MCOM-Ac - Paper - II

1
1
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
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 distinction between job costing and process costing
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 OF 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
2
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 Deiniti!n:
CIM. London defines process costing as 8t0at for1 of
operation costing w0ic0 app#ies w0ere standardi6e goods are
produced9
1.2.2 Fe"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.
!. rocess costing 0e#ps in preparation of tender4 ;uotations
$. "ince cost data is avai#ab#e for eac0 process4 operation and
depart1ent4 good 1anageria# contro# is possib#e.
1.2.) Li*it"ti!n#:
1. Cost obtained at eac0 process is on#/ 0istorica# cost and are not
ver/ usefu# for effective contro#.
2. rocess costing is based on average cost 1et0od4 w0ic0 is not
t0at suitab#e for perfor1ance ana#/sis4 eva#uation and
1anageria# contro#.
3. &or'(in(progress is genera##/ done on esti1ated basis w0ic0
#eads to inaccurac/ in tota# cost ca#cu#ations.
4. 70e co1putation of average cost is 1ore difficu#t in t0ose cases
w0ere 1ore t0an one t/pe of products is 1anufactured and a
division of t0e cost e#e1ent is necessar/.
!. &0ere different products arise in t0e sa1e process and
co11on costs are prorated to various costs units. "uc0
individua# products costs 1a/ be ta'en as on#/ appro-i1ation
and 0ence not re#iab#e.
%
1.% DISTINCTION BET+EEN JOB COSTING AND
PROCESS COSTING
=ob order costing and process costing are two different
s/ste1s. :ot0 t0e s/ste1s are used for cost ca#cu#ation and
attac01ent of cost to eac0 unit co1p#eted4 but bot0 t0e s/ste1s
are suitab#e in different situations. 70e basic difference between job
costing and process costing are
B"#i# !
Di#tincti!n
J!, !r&er c!#tin$ Pr!ce## c!#tin$
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 separate#/.
Costs are co1p#ied for
eac0 process for
depart1ent on
ti1e basis i.e. for a
given accounting
period.
4. Cost ca#cu#ations Cost is co1p#ied w0en
a job is co1p#eted.
Cost is ca#cu#ated at
t0e end of t0e cost
period.
!. Contro# roper contro# is
co1parative#/ difficu#t
as eac0 product unit is
different and
t0e productionis not
continuous.
roper contro# is
co1parative#/ easier
as t0e production is
standardi6ed and is
1ore suitab#e.
$. 7ransfer 70ere is usua##/ not
transfer fro1 one job
to anot0er un#ess
t0ere is so1e surp#us
wor'.
70e output of one
process is transferred
to anot0er process as
input.
). &or'(in(rogress 70ere 1a/ or 1a/ not
be wor'(in(progress.
70ere is a#wa/s so1e
wor'(in(progress
because of continuous
production.
+. "uitabi#it/ "uitab#e to industries
w0ere production is
inter1ittent and
custo1er orders can
be identified in t0e
va#ue of production.
"uitab#e4 w0ere goods
are 1ade for stoc' and
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 ?
a3 Cost of 1ateria#s used in t0at process.
b3 Cost of #abour incurred in t0at process.
c3 Direct e-penses incurred in t0at process.
d3 Over0eads c0arged to t0at process on so1e pre deter1ined.
e3 Cost of ratification of nor1a# defectives.
f3 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
a3 "crap va#ue of >or1a# Loss 2if an/3 occurs in t0at process.
b3 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"rticu/"r# Unit# R#. P"rticu/"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
7oroduction
Over0eads
-- >e-t process3
7oCost of
Aectification of
>or1a# Defects
-- :/ rocess I
"toc' .@c.
-- --
7o .bnor1a# Bains --
00 000 00 00
1
1.).) Pr!ce## L!##e#:
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*"/ 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:
7 o ta# c o st in c rea s ed ? " a#e % a#ue o f "c rap
Input ? >or1a# Loss units
2. A,n!r*"/ 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"/ue ! A,n!r*"/ L!##:
7 o ta# Co st in c rea s e ? "c rap % a#ue o f nor1a# Lo ss - <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*"/ L!## A.c. Cr.
7o rocess .@c. -- -- :/ :an' -- --
:/ Costing E L
.@c.
-- --
00 000 00 00
%. A,n!r*"/ 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*"/ G"in
7 o ta# Co st in c urred ? "c rap % a#ue o f >or1a# Lo ss - .bnor1a# Bain <nites
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*"/ G"in A.c. Cr.
7o >or1a# Loss .@c. -- -- :/ rocess .@c. -- --
7o Costing E L .@c. -- --
00 00 00 00
3
C-ec4 5!ur Pr!$re##:
1. Define t0e fo##owing ter1s
a. rocess costing
b. >or1a# Loss
c. .bnor1a# Loss
2. Bive t0e for1u#as of fo##owing
a3 Cost of good @ nor1a# unit
b3 %a#ue of .bnor1a# Loss
1.1 SOLVED ILLUSTRATIONS
I//u#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#
Direct Materia# Direct
&ages
roduction Over0eads
.ctua# output transferred to process II
>or1a# Loss
%a#ue of "crap per unit
1000 units F As. 20 per
unit
As. 44200@(
As. $4000@(
As. $4000@(
G00 units
!H
As. +@(
S!/uti!n :
Dr. Pr!ce## 6 I A.c. Cr.
7oAaw1ateria# F 20 1000 20000 :/ >or1a# Loss
7o Direct
Materia#
4200 2!H on
10003
!0 400
7o Direct &ages $000 :/ .bnor1a#
Loss .@c.
!0
7o roduction :I rocess ? II
.@c.
Over0eads $000 2output
transferred3
G00
1000 3$200 1000 3$200
7
Dr. A,n!r*"/ L!## A.c. Cr.
7o rocess ? I .@c. !0 :/ :an' .@c. !0 400
:/ Costing E L
.@c.
!0 !0 400
Dr. N!r*"/ L!## A.c. Cr.
7o rocess ? I .@c. !0 400 :I :an' !0 400
+!r4in$ N!te#:
213 Cost of abnor1a# Loss C
D 7 ota# C ost in crea s ed ? "a # es va # ue of " crap - abnor1a# units
D 3$200 ? 400 - !0
1000 ? !0
223 It 0as been assu1ed t0at units of abnor1a# #oss 0ave a#so
been so#d at t0e sa1e rate i.e. of >or1a# "crap
I//u#tr"ti!n 2: 2>or1a# @ .bnor1a# Loss and .bnor1a# Bain3
70e product of a co1pan/ passes t0roug0 3 distinct
process. 70e fo##owing infor1ation is obtained fro1 t0e accounts for
t0e 1ont0 ending =anuar/ 314 200+.
P"rticu/"r# Pr!ce## 6 A Pr!ce## 6 B Pr!ce## 6 C
Direct Materia# )+00 !G40 +++$
Direct &ages $000 G000 12000
roduction Over0eads $000 G000 12000
3000 units F As. 3 eac0 were introduced to process ? I. 70ere was
no stoc' of 1ateria#s or wor' in progress. 70e output of eac0
process passes direct#/ to t0e ne-t process and fina##/ to finis0ed
stoc' .@c.
8
70e fo##owing additiona# data is obtained C
Pr!ce## Out(ut Percent"$e !
N!r*"/ L!## t!
In(ut
V"/ue ! Scr"( (er
unit
9R#.:
rocess ? I 2+!0 ! H 2
rocess ? II 2!20 10 H 4
rocess ? III 22!0 1! H !
repare rocess Cost .ccount4 >or1a# Cost .ccount and
.bnor1a# Bain or Loss .ccount.
S!/uti!n:
Dr. Pr!ce## 6 A A.c. Cr.
7o <nits
introduced
3000 G000 :/ >or1a# Loss
.@c.
1!0 300
7o Direct
Materia#
)+00 :/ rocess ? :
.@c.
2+!0 2+!00
7o Direct &ages $000 2<nits
transferred
7o roduction F As. 10@(3
Over0eads $000
%000 27700 %000 27700
Dr. Pr!ce## 6 B A.c. Cr.
7o rocess ? I .@c. 2+!0 2+!00 :/ >or1a# Loss
.@c.
2+! 1140
7o Direct
Materia#
!G40 :/ .bnor1a#
Loss .@c.
4! G000
7o Direct &ages G000 :/ rocess ? C
.@c.
2!20 !0400
7o roduction
Over0eads G000
2710 12))0 2710 12))0
10
Dr. Pr!ce## 6 C A.c. Cr.
7o rocess ? II .@c. 2!20 !0400 :/ >or1a# Loss
.@c.
3)+ 1+G0
7o Direct
Materia# .@c
+++$ :/ 5inis0ed
"toc' .@c.
22!0 +!!00
7o Direct &ages 12000
7o roduction
Over0eads 12000
7o .bnor1a# Bain
.@c.
10+ 4104
2227 73%80 2227 73%80
7o >or1a# Loss .@c. 10+ !40 :/ rocess ? C
.@c.
10+ 4104
7o Costing EL .@c. 3!$4
107 )10) 107 )10)
Dr. N!r*"/ L!## A.c. Cr.
7o rocess ? . .@c. 1!0 300 :/ :an' .@c.
2"a#es3
7o rocess ? : .@c. 2+! 1140 rocess ? .
.@c.
1!0 300
7o rocess ? C .@c. 3)+ 1+G0 rocess ? : .@c. 2+! 1140
rocess ? C
.@c.
2)0 13!0
:/ .bnor1a#
Bain .@c.
10+ !40
71% %%%0 71% %%%0
1.2 INTER PROCESS PROFITS:
>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' - rofit inc#uded in tr an sfer p rice
7ransfer rice
I//u#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 31
st
Marc04 200G.
Pr!ce##
I
Pr!ce##
II
Pr!ce##
III
Fini#-e&
St!c4
R#.
Direct Materia# 20000 30000 10000 ((
Direct &ages 30000 20000 40000 ((
"toc' on 31
st
Marc0 200G
10000 20000 30000 1!000
"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!/uti!n:
Dr. Pr!ce## 6 I A.c. Cr.
P"rticu/"r# T!t"/
R#.
C!#t
R#.
Pr!it
R#.
P"rticu/"r# T!t"/
R#.
C!#t
R#.
Pr!it
R#.
7o Materia#s 20000 20000 (( :/ rocess
II.@c.
27ransfer3
!0000 40000 10000
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. Pr!ce## 6 II A.c. Cr.
P"rticu/"r#
T!t"/
R#.
C!#t
R#.
Pr!it
R#.
P"rticu/"r#
T!t"/
R#.
C!#t
R#.
Pr!it
R#.
7o rocess ? I .@c. !0000 40000 10000 :/
rocess(III
.@c. 100000 )2000 2+000
7o Materia# 30000 30000 (( 27ransfer3
7o &ages 20000 20000 ((
100000 G0000 10000
Less C
C#osing
"toc' C@d. 20000 1+000 2000
ri1e Cost +0000 )2000 +000
7o Bross rofit
220H on
7ransfer rice3 20000 (( 20000
100000 )2000 2+000 100000 )2000 2+000
7o "toc' :@d. 20000 1+000 2000
1%
Pr!ce## III A.c
P"rticu/"r# T!t"/
R#.
C!#t
R#.
Pr!it
R#.
P"rticu/"r# T!t"/
R#.
C!#t
R#.
Pr!it
R#.
7oprocessII .@c
7o Materia# 7o
&ages 7O7.L
Less.C#osing stoc'
7o Bross profit
220Hof transfer
price3
100000
10000
40000
)2000
10000
40000
2+000
(((((((
:/5inis0ed
stoc' .@c
1!0000 G)$00 !2400
1!0000
30000
122000
24400
2+000
!$00
120000
30000
G)$00
((((((((
22400
30000
1!0000 G)$00 !2400 1!0000 G)$00 !2400
7o "toc' b@d 30000 24000 !$00
Fini#-e& #t!c4 A.c
P"rticu/"r# T!t"/
R#.
C!#t
R#.
Pr!it
R#.
P"rticu/"r# T!t"/
R#.
C!#t
R#.
Pr!it
R#.
7o process III .@c
2(3"toc'
7o gross profit
11!000
1!000
G)$00
G)$0
!2400
!240
:/ "a#es 1+0000 +)+40 G21$0
13!000 +)+40 G21$0
4!000 ((( 4!000
1+0000 +)+40 G21$0 1+0000 +)+40 G21$0
7o "toc' .@c 1!000 G)$0 !240
Ca#cu#ation of profit on c#osing stoc'
rofit inc#uded in stoc' D rof i t in c #uded in tr ansfer pr i ce - %a#ue of stoc'
7ransfer price
rocess I D >o profit
rocess Ii D 1000 0-20000D2000
100000
rocess Iii D2+00 0 -30000D!$00
1!0000
5inis0ed stoc'D !2400-1!000D!240
1!0000
1)
I//u#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
Pr!ce##
C
<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!/uti!n :
Dr. Pr!ce## A A.c. Cr.
7o<nits
Introduced
:/ >or1a# Loss !00 14!00
F As. !0 10000 !4004000 :/ .bnor1a# 200 110$3
7o"undr/
Materia#s
$4000 Loss .@c. $4200 342G!+
7o Labour 1+4000 :/ rocess :
.@c.
34100 1)14)G
7oDirect
,-penses
34000 :/ E L .@c.
2F !!.323
10000 !42)4000 !42)4000
11
Dr. Pr!ce## B A.c. Cr.
7o rocess . .@c. $200 342G!+ :/ >or1a# Loss G30 4$!0
7o"undr/
Materia#s
G000 :/ rocess C
.@c.
2)00 240+41$!
7o Labour 4+000 :/ E L .@c. 2)00 240+41$!
7o Direct
,-penses
11000
7o.bnor1a# Bains 100221
.@c. 2F )).1G3
2%%0 )20870 2;%%0 );20;870
Dr. Pr!ce## C A.c. Cr.
7o rocess : .@c. 20+1$! :/ >or1a# Loss !40 !400
7o"undr/
Materia#s
3233 :/ .bnor1a#
Loss
$0 )30!
7o Labour 3G000 :/ E L .@c. 2100 2!!$G3
7o Direct
,-penses
1+000 2 F 12.)$3
2300 227%87 2300 227%87
Dr. Pr!it < L!## A.c. Cr.
7o rocess . .@c. 3100 1)14)G :/ "a#es2 F As. )03 3100 21)000
7o rocess : .@c. 2)00 20+1$! :/ "a#es2FAs. 1003 2)00 2)0000
7o rocess C .@c. 2)00 2$!$G3 :/"a#es2FAs.20003 2)00 420000
7o Manage1ent
,-penses .@c.
+0000 :I .bnor1a# Bain
.@c.
G3)2
7o"e##ing
,-penses
!0000
7o .bnor1a# Loss
.@c.
1)1$+
7o >et rofit 133+$)
812%32 812%32
12
Dr. A,n!r*"/ L!## A.c. Cr.
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 17%27 220 17%27
7o >or1a# Loss .@c. 130 $!0 :/ rocess : @c. 130 10022
7o Costing E L .@c. G3)2
1%0 10022 1%0 10022
I//u#tr"ti!n 1
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
"crap so#d F As. !0 per tone !0 tones 30 tones !1 tones
"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.
13
S!/uti!n
Dr. Pr!ce## N!. 1 A.c. Cr.
7o Materia# F As.
200
1000 200000 :/ >or1a# Loss
2sa#e of "crap3
!0 2!00
7o &ages 40000 :/ &eig0t Loss !0 ((
7o ,-penses 32!00 :/ rocess I "toc'
.@c.2F300per tone3
G00 2)0000
1000 232100 1000 232100
Dr. Pr!ce## N!. 1 St!c4 A.c. Cr.
7o rocess I .@c. G00 2)0000 :/ :an' 2F 3203 300 G$000
7o Costing rofit E Loss
.@c.
$000 :/rocess>o.2
.@c.
$00 1+0000
800 232000 800 232000
Dr. Pr!ce## N!. 2 A.c. Cr.
7o rocess 1 "toc'
.@c.
$00 1+0000 :/ >or1a# Loss
2F As. !03
30 1!00
7o wages 30000
7o ,-penses 10+00 :/ &ig0t Loss $0 ((
:/ rocess 2
"toc'
.@c2F As. 4303 !10 21G300
200 220700 200 220700
Dr. Pr!ce## N!. 2 St!c4 A.c. Cr.
7o rocess 2 .@c. !10 21G300 :/ :an'
7oCosting EL .@c. !100 2sa#e F 4!03 2!! 114)!0
:/ rocess 3
.@c.
2!! 10G$!0
110 2)))00 110 2)))00
17
Dr. Pr!ce## N!. % A.c. Cr.
7o rocess 2 "toc'
.@c.
2!! 10G$!0 :/ scrap !1 2!!0
7o wages )000 :/ &eig0t Loss !1 ((
7o ,-penses 3)10 :/ rocess 3
stoc' .@c
1!3 11)+10
211 120%20 211 120%20
Dr. Pr!ce## N!. % St!c4 A.c. Cr.
7o rocess 3 .@c. 1!3 11)+10 :/ :an'
7o Costing E L .@c. 4!G0 2sa#e F +003 1!3 122400
11% 122)00 11% 122)00
Dr. C!#tin$ Pr!it < L!## A.c. Cr.
P"rticu/"r# R#. P"rticu/"r# R#.
7o Manage1ent ,-penses 10!00 :/ rocess 1 "toc' .@c. $000
7o "e##ing ,-penses +000 :/ rocess 2 "toc' .@c. !100
7o Interest on Capita# 2000 :/ rocess 3 "toc' .@c. 4!G0
:/ >et Loss 4+10
20100 20100
1.3 VALUATION OF +OR=>IN>PROGRESS
1.3.1 Me"nin$ ! +!r4>in>Pr!$re##:
"ince production is a continuous activit/4 t0ere 1a/ be so1e
inco1p#ete production at t0e end of an accounting period.
Inco1p#ete units 1ean t0ose units on w0ic0 percentage of
co1p#etion wit0 regu#ar to a## e#e1ents of cost 2i.e. 1ateria#4 #abour
and over0ead3 is not 100H. "uc0 inco1p#ete production units are
'nown as &or'(in(rogress. "uc0 &or'(in(rogress is va#ued in
ter1s of e;uiva#ent or effective production units.
1.3.2 Me"nin$ ! e?ui'"/ent (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.
18
,;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.
1.3.% 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
20
Situ"ti!n I :
On/@ c/!#in$ A!r4>in>(r!$re## Ait-!ut (r!ce## /!##e# C
In t0is case4 t0e e-istence of process #oss is ignored. C#osing
wor'(in(progress is converted into e;uiva#ent units on t0e basis of
esti1ates on degree of co1p#etion of 1ateria#s4 #abour and
production over0ead. .fterwards4 t0e cost pr e;uiva#ent unit is
ca#cu#ated and t0e sa1e is used to va#ue t0e finis0ed output
transferred and t0e c#osing wor'(in(progress
Situ"ti!n II:
+-en t-ere i# c/!#in$ A!r4>in>(r!$re## Ait- (r!ce## /!## !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& c/!#in$ A!r4>in>(r!$re## Ait-!ut (r!ce##
/!##e#.
"ince t0e production is a continuous activit/ t0ere is
possibi#it/ of opening as we## as c#osing wor'(in(progress. 70e
procedure of conversion of opening wor'(in(progress wi## var/
depending on t0e 1et0od of apportion1ent of cost fo##owed vi64
5I5O4 .verage cost Met0od and LI5O.
Let us discuss t0e 1et0ods of va#uation of wor'(in(progress one b/
one.
2a3 FIFO Met-!&: 70e 5I5O 1et0od of costing is based on t0e
assu1ption of t0at t0e opening wor'(in(progress units are
t0e first to be co1p#eted. ,;uiva#ent production of opening
wor'(in(progress can be ca#cu#ated as fo##owsC
,;uiva#ent roduction D <nits of Opening &I - ercentage of wor'
needed to finis0
t0e units
2b3 A'er"$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 J current cost3 b/
e;uiva#ent production.
2d3 LIFO 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'"/ent
Pr!&ucti!n
articu#ars <nits articu#ars <nits Materia# Labour Over0eads
H <nits H <nits H <nits
Opening "toc' -- <nits
co1p#eted
-- -- -- -- --
<nits Introduced -- >or1a#
Loss
-- (( (( (( ((
.bnor1a#
Loss
-- -- -- -- --
-- ,;uiva#ent
<nits
-- -- -- -- -- -- K-
223 "tate1ent of cost per ,;uiva#ent <nits C
E/e*ent ! c!#tin$ C!#t
R#.
E?ui'"/ent
Unit#
C!#t (er
E?ui'"/ent
Unit# R#
Materia# Cost 2>et3 K- K- K-
Labour Cost K- K- K-
Over0eads Cost K- -- K-
-- K-
22
233 "tate1ent of ,va#uation
P"rticu/"r# E/e*ent !
c!#t
E?ui'"/ent
Unit#
C!#t (er
e?ui'"/ent
unit#
R#.
C!#t
R#.
T!t"/
C!#t
R#.
<nits co1p#eted Materia# -- -- --
Labour -- -- --
Over0eads -- -- -- K-
C#osing &I Materia# -- -- --
Labour -- -- --
.bnor1a# Loss Materia# -- -- --
Labour -- -- --
I//u#tr"ti!n 2: 9A'er"$e C!#tin$:
repare a state1ent of e;uiva#ent production4 state1ent of
cost4 process account fro1 t0e fo##owing infor1ation using average
costing 1et0od.
Opening "toc'
Materia#
Labour
Over0eads
<nits Introduced
Materia#
&ages
Over0eads
!0000 <nits
As. 2!000
As. 10000
As. 2!000
2000000 <nits
As. 100000
As. )!000
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!/uti!n :
In(ut Out(ut E?ui'"/ent Pr!&ucti!n
articu#ars <nits articu#a
rs
<nits Materia# Labour Over0eads
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.
Current
cost
As.
7ota#
Cost
As.
,;uiva#ent
units
Cost
per
unit
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!
St"te*ent ! A((!rti!n*ent ! C!#t
P"rticu/"r# Unit# C!#t (er
unit
C!#t T!t"/
c!#t
1. <nits introduced E
transferred
14!04000 1.42! 213)!0
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.
7o Opening "toc' !04000 $04000 :/ <nits
co1p#eted
7o Materia#s 24004000 14004000 E transfer !04000 24134)!0
7o Labour )!4000 :/ C#osing "toc' !04000 G142!0
7o Over0eads )04000
24!04000 340!4000 24!04000 340!4000
I//u#tr"ti!n 3: 9FIFO Met-!&:
5ro1 t0e fo##owing infor1ation re#ating to LL> Co1pan/ Ltd.
repare rocess Cost .ccount for rocess III for t0e /ear 200+.
Opening "toc' I> rocess III
7ransfer fro1 rocess II
Direct Materia# added in rocess III
Direct &ages
roduction Over0ead
<nits "crap
7ransferred to rocess I%
C#osing "toc'
!000 units of
As. 3$4000
24134000 units of
As. +42)4000
As. 44014+00
As. 14G+4100
As. GG40!0
114000 units
14+G4000 units
1+4000 units
2)
De$ree ! C!*(/eti!n :
Opening
"toc'
Materia# )0 H
Labour !0 H
Over0ead !0 H
C#osing "crap
"toc'
+0 H 100 H
$0 H +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!/uti!n :
In(ut Out(ut E?ui'"/ent Pr!&ucti!n
articu#ar s <nits articu#ars <nits Materia# Labour Over0eads
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 roducedC Opening stoc' J units introduced ? c#osing stoc'
C !000 J213000 ? 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.
Cost
er
<nit
As.
Materia# ? I
7ransfer fro1 revious
process
+42)4000
Less ? %a#ue of scrap
2nor1a#3
1!4000 +4124000 24034000 4.00
Materia# ? II
.dedJ in t0e process 44014+00 24004G00 2.00
Direct &ages 14G+4100 14G+4100 1.00
Over0eads GG40!0 14G+4100 0.!0
).!0
21
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
<nits introduced and Materia# I 14+44000 4.00 )43$4000
Co1p#eted Materia# II 14+44000 2.00 34$+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 11;10;810
Dr. Pr!ce## III A.c. Cr.
7o :a#ance b@d. !4000 3$4000 :/ >or1a#
Loss
104000 1!4000
7o rocess II .@c. 24134000 +42)4000 :/ rocess
I% .@c.
14+G4000 144224)!0
7o Materia#s 44014+00 :/
.bnor1a#
Loss
14000 )4200
7o &ages 14G+4100 :/ C#osing
"toc'
1+4000 141)4000
7o Over0eads GG40!0
2;17;000 11;21;810 2;17;000 11;21;810
N!te :
Cost of goods transferred to rocess I% C
%a#ue of Opening "toc'
Cost incurred in t0is process for Opening "toc'
Cost incurred for t0e units introduced E rocessed
T!t"/
3$4000
$4)!0
13 4+0 4000
1) ;22 ;310
22
I//u#tr"ti!n 7
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 $04000
Over0eads $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.
MC. .. ? Inter4 Ma/ 2001N
S!/uti!n :
"tate1ent of ,;uiva#ent roduction 2weig0ted .verage cost
Materia#3
articu#ars 7ota#
<nits
Materia# ? I Materia# ? II Labour Over0eads
<nits Co1p#ete#/
rocessed 1)000 100 1)000 100 1)000 100 1)000 100 1)000
>or1a# Loss 1+00 ((
10H of 22000 J
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
23
St"te*ent ! C!#t
articu#ars Cost
As.
,;uiva#ent
<nits
Aate @ ,;uiva#ent
<nits
As.
M"teri"/ 6 I :
Opening ba#ance 2000 units 1243!0
Cost of 20000 units F As. $
er unit 14204000
142!41!0 204200 $.1G!!
M"teri"/ 6 II :
Opening "toc' 134200
In rocess II 304000
434200 1G4400 2.22$+
L",!ur :
Opening Labour 1)4!00
In rocess II $04000
))4!00 1+4$00 4.1$$)
O'er-e"&# :
Opening "toc's 114000
In rocess II $04000
)14000 1)4+00 3.G+++
T!t"/ c!#t (er unit 12.1337
%a#uation of ,;uiva#ent <nit
As.
5inis0ed goods
.bnor1a# <nits
&or'inprogress
Materia# I Materia# II
Labour Over0eads
21)000 units - As. 1$.!))+3
2+00 units - As. 1$.!))+3
24000 units - As. $.1G!!3
23200 units - As. 2.22$+3
22400 units - As. 4.1$$)3
21$00 units - As. 3.G+++3
244)+2
)412$
104000
$43+2
24+14+22
1342$2
4+42G0
Dr. Pr!ce## III A.c. Cr.
7o Opening &I 24000 !)40!0 :/ >or1a# Loss 14+00 )4200
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
7o Direct Labour $04000
7o Over0eads $04000
7o .bnor1a# Bain +00 1342$2
22;700 %;%3;%12 22;700 %;%3;%12
27
I//u#tr"ti!n.8
70e finis0ed product of a factor/ pass t0roug0 two
processes C t0e entire 1ateria# being p#aced in process at t0e
beginning of t0e first process. 5ro1 t0e fo##owing production and
#ast data re#ating to t0e first process4 wor' out t0e va#ue of t0e
c#osing inventor/ and t0e va#ue of t0e 1ateria#s transferred to t0e
second process.
Pr!ce## I
Opening inventor/
Materia#
Labour
Manufacturing Over0eads
Opening inventor/ 22! percent co1p#ete3
ut into rocess
7ransferred to II rocess
C#osing inventor/ 220 percent co1p#eted3
"poi#age during process
R#.
104000
2)4!00
!04000
404000
44000
124000
104000
!4000
14000
MI.C.&...4 5ina#N
S!/uti!n :
Pr!ce## I A.c
P"rticu/"r# =$. A*!unt
R#.
P"rticu/"r# =$. A*!unt
R#.
Opening
Inventor/
44000 104000 7ransferred
to rocess II
104000 141!4)!0
Materia# 124000 2)4!00 >or1a# Loss 14000 ((
Labour !04000 C#osing
Inventor/
!4000 114)!0
Manufacturing
Over0eads 404000
12;000 1;23;100 12;000 1;23;100
+!r4in$ N!te :
"tate1ent of ,;uiva#ent roduction <nits
articu#ars Output
Lg.
Materia# Labour Over0eads
*t/. H *t/. H *t/. H
Opening "toc'
rocessed
44000 34000 )! 34000 )! 34000 )!
Co1p#ete#/
rocessed
$4000 $4000 100 $4000 100 $4000 100
>or1a# Loss 14000 (( (( (( (( (( ((
C#osing Inventor/ !4000 14000 20 14000 20 14000 20
12;000 10;000 10;000 10;000
28
St"te*ent ! E/e*ent ! C!#t !n t-e ,"#i# ! E?ui'"/ent
Pr!&ucti!n
P"rticu/"r# C!#t
R#.
E?ui'"/ent
Unit#
C!#t (er Unit
R#.
Materia# 2)4!00 104000 2.)!
Labour !04000 104000 !.00
Over0eads 404000 104000 4.00
7ota# 11.)!
articu#ars ,#e1ents ,;uiva#ent
<nits
Cost
er
<nit
As.
Cost
As.
7ota#
cost
As.
Op. "toc'
rocessed
Materia# 34000 2.)! +42!0
Labour 34000 !.00 1!4000
Over0eads 34000 4.00 124000 3!42!0
Co1p#ete#/
rocessed
Materia# $4000 2.)! 1$4!00
Labour $4000 !.00 304000
Over0eads $4000 4.00 244000 )04!00
C#osing
Inventor/
Materia# 14000 2.)! 24)!0
Labour 14000 !.00 !4000
Over0eads 14000 4.00 44000 114)!0
TOTAL 1;13;100
V"/ue ! $!!&# tr"n#erre& t! ne0t (r!ce##
As. <nits
%a#ue of opening stoc' 2given3 .dditiona#
cost on opening stoc' %a#ue of co1p#ete#/
processed units
104000
3!42!0
)04!00
44000
$4000
141!4)!0 104000
I//u#tr"ti!n 10
.:C Li1ited 1anufactures a product O2KP b/ using t0e
process nor1a##/ A. 7. for t0e 1ont0 of Ma/ 200G4 t0e fo##owing
data is avai#ab#e.
%0
Materia# Introduced
7ransfer to ne-t process
&or'(in(rocess
.t t0e beginning of t0e 1ont0 24@! co1p#eted3
.t t0e end of t0e 1ont0 22@3 co1p#eted3
Cost recordsC
&or'(n(rocess at t0e beginning of t0e 1ont0
Materia#
Conversion cost
Cost during t0e 1ont0
Materia#s
Conversion cost
rocess A. 7.
1$4000 units
144000 units
44000 units
34000 units
As. 304000
As. 2G4200
As. 14204000
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
MC... C,. >ov. 200)N
S!/uti!n :
"tate1ent of ,;uiva#ent roduction 2average cost 1et0od3
Input units articu#ars Output
<nits
,;uiva#ent roduction
Materia#s Conversion cost
H co1p#eted ,;uiva#ent
<nits
H
Co1p#et
ed
,;uiva#ent
<nits
4000 Opening &I (( ((
1$000 Introduced and 144400 100 144400 100 144400
Co1p#eted to
ne-t
>or1a#
spoi#age
14440 100 14440 100 14440
.bnor1a#
spoi#age
141$0 100 141$0 100 141$0
C#osing &I 34000 100 34000 $$.$) 24000
20000 20000 20000 1G000
%1
St"te*ent #-!Ain$ c!#t ! e"c- e/e*ent
articu#ars Materia#s Conversion
cost
Opening
Cost in process
7ota# 2a3
,;uiva#ent <nits 2b3 Cost
per unit 2a Q b3
304000
14204000
2G4200
14$04+00
14!04000 14G04000
204000
).!0
1G4000
10.00
St"te*ent #-!Ain$ &i#tri,uti!n ! c!#t
articu#ars ,;uiva#ent
<nits
Cost per
unit
2As.3
<nits co1p#eted
Materia#s Conversion
cost >or1a# spoi#age
210 H3
C/!#in$ #t!c4 : Materia#
Conversion cost
A,n!r*"/ St!c4:
Materia# Conversion
"toc'
144400
144400
14440
34000
24000
141$0
141$0
).!0
10.00
1).!0
).!0
10.00
).!0
10.00
140+4000
14444000 24!24000
2!4200
424!00
204300
224!00
204000
+4)00
114$00
Dr. Pr!ce## A.c. Cr.
7o Opening &I
7o Materia#
Introduced
7o Conversion cost
Incurred
!G4200
14204000
14$04+00
:/ rofit and Loss
.@c.
2abnor1a#3
:/ 7ransfer to >e-t
rocess
:/ C#osing &I
204300
24))4200
424!00
%)0000 %;)0;000
I//u#tr"ti!n.11
BR 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.
.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
H co1p#ete as to 1ateria#s.
repare a rocess .ccount for recording t0e 1ont0Ps
transactions and prepare a rocess Cost "0eet s0owing tota# and
units costs
MI.C.&...4 5ina#N
S!/uti!n:
Dr. Pr!ce## A.c. Cr.
7o Opening "toc'
7o Materia#
7o Labour
7o Over0eads
400
24$00
+4000
$+4!00
)G4+00
2142+0
:I 7ransfer to
5inis0ed stoc'
:/ &or'(in(
rogress
24!00
!00
14!$40G4
2144+$
%000 1;33;170 %000 1;33;170
+!r4in$ N!te :
"tate1ent of ,;uiva#ent roduction 2<nits3
Input articu#ars Outp
ut
Materia# Labour Over0ead
*t/. H *t/. H *t/. H
400
2$00
Opening
"toc'
Co1p#ete#/
rocessed
&or'(in(
rogress
400
24100
!00
240
24100
400
$0
100
+0
240
24100
300
$0
100
$0
240
24100
300
$0
100
$0
3000 34000 24)40 24$40 24$40
%%
+!r4in$ 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.
St"te*ent ! E/e*ent ! c!#t !n t-e ,"#i# ! E?ui'"/ent Unit#
Cost
As.
,;uiva#ent
<nits
Cost per
unit
As.
Materia# Labour
Over0eads
$+4!00
)G4+00
2142+0
2.)40
2.$40
2.$40
2!.000
30.22)3
+.0$0$
articu#ars ,;uiva#ent
<nits
Cost
er <nit
As.
Detai#s
As.
7ota#
As.
Op. "toc'
rocessed
Co1p#ete#/
rocessed
&or'(in(
rocess
Materia#
Labour
Over0eads
Materia#
Labour
Over0eads
Materia#
Labour
Over0eads
240
240
240
24100
24100
24100
400
300
300
2!.0000
30.22)3
+.0$0$
2!.0000
30.22)3
+.0$0$
2!.0000
30.22)3
+.0$0$
$4000
)42!!
14G3! 1!41G0
14324G04
2144+$
!24!00
$344))
1$4G2)
104000
G40$+
2441+
TOTAL 1;28;170
T!t"/ C!#t ! 2100 unit#
As.
Cost of opening stoc'
.dditiona# cost of opening stoc' processed Cost
of co1p#ete#/ processed
+4000
1!41G0
14324G04
1;12;08)
%)
I//u#tr"ti!n 12
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
Iou 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
MC...4 InterN
%1
9": St"te*ent ! E?ui'"/ent Pr!&ucti!n 9FIFO Met-!&:
input
units
Output
<nits
,;uiva#ent
articu#ars articu#ars Materia# Labour E
Over0eads
<nits H <nits H
Op. "toc' of
&.I..
<nits
Introduced
+00
G4200
<nits
co1p#eted
&or' on Op.
stoc'
>ew units
C#osing stoc'
>or1a# Loss
.bnor1a#
Loss
+00
)100
G00
+00
400
((
)100
G00
((
400
100
100
100
320
)4100
$30
((
320
40
100
)0
100
104000 104000 +4400 +43)0
9,: St"te*ent ! c!#t (er e?ui'"/ent unit# !r e"c- e/e*ent
articu#ars Cost
As.
,;uiva#ent
<nit
Cost er
<nit
Materia# Less C
"crap rea#i6ation
2+00 units F As. 43 Labour
Over0eads
3$4+00
34200 334$00
1$4)40
+43)0
+4400
+43)0
+43)0
4.00
2.00
1.00
I "tate1ent s0owing cost of abnor1a# #oss4 c#osing &I and units
transferred to t0e ne-t process C
articu#ars Cost per
unit As.
,;uiva#ent
unit
7ota# cost
As.
.bnor1a# Loss
Materia#s Labour
Over0eads
C#osing &I Materia#
Labour Over0eads
)G00 units transferred to ne-t
process
2i3 Cost of opening &I 2+0 units3 2ii3
Cost incurred on opening &I
Materia# Labour
Over0eads
4.00
2.00
1.00
4.00
2.00
1.00
((
2.00
1.00
400
320
320
G00
$30
$30
((
320
320
14$00
$40
320
24!$0
34$00
142$0
$30
!44G0
44000
$40
320
G$0
%2
2iii3 Cost of co1p#eting )100 units
Materia#
Labour Over0eads
4.00
2.00
1.00
)100
)100
)100
2+400
14200
)100
4G)00
7ota# 2I J ii J iii3 1)200
Dr. Pr!ce## A.c. !r Fe,ru"r@ 1880 Cr.
7o Opening &I
7o Materia#s 7o
Labour
7o Over0eads
+00
G200
((
((
4000
3$+00
1$)40
+3)0
:/ 5inis0ed
Boods
:/ C#osing &I
:/ >or1a# Loss
:/ .bnor1a#
Loss
)G00
G00
+00
400
!4$$0
!4G0
3200
2!$0
10000 $!G10 10000 21810
1.7 ECERCISE
1.7.1 O,Decti'e t@(e:
An#Aer in Brie
1. "tate an/ four features of process costing.
2. Define process costing4
3. &0at do /ou 1ean b/ nor1a# #oss S Row is it treated in
process cost accountsS
4. &0at do /ou 1ean b/ abnor1a# #oss S Row is it treated in
process cost accountsS
!. Distinguis0 between nor1a# #oss and abnor1a# #oss.
$. &0at do /ou 1ean b/ abnor1a# effectiveS Row is it treated
in process cost accountsS
). &0at do /ou 1ean b/ inter process profitS &0at purpose
does it serveS
+. &0at do /ou 1ean be e;uiva#ent productionS
G. >a1e an/ four industries in w0ic0 process costing is
app#icab#eS
10. ,nu1erate an/ two advantages of process costing.
11. ,nu1erate an/ two disadvantages of process costing.
12. &0at do /ou 1eant b/ e;uiva#ent unitsS
%3
Mu/ti(/e 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
2b3 >or1a# spoi#age
2c3 "easona# 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
2b3 "tandard costs
2c3 5I5O
2d3 LI5O
4. In process costing4 costs fo##ow
2a3 rice rise
2b3 rice dec#ines
2c3 roduct f#ow
2d3 5inis0ed goods
!. &0en average costing is used4 t0e opening inventor/ costs
are
2a3 Lept 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.
$. . 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
). &0ic0 of t0e fo##owing 1et0od of costing can be used in a
#arge oi# refiner/S
2a3 rocess costing
2b3 Operating costing
2c3 <nit costing
2d3 =ob costing
%7
+. &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
G. . product w0ic0 0as practica##/ no sa#es or uti#it/ va#ue is
2a3 &aste
2b3 "crap
2c3 "poi#age
2d3 Defectives
10. 7ri11ings in ti1ber industr/ s0ou#d be treated as a C
2a3 &aste
2b3 "crap
2c3 "poi#age
2d3 Defectives
11. 70e t/pe of process #oss t0at s0ou#d not affect t0e cost of
inventor/ is
2a3 .bnor1a# #oss
2b3 nor1a# #oss
2c3 "easona# #oss
2d3 standard #oss
12. 70e stage w0ere joint products are separated fro1 eac0
ot0er is 'nown as
2a3 brea'(even point 2b3 ang#e of incidence
2c3 sp#it(off point
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
2b3 As. +
2c3 As. 10
2d3 As. G
14. .bnor1a# #oss is c0arged to
2a3 process account 2b3 costing profit and #oss account
2c3 >or1a# #oss account
2.nswersC 12a34 2 2d34 3 2b34 42c34 !2a34 $2b34 )2a34 +2c34 G2a34
102b3.311 2a34 122c34 13 2c34 142b3 3
%8
1.7.2 S-!rt n!te#
1. &rite a s0ort note(Inter process profits.2.pr(0+3
2. &rite a "0ort >ote(7reat1ent of #osses in rocess.2.pr 0)3
3. &rite a s0ort >ote(,;uiva#ent roduction. 2.pr(0)3
4. Describe t0e 1ain features of process costing.
!. ,-p#ain t0e features of process costing
$. Row wou#d /ou treat abnor1a# gain S
1.7.%. L!n$ ?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#P and T.bnor1a#P &astage
during t0e process of 1anufactureS
!. 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.
$. ,-p#ain t0e concept of ,;uiva#ent roduction. Discuss t0e two
1et0ods of its va#uation.
1.7.) Pr"ctic"/ Pr!,/e*#
I//u#tr"ti!n 1:
During a particu#ar period 24000 units at a cost of T $04000 were
introduced into rocess O.P 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 O:P4 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
Labour
Over0eads
100H co1p#ete
!0H co1p#ete
!0H co1p#ete
.dditiona# costs incurred during t0e process wereC
Materia#s
Labour
Over0eads
As. 1)4000
As.334 400
As. 1$4)00
70e units scrapped rea#ised As.10 per unit.
repare rocess O.P .@c wit0 a## re#evant state1ents.
2.ns.C ,;uiva#ent <nits4 Materia#C 14G004 LabourC 1$)04 Over0eadsC 14$)0
7ransfer to rocess : 14400 units FAs. )0 p.u.3
2M.Co1. Mar. 20023
)0
I//u#tr"ti!n 2 :
KIU Ltd. is engaged in process industr/. During t0e 1ont0 .ugust
20004 2000 <nits were introduced in process OKP. 70e nor1a# #oss
was esti1ated at !H of input. .t t0e end of t0e 1ont0 14400 units
0ad been produced and transferred to process OIP. 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
Labour
Over0eads
)!H Co1p#eted
!0H Co1p#eted
!0H Co1p#eted
5o##owing are t0e furt0er infor1ation on t0e process OKP C
Cost of t0e 2000 units
.dditiona# Direct 1ateria#s
Direct Labour
Direct Over0eads
<nits scrapped rea#ised
As. !+4000
As. 144400
As. 334400
As. 1$4)00
As. 10 eac0
repare state1ent of e;uiva#ent production4 state1ent of cost4
state1ent of eva#uation and process OKP account.
2M.Co1. Mar. 200!3
An#. 2,;uiva#ent <nits4 Materia#C 14)+!4 LabourC 14$)04 Over0eadsC 14$)03
I//u#tr"ti!n % : 9FIFO:
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
7ransfer to rocess %C
304$00 units F As. 304$00
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
13 "tate1ent of e;uiva#ent production
23 Cost of e;uiva#ent unit for eac0 e#e1ent of t0e cost4 t0e
#oss4 t0e wor'(in(process4 etc.
33 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
I//u#tr"ti!n ) : 9FIFO:
70e fo##owing data pertains to rocess I for Marc0 2003 of :eta
Li1ited C
articu#ars <nits As.
Opening &or'(in(rogress F F F F ... Degree
of co1p#etion C
Materia#s 100HV Labour and
over0eads 33WH
Input of Materia#s F F F F ... Direct
Labour F F F F ...
Over0eads F F F F ...
C#osing &or'(in(rogress F F F F ...
14!00
1+4!00
!4000
1!4000
!24000
144000
2+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 J units put in3.
"crap va#ue 2.00 per unit.
<nits transferred to t0e ne-t process 1!4000 units.
Iou are re;uired toC
13 Co1pute e;uiva#ent units of production.
23 Co1pute cost per e;uiva#ent unit for eac0 cost e#e1ent i.e.4
1ateria#s4 #abour and over0eads.
33 Co1pute t0e cost of finis0ed output and c#osing wor'(in(
progress.
43 repare t0e process and ot0er .ccount.
)2
A##u*e:
i3 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$0004 LabourC1440004 Over0eadsC 1440003
I//u#tr"ti!n 1: 9+ei$-te& A'er"$e:
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$0H Co1p#ete3 14!00
<nits introduced into t0is process +4000
70ere are 24000 units in process at t0e end and t0e stage of
co1p#etion is esti1ated to be C
Materia#s 100H
Labour !0H
Over0eads !0H
+4000 units are transferred to ne-t process.
70e process costs for t0e period areC
Materia#s
Labour
Over0eads
As. 14 004000
As.)+4000
As. 3G4000
(M.Com. Oct. 2006)
An#. 2,;uiva#ent <nits4 Materia#C1040004 LabourC G40004 Over0eadsC G40003
I//u#tr"ti!n 2 : 9A'er"$e:
"0ete and "0ete vt. Ltd. gives t0e fo##owing particu#ars re#ating to
process OP in its p#ants for t0e 1ont0 of =anuar/ 200) C
)%
P"rticu/"r# R#. R#.
+!r4>in>Pr!$re## 9100 unit#: !n
01>01>2003
Materia# 2100H3 F F F F
Degree of Co1p#etion Labour 2!0H3 F F F F
Over0eads 2!0H3 F F F F
Unit# intr!&uce& &urin$ t-e M!nt-
=anuar/4 200) ? <nits ? 1G4!00 F F F F
Pr!ce##in$ C!#t incurre& &urin$ t-e
M!nt-
=anuar/4 200) Materia#s F F F F
Labour F F F F
Over0eads F F F F
124000
)4200
1$4000
(
44$!4!00
14+04000
2 4$4 4+00
(
(
3!4200
(
(
(
G4104300
articu#ars <nits
Output transferred to rocess * F F F F
<nits "crapped 2Degree of Co1p#etion Materia# 100H4
Labour +0H and Over0eads +0H3 F F F F
&or'(in(rogress 2C#osing :a#ance3 F F F F
2Degree of Co1p#etion(Materia#s 100H4 Labour and Over0eads
!0H3
1+4200
14400
400
>or1a# #oss in processing is !H of tota# input and scrapped units
fetc0 2.!0 eac0. repare t0e fo##owing state1ents for rocess OP
for =anuar/4 200) C
a3 "tate1ent of ,;uiva#ent roduction
b3 "tate1ent of Cost and "tate1ent of ,va#uation
c3 rocess OP .@c
d3 .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
I//u#tr"ti!n 22 : 9FIFO 6 N! L!##e#:
.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
))
Materia#
Labour
As. 1+4000
As. 1)4000
Over0eads As. !4300
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) Process Account.
b) Statement of Eui!a"ent
Production d) Statement of
E!a"uation
2.pr. 0+4 adapted3
2,;uiva#ent <nits4 Materia#C 134)004 LabourC 1342004 Over0eadsC
1342003
I//u#tr"ti!n 23 : 9FIFO 6 Pr!ce## A.c Ait- A,n!r*"/ L!##:
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#
Labour
Over0eads
100H Materia# $0H
!0H Labour !0H
!0H Over0eads !0H
"crap rea#ised Ae. 1.00 per unit
Ot0er infor1ation T
Materia# 104!00
Labour 204)$0
Over0eads 1$44)0
2M.Co14 Oct. 200+4 adapted3
2An#. ,;uiva#ent <nits4 Materia# IC 104G004 Materia# IIC 104!004 LabourC 1043+04
Over0eadsC 1043+03
)1
2
OPERATING COSTING
Unit Structure
2.0 Learning objectives
2.1 Introduction
2.2 Meaning of Operating Costing
2.3 7ransport Costing
2.4 "o#ved rob#e1s of Operating Costing
2.! Rospita# Costing
2.$ "o#ved rob#e1s on Rospita# Costing
2.) Rote# Costing
2.+ "o#ved rob#e1s on Rote# Costing
2.G ,-ercise
2.10 *uestions
2.0 LEARNING OBJECTIVES
.fter stud/ing t0is c0apter one s0ou#d ab#e to understandC
70e 1eaning of operating costing.
rocess to se#ect cost #i1it in operating costing.
rocedure in operating costing according to t0e procedure of a
transporter
.ccounting procedure of a Rote#
.ccounting procedure of a Rospita#
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 OF 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 ? Li#o1eter in a
transport co1pan/. 70e fo##owing are so1e of e-a1p#e of cost units
used in different organi6ations
,nterprises
assenger transport
Boods transport
Rote#
Rospita#
Canteen
&ater supp#/
,#ectricit/
Cost per unit
Li#o1eter
7on ? Li#o1eter
er roo1 per da/
er bed per da/
er ite14 per 1ea#
er 1000 #iters
er 'i#owatt
2.2.2 C!//ecti!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.
)3
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 C/"##iic"ti!n ! c!#t#:
C!#t# "re c/"##iie& int! t-e !//!Ain$ 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!//ecti!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
)7
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"i/@ /!$ #-eet T",/e
%e0ic#e >o.C XXXXXXX
Date of urc0aseC XXXXXX..
Ma'e and "pecificationC XXXX.
7i1e of LeavingC XX
License >o.C XXXXXXX
Aoute >o.C((((((((((((((
DriverC XXXXXX
7i1e of AeturningC XXX.
7rip no. 5ro1 7o ac'ages Li#o1eters 7i1e Ae1ar's
Out Co##ected Out In Rrs
"upp#ies &or'erPs ti1e abnor1a# de#a/s
etro# @ diese# XXXXXXDriver XXXX..Loading @ un#oadingXXXX
Oi# XXXXXXXX.conductor XXX..ccident XXXXXXXXXX.
Brease XXXXXC#eaner XXX..7raffic De#a/s XXXOt0ers XXX
F!r*"t ! tr"n#(!rt !(er"tin$ c!#t #-eet:
Operating cost s0eet
%e0ic#e >o. C XXXXXXX..
Cost <nitC XXXXXXXXX
eriod XXXXXXXXXXX..
>o. of Cost units XXXXXXX.
articu#ars
As. 7ota#
As.
er L1
As.
.. 5i-ed Cost 2or "tanding c0arges3 1.
Aoad 7a-
2. Insurance
3. DriverPs "a#ar/
4. ConductorPs "a#ar/ !.
Depreciation
$. Interest on Capita# ).
Barage Aent
+. Office E .d1inistration
Over0eads
:. %ariab#e 2Aunning3 costs
Depreciation
etro# Diese# Oi# E
Brease
Aepairs and 1aintenance 7/res
and tubes
7ota# operating cost
--
--
--
--
--
--
--
-- --
--
--
--
--
--
--
--
--
-- --
--
--
--
--
--
--
--
--
--
--
--
000 000
N!te: Maintenance e-penses can be s0own separate#/ a#so
depends on cases.
)8
1. Bive t0e for1at of 7ransport Operating cost(s0eet
2. give t0e Cost <nit of t0e fo##owing
a3 assenger 7ransport
b3 Bood 7ransport
c3 ,#ectricit/
d3 Rospita#
e3 Rote#
2.) SOLVED PROBLEMS OF OPERATING COSTING
I//u#tr"ti!n 1:
5ro1 t0e fo##owing infor1ation ca#cu#ate fare for passenger LM.
70e cost of t0e :us
Insurance c0arges .nnua#
ta-
Barage rent .nnua#
repairs
,-pected #ife of t0e bus
%a#ue of scrap at t0e end of ! /ears Aoute
distance
DriverPs sa#ar/
ConductorPs "a#ar/
Co11ission to Driver E conductor 2s0ared e;ua##/3
"tationar/
Manager(cu1(accountantPs "a#ar/
Diese# and Oi# 2for 100 '1s3
As. 4!0000
3 H p.a.
As. 4!00
As. !00 p.1.
As. 4+00
! /rs
As. 3000
20 '1 #ong
As. !!0 p.1.
A. !00 p.1.
10 H of t0e ta'ings
As. 2!0 p.1.
As. 1)!0 p.1.
12!
70e bus wi## 1a'e 3 rounds trips for carr/ing on t0e average
40 passengerPs in eac0 trip. .ssu1e 1! H profit on ta'ings. 70e
bus wi## wor' on t0e average 2! da/s in a 1ont0.
10
S!/uti!n :
Operating Cost "tate1ent
:us >o.
Capacit/C 40 persons
articu#ars er
.nnu1
As.
er
.nnu1
As.
er
.nnu1
As.
.. "tanding C0arges
Depreciation
7a- Insurance
"tationer/
ManagerPs "a#ar/
:. Maintenance C0arges
Barage Aent
Aepairs
C. Operating 2or3 Aunning C0arges Diese#
E Oi#
DriverP "a#ar/ ConductorPs
"a#ar/
T!t"/ .dd C
Co11ission and rofit 2!@)!
5are per passenger '1.
+44000
44!00
134!00
34000
214000 142$4000
104+00
1$43!0
00.0+)!0
00.00)!0
00.0113!
$4000
44+00
34)!0
$4$00
$4000
14!341!0 00.10$3!
00.03!4!
00.141+0
+!r4in$ N!te:
213 >o. of L1 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 J profit
1! H of 7a'ing tota# D 2! H of ta'ing so t0e cost
Cost is on#/ )! H
11
I//u#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-ic/e A Ve-ic/e B
Mi#age run 2annua#3 Cost
of ve0ic#es
Aoad License 2.nnua#3
I11une 2.nnua#3 Barage rent
2.nnua#3
"upervision and "a#aries 2.nnua#3
DriverPs wage per 0our
Cost of fue# per ga##on Mi#es
runs per ga##on
Aepairs and 1aintenance per 1i#e 2As.3 7ire
a##ocation per 1i#e
,sti1ated #ife of ve0ic#e 21i#es3
1!000
As. 2!000
)!0
)00
$00
1200
3
3
20
1.$!
0.+0
14004000
$000
As. 1!000
)!0
400
!00
1200
3
3
1!
2.00
0.$0
)!4000
C0arge interest F ! H p.a. on cost of ve0ic#es. 70e ve0ic#es run 20
1i#es per 0our on an average
MM. Co1. Madurai La1rajN
S!/uti!n :
O(er"tin$ c!#t #-eet 9c!#t (er *i/e:
P"rticu/"r# Ve-ic/e>
A
Ve-ic/e>
B
.. Operating and Maintenance C0arges
Depreciation . ? 2!000 @ 100000
: ? 1!000 @ )!000
Aepairs and 1aintenance
7ire a##ocation 5ue# 23 @
20 1i#es3
DriverPs wages 2. ? 3 @ 203 23 ? 3 @ 1!3
:. "tanding C0arges
A B Aoad
#icense As. As.
)!0 )!0
Insurance )00 400
C0arges $00 !00
"upervision 1200 1200
Interest F ! H p.a. 12!0 )!0
4!00 3$00
Mi#eage run per annu1 1!000 $000 5i-ed
standing c0arge 0.30 0.$0 per 1i#e
Operating cost per 1i#e
0.2!
((1.$
!
0.+0
0.1!
0.1!
((
0.20
0.20
2.00
0.$0
0.1!
3.00
0.30
3.1!
0.$0
3.30 3.)!
12
N!te : 213
223
Depreciation is #in'ed wit0 1i#eage so operating cost.
Driver wage is ta'en as operating since it is paid per
0our.
I//u#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
Truc4
7 T!n Truc4
urc0ase rice As. Life
2Iears3
"crap va#ue at t0e end f !
t0
/ear LM
er #iter of diese#
Aepair and 1aintenance p.a. per truc'
2As.3
Ot0er fi-ed e-penses p.a. 2As.3
Lubricants and sundries per 100 '1 2As.3
104004000
!
>i#
3
$04000
$04000
20
+4!04000
!
>i#
4
4+4000
3$4000
20
,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.
MC... 5ina#N
1%
S!/uti!n :
Co1parative state1ent of operating cost s0eet C
10 T!n
Truc4
R#.
7 T!n Truc4
R#.
5i-ed C0arges 2p.1.3
DriverPs "a#ar/ 2wor'ing no. 13 "taff
e-penses
Ot0er fi-ed e-penses
Operating E Maintenance C0arges 2p.1.3
Depreciation 2>ote >o. 23
Diese# Cost 2>ote >o. 33 Lubricants E
"undries2>ote >o. 33 Aepairs E
Maintenance
7ota# Cost 2.3 7ons
Carried 2:3 Cost per ton
2.@:3
124000
G4000
!4000
34334333
14444000
!4)$0
14004000
1!4000
G4000
34000
34!441$)
143!4000
)4200
14004000
)41)40G3
244000
2G.+)
)4!+43$)
244000
31.!G
C!nc/u#i!n : . co1parison of cost per ton b/ using 10 ton truc's
is 1ore econo1ica#. 70e cost paid for bringing coa# per ton
present#/ vi6. As. !0@( is t0e 0ig0est.
+!r4in$ N!te :
10 t!n 7 t!n
1 7ota# nu1ber o truc's and drivers
re;uired
Coa# broug0t to t0e factor/ per 1ont0
2! - 24 - 103 2! -
24 - +3
>o. of truc' re;uired to bring244000 tons is
7ota# nu1ber of drivers re;uired 2
7ota# 1ont0#/ depreciation
Depreciation per truc' per annu1
Depreciation per truc' per 1ont0 7ota#
depreciation
3 Diese# re;uires
7ota# L1 run per truc' p.1.
2$ '1 - 10 trips - 24 da/s3 7ota#
LM run b/ a## truc's
L1 per #iter of diese# Diese#
re;uired #iters
1200
24000@1200D20
20 - 2 D 40
24004000
14$$$.$$
1$$$$.$$ - 20
D 34334333
1440
2++00
3
G$00
22++00 @ 33
((
G$0
24000@G$0D2!
2! - 2 D !0
14)04000
1441$$.$$
141$$.$$ - 2!
D 34!441$)
1440
3$000
4
G000
23$000 @ 43
1)
I//u#tr"ti!n.) :
Iou 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 L1 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.
MC...4 5ina#N
S!/uti!n :
P"rticu/"r# C!#t (er
Annu*
R#.
C!#t Per
M!nt-
R#.
5i-ed ,-penses C
Insurance Barage
Aent Aoad 7a-
.d1inistrative c0arges Depreciation
244004000?104000 Q ! /ears3
Interest on Loan
7ota#
Aunning ,-penses C
Aepairs E Maintenance
Aep#ace1ent of t/re tube
Diese# and oi# cost 2G000 '1 - As.
!@(3
Driver E ConductorPs "a#ar/ 7ota#
Cost per 1ont0
.dd C rofit 20 H of tota#
Aevenue 2! H 7ota# cost
1!4000
G4000
34000
!4000
)+4000
104000
104000
142!0
300
4!4000
!4000
14204000
1!4000
34$00
$14!!0
1!43+).!0
7ota# Aevenue 32;8%3.10
Aate per passenger '1 C
As. 3$G3).!0 @ 14+04000 passenger '1 D 0.42)430! or 0.43 paise
11
+!r4in$#:
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
I//u#tr"ti!n 1 :
Lris0na 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 PCP 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/ OCP. 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/ OCP. 70e
distance fro1 cit/ . to cit/ . and cit/ O:P 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!/uti!n:
Operating Cost and rofit "tate1ent of Lris0na 7ransport Ltd.
P"rticu/"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
+!r4in$ n!te:
91: T!ne 4* !n !utA"r& D!urne@#
5ro1 cit/ . to C?10 journe/s -10 ton - 1!0 '1 D
5ro1 cit/ C to :?+ journe/s - 10 ton - 100 '1 D
2 journe/ - + ton - 100 '1 D
7ota#
1!4000
+4000
14$00
244$00 7one ? '1
12
92: T!ne 4* !n return D!urne@
5ro1 cit/ : to . ? 4 journe/s - 2!0 '1 - 12ton D
5ro1 cit/ : to . ? ! journe/s - 2!0 '1 - 10ton D
5ro1 cit/ : to C ( 1 journe/ - 100 '1 - 10 ton D
7ota#
124000
124!00
14000
2!4!00 7one ? '1
7ota# tone '1 D 244$00 J 2!4!00 D !04100 ton( '1
9%: Net re'enue recei'e&
5ro1 cit/ . to :?10 journe/s -10 ton K As.1!0 D
5ro1 cit/ : to .?4 journe/s - 12 ton K As. 140 D
5ro1 cit/ : to . (! journe/s - 10 ton K As. 140 D
5ro1 cit/ : to C (1 journe/s - 10 ton K As. 140
7ota#
Less C 5ine aid
>et revenue received
1!4000
$4)20
)4000
14000
2G4)20 7one ? '1
14!00
2+4220
I//u#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. >u1ber of 7a-is ? 10
2. Cost of eac0 7a-i ? As. 24004000
3. "a#ar/ of 1anager As. $000 p.1.
4. "a#ar/ of .ccountant As. !000 p.1
!. "a#ar/ of c#eaner As. 3000 p.1.
$. "a#ar/ of Mec0anic As. 4000 p.1.
). Barage Aent As )000 p.1.
+. Insurance pre1iu1 ! H
G. .nnua# 7a- As. $000 per ta-i
10. Drivers "a#ar/ As. 4000 p.1.
11. .nnua# Aepairs As. 1!4000 per ta-i
7ota# #ife of a ta-i is about 24004000 '1s. . ta-i runs in a##
3000 '1s. in a 1ont0 of w0ic0 2! H its runs e1pt/. etro#
consu1ption is one #iter for 10 '1s F As. 40 per #iter. Oi# and ot0er
sundries are As. 10 per 100 '1s.
Ca#cu#ate t0e cost of running a ta-i per '1.
13
S!/uti!n:
O(er"tin$ c!#t #-eet
P"rticu/"r# A*!unt
(er *!nt-
R#.
C!#t (er
=*
R#.
5i-ed ,-penses 2for t0e w0o#e f#eet3 "a#ar/
of 1anager
"a#ar/ of accountant "a#ar/
of C#eaner "a#ar/ of
1ec0anic
$000
!000
3000
4000
Barage Aent
Insurance pre1iu1 ! H on As.
2400000 - 10
7a- $000 - 10 @ 12 7ota#
5i-ed ,-penses
,ffective 'i#o1eter 3000-10- )! H D
224!00
5i-ed e-penses per '1
Aunning e-penses 2per ta-i3
Depreciation 224004000Q200000 - 10 - 30003
Aepairs 21!4000 - 10 Q 123 etro#
23000 - 403 Q 210 - 22!003
Oi# and ot0er sundries 210 - 30003 Q
2100222!003
C!#t (er 4*
)000
+333
40000
!000
3.4+14)
1.33333
0.!!!!!
0.!3333
0.13333
2.0%301
2.1 GOSPITAL COSTING
Rospita#s co1es under service sector4 big co1panies a#so
1aintain 0ospita#s. 5or costing purpose t0e 0ospita# service can be
divided in two fo##owing categories
213 Outpatient depart1ent
223 &ards
233 Medica# service depart1ents suc0 as radio t0erap/ OKP ra/
etc.
243 Benera# "ervices suc0 as 0eating4 #ig0ting4 catering #aundr/
etc.
2!3 Ot0er services suc0 as transport4 dispensar/4 c#eaning etc.
2.1.1 C!#t St"te*ent:
70e e-penses of 0ospita# can be broad#/ divided into two
categories i.e. 213 Capita# ,-penditure and 223 Maintenance
,-penditure ? t0is inc#udes sa#aries and wages4 provision4 staff
unifor1s c#ot0ing4 1edica# and surgica# app#iances and e;uip1ents4
fue# #ig0t and power4 #aundr/4 water etc.
17
2.1.2 F!r*"t ! " c!#t S-eet ! " G!#(it"/:
P"rticu/"r# R#. R#.
.3 5i-ed standing c0arges Aent
Aepairs and 1aintenance Benera#
ad1inistrative e-penses Depreciation
"a#aries to staff
Cost of O-/gen4 K ra/ etc.
--
--
--
--
--
--
00
:3 Aunning or 1aintenance costs
DoctorPs fees
5ood Medicines
Laundr/ Rire
c0arges
--
--
--
--
--
00
7ota# operating cost 00
C!#t (er ("tient &"@ H T! t" / O( er"t in$ c ! #t
N! ! P"tient D"@#
2.2 SOLVED PROBLEMS ON GOSPITAL COSTING
I//u#tr"ti!n 3:
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 supervisors eac0 at a sa#ar/ or As. 2000 per 1ont0.
4 nurse eac0 at a sa#ar/ of As. 1!00 per 1ont0.
2 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
18
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.
5ood supp#ied to patients
=anitor and ot0er services for patients
Laundr/ c0arges for bed #inens
Medicines supp#ied
Cost of o-/gen4 - ra/ etc ot0er t0an direct#/ born for
treat1ent of patients 25i-ed3
Benera# ad1inistration c0arges a##ocated to t0e unit
R#.
+4000
14004000
2!4000
404000
)04000
G04000
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!/uti!n:
St"te*ent ! c!#t "n& (r!it
P"rticu/"r# R#. R#.
.3 :3
C3
Inco1e received 2As. 200 - $1!03
%ariab#e cost 2per annu13
5ood
=anitor and ot0er services
Laundr/ c0arges
Medicines
Doctors fees 2204000 - 123
Rire c0arges for e-tra bed
2:3
5i-ed Costs
"a#aries
"upervisor
>urses
&ard bo/s
Aent 210000 - 123
Aepairs E Maintenance
Benera# ad1inistration
Cost of o-/gen4 K ra/ etc.
2C3
7ota# cost 2: J C3
Pr!it
14004000
2!4000
404000
)04000
24404000
44000
14234000
G4414000
44)G4000
44+00
)24000
244000
14204000
+4000
14004000
G04000
44$24000
2;78;000
20
rofit per patient da/ D 2+ G 00 D 4$.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 Q ! D +00
2110
:rea'even point D 5i-ed C o st - inco1e D 4$2 0 0 - 1230000
Inco1e ? %ariab#e cost )!1000
D As. )!$$)1 2or3 )! $ $)1 D 3)+3.2! patient da/s
200
2.3 GOTEL COSTING
Rote# 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
attendantsP 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!te/:
P"rticu/"r# R#. R#.
.3 5i-ed C0arge "a#aries
to "taff
Aepairs and Aenovation
Depreciation
Interior decoration
"undries
Laundr/ contract cost Aent
:3 Aunning c0arges 2%ariab#e cost3 ower
.ttendant sa#aries
7ota# Operating Cost >o. of
Aoo1 Da/s Cost per Aoo1
Da/s
--
--
--
--
--
--
--
--
--
--
--
--
--
--
21
2.7 SOLVED PROBLEMS ON GOTEL COSTING
I//u#tr"ti!n 7:
. 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 custo1erPs vi6. sing#e
roo14 doub#e roo1 and trip#e roo1s.
5o##owing infor1ation is givenC
T@(e# ! #uite Nu*,er
"ing#e roo1s 100
Doub#e roo1s !0
7rip#e roo1s 30
Occu("nc@
(ercent"$e
100 H
+0 H
$0 H
70e rent of doub#e roo1Ps 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
"taff sa#aries
Aoo1 attendants wages
Lig0ting 0eating and powers
Aepairs and renovations
Laundr/ c0arges
Interior decoration
"undries
R#.
1442!4000
44!04000
241!4000
14234!00
+04!00
)44000
14!34000
rovide profit F 20 H on tota# ta'ings and assu1e 3$0 da/s
in a /ear. Iou are re;uired to ca#cu#ate t0e rent to be c0arged for
eac0 t/pe of suite
MC. .. , IIN
S!/uti!n:
Ca#cu#ation of roo1 occupanc/
7/pe of suite >u1ber Occupanc/
H
>o. of
da/s in a
/ear
Aoo1
occupanc/
da/s
"ing#e Aoo1 Doub#e
Aoo1
7rip#e Aoo1
100
!0
30
100
+0
$0
3$0
3$0
3$0
3$000
14400
$4+0
Ca#cu#ation of e;ua#ant sing#e roo1 suits occupanc/
3$4000 - 1 J 14400 - 2.! J $4+0 - ! D 104400
22
C"/cu/"ti!n ! T!t"/ C!#t :
R#.
"taff sa#aries
Aoo1 attendant wages Lig0ting
0eating and power Aepair and
renovation Laundr/ c0arges
Interior decoration
"undries
7ota# cost e-c#uding bui#ding rent :ui#ding rent
D 10000 - 12 J !H of ta'ing
7ota# cost rofit
20 H of ta'ings
T!t"/ t"4in$#
1442!4000
44!04000
241!4000
14234!00
+04!00
)44000
14!34000
2!4214000
24G$40$$
2+41)40$$
)40442$)
3!4214333
Aent for a sing#e roo1
Aent for a doub#e roo1
Aent for a trip#e roo1
D 3!21333 Q 104400 D As. 33.)3
D 33.)3 - 2.! D As. +4.32!
D +4.32! - 2 D As. 1$+.$!
I//u#tr"ti!n 8:
. #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
2ii3 Aepairs to bui#dings
2iii3 Laundr/ and #inen
2iv3 Interior and tapestr/
2v3 "undr/ e-penses
As. 24)!4000
As. 14304000
As. 404000
As. +)4!00
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.
Iou 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.
MI.C.&...4 Inter1ediateN
S!/uti!n:
7ota# esti1ated costs for t0e /ear ending 31.03.1GG$
P"rticu/"r# T!t"/
R#.
Per r!!*
&"@ 9R#.:
"a#ar/ Aepairs
Laundr/ and #inen
Interior decoration
DepreciationC As. :ui#ding
!H on +0 #a'0s D 44004000 5urniture 1! H
on 20 #a'0s D 34004000 Misce##aneous
e-penses
.ttendantPs sa#ar/
Lig0ting c0arges 7ota#
cost
.dd C rofit 1argin at 20H on rent or 2!H
of cost
24)!4000
14304000
404000
+)4!00
)4004000
G!4400
!44000Y
3$4000YY
1441+4400 @ G000
YYY fu## roo1 da/s
1!).$0
1G).00
During season roo1 rent is As. 1G) and during off(season roo1
rent is As. G+.!0
Y .ttendantP 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 Q 30 D
As. 4 er roo1 da/.
Lig0t bi## during 4 1ont0s of winter at As. 30 per 1ont0 or 30 Q
30 D Ae. 1 per Aoo1 da/.
T!t"/ /i$-t ,i// !r u// !ne @e"r R#.
# During season F As. 4 for )4200 da/s 2+4+00
# During 2 1ont0s of off(season
F As. 4 for 14200 da/s 22 Q $ - 34$003 44+00
# During 4 1ont0s of winter at Ae. 1
5or 24400 da/s 24 Q $ - 34$003 24400
T!t"/ %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 seasonPs occupanc/ for $ 1ont0s F 40 H 2!0 - 0.4
- $ - 303 D 3 4$00 roo1 da/s
7ota# roo1 da/s during t0e Iear
7ota# fu## roo1 da/s in ter1s of rate
"eason
Off "eason 2in ter1s of !0 H rate on 34$00 da/s3
7ota# 5u## roo1 da/s
104+00
)4200
14+00
G4000 per annu1
I//u#tr"ti!n 10:
,#egant Rote# 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
"ing#e roo1
Doub#e roo1
%ariab#e cost
400
!00
5i-ed cost
200
2!0
233 .verage sa#es per da/ of restaurant As.
contribution is at 30 H. 5i-ed cost As. 104
annu1.
14 004000V
004000 per
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.
5!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
s0opping arcade separate#/.
restaurant4 sports centre and
MC. .. 5ina#N
21
S!/uti!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
%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
"ing#e roo1
Doub#e roo1
2)43)!
!44)!
400
!00
200
2!0
140G4!04000
2)43)4!00
!44)!4000
134$+4)!0
14$442!4000
4140$42!0
.dd C 20 H 1argin of safet/ on 0ire of roo1 or 2! H of tota# cost
7ota# a1ount of roo1 rent to be received 24!$4$440$2
Aent per da/ of sing#e roo1 Gin As.3
2Aefer to wor'ing note 23
2As. 24 !$4$440$2 @ 334G4!3
Aent per da/ of doub#e roo1 2in As.3
2As. )!$ - 1.2 ti1es3
)!$ 2appro-3
G0) 2appro-3
b3 rofitabi#it/ of restaurant R#.
7ota# sa#es per annu1 3$! da/s - As. 14004000
Contribution per annu1
230 H of 7ota# "a#es3 C 2.3 5i-ed
cost per annu1 C 2:3 rofit M 2.3 ?
2:3N
rofitabi#it/ of sports centre C
Contribution of sports centre per da/ C 2!0 persons - As. !03
7ota# contribution per annu1 2As. 24!00 - 3$! da/s3 C 2.3
5i-ed cost per annu1 C 2:3
rofit C M2.3 ? 2:3N
rofitabi#it/ of s0opping arcade C
Contribution per annu1 2As. !04000 - 12 1ont0s3 Less C
5i-ed Cost
Pr!it
34$!4004000
140G4!04000
104004000
GG4!04000
R#.
24!00
G4124!00
!4004000
44124!00
R#.
$4004000
$4004000
>i#
22
+!r4in$ N!te :
1. "ing#e roo1 occupanc/ da/s in a /ear D 100 roo1 - 3$! da/s -
)! H
D 2)43)!
Doub#e roo1 occupanc/ da/s in a /ear D 20 roo1s - 3$! da/s -
)! H
D !44)!
2. In ter1s of sing#e roo1 tota# roo1 occupanc/ da/s in a /ear
D 2)43)! J 1.20 H - !44)! D 2)43)! J $4!)0
D 334G4!
I//u#tr"ti!n 11:
5o##owing are t0e infor1ation given b/ an owner of a 0ote#.
Iou 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.
13 "taff sa#aries As. +04000 per annu1
23 Aoo1 attendantPs 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.
33 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.
43 Aepairs to bui#ding
!3 Linen etc.
$3 "undries
As. 104000 per annu1
As. 44+00 per annu1
As. $4$00 per annu1
)3 Interior decoration and furnis0ing As. 104000 annua##/
+3 Cost of bui#ding As. 44004000V rate of depreciation ! H
G3 Ot0er e;uip1ents As. 14004000V rate of depreciation 10 H
103 Interest F !H 1a/ be c0arged on its invest1ent of
As. !4004000 in t0e bui#ding and e;uip1ent
113 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. Iou 1a/ assu1e t0at period of su11er and
winter is si- 1ont0 eac0. >or1a# da/s in a 1ont0 1a/ be
assu1ed to be 30.
23
S!/uti!n :
O(er"tin$ c!#t #-eet
Aent per da/
R#. Per "nnu*
R#.
1. "taff sa#aries
Aoo1 attendantPs sa#aries
"u11er 2 - 2100 - +0 Q 1003 - 30 - $ &inter
2 - 2100 - 30 Q 1003 - 30 - $ Lig0ting4
0eating and power
"u11er !0 - $ - 2100 - +0 Q 1003 &inter
!0 - $ - 100 - 230 Q 1003 ower
20 - $ - 100 - 230 Q 1003 Aepairs to
bui#ding
Linen etc.
"undries
Interior decoration and furnis0ing
Depreciation C :ui#ding
Ot0er e;uip1ents
Interest on invest1ent 2!H on As. !40040003
.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! Q 100
T!t"/ c!#t
2+4+00
104+00
+04000
3G4$00
3$4$00
104000
44+00
$4$00
104000
304000
2!4000
244000
G4000
34$00
204000
104000
24424$00
!44400
2;83;000
Aent per roo1 for one da/ D 7ota# Cost Q >o. of roo1 da/s
D 24 G)4000 Q 1G4+00
D 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 Q1003 - 30 - $
+0 - 30 - $ D 144400
&interC 100 - 230 Q 1003 - 30 - $
30 - 300 - $ D ! 4400
7ota# roo1 da/s D 1G 4+00
I//u#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
27
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.
Depreciation
DriverPs sa#ar/ As.
ConductorPs "a#ar/ As.
art ti1e c#er'Ps sa#ar/ As.
Insurance As.
Diese# consu1ption 4 '1s per As.
#itre F
7o'en ta- As.
er1it fee As.
Lubricant oi# As.
Aepairs and 1aintenance As.
>or1a# capacit/ As.
34!04000
2! !
14200 p.1.
14000 p.1.
400 p.1.
14+00
+ per #itre
24400 p.1.
14000 p.1.
100 for ever/ 200 '1s
14!00 p.1.
!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.
S!/uti!n:
Operating cost state1ent for t0e 1ont0
As.
7ota#
As.
As.
er passenger
'1 2tota# cost J
440040003
passenger '1
As.
5i-ed c0arges DriverPs
sa#ar/ ConductorPs sa#ar/
C#er'Ps sa#ar/
Insurance 214+00 Q 123 7o'en
7a- 224400 Q 123 er1it fees
Depreciation 22!H of 3.!#a'0sQ 123
Aepairs and Maintenance
14200
14000
400
1!0
200
14000
)42G2
14!00
124)42
1+4$00
44$!0
0.031+!
0.04$!0
0.011$3
Aunning c0arges
Diese# cost G4300 '1 Q4D2432! #iters F As. + Lubricant
oi# G4300'1Q200D4!.! #itersF As.100
7ota#
3!4GG2 0.0+GG+
28
.dd C 33 H profit on net ta'ing or 4G.2!H on cost >et
ta'ings
.dd C 20 H for passenger ta- 7ota#
1)4)2$ 0.04432
!34)1+
104)44
0.13430
0.02$+$
$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
Y 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 3 0 0
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
4400 4 000 8 8
I//u#tr"ti!n: 1%: 9Ser'ice c!#tin$ 6 u#e !An . c!*("n@ c"r# !r
-ire c"r#:
. 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 Rire 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
MC...4 InterN
30
S!/uti!n :
.#ternative proposa#s
Aei1burse1ent 2.3 5i-ed
cost 2:3
er car per annu1
Insurance
7a-es Depreciation
2As.14004000?204000Q !3 7ota#
5i-ed cost per '1 2As.1+4000 Q
204000 '13 Aunning and
1aintenance cost 2C3
er car per '1 etro#
Aepairs E Maintenance 7/re
7ota# cost per '1 2.J:JC3 Cost of
204000 '1
I
<se of concern car
II
<se of
own car
III
<se of
0ired car
As. er
annu1
As. er
'1
As. er
'1
As. er
'1
((
14200
+00
1$4000
((
0.G0
0.$0
0.20
0.12
1.$0
((
((
((
((
1.00 F
((
0.$0
((0.1
2
1+4000
1.+2 1.$$ 1.)$
As.
3$4400
334200 3!4200
Aan'ing of a#ternating proposa#s III I II
Decision II a#ternating i.e.4 use of own car wi## be t0e best
a#ternative fro1 co1pan/Ps point of view. III a#ternative i.e. 0iring
t0e card is 2nd best a#ternative. I a#ternative i.e. 1aintaining t0e
f#eet wi## be cost#iest a#ternative.
As. 14200 Q 204000 '1s D Ae. 0.0$V 2As. +00 Q 204000 '1s3 D Ae.
0.04 F As. 204000 Q 204000 '1s D Ae. 1@(
I//u#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.
31
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
MC...4 InterN
S!/uti!n:
<nion 7ransport Co1pan/
"tate1ent s0owing operating cost of t0e bus per annu1
.. standing c0arges
Managers sa#ar/ 2As. 14400 - 123
DriverPs sa#ar/ 2As. $00 - 123
ConductorPs "a#ar/ 2As. 200 - 123
Aoad 7a-
Insurance 23H of As. 140040003
Barage rent 2As. 400 - 123
"tationer/ 2As. 100 - 123
Depreciation 2As. 14004000 Q ! /ears3
:. Maintenance Cost ? Aepairs
C. Aunning c0arges
etro# and oi# 23$4000 '1 - As. !003 Q 100
7ota# costs 2. J : J C3
.dd C 10 H of ta'ings for co11ission of driver E
conductor
1! H profit ? desired on ta'ings
2! H on tota# ta'ings D 33 ? 1@30 of cost
D As.
1$4+00 D As.
)4200 D As.
24400 D As.
24000 D As.
34000 D As.
44+00 D As.
14200 D As.
204000 !)4400
D As. 243$0
D As. 1+4000
D As. ))4)$0
D As.
D As. 2!4 G 20
D As. 14034$+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 Q 144404000 D Ae. 0.0)2
Ca#cu#ation of tota# distance covered
220 '1 2 - 3 - 2! - 123 D 3$4000 '1 per annu1
32
I//u#tr"ti!n 11: 9Tr"n#(!rt C!#tin$:
ra'as0 .uto1obi#es distributes its goods to a regiona#
dea#er using a sing#e #orr/. 70e dea#ersP 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
etro# Cost
Oi#
DriverPs wages
Aepairs
Barage Aent
Cost of Lorr/ 2e-c#uding t/res3
Life of Lorr/
Insurance
Cost of t/res
Life of t/res
,sti1ated sa#e va#ue of #orr/ at end of its
#ife
%e0ic#e #icense cost
70e #orr/ operates on five da/ wee'
+ '1 per #iter
As. 13 per #iter
As. 100 per wee'
As. 400 per wee'
As. 100 per wee'
As. 1!0 per wee'
As. 44!04000
+04000 'i#o1eters
As. $4!00 per annu1
As. $42!0
2!4000 'i#o1eters
As. !04000
As. 14300 per annu1
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
MC...4 InterN
S!/uti!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 Q 2 D 14$00
3. 7ota# consu1ption in wee's D 34200 '1 Q + '1 D 400 #t
4. 7/re cost D 2As. $42!0 Q 2!4000 '13 - 34200 '1 D As. +00
!. Depreciation of #orr/ in 4 wee's
D 2As. 44 !04000 ? As. !04000 '13 Q +04000 - 34200 D As.
1$4000
3%
Operating cost state1ent f a #orr/ of M@s. ra'as0 .uto1obi#es
2for t0e 4 wee' period3
Runnin$ 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
Fi0e& c!#t# R#.
Barage ret 2As. 1!0 - 43 $00
Insurance 2As. $4!00 Q !23 - 4 !00
License cost 2As. 14300 Q !23 - 4 100
Ot0er over0eads 2As. 414$00 Q !23 - 4 34200
7ota# fi-ed cost ( 2ii3 44400
7ota# 2i3 J 2ii3 2+4000
2b3 Cost per tone ? '1 D As. 2+4+00 Q 21$00 - 10 tons3 As. 1.+0
2.8 ECERCISE
2.8.1. O,Decti'e T@(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
2c3 =ob costing
2b3 rocess costing
2d3 Operating costing
3. ,#ectricit/ generating co1pan/ s0ou#d e1p#o/
2a3 <nit costing
2c3 Operating costing
2b3 rocess costing
2d3 Mu#tip#e costing
3)
4. Cine1a 0ouses 1ust adopt
2a3 Operating costing
2c3 :atc0 costing
2b3 =ob costing
2d3 Contract costing
!. 5or a #ibrar/ t0e best 1et0od of costing suitab#e is
2a3 Output costing
2c3 rocess costing
$. 5or an educationa# institutes t0e rig0t 1et0od of costing is
2a3 Output costing
2b3 =ob costing
2d3 rocess costing
). Rospita#s 1ust 1a'e use of
2c3 rocess costing
2b3 :atc0 costing
+. 5or 0ote#s t0e best 1et0od of costing is
2a3 "ing#e or output
2c3 rocess costing
2b3 Contract costing
2d3 Operating costing
G. .ir India Co. 1ust 1a'e use of
2a3 =ob costing
2c3 :atc0 costing
10. Indian Aai#wa/s 1ust adopt
2c3 :atc0 costing
2d3 rocess costing
2b3 <nit costing
11. ub#ic uti#it/ underta'ings 1ust invariab#/ adopt
2c3 Contract costing
2b3 Output costing
12. Larnata'a ,#ectricit/ :oard 1ust 1a'e use of
2a3 "ing#e or output costing 2c3 rocess costing
2b3 =ob costing
2d3 Operating cost
31
13. 70e 1et0od of costing used in case of a gas co1pan/ is
ter1ed as
2a3 =ob costing 2b3 rocess costing
14. Mines T.P and T:P 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
1!. 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#Aer#: 1312c34 22d34 32c34 42a34 !2b34 $ 2b34 )2a34 +2d34 G2b34 102a34 112d34 122a3
2c34 14 2a34 1!2a3
2.8.2 Si*(/e 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 unitS
!. List out an/ eig0t underta'ings w0ic0 1a'es use of
operating costing.
$. Bive t0e co1posite unit of t0e fo##owing underta'ings C
2a3 Aoadwa/s carr/ing passenger
2b3 Aai#wa/s carr/ing goods
2c3 Rospita# and
2d3 Co##ege.
). Mention t0e basis of c#assif/ing t0e cost under operating
costing.
+. Mention t0e basis of c#assif/ing t0e costs under transport
costing.
G. &0at is a #og s0eet S
10. &0at do /ou 1ean b/ cost su11ar/ perfor1ance
state1entS
11. &0at do /ou 1ean b/ abso#ute tone('i#o1eterS
12. &0at do /ou 1ean b/ a co11ercia# tone('i#o1eterS
13. Distinguis0 between abso#ute tone('i#o1eter and co11ercia#
tone 'i#o1eter.
32
14. &0at do /ou 1ean b/ 8'i#o1eter run9S
1!. &0at do /ou 1ean b/ 8cost per 0our9 under operating
costingS
2.8.% St"te A-et-er e"c- ! t-e !//!Ain$ #t"te*ent i# ITrueJ
!r IF"/#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.
!. 5are in case of ta-is is genera##/ based on cost per
passenger4 '1
An#Aer : 213 7rue 223 5a#se 233 7rue 243 5a#se 2!3 5a#se
2.8.). L!n$ "n#Aer t@(e.
1. &0at is service costing S 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 costingS .
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 8Operating Costing9 S "tate t0e industries w0ere it is
to be usedS
!. &0at is a 8Log s0eet9S Bive its profor1a.
$. Iour c#ient running a canteen tends to introduce costing
s/ste1 in 0is organi6ation. Row s0ou#d 0e c#assif/ 0is costs
for t0e purpose of preparing an Operating Cost "tate1ent S
33
2.8.1 Pr"ctic"/ (r!,/e*#
I//u#tr"ti!n 1 :
. Minera# is transported fro1 two 1ines ? 8.9 and 8:9 and un#oaded
at p#ots in a Aai#wa/ "tation. Mine . is at a distance of 10'1s. .nd
: is at a distance of 1!'1s. fro1 t0e 1ines. Aecords revea# t0at
t0e #orries average a speed of 30 '1s. per 0our4 w0en running and
regu#ar#/ ta'e 10 1inutes to un#oad at t0e rai#0ead. .t 1ine 8.9
#oading ti1e averages 30 1inutes per #oad w0i#e at 1ine 8:9
#oading ti1e averages 20 1inutes per #oad.
DriversP wages4 depreciation4 insurance and ta-es are found to cost
T G per 0our operated. 5ue#4 oi#4 t/res4 repairs and 1aintenance cost
T 1.20 per '1.
Draw up a state1ent4 s0owing t0e cost per tonne('i#o1eter of
carr/ing 1inera# fro1 eac0 1ine.
2M.Co1. Oct. 01)
(Ans.$ Cost per tonne %m. Mine A$ &s. 0.'2( Mine )$ &s.0.66)
I//u#tr"ti!n 2 :
. transport co1pan/ 1aintains a f#eet of bus as fo##ows C
>u1ber of :uses
20
10
Carr/ing Capacit/
!0 passengers eac0
40 passengers eac0
,ac0 bus 1a'es ! trips a da/4 covering a distance of 10 L1.
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(L1. fro1 t0e fo##owing C
&ages of 30 Drivers
&ages of 30 C#eaners
etro#
Oi#4 Brease etc.
7/res4 7ubes etc.
Aepairs
Barage Aent
Aoad Licences
T 34000 eac0 per 1ont0
T 14000 eac0 per 1ont0
T 204000 per 1ont0
T !4000 per 1ont0
T 24000 per 1ont0
T 304000 per /ear
T 404000 per /ear
T 204000 per /ear
37
7a-es
er1it 5ee
"a#ar/ of Operating Manager
Office Over0eads
T !4000 per 0a#f /ear
T 2!4000 per /ear
T !4000 per 1ont0
T 104000 per /ear
2M.Co14 Oct 20003
.nsC 27ota# Operating CostC As. 1G4!G40004 Cost per passenger L1.C As.0.11!3
I//u#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'
urc0ase rice 2T3
Life 2Iears3
"crap va#ue at end of !
t0
/ear L1s.
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
F F
F F
F F
F F
F F
F F
F F
104004000
!
>i#
3
$04000
$04000
20
+4004000
!
>i#
4
4+4000
3$4000
20
,ac0 7ruc' wi## dai#/ 1a'e ! trips 2to and fro3 on an average for 24
da/s in a 1ont0.
Cost of Diese# T1$ 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.
38
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$4 + 7on 7ruc'C
As.43.113
I//u#tr"ti!n ) :
70e fo##owing were t0e e-penses incurred b/ C.LL and M.LL
Co1pan/ in operating two #orries 2for t0e conve/ance of Aaw
Materia#s3 and a bus 2for t0e conve/ance of "taff3 during t0e 1ont0
of 5ebruar/4 200$ C
Mont0#/ Cost
Lorr/ C Lorr/ M :us
DriverPs "a#aries F F F F F
C#eanerPs &ages F F F F F Diese#
F F F F F Oi# F
F F F F Aepairs F F F F F
Depreciation F F F F F Office
Over0eads F F F F F
"ervicing C0arges F F F F F Aoad
and &0ee# 7a- F F F F F "undr/
,-penses F F F F F
110
120
1)0
1+
1!0
330
)0
130
4!
3!
11!
120
240
2!
1!0
220
)0
110
4!
40
120
$0
110
20
100
3!0
)0
)!
30
20
70e above ve0ic#es carried t0e fo##owing Aaw 1ateria#s and
assengers during t0e 1ont0 C
Lorr/ C 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 44!00
:us 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.( Apri" 06( adapted)
70
.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$004 :usC
!040003
I//u#tr"ti!n 1:
.n entrepreneur owns a bus w0ic0 runs fro1 Mu1bai to une and
bac' for 2! da/s in a 1ont0. 70e distance fro1 Mu1bai to une is
1)0 '1s. 70e bus co1p#etes t0e trip fro1 Mu1bai to une and
bac' on t0e sa1e da/. Ca#cu#ate t0e fare to be c0arged to
passengers if a profit of 33WH on cost is e-pected.
70e fo##owing furt0er infor1ation is avai#ab#e C
articu#ars As.
Cost of :us
"a#ar/ of Driver per 1ont0
"a#ar/ of Conductor
5i-ed Office Over0eads
Insurance p.a.
Diese# consu1ption 1$ '1s. per #itre costing
Loca# 7a-es p.a.
Oi# and Lubricants per 100 '1s.
Aepairs and Maintenance p.a.
Licence 5ees p.a.
>or1a# "eating Capacit/
Depreciation Aate
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
F F F F F
34004000
140!0
)00
4+0
$4)20
2! per #itre
1.200
20
1.000
2.+40
!0 passengers
20H p.a.
70e bus usua##/ runs fu## upto G0H of its capacit/ bot0 wa/s. er1it
fee is pa/ab#e on t0e cost of bus at 10H p.a.
2M.Co1. .pri# 0!3
.nsC 27ota# Operating CostC As. 340+42G!4 7ota# passenger L1.C 4!4G040003
I//u#tr"ti!n 2 :
LLL .uto1obi#es distributes its goods to a regiona# trader using a
sing#e #orr/. 70e traderPs 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.
71
Iour 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'
DriverPs 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& :
a3 . 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.
b3 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 L1( 7onne .C1$4000 ,ffective
L1. 1$003
I//u#tr"ti!n 3 :
. 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.
72
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. 10 per 100 '1sV repairs and 1aintenance As. 300
p.1.V per1it fee As. 2+4 p.1. and t0e nor1a# capacit/ is !0
persons.
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 L1.
As.0.0343
I//u#tr"ti!n 7 :
. 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
7%
Cost of t0e bus 2Depreciation F 20H p.a.V >or1a# Capacit/ C !0
persons3 $4004000
"a#ar/ C Driver
"a#ar/ C Conductor
5i-ed Office Over0eads
Insurance
5ue# 2Consu1ed F 4 '1s@#itre3
A.7.O. ta-
Lubricant Oi#
Aepairs and Maintenance
er1it 5ee
!4000 per 1ont0
!4000 per 1ont0
24000 per 1ont0
)4200 per 1ont0
3! per #itre
$00 per annu1
10 per 100 '1s
!00 per 1ont0
300 per 1ont0
assenger ta- is 20H of t0e net ta'ings. 70e bus is occupied G0H
of its capacit/ w0i#e on Lonava#a trip and +0H of its capacit/ w0i#e
on .#ibag0 trip4 but is fu##/ occupied in its #oca# journe/.
2M. Co14 .pri# n0+4 adapted)
.nsC 27ota# Operating CostC As. )24$!$4 7ota# assenger L1. 243G.0004 Cost per
passenger L1.C As.4+.$43
I//u#tr"ti!n 8
. 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/.
Cost of truc'
Diese#4 oi#4 grease 2per trip eac0 wa/3
Aepairs and 1aintenance 2per 1ont03
DriverPs 21ont0#/3 wages
C#eaner(cu1(attendantPs wages 21ont0#/3
Insurance 2per /ear3
Aoad #icense 2per /ear3
Benera# "upervision c0arges 2per /ear3
,sti1ated #ife 2/ears3
As.
14 +04000
30
14!00
14!00
)!0
G4000
34000
$4000
10
7)
&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
i3 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'S
2M.Co1 4 .pri# 0G4 adapted3
An#: 27ota# Operating CostC As. +42!04 Cost per 7onne L1.C As.1.1003
I//u#tr"ti!n 10 :
5ro1 t0e fo##owing infor1ation re#ating to a Rote#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 31
st
Marc04 200+ C
1. "a#aries of office staff As. !04000 per 1ont0.
2. &ages of t0e roo1 attendantC As. 20 per da/ per roo1 w0en
t0e roo1 is occupied.
3. #ig0ting4 Reating and ower C
a3 70e nor1a# #ig0ting e-penses for a roo1 for t0e fu## 1ont0 is
As. !004 w0en occupied.
b3 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.
!. Aepairs to Rote# bui#dingC As. !04000 per annu1.
$. Licence feesC As. 124400 per annu1.
). "undriesC T 104000 per 1ont0.
+. Interior decoration and furnis0ingC As. 14004000 per annu1.
G. 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 Rote#4 +0H of t0e roo1s are
genera##/ occupied in su11er4 $0H in winter and 30H in rain/
season.
71
70e period of su11er4 winter and rain/ season 1a/ be considered
to be of 4 1ont0s in eac0 case. . 1ont0 1a/ be assu1ed of 30
da/s of an average 2M. Co1. Oct. 0+4 adapted3
An#: 27ota# ,arningsC As. 3341+40004 7ota# Aoo1 Da/sC 404+00.Cost per Da/C
As.+1.323
I//u#tr"ti!n 11:
Ae#a- Rote# 0as a capacit/ of 100 sing#e roo1s and 20
doub#e roo1s. 70e average occupanc/ of bot0 sing#e and doub#e
roo1s is e-pected to be +0H t0roug0out t0e /ear of 3$! 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$)4G040004 7ota# Aoo1 Da/sC "ing#e roo1C 2G4200
Doub#e roo1 C !4+40.3
I//u#tr"ti!n 12:
. 0ospita# is run b/ a Co1pan/. 5or t0is purpose it 0as 0ired
a bui#ding at a rent of As. !4000 per 1ont0 p#us it wou#d bear t0e
repair c0arges a#so.
70e 0ospita# is 0aving 2! beds and ! 1ore beds can be
acco11odated w0en t0e need arises.
70e staff of t0e 0ospita# is as fo##ows C
2 "upervisors eac0 at a sa#ar/ of As. !00 per 1ont0
4 >urses eac0 at a sa#ar/ of As. 300 per 1ont0
2 &ard bo/s4 eac0 at a sa#ar/ of As. 1!0 per 1ont0
.#t0oug0 t0e 0ospita# is open for patients a## t0e 3$! 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
72
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
"anitar/ and Ot0er services for patients
Laundr/ C0arges
Medicines supp#ied
As. 444000
As. 124!00
As. 2+4000
As. 3!4000
Cost of o-/gen4 K(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.$143!04 7ota# >u1ber of atient da/sC !000.3
73
%
INTEGRATED AND NON 6 INTEGRATED
ACCOUNTS
Unit Structure
3.0 Learning Objectives.
3.1 Introduction
3.2 >on(Integra# or cost #edger accounting s/ste1 2inter#oc'ing
s/ste1 3
3.3 Ledger Maintained under Inter#oc'ing "/ste1
3.4 "o#ved rob#e1s
3.! Integra#2or Integrated3 accounting
3.$ .dvantages of Integra# accounting
3.) ,ssentia# features of Integra# .ccounting
3.+ *uestions
3.G ,-ercise
%.0 LEARNING OBJECTIVES
Ater #tu&@in$ t-i# c-"(ter !ne #-!u/& ",/e 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 accentsP under doub#e entr/
stated of boo' 'eeping. Rowever4 in order to ensure arit01etica#
accurac/ of data often t0e princip#es of doub#e entr/ s/ste1 of bu#'
'eeping is fo##owed.
77
%.2 NON>INTEGRAL OR COST LEDGER
ACCOUNTING S5STEM 9 INTERLOC=ING
S5STEM:
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
a3 &0en separate set of costing boo's are 1aintained it faci#itates
read/ acco1p#is01ent of its objectivesP3 If avoids t0e co1p#ications
or recording t0e entries if it is integrated wit0 financia# accounts.
b3 It can be 1aintained according to convenience as it need not be
statutori#/ 1aintained
70e fo##owing are so1e of t0e #i1itations
a3 &0en cost accounts are independent#/ 1aintained4 it a1ounts to
dup#ication of e-penses a#ong wit0 financia# accounts.
b3 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
S5STEM
%.%.1 Su,#i&i"r@ ,!!4# *"int"ine& un&er inter/!c4in$ #@#te*
! "cc!untin$:
70e fo##owing are so1e of t0e subsidiar/ boo's 1aintained under
inter#oc'ing s/ste1 of accountingC
13 "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.
78
23 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
33 =ob #edgerC t0is #edger is used to record t0e 1ateria# cost4
wages4 and over0eads incurred in respect of a job.
43 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.
!3 "tanding order #edgerC 70is #edger is used to record over0eads
incurred.
%.%.2 Acc!unt# M"int"ine& Un&er C!#t B!!4#
70e fo##owing i1portant accounts are 1aintained under cost boo'sC
13 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
a3 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'.
23 "tores #edger contro# accountC t0e tota# of stores #edger is
entered in t0is account.
33 &ages contro# accountC In t0is account t0e wages accrued and
paid and a##ocation of wages in t0is account are recorded.
43 &or' in progress contro# accountC 70is account represents cost
#edger in su11ar/ for1.
!3 5inis0ed goods stoc' #edger contro# accountC 70is account
represents finis0ed goods stoc' #edger transactions in tota# for1.
$3 "e##ing4 distribution4 and ad1inistration over0ead contro#
accountC 970is account represents se##ing4 distribution and
ad1inistration over0eads
80
)3 Capita and repair accountC 70is account represents capita#i6ed
and repair e-penses
+3 Cost of sa#es accountC 70e tota# cost to 1a'e and se## t0e
finis0ed goods is recorded in t0is account
G3 Costing rofit and #oss accountC 70is account revea#s t0e profit
or #os as per cost accounts.
103 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.
113 Over0ead adjust1ent accountC 70is account is used to record
over or under absorption of over0eads.
,ntries to Aecord 7ransactions under Inter#oc'ing "/ste1
13 Materia#s purc0ased for stoc'
"tores #edger contro# account Dr
7o Benera# #edger adjust1ent a@c
23 Materia# purc0ased for a specia# job
&or' in progress contro#a@c Dr.
7o genera# #edger adjust1ent a@c
33 5or issue of direct 1ateria#s to production depart1ent
&or' in progress contro# a@c Dr
7o stores #edger contro# account
43 5or issue of indirect 1ateria#s to production depart1ents
Over0ead contro# a@c Dr.
7o stores #edger contro# a@c
!3 5or returning 1ateria#s to supp#ier
Benera# #edger adjust1ent a@c Dr
7o stores #edger contro# a@c
$3 5or 1ateria#s returned fro1 production depart1ent
"tores #edger contro# a@c Dr
7o &or' in progress contro# a@c
)3 5or 1ateria#s transferred fro1 job to job
>o entr/ is passed in contro# account. In wor' in progress #edger
t0e fo##owing
,ntr/ is passed
7ransferee job a@c Dr
7o transferor job a@c
81
+3 5or tota# sa#ar/ and wages paid
&ages contro# a@c Dr.
G3 5or a##ocation of direct and indirect #abour
&or' in progress contro# a@c Dr.
7o wages a@c
10 5or recording direct e-penses
11 5or recording over0ead incurred and accrued
Over0ead contro# a@c Dr
12 &0en over0ead s are received Dr
Cost of sa#es a@c
7o over0ead contro# a@c
13 5or adjusting under or over absorption over0eads
70e over0ead contro# account is c#osed b/
transferring to over0ead suspense account.
14 5or recording finis0ed stoc' produced
5inis0ed goods stoc' #edger contro# account Dr.
1! &0en finis0ed goods are so#d at cost
Cost of sa#es a@c Dr
7o finis0ed goods are so#d at cost
1$ &0en finis0ed goods are so#d at tota# sa#es va#ue
Benera# #edger adjust1ent a@c Dr
7o Costing rofit and #oss a@c
1) 5or recording sa#es returns
Costing rofit and #oss a@c Dr.
1+ 5or recordings repair wor'
Aepair order a@c Dr
7o wor' in progress contro# a@c
1G 5or a##ocation of repare wor'
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
Dr
82
21 5or recording specia# orders co1p#eted and so#d
i11ediate#/ at factor/ cost
Benera# #edger adjust1ent a@c
Dr
7o costing profit and #oss a@c
22 5or recording tota# cost to 1a'e and se##
Cost of sa#es Dr
7o costing profit and #oss a@c
23 5or recording under absorption of over0eads w0ic0
is not /et adjusted
Dr
Costing profit and #oss a@c
7o Over0ead suspense a@c
24 5or recording over absorption of over0eads w0ic0 is
not /et adjusted
Dr
Over0ead suspense a@c
7o Costing rofit and #oss a@c
2! 5or recording profit
Costing profit and #oss a@c
7o Benera# #edger adjust1ent a@c
1. &0ic0 #edgers 0ave been 1aintained under >on(integra#
.ccounting s/ste1S
2. Bive =ourna# entries for fo##owing transactions under.
Inter#oc'ing s/ste1.
a3 Materia# urc0ased for stoc'
b3 Issue of Direct Materia# to roduction Depart1ent
c3 Aeturn Materia#s to supp#iers
d3 Materia# transferred fro1 =ob . to =ob :.
e3 7ota# "a#ar/ E &ages paid.
f3 Aecording sa#es return
g3 Aecording over0eads incurred E accrued.
%.) SOLVED PROBLEMS
I//u#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
8%
Pr!it "n& L!## Acc!unt !r t-e @e"r en&e& %0.08.2002
R#. R#. R#. R#.
Opening stoc' Aaw
Materia#
&or'(in(
progress
5inis0ed goods
Aaw 1ateria#
urc0ased Direct
wages
5actor/
over0eads
.d1inistration
,-penses
"e##ing and
Distribution ,-p.
re#i1inar/ ,-p.
&ritten off
Debenture Interest
>et profit
G04000
!04000
)04000 24104000
!4004000
24004000
24004000
14)04000
24204000
)!4000
304000
14$34000
"a#es
C#osing "toc'
Aaw Materia#
&or'(in
rogress
5inis0ed
goods
Misce##aneous
Aeceipts
G+4000
!34000
)24000
1!4004000
24234000
4!4000
1)4$+4000 1)4$+4000
St"te*ent ! Rec!nci/i"ti!n ! Pr!it "# (er Fin"nci"/ "n& C!#t
Acc!unt#
rofit as per financia# accounts 2a3
Difference in va#uation of stoc'
.dd C Aaw 1ateria#s ? c#osing stoc' &or'
in progress ? opening stoc'
5inis0ed goods ? opening stoc'
C#osing stoc'
7ota# 2.3
Less Aaw 1ateria#s ? opening C
stoc's
&or' in progress ? c#osing stoc'
7ota# 2:3
R#. R#.
14200
14300
24000
14000
14$34000
!4!00
14$!0
)!0
24400
8)
2b3 Ot0er ite1s 2. ? :3
.dd C re#i1inar/ e-penses written off
Debenture interest
Less Misce##aneous receipts C
rofit as per Cost .ccounts
)!4000
304000
34100
$04000
140!4000
4!4000
242$4100
Iou are re;uired to prepare t0e fo##owing accounts as t0e/ were
appearing in t0e cost #edgerC
213 Aaw Materia# Contro# .@c.
223 &or'(in(rogress Contro# .@c.
233 5inis0ed Boods Contro# .@c.
243 Cost of "a#e .@c. and
2!3 Costing rofit and Loss .@c.
MIC&.4 InterN
S!/uti!n:
B"#i# c"/cu/"ti!n
C!*(ut"ti!n ! ite*# "# (er C!#t Acc!unt#
articu#ars .s per financia#
accounts
As.
%a#uation
difference
As.
.s per cost
accountants
As.
R"A *"teri"/# Opening
"toc' C#osing "toc'
+!r4 6 in 6 Pr!ce##
Opening "toc' C#osing
stoc'
Fini#-e& G!!&#
Opening "toc'
C#osing "toc'
G0000
G+000
!0000
!3000
)0000
)2000
J 1$!0
J 1200
( 1300
( )!0
( 2000
J 1000
G1$!0
GG200
4+)00
!22!0
$+000
)3000
R"A M"teri"/ C!ntr!/ Acc!unt
7o :a#ance b@d 7o B. L.
.dj. .@c.
G1$!0
!00000
:/ &I Contro# .@c.
2ba#ance figure3
:/ :a#ance c@d.
4G24!0
GG200
181210 181210
81
+IP C!ntr!/ Acc!unt
7o :a#ance b@d. 7o
Aaw Materia#
Contro# .@c. 7o
&ages Contro# .@c.
7o 5actor/
Over0eads Contro#
.@c.
4+)00
4G24!0
200000
200000
:/ 5inis0ed Boods
Contro# .@c.
2ba#ancing figure3
:/ :a#ance C@d.
+++G00
!22!0
8)1110 8)1110
Fini#-e& G!!&# C!ntr!/ Acc!unt
7o :a#ance b@d.
7o &I Contro# .@c. 7o
.d1in. Over0eads
Contro# .@c.
$+000
+++000
1)0000
:/ Costing "a#es .@c.
2ba#ancing figure3
:/ :a#ance C@d.
10!3G00
)3000
1122800 1122800
C!#t ! S"/e# Acc!unt
7o 5inis0ed goods
Contro# .@c.
7o "e##ing and
Distribution
Contro# .@c. 7o rofit
7a'en to
Costing E L .@c.
10!3GG0
220000
22$100
:/ Benera# Ledger
.djust1ent .@c. 1!00000
1100000 1100000
C!#tin$ Pr!it < L!## Acc!unt
7o :a#ance
7ransferred
7o Benera#
Ledger
.djust1ent .@c. 22$100
:/ Cost of "a#es .@c. 22$100
222100 222100
82
I//u#tr"ti!n 2:
70e fo##owing figures 0ave been e-tracted fro1 t0e cost
records of a 1anufacturing unitC
"tores C Opening ba#ance
urc0ases
7ransfers fro1 &or'(in(rogress
Issues to wor'(in(progress
Issues to repairs and 1aintenance
Deficiencies found in stoc' ta'ing
+!r4>In>Pr!$re## :
Opening :a#ances
Direct wages app#ied
Over0eads app#ied
C#osing ba#ance
R#.
304000
14$04000
+04000
14$04000
204000
$4000
$04000
$04000
24404000
404000
5inis0ed products C ,ntire output is so#d at a profit of 10H on actua#
cost fro1 wor'(in(progress.
Ot0er wages incurred As. )04000V over0eads incurred As.
24!04000.
Ite1s not inc#uded in cost recordsC Inco1e fro1 Invest1ents As.
104000V #oss in sa#e of capita# assets As. 204000.
Draw up stores contro# account4 &or'(In(rogress Contro#
.ccount4 Costing rofit and Loss .@c.4 rofit and Loss .ccount and
Aeconci#iation "tate1ent.
MIC&.4 InterN
S!/uti!n:
9": C!#tin$ B!!4
9i: St!re# C!ntr!/ Acc!unt
7o :a#ance b@d.
7o Benera# Ledger
.djust1ent .@c. 7o &or'
? in ?
rogress Contro# .@c.
30000
1$0000
+0000
:/ &or'(in(rogress
Contro# .ccount
:/ &or' Over0ead
Contro# .@c.
:/ "tores Contro# .@c.
:/ Costing rofit E Loss
c@d.
1$0000
20000
$000
+4000
230000 230000
83
9ii: +!r4>in>(r!$re## C!ntr!/ Acc!unt
7o :a#ance b@d.
7o "tores Contro# .@c.
7o Direct &ages
Contro# .@c.
7o &or' Over0eads
contro# .@c
$0000
1$0000
$0000
240000
:/ "tores Contro# .@c.
:/ Costing rofit and
Loss .@c.
2cost of sa#es3
:/ :a#ance c@d.
+0000
400000
40000
120000 120000
9iii: C!#tin$ Pr!it "n& L!## Acc!unt
P"rticu/"r#
7o &or'(in(rocess
Contro# .@c. 2cost of
sa#es3
7o &or's Over0eads
Contro# .@c.
7o "tores Contro#
.@c.
2s0ortage3
7o rofit
R#. P"rticu/"r# R#.
:/ Benera# Ledger
400000 .djust1ent
.@c.
2sa#es3 400000
30000 :/ Cost of
"a#es
10 H 40000 440000
profit
$000
4000
))0000 ))0000
9i': +!r4# !'er-e"&# c!ntr!/ Acc!unt
7o Benera# #edger
.djust1ent .@c.
7o "tores Ledger
Contro# .@c.
2!0000
20000
:/ &or'(in(progress
.ccount
:/ Costing rofit E
Loss .@c.
2under ? recover/3
240000
30000
230000 230000
N!te: It 0as been presu1ed t0at under recover/ of over0eads 0as
been transferred to Costing rofit and Loss .ccount
87
9,: Fin"nci"/ B!!4#
Pr!it < L!## Acc!unt
P"rticu/"r# R#. R#. P"rticu/"r# R#. R#.
7o Opening "toc'
"tores
&or'(in(
progress
7o urc0ases
7o &ages Incurred
7o Over0eads
Incurred 7o
Loss on sa#es
of Capita# .ssets
30000
$0000 G0000
1$0000
)0000
2!0000
20000
:/ "a#es
:/ C#osing
"toc' C
"tores
&or'(in(
rogress
:/ Inco1e
fro1
Invest1ents
:/ Loss
+4000
40000
440000
124000
10000
1$000
!G0000 !G0000
Rec!nci/i"ti!n St"te*ent
9 R#. K : 9R#. 6 :
rofit as per costing records
Less C <nder absorption of wages Ite1s
not inc#uded in cost accounts .dd C
Inco1e fro1 invest1ent
Less C Loss on sa#e of capita# assets Loss
as per financia# boo's
4000
10000
14000
1$000
10000
20000
30000 30000
I//u#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#.
9/"4-#:
"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#.
88
M"teri"/# :
urc0ased
Issued to production
Issued to genera# 1aintenance
Issued to bui#ding construction
&ages
Bross &ages paid
Indirect wages
5or bui#ding construction
&or' over0ead
.ctua# a1ount incurred 2e-c#uding ite1s s0own above3
.bsorbed in bui#ding construction
<nder absorbed
Ao/a#t/ paid
"e##ing4 distribution and ad1inistration over0eads sa#es
"a#es
9/"4-#:
(
40
!0
$
4
(
1!0
40
10
(1$
0 20
+
!
2!
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/Ps 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/.
MC... InterN
S!/uti!n:
C!#t Le&$er C!ntr!/ A.c.
LR#. L"4-#M
.@c.
7o "tores Ledger
Contro# .@c.
:ui#ding Construction .@c.
7o 5inis0ed Boods
Contro# .@c.
4!0
!!
2!
44
403
:/ :a#ance b@d.
:/ "tores Ledger
Contro# .@c.
:/ &ages Contro# .@c.
:/ &or' Over0eads
Contro# .@c.
:/ Ao/a#t/ a@c.
:/ " E D and ad1in.
Over0eads .@c.
:/ Costing rofit E
Loss .@c.
!40
40
1!0
1$0
!
2!
!)
833 833
100
St!re# Le&$er C!ntr!/ A.c.
LR#. L"4-#M
7o :a#ance b@d.
7o Cost Ledger Contro# .@c.
+0
40
:/ &I Contro# .@c.
:/ &or's Over0eads
Contro# .@c.
:/ :ui#ding
Construction .@c.
:/ C#osing :a#ance
:/ &or's Over0eads
Contro# .@c. 2#oss3
$0
$
4
!!
!
120 120
+!r4 6 in 6 Pr!$re## C!ntr!/ A.c.
7o :a#ance b@d.
7o "tores Ledger
Contro# .@c.
7o &ages Contro# .@c. 7o
&or's Over0ead
Contro# .@c. 7o
Ao/a#t/ .@c.
20
!0
100
1+3
!
:/ 5inis0ed Boods
Contro# .@c.
:/ C#osing :a#ance
333
2!
%17 %17
Fini#-e& G!!&# C!ntr!/ A.c
7o :a#ance b@d.
7o &I Contro# .@c.
430
333
:/ Cost of Boods "o#d
.@c.
:/ :a#ance c@d.
3$0
403
32% 32%
C!#t ! S"/e# A.c
7o Cost of Boods "o#d .@c.
7o "e##ing4 Distribution E
.d1inistration
Over0eads .@c.
3$0
2!
:/ Costing rofit and
Loss .@c.
3+!
%71 %71
101
C!#tin$ Pr!it < L!## A.c.
7o Cost of "a#es .@c.
7o &or' Over0ead
Contro# .@c.
7o Cost Ledger Contro# .@c.
2profit3
3+!
+
!)
:/ Cost Ledger Contro#
.@c.
4!0
)10 )10
Bui/&in$ C!n#tructi!n A.c.
7o :a#ance b@d.
7o "tores Ledger
Contro# .@c.
7o &age Contro# .@c. 7o
&or's Over0ead
Contro# .@c.
10
4
10
20
:/ Cost Ledger Contro#
.@c.
44
)) ))
+!r4# O'er-e"& C!ntr!/ A.c
7o "tores Ledger
Contro# .@c.
7o &age Contro# .@c. 7o Cost
Ledger Contro# .@c.
$
40
1$0
:/ :ui#ding Construction
.@c.
:/ &I Contro# .@c.
:/ :a#ance
2Costing rofit ELoss
.@c.3
20
1+3
+
211 211
+"$e# C!ntr!/ A.c
7o Cost Ledger Contro# .@c. 1!0 :/ &or's Over0ead
Contro# .@c.
:/ :ui#ding Construction
.@c.
:/ &I Contro# .@c.
40
10
110
110 110
102
R!@"/t@ A.c
7o Cost Ledger Contro# .@c. ! :/ &I Contro# .@c. !
1 1
C!#t ! G!!&# S!/& A.c
7o 5inis0ed Boods
Contro# .@c.
3$0 :/ Cost of "a#es .@c. 3$0
3$0 3$0
Se//in$ Di#tri,uti!n "n& A&*ini#tr"ti!n O'er-e"&# A.c.
7o Cost Ledger Contro# .@c. 2! :/ Cost of "a#es .@c. 2!
2! 2!
Tri"/ B"/"nce
P"rticu/"r# Dr. Cr.
"tores Ledger Contro# .@c. &I
Contro# .@c.
5inis0ed Boods Contro# .@c. Cost
Ledger .djust1ent .@c.
!!
2!
403
4+3
)7% )7%
+!r4in$ 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
D As. 3$0 #a'0s
I//u#tr"ti!n ) :
. co1pan/ operates separate cost accounting and financia#
s/ste1. 70e fo##owing is t0e #ist of opening ba#ances as on
1(4(200G in t0e cost #edgerC
P"rticu/"r#
"tores Ledger Contro# .ccount
&I Contro# .ccount
5inis0ed Boods Contro# .ccount
Benera# Leger .djust1ent .ccount
De,it
R#.
!343)!
14044!G!
304)+0
((
Cre&it
R#.
14++4)!0
10%
7ransactions for t0e ;uarter ended 30($(200G are as underC
Materia# purc0ased
Materia# issued to production
Materia#s issued for factor/ repairs
5actor/ wagespaid2inc#uding indirect wages As.
2340003
roduction over0eads incurred
roduction over0eads under ? absorbed and
written ? off
"a#es
R#.
2$4)00
404000
G00
))4!00
G!4200
34200
24!$4000
70e co1pan/Ps gross profit is 2!H on factor/ cost at t0e end
of t0e ;uarter4 &I stoc's increased b/ As. )4!00@(.
repare t0e re#evant Contro# .ccount4 Costing rofit and
Loss .ccount and Benera# Ledger .djust1ent .ccount to record
t0e above transactions for t0e ;uarter ended 30($(200G.
MC... InterN
S!/uti!n:
Gener"/ Le&$er A&Du#t*ent A.c.
7o "a#es
7o :a#ance C@d.
24!$4000
14+041!0
:/ :a#ance b@d
:/ "tores Ledger
Contro# .@c.
:/ &ages Contro#
.@c.
:/ Over0eads Contro#
.@c.
:/ Costing rofit E
Loss .@c.
14++4)!0
2$4)00
))4!00
G!4200
4+4000
)%2110 );%2;110
St!re# Le&$er C!ntr!/ A.c
7o :a#ance b@d. 7o
Benera# Ledger
.djust1ent .@c.
!343)!
2$4)00
:/ &I Contro# .@c.
:/ 5actor/ Over0eads
Contro# .@c.
:/ :a#ance C@d.
404000
G00
3G41)!
+040)! +040)!
10)
+IP C!ntr!/ A.c
7o :a#ance b@d.
7o "tores Ledger
Contro# .@c.
7o &ages Contro# .@c.
7o 5actor/
over0eads
Contro# .@c.
14044!G!
404000
!44000
141!4G00
:/ 5inis0ed Boods
Contro# .@c.
:/ :a#ance c@d
24024G00
141240G!
%;1);881 %;1);881
Fini#-e& G!!&# C!ntr!/ A.c.
7o "tores Ledger
Contro# .@c.
7o Benera# Ledger
.djust1ent .@c.
G00
234000
G!000
:/ Costing rofit E
Loss .@c.
:/ &I Contro# .@c.
3200
141!4G00
1;18;100 1;18;100
C!#t ! S"/e# A.c
7o 5inis0ed Boods
Contro# .@c. 24044+00
:/ Benera# #edger
.djust1ent .@c. 24044+00
S"/e# A.c
.@c.
24!$4000 :/ Benera# Ledger
.djust1ent .@c.
24!$4000
+"$e# C!ntr!/ A.c
7o Benera# Ledger
.djust1ent .@c. ))4!00
:/ 5actor/ Over0eads
Contro# .@c.
:/ &I Contro# .@c.
234000
!44!00
33;100 33;100
101
C/!#in$ Pr!it < L!## A.c
7o 5actor/ O.R.
Contro# .@c.
7o Cost of sa#es .@c. 7o
Benera# Ledger .dj. .@c.
34200
24044+00
4+4000
:/ "a#es .@c. 24!$4000
212000 2;12;000
Tri"/ B"/"nce 9"# !n %0>2>2008:
P"rticu/"r# Dr. Cr.
"tores Ledger Contro# .@c. &I
Contro# .@c.
5inis0ed Boods Contro# .@c. Benera#
Ledger .djust1ent .@c.
3G41)!
141240G!
2+4++0
14+041!0
14+041!0 14+041!0
I//u#tr"ti!n 1:
.s of 31st Marc04 200+ t0e fo##owing ba#ances e-isted in a
fir1Ps cost #edger4 w0ic0 is 1aintained separate#/ on a doub#e entr/
basis C
P"rticu/"r#
"tores Ledger Contro# .@c.
&or' ? in ? rogress Contro# .@c.
5inis0ed Boods Contro# .@c.
Manufacturing over0eads Contro# .@c.
Cost Ledger Contro#
De,it
34004000
14!04000
24!04000
)4004000
Cre&it
1!4000
$4+!4000
)4004000
During t0e ne-t ;uarter4 t0e fo##owing ite1s aroseC
5inis0ed product 2at cost3
Manufacturing over0ead incurred
Aaw 1ateria# purc0ased
5actor/ wages
Indirect Labour
Cost of sa#es
Materia#s issued to production
"a#es returned 2at cost3
Materia#s returned to supp#iers
Manufacturing over0ead c0arged to production
R#.
242!4000
+!4000
142!4000
404000
204000
14)!4000
143!4000
G4000
134000
+!4000
Iou are re;uired to prepare t0e cost #edger contro# .@c.4
"tores Ledger Contro# .@c.4 &or'(in(rogress Contro# .@c.4 5inis0ed
"toc' Ledger Contro# .@c. Manufacturing Over0eads Contro# .@c.
102
&ages Contro# .@c. Cost of "a#es .@c. and t0e 7ria# :a#ance at t0e
end of t0e ;uarter.
MC...4 C,N
S!/uti!n:
C!#t Le&$er C!ntr!/ A.c
7o "tores Ledger
Contro# .@c.
7o :a#ance c@d
134000
G4424000
:/ Opening :a#ance
:/ "tores Ledger
Contro# .@c.
:/ Mfg. Over0eads
Contro# .@c.
:/ &ages Contro#
.@c.
$4+!4000
142!4000
+!4000
$04000
8;11;000 8;11;000
7o Opening :a#ance 7o
Cost Ledger Contro# .@c.
34004000
142!4000
:/ &I Contro# .@c.
:/ Cost Ledger
Contro# .@c.
2returns3
:/ :a#ance c@d.
143!4000
134000
24))4000
);21;000 );21;000
+IP C!ntr!/ A.c
7o Opening :a#ance
7o "tores Ledger
Contro# .@c.
7o Mfg. Over0eads
Contro# .@c.
14!04000
404000
143!4000
+!4000
:/ 5inis0ed "toc'
Ledger
Contro# .@c.
:/ :a#ance c@d.
242!4000
14+!4000
);10;000 );10;000
103
Fini#-e& St!c4 Le&$er C!ntr!/ A.c
7o Opening :a#ance 7o
&I Contro# .@c. 7o Cost of
"a#es .@c.
2"a#es returns3
24!04000
242!4000
G4000
:/ Costs of "a#es
:/ :a#ance c@d.
14)!4000
340G4000
);7);000 );7);000
M"nu"cturin$ O'er-e"& C!ntr!/ A.c
7o Cost Ledger
Contro# .@c.
+!4000
204000
:/ Opening :a#ance
:/ &I Contro# .@c.
:/ <nder Aecover/
C@d.
1!4000
+!4000
!4000
1;01;000 1;01;000
+"$e# C!ntr!/ A.c
7o Cost Ledger
Contro# .@c.
2transfer3 $04000
:/ &I Contro# .@c.
:/ Mfg. Over0eads
Contro# .@c.
404000
204000
20;000 20;000
C!#t ! S"/e# A.c
7o 5inis0ed "toc'
Ledger
Contro# .@c. 14)!4000
:/ 5inis0ed stoc'
Ledger
Contro# .@c. 2sa#es
return3
:/ :a#ance c@d.
G4000
14$$4000
1;31;000 131000
107
Tri"/ B"/"nce
7o "tores Ledger
Contro# .@c.
5inis0ed Boods
Ledger Contro# .@c.
7o Mfg. Over0eads
Contro# .@c.
7o Cost of "a#es .@c.
24))4000
14+!4000
340G4000
!000
1$$000
:/ Cost Ledger
Contro# .@c.
G4424000
8)2000 8)2000
I//u#tr"ti!n 2:
K 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 24100
#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
7ota# wages paid ? net
,1p#o/ees deduction
Direct wages c0arged to batc0es fro1 wor' tic'ets
Aecorded non(productive ti1e of direct wor'ers
De,it Cre&it
1)4$00 34300
44400 +2!
1!4400
$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
goods store during t0e 1ont0
$24130
108
70e production over0ead absorption rate is 1!0 H of direct
wages. 70is over0ead absorption orate wou#d a#so be c0arged to
cost of production of capita# e;uip1ent in t0e factor/.
Ae;uiredC
13 "tores #edger contro# account
23 &or'(in(progress contro# account
33 5inis0ed goods contro# account
43 roduction over0ead contro# account
!3 rofit and Loss .ccount
S!/uti!n :
St!re# Le&$er C!ntr!/ A.c.
:a#ance b@d
Creditors ? 1ateria#
urc0ased
241)!
)$1!0
&or'(in(progress
contro# .@c.
roduction over0eads
Contro# .@c.
:a#ance c@d.
2$3!0
32+0
)0$G!
100%21 100%21
+!r4>in>Pr!$re## C!ntr!/ A.c.
:a#ance b@d.
&ages Contro# .@c. (
Direct &ages
roduction Over0eads
Contro# .@c.
2As. 1!400 - 1! H3
1G210
2$3!0
1!400
23100
5inis0ed goods Contro#
.@c.
:a#ance c@d.
$2130
21G30
7)020 7)020
Fini#-e& G!!&# C!ntr!/ A.c
:a#ance b@d.
&or'(in(rogress
Contro# a@c.
341)0
$2130
rofit E Loss .@c. cost of
sa#es
:a#ance c@d.
!G+30
3$4)0
82%00 82%00
110
Pr!&ucti!n O'er-e"& C!ntr!/ Acc!unt
a/1ent :@d.
&ages Contro# .@c.
( Indirect &ages
&ages Contro# .@c. Id#e
ti1e of direct wor'ers
Cas0 creditors ? ot0er
roduction over0eads
incurred
2100
32+0
412!
$$00
12200
&or'(in(progress
Contro# .@c.
21!H of As. 1!4003
Capita# e;uip1ent ?
under
.bsorbed production
Over0eads
21!0 H of As. 1!4003
rofit and Loss .@c.
2under
.bsorbed over0eads
? ba# 5igure3
23100
400!
1200
Pr!it "n& L!## A.c
Cost of goods so#d Bross
profit c@d
"e##ing and Distribution
Over0eads
roduction Over0eads
Contro# .@c.
<nabsorbed
Over0eads >et
profit c@d
!G+30
1!!)0
"a#es
Bross rofit b@d.
)!400
)!400 )!400
!240
1200
G130
1!!)0
11130 11130
%.1 INTEGRAL9OR INTEGRATED: 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 OF 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.
!. 70e s/ste1 creates conditions w0ic0 are e1inent#/ suitab#e
for t0e introduction of 1ec0ani6ed accounting.
$. 70ere is no possibi#it/ of over#oo'ing an/ e-pense under t0e
s/ste1 .
). .s cost accounts are posted straig0t fro1 t0e boo's of
origina# entr/4 t0ere is no de#a/ in obtaining t0e data.
+. 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 decisionsP.
G. 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 ta'en into consideration w0i#e
designing suc0 a s/ste1C
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. Rowever4 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.
!. 5or preparation of interi1 accounts t0ere 1ust be an agreed
routine for treat1ent after accrua#s4 prepaid e-penses and ot0er
necessar/ adjust1ents.
$. 70ere s0ou#d be perfect coordination between t0e staff
responsib#e for t0e financia# and cost aspects to ensure an
efficient processing of accounting docu1ents.
%.3 ESSENTIAL FEATURES OF INTEGRAL
ACCOUNTING
%.3.1 T-e !//!Ain$ "re t-e e##enti"/ e"ture# ! "n inte$r"/ "n
"cc!untin$ #@#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.
!. 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.
$. a## advance pa/1ents are credited and accrua#s debited to t0e
respective contro# account b/ contra entries in t0e prepa/1ents
and accrua# accounts.
).Capita# asset account is debited and respective contro# accounts
are credited in t0e process of cost ana#/sis of capita# e-penditure
%.3.2 J!urn"/ entrie# un&er inte$r"/ #@#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"/ (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.
2. Materia# issued
2a3 Direct Materia#
2b3 Indirect Materia#
Ae#evant over0ead .@c Dr
3. Materia# returned fro1 s0op
f#oors
4. Materia# returned to supp#ier
"tores Contro# .@c. Dr.
7o wor'(in(progress .@c.
Creditors .@c. Dr.
11)
!. Materia# transferred fro1 one
=ob to anot0er job
$. "a#ar/ and wages paid(direct
and indirect
). Direct e-penses
+. Over0ead incurred
7ransferee job .@c. Dr.
7o 7ransferor job .@c.
&ages contro# .@c. Dr.
7o Cas0
7o Cas0
Ae#evant over0ead .@c Dr.
7o cas0
G. Over0ead recovered &or'(in(progress .@c Dr.
25or production over0ead recovered3
5inis0ed "toc' .@c Dr.
2for .d1n. over0ead recovered3
Cost of "a#es .@c. Dr.
25or se##ing and Distribution over0ead Aecovered3
7o re#evant over0ead .@c
10. Over0ead on wor'(in(progress
11. 5inis0ed goods produced
&or'(in(progress .@c Dr.
7o production over0ead .@c
5inis0ed good .@c. Dr.
7o wor'(in(progress .@c
12. Boods so#d 2.t cost3
13. 5or "a#es
14. "a#es returned
Cost of "a#es .@c Dr.
7o finis0ed goods .@c.
Debtors .@c Dr.
7o "a#es .@c
"a#es .@c Dr.
7o Debtors .@c
1!. Capita# &or'
1$. Aepair wor'
1). <nder(absorbed over0ead
"undr/ .ssets .@c Dr.
Ae#evant over0ead .@c Dr.
E L .@c. Dr.
7o re#evant over0ead .@c
1+. Over(absorbed over0ead Ae#evant over0ead .@c Dr.
7o E L .@c.
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.
a3 Direct Materia# issued to production
111
b3 roduction over0eads c0arged to production
c3 &ages paid
d3 "e##ing and Distribution ,-penses incurred
e3 Cost of production of Co1p#eted job.
f3 .1ount received fro1 custo1ers.
g3 Office E .d1inistration e-penses c0arged to production
%.7 SOLVED PROBLEMS OF INTEGRAL
ACCOUNTING
I//u#tr"ti!n>1
5o##owing transactions too' p#ace in &i##u E Co. during t0e
1ont0 of Marc04 1GG3 C
1. Aaw 1ateria# purc0ased on credit
2. Direct 1ateria# issued to production
3. &age paid 230H indirect3
As. 404000
304000
244000
4. Manufacturing e-penses incurred 2cas03 1$4+00
!. Manufacturing over0ead c0arged to production 1$4000
$. "e##ing and distribution cost 2cas03 44000
). 5inis0ed goods at cost 404000
+. "a#es !+4000
G. Aeceipts fro1 debtors 134+00
10. a/1ents to creditors 224000
Iou are re;uired to journa#ise t0e above transactions
presu1ing t0at integrated s/ste1 of accounting is fo##owed b/
&i##u E Co.
S!/uti!n
J!urn"/
+i//u < C!.
9Inte$r"/ Acc!untin$ S@#te*:
Dr. Cr.
1. "tores Contro# .@c Dr. 404000
7o Creditors .@c 404000
2:eing t0e raw 1ateria# purc0ased on credit
2. &or'(in(progress .@c Dr. 304000
7o "tores Contro# .@c 304000
2:eing t0e 1ateria# issued to jobs3
3. 2a3 &ages Contro# .@c Dr. 244000
7o Cas0 244000
2:eing t0e entr/ for direct and indirect wages paid3
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
4. 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
7o "a#e .@c
2:eing t0e a1ount of sa#e3
G. :an' .@c
7o Debtors .@c
2:eing t0e receipt fro1 debtors3
Dr. !+4000
!+4000
Dr. 134+00
134+00
10. "undr/ Creditors .@c Dr. 224000
7o Cas0 224000
2:eing t0e a1ount paid to creditors3
I//u#tr"ti!n>2:
.:C Manufacturing Co1pan/ 0as t0e fo##owing ba#ances in
its integrated #edger as on 1
st
=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
113
7ransactions during t0e /ear ended 31
st
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 $4004000
Iou are re;uired to ?
2a3 &rite up and c#ose off t0e #edger accounts.
2b3 repare a tria# ba#ance of t0e c#osing ba#ances4 and
2c3 repare profit and #oss account and a ba#ance s0eet.
Inter$r"/ Le&$er
Dr
7o :a#ance b@d
7o Creditors .@c
St!re C!ntr!/ A.c.
As.
14004000 :/ &or'(in(progress .@c
14$04000 :/ Inventor/ .dj. .@c
:/ :a#ance c@d
Cr.
As.
24004000
+4000
!24000
24$04000 24$04000
7o :a#ance b.d !24000
Dr. +!r4>in>(r!$re## A.c Cr.
As. As.
7o "tores Contro# .@c 24004000
7o &ages Contro# .@c 14+$4000
7o roduction over0ead .@c 14 + $4000
!4)2 4 000
7o :a#ance b@d 14G04000
:/ 5inis0ed stoc' .@c
:/ :a#ance c@d
34+24000
14G04000
!4)2 4 000
Dr. Fini#-e& G!!&# A.c Cr.
7o &or'(in(progress .@c 34+ 2 4000 :/ Cost of sa#es .@c
34+2 4 000
34+24 0 00
34+2 4 000
117
Dr.
7o :an'
7o :a#ance b@d
+"$e# C!ntr!/ A.c
As.
14G04000
ZZZZZZZ
14G0 4 000
44000
:/ &.I.. .@c
:/ :a#ance c@d
Cr.
As.
14+$4000

44000
14G0 4 000
Dr. Pr!&ucti!n O'er-e"& A.c Cr.
As. As.
7o :an' 14)!4000 :/ &or'(in(progress .@c 14+$4000
7o :a#ance c@d 114000
14+$ 4 000 14+$ 4 000
:/ ba#ance b@d 114000
Dr. Se//in$ "n& Di#tri,uti!n E0(en#e# A.c Cr.
As. As.
7o :an' 204 0 00 :/ cost of "a#es .@c 204000
204000 204 0 00
Dr. C!#t ! S"/e# A.c
As.
7o 5inis0ed stoc' .@c 34+24000 :/ :a#ance c@d
7o "e##ing and Distribution
Over0ead .@c 2040 0 0
4 4 024000
Cr.
As.
44024000
4402 4 000
7o :a#ance b@d 440 2 4000
Dr.
7o :a#ance c@d
S"/e# A.c
As.
!4) 2 4000
!4)24000
:/ Debtors .@c
:/ :a#ance b@d
Cr.
As.
!4)2 4 000
!4)2 4 000
!4)24 0 00
Dr. S-"re C"(it"/ A.c
As.
:/ :a#ance b@d
Cr.
As.
24004000
Dr. Re#er'e A.c Cr.
As. As.
:/ :a#ance b@d !04000
Dr.
7o :a#ance b@d
P/"nt "n& M"c-iner@ A.c Cr.
As. As.
24!04000
118
Dr.
7o :a#ance
7o "a#es
7o :a#ance b@d
Sun&r@ De,t!r# A.c
As.
404000 :/ :an' .@c
!4)240 0 0 :/ :a#ance c@d
$412 4 000
124000
Cr.
As.
$4004000
1240 0 0
$412 4 00
Dr.
7o :an'
7o :a#ance c@d
Dr.
7o "undr/ DebtorPs .@c
7o :a#ance c@d
7o :a#ance b@d
Sun&r@ Cre&it!r# A.c Cr.
As. As.
14)04000 :/ :a#ance b@d $04000
! 04 0 00 :/ "troes Contro# .@c 14$04000
2420 4 000 24204 0 00
:/ :a#ance b@d !04000
B"n4 Acc!unt Cr.
As. As.
$4004000 :/ :a#ance b@ +04000
3!4000 :/ &ages contro# .@ 14G04000
:/ &ages Contro# .@c 14)!4000
:/ &ages Contro# .@ 204000
:/ "undr/ CreditorPs
.@c 14)0 4 000
$43! 4 000 $ 43!4000
3!4000
Dr. In'ent!r@ A&Du#t*ent A.c Cr.
As. As.
7o "tore Ledger contro# .@c +4 0 00 :/ :a#ance c@d +4000
+4000
+4000
7o :a#ance b@d +4000
2b3 Tri"/ ,"/"nce "# !n %1
#t
Dece*,er; 188%
Dr. Cr.
1. "0are Capita# 24004000
2. Aeserve .ccount !04000
3. "undr/ Debtors 124000
4. "undr/ Creditors !04000
!. #aint and Mac0iner/ .@c 24!04000
$. :an' .ccount 3!4000
). "tores Ledger Contro# .@c !24000
+. &or'(in(progress .@c. 14G04000
G. &ages Contro# .ccount 44000
10. roduction Over0ead .@c 114000
11. Inventor/ .djust1ent .@c +4000
12. Cost of "a#es .ccount 44024000
13. "a#es .ccount (((((((((((((( !4)2 4 000
8;17 ; 000 8;17; 0 00
120
Dr.
7o Cost of "a#es .@c 44024000
7o Inventor/ .djust1ent .@c +4000
7o &ages contro# .@c 44000
7o >et profit 14$G4000
(((((((((((
1;7% ; 000
Cr.
:/ "a#es .@c !4)24000
:/ roduction over0ead 114000
.@c
(((((((((((
1;7% ; 000
B"/"nce S-eet
A# "t %1
#t
Dece*,er; 188%
Li",i/itie#
"0are Capita#
Aeserve
rofit
"undr/ Creditors
:an' overdraft
A*!unt
24004000
!04000
14$G 4 00 441G4000
!04000
3!4000
(((((((((((
!4044000
A##et# A*!unt
#ant and 1ac0iner/ 24!04000
St!c4 ! :
5inis0ed good !24000
&.I.. 14G04 0 00 24424000
"undr/ Debtors 124000
(((((((((((
!4044000
I//u#tr"ti!n 6 %
=ourna#ise t0e fo##owing transactions assu1ing t0at cost and
financia# accounts are integrated.
R#.
Aaw 1ateria# purc0ased
Direct 1ateria#s issued to production
&ages paid 230H Indirect3
&ages c0arged to production
Manufacturing e-penses incurred
Manufacturing over0ead c0arged to production
"e##ing and Distribution costs
5inis0ed roduct at cost
"a#es
Aeceipts fro1 custo1ers
aid to creditors
C#osing "toc'
14!04000
14124!00
G04000
)!4000
$34000
$G4000
1!4000
14!04000
242!4000
!24!00
+24!00
>IL
121
Sr. N! P"rticu/"r# A*!unt A*!unt
1 "tores Ledger Contro# .@c Dr
7o :oug0t Ledger Contro# .@c
2:eing raw 1ateria#s boug0t3
14!04000
14!04000
2 &or'(in(progress Ledger Contro# .@c Dr
7o "tores Ledger Contro# .@c
2:eing 1ateria#s issued for production3
14124!00
14124!00
3 &ages Contro# .@c Dr $34000
5actor/ Over0ead Contro# .@c Dr.
2)4000
7o :an' .@c G04000
2:eing wages paid3
4 &or'(in(progress Ledger Contro# .@c Dr. )!4000
7o &ages Contro# .@c !24!00
7o 5actor/ Over0ead Contro# .@c 224!00
2:eing a##ocation of wages to production3
! 5actor/ Over0ead Contro# .@c
7o :an' .@c
Dr. $34000
$34000
2:eing t0e 1anufacturing e-penses incurred
$ &or'(in(progress Ledger Contro# .@c Dr. $G4000
7o 5actor/ Over0ead Contro# .@c $G4000
2:eing over0eads c0arged to production3
) "e##ing E Distribution over0ead Contro# .@c 1!4000
7o :an' .@c 1!4000
2:eing se##ing and distribution cost incurred3
+ 5inis0ed "tores Ledger Contro# .@c Dr. 14!04000
7o &or'(in(progress Ledger Contro# .@c 14!04000
2:eing cost of production of co1p#eted jobs3
G Cost of "a#es .@c Dr. 14$!4000
7o 5inis0ed "toc' Ledger Contro# .@c
7o se##ing E Distribution over0ed Contro#
.@c
2:eing t0e cost of production so#d3
14!04000
1!4000
10 "a#es Ledger Contro# .@c
7o "a#es
2:eing t0e a1ount of sa#es3
11 :an' .@c
7o "a#es Ledger Contro# .@c
Dr. 242!4000
Dr. !24!00
242!4000
!24!00
2:eing a1ount received fro1 custo1ers3
12 :oug0t Ledger Contro# .@c
7o :an' .@c
2:eing a1ount paid to Creditors3
Dr. +24!00
+24!00
122
I//u#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
&ages paid
&ages productive
&ages unproductive
Materia# issued to production
&or's e-penses incurred
&or's e-penses c0arged to production
Office and ad1inistration e-penses paid
Office and ad1inistration e-penses c0arged to
production
"e##ing over0ead paid
"e##ing ovre0eads c0arged to sa#es
"a#es Credit
144+4000
14$+4000
144+4000
204000
142+4000
$!4000
+$4000
444000
434!00
4!4000
4!4000
34G04000
J!urn"/
P"rticu/"r#
"tores #edger contro# .@c Dr.
7o Creditors
2:eing t0e stores purc0ased on credit3
&ages contro# .@c Dr.
7o cas0
2:eing wages paid3
R#.
144+4000
14$+4000
R#.
144+4000
14$+4000
&or'(in(progress contro# .@c Dr.
7o &ages contro# .@c
2:eing t0e wages c0arged to production3
&or's e-penses contro# .@c Dr.
2:eing t0e wages c0arged to wor' e-penses
"ince t0ese are indirect pa/1ents3
144+4000
204000
144+4000
204000
&or'(in(progress contro# .@c Dr. 142+4000
7o "tores #edger contro# .@c 142+4000
2:eing 1ateria#s issued to production3
&or's e-penses contro# .@c Dr. $!4000
7o cas0 $!4000
2:eing wor's e-penses paid during t0e /ear
12%
&or'(in(progress contro# .@c Dr. +$4000
7o wor's e-penses contro# .@c +$4000
2:eing t0e wor's e-penses c0arged to
production3
Office and ad1. ,-penses contro# .@c Dr. 444000
7o cas0 444000
2:eing a1ount paid for office e-penses3
&or'(in(progress contro# .@c Dr. 434!00
7o office and .d1. ,-penses contro# .@c 434!00
2:eing office and ad1. ,-p. c0arged to
production3
Cost of sa#es .@c Dr
7o wor'(in(progress contro# .@c
2:eing t0e finis0ed product transferred3
"e##ing e-penses contro# .@c Dr.
7o cas0
2:eing t0e se##ing e-penses incurred3
34004000
4!4000
34004000
4!4000
Cost of sa#es .@c Dr. 4!4000
7o "e##ing e-penses contro# .@c 4!4000
2:eing se##ing e-penses c0arged to sa#es3
Debtors .@c Dr. 34G04000
7o "a#es .@c 34G04000
2:eing sa#es 1ade on credit3
As.
7o Creditors 144+4000
(((((((((((
144+4000
(((((((((((
As.
:/ &or'(in(progress contro# .@c 142+4000
:/ :a#ance c@d 204000
(((((((((((
144+4000
(((((((((((
+"$e# C!ntr!/ A.c
As.
7o Creditors 14$+4000 :/ &or'(in(progress contro# .@c
:/ wor' e-pense contro# .@c
((((((((((
14$+4000
((((((((((
As.
144+4000
204000
((((((((((((
14$+4000
(((((((((((((
12)
+!r4# E0(en#e# C!ntr!/ A.c
7o Cas0
7o :a#ance c@d
As.
204000
$!4000
14000
((((((((((
+$40 0 0
As.
:/ wor'(in(progress contro# .@c +$4000
(((((((((
+$4 0 00
Oice < A&*ini#tr"ti'e E0(en#e# C!ntr!/ A.c
As.
7o Cas0 .@c 444000
(((((((((
444 0 00
:/ wor'(in(progress contro# .@c
:/ :a#ance c@d
As.
434!00
!00
((((((((((
444 0 00
Se//in$ E0(en#e# C!ntr!/ A.c
As. As.
7o Cas0 .@c 4!4000 :/ Cost of "a#es .@c
4!4000
+!r4 6 in> Pr!$re## C!ntr!/ A.c
As.
7o &ages contro# .@c 144+4000 :/ cost of sa#es .@c
7o "tores #edger .@c 142+4000 :/ :a#ance c@d
7o &or's e-penses .@c +$4000
7o office E ad1. ,-penses 434!00
((((((((((((
440! 4 !00
As.
34004000
140!4!00
((((((((((((
440! 4 !00
In addition to t0ese4 Cas0 .@c4 Creditors .@c and Cost of
"a#es .@c are to be prepared
/u#tr"ti!n 1 :
5ro1 t0e fo##owing particu#ars4 pass journa# entries in an
integrated s/ste1 of accounting in t0e boo's of :ig T:P Ltd.
R#.
Aaw 1ateria#s purc0ased 2+0H on credit3
7oo#s wages paid
5actor/ over0eads incurred
5actor/ over0eads c0arged to production
Office ovre0ead incurred
Office over0eads app#ied to 5inis0ed Boods
"e##ing and Distribution over0eads incurred
"e##ing and Distribution over0eads app#ied to cost of sa#es
5inis0ed goods
produced
Materia#s #ost
b/ fire
Materia#s
issued for
construction of
bui#ding
!4G04000 444!4000 24!04000 14+04000 14G04000
14$04000 14104000 +!4000 4+4000 3$4000 !4004000
104000
404000
121
J!urn"/ Entrie# in t-e ,!!4# ! Bi$ B Lt&.
"r.>o. articu#ars Dr. As. Cr. As.
1 "tores Ledger Contro# .@c Dr.
7o Creditors .@c
7o :an' .@c
!4G04000
44)24000
141+4000
2:eing raw 1ateria#s purc0ased3
2 &I Contro# .@c Dr. 444!4000
7o "tores Ledger Contro# .@c 444!4000
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
24!04000
14+04000
24!04000
14+04000
2:eing wages c0arged to production3
! 5actor/ Over0ead Contro# .@c Dr.
7o Cas0 @ :an' .@c
14G04000
14G04000
2:eing factor/ over0ead incurred3
$ &I Contro# .@c Dr. 14$04000
7o 5actor/ Over0ead Contro# .@c 14$04000
2:eing factor/ over0ead c0arged to
production3
) Office Over0ead Contro# Dr.
7o Cas0 @ :an' .@c
14104000
14104000
2:einf ad1inistrative over0ead incurred3
+ 5inis0ed Boods Contro# .@c Dr. +!4000
7o office over0ead Contro# .@c +!4000
2:eing office over0ead app#ied to finis0e
goods3
G "e##ing and Distribution Contro#.@c Dr 4+4000
7o Cas0 @ :an' .@c
2:eing se##ing and distribution over0ead 4+4000
paid3
10 Cost of "a#es .@c Dr. 3$4000
7o "e##ing and Distribution 3$4000
over0ead contro# .@c
2:eing cost se##ing over0ead c0arged to
cost of sa#es .@c3
122
11 5inis0ed Boods Contro# .@c
7o &I Contro# .@c
Dr. !4004000
!400400
2:eing production cost of finis0ed
goods transferred to finis0ed stoc' .@c3
12 Costing E L .@c Dr. 104000
7o "tores Ledger Contro# .@c 104000
2:eing 1ateria# #ost b/ fire3
13 :ui#ding .@c Dr. 404000
7o "tores Ledger Contro# .@c 404000
2:eing 1ateria# issued for construction
of bui#ding3
%.8 ECERCISE
A. O,Decti'e t@(e.
C0oose t0e correct answers for t0e fo##owing 1u#tip#e c0oice
;uestions
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
2c3 Materia#s 7ransfer >ote 2d3Materia#s issue .na#/sis
s0eet
4. 70is is essentia# to 1a'e t0e cost #edger Tse#f(ba#ancingP
2a3 Benera# Ledger .djust1ent .ccount
2b3 "tores Ledger Contro# .ccount
2c3 &or'(in(progress Ledger
2d3 5inis0ed Boods Contro# .ccount
123
!. 70is is debited wit0 a## purc0ases of 1ateria#s for t0e stores
and credited wit0 a## issues of 1ateria#s.
$. In t0is4 cost of 1ateria#s4 wages and over0eads of eac0 job
underta'en is posted.
). In non(integrated s/ste1 of accounting4 t0e e1p0asis is on
2a3 ersona# accounts 2b3 Aea# accounts
2c 3 >o1ina# accounts 2d3 .## of t0ese
+. 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
G. urc0ases for specia# jobs is debited to
2a3 &or'(in(progress #edger contro# account
2b3 Cost #edger contro# account
2c3 "tores #edger contro# account
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#Aer : 1 2a34 22c34 32d34 42a34 !2b34 $2c34 )2c34 +2b34 G2a34 102a3
B. S-!rt n!te#
1. &rite s0ort notes on TIntegrated .ccountsP.
2. &rite s0ort notes on TCost Ledger Contro# .ccount.P
3. "tate t0e essentia# pre(re;uisites of integrated accounting
s/ste1.
4. List t0ree 1ain advantages of integrated accounts.
!. &rite s0ort notes on TIntegrated accountingP
$. &0at are t0e advantages of integrated accounting S
127
C. L!n$ ?ue#ti!n#
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 #edgerS
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.
!. &rite s0ort notes in TIntegrated .ccounting s/ste1P.
I//u#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"rticu/"r# As.
Materia# Contro# .@c F F F F F &or'(
in(progress Contro# .@c F F F F F
5inis0ed Bood Contro# .@c F F F F F Cost
Ledger Contro# .@c F F F F F
7ransactions for t0e /ear are C
Materia#s purc0ased F F F F F
Materia#s issued as C
Direct 1ateria#s F F F F F
Indirect 1ateria#s F F F F F
&ages paid a##ocated as C
Direct cost F F F F F Indirect cost
F F F F F roduction e-penses F F
F F F %a#ue of finis0ed goods produced F F F F
F C#osing "toc' of finis0ed goods F F F F F
.d1inistration e-penses F F F F F "e##ing
e-penses F F F F F
"a#es F F F F F
$04000
G04000
14404000
24G04000
$4$04000
44!04000
14204000
24)04000
G04000
24404000
104+04000
14204000
24404000
14+04000
1+4004000
repare t0e necessar/ contro# accounts in boo's of costing
records.
2M.Co1. Oct. 044 adapted3
128
I//u#tr"ti!n 2:
On 31
st
Marc0 200! t0e fo##owing ba#ances were e-tracted fro1 t0e
boo's of 7urf and "urf Co1pan/.
P"rticu/"r# Dr. As. Cr. As.
"tores Ledger Contro# .@c F F F F F
&or'(in(rogress Contro# .@c F F F F F
5inis0ed Boods Contro# .@c F F F F F
Cost Ledger Contro# .@c F F F F F
T!t"/
34!04000
34+04000
24!04000
((
(
(
(
G4+04000
G4+04000 G4+04000
70e fo##owing transactions too' p#ace in Marc04 200! C
P"rticu/"r#
As.
Aaw 1ateria#s C urc0ased F F F
Aeturned to "upp#iers F F F
Issued to roduction F F F
Aeturned to stores F F F
roductive &ages F F F
Indirect Labour F F F
5actor/ Over0eads F F F
"e##ing and Distribution Over0eads F F F
Cost of finis0ed goods transferred to ware0ouse F F F
Cost of goods so#d F F F
"a#es F F F
G4!04000
304000
G4+04000
304000
44004000
24!04000
!4004000
44004000
214304000
214004000
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 rofit and Loss .@c
and t0e 7ria# :a#ance.
2M.Co1. Oct. 0!4 adapted3
I//u#tr"ti!n %:
.s on 31
st
Marc04 200!4 t0e fo##owing ba#ances e-isted in "0arad
Co. Ltd.Ps Cost Ledger.
"tores Ledger Contro# .@c F F F &or'(
in(rogress Contro# .@c F F F
5inis0ed "toc' Ledger Contro# .@c F F F
Manufacturing Over0ead Contro# .@c F F F Cost
Ledger Contro# .@c F F F T!t"/
$4024+)0
24444)30
!4034+G0
(
(
(
(
(
2140!0
134304440
134!144G0 134!144G0
During t0e ne-t t0ree 1ont0s4 t0e fo##owing ite1s aroseC
P"rticu/"r# As.
5inis0ed roduct 2.t Cost3 F F F F F
Manufacturing Over0ead incurred F F F F F Aaw
Materia#s urc0ased F F F F F
5actor/ &ages F F F F F
Indirect Labour F F F F F Cost
of "a#es F F F F F
Materia#s issued to roduction F F F F F
"a#es return at cost F F F F F
Materia#s returned to "upp#iers F F F F F
Manufacturing Over0ead C0arged to roduction F F F F F
44214$)0
14+34020
244$4000
140140$0
434330
34)14)+0
24!44$30
104)$0
!4+00
14!44400
1%1
5!u "re re?uire& t! Arite u(:
a3 Cost Ledger Contro# .ccount
b3 "tores Ledger Contro# .ccount
c3 Over0ead Contro# .ccount
d3 &or' in rogress Contro# .ccount
e3 5inis0ed "toc' Ledger Contro# .ccount
f3 7ria# :a#ance 2indicating4 in brief4 w0at eac0 ba#ance represents3
g3 Cost of sa#es .@c
2M.Co1.4 Mar. 0$4 .dapted3
I//u#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
"tores Ledger Contro# .@c F F F F F &or'(
in(rogress Contro# .@c F F F F F
5inancia# Ledger Contro# .@c F F F F F T!t"/
F F F F F
24!04000
24004000
34!04000
(
(
(
(
+4004000
+4004000 +4004000
5o##owing were t0e transactions during t0e 1ont0 of =anuar/ C
Materia# urc0ased
Materia#s issued to roduction
As. )4!04000
As. 34004000
5actor/ As. 404000
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. 104000
As. 34004000
As. 24!04000
As. !04000
As. 304000
As. 3+4000
As. 304000
As. 314000
1%2
&ages
5inis0ed Boods roduced
Cost of 5inis0ed Boods "o#d
"a#es
repare t0e fo##owing accounts for t0e
a. "tore Ledger Contro# .@C
As. +4004000
As. 104004000
As. 124004000
1ont0C
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
I//u#tr"ti!n 1:
.s on 31
st
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
"tores Ledger Contro# .@c F F F F F
&or'(in(rogress Contro# .@c F F F F F
Benera# Ledger Contro# .@c F F F F F
T!t"/ F F F F F
!$4000
$04+00
404000
(
(
(
14!$4+00
14!$4+00 14!$4+00
1%%
70e fo##owing transactions too' p#ace in .pri# 200) C
articu#ars As. articu#ars As.
R"A M"teri"/# : Indirect #abour 404000
i3 urc0ased 14!24000 5actor/ over0ead
e-penses incurred
+04000
ii3 Aeturned to supp#iers 44+00 "e##ing and
ad1inistrative
e-penses
$44000
iii3 Issued to production 14!$4+00 Cost of finis0ed
goods transferred
to ware0ouse
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/Ps boo'sC
a3 Benera# Ledger Contro# .@c
b3 "tores Ledger Contro# .@c
c3 &or'(in(progress Contro# .@c
d3 5inis0ed Boods "toc' Contro# .@c
e3 5actor/ Over0ead Contro# .@c
f3 Costing rofit and Loss .@c
g3 7ria# :a#ance as at 30
t0
.pri#4 200)
2M. Co1.4 Oct. 0+4 adapted3
I//u#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 1
st
=anuar/ 2004.
1%)
7ransactions for t0e /ear ended 31
st
Dece1ber4 2004 were as
underC
P"rticu/"r#
As. As.
&ages ? Direct F F F F +)4000
Indirect F F F F ! 4000
urc0ase of 1ateria#s 2on Credit3 F F F F
Materia#s issued to production F F F F
Materia#s for repairs F F F F
Boods finis0ed during t0e /ear 2.t F F F F
cost3
"a#es 2on Credit3 F F F F Cost
of Boods so#d F F F F
roduction over0eads absorbed F F F F
roduction over0eads incurred F F F F
.d1inistration over0eads incurred F F F F
"e##ing over0eads incurred F F F F
a/1ents to Creditors F F F F
a/1ents fro1 Debtors F F F F
Depreciation of Mac0iner/ F F F F
repaid Aent 2inc#uded in factor/ F F F F
over0eads3
G24000
14004000
14104000
24000
241!4000
34004000
24204000
4+4000
404000
124000
144000
14014000
24G04000
14300
300
&rite up accounts in t0e integrated #edger and prepare a tria#
ba#ance. 2M. Co1.4 Mar. 0!4 adapted3
"tores Contro# .@c F F F F F
&or'(in(rogress F F F F F
5inis0ed Boods .@c F F F F F
:an' .@c F F F F F
Creditors .@c F F F F F
5i-ed .ssets .@c F F F F F
Debtors .@c F F F F F
"0are Capita# .@c F F F F F
Depreciation rovision .@c F F F F F
rofit and Loss .@c F F F F F
T!t"/ F F F F F
1+4000
1)4000
134000
104000
(!!400
0
124000
(
(
(
(
(
(
(
+4000
(
(
+04000
!4000
324000
142!4000 142!4000
1%1
I//u#tr"ti!n 3:
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"rticu/"r# As.
"0are Capita# F F F
Aeserves F F F
"undr/ Creditors F F F #ant
and Mac0iner/ F F F
"undr/ Debtors F F F
C#osing "toc' F F F
Cas0 and :an' :a#ances F F F
304004000
204004000
!04004000
!)4!04000
204004000
1!4004000
)4!04000
Tr"n#"cti!n# Durin$ t-e @e"r As.
"tores urc0ased F F F
"tores issued to production F F F
"tores in Rand F F F Direct
&ages incurred F F F Direct
&ages c0arged to production F F F
Manufacturing ,-penses incurred F F F
Manufacturing ,-penses c0arged to F F F
production
"e##ing and Distribution ,-penses F F F
5inis0ed "toc' roduction 2at cost3 F F F "a#es
F F F
C#osing "toc' F F F
a/1ent to Creditors F F F
Aeceipt fro1 Debtors F F F
14004004000
140!4004000
G4!04000
$!4004000
$04004000
304004000
2)4!04000
104004000
14+04004000
24204004000
G4!04000
14104004000
24104004000
2M.Co1. Oct. 0$4 adapted3
I//u#tr"ti!n 7:
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
7ota# wages paid
5actor/ over0eads incurred
5actor/ over0eads c0arged to production
Office over0eads incurred
Office over0eads app#ied to finis0ed goods
"e##ing and Distribution over0eads incurred
T G4+04000
T )4404000
T 44004000
T 34004000
T 34104000
T 24$04000
T 14+04000
T 14404000
T )$4000
"e##ing and Distribution over0eads app#ied to T $04000
cost of sa#es
5inis0ed goods produced
Materia#s issued for construction of :ui#ding
T +4004000
T !04000
2M.Co1. Oct. 0)4 adapted3
I//u#tr"ti!n 28:
Dutta ,nterprises operates an integra# s/ste1 of accounting. Iou
are re;uired to pass t0e =ourna# ,ntries for t0e fo##owing
transactions t0at too' p#ace for t0e /ear ended 30($(2003.
2>arrations are not re;uired3.
P"rticu/"r# As.
Aaw 1ateria#s purc0ased 2!0H on credit3 F F F
Materia#s issued to production F F F &ages
paid 2!0H Direct3 F F F &ages
c0arged to production F F F
5actor/ over0eads incurred F F F
5actor/ over0eads c0arged to production F F F
"e##ing and Distribution over0eads F F F
incurred
5inis0ed goods at cost F F F "a#es
2!0H Credit3 F F F
C#osing "toc' F F F
Aeceipts fro1 Debtors F F F
a/1ents to Creditors F F F
$4004000
44004000
24004000
14004000
+04000
14004000
404000
!4004000
)4!04000
>IL
24004000
24004000
2M.Co1. .pr. 0G4 adapted3

1%3
)
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.
Row to prepare profit state1ents based on 1argina#
costing and absorption costing.
t0e assu1ptions under#/ing C% ana#/sis
Row 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%7
decisions. 70is t0e o#dest and wide#/ used s/ste1. 70is 1et0od is
a#so ca##ed as cost plus costing.
).2 LIMITATIONS OF 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 ter1P Margina# CostP 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%8
).%.1 Deiniti!n "n& Me"nin$C
Margina# costing is a princip#e w0ereb/ variab#e costs are
c0arged to cost units and fi-ed costs attributab#e to t0e re#evant
period is written off in fu## against t0e contribution for t0at period.
Margina# Costing is t0e ascertain1ent of 1argina# cost and t0e
effect on profit of c0anges in vo#u1e or t/pe of output b/
differentiating between fi-ed costs and variab#e cost.
CIM. defines 1argina# as 8t0e accounting s/ste1 in w0ic0
variab#e cost are c0arged to t0e cost units and fi-ed costs of t0e
period are written off in fu## against t0e aggregate contribution.
Margina# Costing is not a distinct 1et0od of costing #i'e job
costing or process costing. It is a tec0ni;ue w0ic0 provides
presentation of cost data in suc0 a wa/ t0at true cost vo#u1e profit
re#ations0ip is revea#ed. <nder t0is tec0ni;ue4 it is presu1ed t0at
costs can be divided in two categories4 i.e.4 fi-ed cost and variab#e
cost. 5i-ed cost is c0arged to contribution of t0e period in w0ic0 it
is incurred and is considered period cost.
).%.2 Fe"ture# ! *"r$in"/ 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$in"/ c!#tin$
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/.
g. It provides usefu# data for t0e 1anage1ent in deter1ination of
po#icies regarding future
0. 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.
g. Cost co1parison of two jobs wi## be difficu#t. 70oug0
1argina# costing 1a/ be sa1e for bot0 t0e jobs.
0. &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$in"/ c!#tin$
1..## costs are c0arged to t0e cost of
production
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.
3. 70e difference between sa#es and
tota# cost constitute profit.
1. On#/ variab#e cost is c0arged to
cost of production. 5i-ed costs are
recovered fro1 contribution.
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
contribution w0en fi-ed cost is
deducted fro1 contribution4 it
resu#ts in profit.
1)1
4. 70e apportion1ent of fi-ed costs
on an arbitrar/ basis gives rise to under
or over absorption of over0eads.
!. Costs are c#assified according to
functiona# basis suc0 as production cost4
ad1inistration cost4 se##ing and
distribution cost.
4. .s on#/ variab#e costs are
c0arged to products4 it does not
give rise to over or under
absorption of over0eads
!. Costs are c#assified according to
variabi#it/.
).1 CONTRIBUTION ANAL5SIS
).1.1 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"/e#>V"ri",/e c!#t
Or
C!ntri,uti!nH FKP
).1.2 C!#t V!/u*e (r!it 9CVP: An"/@#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
v. *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 6V!/u*e 9P.V: R"ti! ": H C !n tr i,u ti!n
S"/e#
,:H D iere n ce in P r ! it#
Dierence in #"/e#
i: P.V R"ti!H C !n tr i,u ti!n 0 100
S"/e#
ii: P.V R"ti!n H100N>>M"r$in"/ C!#tN
1)2
rofit at a given sa#es vo#u1e
Contribution D "a#es - @% Aatio
rofit D Contribution( 5i-ed Cost
rofit at a given sa#es #eve# D 2"a#es Aevenue - @v Aatio3(
5i-ed cost.
).1.% Bre"4e'en P!int:
70e point w0ic0 brea's t0e tota# cost and t0e se##ing price
even#/ to s0ow t0e #eve# of output or sa#es at w0ic0 t0ere s0a## be
neit0er profit nor #oss4 is regarded as brea' even point. .t t0is point4
t0e inco1e of t0e business e-act#/ e;ua#s its e-penditure. If
production is en0anced be/ond t0is #eve#4 profit s0a## accrue to t0e
business4 and it is decreased fro1 t0is #eve#4 #oss s0a## be suffered
b/ t0e business.
:rea'even point 2in units 3D 5 i- ed c o st
Contribution per unit
:rea'?even oint 2in As.3 D 5 i- ed Co st - sa#es
).1.) M"r$in ! #"et@:
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/
Margin of "afet/ can
fo##owing for1u#aC
D 7ota# "a#es(:rea' even sa#es
a#so be co1puted according to t0e
Margin of safet/ D >e t pro fit
@% Aatio
Margin of safet/ can a#so be e-pressed as a percentage of
sa#esC
D Marg in o f " a fe t/ -100
7ota# "a#es
13 Define t0e fo##owing ter1s.
a3 .bsorption Costing
b3 Margina# costing
c3 Contribution
d3 :rea' ,ven oint
e3 Margin of "afet/
1)%
23 Bive 5or1u#as
a3 Contribution
b3 rofit %o#u1e Aatio
c3 rofit at a given sa#es #eve#s
d3 :rea' ,ven point in units
e3 Margin of safet/.
).2 SOLVED ILLUSTRATIONS
I//u#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
%ariab#e cost D
roduction D
"a#es D
As. 14 204000
As. $0 per unit
104000 units
)4000 units F As. 100 unit
"toc' is va#ued on t0e basis of 5I5O
S!/uti!n:
INCOME STATEMENT 9Un&er A,#!r(ti!n C!#tin$:
"a#es 2)4000 units F As. 100 per unit3
Less C Cost of Boods Manufactured C
%ariab#e cost 2104000 unit F As. $0 per unit3
R#.
$4004000
R#.
)4004000
2 As. 14204000 3 14204000
5i-ed cost 2 104000 units D As. 12 per unit 3 )4204000
)04000
.dd %a#ue of Opening "toc'
C
Less %a#ue of C#osing "toc' 244000 units F As. )2
C per unit3
Pr!it
)4G04000
24++4000
!4024000
1;87;000
1))
INCOME STATEMENT 9Un&er M"r$in"/ C!#tin$:
R#. R#.
"a#es )4004000
%ariab#e cost $4004000
.ddC %a#ue of Opening "toc' 214000 units F As. !0
per unit3
!04000
$4!04000
Less C %a#ue of C#osing "toc' 244000 units F As. $0
per unit3
24404000
44104000
Contribution 24G04000
Less C 5i-ed Cost 14204000
Pr!it 1;30;000
I//u#tr"ti!n> 2
Iour 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 $.!0 and standard
fi-ed factor/ cost per unit is As. 1.!0. 7ota# fi-ed se##ing and
ad1inistration over0ead a1ounted to As. 104000. 70e co1pan/
se##s its product at As. 10 per unit.
repare Inco1e "tate1ents under .bsorption Costing and
Margina# Costing. ,-p#ain t0e reasons for difference in profit4 if
an/.
S!/uti!n:
INCOME STATEMENT 9A,#!r(ti!n C!#tin$:
R#. R#.
"a#es 2104000 units F As. 103 14004000
%ariab#e factor/ cost 2114000 units F As.
$.!03
)14!00
5i-ed factor/ cost 2114000 units F As. 1.!03 1$4!00
++4000
+4000
1)1
.dd C Opening stoc' 214000 units F As. +3 G$4000
1$4000
Less C C#osing sto' 224000 units F As. +3 +04000
Less C Over(absorption 214000 units F As. 1.!03 14!00
)+4!00
.dd C "e##ing and ad1inistration over0ead 104000
7ota# cost ++4!00
Pr!it 11;100
INCOME STATEMENT 9M"r$in"/ C!#tin$:
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 $4!00
)+4000
Less C C#osing "to' 224000 units F As. $.!03 134000
%ariab#e cost of 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
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.
.bsorption Costing +4000
Margina# Costing $4!00
((((((((
14!00
((((((((
>et Difference D As. 34000 ? As. 14!00
C#osing "toc'
As.
1$4000
134000
(((((((((
34000
((((((((((
As. 14!00
((((((((((
1)2
I//u#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!/uti!n C
"e##ing rice
Le## C %ariab#e Cost
Contribution
@% Aatio
:rea' ,ven "a#es 2As.3
As. er <nit
20
10
((((
10
Contribution 10
D (((((((((((((( D (((( D
0.! "a#es 20
5i-ed Cost
D ((((((((((((((
@% Aatio
As. 44004000
D ((((((((((((((((
0.!
D As. +4004000
5i-ed Cost
:rea' ,ven "a#es 2<nits3 D (((((((((((((((((((
Contribution er <nit
D As. 44004000
((((((((((((((((((
As. 10
D 404000 <nits
Margin of "afet/ "a#es D
Margin of "afet/ 2<nits3 D
:udgeted Output? :rea' ,ven "a#es
+04000 ? 404000 D 404000 <nits
Margin of "afet/ "a#es 2As.3 D Margin of "afet/ <nits - "e##ing
rice <nit
D 404000 - 10
D As. 44004000
1)3
I//u#tr"ti!n> ) :
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!/uti!n :
.ctivit/
Leve#
articu#ars )!H As. +0H
As.
100H
As.
"a#es 14+)4!000 24004000 24!04000
Le## : V"ri",/e C!#t :
Direct Materia# 230H3 !$42!0 $04000 )!4000
Direct Labour 220H3 3)4!00 404000 !04000
5actor/ Over0eads 210H3 1+4)!0 204000 2!4000
.d1inistration Over0eads 21!H3 2+412! 304000 3)4!00
T!t"/ V"ri",/e E0(en#e# 1;)0;221 1;10;000 1;73;100
Contribution 4$4+)! !04000 $24!00
Le## : Fi0e& C!#t 304000 304000 304000
9%: Pr!it 12;731 20;000 %2;100
91: BEP Fi 0e & C ! #t %0;000 %0;000 %0;000
9in R#.: P.V R"ti! 0.2! 0.2! 0.2!
14204000 14204000 14204000
C !n tr i,u ti!n 4$ 4+)! !0 4000 $2 4!00
92: P.V R"ti! S"/e# 14+)4!00 24004000 24!04000
D 0.2! D 0.2! D 0.2!
1)7
I//u#tr"ti!n >1 :
Co1pan/ K and Co1pan/ I4 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!*("n@
ICJ
C!*("n@
I5J
P"rticu/"r# R#. R#. R#. R#.
"a#es $4004000 $4004000
Less C %ariab#e Cost 44+04000 44004000
5i-ed Cost $04000 !4404000 14404000 !4404000
rofit $04000 $04000
5!u "re re?uire& t! :
2i3 Ca#cu#ate t0e :rea'(,ven oint for eac0 co1pan/.
2ii3 Ca#cu#ate t0e sa#es vo#u1e at w0ic0 eac0 of t0e two
co1panies wit0 profit of
As. 204000.
2iii3 Ca#cu#ate 1argin of "afet/ for bot0 t0e co1panies.
M"r$in"/ C!#t S-eet
P"rticu/"r# C 5
"a#es
Le## : %ariab#e Cost
Contribution
Le## : 5i-ed Cost rofit
$4004000
44+04000
$4004000
44004000
14204000
$04000
24004000
14404000
$04000 $04000
C ontr i buti o n
213 @% Aation D "a#es
K
1420 4 000
$4004000
D 0.2
I
2400 4 000
$4004000
D 0.33
5i-ed C ost
223 :, 2As.3 D @% Aatio
K
$04 0 00
0.2
D As. 34004000
I
1440 4 000
0.33
D As. 44204000
1)8
5i - ed cost J 7arget ro f it
233 "a#es re;uited to earn a desired profit D @ % Aatio
K
$040 0 0 J 20 4 000
0.2
I
1440 4 000 J 2 0 4000
0.33
D As. 44004000 D As. 44+04000
243
MO" 2As.3 D
rofit
@ % Aatio
K
$040 0 0
0.2
D As. 34004000
I//u#tr"ti!n> 2.
I
$040 0 0
0.33
D As. 14+04000
2a3 K 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/ S
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/P.
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.
Iou 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.
110
2f3 Co11ent on t0e econo1ic soundness of t0e fo##owint
fir1s C
Fir* A Fir* 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 reduction in se##ing price
SOLUTION
Contribution As. 24004000
2a3 @% Aatio ((((((((((((((((( K 100 ((((((((((((((((((( K 100 D 2!H
"a#es As. +4004000
rofit
Margin of "afet/ ((((((((((
@% Aatio
As. 14!04000
(((((((((( D R#. 2;00;000
2!H
2b3 Margin of "afet/ rofit
@ % Aatio
or rofitD Margin of "afet/ - @% Aatio D As. 24404000 - 30H D R#. 32;000
Margin o f "afe t /
40H
As. 2 4 404 0 00
D 40H D R#. 2;00;000
Contribution D "a#es - @% Aatio D As. $4004000 - 30H D R#. 1;70;000
5i-ed cost D Contribution ? rofit D As. 14+04000 ? As. )24000
D R#. 1;07;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
D As. 24)04000 ? As. 140+4000 D R#. 1;22;000
2c3 .verage cost at +4000 units vo#u1e
D "e##ing price per unit J #oss co1ponent per unit D As. 1! J 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
111
C0ange in tota# c o st As. $040 0 0
%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
D As. 14204000
Contribution
@% Aatio "a#es K 100
As. 10 2
As. 1! K 100 D $$ 3 H
5i-ed cost
:rea' ,ven oint 2Aupees3 @ % Aatio
D As. 14204000 D R#. 1;70;000
$$ 2 @ 3 H
:rea' ,ven oint 2in units3 5i-ed Cost As. 14 2 040 0 0
Contribution per unit As. 10 D 12;000 unit#
A/tern"ti'e S!/uti!n :
&e 'now t0e fo##owing re#ations0ip C
"a#es D 7C J @L C
As. 1! D - J As. 2!3 C
As. 20 D -
"a#es D 7C J @L
As. 1! D - J As. 4
As. 11 D -
7C D +4000 - As. 20 per unit D 14$04000V
7C D 204000 - As. 11 per unit D As. 24204000
Diff e ren c e in c o st
%ariab#eCost per unit Difference in .ctivit/
D As. ! per unit
As. $ 0 4000
124000 units
7C D 5i-ed Cost J %C per unit - .ctivit/
As. 14$04000 D - J As. ! - +4000
As. 14204000 D -
5i-ed cost As. 142040 0 0 D 124000 units
:.,.. 2unit3 Contribution per unit 2As. 1! ? As. !3
"
:.,.. 2"a#es As.3 D 5i-ed Cost - C er unit
D As. 14+04000
1!
As. 14204000 - 10
2d3 "e##ing price
Less C Margina# cost
Contribution
@% Aatio
Margin of "afet/
As.
10
+
2
(((
As. 2
As. 10 - 100 D 20H
rofit As. 30 4 000
@% Aatio 20H
R#. 1;10;000
112
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
"a#es at :rea' ,ven oint D 304004000
204004000
(((((((((((((
@% Aatio !0H
70erefore4 Contribution or fi-ed ,-penses at :.,..
2!0H of As. 3040040003 D As. 1!4004000
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
1003
Less C 5i-ed ,-penses
rofit
D1!4004000
D104004000
2f3
:rea' ,ven "a#es
5i-ed cost or Contribution
2.t :.,.. contribution is
,;ua# to 5i-ed Cost3
Fir* A
24004000
1400400
!0H
Fir* B
24004000
$04000
30H
Cont r ibut i on K 100 D
@% Aatio D "a#es
14 0 04 0 00 - 100
24004000
$04000
24004000
As.
Current "a#es %o#u1e 34004 0 00
Contribution on Current "a#es %o#u1e 14!04000
2i.e. "a#es - @% Aatio3 234004000 - !0H3
Less C 5i-ed cost 14004000
rofit !04000
As.
3400 4 000
G04000
234004000 - 30H3
$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. Riger 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.
11%
2g3 "uppose se##ing price per unit is Ae. 1 and units so#d are 100.
resent
osition
.fter reduction of
10H in se##ing
price
.fter
reduction of
20H in se##ing
price
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#e s - re s en t Con tri b u tion >ew
Contribution
H Increase in "a#es
G0
30 - 40
D As. 120
20H
+0
20 - 40
D As. 1$0
$0H
I//u#tr"ti!n> 3 :
. 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 S
2ii3 Deter1ine profit or #oss on a present sa#es vo#u1e of
As. +04004000.
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 S
S!/uti!n
C0ange in pro fit
C0ange in sa#es - 100
A s. 4 420 4000
As. 1!4004000 - 100 D 2+H
2i3 :rea' ,ven oint D 5 i-ed c o st
@% ratio
A s. 14 400 4000
2+ - 100
D R#. 10;00;000
2ii3 rofit D 2"a#es - @% ratio3 ? 5i-ed cost
2As. +04004000 - 2+H 3 ? As. 144004000
D R#. 7;)0;000
11)
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
10H reduction in price are C
As.
"a#es 2As. $04004000 ? 10H3 !44004000
Contribution As. 104+04000
2As. 1$4+04000 ? 10H of As. $040040003
A s. 10 4 + 0 4000
@% ratio As. !44004000 - 100 D 20H
Con tribu tion D
Ae;uired "a#es %o#u1e D @% Aatio
A s. 1$ 4+0 4000
20H
D R#. 7);00;0
).3 E0erci#e
).3.1 Si*(/e 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.
!. &0at is Contribution S Row is it different fro1 profit S
$. Bive Margina# Costing ,;uation.
). Bive t0ree wa/s b/ w0ic0 @% Aatio can be i1proved.
+. &0at is Margin of "afet/S Row can it be i1provedS
G. &0/ are @% Aatio and Margina# of "afet/ ca#cu#atedS
10. Distinguis0 :, c0arts fro1 @% c0arts.
11. &rite a note on Cas0 :rea'(even c0art.
).3.2 O,Decti'e ?ue#ti!n#
5ro1 t0e fo##owing c0oose t0e 1ost appropriate answerC
i3 Contribution 1argin is a#so 'nown as
a3%ariab#e cost
b3 Bross rofit
c3 >et Inco1e
ii3 eriod cost 1eans
a3%ariab#e cost
b3 5i-ed cost4
c3 ri1e cost
iii3 70e brea' even point is t0e point at w0ic0C
a370ere is no profit no #oss
111
b3 Contribution 1argin is e;ua# to tota# fi-ed costC
c3 7ota# revenue is e;ua# to tota# costC
d3 .## of t0e above
iv3 roduction cost under 1argina# costing inc#ude
2a3 ri1e cost on#/
2b3 ri1e cost and variab#e over0ead
2c3 rice cost and fi-ed over0ead
2d3 rice cost4 variab#e over0ead and fi-ed over0ead
v3 One of t0e pri1ar/ difference between 1argina# costing and
absorption costing is regarding t0e treat1ent of C
2a3 Direct 1ateria# 2c3 5i-ed over0ead
2b3 %ariab#e over0ead 2d3 Over0ead costs
vi3 eriod costs are C
2a3 %ariab#e costs
2b3 5i-ed cost
2c3 ri1e cost
2d3 Over0ead cost
vii3 .bsorption costing differs fro1 1argina# costing in t0e
2a3 5act t0at standard costs can be used wit0 absorption
costing but not wit0 1argina# costing.
2b3 .1ount of fi-ed costs t0at wi## be incurred
2c3 Lind of activities for w0ic0 eac0 can be use
2d3 .1ount of costs assigned to individua# units of
products.
viii37o obtain t0e brea'(even point in rupee sa#es va#ue4 tota#
fi-ed costs are divided b/ C
2a3 %ariab#e cost per unit
2b3 Contribution 1argin per unit
2c3 5i-ed cost per unit
2d3 rofit @ vo#u1e ration.
i-3 70e brea'(even point is t0e point at w0ic0
2a3 70ere is 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.
-3 Margin of safet/ is referred to as C
2a3 ,-cess of actua# sa#es over fi-ed e-penses
2b3 ,-cess of actua# sa#es over variab#e e-penses
2c3 ,-cess of actua# sa#es over brea'(even sa#es
2d3 ,-cess of budgeted sa#es over fi-ed costs.
An#Aer : i 2b34 ii2a34 iii 2a34 iv 2b34 v2c34 vi 2c34 vii 2d34 viii2d34 i- 2d34 -2c3.
112
).3.% E##"@ t@(e ?ue#ti!n#C
13 &0at do /ou 1ean b/ differentia# costs and incre1enta#
revenueS
23 "tate t0e 1anageria# decision w0ic0 can be ta'en wit0 t0e
0e#p of Differentia# cost .na#/sisS
33 ,-p#ain t0e i1portance of t0e 1argina# cost tec0ni;ue in
1anageria# decision 1a'ing.
43 In t0e conte-t of cost vo#u1e profit ana#/sis4 w0at is 1eant
an/ #i1iting factorS Discuss its uti#it/.
!3 ,-p#ain brief#/ t0e circu1stances under w0ic0 se##ing prices
be#ow 1argina# cost 1a/ be justified.
$3 Row does cost vo#u1e profit ana#/sis 0e#p contro# of costS
)3 8Cost %o#u1e rofit ana#/sis is 0e#pfu# for profit p#anning9.
,-p#ain.
+3 &0at is Tana#/sis of 1argin of contributionP S Discuss t0e
need for it.
G3 Define 1argina# costing4 &0at are t0e features of 1argina#
costing S
103 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.
113 In t0e conte-t of cost(vo#u1e profit ana#/sis4 w0at is 1eant
b/ #i1iting factorS Discuss its uti#it/.
123 Define cost(vo#u1e profit ana#/sis and e-p#ain its 1ain
features and usefu# contribution to t0e 1anage1ent in
decision 1a'ing.
133 Row does cost(vo#u1e profit ana#/sis 0e#p contro# of costS
).3.) Pr"ctic"/ Pr!,/e*#
I//u#tr"ti!n 1:
Iou 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
13 a3 . %. Aatio.
b3 :rea' even oint.
c3 Margin of safet/ in 2002.
d3 rofit w0en sa#es are As. 14 204000.
e3 "a#es re;uired earning a profit of As. )!4000
23 Ca#cu#ate t0e revised . %. ratio4 brea' even point in eac0 of t0e
fo##owing cases C
a3 Decrease of 10H in se##ing price.
b3 Increase of 10H in variab#e costs.
c3 Increase of sa#es vo#u1e to 4000 units and increase in fi-ed
costs b/ As. 404000.
113
d3 Increase of As. 1+4000 in fi-ed costs.
e3 Increase of 20H in se##ing price and increase of As. +4000 in
fi-ed costs.
33 70e sa#es and cost of sa#es during t0e two /ears were as fo##owsC
Iear "a#es As. Costs of "a#es As. <nits
2001 F F F F 2002
F F F F
$4004000
)4!04000
!4$04000
$4+04000
24400
34000
2M.Co1.4 .pr. 034 .dapted3
2An#: @% Aatio 20H4 5i-ed Cost( As. +040003
I//u#tr"ti!n 2 :
Iou are given t0e fo##owing infor1ation for t0e ne-t /ear.
Iear <nits
"a#es 2104000 units3 F F F F F
%ariab#e Cost F F F F F 5i-ed
Cost F F F F F
14204000
4+4000
$04000
13 5ind out t0e . %. Aatio4 :rea'(even point and t0e 1argin of
safet/.
23 ,va#uate t0e effect of fo##owing on . %. Aatio4 :rea'(even
point and t0e 1argin of safet/.
a3 10H increase in %ariab#e Cost.
b3 10H decrease in %ariab#e Cost.
c3 10H increase in 5i-ed Cost.
d3 10H decrease in 5i-ed Cost.
e3 10H increase in 0/sica# "a#es %o#u1e.
f3 10H decrease in 0/sica# "a#es %o#u1e.
g3 !H increase in "e##ing rice.
03 !H decrease in "e##ing rice.
i3 10H increase in "e##ing rice and 10H decrease in 0/sica#
"a#es %o#u1e.
j3 !H decrease in "e##ing rice and 10H increase in 0/sica#
"a#es %o#u1e.
2M.Co1.4 Oct G$4 .dapted3
2.nsC @% Aatio $0H4 :,( As.140040004 MO"( As. 2040003
117
I//u#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 F F F F F Less C
%ariab#e Cost F F F F F
104004000
44004000
104004000
$4004000
F F F F F Less C
5i-ed Cost F F F F F
$4004000
34004000
44004000
14004000
rofit F F F F F 34004000 34004000
13 Ca#cu#ate Contribution @ "a#es ratio for eac0 co1pan/.
23 Ca#cu#ate :, for eac0 co1pan/.
33 rofits of eac0 co1pan/ if sa#es increase b/ 20H.
43 rofits of eac0 co1pan/ if sa#es decrease b/ 20H.
!3 Co11ent on t0e profitabi#it/ of bot0 co1panies.
2M.Co1. .pr 044 .dapted3
9An#: @% Aatio .: Ltd. $0H4 LM Ltd. 40H :,( .: Ltd. As. !40040004 LM.Ltd(
As. 24!040003
I//u#tr"ti!n ):
70e %ija/a ,#ectronics Co. furnis0es /ou t0e fo##owing inco1e
infor1ation of t0e /ear 1GG!.
articu#ars 5irst Ra#f "econd Ra#f
"a#es F F F F F rofit
F F F F F
440!4000
104+00
!4134000
324400
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. @% Aatio
b3 5i-ed Cost
c3 :rea'(even point
d3 %ariab#e Cost for first and second 0a#f of t0e /ear
e3 70e a1ount of rofit or Loss w0ere sa#es are As. 34244000.
f3 70e a1ount of sa#es re;uired to earn a profit of As. !44000.
2M.Co1. .pr 0+4 .dapted3
9An#: @% Aatio 20H4 5i-ed Cost As. 14 4040004 :,( As. )4 0240003
118
I//u#tr"ti!n 1:
>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
i3 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 aboveS
2M.Co1. Oct 044 .dapted3
9An#: @% Aatio )1.43H :,( 14000 C0airs3
I//u#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
As. 1!4000
As. 344000
As. 14 !04000
As. $ per unit
i3 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
a3 Decrease of 10H in t0e se##ing price
b3 Increase of 10H in t0e variab#e costs
c3 Increase of sa#es vo#u1e b/ 24000 units
d3 Increase of T $4000 in fi-ed costs.
2M.Co1. Oct 0!4 .dapted3
9An#: @% Aatio 40H4 :,( As.+!4 0004 MO"( As. $!40003

120
1
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
1.0 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
costPs3 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
.3 De#eting a seg1entV b3 specia# se##ing price decisionsV
c3 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 co1paniesP 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
1.1 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.
1.2 LONG 6TERM 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
1.% APPLICATION S OF 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.
1.%.1 M"4e !r Bu@ &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
F"ct!r# t-"t in/uence *"4e !r ,u@ &eci#i!n:
In a 1a'e or bu/ decision t0e fo##owing cost and non cost
factors 1ust be considered specifica##/.
": 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.
!. .n/ transportation invo#ved due to t0e #ocation of production
$. Cost of ac;uiring specia# 'now 0ow re;uired for t0e ite1.
,: Re(/"cin$ e0i#tin$ *"c-iner@ Ait- neA *"c-iner@
"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
i3 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
i3 "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: A/tern"ti'e u#e ! (/"nt !r (r!&ucti'e "ci/it@>
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.
&: Pr!&uct Mi0; Pr!it (/"nnin$ "n& (r!it *"0i*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 iv3rices to be c0arged and so on. Margina#
costing tec0ni;ues guide t0e 1anage1ent in t0is regard.
12%
e: A'!i&",/e "n& un"'!i&",/e 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.
: Re/e'"nt C!#t "n& Irre/e'"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.
$: Pr!it",i/it@ ! t-e &e("rt*ent ! r (r!&uct#P
70e preparation of a depart1enta# profit and #oss account
under 1argina# costing is usefu# in deter1ining w0ic0 depart1ent is
1a'ing profit and w0ic0 depart1ent is incurring a #oss. 70is
enab#es t0e 1anage1ent to decide w0et0er a particu#ar
depart1ent4 1ust continue operation or it s0ou#d be e#i1inated.
70e decision is ta'en b/ referring to t0e contribution 1ade or #oss
incurred b/ t0e depart1ent or product.
1.%.2 Se//in$ "t !r ,e/!A *"r$in"/ c!#tC
"o1e ti1e it 1a/ beco1e necessar/ to se## t0e goods at a
price be#ow t0e 1argina# cost so1e suc0 situations are as fo##owsC
a3 &0ere 1ateria#s are of peris0ab#e nature
b3 &0ere #arge ;uantities of stoc' are accu1u#ated and w0ose
1ar'et prices 0ave fa##en. 70is wi## save t0e carr/ing cost of stoc's.
c3 In order to popu#ari6e a new product.
d3 In order to increase sa#es of t0ose products 0aving 0ig0er 1argin
or profits.
If t0e se##ing price is be#ow t0e tota# cost but above t0e
1argina# cost4 t0e contribution wi## #eave on under recovering of
fi-ed cost. If t0e se##ing price fi-ed is e;ua# to 1argina# cost4 t0ere
wi## be a #oss w0ic0 is e;ua# to fi-ed cost. Rowever4 w0ere t0e
se##ing price is fi-ed is #esser t0an t0e 1argina# cost4 t0e #oss wi## be
greater t0an fi-ed cost.
1.%.% Deter*in"ti!n ! #e//in$ (rice "n& '!/u*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.
1.%.) S-ut D!An !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
i3 ,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.
v3 La/ off or retrenc01ent co1pensation to wor'ers
13 &0/ t0e goods are so#d at or be#ow t0e Margina# CostS
23 Distinguis0 between
a3 Long 7er1 Decisions and s0ort 7er1 Decisions.
b3 Ae#evant Cost and Irre#evant cost
1.) SOLVED PROBLEMS
I//u#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.
"a#es
Cost of sa#es at
purc0ase price
.rea of storage 2s;. ft.3 >o. of
parce#s sent
>o. of invoices sent
Pr!&uct#
A B C D
R#. R#. R#. R#.
34004000
24004000
!4004000
44!04000
24!04000
24104000
44!04000
242!4000
!04000
14004000
+04000
404000
14!04000
14404000
+04000
)!4000
$04000
304000
14)!4000
14204000
121
Its over0ead cost and basis of a##ocation are C
Fi0e& c!#t# R#. B"#i# !
"//!c"ti!n
Aent and insurance
Depreciation
"a#es1anPs sa#aries and
e-penses
.d1inistrative wages and
sa#aries
%ariab#e costs
ac'ing4 wages and
1ateria#s
Co11issions
"tationer/
304000
104000
$04000
!04000
";. ft.
arce#
"a#es vo#u1e
>o. of invoices
20 p. per parce#
4 H of sa#es
10 p. per invoice
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.
MI.C.&...4 InterN
S!/uti!n:
2a3 rofit and Loss "tate1entC
Pr!&uct
A B C D T!t"/
R#. R#. R#. R#. R#.
"a#es 2.3
%ariab#e costs C
Cost of sa#es at
urc0ase rice
Co11ission F 4H of sa#es
ac'ing4 wages E
1ateria#s
F 20 p. per parce#
34004000 !4004000 24!04000 44!04000 1!4004000
24004000
124000
204000
44!04000
204000
304000
24104000
104000
1!4000
242!4000
1+4000
3!4000
104+!4000
$04000
14104000
"tationer/ F 10 p. per invoice
7ota# variab#e costs 2:3
+4000 144000 $4000 124000 404000
24404000 !4144000 24414000 24G04000 124+!4000
Contribution 2.3 ? 2:3 $04000 2(3
144000
G4000 14$04000 241!4000
122
5i-ed Costs C
Aent and insurance F 1!
p. per s;. ft.
Depreciation F 2 p. per parce#
"a#es1enPs sa#aries E
e-penses
F 4 p. per Ae. of sa#es
.d1inistrative wages E
"a#aries F 12.! p. per invoice
7ota# 5i-ed Cost 2 I 3 rofit E
Loss 2 K 3?2 I 3
ercentage of rofit or #oss on
sa#es
)4!00
24000
124000
104000
$4000
34000
204000
1)4!00
124000
14!00
104000
)4!00
44!00
34!00
1+4000
1!4000
304000
104000
$04000
!04000
314!00 4$4!00 314000 414000 14!04000
2+4!00 2(3
$04!00
2(3
224000
141G4000 $!4000
G.! 2(3 12.1 2(3 +.+ 2$.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
Pr!&uct B
i
&i#c!ntinue&
R#.
Pr!&uct C
i
&i#c!ntinue&
R#.
roduct .
roduct :
roduct C
roduct D
7ota# Contribution Less C
5i-ed Costs
7ota# rofit
$04000
((G4000
14$04000
$04000
((
2(3 144000
14$04000
242G4000
14!04000
240$4000
14!04000
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.
I//u#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.
123
D!// E#ti*"te&
&e*"n&
St"n&"r&
M"teri"/
c!#t
9R#.:
St"n&"r&
L",!ur
C!#t 9R#.:
E#ti*"te& #"/e
(rice (er unit
9R#.:
. : C D
Dress Lit
!04000
404000
3!4000
304000
24004000
20
2!
32
!0
1!
1!
1!
1+
20
!
$0
+0
100
120
!0
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/Ps 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.
Iou are draw a conservative esti1ate of t0e /earPs profitabi#it/.
MC...4 InterN
S!/uti!n :
"tate1ent of conservative esti1ate of t0e /earPs profitabi#it/
D!// A D!// B D!// C D!// D Dre## =it
,sti1ated De1and 2<nits3
"e##ing rice per unit 2.3
!04000
As.
$0
404000
As.
+0
3!4000
As.
100
304000
As.
120
24004000
As.
!0
Margina# cost per unit Materia#
Cost Labour Cost %ariab#e
Cost
240H of #abour cost3 7ota#
1argina# cost C 2:3
Contribution per unitC 2C3 D M2.3 ?
2:3N
7ota# contribution on
,sti1ated de1and
20
1!
$
2!
1!
$
32
1+
).20
!0
20
+
1!
!
2
41 4$ !).20 )+ 22
1G 34 !).20 )+ 22
G4!04000
2!04000 -
As. 1G3
134$04000
2404000 -
As. 343
144G+4000
23!4000 -
As.42.+0
124$04000
2304000 -
As. 423
!$4004000
224004000
- As. 2+3
127
Less C Discount on dress 'its
>et contribution
7ota# net contribution 2As.3
LessCOverti1e re1iu1 2As.3
23+4$$$ 0rs - As. 1!3 Less C 5i-ed
Cost 2As.3
rofit 2As.3
((
G4!04000
((
134$04000
((
144G+4000
((
124$04000
1!4!04000
404!04000
G14+14000
!4)G4GG0
304004000
!!43+4000
Y 7ota# #abour 0ours re;uired to 1eet esti1ated de1and of four
t/pes of do##s and t0eir dress 'it.
D!//
9":
E#ti*"te&
&e*"n&
9Unit#:
9,:
St&. /",!ur ti*e
P.U.
9St&. /",!ur c!#t
Q 11:
9c:
T!t"/
/",!ur
-!ur#
9&: H 9,: 6
9c:
. : C D
Dress 'it
!04000
404000
3!4000
304000
24004000
1 0r.
1 0r.
1.2 0rs
1.3333 0rs.
0.33333 0rs.
!04000.00
404000.00
424000.00
404000.00
$$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.
128
I//u#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"rticu/"r#
"a#es 2per unit3
Consu1ption of 1ateria#
Materia# cost
Direct wage cost
Direct e-penses
Mac0ine 0ours used
Over0ead e-penses
5i-ed
%ariab#e
Pr!&uct A
As. 100
2 'gs
As. 10
As. 1!
As. !
3 0rs
As. !
As. 1!
Pr!&uct B
As. 120
3 'gs
As. 1!
As. 10
As. $
2 0rs.
As. 10
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.
MI.C.&...4 InterN
S!/uti!n :
2a3 Margina# Cost "tate1ent
roduct
. :
As @ er
<nit
As @ er
<nit
"e##ing rice Direct
Materia#s Direct &ages
Direct ,-penses
%ariab#e Over0eads
Margina# Cost Contribution
1argin @% ratio
Contribution per 'g. of 1ateria#
Contribution per 1ac0ine 0our
100
10
1!
!
1!
120
1!
10
$
20
4!
!!
!1
$G
!! H
2).!
1+.3
!).! H
23
34.!
130
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 Q 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 A s. $G 4000
7ota# A s. 2 4 $1 4 ! 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.
I//u#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.
131
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
! 104000
+ 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.
S!/uti!n :
roposa# 2a3
resent J
e-port
Leve#
order
roposa# 2b3
resent J
e-port
Leve#
order
roposa# 2c3
rice reduction over
present #eve#s
I or II or III
"e##ing price per
unit 2As.3 Less C
%ariab#e cost
er unit 2As.3
)!
!0
$0
!!
)!
!0
!!
!0
)0
!0
$)
!0
$4
!0
Contribution per
unit 2As.3
"a#es 2inunits3
Contribution 2As. In
#a'03 7ota#
Contribution 2As. In
#a'0s3
2!
404000
10
!
304000
1.!
2!
404000
10
!
304000
1.!
20
!04000
10
1)
)04000
11.G
14
)!4000
10.!
11.! 11.! 10 11.G 10.!
N!te: 5i-ed cost 0as been e-c#uded as t0e/ wou#d re1ain t0e
sa1e under a## a#ternatives.
132
C!**ent < A&'i#e:
213 roposa# to se## )04000 units 2under proposa# OCP 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/. Rowever4 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.
I//u#tr"ti!n > 1
"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. Rowever4 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. Rowever 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#/.
13%
S!/uti!n :
,-isting
osition
wit0out
e-port
order
,-port
order
differentia#
figures
roposed
position
wit0 e-port
order
<nits for 2 1ont0s 2nos.3
"e##ing price per unit "a#es
2.3
14200
As.
1!0
14+04000
As.
100
$04000
As.
((
24404000
Direct Materia#F As. $0 p.u. Direct
Labour F As. 30 p.u. 5actor/
Over0eads
"pecia# pac'ing4 #abe#ing etc. "e##ing
E .d1in. Over0eads F As. 1! p.u.
2for 2 1ont0s3 7ota# Cost 2:3
rofit 2 . ? : 3
)24000
3$4000
3$4000Y
((
1+4000
3$4000
1+4000
((24000
((
140+4000
!44000
3$4000
24000
1+4000
14$24000 !$4000 241+4000
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.
Rence4 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!nc/u#i!n:
70e e-port order s0ou#d be accepted as it wou#d give
additiona# profit of As. 4000.
I//u#tr"ti!n: 2
K 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.
10H 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.
13)
Ot0er variab#e costs of t0e production process are as 22.32
#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$0.
Iou are re;uired to co1pute t0e cost per tone and net profit
earned in respect of eac0 factor/.
Can /ou suggest an/ ot0er a#ternative production p#an for
bot0 t0e factories wit0out an/ c0ange in present tota# output of
14+04000 tons w0ereb/ t0e co1pan/ 1a/ earn opti1u1 profit.
MC... 5ina#N
S!/uti!n :
"tate1ent of cost per tone and net profit earned in respect of eac0
factor/
Luc4n!A Pune
resent roduction 2tones3
Cost of raw 1ateria# 2As. In #a'0s3 2Aefer
to wor'ing note 13
Ot0er variab#e costs 2As. In #a'0s3 5i-ed
costs 2As. In #a'0s3
7ota# cost 2As. In #a'0s3
Cost per ton2As.3Ctota# cost@production in
tones
"e##ing price 2As.3 per tone
>et profit per ton 2As.3 C 2"..?cost per ton3
7ota# net profit 2As. In #a'0s3
)4200
R#.
!G.04
22.32
1+.00
GG.3$
143+0
144!0
)0
As.2)0 - )4200
tons3
R#.
+).4+
32.G4
24.+4
14!.2$
1434!
144$0
11!
2As. 11! -
104+00 tons3
7ota# profit of t0e co1pan/ 2As. !.04 #a'0s J As. 12.42 #a'0s3
D As. 1).4$ #a'0s
131
Co1putation of contribution per ton of output
Luc4n!A Pune
Ma-i1u1 production capacit/ 2tones3
resent production 2tones3
Cost per ton of output C
Cost per ton of output 1anufactured fro1
Loca##/ purc0ased raw 1ateria# 2Aefer
to wor'ing note 23
Cost per ton of output 1anufactured fro1
Materia# purc0ased fro1 :0opa# 2Aefer
to wor'ing note 33
Ot0er variab#e cost 2As.3
7ota# variab#e cost
2w0en 1ateria# is purc0ased #oca##/3 7ota#
variab#e cost
2w0en 1ateria# is purc0ased fro1
:0opa#3
"e##ing rice per ton 2As.3 Contribution per
ton of output C 2" ? %3 2Loca##/ purc0ased raw
1ateria#3
Contribution per ton of output 2" ? %3
2w0en 1ateria# was purc0ased fro1
:0opa#3
G4000
)4200
As.
+00
++0
310
2As.22.32
#a'0s Q
)4200tons3
14110
141G0
144!0
340
2144!0 ?
141103
2$0
2144!0 ?
141G03
114++0
104+00
As.
+10
++0
30!
2As. 32.G4
#a'0s Q 104+00
tons3
1411!
141+!
144$0
34!
2144$0 ?
1411!3
2)!
2144$0 ?
141+!3
70e priorit/ to produce 1+4000 of tota# output depends on
contribution per ton fro1
C!ntri,uti!n
(er unit
Pri!rit@
une factor/ 2#oca# purc0ase of raw 1ateria#3
Luc'now factor/ 2#oca# purc0ase of raw 1ateria#3
une factor/ 2raw 1ateria# purc0ased fro1
:0opa#3
Luc'now factor/ 2raw 1ateria# purc0ased fro1
:0opa#3
34!
340
2)!
2$0
I
II
III
I%
132
"uggested a#ternative production p#an to earn opti1a# profit
roduction
priorit/
Aaw
1ateria#
input 2in
tones3
Output 2in tones3
Luc'now une 7ota#
I II III
I%
114)00 tons
!4400 tons
211+00 ?
11)003
1+0 tons
)20 tons
2ba#ancing
figure3
21+4000 ?
1)42+0 tons3
134000
$4000
200
+00
((
!4400
)20
114)00
((
1+0
((
114)00
!4400
1+0
)20
20;000 2;120 11;770 17;000
+!r4in$ N!te :
Luc4n!A Pune
13 resent production output
2for1a#3
)4200 104+00
7ota# raw 1ateria# re;uired for
resent production 2tons3 +4000 124000
M)4200 - 100 Q G0N M104+00 - 100 Q G0N
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+
2As. In #a'0s3 2As. )20 -$4000J
As. )G2 - 240003
2124000 - As. )2G3
23 Cost per ton of output
Manufactured fro1 #oca##/ +00 +10
urc0ased raw 1ateria# 2in
As.3
MAs.)20 - 100QG0N MAs.)2G - 100QG0N
33 Cost per ton of output
Manufactured fro1 1ateria# ++0 ++0
urc0ased fro1 :0opa# 2in
As.3
MAs. )G2 - 100QG0N
133
I//u#tr"ti!n > 3
U,D Ltd. 1anufacturing two products and * and se##s
t0e1 at As. 21! and As. 320 per unit respective#/. 70e variab#e
costs per unit are as underC
P"rticu/"r# Pr!&uct P
R#.
Pr!&uct E
R#.
R"A M"teri"/# :
Materia# ? K
Materia# ? I
Direct A"$e# 9R#. 2 (er /",!ur -!ur:
Depart1ent ? .
Depart1ent ? :
Depart1ent ? c
Depart1ent ? D
%ariab#e over0eads
22.00
+.00
3$.00
1+.00
!4.00
((
23.00
2+.00
32.00
!4.00
3$.00
(()2.0
0
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$4 1+ and 24 in
depart1ent .4 :4 C and D respective#/. >eit0er t0e wor'ers are
subject to transfer fro1 one depart1ent to anot0er nor is an/ new
recruit1ent possib#e at present. 5i-ed costs are As. 124000 per
1ont0.
Iou are re;uired to find out t0e fo##owing C
2a3 t0e product 1i- to /ie#d 1a-i1u1 profit.
2b3 70e 1ost profitab#e product if on#/ one product is to be
1anufactured. &0et0er t0e answer wi## differ if #icense to
i1port raw 1ateria# is re#eased on#/ for As. 14+04000
MC...4 5ina#N
S!/uti!n:
roduct wise contribution per direct #abour 0our
Pr!&uct P
R#.
Pr!&uct E
R#.
"e##ing price per unit
7ota# Aaw 1ateria# cost per unit 2As.
22 - As. +3
2As. 2+ J As. 323 Direct
&ages per unit
2As. 3$ J As. 1+ J As. !43 2As.
!4 J As. 3$ J As. )23
21! 320
30
10+
$0
1$2
137
%ariab#e over0eads per unit 7ota#
variab#e cost per unit Contribution per
unit 2"p ? %c3 Direct #abour 0ours per
unit
Contribution per direct #abour 0our
2contribution per DLR per unit3
23
1$0
!4
1+
3
14.30
23$.30
+3.)0
2)
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.
A/tern"ti'e 6 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 *
A/tern"ti'e 6 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 *i0 un&er "/tern"ti'e I
Depart1ent .vai#ab#e
Rours
Rours
re;uired for
44+00 units
of *
Ae1aining
0ours
Rrs @
units of
product
<nits of
product
2a3 2b3 c D 2a3 ?

2b3
2d3 2e3D2c3
@2d3
.
: C D
)24000 &>
1
3+4400
434200
!)4$00
434200
2+4+00
((!)4$0
0
2+4+00
G4$00
434200
>IL
$ &>2
3
G
((
44+00
34200
44+00
((
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.
138
St"te*ent ! Pr!&uct *i0 un&er "/tern"ti'e II
Depart1ent .vai#ab#e
Rours
Rours
re;uired
for 44+00
units of
Ae1aining
0ours
Rrs @
units of
product
*
<nits of
product
2a3 2b3 c D 2a3 ? 2b3 2d3 2e3D2c3 @2d3
. : C D )24000
3+4400
434200
!)4$00
2+4+00
144400
434200
((
434200
244000
((!)4$0
0
G &> 2
$
((
12
44+00
44000
((44+0
0
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
.<. 2As.3
.1ount
2As.3
<nit Contributi
on .<.
2As.3
.1ount
2As.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.
Rence 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 P
R#.
Pr!&uct E
R#.
Contribution per unit 2As.3 C 2a3 Ma-i1u1
possib#e output 2in units3 C 2:3 7ota# contribution
D 2.3 - 2:3
!4.00
44+00
24!G4200
+3.)0
44+00
44014)$0
roduct * is to be preferred as it wou#d give 1ore contribution.
170
"tate1ent of 1ost profitab#e product if on#/ one product is to
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 er1issib#e
output 2in units3 out of i1ported
Materia# of As. 14+04000
Ma-i1u1 output possib#e in t0e
avai#ab#e 0ours
Output possib#e 'eeping in view t0e
avai#abi#it/
Of i1ported 1ateria# and #abour 0ours
2units3
Contribution per unit 2As.3 Contribution
per rupees of 1ateria# 7ota# contribution C
2As.3
30
$4000
44+00
44+00
!4
1.+0
24!G4200
244+00 units
- As. !4.003
$0
34000
44+00
34000
+3.)0
1.3G!
24!14100
234000 units
- 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.
+!r4in$ n!te# :
13 Co1putation of tota# Labour 0ours avai#ab#eC
Depart1ents 2a3 >o. or
wor'1en
2b3
Da/s
2c3
Rrs @
da/s
2d3
7ota# Rours
2e3 D 2b3 - 2c3
- 2d3
. : C D 30
1$
1+
24
300
300
300
300
+
+
+
+
)24000
3+4400
434200
!)4000
23 Co1putation of 0ours re;uired per unit of eac0 product
Depart1ent 5irst a#ternative "econd a#ternative
&ages
2As.3
2a3
&ages @
Rr
2As.3
2b3
Rrs
2c3 D
2a3 Q 2b3
&ages
2As.3
2d3
&ages
@ Rr
2As.3
2e3
Rrs
2f3 D
2d3 Q 2e3
. : C D 3$
1+
!4
((
$
$
$
((
$
3
G
((
!4
3$
(()
2
$
$
((
$
G
$
((1
2
7ota# 0ours per unit 1+ 2)
171
I//u#tr"ti!n :7
. 1u#ti product co1pan/ 0as t0e fo##owing costs and output
data for t0e #ast /ear.
P"rticu/"r#
"a#es 1i-
"e##ing price
%ariab#e cost per unit
7ota# fi-ed cost
7ota# s#es
Pr!&uct
C 5
40 H 3! H
As. As.
20 2!
10 1!
R
2! H
As.
30
1+
14!04000
!4004000
70e co1pan/ proposes to rep#ace product U b/ product ".
,sti1ated cost and output data are C
"a#es 1i-
"e##ing price
%ariab#e cost per unit
7ota# fi-ed costs
7ota# sa#es
!0 H 30 H 20 H
20 2! 2+
10 1! 14
14!04000
!4004000
.na#/6e t0e proposed c0ange and suggest w0at decision t0e
co1pan/ s0ou#d ta'e.
MI.C.&...4 InterN
S!/uti!n :
213 Co1putation of resent rofit and :,
P"rticu/"r#
"e##ing rice
%ariab#e cost
Contribution @%
Aatio "a#es Mi-
Contribution per rupee of sa#es 2@%
ratio - sa#es 1i-3
"a#es
7ota# contribution 2As. !4004000 - 44 Q 1003 5i-ed
Costs
rofit
:rea'(even point 2As. 14!04000 - 100 Q 443
Pr!&uct
C
R#.
5
R#.
R
R#.
20
10
2!
1!
30
1+
100 H
44 H
!00000
10
!0 H
40 H
20 H
10
40 H
3! H
14 H
12
40 H
2! H
10 H
As.
As.
As.
As.
As.
220000
1!0000
)0000
340G0G
172
223 Co1putation of roposed rofit and :,
P"rticu/"r# Pr!&uct
"e##ing rice
%ariab#e cost
Contribution @%
Aatio "a#es Mi-
Contribution per rupee of sa#es 2@%
ratio - sa#es 1i-3
"a#es
7ota# contribution 2As. !4004000 - 4) Q 1003 5i-ed
Costs
rofit
:rea'(even point 2As. 14!04000 - 100 Q 4)3
C
R#.
5
R#.
R
R#.
20
10
2!
1!
2+
14
100 H
4) H
!00000
10
!0 H
!0 H
2! H
10
40 H
30 H
12 H
14
!0 H
20 H
10 H
As.
As.
As.
As.
As.
23!000
1!0000
+!000
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.
I//u#tr"ti!n : 8. 9M"4e !r Bu@:
.uto arts Ltd. 0as an annua# production of G04000 units for
a 1otor co1ponent. 70e co1ponentPs cost structure is as be#ow C
Materia#
Labour 22! H fi-ed3
,-penses
%ariab#e
5i-ed
R#.
2)0 per
unit
1+0 per
unit
G0 per
unit
13! per
unit
T!t"/ 231 (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 S
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+!.
17%
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.
MC... InterN
S!/uti!n :
2a3 "tate1ent s0owing t0e variab#e cost and purc0ase cost of
co1ponent. <sed b/ .uto arts Ltd.
V"ri",/e c!#t Per
Unit
R#.
T!t"/ !r
80;000 unit#
R#.
Materia#s Labour
,-penses
7ota# %ariab#e cost 2w0en co1ponent is produced Cost of
purc0ase 2w0en co1ponent is purc0ased Difference4
e-cess of purc0ase price over variab#e cost
2)0
13!
G0
4G!
!40
24434004000
14214!04000
+14004000
444!4!04000
44+$4004000
4! 404!04000
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 Less C
Materia# cost
Labour 2variab#e3
,-penses 2variab#e3
Loss per unit if t0e present co1ponent is purc0ased
urc0ase price of t0e e-isting product
Less C 7ota# %ariab#e cost of producing t0e e-isting
co1ponent
,-cess cost
200
13!
G0
4+!
42!
$0
!40
4G!
4!
17)
70us4 if t0e co1pan/ diverts its resources for t0e production
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 Cost of
purc0asing t0e co1po0nent 2G04000 - !403 5i-ed ,-penses4
not 0aving been saved 2G04000 - 1+0 i.e. $)! ? 4G!3
Less C Contribution fro1 t0e new product 2 G04000 - $03 7ota#
cost if co1ponent is purc0ased and new product is 1ade 2:3
"avings 2. ? :3
$40)4!04000
44+$4004000
14$24004000
$44+4004000
!44004000
!4G44004000
134!04000
I//u#tr"ti!n : 10. 9E0(!rt (r!(!#"/#:
%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
<nits produced and so#d
Direct Materia#s
Direct Labour
5actor/ over0eads 240 H fi-ed3
"e##ing and ad1inistration over0eads
2$0H fi-ed3
7ota# cost per unit
"e##ing price per unit
Pr!&uct
A
$00
As. 2.00
4.00
!.00
+.00
1G.00
23.00
Pr!&uct B
400
As. 4.00
4.00
3.00
!.00
1$.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/.
171
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/.
5!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.
MC. .. InterN
S!/uti!n:
2i3 ,cono1ics of t0e two ,-port roposa#s
Or&er r!*
C"n"&" !r
Pr!&uct A
R#.
Or&er r!*
Mi&&/e E"#t
!r Pr!&uct B
R#.
Margina# Cost per unit
Materia#s Labour
%ariab#e factor/ over0eads
%ariab#e se##ing and ad1in.
Over0eads
"pecia# ac'ing c0arges 7ota#
variab#e cost
,-port price per unit
2.00
4.00
3.00
3.20
0.!0
4.00
4.00
2.00
0.!0
12.)0 12.30
1).!0
4.+0
1!.!0
3.20
"ince 1ac0ine 0our is t0e #i1iting 2Le/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
Contribution per 1ac0ine 0our
2.! 0our
As. 1.G2
1.! 0our
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.
172
+!r4in$ N!te A B T!t"/
5actor/ over0eads per unit
Mac0ine 0our rate per 0our
Mac0ine 0our per unit <nits
produced
Mac0ine 0our uti#i6ed Lever
of activit/
As. !
As. 2
2.!
$00
14!00
As. 3
As. 2
1.!
400
$00
)! H
24100
Ma-i1u1 0ours at 100H activit/V 2100 Q )! - 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/
Unit# Pr!&uct
A
200
R#.
Pr!&uct
B
723
R#.
T!t"/
R#.
Materia#s
Labour
5actor/ Over0eads C
%ariab#e
5i-ed
"e##ing and ad1in. Over0eads C
%ariab#e
5i-ed
"pecia# ac'ing 7ota#
Costs "a#es
rofit
14200
24400
14+00
14200
14G20
24++0
114400
134+00
24400
344$+
344$+
14!$1
4+0
14)34
14200
12414!
144+3G
24$G4
44$$+
!4+$+
343$1
14$+0
34$!4
440+0
224!4!
2+4$3G
!40G4
+!r4in$ n!te#:
13 >u1ber of <nits of : C
"a#es in t0e 0o1e 1ar'et 400
,-port 1ar'et )00 @ 0r @ 1.! 4$)
7ota# +$)
23 "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 A s. ) 423G
7ota# A s. 14 4+3G
I//u#tr"ti!n:11. 9Deci#i!n ",!ut *ec-"niO"ti!n:
70e present output detai#s of a 1anufacturing depart1ent
are as fo##ows C
173
.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/ $0 H. 7o
provide t0e necessar/ incentive to ac0ieve t0e increased output4
t0e :oard intends to offer a 1 H increase on t0e price wor' rate of
Ae. 1 per unit for ever/ 2 H increase in average individua# output
ac0ieved.
MC... InterN
S!/uti!n :
+!r4in$ N!te# :
13 resent average output e1p#o/ee and tota# future e-pected
output per wee'
resent average output per e1p#o/ee per wee'
D 7 o ta# re s en t O u tpu t 1
7ota# >u1ber of resent e1p#o/ees
D 4+ 4000 a
1$0 e1p#o/ees
D 300 units
7ota# future e-pected output per wee'
D 7ota# >u1ber of future e1p#o/ees
Mpresent output J $0 H of present output per e1p#o/eeN
D 120 e1p#o/ees 2300 units J $0 H - 300 units3
D !)4$0 units
23 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 J 30 H -
Ae. 1
D Ae. 1.00 J 0.30
D Ae. 1.30 per unit
present sa#e price per unit.
177
33 resent and proposa# sa#es price per unit present sa#e price per
unit.
resent "a#e price per unit D As. 12.!0
2As. $04000 Q 4+4000 units3
roposed sa#e price per unit D As. 12.00
2As. 12.!0 ? 4H - As. 12.!03
43 resent 1argina# cost 2e-c#uding wages per unit3 C
re s en t s a#e s v a#ue ? fi- e d e - pen s e s E pro f it ? c on tribu tion
toward s pre s en t wage s
resent output 2units3
D A s. $ 400 4000 ? A s. 2 440 4000 ? A s. 4+ 4000
D As. $.!0 per unit
4+4000 units
"tate1ent of e-tra wee'#/ contribution 2infor1ation resu#ting
fro1 t0e proposed c0ange of 1ec0ani6ation 1eant for boardPs
eva#uation3
,-pected sa#es units 2refer to wor'ing note 13
"a#es va#ue 2.3
2!)4$00 units - As. 123 2refer to wor'ing note 33
Margina# cost 2e-c#uding wages3 2:3
2!)4$00 units - As. $.!03 2refer to wor'ing note 43
&ages C 2C3
2!)4$00 units - As. 1.303 2refer to wor'ing note 23 7ota#
1argina# cost C 2D3 D M 2:3 J 2C3 N
Margina# Contribution M 2.3 ? 2D3 N Less C
resent Contribution
Increase in Contribution 2per wee'3
!)4$00
R#. R#.
34)44400
)44+00
$4G14200
444G42+0
24414G20
24404000
14G20
,va#uationC "ince t0e 1ec0ani6ation 0as resu#ted in t0e
increase of contribution to t0e e-tent of As. 14G20 per wee'4
t0erefore t0e proposed c0ange s0ou#d be accepted.
178
I//u#tr"ti!n: 12. 9Li*ite& "ct!r &eci#i!n:
. co1pan/ producing products OI,P n O"IBM.P using a
sing#e production process4 0as t0e fo##owing cost data
"e##ing price per unit 2As.3
%ariab#e cost per unit 2As.3
Mac0ine 0ours re;uired per unit production 20rs3
Mar'et #i1itation 2units3
7ota# 1ac0ine 0ours avai#ab#e ? 4 #a'0s
5i-ed cost per annu1 ? As. 2$ #a'0s
PIE SIGMA
20 30
11 1$
1 2
1#a'0 2.!#a'0
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
MI.C.&...4 InterN
S!/uti!n :
P"rticu/"r# Pr!&uct# T!t"/
I, "IBM.
7ota# Mac0ine 0ours avai#ab#e
Mar'et Li1itation 2units3
Mac0ine 0ours re;uired per unit of
production
5i-ed cost per annu1 2As. In #a'0s3 "e##ing
price per unit 2As.3
%ariab#e cost per unit 2As.3 Contribution per
unit 2As.3 Contribution per 1ac0ine 0our
2As.3 Aan'ing
1 #a'0
1
2.!#a'0s
2
4 #a'0s
4.00
20
11
30
1$
G 14
G
1
)
2
180
2a3 "tate1ent s0owing best co1bination of roduct Mi- towards
opti1u1 contribution
roduction for 1ar'et de1and 2units3
7ota# Rours re;uired 7ota#
Contribution 2As.3
27ota# roduction - contribution per
unit3
14004000
14004000
14!04000
34004000
24!04000
44004000
G4004000 214004000 304004000
2b3 Co1putation of Ae;uire1ent of .dditiona# Mac0ines on Aenta#
:asis
P"rticu/"r#
.nnua# rent per 1ac0ine 0aving capacit/ of 304000 0rs.
>o. of additiona# units of "IBM. to be produced to 1eet t0e
1ar'et de1and 2additiona#3
Ae;uire1ent of 1ac0ine 0ours for production 214004000 - 23
>u1ber of Mac0ines re;uired
224004000 Q 3040003 D $.$) 2i.e. $ J 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.
D 2304000 0rs. - As. ) ? Aent As. 14!040003 - $
D 24104000 ? 14!04000 D $04000 - $ D
2ii3 >et contribution fro1 )t0 Mac0ine
D 204000 0rs. - As. ) ? As. 14!04000 D 21040003
As. 14!04000
14004000 units
24 004000 0rs.
) 1ac0ines
34$04000
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
D As. 1!4000
181
70us4 t0e sevent0 1ac0ine wi## a#so give additiona# contribution
of As. 1!4000.
Rence4 in a## seven 1ac0ines 1a/ be ta'en on rent.
1.1 ECERCISE
1.1.1 O,Decti'e Eue#ti!n#
An#Aer 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.
!. Co11ent(Margina# Costing is not app#icab#e to Contract Costing.
$. Co11ent profit vo#u1e ratio ignores price c0anges.
). Define(opportunit/ Cost.
+. Define(Aep#ace1ent Cost
G. Define(>or1a# Cost
10. Define ?Differentia# Cost
11. Define .voidab#e cost 12.
Define(<navoidab#e Cost
13. Define(differentia# Costing
14 Define Differentia# Cost .na#/sis.
1! Define Differentia# Costing
Se/ect t-e c!rrect "n#Aer in e"c- ! t-e !//!Ain$:
1. Measurab#e va#ue of an a#ternative use of resources is
a3"un' Cost c3Opportunit/ cost
b3 I1puted cost d3 Differentia# cost
2. 70e decision 1a'er s0ou#d consider4 in case of #i1iting factor to
1a-i1i6e t0e rofit
a3 "a#es b3 Contribution
c3 %ariab#e cost d3 5i-ed cost
182
3. In 1a'e or bu/ decision
a3 On#/ 1argina# cost is re#evant
b3 On#/ fi-ed cost is re#evant
c3 7ota# cost is re#evant
d3 >one of t0ese
4. Idea# product 1i- is decided in ter1s of
a3 "a#es b3 %ariab#e cost
c3 7ota# cost d3 Margina# cost
!. . cost incurred in t0e past and 0ence irre#evant for current
decisions 1a'ing is
a3 5i-ed cost b3 Direct cost
d3 Discretionar/ cost d3 "un' cost
$. . cost t0at cannot be c0anged b/ an/ decision 1ade now is
a3 "un' cost b3 Opportunit/ cost
c3 Indirect cost d3 1i-ed cost
). . s0ut down point is t0e point at w0ic0
a3 Margina# cost and purc0ase price s0ou#d be considered
b3 Contribution is #ess t0an fi-ed cost
c3 Contribution is e;ua# to fi-ed cost
d3 >one of t0ese
+. In a decision situation w0ic0 one is t0e cost not #i'e#/ to contain
a variab#e cost co1ponent
a3 Materia# b3 Labour
c3 Over0ead d3 Direct e-penses
G. 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'ingP
a3.bsorption cost b3%ariab#e cost
c3 Differentia# cost d3 Incre1enta# cost
1.1.2 T-e!r@ Eue#ti!n#
1. &0at do /ou 1ean b/ #i1iting factorS Row does t0e
1anage1ent e#ect t0e 1ost profitab#e 1i- t0e presence of a
#i1iting factorS
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. Row does 1argina# cost differ fro1 tota# costS In w0at
circu1stances4 if an/4 1a/ it be to t0e advantage of
1anufacturer to se## so1e of its products at price C
a3 be#ow tota# cost
b3 be#ow 1argina# cost.
18%
4. &0at is 8cost and profit9S :ring out its i1portance.
!. 8rofit(%o#u1e ana#/sis9 is a tec0ni;ue of ana#/6ing t0e costs
and profits at various #eve#s of vo#u1eP. ,-p#ain 0ow suc0
ana#/sis 0e#ps 1anage1ent.
1.1.% Pr"ctic"/ (r!,/e*#
I##ustration 1C
5ro1 t0e fo##owing date /ou are re;uired to present.
13 70e 1argina# cost of product - and / and t0e contribution per
unit.
23 70e tota# contribution and profits resu#ting fro1 eac0 of t0e
suggested sa#es 1i-tures.
articu#ars roduct er unit As.
Direct Materia#s F F F F F Direct
Materia#s F F F F F Direct &ages
F F F F F Direct &ages F F
F F F
K
I
K
I
10.!0
+.!0
3.00
2.00
%ariab#e e-penses 100H of direct wages per product.
5i-ed e-penses 2tota#3 +00
"a#es rice K 20.!0 and
I 14.!0
"uggested sa#es 1i-esC
.#ternatives >o of <nits
K I
. F F F F F
: F F F F F
C F F F F F
100
1!0
200
200
1!0
100
2M.Co1. Oct. G)4 adapted3
9An#.: Contribution per <nitC roduct K( As. 44 roduct I( As. 23
18)
I//u#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#u-
As.
Lu-ur/
As.
,cono1/
As.
Materia#s F F F F F
&ages F F F F F
Over0eads F F F F F
>et rofit @ Loss F F F F F
.verage "e##ing rice F F F F F
.nnua# "a#es 2<nits3 F F F F F
10.00
$.00
12.00
+.00
3.00
$.00
3.00
2.00
4.00
2+.00
2.00
1).00
3.00
G.00
3.00
2$.00
104000
20.00
204000
12.00
!4000
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. Re
cannot increase t0e sa#e of Lu-ur/ cases. It 0as been ascertained
t0at $0H of t0e over0eads is fi-ed.
Iou are re;uired to advise t0e 1anufacturer.
2M. Co1.4 Mar. G+4 adapted3
9An#.: Contribution per <nitC De#u-e( As. !.204 Lu-ur/( As. $.$04 ,cono1/(
As. !.403
I//u#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
181
articu#ars Met0od . Met0od :
%ariab#e costs
"pecific 5i-ed Costs
"e1i(variab#e costs C
for 34!04000 copies
for 44!04000 copies
!.!0 per cop/
+4004000 per 1ont0
!4!04000 p.1.
$4!04000 p.1.
!.00 per cop/
124004000 per 1ont0
44)!4000 p.1.
!42!4000 p.1.
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
"pecific 5i-ed costs
24204000 copies per 1ont0
As. +.!0 per cop/
As. 3.!0 per cop/
As. +4004000 per 1ont0
Iou are re;uired to ca#cu#ate for eac0 production 1et0od C
13 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.
23 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
182
I//u#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#
Direct Labour 2Ae. 1 per 0r3
%ariab#e Over0ead 22 per 0r3
"e##ing rice
"tandard ti1e to produce
. :
24 14
2 13
4 $
100 110
2 0rs 3 0rs
2M.Co1. Mar. 044 adapted3
9An#.: Contribution per "tandard RourC roduct .( As. 3!4 roduct :( As. 2!.$)3
I//u#tr"ti!n 1 :
5ro1 t0e fo##owing infor1ation /ou are re;uired to C
a3 Ca#cu#ate and present t0e 1argina# product cost and
contribution per unit.
b3 "tate w0ic0 of t0e a#ternative sa#es 1i-es /ou wou#d
reco11end to 1anage1entS and &0/S
articu#ars er <nit As.
Se//in$ Price :
5or K F F F F F 5or I
F F F F F Direct
M"teri"/# :
F F F F F Direct
+"$e# :
F F F F F
2!0
200
+0
$0
$0
40
5i-ed over0eads are As. )!4000 and variab#e over0eads are 1!0H
of direct wages.
.#ternative "a#es Mi-
13 2!00 units of product K and 2!00 units of product I.
23 >i# units of product K and 4000 units of roduct I. 33
4000 units of roduct K and 1000 units of roduct I.
2M.Co1. Mar G$4 adapted3
9An#.: Contribution per <nitC roduct K( As. 204 roduct I( As. 403
183
I//u#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/. Ris 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.
9An#.: "e##ing rice per <nit of +0H capacit/C As.13!.4G3
I//u#tr"ti!n 3 :
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 F F F F F Labour
F F F F F %ariab#e Over0eads F F
F F F
5i-ed Over0ead F F F F F rofit
F F F F F
"e##ing rice F F F F F
$00
200
200
14000
!00
!00
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. Rowever4 t0e/ want to 'eep t0e tota# profit infact.
187
Iou are re;uired to prepare a state1ent s0owing t0e position4 if
13 "e##ing price is reduced b/ 10H and
23 "e##ing price is reduced b/ 20H.
9An#.: @% AatioC Option I(44.44H4 Option II(3).!H3
I//u#tr"ti!n 3 :
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 and ot0er e-penses are as
fo##ows C
articu#ars er <nit 7ota#
Aaw 1ateria#
F F F F F
Direct Labour
F F F F F
%ariab#e factor/ over0ead
F F F F F
5i-ed factor/ over0ead
F F F F F
%ariab#e "e##ing Costs
F F F F F
5i-ed "e##ing and .d1inistration
F F F F F
over0ead
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.
Iou are re;uiredC
a3 &0at s0ou#d be t0e 1ini1u1 rice to be ;uoted b/ Modern C0air
Manufacturing Co1pan/S
b3 repare an inco1e state1ent s0owing t0e position of t0e co1pan/
wit0out specia# order4 for specia# order and wit0 specia# order.
(Ans.: Minimum Price to be uoted &s. *+.',)
188
I//u#tr"ti!n 7 :
. 1anufacturer 0as p#anned 0is #eve# of operation at !0H of 0is
p#ant capacit/ of 304000 units. Ris e-penses are esti1ated as
fo##ows4 if !0H of t0e p#ant capacit/ is uti#i6ed.
i3 Direct Materia#s
ii3 Direct Materia#s
iii3 %ariab#e and Ot0er Manufacturing ,-penses
iv3 7ota# 5i-ed ,-penses irrespective of Capacit/
uti#i6ation
As. +42+0
As. 1141$0
As. 34G$0
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 offerS
"upport /ou suggestion wit0 suitab#e ;uantitative infor1ation.
9An#.: 7ota# ContributionC resent position As. $4$004 roposed Offer
As. 1inus $003
I//u#tr"ti!n 8:
K 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
a3 70e a1ount of fi-ed cost
b3 70e :, in units and in "a#es %a#ue
c3 rofit w0en 2$4000 units are so#d
d3 70e nu1ber of units to be so#d to earn post(ta- profit of T
304000. 7a- rate is 40H.
K 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 K
Ltd. at present se##ing price #ess 10H wit0 a condition t0at K Ltd.
s0ou#d purc0ase co1petitorPs product e;ua# to doub#e of t0e units
purc0ased b/ t0e co1petitor fro1 K Ltd. 70e co1petitorPs product
200
se##ing price is As. G0 and fetc0es contribution of As. 2! per unit. If
t0e co1petitorPs offer is accepted4 ca#cu#ateC
a3 :, in units purc0ased and so#d b/ K Ltd.
b3 >o. of units to be purc0ased and so#d to earn profit of
As. 404000
2M.Co1. Mar 200)4 adapted3
9An#.: Contribution per <nitC As. 104 5i-ed Cost As. 14 $040003
I//u#tr"ti!n 10 :
5o##owing re#evant data of a fir1 is given C
.ctivit/ Leve#s 2tons3
!04000
tons
$04000
tons
)04000
tons
+04000
tons
%ariab#e Cost F F F 2T in
t0ousands3
!4000
14!00
24!00
G4000
$4000
14$00
24!00
104100
)4000
14$!0
34000
114$!0
+4000
14)00
34000
124)00
"e1i(%ariab#e F F F cost
2T in t0ousands3
5i-ed Cost F F F 2T in
t0ousands3
7ota# Cost F F F 2T in
t0ousands3
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 ?
13 Ca#cu#ate t0e additiona# @ incre1enta# costs if it 1anufactures
additiona# 2a3 104000 tons 2b3 1!4000 tons.
23 .dvise w0et0er t0e fir1 s0ou#d accept Oan/ oneP of t0e fo##owing
additiona# 2specia#3 e-port 1ar'et offers and if Ies4 Ow0ic0 oneP
s0ou#d it accept C
i3 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
9An#.: .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.) BENEFITS OF 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%
!. It creates an at1osp0ere of cost consciousness.
$. It 1otivates wor'ers to strive for acco1p#is01ent of defined
targets. It precipitates an attitude t0at is conducive to efficienc/.
). It 0ig0#ig0ts areas4 w0ere probe pro1ise i1prove1ent.
+. Its introduction #eads to si1p#ification of procedures and
standardi6ation of products.
G. Its introduction enab#es
re;uired for preparation
;uotation purposes.
t0e 1anage1ent to reduce ti1e
of reports for pricing4 contro# or
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.
2.1 SETTING OF 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 1anage1entPs 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 ANAL5SIS OF 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.
2.3 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"/ c!#t '"ri"nce H St"n&"r& c!#t ! M"teri"/ u#e& 6 Actu"/ c!#t
! *"teri"/
Materia#s cost variances are as fo##owsC (
": M"teri"/ 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"/ (rice '"ri"nce H Actu"/ ?u"ntit@ 9St"n&"r& (rice 6 Actu"/
(rice:
,: M"teri"/ u#"$e '"ri"nce: It is t0at part of 1ateria# cost
variance w0ic0 due to different between t0e actua# ;uantit/ used
201
and standard ;uantit/ specific for output . 70is indicated w0et0er
or not 1ateria# was proper#/ uniti6ed4 It is deter1ined as fo##ows
M"teri"/ u#"$e '"ri"nce H #t"n&"r& (rice 9 #t"n&"r& ?u"ntit@ 6 "ctu"/
?u"ntit@:
c: M"teri"/ Mi0 '"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"/ *i0 '"ri"nce H #t"n&"r& (rice 9re'i#e& #t"n&"r& ?u"ntit@6
"ctu"/ ?u"ntit@:
&: M"teri"/ @ie/& '"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"/ @ie/& '"ri"nce H #t"n&"r& (rice 9"ctu"/ !ut(ut 6 #t"n&"r&
!ut(ut:
I//u#tr"ti!n 1
Ies Ltd 1anufacture a sing#e product t0e standard cost of w0ic0
is as fo##ows C
Materia# . $0H F As20@ per Lg.
Materia# : 40H F As10@ per Lg.
>or1a# #ost is 20H of input . Due to s0ortage of 1ateria# . t0e
standard 1i- was c0anged. .ctua# resu#t for =anuar/ 2011 were as
fo##ows C
Materia# . ? 10! Lg. F As20@ per 'B
Materia# : ? G! Lg F AsG@ per Lg.
Input 200 'g
Loss 3! Lg
Output 1$! Lg
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 K 1$!@1$0 +2.! D +0K 1$!@1$0
: Materia# price variance D .ctua# ;uantit/ 2"tandard price ? .ctua#
price3
. D 10!220(203 D 0
: D G! 210(G3 D G!5
7ota# D
G!5
C Materia# usage variance D standard price 2standard ;uantit/ ?
actua# ;uantit/3
. D 20K24G!@4(10!3 D 3)! 5
: D 10 2 1$!@2(G!3 D 12! .
7ota# D 2!0 5
D Materia# Mi- variance Dstandard price
;uantit/(actua# ;uantit/ 3
. D 202120(10!3
: D 10 2+0(G!3
7ota#
2 revised standard
D 300 5
D 1!0 .
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$00@+0 D As. 20
13 Define t0e fo##owing ter1s and Bive for1u#as
a3 "tandard Cost
b3 Materia# rice %ariances
c3 Materia# Mi- %ariances
d3 Materia# /ie#d variances
203
2.7 LABOUR COST VARIANCE:
Labour cost variance is different between t0e actua# wages
paid and standard wages specific wages for t0e production. It is
ca#cu#ated as fo##owsC
L",!ur c!#t '"ri"nce H St"n&"r& /",!ur c!#t 6 Actu"/ /",!ur c!#t
STD G!ur# C STD R"te 6 Actu"/ G!ur# C Actu"/ r"te.
5o##owing are t0e #abour cost variance.
A: L",!ur r"te '"ri"nce: It is t0at portion of #abour cost variance
w0ic0 due to t0e different between t0e actua# #abour rate and
standard #abour rate specific. It deter1ined 0as fo##ows C
L",!ur r"te '"ri"nce H Actu"/ -!ur# 9 #t"n&"r& r"te 6 Actu"/ r"te :
B: L",!ur eicienc@ '"ri"nce: It is t0at part of #abour cost
variance w0ic0 due to t0e different between t0e actua# 0ours paid
and standard 0ours a##owed for output ac0ieved. It deter1ined as
fo##ows C
L",!ur eicienc@ '"ri"nce H #t"n&"r& r"te 9#t"n&"r& -!ur# 6 "ctu"/
-!ur#:
C: L",!ur *i0 '"ri"nce: roduction 1a/ be co1p#eted if #abour
is 1i-ed according standard proportion. "tandard 1i- 1a/ not be
ad0ered to under su1 circu1stances and substitute wi## 0ave to
1ade . It is deter1ined as fo##owsC (
L",!ur *i0 '"ri"nce H #t"n&"r& r"te 9"ctu"/ /",!ur *i0 6 re'i#e&
#t"n&"r& /",!ur *i0:
D: L",!ur @ie/& '"ri"nce: It is t0at part of #abour efficienc/
variance w0ic0 is due to different between actua# output and
standard output of wor'ers specific . It is deter1ined as fo##owsC(
L",!ur @ie/& '"ri"nce H "'er"$e #t"n&"r& /",!ur -!ur# r"te 9"ctu"/
(r!&ucti!n 6 #t"n&"r& (r!&ucti!n !n "ctu"/ -!ur:
I//u#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
Rours
Aate per
Rours
7ota# As
"'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"/ 1).10
207
.ctua# Data
.rtic#es roduces 1000 units
P"rticu/"r# G!ur# R"te (er
G!ur#
T!t"/ R#
"'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"/ 12210
C"/cu/"te&
1 Labour cost variance
2. Labour rate variance
3. Labour efficienc/ variance
4. #abour 1i- variance
!. #abour /ie#d variance
S!/uti!n:
1. Labour cost variance D "tandard #abour cost ? .ctua# #abour
cost
"'i##ed D "7D Rours K "7D Aate ? .ctua# Rours K .ctua# rate.
!000 K1.! ? 4!00 K 2 D )!00(G000D As 1!00 .
<ns'i##ed D +000 K 0.! ? 10000 K 0.4! D 4000(4!00 D As!00 .
"e1i "'i##ed D 4000 K 0.)!( 4200 K0.)! D 3000(31!0 D As 1!0 .
1!00 J !00 J 1!0 D As21!0 .
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. J !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
208
!. 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 K 1000
D 1100 units
.verage std rateD As).! J 4 J 3 D As.14.!0
2.8 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
.3 %ariab#e Over0ead %ariance
:3 5i-ed Over0ead %ariance
A: V"ri",/e O'er-e"& V"ri"nce : It is different between standard
variab#e over0ead cost and actua# variab#e over0ead cost. It
V"ri",/e !'er-e"& c!#t '"ri"nce H St"n&"r& '"ri",/e !'er-e"& c!#t 6
"ctu"/ '"ri",/e !'er-e"& c!#t.
%ariab#e over0ead cost is again dividend into two parts
1 V"ri",/e !'er-e"& e0(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",/e O'er-e"& E0(en&iture '"ri"nce H #t"n&"r& '"ri",/e
!'er-e"& "t "ctu"/ /e'e/ 6 "ctu"/ '"ri",/e !'er-e"&
2. V"ri",/e !'er-e"& eicient/@ '"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",/e O'er-e"& Eicienc@ V"ri"nce H #t"n&"r& '"ri",/e !'er-e"&
6 "ctu"/ '"ri",/e !'er-e"& !r (r!&ucti!n.
210
I//u#tr"ti!n %
5o##owing infor1ation is obtained fro1 &ise Ltd
:udgeted production for t0e period
:udgeted variab#e over0ead
"tandard 7i1e for one unit
.ctua# roduction for t0e period
.ctua# %ariab#e over0ead
.ctua# Rours &or'ed
$00 units
As 1!$00@(
20 0ours
!00 units
As 14000@(
G000 Rrs
C"/cu/"te:
. %ariab#e over0ead e-penditure variance
: variab#e over0ead efficienc/ variance
C %ariab#e Over0ead variance
S!/uti!n:
. %O ,-penditure variance D standard variab#e over0ead at actua#
#eve# ? actua# variab#e over0ead
D 11)00(14000 D 2300 .
"%OR D 1!000@12000 K G000 D 11)00
: %O ,fficienc/ %ariance D standard variab#e over0ead ? actua#
variab#e over0ead for production.
D 13000(11)00D 1300 5
C %ariab#e over0ead cost variance D "tandard variab#e over0ead
cost ? actua# variab#e over0ead cost.
D 13000(14000D 1000 .
2.10 FICED OVERGEAD COST VARIANCE
It represents t0e difference between actua# fi-ed over0ead
incurred and standard cost of fi-ed over0ead absorbed. It
Fi0e& !'er-e"& C!#t '"ri"nce H St"n&"r& c!#t ! i0e& !'er-e"& 6
"ctu"/ i0e& !'er-e"&
5i-ed over0ead variance is fo##owsC
A. Fi0e& !'er-e"& '!/u*e '"ri"nce > It t0at part of fi-ed
over0ead variance w0ic0 due different between actua# fi-ed
over0ead incurred and standard a##owance for fi-ed over0ead.
211
Fi0e& !'er-e"& '!/u*e '"ri"nce H #t"n&"r& r"te C "ctu"/ !ut(ut
>,u&$ete& !'er-e"&
B. Fi0e& !'er-e"& e0(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.
Fi0e& !'er-e"& e0(en&iture '"ri"nce H ,u&$ete& i0e& !'er-e"& 6
"ctu"/ i0e& !'er-e"&.
C. Fi0e& !'er-e"& C"/en&"r V"ri"nce > It is t0at part of fi-ed
over0ead vo#u1e variance w0ic0 is due to different between
budgeted fi-ed over0ead and fi-ed over0ead for dates avai#ab#e
during t0e period at standard rate.
Fi0e& O'er-e"& C"/en&"r '"ri"nce H #t"n&"r& r"te 9 "ctu"/ ?u"ntit@ 6
St"n&"r& ?u"ntit@:
D. Fi0e& !'er-e"& eicienc@ '"ri"nce: It t0at portion of vo#u1e
variance w0ic0 ref#ected increase or reduced output arising fro1
efficienc/ being above or be#ow standard.
Fi0e& !'er-e"& eicienc@ '"ri"nce H #t"n&"r& r"te 9"ctu"/
(r!&ucti!n 6 #t"n&"r& (r!&ucti!n:
E. Fi0e& !'er-e"& c"("cit@ '"ri"nce: It is t0at part of fi-ed
over0ead variance w0ic0 arrives due to different between capacit/
uti#i6ed and avaib#e capacit/.
Fi0e& !'er-e"& c"("cit@ '"ri"nce H St"n&"r& r"te 9re'i#e& ,u&$ete&
> ,u&$ete& unit:
I//u#tr"ti!n )
5ro1 t0e fo##owing data ca#cu#ate over0ead variance C
P"rticu/"r# Bu&$et Actu"/
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!/uti!n:
1. 7ota# over0ead variance D .ctua# output in standard rate ? .ctua#
over0ead
1$000 K ! ?230!00J 4)0003
As 2!00 5
2. %ariab#e Over0ead %ariance D "tandard rate K .ctua# output ?
.ctua# Over0ead
3 K 1$000 ? 4)000 D 10005
3. 5i-ed Over0ead %ariance D "tandard rate K .ctua# Output ?
.ctua# Over0ead
2 K 1$000 ? 30!00 D As 1!005
4. 5i-ed over0ead vo#u1e %ariance D "tandard Aate K .ctua#
Output ? :udgeted Over0ead
2 K 1$000 (30000 D 2000 5
!. 5i-ed over0ead ,-penditure %ariance D :udgeted 5i-ed ? .ctua#
5i-ed over0ead
As 30000( As 30!00 D As !00.
$. 5i-ed Over0ead Capacit/ %ariance D "tandard Aate 2Aevised
:udgeted <nits ? :udgeted <nits3
As 2 21!)!0( 1!0003 D 2 K)!0
As 1!00 5
). 5i-ed over0ead ca#endar variance D "tandard Aate 2.ctua#
*uantit/ ? "tandard *uantit/3
2 21!)!0@2! K23 D As12$0 K 2
As 2!20 5
+. 5i-ed over0ead efficienc/ variance D "tandard Aate 2 .ctua#
roduction ? "tandard roduction3
D 2 21$000(1)0103 D As 2020 .
N!te: "tandard production D 1!000 units
J Increase Due Capacit/ increase D )!0
JZ Increased production for 2 da/s D 12$0
7ota# D 1)010
2.11 SALES VARIANCE
"a#es variance is difference between t0e actua# va#ue
ac0ieved in a given period and budgeted va#ue of sa#es. "a#es
21%
va#ue variance are usefu# for sa#es 1anagers in deter1ined t0e
effect of c0anges in different factors on sa#es va#ue. 70e fo##owing
are 7/pes of variance.
A: S"/e# '"/ue '"ri"nce > It is t0e different between t0e actua#
sa#es va#ue re#iab#e and t0e standard va#ue of sa#e as per t0e
:udget.
S"/e '"/ue '"ri"nce H Actu"/ Eu"ntit@ C Actu"/ (rice > St"n&"r&
?u"ntit@ C St"n&"r& Price
B: S"/e# (rice '"ri"nce > It is t0at portion of t0e tota# sa#es va#ue
variance w0ic0 due to different between actua# sa#es price rea#ised
and budgeted sa#es price
S"/e# (rice '"ri"nce H Actu"/ Eu"ntit@ 9 Actu"/ (rice 6 #t"n&"r&
(rice:
C: S"/e# '!/u*e '"ri"nce > It is t0at portion of tota# sa#es va#ue
variance w0ic0 due to difference between t0e standard va#ue t0e
actua# sa#es effected and standard va#ue of sa#es as per t0e budget.
S"/e# '!/u*e '"ri"nce H #t"n&"r& (rice 9Actu"/ ?u"ntit@ 6 St"n&"r&
?u"ntit@:
D: S"/e# Mi0 '"ri"nce > It is t0at portion of sa#es vo#u1e variance
w0ic0 due t0e difference between t0e standard va#ue of actua#
sa#es effected and .ctua# va#ue of "a#es.
S"/e# *i0e& '"ri"nce H St"n&"r& Price 9 Actu"/ (r!(!rti!n 6 re'i#e&
#t"n&"r& *i0 "ctu"/ #"/e#:
E: S"/e# ?u"ntit@ '"ri"nce > It is t0at portion of sa#es vo#u1e
variance w0ic0 due tot t0e difference between standard va#ue of
actua# sa#es effected and standard va#ues of sa#es as per t0e
budged.
S"/e ?u"ntit@ '"ri"nce H #t"n&"r& (rice 9 re'i#e& #t"n&"r& *i0 6
#t"n&"r& *i0:
C-ec4 5!ur Pr!$re## :
13 ,-p#ain t0e ter1s and give for1u#as.
a3 Labour Aate %ariance
b3 Labour Iie#d %ariance
c3 Labour Cost %ariance
d3 %ariab#e over0ead efficient#/ variances
e3 5i-ed over0ead vo#u1e variances
f3 5i-ed over0ead ca#endar variances
g3 "a#es va#ue variances
03 "a#es ;uantit/ variances
21)
I//u#tr"ti!n 1
5ro1 t0e fo##owing infor1ation about sa#es ca#cu#ateC
.3 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"ntit@ Se//in$ (rice (er
unit
RS
. !000 ! 2!000
: 4000 $ 24000
C 3000 ) 21000
7ota# 12000 )0000
ACTUAL
Pr!&uct Eu"ntit@ Se//in$ (rice
(er unit
RS
. $000 $ 3$000
: !000 ! 2!000
C 4000 +) 32000
7ota# 1!000 G3000
S!/uti!n:
.. 7ota# "a#es %ariance D As G3000( As )0000 D As23000 5
:. "a#es price %ariance
"tandard rice3
D
D .ctua# ;uantit/ 2 .ctua# rice ?
. D $000 K 2$(!3 D As $000 5
: D !000 K2!($3 D As !000 .
C D 4000 K 2+()3 D As4000 5
((((((((((
As !000 5
C. "a#es vo#u1e variance D "tandard price 2.ctua# *uantit/ ?
"tandard *uantit/3
D . 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
D. "a#es 1i- %ariance D "tandard price 2.ctua# 1i- ? "tandard
Mi-3
D As.++000( As.+)!00 D !00 5
211
N!te : .ctua# Mi-
$000 K ! D 30000
!000 K $ D 30000
4000 K ) D 2+000
7ota# D ++000
Aevised Mi-
$2!0 K ! D 312!0
!000 K $ D 30000
3)!0 K ) D 2$2!0
7ota# D +)!00
, "a#es *uantit/ %ariance D
standard ;uantit/3
D
D
"tandard price 2 actua# ;uantit/ ?
)0000 @ 12000 2 1!000(120003
As1)!00 5
2.12 ECERCISE
1. &0at standard costing . ,-p#ain t0e advantages and #i1itations
of costing S
2. &0at is 1eant b/ standard cost S Row standard cost is
deter1ined S
3. 70e standard cost of Mi- is as under C
+ 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 $+ per tonnes.
.ctua# /ie#d is 2!.! tonnes. ca#cua#ate .
variance : 1ateria# usage variance C Materia#
D 1ateria# 1i- variance , 1ateria# /ie#d variance .
Materia# cost
price variance
9An#: ": R#.128 A ,: R#.128 A c: R#. 20 A &: R#.)0 A e: R#.28 A:
4. 70e fo##owing figures are e-tracted fro1 t0e boo's of co1pan/
P"rticu/"r# Bu&$et Actu"/
Output in units $000 $!00
Rours 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#.: Over0ead cost variance As100 . b3 %ariab#e OR Cost variance As1!0 .
c3 5i-ed OR 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
!. 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& -!ur/@ r"te#
10 1en As 0.$2!
! wo1en As 0.400
! :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#%1 A ; R# 12 F ; R# %1 A ; R#) F "n& R#)3 A
$. 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
Pr!&uct STD unit# STD R"te#
R#
Actu"/
Unit#
Actu"/
R"te# R#
. !000 ! $000 $
: 4000 $ !000 !
C 3000 ) 4000 +
.ns . As!000 5 : As!00 5 C As1)!00 5 D As2300 5 , As1+000 5
). 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
213
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
!. "tandard cost is a specifica##/ ZZZZZ cost.
2a3 re(deter1ined 2b3 ,sti1ated 2c3 #anned 2d3 .verage
9An#> 1> , ; 2 6 " ; % 6 & ; ) 6 " ; 1 6 " :
I//u#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.
9An#.: MCV> R#. );000 A; MPV> %;000 A; MMV> 700 F; M5V> 1;700 A; MUV>
1;000 A:
I//u#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
Row 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 costS
9An#.: MCV> R#. );000 A; MPV> %;000 A; MMV> 700 F; M5V> 1;700 A;
MUV> 1;000 A:
217
I//u#tr"ti!n 2 :
"tandard Materia# for 100 Lg. C0e1ica# . is give be#ow C
Lg. 7ota# As
4! 40
2! 110
10 100
Of Materia# K at As 4 per Lg.
Of Materia# I at As + per Lg.
Of Materia# U at As 12 per Lg.
"tandard Loss
F F F F
F F F F
F F F F
F F F F
1+0.00
320.00
300 .00
+00.00
(+00.0
0
.ctua# production is 2000 units of c0e1ica# . and actua# 1ateria#
usage is as fo##ows C
Lg. 7ota# As
1000 +!0
4!0
Of Materia# K at As 3.+0 per Lg.
Of Materia# I at As +.40 per Lg.
Of Materia# U at As 13 per Lg.
F F F F
F F F F
F F F F
34+00
)4140
! 4+!0
1$4)G0
Ca#cu#ate C
a3 Materia# Cost %ariance b3 Materia# rice %ariance
c3 Materia# Mi- %ariance d3 Materia# Iie#d %ariance
e3 Materia# <sage %ariance
2M.Co1. Mar. G$4 adapted3
9An#.: MCV> R#. 380 A; MPV> 180 A; MMV> 127 F; M5V> 327 A; MUV> 200 A:
I//u#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# K at t0e standard price of As 2.
30 'gs of 1ateria# I 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# K at t0e price of As 3.
40 'gs of 1ateria# I 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
9An#.: MCV> R#. )0 A; MPV> %0 A; MMV> 13 F; M5V> 23 A; MUV> 10 A:
I//u#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
218
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.
Iou are re;uired to ca#cu#ate C
i3 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
9An#.: LCV> R#. 270 A; LRV> 82 F; LEV> %2 F; MITV> 120 F; LMV> 2)7 A:
I//u#tr"ti!n 1 :
5ro1 t0e fo##owing records of t0e >avi Mu1bai
Manufacturing Co1pan/ /ou are re;uired to co1pute 1ateria# and
#abour variance.
Input(100 Lg. of Materia# /ie#ds a "tandard Output of 104000
unit
"tandard rice per Lg of Materia# As 20
.ctua# *uantit/ of Materia# issued and used b/
roduction Depart1ent
104000 Lg.
.ctua# rice per Lg 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 Ra#f Da/
.ctua# &age Aate per Da/ As 4.!0
2Oct. G$4 adapted3
9An#.: MCV> R#. %0;000 A; MPV> 10;000 A; MUV>20;000 A; LCV> R#. 8;000 A;
LRV> 1;000 A; LEV> );000 A:
I//u#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"/ C!#t :
Materia# 44G00 'g F As 42 per 'g
Labour 3G4$00 0ours F As 1 per 0our
.ctua# roduction 100 units
220
Iour are re;uired to ca#cu#ate C
i3 Materia# Cost %ariance ii3
iii3 Materia# <sage %ariance iv3
v3 Labour Aate %ariance vi3
Materia# rice %ariance
Labour Cost %ariance
Labour ,fficienc/ %ariance
9An#.: MCV> R#. 1;700 A; MPV> 8;700 A; MUV> );000 F; LCV> R#. %;100 A;
LRV> %;820 A; LEV> )00 F:
I//u#tr"ti!n 3 :
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
32.00
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.
9An#.: MCV> R#. 18;200 A; MPV> 18;100 A; MUV> 100 A; M5V> 1;200 F; MMV>
2;100 A; LCV> R#. 2;000 A; LRV> 10;000 A; LEV> )000 F:
I//u#tr"ti!n 7 :
70e fo##owing standards 0ave been set to 1anufacture a product C
Direct M"teri"/# :
4 units of . at As 4.00 per unit 1$.00
$ units of : at As 3.00 per unit 1+.00
30 units of C at Ae. 1.00 per unit 30 .0 0
$4.00
Direct #abour $ 0rs. F As + per 0our 4+ .0 0
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.
9An#.: MPV> %7;200 A; MUV> 1;000 A; LRV> 20;000 A; LEV> 7;000 F:
I//u#tr"ti!n 8 :
Letan C0e1ica# Co. gives /ou t0e fo##owing standard and actua#
data of C0e1ica# >o. 14!$.
"tandard Data .ctua# Data
Lg.
4!0
3$0
+10
G0 )20
As
of Materia# . F
As 20 per 'g
G4000
of Materia# : F
As 10 per 'g
3 4$00
24400 s'i##ed
0ours
F As 21
!04400
14200 uns'i##ed
0ours
F 12
14 4400
>or1a# @ Loss
7ota#
As
124$00
$44+00
))4400
Lg.
4!0
3$0
+10
!0
)$0
As
F 1G per 'g.
+.!!0
F 11 per 'g.
3 4G$0
24400 s'i##ed
0ours
F 22
!24+00
14200 uns'i##ed
0ours
F 12.!0
1! 4000
.ctua# Loss
7ota#
As
12.!10
$) .+00
+0.310
a3 Materia# Cost %ariance
c3 Materia# Iie#d %ariance
e3 Labour Aate %ariance
b3 Materia# rice %ariance
d3 Labour Cost %ariance
f3 Labour Bang %ariance
2M.Co1. Mar.024 adapted3
9An#.: MCV> R#. 380 F; MPV> 80 F; M5V> 300 F; LCV> R#. 200 F; LRV> %;000
A; LGV> NIL:
222
I//u#tr"ti!n 10 :
Input Lg. Materia# As
er Lg.
As 7ota#
As
Input As
er Lg.
As 7ota#
As
400
200
100
K F !0
I F 20
U F 1!
Labour
100 Men 0rs. F
er 2 per 0r.
200 &o1en
0rs. F
As 1.!0 per 0r.
Lg >or1a# #oss
204000
44000
14!00
2!4!00
!00
420
240
G0
F 4!
F 2!
F 1!
120 0rs. F
As 2.!0 per 0r.
300
240 0rs. F
As 1.$0 per 0r
Lg .ctua# #oss
+4G00
$4000
143!0
2$42!0
$+4
)00
200
300
)!0
3+4
2! )!
$)! Lg 2$4000 Lg Lg 2$4G34
5ro1 t0e above infor1ation ca#cu#ate t0e fo##owing variancesC
a3 Materia# Cost %ariance e3 Labour Cost %ariance
b3 Materia# rice %ariance f3 Labour Mi- %ariance
c3 Materia# Mi- %ariance g3 Labour Iie#d %ariance
d3 Materia# Iie#d %ariance 03 Labour Aate %ariance
2M.Co1. Mar 20014 adapted3
9An#.: MCV> R#. 310 A; MPV> 800 F; MUV> 1;210 A; M5V> 1;721 A; MMV>131
F; LCV> R#. 17) A; LRV> 7) A; LEV> 100 A; L5V> %1 A; LMV> 21 A:
I//u#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
&or'ing Da/s F F F F ... 5i-ed
Over0eads 2T3 F F F F ...
%ariab#e Over0eads 2T3 F F F F ...
44000
20
404000
124000
34+00
21
3G4000
124000
Iou are re;uired to ca#cu#ate t0e fo##owing Over0ead %ariancesC
i3 %ariab#e Over0ead %ariance
ii3 5i-ed Over0ead %ariance
a3 ,-penditure c3 ,fficienc/ %ariance
b3 %o#u1e %ariance d3 Ca#endar %ariance
iii3 .#so prepare Aeconci#iation "tate1ent for t0e sa1e.
9An#.>VOGCV> 200 A; FOGCV> 1;000 A; FOGVV> 2;000 A; FOGE0(.V> 1;000 F;
FOGEi.V> );000 A; FOGCV> 2;000 F:
22%
I//u#tr"ti!n 12:
70e fo##owing figures are e-tracted fro1 t0e boo's of a co1pan/C
articu#ars :udget .ctua#
Output 2in <nits3 ... F F F F Rours
F F F F ...
Over0eads Cost C
5i-ed F F F F ...
%ariab#e F F F F ... 7ota#
Over0eads Cost F F F F ...
>u1ber of Da/s F F F F ...
$4000
34000
14200
$4000
$4!00
34300
142!0
$4$!0
)4200 )4G00
2! 2)
Iou are re;uired to ca#cu#ate t0e fo##owing over0eads variances C
i3 Over0ead Cost %ariance
ii3 %ariab#e Over0ead Cost
iii3 5i-ed Over0ead Cost %ariance
iv3 5i-ed Over0ead %o#u1e %ariance
v3 5i-ed Over0ead ,fficienc/ %ariance
vi3 5i-ed Over0ead Capacit/ %ariance.
9An#.>VOGCV> 200 A; FOGCV> 10 F; FOGVV> 2;000 A; FOGE0(.V> 1;000 F;
FOGEi.V> );000 A; FOGCV> 2;000 F:
I//u#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.
Iou are re;uired to ca#cu#ate sa#es %ariances
2M.Co1. Mar. 0!4 adapted3
9An#.: S V"/ue V> 1;000 F; SPV> 11;000 F; S V!/u*e V> 10;000 A:
I//u#tr"ti!n 1):
70e cost accountant of Lagoon Ltd. found to t0is surprise
t0at t0e actua# profit for t0e period ending 31
st
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
articu#ars :udgeted
As #a'0s
.ctua# As
#a'0s
"a#es ... F F F F
%ariab#e Cost F F F F ... 5i-ed
costs F F F F ... rofit
F F F F ...
!0.00
30.00
10.00
10.00
+2.!0
!).!0
1!.00
10.00
22)
Iou 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
9An#.: S V"/ue V> %2;10;000 A; SPV> 3;10;000 A; S V!/u*e V> 21;00;000 A:
I//u#tr"ti!n 11 :
. Co1pan/Ps :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.
a3 "a#es %a#ue %ariance
b3 "a#es rice %ariance
c3 "a#es %o#u1e %ariance
d3 "a#es Mi- %ariance
e3 "a#es *uantit/ %ariance
2M.Co1. Mar. 0)4 adapted3
9An#.: S V"/ue V> 2;20;000 A; SPV> 70;000 A; S V!/u*e V> 1;70;000 A; SEV>
2;2);000 A; SMV> ));000 F:
221
3
BUDGETAR5 CONTROL
Unit Structure
).0 Objectives
).1 :udgets
).2 :udgetar/ contro#
).3 Uero base
budget
).4 erfor1ance :udgeting
).! 5unctiona# :udgets
).$ Capita# ,-penditure :udget
).) ,-ercises
3.0 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#
3.1 BUDGETS
:udget 0as been defined b/ CIM. <. L. as4 O . 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.P
. 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.
3.2 BUDGETAR5 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'e/!(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"/ 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#/.
223
C. C!*("ri#!n ! Bu&$ete& "n& Actu"/ 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.
D. 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.
3.% 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 /earPs 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. Rowever 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. Rence 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 OUero :aseP 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.
227
A((/ic"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.
!. :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 <."... Re 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. Re wrote an artic#e on U:: in Rarvard :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.
228
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.
v. .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.
v. 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.
3.) PERFORMANCE 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.
13 Define t0e ter1s.
a3 :udget
b3 :udgetar/ Contro#
c3 Uero :ase :udget
d3 erfor1ance :udgeting
23 8:udgetar/ contro# is actua##/ a 1eans of Contro#.9 Discuss.
2%1
3.1 FUNCTIONAL 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.
v. Master :udgetC .## t0e budgets described above are ca##ed
as O5unctiona# :udgetsP 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
OCo1pressive :udgetP 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.
3.2 CAPITAL ECPENDITURE BUDGET
3.2.1 Fi0e& "n& F/e0i,/e 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 M<.L.N as Ot0e 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/P. 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/.
v. 5ina##/ t0e profit or #oss at different #eve#s of activit/ wi## be
co1puted b/ co1paring t0e costs wit0 t0e revenues.
2%)
3.2.2 Pre("r"ti!n ! Bu&$et:
. budgetar/ contro# is e-tre1e#/ usefu# for p#anning and
contro##ing as described above. Rowever4 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. Rowever4 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%1
0ave to be ensure t0at eac0 budget center is contro##ed b/ an
appropriate 1e1ber of t0e staff.
v. :udget Manua#C . budget 1anua# is defined b/ ICM. asP 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#P. 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
!. rincipa# budget factor
$. Detai#ed progra1 of budget preparation
). .ccounting codes and nu1bering
+. 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"/e#: Consu1er de1and4 s0ortage of sa#es staff4 inade;uate
advertising
M"teri"/: .vai#abi#it/ of supp#/4 restrictions on i1port
L",!r: "0ortage of #abor
P/"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.
a3 5unctiona# :udget.
b3 roduction :udget.
c3 Cas0 :udget.
d3 Master :udget.
e3 :udget Co11ittee
f3 :udget Creators.
g3 :udget Manua#
23 Distinguis0 between 5i-ed :udget and 5#e-ib#e :udget.
I//u#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"/e# Bu&$et 9unit#:
=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 1
st
=anuar/
20114 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"/ A: ) =$.
M"teri"/ B: 1 =$.
Materia#s e;ua# to one 0a#f of t0e re;uire1ents of t0e ne-t
1ont0Ps production are to be in 0and at t0e end of ever/ 1ont0.
70is re;uire1ent was 1et on 1
st
=anuar/ 2011.
repare t0e fo##owing budgets for t0e ;uarter ending on 31
st
1ars0 2011
I3 roduction :udget( *uantit/ &ise.
II3 Materia#s urc0ase :udget( *uantit/ wise.
2%3
S!/uti!n:
R Lt&.
Pr!&ucti!n Bu&$et L In unit#M J"nu"r@ 6 M"rc- 2011
P"rticu/"r# J"nu"r@ Fe,ru"r@ M"rc-
IN "a#es 104+00 1!4$00 124200
IIN ,sti1ated C#osing "toc' 34G00 340!0 24$00
IIIN Bross Ae;uire1entsMIJIIN 144)00 1+4$!0 144+00
I%N Opening "toc' 24)00 34G00 340!0
%N >et Ae;uire1ents MIII(I%N 124000 144)!0 114)!0
M"teri"/# Re?uire*ent Bu&$et L Eu"ntit"ti'eM
M"teri"/ A> J"nu"r@ 6M"rc- 2011
roduction M.s per roduction
:udget(unitsN
124000 144)!0 114)!0
Ae;uire1ent for roductionC 4 'g
per unit
4+4000 !G4000 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"/# Re?uire*ent Bu&$et L Eu"ntit"ti'eM
M"teri"/ B> J"nu"r@ 6M"rc- 2011
roduction M.s per roduction
:udget(unitsN
124000 144)!0 114)!0
Ae;uire1ent for roductionC ! 'g
per unit
$04000 )34)!0 !+4)!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
+!r4in$ N!te#:
13 roduction for .pri#. "a#es 104400 M unitsN J C#osing "toc' 244!0 MunitsN
D 124+!0 MunitsN ? Opening "oc' 24$00 MunitsN D 1042!0 MunitsN.
23 Materia# re;uired for production in .pri#C . C1042!0 K 4 D 414000 'g.
: C1042!0 K ! D !142!0 'g.
2%7
I//u#tr"ti!n 2
. Ltd. 1anufactures a sing#e product wit0 a sing#e grade of
#abor. 70e sa#es budget and finis0ed goods stoc' budget for t0e 1
st
*uarter ending on 30
t0
=une 2011 are as fo##owsC
"a#esC 1400 units
Opening finis0ed unitsC 100 units
C#osing finis0ed unitsC 140 units
70e goods are i1ported on#/ w0en t0e production wor' is
co1p#ete and it is budgeted t0at 10H of finis0ed wor' wi## be
scrapped.
70e standard direct #abor content of t0e product is 3 0ours.
70e budgeted productivit/ ratio for direct is +0H on#/.
70e co1pan/ e1p#o/s 3$ direct operatives w0o are
e-pected to average 144 wor'ing 0our eac0 in t0e 1
st
;uarter.
Iou are re;uired to prepare4
IN roduction :udget
IIN Direct Labor :udget
IIIN Co11ent on t0e prob#e1 t0at /our direct #abor budget
revea#s and suggest 0ow t0is prob#e1 1ig0t be overco1e.
S!/uti!n:
A Lt&.
Pr!&ucti!n Bu&$et
A(ri/ 6 June 2011
P"rticu/"r# N!. ! unit#
IN "a#es 5orecast 14400
IIN ,sti1ated C#osing "toc' 140
IIIN Bross Ae;uire1ent MI J IIN 14!40
I%N Opening "toc' 100
%N >et roduction Ae;uire1ent MIII ? I%N Bood
roduction
14440
%IN &astage M 10H of tota# production ?
assu1edN
1$0
%IIN 7ota# roduction Ae;uire1entM % J %IN 14$00
2%8
Direct L",!r Bu&$et
P"rticu/"r# N!. ! -!ur#
7ota# "tandard Rours Ae;uiredC 14$00 units K 3 44+00
roductivit/ AatioC +0H
.ctua# Rours Ae;uiredC 44+00@ .+0 $4000
:udgeted Rours .vai#ab#e 3$ 1en K 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$ Rours. 70erefore it wi## be necessar/ to wor'
overti1e4 as we## as i1prove1ent in t0e efficienc/.
I//u#tr"ti!n %
"u11ari6ed be#ow are t0e Inco1e and ,-penditure forecast
for t0e 1ont0 Marc0 to .ugust 2011.
M!nt- Cre&it
S"/e#
R#.
Cre&it
Purc-"#e#
R#.
+"$e#
R#.
M$.
E0(en#e#
R#.
Oice
E0(en#e#
R#.
Se//in$
E0(en#e#
R#.
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
Iou are given fo##owing furt0er infor1ation
i. #ant Costing As. 1$4000 due for de#iver/ in =une. 10H on
de#iver/ and ba#ance after t0ree 1ont0s
ii. .dvance 7a- As. +4000 is pa/ab#e in Marc0 and =une
iii. eriod of credit a##owed4 "upp#iers 2 1ont0s and Custo1ers
1 1ont0
iv. Lag in pa/1ent of 1anufacturing e-penses 0a#f 1ont0
v. Lag in pa/1ent of a## ot0ers e-penses one 1ont0
vi. Cas0 ba#ance on 1
st
Ma/ 200+ is As. +4000
vii. repare Cas0 :udget for t0ree 1ont0s starting fro1 1
st
Ma/
2010
2)0
S!/uti!n:
C"#- Bu&$et
M"@>Au$u#t 2010
P"rticu/"r# M"@ June Ju/@
IN Opening Cas0 :a#ance +4000 1!4)!0 124)!0
IIN ,-pected Cas0 AeceiptsC
.N Co##ections fro1 Debtors MCredit
1 1ont0N
$24000 $44000 !+4000
IIIN 7ota# ,-pected Aeceipts $24000 $44000 !+4000
I%N 7ota# Cas0 .vai#ab#e MIJIIIN )04000 )G4)!0 )04)!0
%N ,-pected a/1ent
.N urc0ases M2 1ont0s creditN 3$4000 3+4000 334000
:N Manufacturing ,-penses MRa#f
1ont0 creditNY
34)!0 44000 34)!0
CN &ages MRa#f 1ont0 creditN +4000 104000 +4!00
DN Office ,-penses Mone 1ont0 creditN 14!00 24!00 24000
,N "e##ing ,-penses Mone 1ont0 creditN !4000 44!00 34!00
5N urc0ase of Mac0ine 14$00
BN .dvance 7a- +4000
%IN 7ota# a/1ent M.J:JCJDJ,J5JBN !442!0 $)4000 !243!0
%IIN 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 1ont0Ps !0H and previous
1ont0Ps !0H are paid in t0e current 1ont0.
I//u#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 M 40H fi-ed N
.d1inistrative Over0eadsC As.20 M!0H fi-edN
7ota# Cost er <nitC As.1+0
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 $0H and +0H capacit/ uti#i6ation.
S!/uti!n:
F/e0i,/e Bu&$et
P"rticu/"r# C"("cit@
Uti/iO"ti!n
10N
C"("cit@
Uti/iO"ti!n
20N
C"("cit@
Uti/iO"ti!n
70N
.N >u1ber of <nits 104000 124000 1$4000
:N "e##ing rice er <nit As.200 As.1G$ As.1G0
CN %ariab#e Cost er <nit
Direct Materia#
Direct Labor
5actor/ Over0eadsM$0HN
.d1inistrative
Over0eadsM!0HN
As.100
As.30
As.1+
As.10
As.102
As.30
As.1+
As.10
As.10!
As.30
As.1+
As.10
DN 7ota# %ariab#e Cost er <nit As.1!+ As.1$0 As.1$3
,N 7ota# %ariab#e Cost M. K DN As.1!4+04000 As.1G4204000 As.2$40+4000
5N 5i-ed Costs
MAs.12 J As.10 D As.22 per unit at
e-isting #eve# 104000 units.N
As.24204000 As.24204000 As.24204000
BN 7ota# CostM, J 5N As.1+4004000 As.214404000 As.2+42+4000
RN "a#es Aevenue M. K %N As.204004000 As.234!24000 As.304404000
IN rofits@ Losses MR ? B N As.24004000 As.24124000 As.24124000
3.3 ECERCISES
1. "e#ect t0e correct answer fro1 t0e c0oices given in eac0 of
fo##owingC(
13 . budget is .N an aid to 1anage1ent :N a post1orte1
ana#/sis CN a substitute of 1anage1ent.
2)2
23 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 .N 104+00
:N124G$0 CN 144400 DN 124+00
33 . budget is a projected p#an of action in .N p0/sica# units :N
1onetar/ ter1s CN p0/sica# units and 1onetar/ units.
43 5#e-ib#e budget are usefu# for .N #anning purposes on#/ :N
#anning perfor1ance eva#uation and feedbac' contro# CN
Contro# of perfor1ance on#/
!3 70e scarce factor of production is 'nown as 4 .N Le/ factor
:N Lin'ing factor CN Critica# factor DN roduction factor.
2. "tate w0et0er t0e fo##owing state1ents are 7A<, or 5.L",.
13 5i-ed budgets are concerned wit0 ac;uisition of fi-ed
assets.
23 5unctiona# :udgets are subsidiar/ to 1aster budget.
33 :udgeting is usefu# for p#anning and contro##ing.
43 Capita# e-penditures budget is prepared genera##/ for s0ort
ter1.
!3 :udgetar/ contro# is a tec0ni;ue of costing.
I//u#tr"ti!n 1
repare a Cas0 :udget fro1 t0e fo##owing infor1ation for
.:C Ltd.
P"rticu/"r# 1
#t
Eu"rter
LR#.M
2
n&
Eu"rter
LR#.M
%
r&
Eu"rter
LR#.M
)
t-
Eu"rter
LR#.M
Opening Cas0 104000
Co##ection fro1 custo1ers 142!4000 14!04000 14$04000 24214000
a/1entsC
urc0ase of Materia#s 204000 3!4000 3!4000 !44200
Ot0er ,-penses 2!4000 204000 204000 1)4000
"a#aries and &ages G04000 G!4000 G!4000 140G4200
Inco1e 7a- !4000
Mac0iner/ urc0ase 204000
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.
I//u#tr"ti!n 2
. co1pan/ 1anufactures two products4 K and I. . forecast
units to be so#d in first 4 1ont0s of t0e /ear is given be#ow.
P"rticu/"r# Pr!&uct C Lunit#M Pr!&uct 5 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 ,e/!A:
P"rticu/"r# Pr!&uct C 6 R#.
Per Unit
Pr!&uct 5 6 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 M&IN
at t0e end of an/ 1ont0 and finis0ed product Min unitsN e;ua# to 0a#f
t0e budgeted sa#e of t0e ne-t 1ont0 s0ou#d be in stoc' at t0e end
of eac0 1ont0M inc#uding previous /earN
Iou are re;uired to prepare4
.N roduction :udget for =anuar/ to .pri# and
:N "u11ari6ed production cost budget
2))
I//u#tr"ti!n %
70e 1ont0#/ budget for 1anufacturing over0eads of a
1anufacturing co1pan/ is given be#ow.
P"rticu/"r# C"("cit@ 70N C"("cit@ 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
Iou 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 $0H4 +0H4 and 100H capacit/ #eve#s.
----
2)1
7
COST AUDIT
Unit Structure
+.0 Objectives
+.1 Introduction
+.2 Definition of .uditing
+.3 Co1pu#sor/ .udit
+.4 70e .uditor
+.! Cost .udit
+.$ ,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
Cost .udit 2Aeporting3 Au#es
+.14 Cost Investigation
+.1! ,-ercises
7.0 OBJECTIVES
.fter stud/ing t0is unit t0e "tudents wi##C
Lnow t0e Concept of .udit
Lnow "tatutor/ .udit
Lnow Cost .udit
Lnow t0e "cope and 5unctions of Cost .udit
Lnow t0e benefits of cost .udit
Lnow t0e difference between 5inancia# .udit and cost .udit
<nderstand t0e concept of efficienc/ .udit
7.1 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/Ps 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/Ps
financia# state1ents is a vita# service to investors4 creditors4 and
ot0er participants in econo1ic e-c0ange.
7.2 DEFINITION OF 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)3
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/. Rowever 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. 70e entries in t0e boo's of account are ade;uate#/ supported
b/ under#/ing papers and docu1ents and b/ ot0er evidence.
3. >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
!. 70e 5inancia# state1ent a1ounts are proper#/ c#assified
described and disc#osed in confor1it/ wit0 accounting
standardsV and
2)7
$. 70e state1ent of accounts ta'en as a w0o#e4 present a true and
fair picture of t0e operationa# resu#ts and of t0e assets and
#iabi#ities.
70e aforesaid definition is ver/ aut0oritative. It 1a'es c#ear
t0at t0e basic objective of auditing4 i.e. e-pression of opinion on
financia# state1ents does not c0ange wit0 reference to nature4 si6e
or for1 of an entit/. 70e definition given in .."(1 is restrictive
since it covers financia# infor1ation aspect on#/. Rowever4 t0e
scope of auditing is not restricted to financia# infor1ation on#/ but4
toda/V it e-tends to variet/ of non(financia# areas as we##. 70at is
0ow various e-pressions #i'e 1ar'eting audit4 personne# audit4
efficienc/ audit4 Cost audit4 etc4 ca1e into e-istence.
7.% COMPULSOR5 AUDIT
Co1pu#sor/ audit in t0e case of co1panies was introduced
b/ t0e Co1panies .ct4 1G!$ 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$14 0as a#so 1ade t0e audit of
accounts of certain assesses co1pu#sor/. .
7.) TGE AUDITOR
70e person conducting audit is 'nown as t0e auditor. Re
1a'es a report to t0e person appointing 0i1 after due e-a1ination
of t0e accounting records and t0e accounting state1ent in t0e for1
of an opinion on t0e financia# state1ents. 70e opinion t0at 0e is
2)8
ca##ed upon to e-press is w0et0er t0e financia# state1ents ref#ect a
true and fair view. .uditing4 especia##/ of co1panies and for pub#ic
purposes 0as beco1e t0e preserve of persons 0aving recogni6ed
professiona# training and ;ua#ification. In India4 under t0e aut0orit/
of t0e Co1panies .ct4 1G!$ 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.
7.1 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/.
7.1.1 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. Detection of errors and frauds.
4. Deter1ination of inventor/ va#uation
!. 5aci#itating t0e fi-ation of prices of goods or services.
$. eriodica# reconci#iation between cost accounts and financia#
accounts.
). ,nsuring opti1u1 uti#i6ation of 0u1an4 p0/sica# and financia#
resources of t0e co1pan/.
+. Detection and correction of abnor1a# #osses.
G. Incu#cation of cost consciousness.
10. .dvising 1anage1ent as regards t0e areas w0ere perfor1ance
ca##s for i1prove1ent.
210
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/.
7.1.2 Eu"/iic"ti!n# ! C!#t Au&it!r: Secti!n 2%% B 91:
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.
7.1.% Di#?u"/iic"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/.
211
7.1.) 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.
7.1.1 Cei/in$ !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 . Rowever4 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. Rowever4 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
7.1.2 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.
7.2 AN EFFICIENC5 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.
212
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/.
!. . sound financia# 1anage1ent is ref#ected in t0e 1aintenance
of 1ini1u1 inventor/ of stores and spares. 70e cost audit
21%
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
$. 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/.
). 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
+. . 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.
G. . 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.
21)
7.3 COST AUDIT V.S FINANCIAL 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.uditorPs 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
211
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.
a3 .uditing
b3 .uditor
c3 Cost .udit
d3 Cost .udit Aeport
e3 ,fficienc/ .udit
23 Bive t0e provisions for co1pu#sor/ .udit.
7.7 SCOPE AND FUNCTIONS OF 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.
7.8 ORGANIRATION FOR AND CIRCUMSTANCES
FAVORING 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.
212
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.
7.10 BENEFITS OF COST AUDIT
A u&i t# "# " n A i& t! G! 'er n *e n t:
>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/. Iet 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:IC34 w0ic0 is t0e investigating and
213
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.
Rowever4 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
217
va#uation inc#uding t0at of wor' in progress. 70e aut0entication for
inventor/ va#ues b/ cost accountants was reco11ended b/ t0e
Rig0 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 consu1erPs 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
218
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.
Ut i/ i t@ 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 A i& t! S- "re -!/& 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.
7.11 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. Aaw Materia#s4 boug0t out co1ponents and process 1ateria#s.
2. Consu1ab#e stores4 "1a## too#s4 etc
3. "a#aries and &ages
4. Ot0er direct e-penses
!. Depreciation
$. 5actor/ Over0eads
). .d1inistration over0eads
+. "e##ing and distribution over0eads.
G. *uantitative data regarding production etc.
10. "a#es detai#s 2;uantit/ and va#ue3
11. 0/sica# inventor/ of finis0ed goods and wor' in progress.
7.12 PROVISIONS REGARDING COST ACCOUNTS
AND AUDIT
70e 1G$! 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
2 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.
!. It s0a## be t0e dut/ of t0e co1pan/ to give a## faci#ities and
assistance to t0e person appointed for conducting t0e cost audit.
$ 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.
). 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.
+. .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.
G 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.
FORM OF COST AUDIT
I@weXXXXXXXXXX.. 0aving been appointed as Cost
.uditor2s3 4 under "ection 223 : of t0e Co1panies .ct 1G!$4
ofXXXXXXXXX 21ention na1e of t0e co1pan/3 0aving its
registered office at XXXXXX21ention registered office address
of t0e co1pan/3 20erein after referred to as t0e co1pan/34 0ave
e-a1ined t0e boo's of accounts prescribed under c#ause 2d3 of
subsection 2i3 of section 20G of t0e said .ct4 and ot0er re#evant
report for t0e /ear endedXXXXX..21entioned t0e financia# /ear3
re#ating to XXXXXXXXXX 21ention na1e of product3
1aintained b/ t0e co1pan/ and report4 subject to 1/@our
co11ents under t0e 0eading 8 .uditorPs Observations and
Conc#usionsP contained in t0e .nne-ure to t0is report 4 t0at ?
2a3 I @we 0ave@0ave not obtained a## t0e infor1ation and
e-p#anations4 w0ic0 to t0e best of 1/@our 'now#edge and be#ief
were necessar/ for t0e purpose of t0is auditV
22%
2b3 roper cost accounting records as re;uired under c#ause 2d3 of
sub( section2i3 of section20G of t0e Co1paines.ct41G!$ 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!$3 in t0e 1anner so
re;uiredV
2e 3 in 1/@our opinion4 t0e co1pan/Ps cost accounting records
0ave @0ave not been proper#/ 'ept so as to give a true and fair
view of t0e cost of production4 processing4 1anufacturing or
1ining activities4 as t0e case 1a/ be4 and 1ar'eting of t0e
product under reference V and
2f3 t0e cost state1ents in respect of product under reference as
specified in t0e .nne-ures @ rofor1a of "c0edu#es I and II of t0e
Cost .ccounting Aecords 2XXXX..3 Au#es du#/ audited b/ 1e@us
are@are not 'ept in t0e co1pan/.
70e 1atters contained in t0e .nne-ure and profor1a to t0is report
for1 part of t0is report4 w0ic0 is a#so subject to 1/@our observations
1ade t0ere in.
Dated t0isXXXXX date of XX..XXXX1GXXXXXX. .t XXX..
2Mention na1e of p#ace of signing t0is report3
CO"7 .<DI7OA" 2"3
N!te:
213 De#ete in app#icab#e words.
223 "pecif/ t0e tit#e of cost .ccounting Aecords Au#es 1ade under
C#ause 2d3 of subsection 213 of "ection 20G of t0e Co1panies .ct4
1G!$ w0ic0 are app#icab#e to t0e product of t0e co1pan/.
7.1% 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!$34 and ins supersession of t0e Cost .udit 2Aeport3 Au#es4
1G$+4 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 tit/e "n& C!**ence*ent:
213 70ese ru#es 1a/ be ca##ed t0e Cost .udit 2Aeport3 Au#es4
1GG$.
223 70e/ s0a## co1e into force on t0e date of t0eir pub#ication in
t0e Officia# Ba6ette.
2. Deiniti!n#: In t0ese ru#es4 un#ess t0e conte-t ot0erwise
re;uiresC
2a3 8 .ct9 1eans t0e Co1panies .ct41G!$ 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!$3 app#/V
2e3 8"c0edu#e9 1eans sc0edu#e anne-ed to t0ese ru#eV
2f3 .## ot0er words and e-pressions used in t0e ru#es but not
defined4 and defined in t0e .ct and ru#es 1ade under "ection 20G
of t0e .ct s0a## 0ave t0e sa1e 1eanings respective#/ assigned to
t0e1 in t0e .ct or ru#es4 as t0e case 1a/ be.
%. A((/ic"ti!n :
70ese ru#es s0a## app#/ to ever/ co1pan/ in respect of w0ic0
an audit of t0e cost accounting records 0as been ordered b/ t0e
Centra# Bovern1ent under "ubsection 2 13 of section 233 : of t0e
.ct.
). F!r* ! Re(!rt :
213 ,ver/ Cost .uditor w0o conducts an audit of t0e cost
accounting records of t0e co1pan/ s0a## sub1it a report in
trip#icate to t0e Centra# Bovern1ent in t0e 5or1 2 inc#uding
.nne-ures and profor1a3 In accordance wit0 t0e procedures
specified in t0e "c0edu#e anne-ed to t0ese ru#es and at t0e sa1e
ti1e forwarded a cop/ of t0e report to t0e co1pan/.
223 ,ver/ Cost .uditor4 w0o sub1its a report under sub ru#e 213 4
s0a## a#so give c#arifications4 if an/4 re;uired b/ t0e Centra#
Bovern1ent on t0e Cost .udit Aeport sub1itted b/ 0i14 wit0in
t0irt/ da/s of receipt of t0e co11unication address to 0i1 ca##ing
for suc0 c#arifications.
221
1. Ti*e Li*it !r Su,*i##i!n ! Re(!rt :
70e Cost .uditor s0a## send 0is report referred in sub ru#e
213 of ru#e 4 to t0e Centra# Bovern1ent and to t0e concerned
co1pan/ wit0in 1+0 da/s fro1 t0e end of t0e co1pan/Ps financia#
/ear to w0ic0 t0e cost .udit Aeport Ae#ates.
2. C!#t Au&it!r t! ,e urni#-e& Ait- t-e c!#t Acc!untin$
rec!r&# etc91:
&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
3. Pen"/tie#:
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$3 of section 20G of t0e .ct4 w0o is in defau#t4 s0a##
subject to t0e provisions of section 233 : of t0e .ct 4 be
punis0ab#e wit0 fine w0ic0 1a/ e-tend to five 0undred rupees
and w0ere t0e contravention is a continuing one4 wit0 a furt0er
fine w0ic0 1a/ e-tend to fift/ rupees for ever/ da/ after t0e first
da/ during w0ic0 period suc0 contravention continues.
7. S"'in$ :
"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.
13 Bive na1es.
a3 Depart1ent of Co1pan/ .ffairs.
7.1) COST INVESTIGATION
. cost accountant is often faced wit0 a prob#e1 of
deter1ining out of contro# situations .It is enoug0 to warrant
1anage1entPs 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$"ti!n *!&e/ "# !//!A#:
i: M"teri"/it@ Si$niic"nce M!&e/:
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#.
223
ii: C!ntr!/ C-"rt M!&e/:
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.
iii: C!#t ,eneit "n"/@#i# ! '"ri"nce in'e#ti$"ti!n *!&e/:
In t0is 1ode# decision on w0et0er variance is wort0
investigating is ta'en based on e-pected cost of investigation and
contro# and e-pected benefits fro1 contro# action. .n investigation
can be underta'en if t0e e-pected benefits fro1 t0e investigation
e-ceed t0e cost of searc0ing and correcting t0e source of cost
variance.
i': St"ti#tic"/ Si$niic"nce M!&e/:
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#.
7.11 ECERCISES
1. C0oose t0e rig0t answer fro1 t0e 5o##owingC
a3 Co1pu#sor/ audit in t0e case of co1panies was introduced b/
t0e
2i3 Bovern1ent 2ii3 Aeserve :an' 2iii3 Co1panies .ct.
b3 XXXXXXX. Is t0e verification of correctness of cost records
and c0ec' on t0e ad0erence to t0e cost accounting p#anS
2i3 Cost .udit 2ii3 5inancia# .udit 2iii3 Manage1ent .udit.
c3 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'
d3 70e cost .udit Aeport 1ust be sub1itted to XXXXXXXX..
2i3 "0are0o#ders 2ii3 :oard of Directors 2iii3 Centra# Bovern1ent
9An# 6 " 6 iii; , 6 i; c> ii; &> iii :
227
23 .nswer in one sentence on#/
a3 &0at is cost .uditS
b3 &0at is an efficienc/ .uditS
c3 &0at are t0e objectives of cost .uditS
d3 &0at is co1pu#sor/ auditS
e3 &0o can act as a cost auditorS
3. &0at is cost .uditS &0at are t0e objectives of cost auditS
4. Distinguis0 between cost audit and financia# audit.
! &0at is an .udit AeportS ,-p#ain t0e objectives and contents of
cost audit reportS
----
I
S5LLABUS
M. C!*. P"rt > I
P"(er 2> A & '"nc e & C !#t A cc!u n tin$ 9100 M "r4 # :
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
% Inte$r"te& "cc!unt#
Meaning4 .dvantages and disadvantages. Distinctive
features4 practica# prob#e1s
N!n inte$r"te& #@#te* ! "cc!unt#
Cost contro# accounts to be prepared4 =ourna# entries4
practica# prob#e1s
) M"r$in"/ c!#tin$ "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.
1 M"n"$eri"/ Deci#i!n#
Manageria# Decisions t0oug0 Cost accounting suc0 as ricing
.ccepting specia# Offer4 rofit p#anning. Ma'e or :u/
decision4 Deter1ining 'e/(factor4 Deter1ining "a#es(1i-4
deter1ining opti1u1 .ctivit/ Leve#4 perfor1ance ,va#uation4
.#ternatives 1et0ods of roduction4 Cost reduction and cost
Contro#.
2 St"n&"r& C!#tin$
"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.
3 Bu&$et"r@ C!ntr!/
: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
7 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.
P A TTE RN OF E U ESTIO N P A PE R
Ma-i1u1 Mar's 100
>o of ;uestions to be as'ed
>o of ;uestion to be answered
*uestion >o. 01 Co1pu#sor/ ractica# ;uestion
*uestion >o.02 Co1pu#sor/ Objective
*uestion >o. 03 to *uestion >o. 0G
Duration 3 Rours
G
$
20 Mar's
1$ Mar's
1$ Mar's eac0
N!te# :>
13 5ro1 *uestion >o. 03 to *uestion >o. 0G not 1ore t0an one
;uestion 1a/ be t0eor/ inc#uding s0ort prob#e1s@;uestions.
23 "tudent to answer an/ four out of *uestion >o. 03 to *uestion
>o. 0G
33 Objective ;uestions to be based on a## topics and inc#ude Inter
a#ia ;uestion #i'eC(
.3 Mu#tip#e c0oice :3 .nswer in one sentence
C ! #t in$ Rec ! **e n ce & B !! 4#
Lecture on costing b/ "wa1inat0an pub#is0ed b/ ". C0and E Co.
ractica# costing b/ L0anna ande/ and .0uja pub#is0ed b/ ".
C0and E Co.
Cost .ccounting b/ C s Aa/udu pub#is0ed b/ 7ata McBraw Ri##s
Cost .ccounting b/ =awa0ar#a# pub#is0ed b/ 7ata McBraw Ri##s
70eor/ and prob#e1s of Cost and Manage1ent accounting b/ M I
L0an and L =ain pub#is0ed b/ 7ata McBraw Ri##s
Cost .ccounting b/ Aavi M Lis0ore pub#is0ed b/ 7a-1ann Ltd.
Cost .ccounting b/ > L rasad
Cost .ccounting ? 70eor/ and ractice b/ : L :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/ % L "a-ena C D
%as0ist pub#is0ed b/ ". C0and
Cost .ccounting b/ " =ain and L L >arang pub#is0ed b/ La#/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/ Rorngreen4 C0ar#es4
5oster and Datar pub#is0ed b/ rentice Ra## of India.
Manage1ent .ccounting b/ M I L0an and L =ain pub#is0ed b/
7ata McBraw Ri##s
.dvanced Manage1ent accounting b/ A " Lap##an and ..
.t'inson prentice India internationa#
.dvanced prob#e1s and so#utions in Cost .ccounting b/ " >
Ma0es0wari pub#is0ed b/ "u#tan C0and.
228
EUESTION PAPER > APRIL 2011
TIME > % GOURS TOTAL MAR=S 100
N.B. 13 *. >o. I and II are c!*(u/#!r@. .tte1pt an/ !ur
;uestions fro1 t0e re*"inin$.
2: *uestion >o. I carries 20 1ar's and a## re1aining
;uestions carr/ 1$ 1ar's eac0.
%: A// "ub(;uestions carr/ e;ua# 1ar's un#ess specified to
t0e contrar/.
): &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 1i-
articu#ars roduct 8K9 roduct 8I9 roduct 8U9
<nits budgeted to be produced and so#d 14+00 34000 14200
"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 Rour 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 A: C0oose t0e correct option and rewrite in fu##.
": In case of operation of a 1otor ve0ic#e4 t0e fo##owing cost
wou#d be c#assified as fi-ed cost C (
i3 Insurance
ii3 C0ange of engine oi# after ever/ !4000 'i#o1eters.
iii3 7/re Aep#ace1ent
iv3 etro#
230
,: <nder rocess Costing4 t0e concept of process cost is
based on C
i3 Margina# cost
ii3 "tandard cost
iii3 .verage cost
iv3 Differentia# cost
c: @% ratio is indicated in a :rea' even c0art b/ C
i3 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.
&: 5i-ed Over0ead Cost %ariance is t0e difference betweenC
i3 .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: Cost .udit Aeport is to be sub1itted b/ t0e cost auditor C
i3 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/
: . budget t0at gives indication of purc0ases to be 1ade
as derived fro1 production figures is 'nown as C
i3 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
i3 ,fficienc/ variance
ii3 7ota# over0ead variance
iii3 "pending variance
iv3 %o#u1e variance
231
-: <nder integrated s/ste1 of accounting issue of indirect
raw 1ateria# for production is debited to C
i3 urc0ases .ccount
ii3 &or'(in(rogress Contro# .ccount
iii3 "tores Ledger Contro# .ccount
iv3 &or's over0ead contro# account.
E.2 B: .nswer t0e fo##owing in brief 2in !ne sentences3 C
13 "tate an/ two variab#e costs of a Rote#.
23 >a1e an/ two industries w0ere process costing in
app#icab#e.
33 >a1e t0e account w0ic0 1a'es t0e cost #edger se#f
ba#ancing.
43 If contribution per unit is 'nown4 0ow i## /ou ca#cu#ate
Margin of "afet/ 2in units3S
!3 &0en is t0e "a#es %o#u1e %ariance said to be adverseS
$3 Mention an/ one budget c#assified on t0e basis of
coverage.
)3 Bive t0e for1u#a for 8,;uiva#ent <nits9 under rocess
Costing.
+3 &rite t0e for1u#a for ca#cu#ating Labour Cost %ariance.
E.% On 30
t0
"epte1ber4 200G fo##owing was t0e :a#ance "0et
of MD vt. Ltd.
Liabi#ities As. .ssets As.
,;uit/ s0ares 2As. 103 fu##/ paid
Aeserves and "urp#us Creditors
roposed dividend
204000
104000
404000
1!4000
,;uip1ent 2cost3 204000
Less C Depreciation !4000
"toc'
Debtors
:an'
1!4000
204000
1!4000
3!4000
+!4000 +!4000
70e co1pan/ is deve#oping a s/ste1 of forward p#anning and on 1
st
October4 200G it sub1its t0e fo##owing infor1ation C
Credit sa#es
2As.3
Cas0 "a#es
2As.3
Credit purc0ases
2As.3
"epte1ber 200G 2actua#3 October
200G 2budgeted3 >ove1ber 200G
2budgeted3
Dece1ber 200G 2budgeted3
1!4000
1+4000
204000
2!4000
144000
!4000
$4000
+4000
404000
234000
2)4000
2$4000
232
On 1
st
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 30
t0
"epte1ber4 20103 to
be paid in October4 200G.
Iou 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
License4 Aoad(ta-
Barage rent
7/res and tubes
Ot0er Over0eads a##ocated
Drivers re1uneration
Oi#
etro#
G4000 per annu1
44000 per annu1
14!00 per wee'
!00 per wee'
204000 2Life C 2!4000 '1s.3
$04000 per annu1
+00 per wee'
300 per wee'
2! per #itre 2consu1ed F
+ '1s. per #itre3
70e effective #ife of t0e ve0ic#e is wort0 running +04000
'1s. at t0e end of w0ic0 t0e ve0ic#e wi## 0ave scrap va#ue
of As. 2!4000.
Iou are re;uired to sub1it a state1ent s0owing t0e tota#
cost for a 1ont0 and decide t0e fare to be c0arged per
tonne '1. t0at a##ows 20H profit on fares.
23%
E.1 70e fo##owing is t0e data avai#ab#e of .: Ltd. in respect of
rocess III for t0e 1ont0 of =anuar/4 2011.
R#.
1. Direct 1ateria#s ))$
2. Direct #abour 3+$
3. roduction over0eads )$+
4. 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
Materia#s added in t0e process
Labour
Over0eads
$0H
!0H
40H3 3G0
). "toc' on 31(1(2011 C +00 units 2Degree of co1p#etionC
Materia#s added in t0e process +0H
Labour )0H
Over0eads $0H3
+. 3!0 <nits scrapped are fu##/ co1p#ete in a## respects i.e.
1ateria#s4 #abour and over0eads.
G. >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
"tores Ledger Contro# .ccount
&or' 0in(rogress Contro# .ccount
5inis0ed Boods Contro# .ccount
:ui#ding Construction .ccount
Benera# Ledger .djust1ent .ccount
As. 2in #a'0s3
+0
20
430
10
!40
23)
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
&or's Over0eads ( .ctua# a1ount incurred 1$0
2e-c#uding ite1s s0own above3
( .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/Ps 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.3 70e standard cost of a certain c0e1ica# 1i-ture is as
fo##ows C
Materia#
I 240H3
II 2$0H3
Cost per tonne 2As.3
20
30
. standard #oss of 10H is
e-pected in production
5or a period4 t0e actua# consu1ption data was as fo##owsC
Materia#
I 21+0 tonnes3
II 2220 tonnes3
Cost per tonne 2As.3
1+
34
70e actua# weig0t produced was 3$4
tonnes
Ca#cu#ate a## t0e Materia# %ariances.
231
E.7 ": 5ro1 t0e fo##owing particu#ars4 /ou are re;uired to
ca#cu#ate C
i3 @% ratio
ii3 :.,.. for sa#es
iii3 Margin of safet/
iv3 rofit w0en sa#es are As. 24004000@(
v3 "a#es re;uired to earn net profit of As. 404000@(
Iear "a#es 2As.3
I 24404000
II 24+04000
rofit 2As.3 <nits
1+4000 244000
2$4000 2+4000
,: .: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
Aaw 1ateria#
Direct #abour
Direct e-penses
&or's over0eads 2$0H 5i-ed3
.d1inistration over0eads 2+0H 5i-ed3
"e##ing over0eads 2!0H 5i-ed3
As. 2per unit3
2.!2
0.)!
0.10
2.!0
0.40
0.20
70e actua# production during t0e period was #ater
reviewed and re(esti1ated at $04000 units. repare t0e
budgeted cost 2bot0 tota##/ and per unit3 at t0is revised
#eve# on t0e basis of t0e aforesaid data s0owing a profit
of 22.!H of t0e sa#e(price w0ic0 /ou wou#d arrive at
t0erein.
E.8 ": &rite s0ort notes on 2an/ two3 C
i3 "tatutor/ Cost .udit C
ii3 Cross(c0ec's in Over0eads variances C
iii3 urc0ase :udget C
iv3 Cost .udit 2Aeporting3 Au#es.
232
,: . co1pan/ sub1its t0e fo##owing data of its product
1anufactured for t0e first ;uarter of 200G and 2010 C
P"rticu/"r# A*!unt# . V"/ue#
"a#es C =anuar/4 200G C 5ebruar/4 200G C
Marc04 200G
"e##ing price 2200G3
T"r$et# !r ir#t ?u"rter 2010 : Increase in "a#es
;uantit/ Increase in "a#es price
"toc' C 1(1(2010 2H of =anuar/4 2010 "a#es3 "toc' C 31(3(2010
"toc' C 31(3(2010 and 2+(2(2010
2as percentage of subse;uent 1ont0Ps "a#es3
304000 units
2!4000 units
3!4000 units
As. 20
10H
10H
!0H
2!4000 units
!0H
repare t0e "a#es and roduction budget for t0e first
;uarter 2010.
%1
M.COM.
Part-I
ADVANCED
ACCOUNTACY PAPER-II
ADVANCE COST
ACCOUNTING
UNIVERSITY OF MUMBAI
Dr. Rajan
Welukar Vice
Chancellor,
University o
M!"#ai
Programme Co-
or!nator " E!tor
Cour#e Wr!ter
Dr. D$ane#%ar &ar!'$anan
$roessor%C!"%&irector I&O',
University o M!"#ai
( M#. Ma$ura )ulkarn!
Asst( $ro%c!"%Asst( &irector,
I&O', University o M!"#ai
( Dr. P. ). *angar
$rinci)al,
San)a*a Colle+e o
Co""erce Navi M!"#ai %
,--.-/
( Dr. Paulraj
Aruna'$anan 0!r!
Nana1 Colle+e
0TB Na+ar
M!"#ai % ,---2.
( Dr. V. S.
)annan Vice
$rinci)al
3(E(S( Shro Colle+e o
Co""erce, 3an*ivali 4E5, M!"#ai
% ,--6-6
Se+tem,er- ./00 M.Com. Part-I- A1an'e A''ounta'2 Pa+er-II-
A1an'e Co#t A''ount!ng
$!#lishe* #y 7 $roessor c!" &irector
Instit!te o &istance an* O)en 'earnin+ ,
University o M!"#ai,
Vi*yana+ari, M!"#ai % ,-- -89(
&T$ Co")ose*
$rinte* #y
7 Ash:ini Arts
0!r!1ri)a Cha:l, M(C( Cha+la Mar+, Ba"an:a*a,
Vile $arle 4E5, M!"#ai % ,-- -88(
7
CONTENTS
Unit N!. Tit/e P"$e N!.
1. rocess Costing 01
2. Operating Costing 4!
3. Integrated and >on(Integrated .ccounts +)
4. Margina# Costing and .bsorption Costing 13)
!. Manageria# Decisions 1$0
$. "tandard Costing 201
). :udgetar/ Contro# 22!
+. Cost .udit 24!

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