KDF1B COST ESTIMATION & CONTROL. Unit : I - V

Transcription

1 KDF1B COST ESTIMATION & CONTROL Unit : I - V

2 UNIT I Syllabus INTRODUCTION COST BEHAVIOUR COSTING SYSTEMS COST BEHAVIOUR AND DECISION MAKING FINANCIAL GEARING AND OPERATIONAL GEARING. KDF1B Cost Estimation & Control 2

3 INTRODUCTION Costing is a process of recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action for the control of costs. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. KDF1B Cost Estimation & Control 3

4 COSTING SYSTEMS A Costing system is a framework used by the firms to estimate the cost of their products for profitability analysis, inventory valuation and cost control. KDF1B Cost Estimation & Control 4

5 COSTING SYSTEMS KDF1B Cost Estimation & Control 5

6 COST BEHAVIOUR AND VALUE IMPROVEMENTS Cost Behaviour is associated with learning how costs change when there is a change in an organization's level of activity. The costs which vary proportionately with the changes in the level of activity are referred to as variable costs. The costs that are unaffected by changes in the level of activity are classified as fixed costs. KDF1B Cost Estimation & Control 6

7 COST BEHAVIOUR KDF1B Cost Estimation & Control 7

8 COST BEHAVIOUR AND DECISION MAKING The idea of cost behaviour is one of the most important concepts in managerial accounting. Determining how a cost will behave is critical to planning, decision making and controlling. KDF1B Cost Estimation & Control 8

9 COST BEHAVIOUR AND DECISION MAKING KDF1B Cost Estimation & Control 9

10 FINANCIAL GEARING AND OPERATIONAL GEARING Gearing refers to the level of a company s debt related to its equity capital, usually expressed in percentage form. KDF1B Cost Estimation & Control 10

11 FINANCIAL GEARING Financial gearing refers to the relative proportions of debt and equity that a company uses to support its operations. This information can be used to evaluate the risk of failure of a business. KDF1B Cost Estimation & Control 11

12 OPERATIONAL GEARING Operational gearing is the effect of fixed costs on the relationship between sales and operating profits. If a company has no operational gearing, then operating profit would rise at the same rate as sales growth (assuming nothing else changed). Often a high fixed costs increase operational gearing. KDF1B Cost Estimation & Control 12

13 UNIT II - Syllabus Activity Based Costing Job costing Process costing KDF1B Cost Estimation & Control 13

14 ACTIVITY BASED COSTING KDF1B Cost Estimation & Control 14 14

15 ACTIVITY BASED COSTING FORMULA KDF1B Cost Estimation & Control 15

16 Job Costing COMPONENTS OF JOB COSTING KDF1B Cost Estimation & Control 16

17 Job Costing Job costing It is the accounting which tracks the costs and revenues by "job" and enables standardized reporting of profitability by job. For an accounting system to support job costing, it must allow job numbers to be assigned to individual items of expenses and revenues. A job can be defined to be a specific project done for one customer, or a single unit of product manufactured, or a batch of units of the same type that are produced together. BPZ6A / BPG6B -ADVANCED COST ACCOUNTING 17

18 Job Costing JOB COST SHEET MODEL KDF1B Cost Estimation & Control 18

19 Job Costing Features of Job Costing It is a specific order costing The job is carried out or the product is produced to meet the specific requirements of the order It is concerned with cost of Individual Job Cost are collected to each job at the end of its completion Work in progress may or may not exist at the end of the accounting years KDF1B Cost Estimation & Control 19

20 Process Costing Meaning and Features: Process costing is a method of costing used to ascertain the cost of production of each process, operation or stage of manufacture where processes are carried on having one or more of the following features: (i) Where the product of one process becomes the material of another process or operation, (ii) Where there is simultaneous production at one or more process of different products, with or without by product, (iii) Where, during one or more processes or operations of a series, the products or materials are not distinguishable from one another, as for instance, when finished products differ finally only in shape or form KDF1B Cost Estimation & Control 20

21 Process Costing Process costing has been defined by Kohler as: A method of accounting whereby costs are charged to processes or operations and averaged over units produced; it is employed principally where a finished product is the result of a more or less continuous operation, as in paper mills, refineries, canneries and chemical plants; distinguished from job costing, where costs are assigned to specific orders, lots or units. KDF1B Cost Estimation & Control 21

22 Process Costing APPLICATION OF PROCESS COSTING The method is useful in the case of: (i) Metallurgical industries (like steel and aluminum) (ii) Chemical industries (like plastics and drugs) (iii) Food processing industries (like cheese, chocolates, etc.) and (iv) Any other industry where there is continuous output involving two or more processes. KDF1B Cost Estimation & Control 22

23 Process Costing Example of Production Process Coconut Oil KDF1B Cost Estimation & Control 23

24 Process Costing KDF1B Cost Estimation & Control 24

25 Process Costing KDF1B Cost Estimation & Control 25

26 Process Costing KDF1B Cost Estimation & Control 26

27 Process Costing KDF1B Cost Estimation & Control 27

28 Process Costing KDF1B Cost Estimation & Control 28

29 Process Costing KDF1B Cost Estimation & Control 29

30 Process Costing To have a look about production process click the following KDF1B Cost Estimation & Control 30

31 Unit III - Syllabus Decision Making Marginal Costing Differential Costing KDF1B Cost Estimation & Control 31

32 Decision making A decision can be defined as a course of action purposely chosen from a set of alternatives to achieve organizational or managerial objectives or goals. Decisions play important roles as they determine both organizational and managerial activities. Decision-making is an integral part of modern management. KDF1B Cost Estimation & Control 32

33 Decision Making Process KDF1B Cost Estimation & Control 33

34 BPZ6A / BPG6B -ADVANCED COST ACCOUNTING 34

35 Decision making techniques KDF1B Cost Estimation & Control 35

36 Marginal Costing The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for. Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). KDF1B Cost Estimation & Control 36

37 Marginal Costing IMPORTANT FORMULA 1 Marginal Costing Equation SALES VC = FC + PROFIT 2 Contribution = Sales VC OR Profit + FC 3. Profit Volume Ratio = Contribution / Sales Break Even Point = FC / PV Ratio 5. Break Even Point(Quantity) = FC / Contribution p.u 6. Margin Of Safety = Total Sales Break even Sales 7. Margin Of Safety(In Rupees) = Profit / PV Ratio 8. Margin Of Safety(Quantity) = Profit / Contribution p.u KDF1B Cost Estimation & Control 37

38 Marginal CostingTM OTHER FORMULA 1. CONTRIBUTION = PROFIT + FC 2. Sales(In Rupees) = Contribution / PV Ratio 3. Profit = Contribution FC 4. Contribution = Sales * PVR 5. Finding the Selling Price = Total VC / VCR 6. Finding the Profit = MOS * PVR KDF1B Cost Estimation & Control 38

39 MARGIN OF SAFETY The excess of actual or budgeted sales over the break even volume of sales is called margin of safety. At break even point costs are equal to sales revenue and profit is zero. Margin of safety, therefore, tells us the amount of sales that can be dropped before losses begin to be incurred. With a high margin of safety business have low risk of not breaking even and with a low margin of safety business have high risk of not breaking even. KDF1B Cost Estimation & Control 39

40 Marginal Costing Application of Marginal Costing in Managerial Decision Making Pricing Decisions Profit Planning and Maintaining a Desired Level of Profit Make or Buy Decisions Problem of Key Selection of a Suitable or Profitable Sales Mix Effect of Changes in Sales Price Alternative Methods of Production Determination of Optimum Level of Activity Evaluation of Performance Capital Investment Decisions KDF1B Cost Estimation & Control 40

41 Differential Costing KDF1B Cost Estimation & Control 41

42 DIFFERENTIAL COSTS KDF1B Cost Estimation & Control 42

43 DIFFERENTIAL COSTS KDF1B Cost Estimation & Control 43

44 UNIT IV - Syllabus Cost control and reduction Budgetary Control Functional Budgets KDF1B Cost Estimation & Control 44

45 COST CONTROL KDF1B Cost Estimation & Control 45

46 KDF1B Cost Estimation & Control 46

47 Cost Reduction Cost reduction in its simplistic form is a reduction of a business s cost base from a predetermined point in time. This approach embraces short term slash and burn cost take-out, while also adopting longer term operational cost efficiencies (doing more for less). However, in both cases, the cost reduction exercise is finite as it is often reactionary, addressing a crisis or an executive one off mandate rather than reflecting an overarching shift in cost leadership or company identity. KDF1B Cost Estimation & Control 47

48 COST REDUCTION KDF1B Cost Estimation & Control 48

49 Budget A budget is an estimation of revenue and expenses over a specified future period of time; it is compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a family, a group of people, a business, a government, a country, a multinational organization or just about anything else that makes and spends money. Among companies and organizations, a budget is an internal tool used by management and is often not required for reporting by external parties. KDF1B Cost Estimation & Control 49

50 Budgetary Control Budgetary control is the process of determining various actual results with budgeted figures for the enterprise for the future period and standards set then comparing the budgeted figures with the actual performance for calculating variances, if any. First of all, budgets are prepared and then actual results are recorded. Definition: According to Brown and Howard, Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability. KDF1B Cost Estimation & Control 50

51 BUDGETS TM KDF1B Cost Estimation & Control 51

52 Budget KDF1B Cost Estimation & Control 52

53 Unit V - Syllabus Standard costing & Variance Analysis Material Labour Overhead Profit Variances KDF1B Cost Estimation & Control 53

54 STANDARD COST KDF1B Cost Estimation & Control 54

55 VARIANCE ANALYSIS KDF1B Cost Estimation & Control 55

56 ELEMENTS OF COST KDF1B Cost Estimation & Control 56

57 ELEMENTS OF COST KDF1B Cost Estimation & Control 57

58 ELEMENTS OF COST KDF1B Cost Estimation & Control 58

59 COST DETERMINATION KDF1B Cost Estimation & Control 59

60 Example of variance Analysis KDF1B Cost Estimation & Control 60