Cost concepts

1. Differences between Financial Accounting , Cost Accounting & Management Accounting

2. Basis Financial Accounting Cost Accounting Management Accounting Accounting method It depending on double entry system. It is not depending on double entry system. It is not depending on double entry system. Accounting standards Accounts should be prepared based on accounting standards issued by Institute of Charted Accountants of India. It is not bound by any accounting standards. It is not bound by any accounting standards. Analysis of cost and profit It shows overview of business. It shows detailed cost and profit data for each product. It provides the info. relating to plants, departments, individual product, etc. Control Aspect It does not attach importance to control aspect. It provides detailed system like standard costing & budgetary control. It provides detailed info. for taking optimum decisions.

3. Basis Financial Accounting Cost Accounting Management Accounting External & Internal Users It is for external use. It is for internal use. It is for internal use. Format of presenting information Structured format (P&L a/c, Balance Sheet, etc.) There is no uniform format. Format is tailored to meet the needs of management. There is no uniform format. Format is tailored to meet the needs of management. Historical and predetermined cost It is concerned historical records. It depends on historical data and extends plans to improve performance in the future. It depends on historical data and it is future oriented. Periodicity of reporting Usually on an annual basis. Depending on requirements (weekly, monthly, etc.). Depending on requirements (weekly, monthly, etc.).

4. Basis Financial Accounting Cost Accounting Management Accounting Purpose To know Profit & loss. To provide detailed cost info. to Mgt . To take decisions. Statutory Requirements As per Companies Act & Income Tax Act. It is voluntary (it is mandatory for certain industries as per Companies Act) It is optional. Types of statements prepared For general purpose (P&L a/c., Balance Sheet, etc.) For specific purpose (variance report, idle time report, etc.) For specific purpose (ex. Performance report of sales manager). Types of transactions recorded It records only monetary transactions. It records external as well as internal transactions (issue of materials to production dept.) It records external as well as internal transactions (sales, expenditure, product quality, etc .)

5. Role of Accounting Information in Planning and Control

6. Essentials of Good Information System Proper Form (comprehensive form with suggestive title, heading, sub heading and number of paragraphs) Contents (need to simple) Promptness (preparation and submission of report at the proper time) Accuracy Comparability Consistency (need to follow same methods) Relevancy (Info. should be relevant and not to use unambiguous terms )

7. Types of Information

8. Info. meant for Top Level Management Info. on budgeted and actual profits Info. on sales and production Capital budgeting Master budget Periodical financial reports Machine and labour utilization report Info. on research and development activities Project evaluation report Overhead cost and efficiency reports Info. on selling and distribution overheads.

9. Purchase Manager Info on material price and usage variance Info on material carrying cost, loss of material in the storage etc. Info on trends in the pertaining of various items of materials. Materials Manager Info on stock of raw-materials, work in progress and finished goods Info about materials wastage and loss Info on level of materials stock at the stores Info on surplus and deficiency reports Info. meant for Middle Level Management

10. Production Manager Info on budgeted and actual production Info on overtime work and idle time Info on labour utilization statement Info on machine utilization statement Sales Manager Info on budget and actual sales Info on sales trend Info on orders received and orders executed Info on cash sales and credit sales Info. meant for Middle Level Management

11. Info on labour efficiency variance Info on idle time, overtime and machine utilization Info on material usage variance Info on credit collections and outstanding Info on budgeted and actual production Info on material spoilage Info on cost of materials, labour etc. Info. meant for Jr. Level Management

12. Cost Concepts

13. Cost Methods Job order Costing : Cost ascertainment used in job order industries. Contract costing : Work is undertaken to customer’s special requirements and each order is of long duration. Batch costing : Where similar articles are manufactured in batches either for sale or for use within the undertaking. Process costing : Sequence of continuous or repetitive operations or processes and products are identical and cannot be segregated. Service (Operating)

14. Techniques of Costing Standard costing: It is predetermined as a target of performance and actual performance is measured against the standard. The difference between standard and actual costs are analysed to know the reasons for the difference so that corrective actions may be taken. Budgetary control: It is a technique applied to the control of total expenditure on materials, wages and overheads by comparing actual performance with planned performance. Contd …

15. Techniques of Costing Marginal costing: In this technique, separation of costs into fixed and variable (marginal) is of special interest and importance. Marginal costing regards only variable costs as the cost of the products. Absorption costing: Costing whereby total cost (fixed and variable costs)are charged to products. Uniform costing: A situation in which a number of firms adopt a uniform set of costing principles.

16. Material Labour Other Expenses Direct Material Indirect Material Direct Labour Indirect Labour Direct Expenses Indirect Expenses Overheads Direct Material Indirect Material Direct Labour Indirect Labour Prime Cost Elements of Cost

17. Formulas Prime cost + Production OH = Factory Cost Factory cost + Administration OH = Cost of Production Cost of Production + Selling & Dist. OH = Total Cost Total cost + Desired Profit = Sales (Price)

18. Cost Classification

19. By Nature of Expenses Material Raw-materials Semi finished goods & Finished goods Labour Skilled Semi skilled & Unskilled Expenses Direct Indirect

20. Production or manufacturing cost Administration cost Selling and distribution cost and Research and development cost By Nature of Function

21. By Variability Fixed costs tend to remain unaffected by the variation or change in the volume of output, such as supervisory salary, rent, taxes, etc. Variable costs tend to vary directly with volume of output, such as direct material, direct labour and direct expense. Semi-fixed/semi-variable cost is partly fixed and partly variable, such as telephone expense, electricity charges, etc.

22. Controllable cost can be influenced by the action of a specified member of an undertaking. Uncontrollable cost cannot be influenced by the action of a specified member of an undertaking. By Controllability

23. By Normality Normal cost refers to the cost, at a given level of output in the conditions in which that level of output is normally attained. Abnormal cost is a cost which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained.

24. On the basis of Time Historical cost Predetermined cost Estimated cost and Standard cost

25. Cost Analysis for Decision Making Marginal vs. Absorption Costing (with fixed cost and without FC) Sunk - irrelevant Committed – pre committed Opportunity Incremental / Differential Avoidable & Unavoidable controllable / uncontrollable