pr"'uct P E R$. R$. 2As. "e##ing price per unit 21! 320 7ota# Aaw 1ateria# cost per unit 22 - As. +3 30 2As. 2+ K As. 323 $0 Direct &ages per unit 2As. 3$ K As. 1+ K As. !43 10+ 2As. !4 K As. 3$ K As. )23 1$2

15: %ariab#e over0eads per unit 23 14.30 7ota# variab#e cost per unit 1$0 23$.30 Contribution per unit 2"p ? %c3 !4 +3.)0 Direct #abour 0ours per unit 1+ 2) Contribution per direct #abour 0our 2contribution per DLS per unit3 3 3.10 70roug0 t0e contribution per direct #abour 0our of production * is better but t0ere is a #i1itation t0at wor'ers in eac0 depart1ent can neit0er be interc0anged nor new#/ recruited4 0ence due to t0is fo##owing two a#ternatives are possib#e and co1pan/ wi## 0ave t0is fo##owing two a#ternatives are possib#e and co1pan/ wi## 0ave to c0oose between t0e two. A0tern#ti(e 7 I : rocuring 44+00 units of product * and uti#i6ing t0e re1aining avai#ab#e 0ours of #abour for 1a'ing units of product as nu1ber of 0our in depart1ent D are on#/ !)4$00 sufficient to produce on#/ 44+00 units of product * A0tern#ti(e 7 II : roducing 44+00 units of product and uti#i6ing t0e re1aining avai#ab#e 0ours of #abour for 1a'ing units of product * as nu1ber of 0ours in depart1ent C are on#/ 434200 sufficient to produce on#/ 44+00 units of product . St#te+ent "! )r"'uct +i1 un'er #0tern#ti(e I Depart1ent .vai#ab#e Ae1ainin Sours Sours re;uired for g 0ours 44+00 units of * 2a3 2b3 c D 2a3 ? Srs @ units of product <nits of produ ct

2d3 2e3D2c3 2b3 @2d3 434200 2+4+00 $ &>2 44+00 . )24000 &> 1 : 3+4400 2+4+00 G4$00 3 34200 C 434200 (( 434200 G 44+00 D !)4$00 !)4$00 >IL (( ((

70e above tab#e s0ows t0at out of t0e avai#ab#e 0ours under a#ternative 1V 44+00 units of product * and 34200 units of roduct can be 1ade. 70is wou#d resu#t in G4$00 id#e 0ours in depart1ent . and 144400 id#e 0ours in Depart1ent D.

15; St#te+ent "! Pr"'uct +i1 un'er #0tern#ti(e II Depart1ent .vai#ab#e Ae1aining <nits Sours Srs @ Sours 0ours of re;uired units of product for 44+00 product units of * 2a3 2b3 c D 2a3 ? 2b3 2d3 2e3D2c3 @2d3 . )24000 2+4+00 434200 G &> 2 44+00 : 3+4400 144400 244000 $ 44000 C 434200 434200 (( (( (( D !)4$00 (( !)4$00 12 44+00 70e above tab#e s0ows t0at out of t0e avai#ab#e 0ours under a#ternative IIV 44+00 units of product and 44000 units of product * can be 1ade. 70is wou#d resu#t in )4200 id#e 0ours in depart1ent . and G4$00 id#e 0ours in depart1ent D rofit state1ent under above a#ternatives.
roduct 5irst a#ternative "econd a#ternative <nit Contribution .1ount .<. 2As.3 2As.3 .1ou <nit Contributi nt on .<. 2As. 2As.3 3 34200 !4.00 14)24+00 44+00 !4.00 24!G4200 * 44+00 +3.)0 44014)$0 44000 +3.)0 34344+00 7ota# contribution !4)44$$0 !4G44000 Less C fi-ed cost ... 14444000 14444000 AO5I7 44304!$0 44!04000

Co11ents4 a#t0oug0 contribution per direct #abour 0our is 1ore in case of product *4 it is not advisab#e to produce 44+00 units of * first as it wou#d resu#t in 1ore id#e 0ours in so1e depart1ents4 vi6.4 depart1ent . and D as co1pared to t0at of second a#ternative. It is4 t0erefore4 second a#ternative 0as given 0ig0er profit figure. Sence second a#ternative is t0e 1ost profitab#e product 1i-. "tate1ent of 1ost profitab#e product if on#/ one product is to be 1anufactured. Pr"'uct Pr"'uct P E R$. R$. Contribution per unit 2As.3 C 2a3 !4.00 +3.)0 Ma-i1u1 possib#e output 2in units3 C 2:3 44+00 44+00 7ota# contribution D 2.3 - 2:3 24!G4200 44014)$0 preferred as it wou#d give 1ore contribution. roduct * is to be

be 1anufactured and #icense to i1port t0e raw 1ateria# is on#/ wort0 As. 14 +04000. Pr"'uct P Pr"'uct E Aaw 1ateria# re;uired .<. 2As.3 30 $0 er1issib#e output 2in units3 out of i1ported Materia# of As. 14+04000 $4000 34000 44+00 44+00 Ma-i1u1 output possib#e in t0e avai#ab#e 0ours 44+00 34000 Output possib#e 'eeping in view t0e avai#abi#it/ Of i1ported 1ateria# and #abour 0ours 2units3 Contribution per unit 2As.3 !4 +3.)0 Contribution per rupees of 1ateria# 1.+0 1.3G! 7ota# contribution C 2As.3 24!G4200 24!14100 244+00 units 234000 units - As. !4.003 - As. +3.)03 roduct is to be preferred 2i.e. answer differs3 because it gives 0ig0er contribution per rupee of 1ateria#4 w0ic0 is a #i1iting factor. ,"r3in% n"te$ : 1. Co1putation of tota# Labour 0ours avai#ab#eC Depart1ents Da/s >o. or Srs @ 2a3 2c3 wor'1en da/s 2b3 2d3 . 30 300 + )24000 : 1$ 300 + 3+4400 C 434200 D 24 300 + !)4000 2. &ages 2As.3 2a3 7ota# Sours 2e3 D 2b3 2c3 300 + 1+

Co1putation of 0ours re;uired per unit of eac0 product 5irst a#ternative "econd a#ternative Srs &ages &ages Srs &ages @ 2c3 D 2As.3 2f3 D Sr @ Sr 2a3 R 2b3 2d3 2d3 R 2As.3 2As.3 2e3 2b3 2e3 . 3$ $ $ !4 $ G : 1+ $ 3 3$ $ $ C !4 $ G (( (( (( D (( (( (( )2 $ 12 7ota# 0ours per unit 1+ 2)

Depart1ent

1:1 I00u$tr#ti"n :: . 1u#ti product co1pan/ 0as t0e fo##owing costs and output data for t0e #ast /ear. P#rticu0#r$ Pr"'uct C4 R "a#es 1i- 40 H 3! H 2! H As. As. As. "e##ing price 20 2! 30 %ariab#e cost per unit 10 1! 1+ 7ota# fi-ed cost 14!04000 7ota# s#es !4004000 70e co1pan/ proposes to rep#ace product U

b/ product ". ,sti1ated cost and output data are C "a#es 1i- !0 H 30 H 20 H "e##ing price 20 2! 2+ %ariab#e cost per unit 10 1! 14 7ota# fi-ed costs 14!04000 7ota# sa#es !4004000 .na#/6e t0e proposed c0ange and suggest w0at decision t0e co1pan/ s0ou#d ta'e. NI.C.&...4 InterO S"0uti"n : 213 Co1putation of resent rofit and :, P#rticu0#r$ Pr"'uct C 4 R R$. R$. R$. "e##ing rice 20 2! 30 %ariab#e cost 10 1! 1+ Contribution 10 10 12 @% Aatio !0 H 40 H 40 H "a#es Mi- 40 H 3! H 2! H 100 H Contribution per rupee of sa#es 20 H 14 H 10 H 44 H 2 @% ratio - sa#es 1i-3 "a#es As. !00000 7ota# contribution 2As. !4004000 - 44 R 1003 As. 220000 5i-ed Costs As. 1!0000 rofit As. )0000 :rea'(even point 2As. 14!04000 - 100 R 443 As. 340G0G

1:2 223 Co1putation of roposed rofit and :, P#rticu0#r$ Pr"'uct C R$. 4 R$. R R$.

"e##ing rice 20 2! 2+ %ariab#e cost 10 1! 14 Contribution 10 10 14 @% Aatio !0 H 40 H !0 H "a#es Mi- !0 H 30 H 20 H 100 H Contribution per rupee of sa#es 2! H 12 H 10 H 4) H 2 @% ratio - sa#es 1i-3 "a#es As. !00000 7ota# contribution 2As. !4004000 4) R 1003 As. 23!000 5i-ed Costs As. 1!0000 rofit As. +!000 :rea'(even point 2As. 14!04000 - 100 R 4)3 As. 31G14G . co1parison of

t0e present situation and t0e proposed situation s0ows t0at if product U is rep#aced b/ product "4 profit wou#d increase b/ As. 1!4000 and brea'even point wi## reduce b/ As. 21)$0@(. 70is c0ange is beneficia# and t0erefore product U 1a/ be dropped4 provided a## ot0er re#evant factors re1ain constant. I00u$tr#ti"n : ;. 8M#3e "r BuA9 .uto arts Ltd. 0as an annua# production of G04000 units for a 1otor co1ponent. 70e co1ponentQs cost structure is as be#ow C R$. Materia# 2)0 per unit Labour 22! H fi-ed3 1+0 per unit ,-penses %ariab#e G0 per unit 5i-ed 13! per unit T"t#0 256 )er unit 2a3 70e purc0ase 1anager 0as an offer fro1 a supp#ier w0o is wi##ing to supp#/ t0e co1ponent at As. !.40. s0ou#d t0e co1ponent be purc0ased and production stopped I 2b3 .ssu1e t0e resources now used for t0is co1ponents 1anufacture are to be used to product anot0er new product for w0ic0 t0e se##ing price is 4+!.

1:&

NC... In

In t0e #atter case t0e 1ateria# price wi## be As. 200 per units G04000 units of t0is product can be produced on t0e sa1e cost basis above for #abour and e-penses. Discuss w0et0er it wou#d be advisab#e to divert t0e resources to 1anufacture t0e new products on t0e footing t0at t0e co1ponent present#/ being produced wou#d instead of being produced4 be purc0ased fro1 t0e 1ar'et. S"0uti"n : 2a3 "tate1ent s0owing t0e variab#e cost and purc0ase cost of co1ponent. <sed b/ .uto arts Ltd. T"t#0 !"r V#ri#.0e c"$t Per ;0<000 Unit unit$ R$. R$. Materia#s 2)0 24434004000 Labour 13! 14214!04000 ,-penses G0 +14004000 7ota# %ariab#e cost 2w0en co1ponent is produced 4G! 444!4!04000 Cost of purc0ase 2w0en co1ponent is purc0ased !40 44+$4004000 4! 404!04000 Difference4 e-cess of purc0ase price over variab#e cost 5i-ed e-penses not being affected4 it is evident fro1 t0e above state1ent t0at if t0e co1ponent is purc0ased fro1 t0e outside supp#ier4 t0e co1pan/ wi## 0ave to spend As. 4! per unit 1ore and on G04000 units t0e co1pan/ wi## 0ave to spend As. 404!04000 1ore. 70erefore4 t0e co1pan/ s0ou#d not stop t0e production of t0e co1ponent. 2b3 70e fo##owing state1ent s0ows t0e cost i1p#ications of t0e proposa# to divert t0e avai#ab#e faci#ities for a new product. "tate1ent s0owing t0e contribution per unit if t0e e-isting resources are used for t0e production of anot0er new product. R$. R$. "e##ing price of t0e new product per unit 4+! Less C Materia# cost 200 Labour 2variab#e3 13! ,-penses 2variab#e3 G0 42! Contribution per unit $0 Loss per unit if t0e present co1ponent is purc0ased urc0ase price of t0e e-isting product !40 Less C 7ota# %ariab#e cost of producing t0e e-isting co1ponent ,-cess cost 4!

4G!

of anot0er new product4 it wi## benefit b/ As. 1!4 i.e. As. $0 ? 4! per unit. On G04000 units t0e co1pan/ wi## save As. 134!04000. 70erefore4 it is advisab#e to divert t0e resources to 1anufacture. 70e new product and t0e co1ponent present#/ being produced s0ou#d be purc0ased t0e 1ar'et. 70is is a#so broug0t out b/ t0e fo##owing figures C R$. 7ota# cost producing t0e co1ponent 2G04000 - $)!3 2.3 $40)4!04000 Cost of purc0asing t0e co1po0nent 2G04000 - !403 44+$4004000 5i-ed ,-penses4 not 0aving been saved 2G04000 - 1+0 14$240040 i.e. $)! ? 4G!3 00 $44+40040 00 Less C Contribution fro1 t0e new product 2 G04000 - $03 !44004000 7ota# cost if co1ponent is purc0ased and new product is 1ade 2:3 "avings 2. ? :3 134!04000 I00u$tr#ti"n : 10. 8E1)"rt )r")"$#0$9 %ina/a' Ltd. opening at )! H #eve# of activit/ produces and se##s two products . and :. t0e cost s0eets of t0e two products are as under C Pr"'uct A Pr"'uct B <nits produced and so#d $00 400 Direct Materia#s As. 2.00 As. 4.00 Direct Labour 4.00 4.00 5actor/ over0eads 240 H fi-ed3 !.00 3.00 +.00 !.00 "e##ing and ad1inistration over0eads 2$0H fi-ed3 7ota# cost per unit 1G.00 1$.00 "e##ing price per unit 23.00 1G.00 5actor/ over0eads are absorbed on t0e basis of 1ac0ine 0our w0ic0 is #i1iting 2'e/3 factor/. 70e 1ac0ine 0our rate is As. 2 per 0our. 70e co1pan/ receives an offer fro1 Canada for t0e purc0ase of product . at a price of As. 1).!0 per unit. .#ternative#/4 t0e co1pan/ 0as anot0er offer fro1 t0e Midd#e ,ast for t0e purc0ase of product : at a price of As. 1!.!0 per unit. On bot0 t0e cases4 a specia# pac'ing c0arge of !0 p. per unit 0as to be borne b/ t0e co1pan/.

!4G44004000

1:6 70e co1pan/ can accept eit0er of t0e two e-port order and in eit0er case t0e co1pan/ can supp#/ suc0 ;uantities as 1a/ be possib#e to be produced b/ uti#i6ing t0e ba#ance of 2!H of its capacit/. 4"u #re re@uire' t" )re)#re: 2a3 . state1ent s0owing t0e econo1ics of t0e two e-port proposa#s giving /our reco11endations as to w0ic0 proposa# s0ou#d be accepted. 2b3 . state1ent s0owing t0e overa## profitabi#it/ of t0e co1pan/ offer incorporating t0e e-port proposa# reco11ended b/ /ou. NC. .. InterO S"0uti"n: 2i3 ,cono1ics of t0e two ,-port roposa#s Or'er Or'er !r"+ !r"+ C#n#'# !"r Mi''0e Pr"'uct A E#$t R$. !"r Pr"'uct Margina# Cost per unit Materia#s 2.00 4.00 Labour 4.00 4.00 %ariab#e factor/ over0eads 3.00 3.20 2.00 %ariab#e se##ing and ad1in. Over0eads "pecia# ac'ing c0arges 0.!0 0.!0 7ota# variab#e cost 12.)0 12.30 ,-port price per unit 1).!0 1!.!0 Contribution per unit 4.+0 3.20 "ince 1ac0ine 0our is t0e #i1iting 2Me/3 factor4 t0e contribution s0ou#d be #in'ed wit0 t0e 1ac0ine 0ours. 70is 0as been wor'ed out as fo##owsC Mac0ine 0our per unit 2.! 0our 1.! 0our Contribution per 1ac0ine 0our As. 1.G2 As. 2.13 roduct : /ie#d a better contribution per 1ac0ine 0our. 70e order fro1 t0e Midd#e ,ast s0ou#d t0erefore be accepted as co1pared to t0e Canadian offer.

1:2 ,"r3in% N"te A B T"t#0 5actor/ over0eads per unit As. ! As. 3 Mac0ine 0our rate per 0our As. 2 As. 2 Mac0ine 0our per unit 2.! 1.! <nits produced $00 400 Mac0ine 0our uti#i6ed 14!00 $00 24100 Lever of activit/ )! H Ma-i1u1 0ours at 100H activit/V 2100 R )! - 100 D 24+000 0ours Capacit/ 0ours avai#ab#e for e-port 24+00 ? 2100 D )00 0ours 2ii3 "tate1ent of overa## profitabi#it/ T"t# Unit$ Pr"'uct Pr"'uct 0 A B R$. 200 :25 R$. R$. Materia#s 14200 344$+ 44$$+ Labour 24400 344$+ !4+$+ 5actor/ Over0eads C %ariab#e 14+00 14!$1 343$1 5i-ed 14200 4+0 14$+0 14G20 14)34 34$!4 "e##ing and ad1in. Over0eads C %ariab#e 5i-ed 24++0 14200 440+0 "pecia# ac'ing 7ota# Costs 114400 12414! 224!4! "a#es 134+00 144+3G 2+4$3G rofit 24400 24$G4 !40G4 ,"r3in% n"te$: 1. >u1ber of <nits of : C "a#es in t0e 0o1e 1ar'et 1ar'et )00 @ 0r @ 1.! +$) 2.

400 ,-port 4$) 7 o t a #

"a#es va#ue of : C 400 units in t0e 0o1e 1ar'et F As. 1G@( As. )4$00 4$) units for e-port F As. 1!.!0 As. )423G 7ota# As. 144+3G

I00u$tr#ti"n:11. 8Deci$i"n #."ut +ec-#niO#ti"n9 70e present output detai#s of a 1anufacturing depart1ent are as fo##ows C

1:5 .verage output per wee' 4+4000 units fro1 1$0 e1p#o/ees "a#eab#e va#ue of output As. $4004000 Contribution 1ade b/ output towards fi-ed e-penses and profit As. 24404000 70e board of directors p#ans to introduce 1ore 1ec0ani6ation into t0e depart1ent at capita# cost of As. 14$04000. 70e effect of t0is wi## be to reduce t0e nu1ber of e1p#o/ees to 1204 and increasing t0e output per individua# e1p#o/ee b/ $0 H. 7o provide t0e necessar/ incentive to ac0ieve t0e increased output4 t0e :oard intends to offer a 1 H increase on t0e price wor' rate of Ae. 1 per unit for ever/ 2 H increase in average individua# output ac0ieved. NC... InterO S"0uti"n : ,"r3in% N"te$ : 1. resent average output e1p#o/ee and tota# future e-pected output per wee' resent average output per e1p#o/ee per wee' = = = 7ota# resent Output 1 7ota# >u1ber of resent e1p#o/ees 4+4000a 1$0 e1p#o/ees 300 units

7ota# future e-pected output per wee' = = = 2. 7ota# >u1ber of future e1p#o/ees Npresent output K $0 H of present output per e1p#o/eeO 120 e1p#o/ees 2300 units K $0 H - 300 units3 !)4$0 units

resent and proposed price wor' rateC resent price wor' rate D Ae. 1.00 per unit roposed price wor' rate D resent rice wor' Aate K 30 H Ae. 1 = Ae. 1.00 K 0.30 = Ae. 1.30 per unit present sa#e price per unit.

3. unit.

1:: resent and proposa# sa#es price per unit present sa#e price per

resent "a#e price per unit D As. 12.!0 2As. $04000 R 4+4000 units3 roposed sa#e price per unit D As. 12.00 2As. 12.!0 ? 4H - As. 12.!03 4. resent 1argina# cost 2e-c#uding wages per unit3 C resent sa#es va#ue ? fi-ed e-penses E profit ? contribution towards present wages resent output 2units3 = = As. $4004000 ? As. 24404000 ? As. 4+4000 As. $.!0 per unit 4+4000 units "tate1ent of e-tra wee'#/ contribution 2infor1ation resu#ting fro1 t0e proposed c0ange of 1ec0ani6ation 1eant for boardQs eva#uation3 ,-pected sa#es units 2refer to wor'ing note 13 !)4$00 R$. R$. "a#es va#ue 2.3 $4G14200 2!)4$00 units - As. 123 2refer to wor'ing note 33 Margina# cost 2e-c#uding wages3 2:3 34)44400 2!)4$00 units - As. $.!03 2refer to wor'ing note 43 &ages C 2C3 )44+00 2!)4$00 units - As. 1.303 2refer to wor'ing note 23 7ota# 1argina# cost C 2D3 D N 2:3 K 2C3 O N 2.3 ? 2D3 O 24414G20 Less C resent Contribution 24404000 14G20 ,va#uationC "ince t0e 444G42+0 Margina# Contribution

Increase in Contribution 2per wee'3

1ec0ani6ation 0as resu#ted in t0e increase of contribution to t0e e-tent of As. 14G20 per wee'4 t0erefore t0e proposed c0ange s0ou#d be accepted.

1:; I00u$tr#ti"n: 12. 8Li+ite' !#ct"r 'eci$i"n9 . co1pan/ producing products P I,Q n P"IBM.Q using a sing#e production process4 0as t0e fo##owing cost data PIE SIGMA "e##ing price per unit 2As.3 20 30 %ariab#e cost per unit 2As.3 11 1$ Mac0ine 0ours re;uired per unit production 20rs3 1 2 Mar'et #i1itation 2units3 1#a'0 2.!#a'0 7ota# 1ac0ine 0ours avai#ab#e ? 4 #a'0s 5i-ed cost per annu1 ? As. 2$ #a'0s Considering t0e #i1iting factors of 1ac0ine 0ours and 1ar'et #i1itations4 /ou are re;uired to 2a3 Indicate t0e best co1bination of products to give opti1u1 contribution4 2b3 "0ow t0e additiona# 1ac0iner/ re;uire1ent to be aug1ented on renta# basis at an annua# rent of As. 1.! #a'0s per 1ac0ine to provide additiona# capacit/ of 304000 0ours per 1ac0ineV 2c3 C0ange in nu1ber to be if t0e annua# renta# c0arges reduce to As. 142!4000 per 1ac0ine NI.C.&...4 InterO S"0uti"n : Pr"'uct$ I, "IBM. 7ota# Mac0ine 0ours avai#ab#e 4 #a'0s Mar'et Li1itation 2units3 1 #a'0 2.!#a'0s 12 Mac0ine 0ours re;uired per unit of production 5i-ed cost per annu1 2As. In #a'0s3 4.00 "e##ing price per unit 2As.3 20 30 %ariab#e cost per unit 2As.3 11 1$ Contribution per unit 2As.3 G 14 Contribution per 1ac0ine 0our 2As.3 G ) Aan'ing 1 2 P#rticu0#r$ T"t#0

1;0 2a3 "tate1ent s0owing best co1bination of roduct Mi- towards opti1u1 contribution 14004000 14!04000 24!04000 roduction for 1ar'et de1and 2units3 7ota# Sours re;uired 14004000 34004000 44004000 7ota# Contribution 2As.3 G4004000 214004000 304004000 27ota# roduction - contribution per unit3 2b3 Co1putation of Ae;uire1ent of .dditiona# Mac0ines on Aenta# :asis
P#rticu0#r$ .nnua# rent per 1ac0ine 0aving capacit/ of 304000 0rs. additiona# units of "IBM. to be produced to 1eet t0e de1and 2additiona#3 Ae;uire1ent of 1ac0ine 0ours for production 214004000 - 23 24 004000 0rs. >u1ber of Mac0ines re;uired ) 1ac0ines 224004000 R 3040003 D $.$) 2i.e. $ K 13 213 In case $ 1ac0ines are 0iredV 7ota# net contribution fro1 $ rented 1ac0ines wit0 fu## capacit/ uti#i6ation 2As.3 34$04000 223 In case ) 1ac0ines are 0ired C 2i3 >et contribution fro1 $ 1ac0ines on fu## uti#i6ation. As. 14!04000 >o. of 14004000 units 1ar'et

= 2304000 0rs. - As. ) ? Aent As. 14!040003 - $ =

24104000 ? 14!04000 D $04000 - $ D 34$04000 2ii3 >et contribution

fro1 )t0 Mac0ine

= 204000 0rs. - As. ) ? As. 14!04000 D 21040003 34!04000 70us4 t0e net contribution wi## stand reduced b/ As. 104000 in case seven 1ac0ines are 0ired. It is4 t0erefore4 better to 0ire on#/ si- 1ac0ines. 2C3 In case t0e annua# renta# c0arges are reduced to As. 142!40004 t0e position wi## be as underV
>et contribution fro1 )t0 Mac0ine D 204000 0rs. - As. ) ? As. 142!4000

= As. 1!4000

1;1 70us4 t0e sevent0 1ac0ine wi## a#so give additiona# contribution of As. 1!4000. Sence4 in a## seven 1ac0ines 1a/ be ta'en on rent.

6.6 ECERCISE
6.6.1 O.Decti(e Eue$ti"n$ An$Ber in Brie! 1. Co11ent ? ricing decisions 1a/ be based on ercentage of profit on tota# cost 2. Co11ent ? ricing decisions 1a/ be based on percentage of profit on se##ing price. 3. ,nu1erate an/ two #i1itations of Margina# Costing 4. Co11ent ?1ajor #i1itation of Margina# Costing s t0at it is difficu#t to separate fi-ed and variab#e costs. 5. Co11ent(Margina# Costing is not app#icab#e to Contract Costing. 6. Co11ent profit vo#u1e ratio ignores price c0anges. 7. Define(opportunit/ Cost. 8. Define(Aep#ace1ent Cost 9. Define(>or1a# Cost 10. Define ?Differentia# Cost 11. Define .voidab#e cost 12. Define(<navoidab#e Cost 13. Define(differentia# Costing 14 Define Differentia# Cost .na#/sis. 1! Define Differentia# Costing Se0ect t-e c"rrect #n$Ber in e#c- "! t-e !"00"Bin%: 1. Measurab#e va#ue of an a#ternative use of resources is a3"un' Cost c3Opportunit/ cost b. I1puted cost d3 Differentia# cost 2. 70e decision 1a'er s0ou#d consider4 in case of #i1iting factor to 1a-i1i6e t0e rofit a. "a#es b3 Contribution c. %ariab#e cost d3 5i-ed cost

a. b. c. d.

On#/ 1argina# cost is re#evant On#/ fi-ed cost is re#evant 7ota# cost is re#evant >one of t0ese

4. Idea# product 1i- is decided in ter1s of a. "a#es b3 %ariab#e cost c. 7ota# cost d3 Margina# cost 5. . cost incurred in t0e past and 0ence irre#evant for current decisions 1a'ing is a. 5i-ed cost b3 Direct cost d. Discretionar/ cost d3 "un' cost 6. . cost t0at cannot be c0anged b/ an/ decision 1ade now is a. "un' cost b3 Opportunit/ cost c. Indirect cost d3 1i-ed cost 7. . s0ut down point is t0e point at w0ic0 a. Margina# cost and purc0ase price s0ou#d be considered b. Contribution is #ess t0an fi-ed cost c. Contribution is e;ua# to fi-ed cost d. >one of t0ese

8. In a decision situation w0ic0 one is t0e cost not #i'e#/ to contain a variab#e cost co1ponent a. Materia# b3 Labour c. Over0ead d3 Direct e-penses 9. In a situation w0en t0e decision is to be ta'en about acceptance or rejection of specia# orders w0ere t0ere is a sufficient id#e capacit/ w0ic0 one is not re#evant for decision 1a'ingQ a3.bsorption cost b3%ariab#e cost c. Differentia# cost d3 Incre1enta# cost 6.6.2 T-e"rA Eue$ti"n$ 1. &0at do /ou 1ean b/ #i1iting factorI Sow does t0e 1anage1ent e#ect t0e 1ost profitab#e 1i- t0e presence of a #i1iting factorI 2. 70e effect of price reduction is a#wa/s to reduce p@v ratio4 to raise t0e :, nd to s0orten t0e 1argin of safet/. ,-p#ain and i##ustrate /our views wit0 appropriate i##ustrations. 3. Sow does 1argina# cost differ fro1 tota# costI In w0at circu1stances4 if an/4 1a/ it be to t0e advantage of 1anufacturer to se## so1e of its products at price C a. be#ow tota# cost b. be#ow 1argina# cost.

1;& 4. &0at is 8cost and profit9I :ring out its i1portance. 5. 8 rofit(%o#u1e ana#/sis9 is a tec0ni;ue of ana#/6ing t0e costs and profits at various #eve#s of vo#u1eQ. ,-p#ain 0ow suc0 ana#/sis 0e#ps 1anage1ent.
6.6.& Pr#ctic#0 )r".0e+$

I##ustration 1C 5ro1 t0e fo##owing date /ou are re;uired to present. 1. 70e 1argina# cost of product - and / and t0e contribution per unit. 2. 70e tota# contribution and profits resu#ting fro1 eac0 of t0e suggested sa#es 1i-tures. articu#ars Direct Materia#s Direct Materia#s Direct &ages Direct &ages roduct er unit As. L J L J 10. !0 +. !0 3. 00

FFFFF FFFFF FFFFF FFFFF

%ariab#e e-penses 100H of direct wages per product. 5i-ed e-penses 2tota#3 +00 "a#es rice L 20.!0 and J 14.!0 "uggested sa#es 1i-esC .#ternatives . : FFFFF FFFFF >o of <nits LJ 100 1!0 200 2 0 0 1 !

2M.Co1. Oct. G)4 adapted3

8An$.: Contribution per <nitC roduct L( As. 44 roduct J( As. 23

1;* I00u$tr#ti"n 2 :
. 1anufacturer of pac'ing cases 1a'es t0ree 1ain t/pes(De#u-e4 Lu-ur/ and ,cono1/. Over0eads are incurred on t0e basis of #abour 0ours. &ages are paid at Ae. 1.00 per 0our. ,sti1ates for t0e cases s0ow t0e fo##owing C articu#ars De#uAs. Materia#s &ages Over0eads >et rofit @ Loss FFFFF FFFFF FFFFF FFFFF 10.00 $.00 12.00 2+.00 2.00 2$.00 104000 1).00 3.00 20.00 204000 G. 00 12. 00 Lu-ur/ As. +.00 3.00 ,cono1 / As. 3. 00

.verage "e##ing rice F F F F F .nnua# "a#es 2<nits3 FFFFF

70e 1anufacturer fe#t t0at 0e wou#d be we## advised to discontinue producing t0e De#u- and ,cono1/ cases even t0oug0 it wou#d 1ean t0at so1e of production faci#ities wou#d re1ain unused. Se cannot increase t0e sa#e of Lu-ur/ cases. It 0as been ascertained t0at $0H of t0e over0eads is fi-ed. Jou are re;uired to advise t0e 1anufacturer. 2M. Co1.4 Mar. G+4 adapted3
8An$.: Contribution per <nitC De#u-e( As. !.204 Lu-ur/( As. $.$04 ,cono1/( As. !.403

I00u$tr#ti"n & : "u/as0 Ltd. is considering #aunc0ing a new 1ont0#/ 1aga6ine at a se##ing price of 10 per cop/. "a#es of t0e 1aga6ine are e-pected to be !4004000 copies per 1ont0 but it is possib#e t0at t0e actua# sa#es cou#d differ ;uite significant#/ fro1 t0is esti1ate. 7wo different 1et0ods of producing t0e 1aga6ines are being considered and neit0er wou#d invo#ve an/ additiona# capita# e-penditure. 70e esti1ated production cost for eac0 of t0e two 1et0ods or 1anufacture4 toget0er wit0 t0e additiona# 1ar'eting and distribution costs of se##ing t0e new 1aga6ine4 are given be#ow C

1;6
%ariab#e costs "pecific 5i-ed Costs "e1i(variab#e costs C for 34!04000 copies for 44!04000 copies !4!04000 $4!04000 p.1. p.1. 44)!4000 !42!4000 p.1. p.1. !.!0 per cop/ +4004000 per 1ont0 !.00 per cop/ 124004000 per 1ont0

It 1a/ be assu1ed t0at t0e fi-ed cost e#e1ent of t0e se1i( variab#e cost wi## re1ain constant t0roug0out t0e range of activit/ s0own. 70e co1pan/ se##s a 1aga6ine covering re#ated topics to t0ose t0at wi## be inc#uded in t0e new pub#ication4 and conse;uent#/4 it is anticipated t0at sa#es of t0is e-isting 1aga6ine wi## be adverse#/ affected. It is esti1ated t0at for ever/ ten copies so#d of t0e new pub#ication4 sa#es of t0e e-isting 1aga6ine are as s0own be#ow C ( "a#es "e##ing rice %ariab#e Costs 24204000 copies per 1ont0
As. +.!0 per cop/ As. 3.!0 per cop/

As. +4004000 per "pecific 5i-ed costs 1ont0 Jou are re;uired to ca#cu#ate for eac0 production 1et0od C

1.

70e net increase in co1pan/ profit w0ic0 wi## resu#t fro1 t0e introduction of t0e new 1aga6ine4 at eac0 of t0e fo##owing #eve#s of activit/ C !4004000 44004000 $4004000 copies per 1ont0.

2.

70e a1ount b/ w0ic0 sa#es vo#u1e of t0e new 1aga6ine cou#d dec#ine fro1 t0e anticipated !4004000 copies p.1.4 before t0e co1pan/ 1a'es no additiona# profit fro1 t0e introduction of t0e new pub#ication. .nd a#so brief#/ identif/ an/ conc#usions w0ic0 1a/ be drawn fro1 /our ca#cu#ations. 2M.Co1.4 Oct. 014 adapted3

1;2 I00u$tr#ti"n * : 5ro1 t0e fo##owing data4 w0ic0 product wou#d /ou reco11end to be 1anufactured in a factor/4 ti1e being t0e 'e/ factor C er unit of roduct . : Direct Materia# 24 14 Direct Labour 2Ae. 1 per 0r3 2 13 %ariab#e Over0ead 22 per 0r3 4 $ "e##ing rice 100 110 "tandard ti1e to produce adapted3
8An$.: Contribution per "tandard SourC roduct .( As. 3!4 roduct :( As. 2!.$)3

2 0rs

3 0rs 2M.Co1. Mar. 044

I00u$tr#ti"n 6 : 5ro1 t0e fo##owing infor1ation /ou are re;uired to C a. Ca#cu#ate and present t0e 1argina# product cost and contribution per unit. b. "tate w0ic0 of t0e a#ternative sa#es 1i-es /ou wou#d reco11end to 1anage1entI and &0/I articu#ars er <nit Se00in% Price : 5or L 5or J Direct M#teri#0$ : 5or L 5or J Direct ,#%e$ : 5or L 5or J 5i-ed over0eads are of direct wages.
As.

FFFFF FFFFF FFFFF FFFFF FFFFF FFFFF

2 ! 2 0 + 0 $ 0 $ 0 4 0

As. )!4000 and variab#e over0eads are 1!0H

.#ternative "a#es Mi1. 2!00 units of product L and 2!00 units of product J. 2. >i# units of product L and 4000 units of roduct J. 3. 4000 units of roduct L and 1000 units of roduct J. 2M.Co1. Mar G$4 adapted3
8An$.: Contribution per <nitC roduct L( As. 204 roduct J( As. 403

1;5 I00u$tr#ti"n 2 : . pen 1anufacturer 1a'es an average net profit of As. 2!.00 per pen on a se##ing price of As. 143.00 b/ producing and se##ing $04000 pens4 or $0H of t0e potentia# capacit/. Sis cost of sa#es is C
As.

Direct Materia#s 3!.00 Direct &ages 12.!0 &or's Over0eads 2!0H 5i-ed3 $2.!0 "a#es Over0eads 22!H %ariab#e3 +.00 During t0e current /ear 0e intends to produce t0e sa1e nu1ber of pens but anticipates t0at 0is fi-ed c0arges wi## go up b/ b/ 10H w0i#e rates of direct #abour and direct 1ateria# wi## increase b/ +H and $H respective#/. :ut 0e 0as no option of increasing t0e se##ing price. <nder t0is situation4 0e obtains an offer for a furt0er 20H of 0is capacit/. &0at 1ini1u1 price wi## /ou reco11end for acceptance to ensure t0e 1anufacturer an overa## profit of As. 1$4)34000. 2M.Co1. Mar. 20004 adapted3
8An$.: "e##ing rice per <nit of +0H capacit/C As.13!.4G3

I00u$tr#ti"n 5 : 70e price structure of an e#ectric 5an 1ade b/ t0e %ija/a ,#ectric Co1pan/ Ltd. is as fo##ows C articu#ars er 5an
As.

Materia#s Labour %ariab#e Over0eads 5i-ed Over0ead rofit "e##ing rice

F F F F F $00 F F F F F 200 FFFFF 200 14000 F F F F F !00 FFFFF !00 FFFFF

24000

70is cost is based on 1anufacture of 14004000 fans p.a. 70e co1pan/ e-pects t0at due to co1petition4 t0e/ wi## 0ave to reduce t0e se##ing price. Sowever4 t0e/ want to 'eep t0e tota# profit infact.

1;: Jou are re;uired to prepare a state1ent s0owing t0e position4 if 1. 2. "e##ing price is reduced b/ 10H and "e##ing price is reduced b/ 20H. 2M.Co1. Oct. 20004 adapted3
8An$.: @% AatioC Option I(44.44H4 Option II(3).!H3

I00u$tr#ti"n 5 : Modern C0air Manufacturing Co1pan/ received an offer to se## 2!4000 outdoor patro c0airs to ,as/ Life Corporation. Modern C0air Manufacturing Co1pan/ produces 44004000 c0airs annua##/ b/ operating at +0H of fu## capacit/. Aegu#ar se##ing price for t0is t/pe of c0airs is 33. t0e c0airs re;uired are si1i#ar to t0ose current#/ being produced b/ Modern C0air Manufacturing Co1pan/. :udgeted annua# production costs fo##ows C
articu#ars

and ot0er e-penses are as

er <nit 7ota#

Aaw 1ateria# Direct Labour %ariab#e factor/ over0ead 5i-ed factor/ over0ead %ariab#e "e##ing Costs 5i-ed "e##ing and .d1inistration over0ead

FFFFF FFFFF FFFFF FFFFF FFFFF FFFFF

4.2! 1)4004000 !.)! 234004000 ).)! 314004000 (( 2!4004000 (( !H of sa#es price (( 144!04000

70e co1pan/ wants to earn a 1ini1u1 profit of Aupee one per c0air and no se##ing e-penses wi## be incurred for specia# order transaction. .ssu1e t0at nor1a# operations wi## not be affected b/ t0e specia# order and t0at regu#ar sa#es vo#u1e for t0e /ear is 44 004000 c0airs as initia##/ p#anned. Jou are re;uiredC

a.

&0at s0ou#d be t0e 1ini1u1 rice to be ;uoted b/ Modern C0air Manufacturing Co1pan/I

b.

repare an inco1e state1ent s0owing t0e position of t0e co1pan/ wit0out specia# order4 for specia# order and wit0 specia# order. 2M.Co1. Oct. 20044 adapted3
(Ans.: Minimum !rice to be quoted &s. *+.',)

1;; I00u$tr#ti"n : : . 1anufacturer 0as p#anned 0is #eve# of operation at !0H of 0is p#ant capacit/ of 304000 units. Sis e-penses are esti1ated as fo##ows4 if !0H of t0e p#ant capacit/ is uti#i6ed. As. i3 Direct Materia#s +42+0 As. ii3 Direct Materia#s 1141$0 As. iii3 %ariab#e and Ot0er Manufacturing ,-penses 34G$0 iv3 7ota# 5i-ed ,-penses irrespective of Capacit/ uti#i6ation As. $4000 70e e-pected se##ing price in t0e do1estic 1ar'et is As. 2 per unit. Aecent#/ t0e 1anufacturer 0as received a trade en;uir/ fro1 an Overseas Organisation interested in purc0asing $4000 units at a price of As. 1.4! per unit. .s a rofessiona# Manage1ent .ccountant4 w0at s0ou#d be /our suggestion regarding acceptance or rejection of t0e offerI "upport /ou suggestion wit0 suitab#e ;uantitative infor1ation. 2M.Co1. Oct. 200$4 adapted3
8An$.: 7ota# ContributionC resent position As. $4$004 As. 1inus $003 roposed Offer

I00u$tr#ti"n ;: L Ltd. 1anufactured and so#d 144000 units and 1+4000 units in t0e first /ear and t0e second /ear respective#/. 70e se##ing price per unit was As. 100 in bot0 t0e /ears. In t0e first /ear it suffered a #oss of 204000 and in t0e second /ear earned profit of As. 204000. ca#cu#ate t0e fo##owing C a. 70e a1ount of fi-ed cost b. 70e :, in units and in "a#es %a#ue c. rofit w0en 2$4000 units are so#d

d. 70e nu1ber of units to be so#d to earn post(ta- profit of T 304000. 7a- rate is 40H. L Ltd. esti1ates t0at its sa#es wi## be T >i# in t0e ne-t /ear. 70e co1petitor 0as 1ade an offer t0at it wou#d bu/ t0e products of L Ltd. at present se##ing price #ess 10H wit0 a condition t0at L Ltd. s0ou#d purc0ase co1petitorQs product e;ua# to doub#e of t0e units purc0ased b/ t0e co1petitor fro1 L Ltd. 70e co1petitorQs product

se##ing price is As. G0 and fetc0es contribution of per unit. If t0e co1petitorQs offer is accepted4 ca#cu#ateC

200 As. 2!

a. :, in units purc0ased and so#d b/ L Ltd. b. >o. of units to be purc0ased and so#d to earn profit of As. 404000 2M.Co1. Mar 200)4 adapted3
8An$.: Contribution per <nitC As. 104 5i-ed Cost As. 14 $040003

I00u$tr#ti"n 10 : 5o##owing re#evant data of a fir1 is given C .ctivit/ Leve#s 2tons3 $04000 )04000 +040 00 tons tons ton F F !4000 $4000 )4000 +4000 F F 14!00 14$00 14$!0 14)00

!04000 tons %ariab#e Cost 2T in t0ousands3 "e1i(%ariab#e cost 2T in t0ousands3 5i-ed Cost 2T in t0ousands3 7ota# Cost 2T in t0ousands3

F F 24!00 24!00 34000 34000 F F G4000 104100 114$!0 124)00

70e fi-ed costs fo##ow step(grap0 pattern as is c#ear fro1 t0e above and t0e se1i(variab#e costs c0ange at unifor1 rate between t0e above given activit/ #eve#s. Biven t0at t0e fir1 operates !!4000 tons #eve# at present ? 1. Ca#cu#ate t0e additiona# @ incre1enta# costs if it 1anufactures additiona# 2a3 104000 tons 2b3 1!4000 tons. 2. .dvise w0et0er t0e fir1 s0ou#d accept Pan/ oneQ of t0e fo##owing additiona# 2specia#3 e-port 1ar'et offers and if Jes4 Pw0ic0 oneQ s0ou#d it accept C i. for 104000 tons at a se##ing price of As. 12!@( per ton. ii3 for 1!4000 tons at a se##ing price of As. 1!0@( per ton. 2M.Co1. .pr. 200G4 adapted3
8An$.: .dditiona# Incre1enta# Cost in t0ousands ( 104000 7ons As. 140)!4 1!4000 7ons As. 24100 3

201

2
STANDARD COSTING
Unit $tructure $.0 Objectives $.1 Introduction $.2 "tandard Costing $.3 "tandard Cost $.4 :enefits of "tandard Costing $.! 5i-ation of "tandards $.$ .na#/sis of %ariances $.) Materia# Cost %ariances $.+ Labour Cost %ariances $.G Over0ead Cost %ariances $.10 "a#es %ariances $.11 Li1itations of "tandard Costing $.12 ,-ercises.

2.0 OBJECTIVES
.fter "tud/ing t0is unit4 /ou wou#d be ab#e toC <nderstand t0e ter1s "tandard Cost and "tandard Costing <nderstand t0e process of setting t0e standards for various e#e1ents of costs. <nderstand 0ow standard costing operates. ,-p#ain t0e benefits of standard costing Ca#cu#ate t0e 1ateria#4 #abour4 over0ead and "a#es %ariances <nderstand t0e use of standard costing for cost reduction

2.1 INTRODUCTION
Managers are constant#/ co1paring t0eir product cost wit0 t0e budgets. 70e reasons for deviations are constant#/ ana#/6ed and responsibi#ities are pro1pt#/ fi-ed. 70us4 8 &0at a product s0ou#d 0ave Coasted9 is a ;uestion of great concern to t0e 1anage1ent for i1prove1ent of cost perfor1ance. "tandard

202 costing is a 1anageria# device to deter1ine efficienc/ and effectiveness of cost perfor1ance. "tandard costing e-p#ains t0e difference between actua# profit and profit as per standard re#ating to t0e operating period. It a#so 0e#ps to e-p#ain t0e variances according to t0eir causes and responsibi#ities.

2.2

STANDARD COSTING

"tandard costing is a contro# tec0ni;ue w0ic0 co1pares standard costs and revenues wit0 actua# resu#t to obtain variances w0ic0 are used to sti1u#ate i1proved perfor1ance. <se of standard costing is not confined to industries 0aving repetitive processes and 0o1ogeneous product on#/. 70is tec0ni;ue 0as estab#is0ed t0e advantages of its use in industries 0aving non repetitive processes #i'e 1anufacture of auto1obi#e4 turbines4 boi#ers and 0eav/ e#ectrica# e;uip1ent.

2.& STANDARD COST

"tandard Cost is a scientifica##/ pre(deter1ined cost4 w0ic0 is arrived at assu1ing a particu#ar #eve# of efficienc/ in uti#i6ation of 1ateria# #abour and indirect services. CIM. defines standard cost as 8a "tandard e-pressed in 1one/. It is bui#t up fro1 an assess1ent of t0e va#ue of cost e#e1ents. Its 1ain uses are providing bases for perfor1ance 1easure1ent4 Contro# b/ e-ception reporting4 va#uing stoc' and estab#is0ing se##ing prices9. revea#s a ver/ usefu# infor1ation for cost contro#. "tandard cost is #i'e a 1ode# w0ic0 provides basis of co1parison for actua# cost. 70is co1parison of actua# cost wit0 standard cost contro#.

2.* BENE ITS O STANDARD COSTING

70e benefits of standard costing are as fo##owsC 1. <se of standard costing #eads to opti1u1 uti#i6ation of 1en4 1ateria#s and resources. 2. Its use provides a /ardstic' for co1parison of actua# cost perfor1ance. 3. On#/ distinct deviations are reported to 1anage1ent. 70us4 it 0e#ps app#ication of t0e princip#e of 81anage1ent b/ e-ception9 4. It is ver/ usefu# to 1anage1ent in disc0arging functions4 #i'e p#anning contro#4 decision ? 1a'ing and price fi-ation.

20& 5. It creates an at1osp0ere of cost consciousness. 6. It 1otivates wor'ers to strive for acco1p#is01ent of defined targets. It precipitates an attitude t0at is conducive to efficienc/. 7. It 0ig0#ig0ts areas4 w0ere probe pro1ise i1prove1ent. 8. Its introduction #eads to si1p#ification of procedures and standardi6ation of products. 9. Its introduction enab#es t0e 1anage1ent to reduce ti1e re;uired for preparation of reports for pricing4 contro# or ;uotation purposes. 10. Its use enab#es to find out t0e cost of finis0ed goods i11ediate#/ after co1p#etion. 11. If standard costing is used4 stoc' #edgers can be 'ept in ter1s of ;uantities on#/. 70is e#i1inates 1uc0 c#erica# effort in pricing4 ba#ancing and posting on stores #edgers cards. 12. Its use 1a/ encourage action for cost reduction.

2.6 SETTING O STANDARDS

Deter1ination of standards for various e#e1ents of cost is an e-ercise t0at re;uires s'i##4 i1agination and e-perience. 5or setting standards4 routines and process of wor'ing conditions are t0oroug0#/ studied and 1otion studies are conducted and different tests are carried out to ensure t0at standards are rea#istic and confor1 to 1anage1entQs view of efficient t operations and re#evant e-penditure. 70e job of setting t0e standards is done b/ a group4 w0ic0 is represented b/ ,ngineering Depart1ent4 production Depart1ent4 urc0ase Depart1ent4 personne# Depart1ent and Cost .ccounts Depart1ent4 "etting of standards can Cost .ccounts Depart1ent. "etting of standards can be divided in two categoriesC 2i3 Deter1ination of ;uantit/ standardsV and 2ii3 Deter1ination of price standards. *uantit/ standards are pre( deter1ined e-pressing in p0/sica# ter1s t0e re#ations0ip between a unit produced and resources consu1ed. rice standards are pre(deter1ined 1easures e-pressing in 1one/ ter1s t0e cost per unit of resources consu1ed. *uantit/ standards are deve#oped b/ representatives of ,ngineering Depart1ent in #iaison wit0 representatives of purc0ase Depart1ent. &age rate standards are deve#oped b/ personne# Depart1ent. .ccounts depart1ent wor's in advisor/ capacit/ supp#/ing t0e infor1ation based on 0istorica# costing.

20*

2.2

ANAL4SIS O VARIANCES

70e co1parison of actua# perfor1ance wit0 standard perfor1ance revea#s t0e variance. . variance represents a deviation of t0e actua# resu#t fro1 t0e standard resu#t. 70ere can be cost variance4 profit variances4 sa#es va#ue and operationa# and p#anning variances. &0et0er a variance is favorab#e or unfavorab#e is u#ti1ate#/ deter1ined wit0 reference to is i1pact on profit. 5or e-a1p#e a variance wi## be adverse4 if t0e actua# cost e-ceeds t0e standard cost or vice versa. rofit variance wi## be favorab#e if actua# profit e-ceeds standard profit or vice versa. %ariance ana#/sis is an e-ercise4 w0ic0 invo#ves efforts to iso#ate t0e causes of variance in order to report to 1anage1ent t0ose situations w0ic0 can be corrected and contro# b/ ti1e#/ action . 70e e-tent to w0ic0 t0e causes are estab#is0ed4 depends upon t0e a1ount of ti1e effort and 1one/4 t0at a co1pan/ is wi##ing to spend in accu1u#ating data as t0at variance occur. In variance ana#/sis a point is reac0ed w0ere incre1enta# infor1ation is not wort0 its incre1enta# cost. 70is point indicates t0e #i1it of variance ana#/sis and it is deter1ined b/ judg1ent in t0e #ig0t of individua# circu1stances. %ariance ana#/sis 1ust be devised to suit t0e conditions prevai#ing wit0in a particu#ar enterprise. .na#/sis of variances 1ust be fo##owed b/ inte##igent and factua# interpretation. Co1putation4 c#assification and reporting of variances is a vita# feature of standard costing.

2.5

MATERIAL COST VARIANCE

It represents t0e different between actua# cost of 1ateria# used and standard cost of 1ateria# specified for output ac0ieved. Materia# cost variance arises due to variation in prices and usage of 1ateria#s. 70e fo##owing for1u#a is used to find out 1ateria# cost varianceC
M#teri#0 c"$t (#ri#nce H St#n'#r' c"$t "! M#teri#0 u$e' 7 Actu#0 c"$t "! +#teri#0

Materia#s cost variances are as fo##owsC ( a. M#teri#0 Price V#ri#nce: It is t0at part of 1ateria# cost variance w0ic0 due to t0e different between t0e actua# price paid and standard price specific for t0e 1ateria#. It is deter1ined as fo##owsC
M#teri#0 )rice (#ri#nce H Actu#0 @u#ntitA 8St#n'#r' )rice 7 Actu#0 )rice9

b. M#teri#0 u$#%e (#ri#nce: It is t0at part of 1ateria# cost variance w0ic0 due to different between t0e actua# ;uantit/ used

206 and standard ;uantit/ specific for output . 70is indicated w0et0er or not 1ateria# was proper#/ uniti6ed4 It is deter1ined as fo##ows
M#teri#0 u$#%e (#ri#nce H $t#n'#r' )rice 8 $t#n'#r' @u#ntitA 7 #ctu#0 @u#ntitA9

c. M#teri#0 Mi1 (#ri#nce: It is t0at part of 1ateria# usage variance w0ic0 is due to different between t0e actua# co1position of 1i- and standard co1position 1i-ing t0e different t/pes of 1ateria#. It is deter1ined as fo##owsC
M#teri#0 +i1 (#ri#nce H $t#n'#r' )rice 8re(i$e' $t#n'#r' @u#ntitA7 #ctu#0 @u#ntitA9

d. M#teri#0 Aie0' (#ri#nce: It is t0at portion of 1ateria# usage variance w0ic0 is due to different between t0e actua# /ie#d optance and standard /ie#d specific. It deter1ined as fo##owsC
M#teri#0 Aie0' (#ri#nce H $t#n'#r' )rice 8#ctu#0 "ut)ut 7 $t#n'#r' "ut)ut9

I00u$tr#ti"n 1 Jes Ltd 1anufacture a sing#e product t0e standard cost of w0ic0 is as fo##ows C Materia# . $0H F As20@ per Mg. Materia# : 40H F As10@ per Mg. >or1a# #ost is 20H of input . Due to s0ortage of 1ateria# . t0e standard 1i- was c0anged. .ctua# resu#t for =anuar/ 2011 were as fo##ows C Materia# . ? 10! Mg. F As20@ per 'B Materia# : ? G! Mg F AsG@ per Mg. Input 200 'g Loss 3! Mg Output 1$! Mg Ca#cu#ate . Materia# cost variance : Materia# price variance C Materia# usage variance D 1ateria# 1i- variance , 1ateria# /ie#d variance . "o#ution . Materia# Cost %ariance is D "tandard cost of Materia# used ? .ctua# cost of 1ateria# As 3300 ?As2G!! D As34!5 .ctua# cost of 1ateria# used . (10!'g F As20 D As2100 : ? G! 'g F AsG D As +!! 7ota# D As2G!!

202 "tandard cost of 1ateria# D . 123.)! F As20 D As24)! : +2.! F As 10 D As+2! 7ota# D As3300 123.)! D 120 L 1$!@1$0 +2.! D +0L 1$!@1$0 : Materia# price variance D .ctua# ;uantit/ 2"tandard price ? .ctua# price3 . D 10!220(203 D 0 : D G! 210(G3 D G!5 7ota# D G!5 C Materia# usage variance D standard price 2standard ;uantit/ ? actua# ;uantit/3 . D 20L24G!@4(10!3 D 3)! 5 : D 10 2 1$!@2(G!3 D 12! . 7ota# D 2!0 5 D Materia# Mi- variance Dstandard price 2 revised standard ;uantit/( actua# ;uantit/ 3 . D 202120(10!3 D 300 5 : D 10 2+0(G!3 D 1!0 . 7ota# D 1!0 5 , Materia# /ie#d variance D standard price 2 actua# output ? standard output3 . 20 21$!(1$03 D 100 5 "tandard price of output Materia# .D $0 - 20 D As. 1200 Materia# :D 40 - 10 D As. 400 7ota# D 100 D As. 1$00 Loss 20 ( Output +0 "tandard Cost rice D As. 1$00@+0 D As. 20

C-ec3 4"ur Pr"%re$$:

1. a. b. c. d. Define t0e fo##owing ter1s and Bive for1u#as "tandard Cost Materia# rice %ariances Materia# Mi- %ariances Materia# /ie#d variances

205

2.: LABOUR COST VARIANCE:

Labour cost variance is different between t0e actua# wages paid and standard wages specific wages for t0e production. It is ca#cu#ated as fo##owsC
L#."ur c"$t (#ri#nce H St#n'#r' 0#."ur c"$t 7 Actu#0 0#."ur c"$t STD G"ur$ C STD R#te 7 Actu#0 G"ur$ C Actu#0 r#te.

5o##owing are t0e #abour cost variance. A. L#."ur r#te (#ri#nce: It is t0at portion of #abour cost variance w0ic0 due to t0e different between t0e actua# #abour rate and standard #abour rate specific. It deter1ined 0as fo##ows C
L#."ur r#te (#ri#nce H Actu#0 -"ur$ 8 $t#n'#r' r#te 7 Actu#0 r#te 9

B. L#."ur e!!iciencA (#ri#nce: It is t0at part of #abour cost variance w0ic0 due to t0e different between t0e actua# 0ours paid and standard 0ours a##owed for output ac0ieved. It deter1ined as fo##ows C
L#."ur e!!iciencA (#ri#nce H $t#n'#r' r#te 8$t#n'#r' -"ur$ 7 #ctu#0 -"ur$9

C. L#."ur +i1 (#ri#nce: roduction 1a/ be co1p#eted if #abour is 1i-ed according standard proportion. "tandard 1i- 1a/ not be ad0ered to under su1 circu1stances and substitute wi## 0ave to 1ade . It is deter1ined as fo##owsC (
L#."ur +i1 (#ri#nce H $t#n'#r' r#te 8#ctu#0 0#."ur +i1 7 re(i$e' $t#n'#r' 0#."ur +i19

(. L#."ur Aie0' (#ri#nce: It is t0at part of #abour efficienc/ variance w0ic0 is due to different between actua# output and standard output of wor'ers specific . It is deter1ined as fo##owsC(
L#."ur Aie0' (#ri#nce H #(er#%e $t#n'#r' 0#."ur -"ur$ r#te 8#ctu#0 )r"'ucti"n 7 $t#n'#r' )r"'ucti"n "n #ctu#0 -"ur9

I00u$tr#ti"n 2 "tandard #abour 0ours and rate for production of one unit of artic#e . is given be#owC articu#ars er unit Aate per 7ota# As Sours Sours "'i##ed wor'ers ! 1.!0 ).!0 <ns'i##ed wor'ers + .!0 4.00 "e1i ? s'i##ed wor'ers 4 .)! 3 T"t#0 1*.60

20: .ctua# Data .rtic#es roduces 1000 units P#rticu0#r$ G"ur$ R#te )er G"ur$ "'i##ed wor'ers 4!00 2 G000 <ns'i##ed wor'ers 10000 . 4! 4!00 "e1i ? s'i##ed wor'ers 4200 0.)! 31!0 T"t#0 12260 C#0cu0#te' 1 Labour cost variance 2. Labour rate variance 3. Labour efficienc/ variance 4. #abour 1i- variance 5. #abour /ie#d variance S"0uti"n: 1. Labour cost variance D "tandard #abour cost ? .ctua# #abour cost
"'i##ed D "7D Sours L "7D Aate ? .ctua# Sours L .ctua# rate. !000 L1.! ? 4!00 L 2 D )!00(G000D As 1!00 . <ns'i##ed D +000 L 0.! ? 10000 L 0.4! D 4000(4!00 D As!00 . "e1i "'i##ed D 4000 L 0.)!( 4200 L0.)! D 3000(31!0 D As 1!0 . 1!00 K !00 K 1!0 D As21!0 .

T"t#0 R$

2. Labour rate variance D .ctua# 0ours 2 standard rate ? .ctua# rate 3 "'i##ed D 4!00 21.!0(23 D 22!0 . <ns'i##ed D 1000020.!0(0.4!3 D !00 5 "e1i s'i##ed D 420020.)!(0.)!3 D 0 22!0. K !00 5 D 1)!0 . 3. Labour efficienc/ variance D standard rate 2 standard 0ours ? actua# 0ours3 "'i##ed D 1.! 2!000(4!003 D As)!0 5 <ns'i##ed D 0.! 2+000(100003 D As1000 . "e1i "'i##ed D 0.)!24000(42003 D As1!0 . 7ota# 400 . 4. Labour 1i- variance D standard rate 2actua# #abour 1i- ? revised standard #abour 1i-3 "'i##ed D 1.! 2 !!00(4!003 D As1!00 5 <ns'i##ed D 0.! 2 ++00(100003 D As$00 . "e1i s'i##ed D 0.)! 2 4400 ? 42003 D As1!0 5 7ota# D As10!0 5

20; 5. Labour /ie#d variance D average standard #abour 0our rate 2actua# production ? standard production on actua# 0ours3 14.!0 2 1000(11003 D As14!0 . N"te: "tandard production of actua# 0ours D 1+)00 @ 1)000 L 1000 = 1100 units .verage std rateD As).! K 4 K 3 D As.14.!0

2.;

OVERGEAD COST VARIANCE

It is different between standard over0ead cost and actua# over0ead cost of producing goods . 70ere are two t/pes of over0ead varianceC A. %ariab#e Over0ead %ariance B. 5i-ed Over0ead %ariance A. V#ri#.0e O(er-e#' V#ri#nce : It is different between standard variab#e over0ead cost and actua# variab#e over0ead cost. It deter1ined as fo##owsC
V#ri#.0e "(er-e#' c"$t (#ri#nce H St#n'#r' (#ri#.0e "(er-e#' c"$t 7 #ctu#0 (#ri#.0e "(er-e#' c"$t.

%ariab#e over0ead cost is again dividend into two parts 1 V#ri#.0e "(er-e#' e1)en'iture (#ri#nce: It is t0at portion of variab#e over0ead variance w0ic0 arrives due to difference between actua# over0ead and standard variab#e over0ead appropriate to t0e #eve# activit/. It deter1ined as fo##owsC
V#ri#.0e O(er-e#' E1)en'iture (#ri#nce H $t#n'#r' (#ri#.0e "(er-e#' #t #ctu#0 0e(e0 7 #ctu#0 (#ri#.0e "(er-e#'

2. V#ri#.0e "(er-e#' e!!icient0A (#ri#nce : It is t0e difference between actua# 0ours wor' at standard variab#e over0ead rate and standard variab#e over0ead for production. It is deter1ined as fo##ows C
V#ri#.0e O(er-e#' E!!iciencA V#ri#nce H $t#n'#r' (#ri#.0e "(er-e#' ) #ctu#0 (#ri#.0e "(er-e#' !"r )r"'ucti"n.

210 I00u$tr#ti"n & 5o##owing infor1ation is obtained fro1 &ise Ltd :udgeted production for t0e period $00 units :udgeted variab#e over0ead As 1!$00@( "tandard 7i1e for one unit 20 0ours .ctua# roduction for t0e period !00 units .ctua# %ariab#e over0ead As 14000@( .ctua# Sours &or'ed G000 Srs C#0cu0#te: . %ariab#e over0ead e-penditure variance : variab#e over0ead efficienc/ variance C %ariab#e Over0ead variance S"0uti"n: . %O ,-penditure variance D standard variab#e over0ead at actua# #eve# ? actua# variab#e over0ead = 11)00(14000 D 2300 . "%OS D 1!000@12000 L G000 D 11)00

: %O ,fficienc/ %ariance D standard variab#e over0ead ? actua# variab#e over0ead for production. = 13000(11)00D 1300 5

C %ariab#e over0ead cost variance D "tandard variab#e over0ead cost ? actua# variab#e over0ead cost. = 13000(14000D 1000 .

2.10

ICED OVERGEAD COST VARIANCE

It represents t0e difference between actua# fi-ed over0ead incurred and standard cost of fi-ed over0ead absorbed. It deter1ined as fo##owsC
i1e' "(er-e#' C"$t (#ri#nce H St#n'#r' c"$t "! !i1e' "(er-e#' 7 #ctu#0 !i1e' "(er-e#'

5i-ed over0ead variance is fo##owsC A. i1e' "(er-e#' ("0u+e (#ri#nce ? It t0at part of fi-ed over0ead variance w0ic0 due different between actua# fi-ed over0ead incurred and standard a##owance for fi-ed over0ead.

211
i1e' "(er-e#' ("0u+e (#ri#nce H $t#n'#r' r#te C #ctu#0 "ut)ut ? .u'%ete' "(er-e#'

B. i1e' "(er-e#' e1)en'iture (#ri#nce ? It t0at part of fi-ed over0ead variance w0ic0 is due different between actua# fi-ed over0ead incurred and budgeted fi-ed over0ead.
i1e' "(er-e#' e1)en'iture (#ri#nce H .u'%ete' !i1e' "(er-e#' 7 #ctu#0 !i1e' "(er-e#'.

C. i1e' "(er-e#' C#0en'#r V#ri#nce ? It is t0at part of fi-ed over0ead vo#u1e variance w0ic0 is due to different between budgeted fi-ed over0ead and fi-ed over0ead for dates avai#ab#e during t0e period at standard rate.
i1e' O(er-e#' C#0en'#r (#ri#nce H $t#n'#r' r#te 8 #ctu#0 @u#ntitA 7 St#n'#r' @u#ntitA9

(. i1e' "(er-e#' e!!iciencA (#ri#nce: It t0at portion of vo#u1e variance w0ic0 ref#ected increase or reduced output arising fro1 efficienc/ being above or be#ow standard.
i1e' "(er-e#' e!!iciencA (#ri#nce H $t#n'#r' r#te 8#ctu#0 )r"'ucti"n 7 $t#n'#r' )r"'ucti"n9

*. i1e' "(er-e#' c#)#citA (#ri#nce: It is t0at part of fi-ed over0ead variance w0ic0 arrives due to different between capacit/ uti#i6ed and avaib#e capacit/. #
i1e' "(er-e#' c#)#citA (#ri#nce H St#n'#r' r#te 8re(i$e' .u'%ete' .u'%ete' unit9

I00u$tr#ti"n * 5ro1 t0e fo##owing data ca#cu#ate over0ead variance C P#rticu0#r$ Bu'%et Actu#0 Output 1!000 units 1$000 units >o. of wor'ing da/s 2! 2) 5i-ed over0ead As 30000 As 30!00 %ariab#e over0ead As 4!000 As 4)000 70ere was an increase of !H in capacit/.

212 S"0uti"n: 1. 7ota# over0ead variance D .ctua# output in standard rate ? .ctua# over0ead 1$000 L ! ?230!00K 4)0003 As 2!00 5 2. %ariab#e Over0ead %ariance D "tandard rate L .ctua# output ? .ctua# Over0ead 3 L 1$000 ? 4)000 D 10005 3. 5i-ed Over0ead %ariance D "tandard rate L .ctua# Output ? .ctua# Over0ead 2 L 1$000 ? 30!00 D As 1!005 4. 5i-ed over0ead vo#u1e %ariance D "tandard Aate L .ctua# Output ? :udgeted Over0ead 2 L 1$000 (30000 D 2000 5 5. 5i-ed over0ead ,-penditure %ariance D :udgeted 5i-ed ? .ctua# 5i-ed over0ead As 30000( As 30!00 D As !00. 6. 5i-ed Over0ead Capacit/ %ariance D "tandard Aate 2Aevised :udgeted <nits ? :udgeted <nits3 As 2 21!)!0( 1!0003 D 2 L)!0 As 1!00 5 7. 5i-ed over0ead ca#endar variance D "tandard Aate 2.ctua# *uantit/ ? "tandard *uantit/3 2 21!)!0@2! L23 D As12$0 L 2 As 2!20 5 8. 5i-ed over0ead efficienc/ variance D "tandard Aate 2 .ctua# roduction ? "tandard roduction3 = 2 21$000(1)0103 D As 2020 . N"te: "tandard production D 1!000 units + Increase Due Capacit/ increase D )!0 KZ Increased production for 2 da/s D 12$0 7ota# D 1)010

2.11 SALES VARIANCE

"a#es variance is difference between t0e actua# va#ue ac0ieved in a given period and budgeted va#ue of sa#es. "a#es

21& va#ue variance are usefu# for sa#es 1anagers in deter1ined t0e effect of c0anges in different factors on sa#es va#ue. 70e fo##owing are 7/pes of variance. A. S#0e$ (#0ue (#ri#nce ? It is t0e different between t0e actua# sa#es va#ue re#iab#e and t0e standard va#ue of sa#e as per t0e :udget.
S#0e (#0ue (#ri#nce H Actu#0 Eu#ntitA C Actu#0 )rice @u#ntitA C St#n'#r' Price ? St#n'#r'

B. S#0e$ )rice (#ri#nce ? It is t0at portion of t0e tota# sa#es va#ue variance w0ic0 due to different between actua# sa#es price rea#ised and budgeted sa#es price
S#0e$ )rice (#ri#nce H Actu#0 Eu#ntitA 8 Actu#0 )rice 7 $t#n'#r' )rice9

C. S#0e$ ("0u+e (#ri#nce ? It is t0at portion of tota# sa#es va#ue variance w0ic0 due to difference between t0e standard va#ue t0e actua# sa#es effected and standard va#ue of sa#es as per t0e budget.
S#0e$ ("0u+e (#ri#nce H $t#n'#r' )rice 8Actu#0 @u#ntitA 7 St#n'#r' @u#ntitA9

(. S#0e$ Mi1 (#ri#nce ? It is t0at portion of sa#es vo#u1e variance w0ic0 due t0e difference between t0e standard va#ue of actua# sa#es effected and .ctua# va#ue of "a#es.
S#0e$ +i1e' (#ri#nce H St#n'#r' Price 8 Actu#0 )r")"rti"n 7 re(i$e' $t#n'#r' +i1 #ctu#0 $#0e$9

*. S#0e$ @u#ntitA (#ri#nce ? It is t0at portion of sa#es vo#u1e variance w0ic0 due tot t0e difference between standard va#ue of actua# sa#es effected and standard va#ues of sa#es as per t0e budged.
S#0e @u#ntitA (#ri#nce H $t#n'#r' )rice 8 re(i$e' $t#n'#r' +i1 7 $t#n'#r' +i19

C-ec3 4"ur Pr"%re$$ :

1. ,-p#ain t0e ter1s and give for1u#as. a. Labour Aate %ariance b. Labour Jie#d %ariance c. Labour Cost %ariance d. %ariab#e over0ead efficient#/ variances e. 5i-ed over0ead vo#u1e variances f. 5i-ed over0ead ca#endar variances ". "a#es va#ue variances $. "a#es ;uantit/ variances

21* I00u$tr#ti"n 6 5ro1 t0e fo##owing infor1ation about sa#es ca#cu#ateC A. 7ota# sa#es variance :3 "a#es price variance C3 "a#es vo#u1e variance D3 "a#es 1i- variance ,3 "a#es ;uantit/ variance STANDARD Pr"'uct Eu#ntitA Se00in% )rice )er unit . !000 ! 2!000 : 4000 $ 24000 C 3000 ) 21000 7ota# )0000 RS 12000

ACTUAL Pr"'uct Eu#ntitA Se00in% )rice )er unit . $000 $ 3$000 : !000 ! 2!000 C 4000 +) 32000 7ota# 1!000 G3000 S"0uti"n: A. 7ota# "a#es %ariance D As G3000( As )0000 D As23000 5 B. "a#es price %ariance "tandard rice3 D .ctua# ;uantit/ 2 = . D $000 L 2$(!3 $000 5 : D !000 L2!($3 .ctua# rice ?

RS

D As D As !000 . C D 4000 L 2+()3 D As4000 5 (((((((((( As !000 5 C. "a#es vo#u1e variance D "tandard price 2.ctua# *uantit/ ? "tandard *uantit/3 = . D ! 2 $000(!0003 D !000 5 : D $ 2 !000(40003 D $000 5 C D ) 2 4000( 30003 D )000 5 7ota# D 1+000 5 (. "a#es 1i- %ariance D "tandard price 2.ctua# 1i- ? "tandard Mi-3 = As.++000( As.+)!00 D !00 5

216 N"te : .ctua# MiAevised Mi$000 L ! D 30000 $2!0 L ! D 312!0 !000 L $ D 30000 !000 L $ D 30000 4000 L ) D 2+000 3)!0 L ) D 2$2!0 7ota# D ++000 7ota# D +)!00

, "a#es *uantit/ %ariance D "tandard price 2 actua# ;uantit/ ? standard ;uantit/3 = )0000 @ 12000 2 1!000(120003 = As1)!00 5

2.12

ECERCISE

1. &0at standard costing . ,-p#ain t0e advantages and #i1itations of costing I 2. &0at is 1eant b/ standard cost I Sow standard cost is deter1ined I 3. 70e standard cost of Mi- is as under C 8 7onnes of 1ateria# . F 40 per tones 12 7onnes of Materia# : F $0 per tonnes "tandard /ie#d is G0H of output . .ctua# cost for a period is as under C 10 tonnes of Materia# . F 30 per tones 20 tonnes of Materia# : F $+ per tonnes. .ctua# /ie#d is 2!.! tonnes. ca#cua#ate . Materia# cost variance : 1ateria# usage variance C Materia# price variance D 1ateria# 1i- variance , 1ateria# /ie#d variance .
8An$: #9 R$.12; A .9 R$.12; A c9 R$. 20 A '9 R$.*0 A e9 R$.2; A9

4. 70e fo##owing figures are e-tracted fro1 t0e boo's of co1pan/ P#rticu0#r$ Bu'%et Actu#0 Output in units $000 $!00 Sours 3000 3300 Over0ead cost ( 5i-ed As1200 As12!0 Over0ead cost ( %ariab#e As$000 As$$!0 >o. of Da/s 2! 2) Co1pute and ana#/sis t0e over0ead variance
An$.9 Over0ead cost variance As100 . b3 %ariab#e OS Cost variance As1!0 . c. 5i-ed OS cost %ariance As!0 54 5O ,-penditure As!0 . 4 5O %o#u1e As 100 5 4 5O ,fficienc/ As4 54 5O Ca#endar AsG$ 5 4 5O Capacit/ As 100 5.

212 5. 70e fo##owing infor1ation is given regarding standard co1position and standard rates of gang of wor'ers St#n'#r' C"+)"$iti"n St#n'#r' -"ur0A r#te$ 10 1en As 0.$2! 5 wo1en As 0.400 5 :o/s As 0.3!0 .ccording#/ to given specifications a wee' consists of 40 0ours and standard output for wee' is 1000 units . In a particu#ar wee' gang consisted of 13 1en 4 4 wo1en and 3 bo/s and actua# wages paid are as fo##ows C Men F As0.$ per 0our4 &o1en F As0.42! per 0our and bo/s F As0.32! per 0our. 7wo 0ours were #ost in t0e wee' due to abnor1a# id#e ti1e . .ctua# production was G$0 units in t0e wee' . 5ind out . Labour cost variance : #abour rate variance C #abour 1i- variance D #abour /ie#d variance and , #abour efficienc/ variance
An$ A R$&6 A < R$ 12 < R$ &1 A < R$* #n' R$*5 A

6.

5ro1 t0e fo##owing infor1ation ca#cu#ate

. ? sa#es %ariance : "a#es price %ariance C sa#es vo#u1e variance D sa#es 1i- variance , sa#es ;uantit/ variance Actu# Pr"'uct STD unit$ STD R#te$ Actu#0 0 R$ Unit$ R#te$ . !000 ! $000 $ : 4000 $ !000 ! C 3000 ) 4000 +
.ns . As!000 5 : As!00 5 C As1)!00 5 D As2300 5 , As1+000 5

7. C0osse t0e rig0t answer wit0 /our reasoningC( 1. Materia# cost variance arises due to variation in price and ZZZZZZ of 1ateria#s. 2a3 *ua#it/ 2b3 *uantit/ 2c3 %o#u1e 2d3 De#iver/

2. Id#e ti1e variance is due to difference between #abour 0ours app#ied and #abour 0ours ZZZZZ. 2a3 <ti#ised 2b3 "upp#ied 2c3 <nuti#ised 2d3 <nderuti#ised 3. 5i-ed over0ead capacit/ variance arises due to difference between capacit/ uti#i6ed and ZZZZZZZ capacit/. 2a3 "pare 2b3 ,-cess 2c3 5i-ed 2d3 #anned

215 4. "a#es 1i- variance is due to t0e difference between standard va#ue of actua# sa#es and actua# va#ue of sa#es ZZZZZZZ. 2a3 Aea#ised 2b3 ,ffected 2c3 Margin 2d3 %o#u1e 5. "tandard cost is a specifica##/ ZZZZZ cost. 2a3 re(deter1ined 2b3 ,sti1ated 2c3 #anned 2d3 .verage
8An$? 1? . < 2 7 # < & 7 ' < * 7 # < 6 7 # 9

I00u$tr#ti"n 1: .#co Ltd. fo##ows "tandard Costing "/ste1. 70e standard 1ateria# costs for G0 units are as underC <nits Aate T M1 $0 4.00 240 M2 40 $.00 240 100 4+0 Less C "crap 10 3.00 30 G0 4!0 During 5ebruar/ 20044 t0e co1pan/ 1anufactured !4400 units. 70e actua# 1ateria# cost was as underC M1 44000 units T 204000 M2 24000 units T 114000 "crap rea#i6ed F T 2.!0 p.u. Ca#cu#ate t0e variances in as 1uc0 detai# as possib#e. 2M.Co1. Oct. 034 adapted3
8An$.: MCV? R$. *<000 A< MPV? &<000 A< MMV? :00 < M4V? 1<:00 A< MUV? 1<000 A9

I00u$tr#ti"n * : 70e standard 1ateria# cost for 100 'g of C0e1ica# D is 1ade up of C C0e1ica# . D 30 'g F T 4 per 'g C0e1ica# : D 40 'g F T ! per 'g C0e1ica# C D +0 'g F T $ per 'g . batc0 of !00 'g of C0e1ica# D was produced fro1 a 1i- of C C0e1ica# . D 140 'g at a cost of T !++ C0e1ica# : D 220 'g at a cost of T 10!$ C0e1ica# C D 440 'g at a cost of T 2+$0 Sow do t0e /ie#d4 1i- and t0e price factors contribute to t0e variance in t0e actua# cost per 100 'g of C0e1ica# D over t0e standard costI 2M.Co1. Oct. 034 adapted3
8An$.: MCV? R$. *<000 A< MPV? &<000 A< MMV? :00 < M4V? 1<:00 A< 1<000 A9 MUV?

21: I00u$tr#ti"n 2 : "tandard Materia# for 100 Mg. C0e1ica# . is give be#ow C Mg. 4! 40 2! 7ota# As Of Materia# L at As 4 per Mg. Of Materia# J at As + per Mg. Of Materia# U at As 12 per Mg. 1+0. 00 320. 00

FFFF FFFF FFFF

110 +00.00 10 "tandard Loss FFF 100 +00.00 .ctua# production is 2000 units of c0e1ica# . and actua# 1ateria# usage is as fo##ows C Mg. 1000 +!0 4!0 7ota# As Of Materia# L at As 3.+0 per Mg. Of Materia# J at As +.40 per Mg. Of Materia# U at As 13 per Mg. FFFF FFFF FFFF 34+0 0 )414 0 !4+!

Ca#cu#ate C a. Materia# Cost %ariance b3 Materia# rice %ariance c. Materia# Mi- %ariance d3 Materia# Jie#d %ariance e. Materia# <sage %ariance 2M.Co1. Mar. G$4 adapted3
8An$.: MCV? R$. 5;0 A< MPV? 6;0 A< MMV? 62: < M4V? 52: A< MUV? 200 A9

I00u$tr#ti"n & : . 1anufacturing co1pan/ uses t0e fo##owing standard 1i- of t0eir co1pound in one batc0 of 100 'gs of its production #ineC !0 'gs of 1ateria# L at t0e standard price of As 2. 30 'gs of 1ateria# J at t0e standard price of As 3. 20 'gs of 1ateria# U at t0e standard price of As 4. 70e actua# 1i- for a batc0 of 120 'gs was as fo##ows C $0 'gs of 1ateria# L at t0e price of As 3. 40 'gs of 1ateria# J at t0e price of As 2.!. 10 'gs of 1ateria# U at t0e price of As 3. Ca#cu#ate t0e different 1ateria# variances. 2M. Co1. .pri# 0G4 adapted3
8An$.: MCV? R$. *0 A< MPV? &0 A< MMV? 15 < M4V? 25 A< MUV? 10 A9

I00u$tr#ti"n *: . gang of wor'ers usua##/ consists of 10 s'i##ed4 ! se1i( s'i##ed and ! uns'i##ed #abour in a factor/. 70e/ are paid at standard 0our#/ rates of T !.004 T 3.20 and T 2.+0 respective#/. In a nor1a# wor'ing wee' of 40 0ours4 t0e gang is e-pected to produce 14000

21; units of output. In a certain wee'4 t0e gang consisted of 13 s'i##ed4 4 se1i(s'i##ed and 3 uns'i##ed #abour. .ctua# wages were paid at t0e rates of 4.+0V 3.40 and 2.$0 respective#/. 7wo 0ours were #ost due to abnor1a# id#e ti1e and G$0 units of output were produced. Jou are re;uired to ca#cu#ate C i. Labour cost variance ii3 Labour rate variance iii3 Labour id#e ti1e variance iv3 Labour efficienc/ variance v3 Labour 1i- variance 2M.Co1. Mar. 0$4 adapted3
8An$.: LCV? R$. 2:0 A< LRV? ;2 < LEV? &2 < MITV? 120 < LMV? 2*: A9

I00u$tr#ti"n 6 : 5ro1 t0e fo##owing records of t0e >avi Mu1bai Manufacturing Co1pan/ /ou are re;uired to co1pute 1ateria# and #abour variance. Input(100 Mg. of Materia# /ie#ds a "tandard Output of 104000 unit "tandard rice per Mg of Materia# As 20 .ctua# *uantit/ of Materia# issued and used b/ roduction 104000 Mg. Depart1ent .ctua# rice per Mg of Materia# As 21 .ctua# Output G4004000 <nits >u1ber of ,1p#o/ees 200 "tandard &age Aate per ,1p#o/ee per Da/ As 4 "tandard Dai#/ Output per ,1p#o/ee per Da/ 100 <nits 7ota# >u1ber of Da/s &or'ed !0 Da/s Id#e 7i1e aid for and Inc#uded in above Sa#f Da/ .ctua# &age Aate per Da/ As 4.!0 2Oct. G$4 adapted3
8An$.: MCV? R$. &0<000 A< MPV? 10<000 A< MUV?20<000 A< LCV? R$. ;<000 A< LRV? 6<000 A< LEV? *<000 A9

I00u$tr#ti"n 2 : 70e fo##owing detai#s re#ating to a product are 1ade avai#ab#e to /ouC St#n'#r' C"$t )er Unit : Materia# !0 'g F As 40 per 'g Labour 400 0ours F As 1 per 0our Actu#0 C"$t : Materia# 44G00 'g F As 42 per 'g Labour 3G4$00 0ours F As 1 per 0our .ctua# roduction 100 units

220 Jour are re;uired to ca#cu#ate C i. Materia# Cost %ariance ii3 Materia# rice %ariance iii3 Materia# <sage %ariance iv3 Labour Cost %ariance %. Labour Aate %ariance vi3 Labour ,fficienc/ %ariance 2M.Co1. Oct. 20004 adapted3
8An$.: MCV? R$. 6<:00 A< MPV? ;<:00 A< MUV? *<000 < LCV? R$. &<600 A< LRV? &<;20 A< LEV? *00 9

I00u$tr#ti"n 5 : 70e fo##owing standards 0ave been set to 1anufacture a product C Direct Materia#s C 2 units of . at As 4.00 per unit +.00 3 units of : at As 3.00 per unit G.00 1! units of C at Ae. 1.00 per unit 1!.00 3 2 . 0 0 Direct #abour 3 0rs. F As + per 0our 24.00 7ota# "tandard rice Cost !$.00 70e co1pan/ Manges0 Ltd. 1anufactured and so#d $4000 units of t0e product during t0e /ear. Direct 1ateria# costs were as fo##ows C 124!00 units of . at As 4.40 per unit 1+4000 units of : t As 2.+0 per unit ++4!00 units of C at As 1.20 per unit 70e co1pan/ wor'ed 1)4!00 direct #abour 0ours during t0e /ear. 5or 2.!00 of t0ese 0ours4 t0e co1pan/ paid As 12 per 0our w0i#e for t0e re1aining t0e wages were paid at t0e standard rate. Ca#cu#ate 1ateria#s price ans usage variances and a#so #abour rate and efficienc/ variances. 2M.Co1. Oct. 014 adapted3
8An$.: MCV? R$. 1;<200 A< MPV? 1;<100 A< MUV? 600 A< M4V? 1<200 < MMV? 2<100 A< LCV? R$. 2<000 A< LRV? 10<000 A< LEV? *000 9

I00u$tr#ti"n : : 70e fo##owing standards 0ave been set to 1anufacture a product C Direct M#teri#0$ : 4 units of . at As 4.00 per unit 1$.00 6 units of : at As 3.00 per unit 1+.00 30 units of C at Ae. 1.00 per unit 30.00 $ 4 . 0 0 Direct #abour $ 0rs. F As + per 0our 4+.00 7ota# "tandard rice Cost 112.00 70e co1pan/ Manges0 Ltd. 1anufactured and so#d $4000 units of t0e product during t0e /ear.

221 Direct 1ateria# costs were as fo##ows C 2!4000 units of . at As 4.40 per unit 3$4000 units of : t As 2.+0 per unit 14))4000 units of C at As 1.20 per unit 70e co1pan/ wor'ed 3!4000 direct #abour 0ours during t0e /ear. 5or !4000 of t0ese 0ours4 t0e co1pan/ paid As 12 per 0our w0i#e for t0e re1aining t0e wages were paid at t0e standard rate. Ca#cu#ate 1ateria#s price ans usage variances and a#so #abour rate and efficienc/ variances. 2M.Co1. Mar. 20034 adapted3
8An$.: MPV? &:<200 A< MUV? 1<000 A< LRV? 20<000 A< LEV? :<000 9

I00u$tr#ti"n ; : Metan C0e1ica# Co. gives /ou t0e fo##owing standard and actua# data of C0e1ica# >o. 14!$. "tandard Data .ctua# Data 4!0 of Materia# . F 4!0 F 1G per 'g. As 20 per 'g 3$0 +.!!0 G4000 F 11 per 'g. 34G$0 +10 124$00 24400 s'i##ed 24400 s'i##ed 0ours 0ours F As 21 F 22 !04400 !24+00 14200 uns'i##ed 14200 uns'i##ed 0ours $44+00 0ours F 12 144400 G0 >or1a# @ Loss !0 .ctua# Loss )20 ))4400 )$0 +0.310 Jou are re;uired to ca#cu#ate C a. Materia# Cost %ariance b3 Materia# rice %ariance c. Materia# Jie#d %ariance d3 Labour Cost %ariance e. Labour Aate %ariance Mar.024 adapted3
8An$.: MCV? R$. 5;0 < MPV? ;0 < M4V? 500 < LCV? R$. 200 < LRV? &<000 A. LGV? NIL9

$).+ 00

f3 Labour Bang %ariance 2M.Co1.

222 I00u$tr#ti"n 10 :
Input Materia# Mg. 7ota# 7ota# Input

As As As

As As

As

er Mg. er Mg. 400 L F !0 204000 420 F 4! +4G00 200 J F 20 44000 240 F 2! $4000 100 U F 1! 14!00 G0 F 1! 143!0 )00 2!4!00 )!0 2$42!0 Labour 100 Men 0rs. F 120 0rs. F er 2 per 0r. 200 As 2.!0 per 0r. 300 0rs. F 240 200 &o1en 0rs. F As 1.!0 per 0r. 300 !00 As 1.$0 per 0r 3+4 $+4 2! Mg >or1a# #oss )! Mg .ctua# #oss $)! Mg 2$4000 Mg Mg 2$4G34

5ro1 t0e above infor1ation ca#cu#ate t0e fo##owing variancesC a. Materia# Cost %ariance e3 Labour Cost %ariance b. Materia# rice %ariance f3 Labour Mi- %ariance c. Materia# Mi- %ariance g3 Labour Jie#d %ariance d. Materia# Jie#d %ariance 03 Labour Aate %ariance 2M.Co1. Mar 20014 adapted3
8An$.: MCV? R$. 560 A< MPV? ;00 < MUV? 1<260 A< M4V? 1<:21 A< MMV?151 ,. LCV? R$. 1:* A< LRV? :* A< LEV? 100 A< L4V? &6 A< LMV? 26 A9

I00u$tr#ti"n 11: 70e fo##owing infor1ation 0as been obtained fro1 t0e records of a 1anufacturing organi6ation using t0e "tandard Costing "/ste1 for t0e 1ont0 of Marc04 200$. articu#ars "tandard .ctua# roduction 2units3 ... F F F F 44000 34+ &or'ing Da/s F F F F ... 20 00 2 5i-ed Over0eads 2T3 F F F F ... 404000 1 %ariab#e Over0eads 2T3 F F F F ... 124000 Jou are re;uired to ca#cu#ate t0e fo##owing Over0ead %ariancesC i. %ariab#e Over0ead %ariance ii3 5i-ed Over0ead %ariance a. ,-penditure c3 ,fficienc/ %ariance b. %o#u1e %ariance d3 Ca#endar %ariance iii3 .#so prepare Aeconci#iation "tate1ent for t0e sa1e. 2M.Co1. Oct. 0$4 adapted3
8An$.?VOGCV? 200 A< OGCV? 1<000 A< OGE!!i.V? *<000 A< OGCV? 2<000 9 OGVV? 2<000 A< OGE1).V? 1<000 <

22& I00u$tr#ti"n 12: 70e fo##owing figures are e-tracted fro1 t0e boo's of a co1pan/C articu#ars Output 2in <nits3 Sours Over0eads Cost C 5i-ed %ariab#e :udget .ctua# ... F F F F F F F F ... F F F F ... F F F F ... $4000 34000 14200 $4000

$4! 00 343 00 142 !0 7ota# Over0eads Cost F F F F ... )4200 )4G00 >u1ber of Da/s F F F F ... 2! 2) Jou are re;uired to ca#cu#ate t0e fo##owing over0eads variances C i. Over0ead Cost %ariance ii3 %ariab#e Over0ead Cost iii3 5i-ed Over0ead Cost %ariance iv3 5i-ed Over0ead %o#u1e %ariance %. 5i-ed Over0ead ,fficienc/ %ariance vi3 5i-ed Over0ead Capacit/ %ariance. 2M.Co1. Mar. 20004 adapted3
8An$.?VOGCV? 200 A< OGCV? 60 < OGE!!i.V? *<000 A< OGCV? 2<000 9 OGVV? 2<000 A< OGE1).V? 1<000 <

I00u$tr#ti"n 1&: :udgeted inco1e fro1 sa#es on !00 tonnes was !4004000 per 1ont0 of M@s .:C and Co. in .pri#4 2004 actua# sa#es were !!0 tonnes wit0 a sa#e va#ue of 4G!4000. Jou are re;uired to ca#cu#ate sa#es %ariances 2M.Co1. Mar. 0!4 adapted3
8An$.: S V#0ue V? 6<000 < SPV? 66<000 < S V"0u+e V? 60<000 A9

I00u$tr#ti"n 1*: 70e cost accountant of Lagoon Ltd. found to t0is surprise t0at t0e actua# profit for t0e period ending 31st Dece1ber4 2004 was t0e sa1e as budget despite rea#i6ing 10H 1ore t0an t0e budgeted se##ing prices. 70e fo##owing facts and figures are avai#ab#e C .ctua# articu#ars :udgeted As As #a'0s #a'0s+2. "a#es ... F F F F !0.00 !0 %ariab#e Cost F F F F ... 30.00 !). 5i-ed costs F F F F ... 10.00 !0 rofit F F F F ... 10.00 1!.

22* Jou are re;uired to assist t0e Cost .ccountant in preparing t0e necessar/ e-p#anations as to w0/ t0e profit re1ained t0e sa1e despite an increase in sa#es. 2M.Co1. Oct. 200!4 adapted3
8An$.: S V#0ue V? &2<60<000 A< SPV? 5<60<000 A< S V"0u+e V? 26<00<000 A9

I00u$tr#ti"n 16 : . Co1pan/Qs :udgeted "a#es of product . are 404000 units at standard se##ing price of As 10 per unit and product : $04000 units at standard se##ing price of As 12 per unit. .ctua# "a#es of roduct . are )04000 units at 14 per unit and roduct : !04000 units at + per unit. Jou are re;uired to ca#cu#ate C a. "a#es %a#ue %ariance d3 "a#es Mi- %ariance b. "a#es rice %ariance e3 "a#es *uantit/ %ariance c. "a#es %o#u1e %ariance 2M.Co1. Mar. 0)4 adapted3
8An$.: S V#0ue V? 2<20<000 A< SPV? :0<000 A< S V"0u+e V? 1<:0<000 A< SEV? 2<2*<000 A< SMV? **<000 9

226

5
BUDGETAR4 CONTROL
Unit Structure ).0 Objectives ).1 :udgets ).2 :udgetar/ contro# ).3 Uero base budget ).4 erfor1ance :udgeting ).! 5unctiona# :udgets ).$ Capita# ,-penditure :udget ).) ,-ercises

5.0 OBJECTIVES
.fter stud/ing t0is topic /ou wi## be ab#eC 1 to understand t0e basic concepts of budget and budgetar/ contro# 2 to understand various t/pes of budgets 3 to understand t0e preparation of various t/pes of budgets 4 to understand t0e benefits of budgetar/ contro# ! to understand t0e #i1itations of budgetar/ contro#

5.1 BUDGETS
:udget 0as been defined b/ CIM. <. M. as4 P . financia# and or ;uantitative state1ent prepared prior to a defined period of ti1e4 of t0e po#ic/ to be pursued during t0at period for t0e purpose of ac0ieving a given objective.Q . budget is a state1ent t0at is a#wa/s prepared prior to a defined period of ti1e. 70is 1eans t0at budget is a#wa/s prepared for future period and not for t0e past. 5or e-a1p#e4 a budget for t0e /ear 2011( 12 regarding t0e sa#es wi## be prepared in t0e /ear 2011( 12. anot0er i1portant point is t0at t0e ti1e for w0ic0 it is prepared is certain. 70us a budget 1a/ be prepared for t0e ne-t 3 /ears @ 1 /ear @ $ 1ont0s@ 1 1ont0 or even for a wee'4 but t0e point is t0at t0e ti1e fra1e for w0ic0 it is prepared is certain. It cannot be prepared for indefinite period of ti1e.

222 :udget is prepared eit0er in ;uantitative detai#s or 1onetar/ detai#s or bot0. 70is 1eans t0at budget wi## s0ow t0e p#anning in ter1s of rupees or in ;uantit/ or bot0. 5or e-a1p#e4 a production budget wi## s0ow t0e production target in nu1ber of units and w0en t0e target units are 1u#tip#ied b/ t0e anticipated production cost4 it wi## be a production cost budget t0at is e-pressed inter1s of 1one/. "i1i#ar#/ purc0ase budget is prepared in ;uantit/ to s0ow t0e anticipated purc0ase in t0e ne-t /ear and w0en t0e ;uantit/ is 1u#tip#ied b/ t0e e-pected price per unit4 it wi## beco1e purc0ase cost budget. "o1e budgets are prepared on#/ in 1onetar/ ter1s4 for e-a1p#e4 cas0 budget4 capita# e-penditure budget etc. ,ver/ organi6ation 0as we## defined objectives4 w0ic0 are to be ac0ieved in a particu#ar span of ti1e. It is of para1ount i1portance t0at t0ere s0ou#d be s/ste1atic efforts to bring t0e1 into rea#it/. .s a part of t0ese efforts4 it is necessar/ to for1u#ate a po#ic/ and it is ref#ected in t0e 1anpower p#anning budget as we## as ot0er re#evant budgets. 70us t0e po#ic/ to be pursued in future for t0e purpose of ac0ieving we##(defined objectives is ref#ected in t0e budget.

5.2 BUDGETAR4 CONTROL

:udgetar/ contro# is actua##/ a 1eans of contro# in w0ic0 t0e actua# resu#ts are co1pared wit0 t0e budgeted resu#ts so t0at appropriate action 1a/ be ta'en wit0 regard to an/ deviations between t0e two. :udgetar/ contro# 0as t0e fo##owing stages. A. De(e0")in% Bu'%et$: 70e first stage in budgetar/ contro# is deve#oping various budgets. It wi## be necessar/ to identif/ t0e budget centers in t0e organi6ation and budgets wi## 0ave to deve#op for eac0 one of t0e1. 70us budgets are deve#oped for functions #i'e purc0ase4 sa#e4 production4 1anpower p#anning as we## as for cas04 capita# e-penditure4 1ac0ine 0ours4 #abor 0ours and so on. <t1ost care s0ou#d be ta'en w0i#e deve#oping t0e budgets. 70e factors affecting t0e p#anning s0ou#d be studied carefu##/ and budgets s0ou#d be deve#oped after a t0oroug0 stud/ of t0e sa1e. B. Rec"r'in% Actu#0 Per!"r+#nce: 70ere s0ou#d be a proper s/ste1 of recording t0e actua# perfor1ance ac0ieved. 70is wi## faci#itate t0e co1parison between t0e budget and t0e actua#. .n efficient accounting and cost accounting s/ste1 wi## 0e#p to record t0e actua# perfor1ance effective#/.

225 C. C"+)#ri$"n "! Bu'%ete' #n' Actu#0 Per!"r+#nce: One of t0e 1ost i1portant aspects of budgetar/ contro# is t0e co1parison between t0e budgeted and t0e actua# perfor1ance. 70e objective of suc0 co1parison is to find out t0e deviation between t0e two and provide t0e base for ta'ing corrective action. (. C"rrecti(e Acti"n: 7a'ing appropriate corrective action on t0e basis of t0e co1parison between t0e budgeted and actua# resu#ts is t0e essence of budgeting. . budget is a#wa/s prepared for future and 0ence t0ere 1a/ be a variation between t0e budgeted resu#ts and actua# resu#ts. 70ere is a need for investigation of t0e sa1e and ta'e appropriate action so t0at t0e deviations wi## not repeat in t0e future. Aesponsibi#ities can be fi-ed on proper persons so t0at t0e/ can be 0e#d responsib#e for an/ suc0 deviations.

5.& RERO BASE BUDGET

Uero :ase :udgeting is 1et0od of budgeting w0ereb/ a## activities are reva#uated eac0 ti1e budget is for1u#ated and ever/ ite1 of e-penditure in t0e budget is fu##/ justified. 70us t0e Uero :ase :udgeting invo#ves fro1 scratc0 or 6ero. Uero :ase :udgeting actua##/ e1erged in t0e #ate 1G$0s as an atte1pt to overco1e t0e #i1itations of incre1enta# budgeting. 70is approac0 re;uires t0at a## activities are justified and prioriti6ed before decisions are ta'en re#ating to t0e a1ount of resources a##ocated to eac0 activit/. In incre1enta# budgeting or traditiona# budgeting4 previous /earQs figures are ta'en as base and based on t0e sa1e t0e budgeted figures for t0e ne-t /ear are wor'ed out. 70us t0e previous /ear is ta'en as t0e base for preparation of t0e budget. Sowever t0e 1ain #i1itation of t0is s/ste1 of budgeting is t0at as activit/ is continued in t0e future on#/ because it is being continues in t0e past. Sence in Uero :ase :udgeting4 t0e beginning is 1ade fro1 scratc0 and eac0 activit/ and function is reviewed t0oroug0#/ before sanctioning t0e sa1e and a## e-penditures are ana#/6ed and sanctioned on#/ if t0e/ are justified. :esides adopting a PUero :aseQ approac04 t0e Uero :ase :udgeting a#so focuses on progra1s or activities instead of functiona# depart1ents based on #ine ite1s4 w0ic0 is a feature of traditiona# budgeting. It is an e-tension of progra1 budgeting. In progra1 budgeting4 progra1s are identified and goa#s are deve#oped for t0e organi6ation for t0e particu#ar progra1. :/ inserting decision pac'ages in t0e s/ste1 and ran'ing t0e pac'ages4 t0e ana#/sis is strengt0ened and priorities are deter1ined.

22: A))0ic#ti"n$ "! Rer" B#$e Bu'%etin%: 70e fo##owing stages@ steps are invo#ved in t0e app#ication of Uero :ase :udgeting. 1. ,ac0 separate activit/ of t0e organi6ation is identified and is ca##ed as a decision pac'age. Decision pac'age is actua##/ not0ing but a docu1ent t0at identifies and describes an activit/ in suc0 a 1anner t0at it can be eva#uated b/ t0e 1anage1ent and ran' against ot0er activities co1peting for #i1ited resources and decide w0et0er to sanction t0e sa1e or not. 2. It s0ou#d be ensured t0at eac0 decision pac'age is justified in t0e sense it s0ou#d be ascertained w0et0er t0e pac'age is consisted wit0 t0e goa# of t0e organi6ation or not. 3. If t0e pac'age is consisted wit0 t0e overa## objectives of t0e organi6ation4 t0e cost of 1ini1u1 efforts re;uired to sustain t0e decision s0ou#d be deter1ined. 4. .#ternatives for eac0 decision pac'age are considered in order to se#ect better and c0eaper options. 5. :ased on t0e cost and benefit ana#/sis a particu#ar decision pac'age s0ou#d be se#ected and resources are a##ocated to t0e se#ected pac'age. U:: was first introduced b/ eter .. /0rr4 a staff contro# 1anager at 7e-as Instru1ents Corporation4 <."... Se deve#oped t0is tec0ni;ue and i1p#e1ented it for t0e first ti1e during t0e /ear 1G$G( )0 in 7e-as in t0e private sector and popu#ari6ed its wider use. Se wrote an artic#e on U:: in Sarvard :usiness Aeview and #ater wrote a boo' on t0e sa1e. 70e U:: concept was first app#ied in t0e "tate of Beorgia4 <."... w0en Mr. =i11/ Carter was t0e Bovernor of t0e "tate. Later after beco1ing t0e resident of <."... Mr. =i11/ Carter introduced and i1p#e1ented t0e U:: in t0e countr/ in t0e /ear 1G+). U:: 0as a wide app#ication in t0e Bovern1ent Depart1ents but a#so in t0e private sector in a variet/ of business. In India4 t0e U:: was app#ied in t0e "tate of Ma0aras0tra in +0s and ear#/ G0s. :enefits fro1 U:: can be su11ari6ed as fo##ows. i. U:: faci#itates review of various activities rig0t fro1 t0e scratc0 and a detai#ed cost benefit stud/ is conducted for eac0 activit/. 70us an activit/ is continued on#/ if t0e cost benefit stud/ is favorab#e. 70is ensures t0at an activit/ wi## not be continued 1ere#/ because it was conducted in t0e previous /ear.

22; ii. . detai#ed cost benefit ana#/sis resu#t in efficient a##ocation of resources and conse;uent#/ wastages and obso#escence is e#i1inated. iii. . #ot of brainstor1ing is re;uired for eva#uating cost and benefits arising fro1 an activit/ and t0is resu#ts into generation of new ideas and a#so a sense o invo#ve1ent of t0e staff. iv. U:: faci#itates i1prove1ent in co11unication and co( ordination a1ongst t0e staff. %. .wareness a1ongst t0e 1anagers about t0e input costs is created w0ic0 0e#ps t0e organi6ation to beco1e cost conscious. vi. .n e-0austive docu1entation is necessar/ for t0e i1p#e1entation of t0is s/ste1 and it auto1atica##/ #eads to record bui#ding. 70e fo##owing are t0e #i1itations of Uero :ase :udgeting. i. It is ver/ detai#ed procedure and natura##/ is ti1e consu1ing and #ot of paper wor' is invo#ved in t0e sa1e. ii. Cost invo#ved in preparation and i1p#e1entation of t0is s/ste1 is ver/ 0ig0. iii. Mora#e of staff 1a/ be ver/ #ow as t0e/ 1ig0t fee# t0reatened if a particu#ar activit/ is discontinued. iv. Aan'ing of activities and decision(1a'ing 1a/ beco1e subjective at ti1es. %. It 1a/ not advisab#e to app#/ t0is 1et0od w0en t0ere are non financia# considerations4 suc0 as et0ica# and socia# responsibi#it/ because t0is dictate rejecting a budget c#ai1 on #ow ran'ing projects.

5.*

PER ORMANCE BUDGETING

It is budgetar/ s/ste1 w0ere t0e input costs are t0e perfor1ance i.e. t0e end resu#ts. 70is budgeting is used e-tensive#/ in t0e Bovern1ent and ub#ic "ector <nderta'ings. It is essentia##/ a projection of t0e Bovern1ent activities and e-penditure t0ereon for t0e budget period. 70is budgeting starts wit0 t0e broad c#assification of e-penditure according to functions suc0 as education4 0ea#t04 irrigation4 "ocia# we#fare etc. ,ac0 of functions is t0en c#assified into progra1s into activities or projects. 70e 1ain features of perfor1ance budgeting are as fo##ows.

2&0 i. C#assification into functions4 progra1s or activities

ii. "pecification of objectives for eac0 progra1 iii. ,stab#is0ing suitab#e 1et0ods for 1easure1ent of wor' as far as possib#e iv. 5i-ation of wor' targets for eac0 progra1. Objectives of eac0 progra1 are ascertained c#ear#/ and t0en t0e resources are app#ied after specif/ing t0e1 c#ear#/. 70e resu#ts e-pected fro1 suc0 activities are a#so #aid down. .nnua#4 ;uarter#/ and 1ont0#/ targets are deter1ined for t0e entire organi6ation. 70ese targets are bro'en down for eac0 activit/ center. 70e ne-t step is to set up various productivit/ or perfor1ance ratios and fina##/ target for eac0 progra1 activit/ is fi-ed. 70e targets are co1pared wit0 t0e actua# resu#ts ac0ieved. 70us t0e procedure for t0e perfor1ance budgets inc#ude a##ocation of resources e-ecution of t0e budget and periodic reporting at regu#ar interva#s. 70e budgets are fina##/ co1pi#ed b/ t0e various agencies suc0 as Bovern1ent Depart1ent4 pub#ic underta'ings etc. t0ereafter t0ese budgets 1ove on to t0e aut0orities responsib#e for reviewing t0e perfor1ance budgets. Once t0e 0ig0er aut0orities decide about t0e funds4 t0e a1ount sanctioned are co11unicated and t0e wor' is started. It is t0e dut/ of t0ese agencies to start t0e wor' in ti1e4 to ensure t0e regu#ar f#ow of e-penditure4 against t0e p0/sica# targets4 prevent over runs under spending and furnis0 report to t0e 0ig0er aut0orities regarding t0e p0/sica# progress ac0ieved. In t0e fina# p0ase of perfor1ance budgetar/ process4 progress reports are to be sub1itted periodica##/ to 0ig0er aut0orities to indicate broad#/4 t0e p0/sica# perfor1ance to be ac0ieved4 t0e e-penditure incurred and t0e variances toget0er wit0 e-p#anations for t0e variances.

C-ec3 4"ur Pr"%re$$:

Define t0e ter1s. a. :udget b. :udgetar/ Contro# c. Uero :ase :udget d. erfor1ance :udgeting 2. 8:udgetar/ contro# is actua##/ a 1eans of Contro#.9 Discuss. 1.

2&1

5.6

UNCTIONAL BUDGETS

70e 5unctiona# :udgets are prepared for eac0 function of t0e organi6ation. 70ese budgets are nor1a##/ prepared for a period of one /ear and t0en bro'en down to eac0 1ont0. 70e fo##owing budgets are inc#uded in t0is categor/. i. "a#es :udgetC . "a#es budget s0ows forecast of e-pected sa#es in t0e future period and e-pressed in ;uantit/ of t0e product to be so#d as we## as t0e 1onetar/ va#ue of t0e sa1e. . "a#es :udget 1a/ be prepared product wise4 territories@ area@ countr/ wise4 custo1er group wise4 sa#es1en wise as we## as ti1e #i'e ;uarter wise4 1ont0 wise4 wee'#/ etc. ii. roduction :udgetC 70is budget s0ows t0e production target to be ac0ieved in t0e /ear or t0e future period. 70e production budget is prepared in ;uantit/ as we## as in 1onetar/ ter1s. :efore preparation of t0is budget it is necessar/ to stud/ t0e principa# budget or t0e 'e/ factor. 70e principa# budget factor can be sa#es de1and or t0e production capacit/ or avai#abi#it/ of raw 1ateria#. 70e po#ic/ of t0e 1anage1ent regarding t0e inventor/ is a#so ta'en into consideration. 70e production budget is nor1a##/ prepared for a period of one /ear and bro'en down on 1ont0#/ basis. roduction targets are decided b/ adding t0e budgeted c#osing inventor/ in t0e sa#es forecast and subtracting t0e opening inventor/ fro1 t0e tota# of t0e sa1e. roduction Cost :udget is prepared b/ 1u#tip#/ing t0e production targets b/ t0e budgeted production cost per unit. iii. Materia# urc0ase :udgetC 70is budget of 1ateria#s tot be purc0ased during t0e co1ing /ear. 5or t0e preparation of t0is budget4 production budget is t0e starting point if it is t0e 'e/ factor. If t0e raw 1ateria# avai#abi#it/ is t0e 'e/ factor4 it beco1es t0e starting point. 70e desired c#osing inventor/ of t0e raw 1ateria#s is added to t0e re;uire1ent as per t0e production budget and t0e opening inventor/ is subtracted fro1 t0e gross re;uire1ents. 70is budget is prepared in ;uantit/ as we## as t0e 1onetar/ ter1s and 0e#ps i11ense#/ in p#anning of t0e purc0ase of raw 1ateria#s. .vai#abi#it/ of storage space4 financia# resources4 various #eve#s of 1ateria#s #i'e 1a-i1u14 1ini1u14 re(order and econo1ic order ;uantit/ are ta'en into consideration w0i#e preparing t0is budget. . separate 1ateria# uti#i6ation budget 1a/ a#so be prepared as a preparation of 1ateria# purc0ase budget.

2&2 iv. Cas0 :udgetC a cas0 budget is an esti1ate of cas0 receipts and cas0 pa/1ents prepared for eac0 1ont0. In t0is budget a## e-pected pa/1ents4 revenue as we## as capita# and a## receipts4 revenue and capita# are ta'en into consideration. 70e 1ain purpose of cas0 budget is to predict t0e receipts and pa/1ents in cas0 so t0at t0e fir1 wi## be ab#e to find out t0e cas0 ba#ance at t0e end of t0e budget period. 70is wi## 0e#p t0e fir1 to 'now w0et0er t0ere wi## be surp#us or deficit at t0e end of budget period. It wi## 0e#p t0e1 to p#an for eit0er investing t0e surp#us or raise necessar/ a1ount to finance deficit. Cas0 budget is prepared in various wa/s4 but t0e 1ost popu#ar for1 of t0e sa1e is b/ 1et0od of Aeceipt and a/1ent 1et0od. %. Master :udgetC .## t0e budgets described above are ca##ed as P5unctiona# :udgetsQ t0at are prepared for t0e p#anning of individua# function of t0e organi6ation. 5or e-a1p#e4 :udgets are prepared for urc0ase4 "a#es4 roduction4 Manpower #anning4 and so on. . 1aster budget w0ic0 is a#so ca##ed as PCo1pressive :udgetQ is a conso#idation of a## t0e functiona# budgets. It s0ows t0e projected rofit and Loss account and :a#ance s0eet of business organi6ation. 5or preparation of t0is budget4 a## functiona# budget are co1bined toget0er and t0e re#evant figures are incorporated in preparation of t0e projected rofit and Loss .ccount and :a#ance "0eet. 70us Master :udget is prepared for t0e organi6ation and not for individua# functions.

5.2

CAPITAL ECPENDITURE BUDGET

5.2.1 i1e' #n' 0e1i.0e Bu'%et$: 70e fi-ed and f#e-ib#e budgets are discussed in detai# in t0e fo##owing paragrap0s. i. 5i-ed :udgetC &0en a budget is prepared b/ assu1ing a fi-ed percentage of capacit/ uti#i6ation4 it is ca##ed as a fi-ed budget. 5or e-a1p#e4 a fir1 1a/ decide to operate at G0H of its tota# capacit/ and prepare a budget s0owing t0e projected profit or #oss at t0at capacit/. 70is budget is defined b/ 70e Institute of Cost and Manage1ent .ccountants of N<.M.O as Pt0e budget w0ic0 is designed to re1ain unc0anged irrespective of t0e #eve# of activit/ actua##/ attained. It is based on a sing#e #eve# of activit/Q. 5or preparation of t0is budget4 sa#es forecast wi## 0ave to be prepared a#ong wit0 t0e cost esti1ate. Cost esti1ate can be prepared b/ segregating t0e costs according to t0eir be0avior i.e. fi-ed and variab#e. Cost predictions s0ou#d be 1ade e#e1ent wise and t0e projected profit or #oss can be wor'ed out b/ deducing t0e cost fro1 t0e sa#es

2&& revenue. .ctua##/ in practice4 fi-ed budgets are prepared ver/ rare#/. 70e 1ain reason is t0at t0e actua# output differs fro1 t0e budgeted output significant#/. 70us if t0e budget is prepared on t0e assu1ption of producing !04 000 units and actua##/ t0e nu1ber of units produced are 404 0004 t0e co1parison of actua# resu#ts wit0 t0e budgeted ones wi## be unfair and 1is#eading. 70e budget 1a/ revea# t0e difference between t0e budgeted costs and actua# costs but t0e reason for t0e deviations 1a/ not be pointed out. . fi-ed budget 1a/ be prepared w0en t0e budgeted output and actua# output are ;uite c#ose and not 1uc0 deviation e-ists between t0e two. In suc0 cases4 1a-i1u1 contro# can be e-ercised between t0e budgeted perfor1ance and actua# perfor1ance. ii. 5#e-ib#e :udgetsC a 5#e-ib#e budget is a budget t0at is prepared for different #eve#s of capacit/ uti#i6ation. It can be ca##ed as a series of fi-ed budgets prepared for different #eve#s of activit/. 5or e-a1p#e4 a budget can be prepared for capacit/ uti#i6ation #eve#s of !0H4 $0H4 )0H4 +0H4 G0H and 100H. 70e basic princip#e of f#e-ib#e budget is t0at if budget is prepared for s0owing t0e resu#ts at sa/4 1!4 000 units and actua# production is on#/ 124 000 units4 t0e co1parison between t0e e-penditures4 budgeted and actua# wi## not be fair as t0e budget was prepared for 1!4 000 units. 70erefore it is deve#oped for a re#evant range of production fro1 124 000 units to 1!4 000 units. 70us even if t0e actua# production is 124 000 units4 t0e resu#ts wi## be co1parab#e wit0 t0e budgeted perfor1ance of 124 000 units. ,ven if t0e production s#ips to +4000 units4 t0e 1anager 0as a too# t0at can be used to deter1ine budgeted cost at +4000 units of output. 70e f#e-ib#e budget t0us4 provides a re#iab#e basis for co1parison because it is auto1atica##/ geared to c0ange in production activit/. 70us a f#e-ib#e budget covers a range of activit/4 it is f#e-ib#e i.e. eas/ wit0 variation in production #eve#s and it faci#itates perfor1ance 1easure1ent and eva#uation. iii. &0i#e preparing f#e-ib#e budget4 it is necessar/ to stud/ t0e be0avior of cost and divide t0e1 in fi-ed4 variab#e and se1i variab#e. .fter doing t0is4 t0e costs can be esti1ated for a given #eve# of activit/. iv. It is a#so necessar/ to p#an t0e range of activit/. . fir1 1a/ decide to deve#op f#e-ib#e budget for activit/ #eve# starting to p#an t0e range of activit/ #eve# fro1 !0H to 100H wit0 an interva# of 10H in between. It is necessar/ to esti1ate t0e costs and associate t0e1 wit0 c0osen #eve# of activit/. %. 5ina##/ t0e profit or #oss at different #eve#s of activit/ wi## be co1puted b/ co1paring t0e costs wit0 t0e revenues.

2&* 5.2.2 Pre)#r#ti"n "! Bu'%et: . budgetar/ contro# is e-tre1e#/ usefu# for p#anning and contro##ing as described above. Sowever4 for getting t0ese benefits4 sufficient preparation s0ou#d be 1ade. 5or co1p#ete success4 a so#id foundation s0ou#d be #aid down and in view of t0is t0e fo##owing aspects are of crucia# i1portance. i. :udget Co11itteeC for successfu# i1p#e1entation of budgetar/ contro# s/ste14 t0ere is a need of a budget co11ittee. In s1a## or 1ediu1 si6e organi6ations4 t0ere 1a/ not be carried out b/ t0e C0ief .ccount 0i1se#f. Due to t0e si6e of organi6ation4 t0ere 1a/ not be too 1an/ prob#e1s in i1p#e1entation of t0e budgetar/ contro# s/ste1. Sowever4 in #arge si6e organi6ation4 t0ere is a need of a budget co11ittee consisting of t0e c0ief e-ecutive4 budget officer and 0eads of 1ain depart1ents in t0e organi6ation. 70e functions of t0e budget co11ittee are to get t0e budgets prepared and t0en scrutini6e t0e sa1e4 to #a/ down broad po#icies regarding t0e preparation of budgets4 to approve t0e budgets4 suggest for revision4 to 1onitor t0e i1p#e1entation and to reco11ended t0e action to be ta'en in a given situation. ii. :udget CentersC ,stab#is01ent of budget centers is anot0er i1portant pre(re;uisite of a sound budgetar/ contro# s/ste1. . budget canter is a group of activities or a section of t0e organi6ation for w0ic0 budget can be deve#oped. 5or e-a1p#e4 1anpower p#anning budget4 researc0 and deve#op1ent cost budget4 production and production cost budget4 #abor 0our and so on. :udget centers s0ou#d be defined c#ear#/ so t0at preparation beco1es eas/. iii. :udget eriodC . budget is a#wa/s prepared prior to a defined period of ti1e. 70is 1eans t0at t0e period for w0ic0 a budget is prepared is decided in advance. 70us a budget 1a/ be prepared for t0ree /ears4 one /ear4 si- 1ont0s4 one 1ont0 or even for a wee'. 70e point is t0at t0e period for t0e functiona# budgets #i'e sa#es4 purc0ase4 production etc. are prepared for one /ear and t0en bro'en down on 1ont0#/ basis. :udgets #i'e capita# e-penditure are genera##/ prepared for a period fro1 1 /ear to 3 /ears. 70us depending upon t0e t/pe of budget4 t0e period of t0e sa1e is decided and it is i1portant t0at it is decided we## in advance. iv. reparation of an Organi6ation c0artC 70ere s0ou#d be an organi6ation c0art t0at s0ows c#ear#/ defined aut0orities and responsibi#ities of various e-ecutives. 70e organi6ation c0art wi## define c#ear#/ t0e functions to be perfor1ed b/ eac0 e-ecutive re#ating to t0e budget preparation and 0is re#ations0ip wit0 ot0er e-ecutives. 70e organi6ation c0art 1a/

2&6 0ave to be ensure t0at eac0 budget center is contro##ed b/ an appropriate 1e1ber of t0e staff. %. :udget Manua#C . budget 1anua# is defined b/ ICM. asQ a docu1ent w0is0 sets out t0e responsibi#ities of t0e person engaged in4 t0e routine of and t0e for1s and records re;uired for budgetar/ contro#Q. 70e budget 1anua# t0us is a sc0edu#e4 docu1ent or boo'#et4 w0ic0 contains different for1s to be used4 procedures to be fo##owed4 budgeting organi6ation detai#s4 and set of instructions to be fo##owed in t0e budgeting s/ste1. It a#so #ists out detai# of t0e responsibi#ities of different persons and t0e 1anagers invo#ved in t0e process. . t/pica# budget 1anua# contains t0e fo##owing. 1. Objectives and of aut0orities and 1anageria# po#icies of t0e business concern. 2. Interna# #ines of aut0orities and responsibi#ities. 3. 5unctions of t0e ro#e of budget co11ittee officer. 4. :udget period 5. rincipa# budget factor 6. Detai#ed progra1 of budget preparation 7. .ccounting codes and nu1bering 8. 5o##ow up procedures. vi. rincipa# :udget 5actorC . principa# budget factor is t0at factor t0e e-tent of w0ose inf#uence 1ust first be assessed in order to prepare t0e functiona# budgets. >or1a##/ sa#es is t0e 'e/ factor or principa# budget factor but ot0er factors #i'e production4 purc0ase4 s'i##ed #abor 1a/ a#so be t0e 'e/ factors. 70e 'e/ factor puts restrictions on t0e ot0er functions and 0ence it 1ust be considered carefu##/ in advance. "o continuous assess1ent of t0e business situation beco1es necessar/. In a## conditions t0e 'e/ factor is t0e starting point in t0e process of preparation of budgets. . t/pica# #ist of so1e of t0e 'e/ factor is given be#owC

S#0e$: Consu1er de1and4 s0ortage of sa#es staff4 inade;uate advertising M#teri#0: .vai#abi#it/ of supp#/4 restrictions on i1port L#."r: "0ortage of #abor P0#nt: .vai#abi#it/ of capacit/4 bott#enec's in 'e/ processes M#n#%e+ent: Lac' of capita#4 pricing po#ic/4 s0ortage of efficient e-ecutive4 #ac' of fau#t/ design of t0e product etc.

2&2 vii. .ccounting AecordsC It is essentia# t0at t0e accounting s/ste1 s0ou#d be ab#e to record and ana#/6e t0e transaction invo#ved. . c0art of accounts or accounts code s0ou#d be 1aintained w0ic0 1a/ correspond wit0 t0e budget centers for estab#is01ent of budgets and fina##/4 contro# t0roug0 budgets.

C-ec3 4"ur Pr"%re$$:

Define t0e ter1s. a. 5unctiona# :udget. b. roduction :udget. c. Cas0 :udget. d. Master :udget. e. :udget Co11ittee f. :udget Creators. ". :udget Manua# 2. Distinguis0 between 5i-ed :udget and 5#e-ib#e :udget. 1. I00u$tr#ti"n 1 1. U Ltd.4 0as prepared t0e fo##owing sa#es :udget for first five 1ont0s of 2011. M"nt- S#0e$ Bu'%et 8unit$9 =anuar/ 104+00 5ebruar/ 1!4$00 Marc0 124200 .pri# 104400 Ma/ G4+00 Inventor/ finis0ed goods at t0e end of ever/ 1ont0 is to be e;ua# to 2! H of sa#es esti1ate for t0e ne-t 1ont0. On 1st =anuar/ 2011. t0ere were 24)00 units of product on 0and. 70ere is no wor' in progress at t0e end of an/ 1ont0. ,ver/ unit product re;uires two t/pes of 1ateria#s in t0e fo##owing ;uantitiesV M#teri#0 A: * >%. M#teri#0 B: 6 >%. Materia#s e;ua# to one 0a#f of t0e re;uire1ents of t0e ne-t 1ont0Qs production are to be in 0and at t0e end of ever/ 1ont0. 70is re;uire1ent was 1et on 1st =anuar/ 2011. repare t0e fo##owing budgets for t0e ;uarter ending on 31st 1ars0 2011 I. roduction :udget( *uantit/ &ise. II3 Materia#s urc0ase :udget( *uantit/ wise.

2&5 S"0uti"n: R Lt'. Pr"'ucti"n Bu'%et L In unit$M J#nu#rA 7 M#rc- 2011 P#rticu0#r$ J#nu#rA e.ru#rA M#rcI. "a#es 104+00 1!4$00 124200 IIO ,sti1ated C#osing "toc' 34G00 340!0 24$00 IIIO Bross Ae;uire1entsNIKIIO 144)00 1+4$!0 144+00 I%O Opening "toc' 24)00 34G00 340!0 -. >et Ae;uire1ents NIII(I%O 124000 144)!0 114)!0 M#teri#0$ Re@uire+ent Bu'%et L Eu#ntit#ti(eM M#teri#0 A? J#nu#rA 7M#rc- 2011 P#rticu0#r$ J#nu#rA e.ru#rA M#rcroduction N.s per roduction :udget( 124000 144)!0 114)!0 4+4000 !G4000 unitsO Ae;uire1ent for roductionC 4 'g per unit 4)4000 .ddC Desired C#osing "toc' 2G4!00 234!00 204!00 Bross re;uire1ents ))4!00 +24!00 $)4!00 LessC Opening "toc' 244000 2G4!00 234!00 >et Ae;uire1ents !34!00 !34000 444000 M#teri#0$ Re@uire+ent Bu'%et L Eu#ntit#ti(eM M#teri#0 B? J#nu#rA 7M#rc- 2011 P#rticu0#r$ J#nu#rA e.ru#rA M#rcroduction N.s per roduction :udget( 124000 144)!0 unitsO Ae;uire1ent for roductionC !+4)!0 5 'g per unit

114)!0 $04000 )34)!0

.ddC Desired C#osing "toc' 3$4+)! 2G43)! 2!4$2! Bross re;uire1ents G$4+)! 1403412! +443)! LessC Opening "toc' 304000 3$4+)! 2G43)! >et Ae;uire1ents $$4+)! $$42!0 !!4000 ,"r3in% N"te$: 1. =
roduction for .pri#. "a#es 104400 N unitsO K C#osing "toc' 244!0 NunitsO 124+!0 NunitsO ? Opening "oc' 24$00 NunitsO D 1042!0 NunitsO.

2. Materia# re;uired for production in .pri#C . C1042!0 L 4 D 414000 'g.

: C1042!0 L ! D !142!0 'g.

2&: I00u$tr#ti"n 2 . Ltd. 1anufactures a sing#e product wit0 a sing#e grade of #abor. 70e sa#es budget and finis0ed goods stoc' budget for t0e 1st *uarter ending on 30t0 =une 2011 are as fo##owsC "a#esC 1400 units Opening finis0ed unitsC 100 units C#osing finis0ed unitsC 140 units 70e goods are i1ported on#/ w0en t0e production wor' is co1p#ete and it is budgeted t0at 10H of finis0ed wor' wi## be scrapped. 70e standard direct #abor content of t0e product is 3 0ours. 70e budgeted productivit/ ratio for direct is +0H on#/. 70e co1pan/ e1p#o/s 3$ direct operatives w0o are e-pected to average 144 wor'ing 0our eac0 in t0e 1st ;uarter. Jou are re;uired to prepare4 I. roduction :udget IIO Direct Labor :udget IIIO Co11ent on t0e prob#e1 t0at /our direct #abor budget revea#s and suggest 0ow t0is prob#e1 1ig0t be overco1e. S"0uti"n: A Lt'. Pr"'ucti"n Bu'%et A)ri0 7 June 2011 P#rticu0#r$ N". "! unit$ I. "a#es 5orecast 14400 IIO ,sti1ated C#osing "toc' 140 IIIO Bross Ae;uire1ent NI K IIO 14!40 I%O Opening "toc' 100 %O >et roduction Ae;uire1ent NIII ? I%O 144 Bood roduction 40 %IO &astage N 10H of tota# production ? assu1edO %IIO 7ota# roduction Ae;uire1entN % K %IO 14$00 1 $ 0

2&; Direct L#."r Bu'%et P#rticu0#r$ N". "! -"ur$ 7ota# "tandard Sours Ae;uiredC 14$00 units L 3 44+00 roductivit/ AatioC +0H .ctua# Sours Ae;uiredC 44+00@ .+0 $4000 :udgeted Sours .vai#ab#e 3$ 1en L 144 0ours !41+4 "0ortfa## +1$ C"++ent$: 5ro1 t0e Direct Labor :udget it can be seen t0at t0e direct #abor 0ours avai#ab#e are not sufficient and 0ence t0ere is s0ortage of +1$ Sours. 70erefore it wi## be necessar/ to wor' overti1e4 as we## as i1prove1ent in t0e efficienc/. I00u$tr#ti"n & "u11ari6ed be#ow are t0e Inco1e and ,-penditure forecast for t0e 1ont0 Marc0 to .ugust 2011. Cre'it ,#%e M!%. O!!ice Se00in M"nt- Cre'it Purc-#$e $ E1)en$e E1)en$e % S#0e$ $ R$. $ $ E1)en$ R$. R$. R$. R$. e$ Marc0 $04000 3$4000 G4000 44000 24000 44000 .pri# $24000 3+4000 +4000 34000 14!00 !4000 Ma/ $44000 334000 104000 44!00 24!00 44!00 =une !+4000 3!4000 +4!00 34!00 24000 34!00 =u#/ !$4000 3G4000 G4000 44000 14000 44!00 .ugust $04000 344000 +4000 34000 14!00 44!00 Jou are given fo##owing furt0er infor1ation i. #ant Costing As. 1$4000 due for de#iver/ in =une. 10H on de#iver/ and ba#ance after t0ree 1ont0s ii. .dvance 7a- As. +4000 is pa/ab#e in Marc0 and =une iii. eriod of credit a##owed4 "upp#iers 2 1ont0s and Custo1ers 1 1ont0 iv. Lag in pa/1ent of 1anufacturing e-penses 0a#f 1ont0 %. Lag in pa/1ent of a## ot0ers e-penses one 1ont0 vi. Cas0 ba#ance on 1st Ma/ 200+ is As. +4000 vii. repare Cas0 :udget for t0ree 1ont0s starting fro1 1st Ma/ 2010

2*0 S"0uti"n: C#$- Bu'%et M#A?Au%u$t 2010 P#rticu0#r$ M#A June Ju0A I. Opening Cas0 :a#ance AeceiptsC IIIO 7ota# ,-pected Aeceipts $24000 $44000 !+4000 I%O 7ota# Cas0 .vai#ab#e NIKIIIO )04000 )G4)!0 )04)!0 -. ,-pected a/1ent A. urc0ases N2 1ont0s creditO 3$4000 3+4000 334000 34)!0 44000 34)!0 B. Manufacturing ,-penses NSa#f 1ont0 creditOY C. &ages NSa#f 1ont0 creditO +4000 104000 +4!00 (. Office ,-penses None 1ont0 creditO 14!00 24!00 24000 *. "e##ing ,-penses None 1ont0 creditO !4000 44!00 34!00 ,. urc0ase of Mac0ine 14$00 .. .dvance 7a- +4000 %IO 7ota# a/1ent N.K:KCKDK,K5KBO !442!0 $)4000 !243!0 %IIO C#osing :a#ance 1!4)!0 124)!0 1+4400 70ere is de#a/ of 0a#f a 1ont0 for pa/1ent of Manufacturing ,-penses and wages and 0ence current 1ont0Qs !0H and previous 1ont0Qs !0H are paid in t0e current 1ont0. I00u$tr#ti"n * . 1anufacturing co1pan/ is current#/ wor'ing at !0H capacit/ and produce 104000 units at a cost of As. 1+0 per unit as per t0e fo##owing detai#s. Materia#sC As.100 LaborC As.30 5actor/ Over0eadsC As.30 N 40H fi-ed O .d1inistrative Over0eadsC As.20 N!0H fi-edO 7ota# Cost er <nitC As.1+0 +4000 1!4)!0 124)!0 IIO ,-pected Cas0

2*1 70e se##ing price per unit at present is As.200. .t $0H wor'ing4 1ateria# cost per unit increases b/ 2H and se##ing price per unit fa##s b/ 2H. .t +0H wor'ing4 1ateria# cost per unit increases b/ !H and se##ing price per unit fa##s b/ !H. repare a 5#e-ib#e :udget to s0ow t0e profits@ #osses at !0H4 $0H and +0H capacit/ uti#i6ation. S"0uti"n: C#)#citA Uti0iO#ti"n 60N A. >u1ber of <nits 104000 124000 1$4000 B. "e##ing rice er <nit As.200 As.1G$ As.1G0 C. %ariab#e Cost er <nit As.100 Direct Materia# As.30 Direct Labor As.1+ 5actor/ Over0eadsN$0HO As.10 .d1inistrative Over0eadsN!0HO (. 7ota# %ariab#e Cost er <nit As.1!+ As.1$0 As.102 As.30 As.1+ As.10 As.1 0! As.3 0 As.1 + As.1 0e1i.0e Bu'%et P#rticu0#r$ C#)#citA Uti0iO#ti"n 20N C#)#citA Uti0iO#ti"n :0N

As.1$3

*. 7ota# %ariab#e Cost N. L DO As.1!4+04000 As.1G4204000 As.2$40+4000 ,. 5i-ed Costs As.24204000 As.24204000 As.24204000 NAs.12 K As.10 D As.22 per unit at e-isting #eve# 104000 units.O .. 7ota# CostN, K 5O As.1+4004000 As.214404000 As.2+42+4000 /. "a#es Aevenue N. L %O As.204004000 As.234!24000 As.304404000 I. rofits@ Losses NS ? B O As.24004000 As.24124000 As.24124000

5.5 ECERCISES
1. "e#ect t0e correct answer fro1 t0e c0oices given in eac0 of fo##owingC( 1. . budget is .O an aid to 1anage1ent :O a post1orte1 ana#/sis CO a substitute of 1anage1ent.

2*2 70e budgeted standard 0ours of factor/ is 124000. t0e capacit/ uti#i6ation ratios for .pri# 200G stood at G0H w0i#e t0e efficienc/ ratios for t0e 1ont0 ca1e to 120H. 70e actua# production in standard 0our for .pri# 200G was .O 104+00 :O124G$0 CO 144400 DO 124+00 3. . budget is a projected p#an of action in .O p0/sica# units :O 1onetar/ ter1s CO p0/sica# units and 1onetar/ units. 2. 4. 5#e-ib#e budget are usefu# for .O #anning purposes on#/ :O #anning perfor1ance eva#uation and feedbac' contro# CO Contro# of perfor1ance on#/ 70e scarce factor of production is 'nown as 4 .O Me/ factor B. Lin'ing factor CO Critica# factor DO roduction factor. 2. "tate w0et0er t0e fo##owing state1ents are 7A<, or 5.L",. 1. 5i-ed budgets are concerned wit0 ac;uisition of fi-ed assets. 2. 5unctiona# :udgets are subsidiar/ to 1aster budget. 3. :udgeting is usefu# for p#anning and contro##ing. 4. Capita# e-penditures budget is prepared genera##/ for s0ort ter1. 5. :udgetar/ contro# is a tec0ni;ue of costing. 5. I00u$tr#ti"n 1 repare a Cas0 :udget fro1 t0e fo##owing infor1ation for .:C Ltd. *tP#rticu0#r$ 1$t 2n' &r' Eu#rter Eu#rter Eu#rter Eu#rt er LR$.M LR$.M LR$.M LR$.M Opening Cas0 104000 Co##ection fro1 custo1ers 142!4000 14!04000 14$04000 24214000 a/1entsC urc0ase of Materia#s "a#aries and &ages 204000 3!4000 3!4000 !44200 Ot0er ,-penses

2!4000 204000 204000 1)4000 G04000 G!4000 G!4000 140G4200 204000

Inco1e 7a- !4000 Mac0iner/ urc0ase

2*& 70e co1pan/ desires to 1aintain a cas0 ba#ance of As.1!4000 at t0e end of eac0 ;uarter. Cas0 can be borrowed or repaid in 1u#tip#es of As.!00 at an interest rate of 10H p. a. Manage1ent does not want to borrow cas0 1ore t0an w0at is necessar/ and wants to repa/ as ear#/ as possib#e. In an/ event4 #oans cannot be e-tended be/ond a ;uarter. Interest is co1puted and paid w0en principa# is repaid. .ssu1e t0at borrowing ta'es p#ace at t0e beginning and repa/1ents are 1ade at t0e end of t0e ;uarter. I00u$tr#ti"n 2 . co1pan/ 1anufactures two products4 L and J. . forecast units to be so#d in first 4 1ont0s of t0e /ear is given be#ow. P#rticu0#r$ Pr"'uct C Lunit$M Pr"'uct 4 Lunit$M =anuar/ 14000 24+00 5ebruar/ 14200 24+00 Marc0 14$00 24400 .pri# 24000 24000 Ma/ 24400 14$00 Ot-er in!"r+#ti"n i$ %i(en .e0"B: P#rticu0#r$ Pr"'uct C 7 R$. Per Unit Direct Materia# 12.!0 1G.00 Direct Labor 4.!0 ).00 5actor/ Over0eads per unit 3.00 4.00 70ere wi## be no opening and c#osing wor' in progress N&I O at t0e end of an/ 1ont0 and finis0ed product Nin unitsO e;ua# to 0a#f t0e budgeted sa#e of t0e ne-t 1ont0 s0ou#d be in stoc' at t0e end of eac0 1ont0N inc#uding previous /earO Jou are re;uired to prepare4 A. roduction :udget for =anuar/ to .pri# and B. "u11ari6ed production cost budget

Pr"'uct 4 7 R$. Per Unit

2** I00u$tr#ti"n & 70e 1ont0#/ budget for 1anufacturing over0eads of a 1anufacturing co1pan/ is given be#ow. P#rticu0#r$ C#)#citA :0N C#)#citA 100N :udgeted roduction $00 units +00 units &ages As.14200 As.24000 Consu1ab#e "tores G00 1!00 Maintenance 1100 1!00 ower and 5ue# 1$00 2000 Depreciation 4000 4000 Insurance 1000 1000 7ota# G+00 12000 Jou are re;uired to4 i. Indicate w0ic0 of t0e ite1 are fi-ed4 variab#e and se1i variab#e ii. repare a budget for +0H capacit/ iii. "0ow t0at tota# cost4 bot0 fi-ed and variab#e per unit and output at $0H4 +0H4 and 100H capacit/ #eve#s.

2*6

:
COST AUDIT
Unit Structure +.0 Objectives +.1 Introduction +.2 Definition of .uditing +.3 Co1pu#sor/ .udit +.4 70e .uditor +.! Cost .udit +.$ ,fficienc/ .udit +.) Cost %@s 5inancia# .udit +.+ "cope E 5unctions of cost .udit +.G Organi6ations for and circu1stances favoring cost .udits +.10 :enefits of Cost .udits +.11 Cost .udit rogra1 and rocedure +.12 "tatutor/ Cost .udit +.13 rovisions of Cost .udit in co1panies .ct and 2Aeporting3 Au#es +.14 Cost Investigation +.1! ,-ercises

Cost .udit

:.0 OBJECTIVES
.fter stud/ing t0is unit t0e "tudents wi##C Mnow t0e Concept of .udit Mnow "tatutor/ .udit Mnow Cost .udit Mnow t0e "cope and 5unctions of Cost .udit Mnow t0e benefits of cost .udit Mnow t0e difference between 5inancia# .udit and cost .udit <nderstand t0e concept of efficienc/ .udit

:.1 INTRODUCTION
>o business or institution can effective#/ carr/ on its activities wit0out t0e 0e#p of proper records and accounts4 since

2*2 transactions ta'e p#ace at different points of ti1e wit0 nu1erous persons and entities. 70e effect of a## transactions 0as to be recorded and suitab#/ ana#/6ed to see t0e resu#t as regards t0e business as a w0o#e. eriodica# state1ents of account are drawn up to 1easure t0e success or fai#ure of t0e activities in ac0ieving t0e objectives of t0e organi6ation. 70is wou#d be i1possib#e wit0out a s/ste1atic record of transactions. 5inancia# state1ents are often t0e basis for decision 1a'ing b/ t0e 1anage1ent and for corrective action so as to even c#osing down t0e organi6ation or apart of it. .## t0is wou#d be possib#e on#/ if t0e state1ents are re#iab#eV decisions based on wrong accounting state1ents 1a/ prove ver/ 0ar1fu# or even fata# to t0e business. 5or ,-a1p#e4 if t0e business 0as rea##/ earned a profit but because of wrong accounting4 t0e annua# accounts s0ow a #oss. 70us4 fro1 t0e point of view of t0e 1anage1ent itse#f4 aut0enticit/ of financia# state1ents is essentia#. It 1ore for t0ose w0o 0ave invested t0eir 1one/ in t0e business but cannot ta'e part in its 1anage1ent4 for e-a1p#e4 s0are0o#ders in a co1pan/4 suc0 persons4 certain#/ need an assurance t0at t0e annua# state1ents of accounts sent to t0e1 are fu##/ re#iab#e. Its is auditing w0ic0 ensures t0at t0e accounting state1ents are aut0entic. In toda/Qs econo1ic environ1ent4 infor1ation and accountabi#it/ 0ave assu1ed a #arger ro#e t0an ever before. .s a resu#t4 t0e independent audit of an entit/Qs financia# state1ents is a vita# service to investors4 creditors4 and ot0er participants in econo1ic e-c0ange.

:.2

DE INITION O AUDITING

.ccording to Benera# Buide#ines on Interna# .uditing issued b/ t0e IC.I4 8.uditing is defines as a s/ste1atic and independent e-a1ination of data4 state1ents4 records4 operations4 and perfor1ances 2financia# or ot0erwise3 of an enterprise for a stated purpose. In an/ auditing situation4 t0e auditor perceives and recogni6es t0e propositions before 0i1 for e-a1ination4 co##ects evidence4 eva#uates t0e sa1e and on t0is basis for1u#ates 0is judg1ent w0ic0 is co11unicated t0roug0 0is audit report.9 "picer and eg#er define .udit as 8 .n e-a1ination of t0e boo's accounts and vouc0ers of a business as wi## enab#e t0e auditors to satisf/ t0at t0e ba#ance s0eet is proper#/ drawn up so as to give a true and fair view of t0e state of affairs of t0e business and w0et0er t0e rofit and Loss .ccount gives a true and fair view of t0e rofit and Loss for t0e period 4 according to t0e best of 0is infor1ation and t0e e-p#anations given to 0i1 and as s0own b/ t0e boo's4 and if not in w0at respect 0e is not satisfied9

2*5 70us4 audit is a critica# e-a1ination of t0e boo's of accounts and t0e financia# state1ents drawn fro1 t0e1. .n audit e-a1ination can be 1ade b/ a person w0o is du#/ co1petent for t0is purpose. .n audit e-a1ination is to be 1ade on t0e basis of evidentia# docu1ents. 70e object of audit e-a1inations is to enab#e t0e auditor to e-press 0is opinion as regards t0e trut0 and fairness of t0e financia# state1ents. .n auditor 1a/ review t0e financia# state1ents of an enterprise to ascertain w0et0er t0e/ ref#ect a true and fair view of its state of affairs and of its wor'ing resu#ts. In anot0er situation4 0e 1a/ ana#/6e t0e operations of an enterprise to appraise t0eir cost ? effectiveness and in sti## anot0er4 0e 1a/ see' evidence to review t0e 1anageria# perfor1ance in an enterprises. In /et anot0er t/pe of audit t0e auditor 1a/ e-a1ine w0et0er t0e transactions of an enterprise 0ave been e-ecuted wit0in t0e fra1ewor' of certain standards of financia# propriet/. Sowever t0e variations in t0e propositions do not c0ange t0e basic p0i#osop0/ of auditing4 t0oug0 t0e process of co##ection and eva#uation of evidence and t0at of for1u#ating a judg1ent t0ereon 1a/ 0ave to be suitab#/ 1odified. .ccording to .."(1 on 8 :asic rincip#es Boverning an .uditing 8 .n .udit is independent e-a1ination of financia# infor1ation of an/ entit/4 w0et0er profit oriented or not4 and irrespective of its si6e or #ega# for14 w0en suc0 an e-a1ination is conducted wit0 a view to e-pressing an opinion t0ereon.9 70e person conducting t0is process s0ou#d perfor1 0is wor' wit0 'now#edge of t0e use of t0e accounting state1ents and s0ou#d ta'e particu#ar care to ensure t0at not0ing contained in t0e state1ents wi## ordinari#/ 1is#ead an/bod/. 70is 0e can do 0onest#/ b/ satisf/ing 0i1se#f t0at. 1. 70e accounts 0ave been drawn up wit0 reference to entries in t0e boo's of accountsV 2. 3. 70e entries in t0e boo's of account are ade;uate#/ supported b/ under#/ing papers and docu1ents and b/ ot0er evidence. >one of t0e entries in t0e boo's of account 0as been o1itted in t0e process of co1pi#ation and not0ing w0ic0 is not in t0e boo's of account 0as found p#ace in t0e state1ents.

4. 70e infor1ation conve/ed b/ t0e state1ents is c#ear and una1biguousV 5. 70e 5inancia# state1ent a1ounts are proper#/ c#assified described and disc#osed in confor1it/ wit0 accounting standardsV and

2*: 6. 70e state1ent of accounts ta'en as a w0o#e4 present a true and fair picture of t0e operationa# resu#ts and of t0e assets and #iabi#ities. 70e aforesaid definition is ver/ aut0oritative. It 1a'es c#ear t0at t0e basic objective of auditing4 i.e. e-pression of opinion on financia# state1ents does not c0ange wit0 reference to nature4 si6e or for1 of an entit/. 70e definition given in .."(1 is restrictive since it covers financia# infor1ation aspect on#/. Sowever4 t0e scope of auditing is not restricted to financia# infor1ation on#/ but4 toda/V it e-tends to variet/ of non(financia# areas as we##. 70at is 0ow various e-pressions #i'e 1ar'eting audit4 personne# audit4 efficienc/ audit4 Cost audit4 etc4 ca1e into e-istence.

:.& COMPULSOR4 AUDIT

Co1pu#sor/ audit in t0e case of co1panies was introduced b/ t0e Co1panies .ct4 1G!$ wit0 specific provisions as to 1aintenance of boo's of accounts4 and audit. .ccording#/ on#/4 independent persons du#/ ;ua#ified and trained in t0e profession can act as statutor/ auditor in t0e case of a co1pan/. 70e scope of duties4 rig0ts4 and #iabi#ities of t0e auditor and re;uire1ents as to annua# accounts and t0e audit report 0as a#so been en#arged. In 1G4G4 ar#ia1ent enacted t0e C0artered .ccountants .ct w0ic0 was vested t0e 1anage1ent and contro# of accounting profession in t0e 1e1bers of t0e profession. .ccording#/4 t0e Institute of C0artered .ccountant of India 2IC.3 was set up under t0e .ct in De#0i. 70e affairs of t0e IC.I are 1anaged and contro##ed b/ Counci# co1prising e#ected representatives of C0artered .ccountants and no1inees of Centra# Bovern1ent. 70e Counci# #a/s down standards of education4 training4 professiona# conduct and discip#ine. 70e IC.I 0as issued a nu1ber of state1ents on .uditing4 "tate1ents standards 2."3 for guidance of t0e 1e1bers of t0e profession. 70e co1panies .ct 1G!$4 a#so prescribes a cost audit t0e case of specified co1panies to be conducted b/ a cost and wor's .ccountant wit0in t0e 1eaning of t0e Cost and &or's .ccountants .ct4 1G!G. 70e Inco1e ? 7a- .ct4 1G$14 0as a#so 1ade t0e audit of accounts of certain assesses co1pu#sor/. .

:.* TGE AUDITOR

70e person conducting audit is 'nown as t0e auditor. Se 1a'es a report to t0e person appointing 0i1 after due e-a1ination of t0e accounting records and t0e accounting state1ent in t0e for1 of an opinion on t0e financia# state1ents. 70e opinion t0at 0e is

2*; ca##ed upon to e-press is w0et0er t0e financia# state1ents ref#ect a true and fair view. .uditing4 especia##/ of co1panies and for pub#ic purposes 0as beco1e t0e preserve of persons 0aving recogni6ed professiona# training and ;ua#ification. In India4 under t0e aut0orit/ of t0e Co1panies .ct4 1G!$ on#/ C0artered .ccountants are professiona##/ ;ua#ified for t0e audit of t0e accounts of co1panies. C0artered .ccountants are in a position to underta'e auditing of a#1ost an/ accounting aspect4 un#i'e cost accountants4 w0ose sp0ere 0as been restricted to audit of t0e cost accounting records and state1ents.

:.6 COST AUDIT

Cost .udit is defined as t0e verification of correctness of cost records and c0ec' on t0e ad0erence to t0e cost accounting p#an. It is t0e audit of cost records. It is an audit process for verification of t0e cost of 1anufacture or production of an/ artic#e on t0e basis of accounts re#ating to uti#i6ation of 1ateria#4 #abour and ot0er ite1s of cost 1aintained b/ t0e co1pan/ wit0 t0e accepted princip#es of cost accounting. 70us4 Cost .udit is an audit of efficienc/. It is 1ain#/ a preventive 1easure4 a guide for 1anage1ent po#ic/ and decision4 in addition to being a baro1eter of perfor1ance of a co1pan/. :.6.1 O.Decti(e$ "! C"$t Au'it: 70e Objectives of cost audit areC 1. %erification of cost accounts wit0 a view to ascertain t0at t0ose 0ave been proper#/ 1aintained and co1pi#ed according to t0e cost accounting s/ste1. 2. ,nsure t0at t0e prescribed procedure of cost accounting is du#/ ad0ered to4 3. 4. 5. Detection of errors and frauds. Deter1ination of inventor/ va#uation 5aci#itating t0e fi-ation of prices of goods or services.

6. eriodica# reconci#iation between cost accounts and financia# accounts. 7. ,nsuring opti1u1 uti#i6ation of 0u1an4 p0/sica# and financia# resources of t0e co1pan/. 8. 9. Detection and correction of abnor1a# #osses. Incu#cation of cost consciousness.

10. .dvising 1anage1ent as regards t0e areas w0ere perfor1ance ca##s for i1prove1ent.

260 70e Centra# Bovern1ent 1a/4 if it considers it necessar/4 direct t0at t0e audit of cost accounts 'ept b/ a co1pan/ under section 20G213 2d3 s0a## be conducted b/ a cost accountant wit0in t0e 1eaning of t0e Cost and &or's .ccountants4 .cts4 1G!G4 in suc0 1anner as 1a/ be prescribed . "uc0 direction 1a/ in re#ation to a co1pan/ engaged in production4 processing4 1anufacturing or 1ining activities4 re;uire specified particu#ars re#ating to 1ateria#4 #abour or ot0er ite1s of cost. 70e Centra# Bovern1ent 0as fro1 ti1e to ti1e fra1ed ru#es regarding t0e particu#ars as to t0e boo's of account re#ating to cost4 to be 'ept b/ a co1pan/. :.6.2 Eu#0i!ic#ti"n$ "! C"$t Au'it"r: Secti"n 2&& B 819 70e person to be appointed as Cost .uditor of a co1pan/ is re;uiredC 2a3 7o be Cost .ccountant wit0in t0e 1eaning of t0e Cost and &or's .ccountants .ct.1G!G and 2b3 7o 0o#d a certificate of practice issued b/ t0e Institute of Cost and &or's .ccountants of India. 70e Cost .uditor 1a/ be an individua# Cost .ccountant or a fir1 of cost accountants wit0 a #east two partners. . fir1 of cost accountants is re;uired to be constituted wit0 t0e previous approva# of t0e centra# govern1ent. :.6.& Di$@u#0i!ic#ti"n$ "! C"$t Au'it"r: .ccording to "ection 233 : 2!3 4 t0e fo##owing persons cannot be appointed or reappointed to conduct audit of t0e Cost .ccounts of a co1pan/ C 2a3 . person w0o 0as been appointed to conduct t0e audit of a co1pan/ under section 224 2 5inancia# .udit3 2b3 . bod/ Corporate 2c3 .n officer or e1p#o/ee of a co1pan/ 2d3 . person w0o is a partner or w0o is in t0e e1p#o/1ent of an officer or e1p#o/ee of t0e Co1pan/ 2e3 . person w0o is indebted to t0e co1pan/ for an a1ount e-ceeding As1000 or w0o 0as given an/ guarantee4 or provided an/ securit/ in connection wit0 t0e indebtedness of an/ 'ind of an/ t0ird person to t0e co1pan/ for an a1ount e-ceeding As1000. 2f3 . person w0o is dis;ua#ified for an/ of t0e above reasons for appoint1ent as auditor of an/ subsidiar/ or 0o#ding co1pan/ of suc0 co1pan/.

261 :.6.* A))"int+ent "! C"$t Au'it"r:

.ccording to "ection 233 : 2234 t0e cost auditor is to be appointed b/ t0e :oard of Directors wit0 t0e previous approva# of t0e centra# govern1ent. 70e appoint1ent of t0e Cost .uditor is va#id on#/ for t0e /ear for w0ic0 0e 0as been appointed. 70e :oard of Directors is free to appoint a different person as a Cost .uditor in t0e subse;uent /ears. :.6.6 Cei0in% "n Nu+.er "! C"$t Au'it$: 70e Cei#ing as regards t0e nu1ber of Cost .udit s0a## wit0 t0e passing of t0e Co1panies 2.1end1ent3 .ct4 1G++ be t0e sa1e as of audits under section 224 2 1(:3 . Sowever4 before t0e appoint1ent of an/ cost auditor is 1ade b/ t0e :oard4 a written certificate s0a## be obtained fro1 t0e .uditor to t0e effect t0at t0e proposed appoint1ent 4 if 1ade4 wi## be in accordance wit0 t0e cei#ing prescribed in t0e case of an auditor under section 224 2 1 ? :3. Sowever4 before t0e appoint1ent of an/ cost auditor is 1ade b/ t0e :oard4 a written certificate s0a## be obtained fro1 t0e .uditor to t0e effect t0at t0e proposed appoint1ent4 if 1ade wi## be in accordance wit0 t0e cei#ing prescribed in t0e case of an auditor under section 22421( :3 :.6.2 C"$t Au'it Re)"rt: 70e Centra# Bovern1ent 0as issued Cost .udit Aeport Au#es 1G$+ w0ic0 specif/ t0e for1 of t0e report to be 1ade b/ t0e cost auditor. 70e report 1ust be sub1itted to t0e Centra# Bovern1ent 2Co1pan/ Law :oard3 in t0e prescribed for1 and in accordance wit0 t0e procedure #aid down in t0e sc0edu#e anne-ed to t0e Au#es. 70e report s0ou#d a#so be sub1itted to t0e co1pan/ wit0 120 da/s of t0e c#osing of t0e /ear to w0ic0 t0e cost audit re#ates. 7o ensure t0at t0e auditor is enab#ed to co1p#ete 0is wor' in ti1e4 t0ere is a provision t0at re;uires t0e co1pan/ and ever/ officer of t0e co1pan/ to 1a'e avai#ab#e to t0e auditor wit0in G0 da/s fro1 t0e end of t0e financia# /ear4 a## cost accounting records4 state1ents and ot0er necessar/ boo's and papers 4 t0at 1a/ be re;uired for t0e purpose of cost audit.

:.2 AN E

ICIENC4 AUDIT

,fficienc/ audit ensures 8app#ication of t0e basic econo1ic principa# vi64 resources f#ow into t0e 1ost re1unerative c0anne#s. 70e 1ain purpose of efficienc/ audit is to ensure t0at 2a3 ever/ rupee invested in capita# or in ot0er fie#ds gives t0e opti1u1 returns and 2b3 t0e p#anning of invest1ent between t0e different functions and aspects is designed to give opti1u1 resu#ts9.

262 70us4 cost audit can appropriate#/ be ca##ed an 8efficienc/ audit9 .70e ver/ purpose of introduction of cost accounting records4 was to enab#e carr/ing out efficienc/ audit. 70e fo##owing are furt0er evidences to prove t0e cost audit can be ca##ed an efficienc/ audit. 1. 70e cost audit report under para 4 of t0e anne-ure ref#ects t0e insta##ed and actua# capacit/ uti#i6ed. It a#so ana#/ses t0e reasons for s0ortfa## in actua# capacit/ uti#i6ation as co1pared to insta##ed capacit/. 70e i11ediate prob#e1 facing our econo1/ is underuti#i6ation of capacities in a## sectors. . stud/ of cost audit reports can bring to #ig0t t0e broad factors responsib#e for underuti#i6ation. In fact4 suc0 an ana#/sis was 1ade b/ t0e govern1ent and presented to par#ia1ent in 1G+1 w0ic0 provided va#uab#e infor1ation regarding reasons for underuti#i6ation of insta##ed capacit/C 2. <nder para $ of t0e anne-ure to cost audit report an ana#/tica# stud/ of t0e consu1ption of raw 1ateria#s per unit of production bot0 in ;uantit/ and in va#ue is 1ade. 70e cost auditor is a#so e-pected to co1pare t0e consu1ption wit0 standards4 if an/4 as we## as wit0 t0e corresponding figures for t0e previous two /ears. 70e cost auditor 0as to offer 0is co11ents on t0e variation in t0e consu1ption. . carefu# stud/ of t0ese co11ents can identif/ areas w0ere wastage of raw 1ateria# occurs and can bring to focus t0e 1ost efficient units in 1ateria# consu1ption. 3. 70e cost auditor is e-pected to co11ent on t0e consu1ption of energ/ power and fue# in tota# as we## as per unit of output . ower and fue# are t0e vita# inputs for industr/. &it0 t0e i1perative need for conserving energ/ for better uti#i6ation4 t0is infor1ation is bound to be great use to an/one w0o ana#/ses t0e cost audit report. 70e para re#ating to power a#so contains detai#ed wor'ings regarding t0e cost of generated power and a co1parative stud/ can bring about better uti#i6ation b/ drawing #essons fro1 efficient units. 4. . 1anufacturing estab#is01ent s0ou#d 'eep its p#ant and 1ac0iner/ in a good state so t0at t0e productivit/ of t0e 1ac0ines is not a##owed to detoriate. 5or t0is purpose4 a stud/ of repairs and 1aintenance e-penses wou#d be 0e#pfu#. 70e cost audit report contains infor1ation regarding consu1ption of stores and spares per unit of output w0ic0 serves as a good indicator of t0e state of repairs and 1aintenance in t0e co1pan/. 5. . sound financia# 1anage1ent is ref#ected in t0e 1aintenance of 1ini1u1 inventor/ of stores and spares. 70e cost audit

26& report contains infor1ation regarding t0e e-tents and proportion of non(1oving ite1s of 1ateria#s as stores and spares as co1pared to t0e tota# inventor/. Man/ co1panies were ab#e to uneart0 t0eir dead inventories t0roug0 t0is co11ent on non ? 1oving ite1sV 6. 70e cost accounting record ru#es a#so envisage 1aintenance of #og boo's s0owing detai#ed ana#/sis of downti1e i.e. ti1e of id#eness of 1ac0ines. .n ana#/sis of t0e #og boo's #in'ed up wit0 reasons for underuti#i6ation of capacit/ wi## provide a sound base for assessing t0e factors responsib#e for #ower production and #ower #eve#s of activit/. 7. articu#ars of e-port sa#es and profitabi#it/ fro1 e-ports sa#es after ta'ing into account e-penses on e-ports are a#so avai#ab#e in t0e cost audit report. One 1ajor outgo fro1 t0e centra# revenue is on account of cas0 incentives and dut/ drawbac's on e-ports. 7o w0at e-tent t0e industr/ is justified in ta'ing t0ese e-port benefits cou#d be 'nown b/ stud/ing para 13 of t0e cost audit report giving t0e profitabi#it/ or ot0erwise of e-ports for t0e co1pan/V 8. . Cost auditor is e-pected to offer co11ents on various 1atters #i'e rectification of i1ba#ances in production faci#ities4 fu##er uti#i6ation of insta##ed capacities4 cost of production4 increased productivit/4 #i1iting factors causing production bott#enec's and i1proved inventor/ po#icies. 9. . cost auditor is a#so e-pected to offer 0is co11ents on t0e budgetar/ contro# s/ste1s and interna# audit s/ste1s4 if an/4 prevai#ing in t0e organi6ation. . good contro# s/ste1 is an instru1ent for ac0ieving 1anageria# objectivesV 10. 70e f#ow of infor1ation fro1 different units of t0e industr/ into t0e govern1ent depart1ents provides t0e best 1eans for carr/ing out an inter(fir1 co1parative stud/ of cost structure and ot0er re#ated aspects. 70oug0 inter( fir1 co1parison is a difficu#t e-ercise because of situations not being co1parab#e4 at #east t0e co1parab#e ones can be iso#ated4 and usefu# conc#usions can be drawn4 t0e s/ste1 of cost audit 0as faci#itated t0is e-ercise. 70e industria# scene is do1inated b/ t0e pub#ic sector. 70e need for i1proving efficienc/ and cost reduction in pub#ic sector underta'ings 0as been e1p0asi6ed b/ t0e govern1ent fro1 ti1e to ti1e. 70ere is no ot0er better instru1ent t0an an independent cost specia#ist 1onitoring t0e be0avior of cost fro1 ti1e to ti1e.

26*

:.5 COST AUDIT V/S INANCIAL AUDIT

. 5inancia# audit under t0e Co1panies .ct4 1G!$ can be described as an e-a1ination of boo's and vouc0ers of a business or underta'ing to enab#e t0e auditor to satisf/ 0i1se#f w0et0er t0e accounts t0ereof are proper#/ drawn up so as to e-0ibit a true and fair view of t0e state of affairs of t0e co1pan/. 70e end product of a financia# audit is a report e-pressing an opinion as to w0et0er. 1. 70e ba#ance s0eet and profit and #oss account give a true and fair view of t0e financia# position and profit @#oss respective#/.

2. 70e necessar/ records as prescribed b/ #aw 0ave been 1aintained or not4 and 3. 70e ba#ance s0eet and profit and #oss account are in agree1ent wit0 t0e boo's of accounts. In addition4 t0e financia# auditor s0ou#d a#so e-press 0i1se#f on 1atter contained in t0e Manufacturing and Ot0er Co1panies 2.uditorQs Aeport3 Order4 1G++ as we## as t0ose contained in "ection 22) 21.3 of t0e Co1panies .ct41G!$. 70e 5inancia# .uditor4 a practicing c0artered .ccountant4 is appointed b/ t0e s0are0o#ders and 0ence 0e reports to t0e1. 70is is app#icab#e to a## co1panies irrespective of si6e and nature of operations. "tatutor/ cost audit is a 8"/ste1 of audit introduced b/ t0e Bovern1ent of India for t0e review4 e-a1ination and appraisa# of t0e cost accounting records and attendant infor1ation re;uired to be 1aintained b/ specified industries.9 5ro1 t0e above definition4 it wou#d be evident t0at t0is audit is app#icab#e on#/ to co1panies engaged in 1anufacture of specified products. Cost .udit resu#ts in a report b/ t0e cost auditor w0ic0 inter a#ia contains an independent opinion as to w0et0erC 1. 70e cost records as prescribed b/ #aw 0ave been 1aintained or notC 2. 70e cost state1ents give a true and fair view of t0e cost of production4 processing and 1ar'eting of t0e product under audit. In addition t0e auditor s0ou#d a#so provide infor1ation regarding various 1atters as specified in t0e for1at of anne-ure to t0e cost audit report. Cost .udit4 t0us4 is product ? oriented as co1pared to financia# audit w0ic0 is organi6ation ? oriented. Of course4 cost audit wou#d be wit0 reference to eac0 co1pan/4 but #i1ited to t0e

266 particu#ar industria# activit/ of w0ic0 t0e audit is ordered to be carried out. 70e prere;uisite for cost audit is t0at t0e co1pan/ s0ou#d be engaged in t0e 1anufacture of a product for w0ic0 cost accounting record ru#es 0ave been prescribed. Cost audit is not necessari#/ a regu#ar annua# e-ercise as it is to be carried out on#/ in case t0e govern1ent orders a co1pan/ to get t0e cost audit done. It is4 0owever4 open to a co1pan/ to get a cost audit carried out vo#untari#/ in w0ic0 case t0e report need not be sub1itted to t0e govern1ent. Aecent#/4 t0e govern1ent 0as decided to order cost audit annua##/. 70us4 broad#/4 financia# audit is concerned wit0 auditing a## t0e inco1e and e-penditure to certif/ t0e wor'ing resu#ts and financia# position of t0e organi6ation as a w0o#e w0ereas cost audit is concerned wit0 auditing of a##ocation and apportion1ent of e-penses under natura# 0eads to deter1ine t0e cost of functions4 products and services4 wit0 reference to a particu#ar product or service.

C-ec3 4"ur Pr"%re$$:

Define t0e ter1s. a. .uditing b. .uditor c. Cost .udit d. Cost .udit Aeport e. ,fficienc/ .udit 2. Bive t0e provisions for co1pu#sor/ .udit. 1.

:.:

SCOPE AND UNCTIONS O COST AUDIT

70e Bovern1ent of India 0as ta'en steps to stud/ t0e cost structure of certain basic industries suc0 as coa#4 sugar4 drugs4 t/res4 ce1ent etc. and to ad1inister t0e prices c0arged b/ t0ese industries. "uc0 contro# is ai1ed at assuring a fair price to t0e consu1er and a fair return to t0e 1anufacturer. It a#so enab#es t0e govern1ent to adjust its ta- and tariff po#icies in respect of t0ese industries in t0e #arger interests of societ/. "tatutor/ provisions as regards cost audit were introduced b/ t0e co1panies 2.1end1ent3 .ct 1G$!4 "ection 20G 2i3 2d3 dea#s wit0 provision re#ating to cost records and section 233 : dea#s wit0 audit of cost accounts in t0e cases of specified industries.

:.; ORGANIRATION OR AND CIRCUMSTANCES AVORING COST AUDIT

70ere are a nu1ber of 1anufacturing underta'ings wit0 poor capacit/ uti#i6ation and a ver/ poor return on capita# e1p#o/ed.

262 Crores of rupees are being #ost in t0ese underta'ings for w0ic0 t0e responsibi#it/ needs to be fi-ed. 70e Centra# Bovern1ent is wor'ing on a docu1ent on t0e accountabi#it/ structure4 w0erein t0e ro#e of responsibi#it/ accounting wi## be under#ined. Incidenta##/4 t0e ro#e of cost accounting and cost audit s0ou#d a#so get e1p0asis in t0is process. 70e Depart1ent of ub#ic ,nterprises w0ose function it is to 1onitor t0e perfor1ance of pub#ic sector underta'ings 0ad been e1p0asi6ing t0e significance of t0e 1aintenance of cost accounting records as we## as t0e introduction of standard costing in ever/ pub#ic sector underta'ing to ensure effective uti#i6ation of scarce resources.

:.10 BENE ITS O COST AUDIT

Au'it$ #$ #n Ai' t" G"(ern+ent: >or1a##/4 t0e price of an/ co11odit/ is deter1ined b/ de1and and supp#/. 70e se##er cannot c0arge an/ price 0e wants nor can t0e consu1er get t0e co11odit/ at an/ price 0e wou#d #i'e to pa/. Jet t0e price wi## sett#e at t0at #eve# w0ere t0e de1and and supp#/ are at e;ui#ibriu1. In a contro##ed econo1/ #i'e ours4 w0ere t0ere are s0ortages in 1an/ ite1s4 capacities are not fu##/ avai#ab#e to 1eet t0e increasing de1and4 in order to protect t0e interest of t0e consu1ers w0o 0ave #i1ited purc0asing powder and a#so to render justice to t0e producers4 t0e govern1ent intervenes and regu#ates t0e price of so1e co11odities. . nu1ber of essentia# co11odities #i'e sugar4 drugs4 'erosene4 petro#eu14 etc4 are sti## under t0e ad1inistered price of certain ite1s under survei##ance. 70an's to t0ese 1easures bot0 t0e consu1er and t0e producer are 0oping for a fair dea#. In fact4 price fi-ation is not on#/ confined to t0e industria# sector but a#so e-tends to t0e agricu#tura# sector as we##. It is in t0is situation t0at cost is a re#evant factor for price fi-ation. 70oug04 origina##/4 cost audit was not intended to be used for price fi-ation b/ t0e govern1ent t0ere 0as been a constant appre0ension t0at t0is audit is ai1ed at regu#ating t0e prices of co11odities. In fact4 t0e govern1ent initiates independent studies of cost of production of an/ co11odit/ as and w0en t0e need for price fi-ation is considered. 70oug0 t0e govern1ent ta'es up t0e stud/ at t0e industr/ #eve# and not at unit #eve#4 t0e basic cost data 0as to e1erge on#/ fro1 t0e units for w0ic0 t0e infrastructure is a#read/ #aid t0roug0 t0e Cost .ccounting Aecord Au#es. .s a#read/ referred to4 one cop/ of t0e report of t0e cost auditor of ever/ co1pan/ as and w0en carried out is passed on b/ t0e Depart1ent of Co1pan/ .ffairs to t0e :ureau of Industria# Costs and rices 2:IC 34 w0ic0 is t0e investigating and

265 reco11ending agenc/ before prices are fi-ed for industria# products. 70e :IC adopts its own procedures for cost stud/ before reco11ending a price. 70ese procedures are not necessari#/ based on t0e contents of t0e cost audit report. Sowever4 t0e cost audit report can be and is being used as a good source of 1ateria# b/ t0e :IC w0i#e 1a'ing t0e cost studies. In particu#ar4 t0e investigator can cross ? c0ec' infor1ation regarding t0e e-tent of capacit/ uti#i6ation4 1anufacturing process4 e-tent of raw 1ateria# wastage4 e-tent of power consu1ption and t0e e-tent of inputs4 i.e. ot0er e#e1ents of cost #i'e depreciation over0eads4 store consu1ption4 etc. 70is wi## enab#e t0e investigator to furt0er probe in detai# into certain sub1issions of t0e industr/ or to 0ave t0e infor1ation wit0out e-tra effort since t0ese cost studies are ti1e bound. :ased on t0e findings in t0e cost audit report4 0e 1a/ e;uitab#/ distribute 0is ti1e to t0e areas to be covered b/ 0i1 in t0e cost e-a1ination. 5ro1 t0e point of view of t0e industr/ a#so4 t0e cost audit report can co1e in 0and/ to put across an/ point of view w0ic0 1a/ be t0e area of de#iberations w0i#e reco11ending t0e price4 :IC offers a1p#e opportunit/ to t0e industr/ to prove wit0 facts and figures t0e cost actua##/ incurred b/ t0e industr/ for w0ic0 an aut0enticated docu1ent bound to be usefu#. 5or e-a1p#e4 t0e e-tent of raw 1ateria# wastage or scrap4 t0e e-tent of power consu1ption4 t0e e-tent of capacit/ uti#i6ation are so1e of t0e 1atters4 in w0ic0 aut0entic data wou#d be avai#ab#e to ;uote. In fact4 t0ose industries and t0ose sectors #i'e co operative w0ic0 are not covered under t0e cost audit fee# t0e1se#ves 0andicapped to ta'e up issues since t0e/ #ac' t0e re#evant infor1ation. 70is is particu#ar#/ so w0ere t0ere is apportion1ent of co11on e-penses between two or 1ore activities4 In t0e cost audit report t0ere is a specific profor1a w0ic0 provides for apportion1ent of tota# e-penses of t0e co1pan/ between t0e product under cost audit as we## as ot0er activities. &0at is i1portant to note is t0at since cost audit report is not prepared 'eeping specifica##/ price( fi-ation in view as an objective4 t0e data contained in t0e report is bound to be unbiased not s'ewed to an/ particu#ar purpose. 7o i1prove t0e profitabi#it/ of t0e pub#ic sector4 t0e on#/ acceptab#e so#ution is cost reeducation@contro# t0roug0 cost accounting and audit. In t0e 1atter of corporate ta-ation4 it is wide#/ 'nown t0at unscrupu#ous 1anage1ents 1anipu#ate t0e ta-ab#e profit b/ fudging t0e figures of inventor/. If t0ere is a foo#proof 1ec0anis1 for inventor/ va#uation4 t0e 1anipu#ation can be detected. . s/ste1 of cost accounting and cost audit can on#/ ensure a proper

26: va#uation inc#uding t0at of wor' in progress. 70e aut0entication for inventor/ va#ues b/ cost accountants was reco11ended b/ t0e Sig0 owered Co11ittee on Co1pan/ Law as ear#/ as in 1G)) because of t0is potentia#4 t0us ensuring t0e due revenue to t0e Bovern1ent. In t0e area of indirection ta-ation since e-cise dut/ and custo1s dut/ are #in'ed to 1ateria#s and since 1ateria# accounting is t0e 1ain area of activit/ of cost accountants4 t0e/ can provide aut0entic data to faci#itate proper assess1ent b/ t0e aut0orities. 70ese aut0orities 0ave now started depending upon cost accounting state1ents in t0eir functioning. Beneration of b#ac' 1one/ t0roug0 unaut0ori6ed use of insta##ed industria# capacit/ is being adopted certain unscrupu#ous 1anage1ents. 70ese unaut0ori6ed usages can be detected on#/ b/ putting t0e inputs and outputs against eac0 ot0er as we## as scrutin/ of t0e Log :oo's and ot0er boo's and ot0er records. 70is fa##s wit0in t0e area of cost accounting and cost audit and 0ence can 1a'e a direct contribution to govern1ent revenues. 70e Bovern1ent is doing out subsidies and re#iefs wit0out an/ 1ec0anis1 for c0ec'ing w0et0er suc0 subsides@re#iefs go on#/ to deserving 0ands. In actua# practice4 one finds t0at even profitab#e co1panies are enjo/ing t0ese incentives. Infor1ation regarding product( wise profitabi#it/ on e-ports is avai#ab#e in t0e cost audit report w0ic0 can be 1ade use of to ensure t0at t0e subsid/ goes on#/ to units w0ic0 actua##/ suffers a #oss in e-ports. It goes to t0e credit of cost accountanc/ t0at in India t0e govern1ent 0as recogni6ed t0e uti#it/ of cost accounting in t0is regard. 70e Inco1e 7a- .ct 0as provided t0at ever/ inco1e ta- return fro1 a co1pan/ s0a## be acco1panied b/ a cop/ of t0e Cost .udit Aeport in case t0e Co1pan/ is subject to cost audit. "i1i#ar#/ t0e 5inance :i##4 1GG! 0as now provided t0roug0 an a1end1ent of "ection 142a3 of t0e Centra# ,-cise and "a#t .ct t0at in t0e process of assess1ent of Centra# ,-cise4 to faci#itate t0e assess1ent4 t0e assessing officer can order an audit to be carried out b/ a practicing cost accountant and 0is report can be 1ade use of for t0e assess1ent purpose. 70is 1easure enab#es cost accounting to 1a'e a direct contribution to t0e revenues of t0e Bovern1ent. 70is audit 0as assu1ed greater significance wit0 t0e recognition of consu1erQs rig0ts wit0 t0e co1ing into force of t0e Consu1er rotection .ct. It is dec#ared t0at t0e consu1er is entit#ed to 'now about t0e ;uantit/4 ;ua#it/ and price in a## of w0ic0 t0ere s0ou#d be a fair dea# to t0e consu1er. &0ereas ;uantit/ and ;ua#it/ can be ta'en care of b/ prescribing proper weig0ts and 1easures co1bined wit0 rea#i6ab#e testing arrange1ents t0roug0

26; recogni6ed #aboratories4 reasonab#eness of price can be tested on#/ t0roug0 proper cost deter1ination. . consu1er cannot 0ave eas/ access to cost infor1ation. 70e on#/ pub#ic source of infor1ation is t0e Cost .udit Aeport. Uti0itA t" t-e c"n$u+er$: . cop/ of t0e cost audit report is sent to t0e concerned ad1inistrative 1inisters. It is possib#e for suc0 a 1inistr/ to find out w0et0er a co1pan/ is profiteering b/ increasing its prices disproportionate to t0e increase in cost of production. "uc0 pricing practices are a#read/ regu#ated b/ t0e MA7 .ct as a 1onopo#istic trade practice. "uc0 instances of profiteering and anti( consu1er 1easures need to be curbed i11ediate#/. 70e 0andicap wit0 t0e Bovern1ent is t0e #ac' of infor1ation in t0is regard. "ince aut0entic infor1ation is avai#ab#e in t0e cost audit report regarding product cost4 price and profits for two /ears4 effective steps can be ta'en bot0 b/ t0e .d1inistrative Ministr/ as we## as b/ t0e MA7 co11ission A$ #n Ai' t" S-#re-"0'er$: 70ere 0as been a rapid growt0 in t0e corporate sector wit0 1ore and 1ore co1panies tapping t0e capita# 1ar'et. 70e s0are0o#ders 0ave to be provided wit0 re#iab#e infor1ation about t0e perfor1ance of t0eir co1pan/ at #east annua##/. resent#/ t0e infor1ation contained in t0e annua# reports is scant/ and distorted. 70e cost auditor and 0is report are 'ept awa/ fro1 t0e s0are0o#ders. 70oug0 t0e industr/ is agreeab#e to provide aggregated perfor1ance figures of t0e group4 no steps are ta'en to provide seg1enta# infor1ation to s0are0o#ders. Cost .udit Aeports contain a wea#t0 of infor1ation regarding eac0 product and its profitabi#it/. It a#so revea#s areas of waster and inefficienc/ wit0 regard to eac0 input4 vi6 1en4 1ateria# and 1ac0ines. 70e Co1panies .1end1ent :i##4 1GG34 0as now proposed t0at t0e cost auditor wi## be appointed b/ t0e s0are0o#ders and 0is report at #east in condensed for1 wi## be avai#ab#e to t0e1. Care 0as to be ta'en to ensure t0at confidentia# infor1ation is not pub#is0ed in t0e co1petitive4 at1osp0ere4 but at t0e sa1e ti1e sufficient infor1ation to t0e s0are0o#ders to enab#e t0e1 to 1a'e an overa## perfor1ance appraisa# of t0eir e#ected representatives4 vi64 t0e Directors4 0as to provide. 70e report s0ou#d cover eac0 activit/ of t0e co1pan/ du#/ #in'ed wit0 t0e overa## wor'ing resu#ts of t0e co1pan/. In case of 1anufacturing activit/4 it can provide t0e capacit/ uti#i6ation for eac0 product and reasons4 for underuti#i6ation of capacit/. Infor1ation regarding energ/ conservation cou#d a#so be ref#ected. 70e report can a#so contain data regarding profits4 generated fro1 do1estic and e-port sa#es. . state1ent regarding t0e trend of costs co1pared to t0e previous /ear cou#d a#so be given. .## t0ese

220 areas are suggested 'eeping in view t0e confidentia#it/ of infor1ation in a co1petitive at1osp0ere. It 1a/ a#so be 'ept in view t0at a## t0e above infor1ation cannot be found fro1 t0e financia# report and t0e/ can be straig0twa/ wor'ed out and conso#idated fro1 t0e detai#ed cost audit report sub1itted to t0e govern1ent.

:.11 COST AUDIT PROGRAMME

#anning for cost .udit invo#ves wor'ing out a progra11e for carr/ing out t0e audit. 70e progra11e s0ou#d cover audit of various e#e1ents of cost and sa#es w0ic0 are nor1a##/ prescribed in t0e cost accounting record ru#es. 70e/ areC 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Aaw Materia#s4 boug0t out co1ponents and process 1ateria#s. Consu1ab#e stores4 "1a## too#s4 etc "a#aries and &ages Ot0er direct e-penses Depreciation 5actor/ Over0eads .d1inistration over0eads "e##ing and distribution over0eads. *uantitative data regarding production etc. "a#es detai#s 2;uantit/ and va#ue3 0/sica# inventor/ of finis0ed goods and wor' in progress.

:.12 PROVISIONS REGARDING COST ACCOUNTS AND AUDIT

70e 1G$! a1end1ents to t0e Co1panies .ct Introduced two provisions wit0 reference to cost accounting and cost audit. 70e a1end1ent to introduce 1aintenance of cost accounting records co1pu#sori#/ on a regu#ar basis was ac0ieved b/ inserting sub( c#ause 2d3 in "ection 20G213 of t0e Co1panies .ct 4 1G!$ . 70is section basica##/ dea#s wit0 t0e 1aintenance of boo's of account b/ a co1pan/. .fter t0e introduction of sub ? c#ause 2d34 "ection20G213 reads as fo##owsC 8,ver/ co1pan/ s0a## 'eep as its registered office proper boo's of account wit0 respect toC 2a3 a## su1s of 1one/ received and e-pended b/ t0e co1pan/ and t0e 1atters in respect of w0ic0 receipt and e-penditure ta'e p#aceV 2b3 a## sa#es and purc0ases of goods b/ t0e co1pan/ V ( c 3 t0e assets and #iabi#ities of t0e co1pan/V and

221 2d3 in t0e case of a co1pan/ pertaining to an/ c#ass of co1panies engaged in production4 processing4 1anufacturing or 1ining activities 4 suc0 particu#ars re#ating to uti#i6ation of 1ateria# or #abour or to ot0er ite1s of cost as 1a/ be prescribed if suc0 c#ass of co1panies is re;uired b/ t0e centra# govern1ent to inc#ude suc0 particu#ars in t0e boo's of account.9 It 1a/ be noted t0at4 b/ t0e introduction of t0e above sub ? c#ause4 t0e centra# govern1ent 0as ac;uired t0e power to prescribe certain cost particu#ars to be inc#uded in t0e accounting records b/ co1panies engaged in specified industries as 1a/ be notified fro1 ti1e to ti1e. 70us4 t0e actua# prescription of t0e cost data is not contained in section 20G213 2d3 of t0e Co1panies .ct but in t0e cost accounting record ru#es prescribed b/ t0e govern1ent fro1 ti1e to ti1e. 70e power to prescribe t0e cost accounting record ru#es is a#so derived b/ t0e centra# govern1ent b/ virtue of t0e genera# power contained in "ection $42213 of t0e Co1panies .ct4 1G!$ w0ic0 provides t0at t0e centra# govern1ent 1a/4 b/ notification in t0e officia# ga6ette4 1a'e ru#es to covera## or an/ of t0e 1atters w0ic0 are to be or 1a/ be prescribed b/ t0e Centra# Bovern1ent and genera##/ to carr/ out t0e purposes of t0e .ct. 70us4 t0e cost accounting record ru#es are prescribed in accordance wit0 "ection $42213 read wit0 "ection 20G213 2d3 of t0e Co1panies .ct4 1G!$ 1. 70e centra# govern1ent derives t0e power to order an/ co1pan/ fa##ing under "ection 20G 213 2d3 to get t0e cost accounts audited b/ a Cost .ccountant wit0in t0e 1eaning of t0e Cost and &or's .ccountant .ct 1G!G. 2. 70e cost auditor s0a## be appointed b/ t0e board of directors4 of t0e co1pan/ wit0 t0e previous approva# of t0e Centra# Bovern1ent. 3 70e powers and duties of t0e cost auditor in re#ation to t0is audit are t0e sa1e as of financia# auditor but t0e cost auditor s0a## sub1it 0is report to t0e centra# govern1ent wit0 a cop/ to t0e co1pan/ at t0e sa1e ti1e. 70e report s0a## be sub1itted in t0e prescribed for1 and wit0in t0e prescribed ti1e. .ccording to a notification issued #ater4 t0ree copies of t0e report need to be sub1itted to t0e govern1ent. 4. .## t0e dis;ua#ifications w0ic0 are app#icab#e to a financia# auditor are a#so app#icab#e to cost auditor. In addition4 a financia# auditor cannot a#so be appointed as a cost auditor of t0e sa1e co1pan/. If a person is dis;ua#ified on t0e above grounds subse;uent to 0is appoint1ent4 0e s0a## cease to conduct t0e cost audit of t0at co1pan/. Incidenta##/4 a cost auditor cannot be

222 appointed as interna# auditor4 w0ic0 in ot0er words 1eans t0at an interna# cannot be a cost auditor a#so. 5. It s0a## be t0e dut/ of t0e co1pan/ to give a## faci#ities and assistance to t0e person appointed for conducting t0e cost audit. 6 70e co1pan/ s0a## wit0in 30 da/s fro1 t0e date of receipt of a cop/ of t0e cost audit report furnis0 to t0e Centra# Bovern1ent fu## infor1ation and e-p#anation on ever/ reservation or ;ua#ification contained in t0e said report. 7. 70e Centra# Bovern1ent 1a/4 after considering t0e report4 ca## for an/ furt0er infor1ation or e-p#anation and t0ereupon t0e co1pan/ s0a## furnis0 t0e sa1e wit0in suc0 ti1e as 1a/ be specified. 8. .fter receiving an/ suc0 furt0er infor1ation and e-p#anation4 t0e Centra# Bovern1ent 1a/ ta'e action on t0e report in accordance wit0 an/ #aw in force for t0e ti1e being. 9 70e Centra# Bovern1ent 1a/ direct t0e co1pan/ concerned to circu#ate to its 1e1bers a#ong wit0 t0e notice for t0e annua# genera# 1eeting4 t0e w0o#e or suc0 portion of t0e cost audit report as it 1a/ specif/. 10. ena#t/ for contravention of an/ of t0e provisions of t0is section can e-tend up to As !4000 for t0e co1pan/4 and for ever/ officer of t0e co1pan/ w0o is in defau#t4 i1prison1ent upto 3 /ears or a fine w0ic0 1a/ e-tend to As !4000 or wit0 bot0. ORM O COST AUDIT I@weXXXXXXXXXX.. 0aving been appointed as Cost .uditor2s3 4 under "ection 223 : of t0e Co1panies .ct 1G!$4 ofXXXXXXXXX 21ention na1e of t0e co1pan/3 0aving its registered office at XXXXXX21ention registered office address of t0e co1pan/3 20erein after referred to as t0e co1pan/34 0ave e-a1ined t0e boo's of accounts prescribed under c#ause 2d3 of subsection 2i3 of section 20G of t0e said .ct4 and ot0er re#evant report for t0e /ear endedXXXXX..21entioned t0e financia# /ear3 re#ating to XXXXXXXXXX 21ention na1e of product3 1aintained b/ t0e co1pan/ and report4 subject to 1/@our co11ents under t0e 0eading 8 .uditorQs Observations and Conc#usionsQ contained in t0e .nne-ure to t0is report 4 t0at ? 2a3 I @we 0ave@0ave not obtained a## t0e infor1ation and e-p#anations4 w0ic0 to t0e best of 1/@our 'now#edge and be#ief were necessar/ for t0e purpose of t0is auditV

22& 2b3 roper cost accounting records as re;uired under c#ause 2d3 of sub( section2i3 of section20G of t0e Co1paines.ct41G!$ 0ave@0ave not been 'ept b/ t0e co1pan/V 2c3 roper returns ade;uate for t0e purpose of 1/@ out Cost .udit@0ave@0ave not been received fro1 branc0es not visited b/ 1/@usV 2d3 t0e said boo's and records give@do not give t0e infor1ation re;uired b/ t0e Co1panies .ct4 1G!$ 21 of 1G!$3 in t0e 1anner so re;uiredV 2e 3 in 1/@our opinion4 t0e co1pan/Qs cost accounting records 0ave @0ave not been proper#/ 'ept so as to give a true and fair view of t0e cost of production4 processing4 1anufacturing or 1ining activities4 as t0e case 1a/ be4 and 1ar'eting of t0e product under reference V and 2f3 t0e cost state1ents in respect of product under reference as specified in t0e .nne-ures @ rofor1a of "c0edu#es I and II of t0e Cost .ccounting Aecords 2XXXX..3 Au#es du#/ audited b/ 1e@us are@are not 'ept in t0e co1pan/. 70e 1atters contained in t0e .nne-ure and profor1a to t0is report for1 part of t0is report4 w0ic0 is a#so subject to 1/@our observations 1ade t0ere in.
Dated t0isXXXXX date of XX..XXXX1GXXXXXX. .t XXX.. 2Mention na1e of p#ace of signing t0is report3 CO"7 .<DI7OA" 2"3

N"te: 213 De#ete in app#icab#e words. 223 "pecif/ t0e tit#e of cost .ccounting Aecords Au#es 1ade under C#ause 2d3 of subsection 213 of "ection 20G of t0e Co1panies .ct4 1G!$ w0ic0 are app#icab#e to t0e product of t0e co1pan/.

:.1& TGE COST AUDIT REPORT RULES

In e-ercise of t0e powers conferred b/ subsection 243 of section 233 :4 read wit0 subsection 213 of section 22) and c#ause 2b3 of subsection 213 of section $424 of t0e co1panies .ct4 1G!$ 21 of 1G!$34 and ins supersession of t0e Cost .udit 2Aeport3 Au#es4 1968. e-cept as respect t0ings done or o1itted to be done4 before suc0 supersession 4 t0e centra# Bovern1ent 0ereb/ 1a'es t0e fo##owing ru#es4 na1e#/ C

22* 1. S-"rt tit0e #n' C"++ence+ent: 213 70ese ru#es 1a/ be ca##ed t0e Cost .udit 2Aeport3 Au#es4 1996. 223 70e/ s0a## co1e into force on t0e date of t0eir pub#ication in t0e Officia# Ba6ette. 2. De!initi"n$: In t0ese ru#es4 un#ess t0e conte-t ot0erwise re;uiresC 2a3 8 .ct9 1eans t0e Co1panies .ct41G!$ 2 1 to 1G!$3V 2b3 8Cost .uditor9 1eans t0e auditor appointed under subsection 2I3 of section 233 : of t0e .ctV 2c 3 8 5or19 1eans t0e 5or1 of Cost .udit Aeport specified in t0e sc0edu#eV and inc#udes .nne-ure to t0e Cost .udit Aeport and profor1a "pecia#i6ed in t0e "c0edu#eV 2d3 8 roduct <nder reference9 Means t0e product to w0ic0 t0e ru#es 1ade under c#ause 2 d3 of subsection 213 of section 20G of t0e Co1panies .ct4 1G!$ 21 to 1G!$3 app#/V 2e3 8"c0edu#e9 1eans sc0edu#e anne-ed to t0ese ru#eV 2f3 .## ot0er words and e-pressions used in t0e ru#es but not defined4 and defined in t0e .ct and ru#es 1ade under "ection 20G of t0e .ct s0a## 0ave t0e sa1e 1eanings respective#/ assigned to t0e1 in t0e .ct or ru#es4 as t0e case 1a/ be. 3. A))0ic#ti"n : 70ese ru#es s0a## app#/ to ever/ co1pan/ in respect of w0ic0 an audit of t0e cost accounting records 0as been ordered b/ t0e Centra# Bovern1ent under "ubsection 2 13 of section 233 : of t0e .ct. 4. "r+ "! Re)"rt :

213 ,ver/ Cost .uditor w0o conducts an audit of t0e cost accounting records of t0e co1pan/ s0a## sub1it a report in trip#icate to t0e Centra# Bovern1ent in t0e 5or1 2 inc#uding .nne-ures and profor1a3 In accordance wit0 t0e procedures specified in t0e "c0edu#e anne-ed to t0ese ru#es and at t0e sa1e ti1e forwarded a cop/ of t0e report to t0e co1pan/. 223 ,ver/ Cost .uditor4 w0o sub1its a report under sub ru#e 213 4 s0a## a#so give c#arifications4 if an/4 re;uired b/ t0e Centra# Bovern1ent on t0e Cost .udit Aeport sub1itted b/ 0i14 wit0in t0irt/ da/s of receipt of t0e co11unication address to 0i1 ca##ing for suc0 c#arifications.

226 5. Ti+e Li+it !"r Su.+i$$i"n "! Re)"rt : 70e Cost .uditor s0a## send 0is report referred in sub ru#e 213 of ru#e 4 to t0e Centra# Bovern1ent and to t0e concerned co1pan/ wit0in 1+0 da/s fro1 t0e end of t0e co1pan/Qs financia# /ear to w0ic0 t0e cost .udit Aeport Ae#ates. 6. C"$t Au'it"r t" .e !urni$-e' Bit- t-e c"$t Acc"untin% rec"r'$ etc819 &it0out prejudice to t0e powers and duties t0e cost .uditor "0a## 0ave under subsection4 243 of section 233 : of t0e .ct4 t0e co1pan/ and ever/ officer t0ereof4 inc#uding t0e persons referred to in subsection 2 $3 of section 20G of t0e .ct4 s0a## 1a'e avai#ab#e to t0e cost auditor wit0in G0 da/s fro1 t0e end of t0e financia# /ear of t0e co1pan/ suc0 Cost .uditor so as to enab#e 0i1 to co1p#ete t0e cost audit and sent 0is report wit0in t0e ti1e #i1it specified in ru#e !. If t0e cost accounting records 4 cost state1ents4 ot0er boo's and papers are not 1ade avai#ab#e b/ t0e co1pan/ wit0in t0e ti1e #i1it specified in sub ru#e 2 13 t0e Cost .uditor s0a## inti1ate t0e fact of not 0aving 1ade avai#ab#e to 0i1 suc0 records4 state1ents 4 boo's and papers to t0e Centra# Bovern1ent wit0in ten da/s after e-pir/ of #i1it of G0 da/s specified in sub ru#e 213 7. Pen#0tie$: 213 If dafu#t is 1ade b/ an/ Cost .uditor in co1p#/ing wit0 t0e provisions and ru#e 4 or ru#e !4 0e s0a## be punis0ab#e wit0 fine w0ic0 1a/ e-tend to five 0undred rupees. 223 If a co1pan/ contravenes t0e provisions of ru#e $ t0e co1pan/ and ever/ officer of t0e co1pan/ inc#uding t0e persons referred to in subsection 2$3 of section 20G of t0e .ct4 w0o is in defau#t4 s0a## subject to t0e provisions of section 233 : of t0e .ct 4 be punis0ab#e wit0 fine w0ic0 1a/ e-tend to five 0undred rupees and w0ere t0e contravention is a continuing one4 wit0 a furt0er fine w0ic0 1a/ e-tend to fift/ rupees for ever/ da/ after t0e first da/ during w0ic0 period suc0 contravention continues. 8. S#(in% : "aving of action ta'en or t0at 1a/ be ta'en for contravention of t0e Cost .udit 2 Aeport3 Au#es 1G$+ ? It is 0ereb/ c#arified t0at t0e supersession t0e Cost .udit 2Aeport3 Au#es4 1G$+ as a1ended fro1 ti1e to ti1e4 s0a## not in an/ wa/ affectC 2i3 .n/ rig0t4 ob#igation or #iabi#it/ ac;uired 4 accrued or incurred t0ere <nder C

222 2ii3 .n/ pena#t/4 forfeiture or punis01ent incurred in respect of an/ contravention co11itted t0ere underC 2iii3 .n/ investigation4 #ega# proceeding or re1ed/ in respect of an/ suc0 rig0t4 privi#ege4 ob#igations4 #iabi#it/ 4 pena#t/4 forfeiture or punis01ent as aforesaid 4 and V an/ suc0 investigation4 #ega# proceeding or re1ed/ 1a/ be instituted4 continued or enforced and an/ suc0 pena#t/4 forfeiture or punis01ent 1a/ be i1posed as if t0ose ru#es 0as not been superseded.

C-ec3 4"ur Pr"%re$$:

1. Bive na1es. a. Depart1ent of Co1pan/ .ffairs.

:.1* COST INVESTIGATION

. cost accountant is often faced wit0 a prob#e1 of deter1ining out of contro# situations .It is enoug0 to warrant 1anage1entQs attention and furt0er investigation is ordered. 70e investigative attention and furt0er investigation is ordered. 70e investigative efforts are directed towards a particu#ar out of contro# situation w0en incre1enta# benefits pro1ise increase in t0e incre1enta# costs. 70ere e-ists reason to deter1ine to#erance #i1its or range. If an/ variance fa##s wit0in t0e range it can be considered acceptab#e or nor1a#. If t0e variance fa##s be/ond to#erance #i1its an investigation s0ou#d be 1ade provided t0e benefits of investigation justif/ t0e cost. 70e basic prob#e1 is t0at w0en a cost variance is reported to a 1anager4 0e s0ou#d investigate to find our w0en actua# and standard differ. Decision is a ta'en eit0er for investigation or disregarding t0e variance. Investigating ever/ adverse variance is a wastage of ti1e and ot0er resources. Investigation costs 1one/ and at ti1es benefits obtainab#e fro1 contro# action on t0ose occasions4 w0en contro# action turns out to be possib#e4 1a/ not justif/ t0ese costs. T-ere #re $"+e "! t-e c"$t in(e$ti%#ti"n +"'e0 #$ !"00"B$: i. M#teri#0itA Si%ni!ic#nce M"'e0:

It 1eans deciding t0e #i1it of cost variance. If t0e si6e of variance 0appens to be wit0in t0e #i1it t0en it can be considered i11ateria#. It is considered 1ateria##/ significant and wort0/ of investigation on#/ a standard cost but a#so of a standard deviation for t0e e-pected dispersa# of actua# costs around t0e standard. . standard is an average costs and so1e dispersa# of actua# around t0e average 1ust be e-pected w0en t0e costs are under contro#.

225 ii9 C"ntr"0 C-#rt M"'e0: Contro# c0arts can be used to s0ow variances. Investigation can be signa#ed b/ 1a'ing contro# #i1its and t0e c0art. &0en a variance e-ceeds t0e contro# #i1it and w0en t0e trends of variances s0ow a progressive#/ worsening 1ove1ent in actua# resu#ts t0oug0t t0e variance in an/ sing#e period 0as not overstepped t0e contro# #i1it. iii9 C"$t .ene!it #n#0A$i$ "! (#ri#nce in(e$ti%#ti"n +"'e0: In t0is 1ode# decision on w0et0er variance is wort0 investigating is ta'en based on e-pected cost of investigation and contro# and e-pected benefits fro1 contro# action. .n investigation can be underta'en if t0e e-pected benefits fro1 t0e investigation e-ceed t0e cost of searc0ing and correcting t0e source of cost variance. i(9 St#ti$tic#0 Si%ni!ic#nce M"'e0: 70is 1ode# re#ies on t0e 1easure1ent not on#/ standard cost but a#so of standard deviation for t0e e-pected dispersa# of actua# cost around t0e standard. 70e standard is an average cost and so1e dispersa# of actua# cost around t0e average 1ust be e-pected w0en t0e costs are under contro#.

:.16 ECERCISES
1. C0oose t0e rig0t answer fro1 t0e 5o##owingC a. Co1pu#sor/ audit in t0e case of co1panies was introduced b/ t0e 2i3 Bovern1ent 2ii3 Aeserve :an' 2iii3 Co1panies .ct. b. XXXXXXX. Is t0e verification of correctness of cost records and c0ec' on t0e ad0erence to t0e cost accounting p#anI 2i3 Cost .udit 2ii3 5inancia# .udit 2iii3 Manage1ent .udit. c. 70e cost .uditor is to be appointed b/ t0e X.XX.. wit0 previous approva# of t0e Centra# Bovern1ent. 2i3 "0are0o#ders 2ii3 :oard of Directors 2iii3 Aeserve :an' d. 70e cost .udit Aeport 1ust be sub1itted to XXXXXXXX.. 2i3 "0are0o#ders 2ii3 :oard of Directors 2iii3 Centra# Bovern1ent
8An$ 7 # 7 iii< . 7 i< c? ii< '? iii 9

22: 2. .nswer in one sentence on#/ a. &0at is cost .uditI b. &0at is an efficienc/ .uditI c. &0at are t0e objectives of cost .uditI d. &0at is co1pu#sor/ auditI e. &0o can act as a cost auditorI &0at is cost .uditI &0at are t0e objectives of cost auditI Distinguis0 between cost audit and financia# audit.

3. 4.

5 &0at is an .udit AeportI ,-p#ain t0e objectives and contents of cost audit reportI

S4LLABUS
0.

C"+. P#rt ? I

P#)er 2? A'(#nce' C"$t Acc"untin% 8100 M#r3$9

1 Pr"ce$$ C"$tin% ,ssentia# c0aracteristics of rocess Costing Co1parison of process costing and job costing4 Inter process profits4 &or' in progress and e;uiva#ent production4 ractica# prob#e1s. 2 O)er#tin% C"$tin% Meaning of operating costing4 Deter1ination of per unit cost4 Co##ection of costing data ractica# prob#e1s based on costing of 0ospita#4 0ote#4 and goods and passenger transport 3 Inte%r#te' #cc"unt$ Meaning4 .dvantages and disadvantages. Distinctive features4 practica# prob#e1s N"n inte%r#te' $A$te+ "! #cc"unt$ Cost contro# accounts to be prepared4 =ourna# entries4 practica# prob#e1s 4 M#r%in#0 c"$tin% #n' #.$"r)ti"n c"$tin% Meaning of absorption costing4 distinction between absorption costing 1argina# costing4 70eor/ and prob#e1s on :rea'even .na#/sis. Cost %o#u1e rofit .na#/sis4 :rea'even C0arts4 Contribution 1argin and %arious decision 1a'ing prob#e1s. 5 M#n#%eri#0 Deci$i"n$ Manageria# Decisions t0oug0 Cost accounting suc0 as ricing .ccepting specia# Offer4 rofit p#anning. Ma'e or :u/ decision4 Deter1ining 'e/(factor4 Deter1ining "a#es(1i-4 deter1ining opti1u1 .ctivit/ Leve#4 perfor1ance ,va#uation4 .#ternatives 1et0ods of roduction4 Cost reduction and cost Contro#. 6 St#n'#r' C"$tin% "tandard Costing as an Instru1ent of Cost Contro# and Cost Aeduction. 5i-ation of "tandards. 70eor/ and prob#e1s based on .na#/sis of %ariances of "a#es4 Materia#s4 Labour and Over0eads. 7 Bu'%et#rA C"ntr"0 :udget and :udgetar/ contro#4 6ero based budget4 erfor1ance budgets4 5unctiona# :udgets Leading to t0e reparation of Master :udgets4 Capita# ,-penditure :udget. 5i-ed and f#e-ib#e :udgets and preparation of different t/pes of budgets.

II 8 C"$t Au'it Cost and efficienc/ .udit4 Cost .udit vis([(vis 5inancia# audit4 specia# C0aracteristics4 "cope .nd 5unctions of Cost .udits4 Organi6ations 5or and Circu1stances favouring cost audits4 :enefits of Cost audits4 Cost audit progra11e and rocedure4 ,-terna# or "tatutor/ Cost .udit4 provision of Cost audit in co1panies .ct and cost .udit 2reporting3 Au#es4 Cost investigation. PATTERN O EUESTION PAPER Ma-i1u1 Mar's 100 Duration 3 Sours >o of ;uestions to be as'ed G >o of ;uestion to be answered $ *uestion >o. 01 Co1pu#sor/ ractica# ;uestion 20 Mar's *uestion >o.02 Co1pu#sor/ Objective 1$ Mar's *uestion >o. 03 to *uestion >o. 0G 1$ Mar's eac0 N"te$ :? 1. 5ro1 *uestion >o. 03 to *uestion >o. 0G not 1ore t0an one ;uestion 1a/ be t0eor/ inc#uding s0ort prob#e1s@;uestions. 2. "tudent to answer an/ four out of *uestion >o. 03 to *uestion >o. 0G 3. Objective ;uestions to be based on a## topics and inc#ude Inter a#ia ;uestion #i'eC( A. Mu#tip#e c0oice :3 .nswer in one sentence C"$tin% Rec"++ence' B""3$ Lecture on costing b/ "wa1inat0an pub#is0ed b/ ". C0and E Co. ractica# costing b/ M0anna C0and E Co. ande/ and .0uja pub#is0ed b/ ".

Cost .ccounting b/ C s Aa/udu pub#is0ed b/ 7ata McBraw Si##s Cost .ccounting b/ =awa0ar#a# pub#is0ed b/ 7ata McBraw Si##s 70eor/ and prob#e1s of Cost and Manage1ent accounting b/ M J M0an and M =ain pub#is0ed b/ 7ata McBraw Si##s Cost .ccounting b/ Aavi M Mis0ore pub#is0ed b/ 7a-1ann Ltd. Cost .ccounting b/ > M rasad Cost .ccounting ? 70eor/ and ractice b/ : M :0a

III Cost .ccounting ? 70eor/ and ractice b/ M > .rora pub#is0ed b/ ractica# Costing b/ C 7u#sian pub#is0ed b/ %i'as ub#is0ed 0ouse Cost .ccounting ? 7e-t and prob#e1s b/ M C "0u' a4 7 " Brewa# M Bupta pub#is0ed b/ ". C0and Cost accounting ? rob#e1s and so#utions b/ % M "a-ena C D %as0ist pub#is0ed b/ ". C0and Cost .ccounting b/ " =ain and M L >arang pub#is0ed b/ Ma#/ani Cost .ccounting ? rincip#es and practice b/ M > .rora pub#is0ed b/ %i'as rincip#es of Manage1ent .ccounting b/ .nt0on4 Aobert pub#is0ed b/ Aic0ard Irwin Inc. Cost .ccounting ? .. Manageria# e1p0asis b/ Sorngreen4 C0ar#es4 5oster and Datar pub#is0ed b/ rentice Sa## of India. Manage1ent .ccounting b/ M J M0an and M =ain pub#is0ed b/ 7ata McBraw Si##s .dvanced Manage1ent accounting b/ A " Map##an and .. .t'inson prentice India internationa# .dvanced prob#e1s and so#utions in Cost .ccounting b/ " > Ma0es0wari pub#is0ed b/ "u#tan C0and.

22;

EUESTION PAPER ? APRIL 2011

TIME ? & GOURS N.B. 13 *. >o. I and II are c"+)u0$"rA. ;uestions fro1 t0e re+#inin%. TOTAL MAR>S 100 .tte1pt an/ !"ur

2. *uestion >o. I carries 20 1ar's and a## re1aining ;uestions carr/ 1$ 1ar's eac0. 3. A00 "ub(;uestions carr/ e;ua# 1ar's un#ess specified to t0e contrar/. 4. &or'ings to for1 part of t0e so#utions and necessar/ assu1ptions to be 1ade and stated c#ear#/. E.1 M@s .#o' Industries 0as given t0e fo##owing detai#s4 find t0e 1ost profitab#e product 1i- and prepare a state1ent of profitabi#it/ of t0at product 1iroduct 8L9 roduct 8J9 roduct 8U9

articu#ars

"e##ing price per unit 2As.3 $0 !! !0 Ae;uire1ents per unit C Direct Materia#s ! 'g 3 'g. 4 'g Direct Labour 4 0rs. 3 0rs. 2 0rs. %ariab#e Over0eads As. ) As. 13 As. + 5i-ed Over0eads As. 10 As. 10 As. 10 Cost of Direct Materia# per 'g. As. 4 As. 4 As. 4 Direct Labour Sour Aate As. 2 As. 2 As. 2 Ma-i1u1 possib#e <nits of "a#es. 44000 !4000 14!00

.## t0e t0ree products are produced fro1 t0e sa1e direct 1ateria# using t0e sa1e t/pe of 1ac0ines and #abour. Direct #abour4 w0ic0 is t0e 'e/ factor4 is #i1ited to 1+4$00 0ours. E.2 A9 C0oose t0e correct option and rewrite in fu##. 8. In case of operation of a 1otor ve0ic#e4 t0e fo##owing cost wou#d be c#assified as fi-ed cost C ( i. Insurance ii3 C0ange of engine oi# after ever/ !4000 'i#o1eters. iii3 7/re Aep#ace1ent iv3 etro#

250 b. <nder rocess Costing4 t0e concept of process cost is based on C i. Margina# cost

ii3 "tandard cost iii3 .verage cost iv3 Differentia# cost c. i. @% ratio is indicated in a :rea' even c0art b/ C Intersection of 5i-ed cost and 7ota# cost #ines.

ii3 Intersection of 7ota# Cost and "a#es #ine iii3 .ng#e of Incidence between 7ota# Cost and "a#es #ine iv3 .ng#e between 7ota# Cost and 5i-ed Cost #ines. d. i. 5i-ed Over0ead Cost %ariance is t0e difference betweenC .ctua# fi-ed cost and budgeted fi-ed cost.

ii3 .ctua# fi-ed cost and standard fi-ed cost iii3 .ctua# 5i-ed cost and .pp#ied fi-ed cost iv3 :udgeted fi-ed cost and .pp#ied fi-ed cost. e. i. Cost .udit Aeport is to be sub1itted b/ t0e cost auditor C to t0e 1anaging director

ii3 to t0e C0ief 5inancia# Officer iii3 to t0e s0are0o#ders iv3 to t0e Centra# Bovern1ent wit0 a cop/ to t0e co1pan/ f. . budget t0at gives indication of purc0ases to be 1ade as derived fro1 production figures is 'nown as C i. 5i-ed budget ii3 5#e-ib#e budget iii3 roduction budget iv3 urc0ase budget ". &0en t0e variance is due to t0e difference between actua# over0ead and app#ied over0ead4 it is ca##ed as C i. ,fficienc/ variance ii3 7ota# over0ead variance iii3 "pending variance iv3 %o#u1e variance

251 $. <nder integrated s/ste1 of accounting issue of indirect raw 1ateria# for production is debited to C i. urc0ases .ccount ii3 &or'(in( rogress Contro# .ccount iii3 "tores Ledger Contro# .ccount iv3 &or's over0ead contro# account. E.2 B9 1. .nswer t0e fo##owing in brief 2in "ne sentences3 C "tate an/ two variab#e costs of a Sote#. 2. >a1e an/ two industries w0ere process costing in app#icab#e. 3. >a1e t0e account w0ic0 1a'es t0e cost #edger se#f ba#ancing. 4. If contribution per unit is 'nown4 0ow i## /ou ca#cu#ate Margin of "afet/ 2in units3I 5. &0en is t0e "a#es %o#u1e %ariance said to be adverseI 6. Mention an/ one budget c#assified on t0e basis of coverage. 7. Bive t0e for1u#a for 8,;uiva#ent <nits9 under rocess Costing. 8. E.& &rite t0e for1u#a for ca#cu#ating Labour Cost %ariance. On 30t0 "epte1ber4 200G fo##owing was t0e :a#ance "0et of MD vt. Ltd.

Liabi#ities As. .ssets As. ,;uit/ s0ares 2As. 103 fu##/ paid 204000 ,;uip1ent 2cost3 204000 Aeserves and "urp#us 104000 Less C Depreciation !4000 1!4000 Creditors 404000 "toc' 204000 roposed dividend 1!4000 Debtors 1!4000 :an' 3!4000 +!4000 +!4000

70e co1pan/ is deve#oping a s/ste1 of forward p#anning and on 1st October4 200G it sub1its t0e fo##owing infor1ation C
Credit sa#es 2As.3 "epte1ber 200G 2actua#3 Credit purc0ases 2As.3 1!4000 144000 404000 October 200G 2budgeted3 Cas0 "a#es 2As.3 204000 $4000 2)4000

1+4000 !4000 234000 >ove1ber 200G 2budgeted3 Dece1ber 200G 2budgeted3 2!4000 +4000 2$4000

252 On 1st October4 200G t0e e;uip1ent wi## be rep#aced at a cost of As. 3040004 As. 144000 wi## be a##owed in e-c0ange for t0e o#d e;uip1ent and a net pa/1ent of As 1$4000 wi## be 1ade. Depreciation is to be provided t t0e rate of 10H per annu1. 70e proposed dividend wi## be paid in Dece1ber 200G. &ages As. 34000 per 1ont0. .d1inistration As. 14!00 per 1ont0. Aent As. 34$00 2for t0e /ear to 30t0 "epte1ber4 20103 to be paid in October4 200G. Jou are re;uired to prepare a cas0 budget for t0e 1ont0s of October4 >ove1ber and Dece1ber4 200G. E.* ra1od .uto1obi#es 0as been distribution goods to its pro1inent custo1er situated at a p#ace 40 '1s4 awa/ fro1 its own p#ace using a sing#e truc'. 70e truc' 0as been purc0ased at a cost of As. )4!04000 2e-c#uding t/res34 and 0as a capacit/ of carr/ing 10 tonnes of #oad of goods. It 1a'es t0e journe/ twice a da/ carr/ing its fu## #oad on t0e outward journe/ w0ereas it returns e1pt/. 70e truc' operates five da/s in a wee'. 70e fo##owing is t0e re#evant data for a 1ont0 e;uated to a 4(wee'#/ period. As. Insurance G4000 per annu1 License4 Aoad(ta44000 per annu1 Barage rent 14!00 per wee' Aepairs and 1aintenance !00 per wee' 7/res and tubes 204000 2Life C 2!4000 '1s.3 Ot0er

Over0eads a##ocated $04000 per annu1 Drivers re1uneration +00 per wee' Oi# 300 per wee' etro# 2! per #itre 2consu1ed F 8 '1s. per #itre3 70e effective #ife of t0e ve0ic#e is wort0 running +04000 '1s. at t0e end of w0ic0 t0e ve0ic#e wi## 0ave scrap va#ue of As. 2!4000. Jou are re;uired to sub1it a state1ent s0owing t0e tota# cost for a 1ont0 and decide t0e fare to be c0arged per tonne '1. t0at a##ows 20H profit on fares.

25& E.6 70e fo##owing is t0e data avai#ab#e of .: Ltd. in respect of rocess III for t0e 1ont0 of =anuar/4 2011. R$. 1. 2. 3. 4. 5. 6. Direct 1ateria#s Direct #abour ))$ )$+ 3+$

roduction over0eads

7ransfer fro1 rocess II C 44200 units 14!$0 7ransfer to rocess I%C 34$!0 units "toc' on 1(1(2011 C $00 units 2Degree of Co1p#etionC Labour !0H 40H3 3G0

Materia#s added in t0e process $0H Over0eads 7.

"toc' on 31(1(2011 C +00 units 2Degree of co1p#etionC Labour )0H $0H3

Materia#s added in t0e process +0H Over0eads

8. 3!0 <nits scrapped are fu##/ co1p#ete in a## respects i.e. 1ateria#s4 #abour and over0eads. 9. >or1a# #oss was 10H of t0e production and units scrapped 0ave a scrap va#ue of Ae. 0.10 per unit. repare rocess account a#ong wit0 "tate1ents of ,;uiva#ent production4 Cost a##ocated per e;uiva#ent unit and ,va#uation for t0e 1ont0 of =anuar/4 2011 assu1ing 5.I.5.O. basis. E.2 70e fo##owing were t0e ba#ances appearing in t0e Cost boo's of Cost Conscious Ltd. at t0e start of a 1ont0 C As. 2in #a'0s3 "tores Ledger Contro# .ccount +0 &or' 0in( rogress Contro# .ccount 20 5inis0ed Boods Contro# .ccount 430 :ui#ding Construction .ccount 10 Benera# Ledger .djust1ent .ccount !40

25*

During t0e 1ont04 t0e fo##owing transactions too' p#ace C Materia#s urc0ased 40 Materia#s issued to production !0 Materia#s issued to genera# 1aintenance $ Materia#s issued to bui#ding construction 4 &ages ( Direct wages paid 1!0 # Indirect wages paid 40 # aid for bui#ding construction 10 # .bsorbed in bui#ding construction 20 # <nder absorbed + Ao/a#t/ paid ! "e##ing4 distribution and ad1inistration over0eads 2! "a#es 4!0 .t t0e end of t0e 1ont04 t0e stoc' of raw 1ateria#s and wor'(in(progress was As. !! #a'0s and As. 2! #a'0s respective#/. 70e #oss arising in t0e raw 1ateria# accounts is treated as factor/ over0eads. 70e bui#ding under construction was co1p#eted during t0e 1ont0. Co1pan/Qs gross profit 1argin is 20H on sa#es. repare t0e re#evant contro# accounts to record t0e above transactions in t0e cost #edger t0e co1pan/ for t0e 1ont0. E.5 70e standard cost of a certain c0e1ica# 1i-ture is as fo##ows C

Materia# Cost per tonne 2As.3 I 240H3 20 . standard #oss of 10H is e-pected in production II 2$0H3 30 5or a period4 t0e actua# consu1ption data was as fo##owsC
Materia# Cost per tonne 2As.3 I 21+0 tonnes3 1+ 70e actua# weig0t produced was 3$4 tonnes II 2220 tonnes3 34

Ca#cu#ate a## t0e Materia# %ariances.

256 E.: #9 i. ii3 5ro1 t0e fo##owing particu#ars4 /ou are re;uired to ca#cu#ate C @% ratio :.,. . for sa#es

iii3 Margin of safet/ iv3 rofit w0en sa#es are As. 24004000@( %. "a#es re;uired to earn net profit of As. 404000@( Jear "a#es 2As.3 rofit 2As.3 <nits I 24404000 1+4000 244000 II 24+04000 2$4000 2+4000 b. .:C Ltd. 0ave prepared t0e fo##owing budget for t0e production of one #a'0 units of t0e co11odit/ 1anufactured b/ it for a period C articu#ars As. 2per unit3 Aaw 1ateria# 2.!2 Direct #abour 0.)! Direct e-penses 0.10 &or's over0eads 2$0H 5i-ed3 2.!0 .d1inistration over0eads 2+0H 5i-ed3 0.40 "e##ing over0eads 2!0H 5i-ed3 0.20 70e actua# production during t0e period was #ater reviewed and re(esti1ated at $04000 units. repare t0e budgeted cost 2bot0 tota##/ and per unit3 at t0is revised #eve# on t0e basis of t0e aforesaid data s0owing a profit of 22.!H of t0e sa#e(price w0ic0 /ou wou#d arrive at t0erein. E.; #9 i. &rite s0ort notes on 2an/ two3 C "tatutor/ Cost .udit C ii3 Cross(c0ec's in Over0eads variances C iii3 urc0ase :udget C iv3 Cost .udit 2Aeporting3 Au#es.

252 b. . co1pan/ sub1its t0e fo##owing data of its product 1anufactured for t0e first ;uarter of 200G and 2010 C

P#rticu0#r$ A+"unt$ / V#0ue$ "a#es C =anuar/4 200G 304000 units : 5ebruar/4 200G 2!4000 units

Marc04 200G 3!4000 units "e##ing price 2200G3 As. 20 T#r%et$ !"r !ir$t @u#rter 2010 : Increase in "a#es ;uantit/ 10H Increase in "a#es price 10H "toc' C 1(1(2010 2H of =anuar/4 2010 "a#es3 !0H "toc' C 31(3(2010 2!4000 units "toc' C 31(3(2010 and 2+(2(2010 2as percentage of subse;uent 1ont0Qs "a#es3 !0H

repare t0e "a#es and ;uarter 2010.

roduction budget for t0e first

&1

M.COM.

Part-I
ADVANCED ACCOUNTACY PAPER-II ADVANCE COST ACCOUNTING

12I-*34I56 7, 010BAI

Dr. Rajan Welukar Dr. Dhanes ar !ar"#han$an -ice C$a8ce99:;< =;:fe>>:;#C?@#(i;ecA:; I(7B< 18i%e;>iAC :f 0?@bai 18i%e;>iAC :f 0?@bai

Pr%&ra''e C%-%r$"nat%r ( Ms. Ma$hura )ulkarn" A>>A. =;:f#c?@#A>>A. (i;ecA:;< I(7B< 18i%e;>iAC :f D E$"t%r 0?@bai C%urse Wr"ter ( Dr. P. ). *an$&ar =;i8ciEa9< 4a8Eada C:99e"e :f C:@@e;ce 2a%i 0?@bai # 400705 (Dr. Paulraj Aruna#han$an .?;? 2a8aF C:99e"e .5B 2a"a; 0?@bai # 400037 (Dr. V. S. )annan -ice =;i8ciEa9 G.*.4. 4$;:ff C:99e"e :f C:@@e;ce< Ga8di%a9i (*H< 0?@bai # 400101 Se+te',er- ./00 M.C%'. Part-I- A$1an#e$ A##%unta#2 Pa+er-IIA$1an#e C%st A##%unt"n&
=?b9i>$ed bC : =;:fe>>:; c?@ (i;ecA:; I8>AiA?Ae :f (i>Aa8ce a8d 7Ee8 Bea;8i8" < 18i%e;>iAC :f 0?@bai< -idCa8a"a;i< 0?@bai # 400 098.

(5= C:@E:>ed : A>$Ii8i A;A> .?;?F;iEa C$aI9< 0.C. C$a"9a 0a;"< Ba@a8Iada< -i9e =a;9e (*H< 0?@bai # 400 099. =;i8Aed bC :

CONTENTS
Unit N". 1. Tit0e P#%e N".

rocess Costing 01

2. Operating Costing 4! 3. Integrated and >on(Integrated .ccounts +) 4. Margina# Costing and .bsorption Costing 13) 5. Manageria# Decisions 1$0 6. "tandard Costing 201 7. :udgetar/ Contro# 22! 8. Cost .udit 24!