Chapter 1: Cost AccountingAn Overview

1.1 Components of Total Cost

Prime cost: It is the aggregate of direct material cost, direct labour cost and direct expenses.

Direct materials + Direct labour + Direct expenses = Prime cost or Direct cost

Factory cost: It is the aggregate of prime cost and factory overheads. Factory cost is also termed as works cost or
production cost or manufacturing cost.

Prime cost + Works (Factory) overheads = Works cost or Factory cost or Manufacturing cost
or Production cost

Office cost: It is the aggregate of factory cost and office and administration overheads. This is also known as
administrative cost or total cost of production.

Factory cost + Administration overhead = Total cost of production or Office cost

Total cost: It is the aggregate of office cost and selling and distribution overheads. This is also called cost of sales

Office cost + Selling and Distribution overheads = Cost of sales or Total cost

Consumption of raw material (or) material used:

Opening stocks of Direct material + Purchase of direct material Closing stock of direct material

Work-in-progress: It has to be adjusted with works cost (i.e., after computation of prime cost but before
determining works cost)

Works cost = Gross works cost + Opening work-in-progress Closing work-in-progress

Finished goods: It has to be adjusted with cost of production (i.e., after computation of works cost but before
determining cost of production)

Cost of production of goods sold or cost of goods sold

= Cost of production + Opening stock of finished goods Closing stock of finished goods

Formula:

Raw materials used = Opening stock + Purchases Closing stock

or Purchases = Raw materials used Opening stock + Closing stock.
Purchases = Raw materials used + Opening stock Closing stock

Chapter 2: Direct Materials

The economic ordering quantity is computed by using the formula:
 where E.O.Q = Economic ordering quantity
U = Units purchased (or) used in a year
P = Cost of placing an order
S = Annual cost of storage of one unit

Sometimes, stock holding cost may be given in percentage (i.e., the inventory-carrying charges). In such
cases the formula differs a little, which is shown below:

where U = Annual consumptions during the year (units)

P = Cost of placing an order
H.C = Holding cost as percentage of average stock value
C = Price/unit

Formula to determine the minimum level of stock:

Minimum level = Re-order level (Normal consumption Average period to obtain delivery)

Formula to determine the safety level of stock:

Safety stock level = Ordering level (Average rate of consumption Re-order period)
(or)
= (Maximum rate of consumption Average rate of consumption) Lead time

Formula to determine the re-order level of stock:

Re-order level = Maximum consumption Maximum re-order period

(or)
= Minimum level + Consumption during time lag period

Formula:

Chapter 3: Direct Labour and Direct Expenses

The formula for computing the rate per hour is as under:
The other method involves the charging of monetary as well as the cost of non-benefits to jobs or units produced by
using an hourly rate as follows:

T: Time Taken

R: Rate

3.1 Barth Scheme

3.2 Halsey Weir Scheme

3.3 Rowan Scheme

3.4 Halsey Premium Bonus Plan

Chapter 4: Overheads Classification, Distribution and
Control
4.1 Units of Production: (Rate Per Unit of Production)
Under this method, the charge per unit is computed by dividing the total estimated factory overhead by the total
estimated units. The overhead absorption rate is calculated as follows:

4.2 Direct Material Cost

4.3 Direct Wages

4.4 Direct Labour Hours

4.5 Prime Cost

Chapter 5: Administration Selling and Distribution

Overheads
The overhead application rate is computed by using the base selected as under.

1. Base: Manufacturing or factory cost

2. Base: Number of units produced

3. Base: Net sales value

4. Base: Number of units sold

6. Base: Conversion cost

Conversion cost means that cost of direct labour, direct expenses and factory overheads are all included.

Gross profit means the profit before administration, selling and distribution overheads.

The bases which lay emphasis on the selling function, namely Net saeles value, Selling costs and Number of
units sold are more equitable than the other bases. A predetermined overhead absorption rate can be used.

It is important to note that administration overhead must not be added to the cost of units in stock (finished goods
or work-in-progress).

It must be added to the cost of units sold.

Chapter 6: Activity-based Costing (Cost Allocation) System

Formula:

Chapter 7: Single Costing*

Raw materials consumed during the period can be calculated as:
7.1 Stock of Work-in-Progress
Work-in-progress means units (products) which are not yet completed but manufacturing process has been initiated,
that is, semi-finished goods. Work-in-progress is valued either as prime cost basis or works cost basis. In practice,
mostly it is valued at works cost. Opening and closing stock will have to be adjusted as follows:

7.2 Stock of Finished Goods

Opening stock and closing stock of finished goods have to be adjusted before computing the cost of goods sold, as
follows:

Chapter 8: Job Costing and Batch Costing

Variable overheads:
Fixed overheads:

The most commonly used formula for determining EBQ is:

Formula:

Chapter 9: Contract Costing

9.1 Guidelines to Asses Profit on Incomplete Contracts
Standard costing principles should be adopted for the recognition of profit for each period. In case of incomplete
contracts, only a certain portion of the profit can be taken to P&L A/c based on the work completed. The firm must
provide for the unforeseen losses and contingencies. The following are the general guidelines that may be followed
for the assessment of profit on incomplete contracts:

(a) Profit should be completed on the basis of work certified.

(b) Uncertified work should be valued at

1. In case the value of work certified is less than 25% or 1/4th of the contract price, then no profit has to be
taken into consideration. The entire profit has to be kept as a reserve for meeting the contingencies.

2. In case the value of work certified is >25% but <50% of the

contract price, [>1/4th bus <1/2]
Formula:

3. In case the value of work certified is 50% of the contract price [ 1/2]:
Formula:
4. In case the contract is nearing completion < 100% of the contract price:
Formula:

(i) 1/3 of profit after adjusting the percentage of cash received from the customer (contractee) to be
credited to P&L A/c.
(ii) (ii) Balance amount of profit is kept as a reserve.
(i) 2/3 of profit after adjusting the percentage of cash received from the customer to be credited to P&L
A/c.
(ii) (ii) Balance amount of profit is kept as a reserve.
(i) Estimate the total cost of completing contract and then calculate the estimated profit.
(ii) (ii) Estimate the profit after adjusting for percentage of cash received and percentage of work certified.

Chapter 10: Process Costing

10.1 Abnormal Loss
The value of abnormal loss is calculated by using the formula as noted under:

10.2 Abnormal Gain

Accounting treatment:

(i) Abnormal gain has to be shown separately.

(ii) (ii) It should be valued based on the average unit cost of good production and credited to the costing
P&L A/c.
(iii) The value of abnormal gain is calculated by using the formula:

Chapter 14: Budgetary Control

14.1 Activity ratio:
Formula to calculate activity ratio is:

14.2 Capacity ratio:

Formula to compute capacity ratio is:

14.3 Efficiency ratio:

Formula to compute efficiency ratio is:

Chapter 15: Standard Costing and Variance Analysis

Standard rate per
Machine hour

If it is departmentalized, the formula is:

NOTE: Instead of machine hour, any other base, that is, labour or wages may be used.

For instance,

For direct wages, the percentage of direct wages may be determined as follows:

The material cost variance may be determined by using the following formula:
15.1 Material-Usage Variance (or) Quantity Variance
The formula for the computation of variance is:

Material-usage variance = Standard price (Standard quantity Actual quantity)

The formula for calculating material-mix variance is as follows:

Material-mix variance = Standard price (Revised standard quantity Actual quantity)

15.2 Direct Labour Cost Variance

Direct labour cost variance is compared by using the following formula:

Direct labour cost variance = Standard cost for actual output Actual cost

(or)
[Standard wage rate per hour Std direct labour hrs. produced] [Actual wage rate per hrs Acutal direct
labour hrs]

Formula:

Labour cost variance = (Std rate Std time for actual output) (Actual rate Actual time).

The direct labour (wage) rate variance is calculated by using the following formula:

Direct labour rate variance = Actual hours or time (Std wage rate Actual wage rate)

The direct labour efficiency is computed as follows:

The variance is calculated by using the formula:

Direct-labour idle-time variance = Std wage rate per hour Abnormal idle hours

(or)
= (Actual hours paid for Std wage rate) (Actual hours worked Std wage rate).

Direct labour mix variance = Std rate (Revised std labour hours Actual labour hours)
Labour-mix variance = (Actual hrs at Std rate of actual gang Actual hrs at Std rate of std gang)

The revised efficiency variance is calculated as:

Revised labour-efficiency variance = Std rate (Std (time) hrs for actual output Revised std time (hours))

Directlabour-yield variance = Standard cost per unit (Standard production for Actual mix Actual production)

Variable-overhead variance = (Std. variable-overhead rate Actual production) Actual variable overhead.

Fixed-overhead variance = (Std. fixed overhead rate Actual output) Actual fixed overheads

(or)
(Std. hours produced Std. fixed overhead rate per hour) Actual fixed overheads.

Volume variance = (Standard rate Actual output) Budgeted fixed overheads

Standard rate (Actual output Std output)
Standard rate per hour (Standard hrs produced Budgeted hours)
Std fixed overhead rate (Budgeted output Actual output).

Standard fixed-overhead rate (Budgeted number of days Actual number of days)

(or) Std. rate (Revised budgeted units Budgeted units)
(or) Std. rate (Revised budgeted hours Budgeted hours)

Std. fixed-overhead rate (Actual hours worked Output in terms of std. hours).
where, the output in terms of std. hours = Actual output Std hours per unit of output.

Sales-price variance] = Actual quantity sold (Standard profit per unit Actual profit per unit)

(or)

= Actual quantity sold (Budgeted selling price Actual selling price)

The following terms must be understood at this junction:

(i) Budgeted profit = Budgeted (standard) quantity of sales Standard profi t per unit.
(ii) Actual profit = Actual quantity of sales Actual profit per unit.
(iii) Standard profit = Actual quantity of sales Standard profit per unit.

Sales-volume variance may be calculated by using the following formula:

Sales-volume variance = Standard profit per unit (Budgeted quantity of sales Actual quantity of sales)
Sales-volume variance may further be sub-classified into:
(i) mix variance and (ii) quantity variance.

Sales-mix variance = (Std. value of actual mix Std. value of revised standard mix).

Sales-quantity variance is computed by using the following formula:

Selling-price variance = Actual quantity sold (Budgeted selling price Actual selling price)

Sales-volume variance = Std. selling price per unit (Std. quantity of sales Actual quantity of sales)Sales-
volume variance may be further classified into:

Sales-mix variance = (Std. value of actual mix Std. value of revised std mix).

(or)
Revised std sales value Budgeted sales value.

Chapter 16: Marginal Costing

Products may be sold under different situations such as profit or loss or no profit and no loss, that is, at cost. As
such, the character of contributions has the following composition under different situations:

(i) Selling price containing profit (sales at profit):

Contribution = Fixed cost + profit
(ii) Selling price at cost: (Sales: No profit No loss):
Contribution = Fixed cost
(iii) Selling price at loss: (Sales at loss)
Contribution = Fixed cost loss.

Contribution = Selling price Variable cost

(Marginal cost)Under marginal-costing technique,

Profit = Contribution Fixed costs
 If profit and fixed costs are known:
Then the equation may be transformed as:
Fixed costs + Profit = Contribution.

From this, the basic marginal equation is obtained as:

Sales Marginal costs = Contribution.

where Contribution = Fixed costs + Profit.

Substituting this in the above equation, we get

Sales Marginal costs = Fixed costs +Profit

(or)
Sales = Marginal costs + Fixed costs + Profit

*Profitability is to be ascertained by using the formula

Chapter 17: Break-Even and Cost-Volume-Profit Analysis

The formulae for P/ V ratio are:

17.1 Formula to Determine BEP

The level of sales required to earn a particular level of profi t can be determined by using the formula:
17.2 Margin of Safety

Formulae
[Pertaining to P/ V ratio, break-even and CVP analysis]