BPC6C Cost and Management Accounting. Unit : I to V

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1 BPC6C Cost and Management Accounting Unit : I to V

2 UNIT -1 FUNDAMENTALS OF COST ACCOUNTING Nature and scope of Cost Accounting, Distinction between cost and financial accounting, Cost sheet, tenders Characteristics of Management Accounting, Objectives of Management Accounting, Difference between Financial, Cost and Management Accounting, 2

3 FUNDAMENTALS OF COST ACCOUNTING MEANING OF COST ACCOUNTING It is a process of recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action for the control of costs DEFINITION OF COST ACCOUNTING The Institute of Cost and Management Accountant, England (ICMA) has defined Cost Accounting as the process of accounting for the costs from the point at which expenditure incurred, to the establishment of its ultimate relationship with cost centres and cost units For Simple notes click 3

4 COST SHEET FORMAT Particulars Raw materials Consumed direct Labour Direct Expenses Per Unit Total Cost Prime Cost Add: Factory overheads All expenes incurred in manufacturing works cost Add: Office Overheads All expenses incurred in administration Cost of Production Add: Selling & Distribution overheads All expenses incurred in selling distribution Cost of Sales Profit Sales 4

5 COST SHEET FORMAT Particulars Raw materials Consumed direct Labour Direct Expenses Per Unit Total Cost Prime Cost Add: Factory overheads All expenes incurred in manufacturing works cost Add: Office Overheads All expenses incurred in administration Cost of Production Add: Selling & Distribution overheads All expenses incurred in selling distribution Cost of Sales Profit Sales 5

6 FUNDAMENTAL S OF COST ACCOUNTING DIFFERENCE BETWEEN COST ACCOUNTING & FINANCIAL ACCOUNTING Cost Accounting Internal Reporting Point of Difference Purpose Optional Objective Manner Obligation Recording External Reporting mainly to tax authorities & Government Compulsory Subjective Manner Marginal Costing Budgetary Control Standard Costing The cost data helps in evaluation Control No control techniques Evaluation of efficiency Stock is always valued of Valuation of cost price stock Financial Accounting Not sufficient for evaluation Stock is valued at cost or market price 6

7 COST SHEET According to CIMA London Cost Sheet is A statement which provides for the assembly of the detailed cost of a centre or a cost unit. It is also a periodical statement. The expenditure which has been incurred upon product for a period is extracted from the financial books and the store records and set out in a memorandum statement. If this statement is confined to the disclosure of the costs of units produced dividing the period, it is termed as Cost- Sheet, but where the statement records both total cost, profit and sales, it is usually known as Statement of Cost or Production Account. 7

8 COST SHEET FORMAT Particulars Raw materials Consumed direct Labour Direct Expenses Per Unit Total Cost Prime Cost Add: Factory overheads All expenes incurred in manufacturing works cost Add: Office Overheads All expenses incurred in administration Cost of Production Add: Selling & Distribution overheads All expenses incurred in selling distribution Cost of Sales Profit Sales 8

9 COST SHEET Problems need to be worked out under 1. Simple cost sheet 2. Cost Sheet with Stock Adjustment 3. Cost sheet with Tender or Quotation 4. Cost Sheet with Estimated cost for future period 5. Cost Sheet with Hidden Information 6. Reconciliation Statement To check more problems click the following B 9

10 UNIT -II COST SHEET 10

11 Management Accounting Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and in day to day operations of an undertaking - ICMA Providing financial information Cause and effect analysis Use of special techniques and concepts Decision making No fixed conventions Achievement of objectives Improving efficiency Forecasting Providing information and not decisions 11

12 Financial, Cost and Management A/c Cost Accounting Management Accounting Purpose Ascertain and control Provide information to the cost of products or management for efficiently services performing the management functions Emphasis Based on both historical Future projections and present data Principles and Procedures Established procedures No such prescribed practice and practices are are followed followed Data used Quantitative information Scope Cost ascertainment and budgeting, Tax planning control and reporting to management Quantitative and Qualitative 12

13 UNIT II Stores Records, Purchase order, Stores Ledger, Economic Ordering Quantity, Minimum and Maximum Reorder Level Labour, importance of labour cost, Different methods of Wage Payment, Calculation of Wages, Methods of incentive for scheme. 13

14 MATERIALS COST Introduction to Materials Material costs are the costs of acquiring of material resources necessary for business. Raw materials and semi-finished products costs. The cost of acquiring the necessary raw materials and semi-finished products belongs to this group. This group of material costs is often the largest. Fuel and energy costs. Acquisition costs of gasoline, machine oil, gas, solid fuel, electricity, heat belong to this group. Packaging costs. Acquisition costs of various containers (boxes, bales, boxes) belong to these costs. Spare parts costs. Expenses of spare parts used to repair equipment, machinery or vehicles. Building materials costs. The cost of building materials arise when the company is building new facilities or making renovation of existing facilities. Other material cost. All material costs which are not included in the above groups related to other expenses. It may be, for example, waste production or other costs. 14

15 MATERIAL PROCUREMENT SYSTEM 15

16 ECONOMIC ORDERING QUANTITY (EOQ) The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory such as holding costs, order costs, and shortage costs. FORMULA FOR EOQ 16

17 ECONOMIC ORDERING QUANTITY (EOQ) 17

18 MATERIALS COST CONCEPT AND MEANING OF STOCK LEVEL Stock level refers to the different levels of stock which are required for an efficient and effective control of materials and to avoid over and under-stocking of materials. The purpose of materials control is to maintain the sock of raw materials as low as possible and at the same time they may be available as and when required. To avoid over and under-stocking, the storekeeper must fix the inventory level, which is also known as a demand and supply method of stock control. In a scientific system of inventory control the following levels of materials are fixed. 1. Re-order Level 2. Minimum Level Or Safety Level 3. Maximum Level 4. Average stock Level 5.. Danger Level 18

19 MATERIALS COST PURPOSE OF STOCK LEVELS 19

20 MATERIALS COST Maximum Level of Stock = (Reorder Level + Reorder Quantity) (Minimum rate of consumption x Minimum reorder period) Minimum level of stock = Reorder level (Average rate of consumption x Average reorder period) Reorder level or Ordering level = Maximum rate of consumption Maximum reorder period Average Stock level = (Maximum stock level + Minimum stock level) /2 or Minimum Stock level + 14 Reorder Quantity Danger level = Minimum rate of consumption Emergency delivery time 20

21 MATERIALS COST To learn more problems click the following link vel_maximum_stock_level_danger_level_cost_and_management_ accounting&b=42&c=

22 MATERIALS COST METHOS OF PRICING OF MATERIAL ISSUES FIFO - FIRST IN FIRST OUT LIFO - LAST IN FIRST OUT HIFO - HIGHEST IN FIRST OUT SAM -SIMPLE AVERAGE METHOD WAM - WEIGHTED AVERAGE METHOD BASE STOCK SPECIFIC PRICE METHOD 22

23 FIFO 23

24 LIFO 24

25 Weighted Average Method 25

26 SPECIFIC PRICE METHOD 26

27 Simple Average Price Method 27

28 BASE STOCK METHOD -FIFO 28

29 Store Ledger Base stock with LIFO 29

30 UNIT III MATERIALS COST WORKOUT PROBLEMS WITH THE HELP OF FOLLOWING LINK

31 LABOUR COST Labour cost - Meaning It is classified as direct and indirect. They form the labour cost which in turn forms a significant percentage of the total cost of production in a manufacturing or service organization. Minimizing costs does not mean reducing cost but means getting optimal and efficient productivity from the employees. Purposes of Labour Cost To calculate the correct gross and net wages for each employee. For financial accounting purposes. For management accounting purposes (i.e. stock valuation) Decision making and control purposes Elements of Labour Cost. Basic Wages. Overtime premium Bonus payment Idle time Labour turnover 31

32 CLASSIFICATION OF LABOUR COST 32

33 REMUNERATION METHODS Time Rate System Wages = No. of hours worked x Rate per hour Piece Rate System Wages = Rate per unit x No. of units produced. Incentive Plans Straight Piece Rate Method Guaranteed Day Work Rowan Premium Bonus Plan Group Incentive Schemes Gantt Task Bonus System Emerson Plan Flat Time Rate Method Taylor Differential Piece Rate Halsey Premium Bonus Plan Merrick Multiple Piece Rate Bedaux Point System Barth Premium System 33

34 LABOUR COST 34

35 LABOUR COST To workout problems refer the following link

36 UNIT III OVERHEADS Overheads overhead Classification, Accounting Manufacturing, Administration, and control of Selling and Distribution (Primary and Secondary Distribution), Allocation Apportionment and Absorption. Machine Hour Rate. 36

OVERHEADS Meaning Overhead costs, often referred to as overhead or operating expenses, refer to those expenses associated with running a business that

37 OVERHEADS Meaning Overhead costs, often referred to as overhead or operating expenses, refer to those expenses associated with running a business that can t be linked to creating or producing a product or service. Types Overhead costs can be broken down into three types: Fixed Variable Semi-variable 37

38 OVERHEAD ANALYSIS OVERHEAD ANALYSIS CAN BE DIVIDED INTO SIX STAGES 1.Overhead Collection - Overhead is said to be collected when it is incurred 2. Overhead Classification - This is the logical grouping of overhead into the major activities undertaken by a business such as production, selling, distribution and administration. 3. Overhead Codification - This refers to the use codes for the identification of overhead costs of different kinds 4. Overhead Allocation - This is charging of whole item of overhead to a single cost centre 5. Overhead Apportionment - This is the charging of proportions of overhead to different cost centres using fair and equitable bases. 6. Overhead Absorption - This is the charging of overhead to cost units using carefully calculated predetermined overhead rates 38

39 OVERHEADS PRIMARY DISTRIBUTION OF OVERHEAD Primary Distribution is the allocation or appointment of different items of overhead to both production and service departments on suitable basis. There is no partiality between production and service department in making primary distribution. IMPORTANT POINTS SHOULD BE KEPT IN MIND The basis for allocation and apportionment should be equitable and practicable. Charges are to be made to different departments in relation to benefits received. The method and basis for allocation and apportionment should not be time consuming and costly 39

40 APPORTIONMENT SECONDARY APPORTIONMENT It reapportions service department overhead to production departments. The objective of this stage is to ensure that only production departments bear all overhead costs, and which will eventually be charged to products. This is because while there is a direct link between the product produced and the production departments, there is no such link between the products and service departments. The absence of a direct link between service cost centres and products will make it difficult to charge service cost centre overheads to products. SERVICE DEPARENTS The departments such as canteen, administration, stores, maintenance, etc that do not take direct part in the production process. They provide support work for the production departments 40

41 UNIT V OVERHEADS Bases of Apportionment 1Cost or value of asset 2Floor space occupied 3Number of employees Overhead Cost Depreciation, insurance, repairs and maintenance, etc. Building depreciation, insurance and repairs, rent and rates, electricity, cleaning cost, Canteen, personnel administration, welfare, supervision, etc. Production or working hours Working hours affect almost all types 5Number of light bulbs 6.Metre reading Electricity Electricity, heating, air conditioning 7.Machine capacity or HP Electrical power 8.Number of requisitions Stores costs 41

42 Statement showing Primary Distribution of Overhead 42

43 Secondary distribution 43

44 UNIT V OVERHEADS 44

45 Over Absorption and Under Absorption of Overhead Over absorption occurs when the overhead absorbed is greater than the actual overhead incurred. Over absorbed overheads represent gains and are therefore credited to the profit and loss account. Under absorption occurs when actual overhead cost incurred is greater than the overhead absorbed. Under-absorbed overhead represents a loss and is therefore debited to the profit and loss account. 45

46 OVERHEADS Overhead Absorption This is the final stage of the overhead analysis process where the overhead of the production departments are charged to the final product. The following is the general formula for calculating overhead absorption rate. Activity level maybe measured using any of the following Cost basis Production hours Output Overhead absorption rates are based on budgeted overhead rather than actual overhead 46

47 UNIT V OVERHEADS Machine Hour Rate: Machine hour rate is a rational method for absorption of factory overhead. The factory overhead costs are allocated to a machine or a group of machines doing the same type of job and the cost per hour of the machine is ascertained dividing the total allocated overhead costs to the machine by number of hours the machine worked during the same period of time for which the costs have been considered. 47

48 MACHINE HOUR RATE 48

49 UNIT V OVERHEADS To workout more problems click the link

50 Unit IV Uses & limitations of funds flow statement Difference between funds flow statement and balance sheet Advantages and limitations of cash flow statement Methods of preparing cash flow statement Objectives of Ratio Analysis Advantages & Limitations of Ratio Analysis Steps in Ratio Analysis Classification of Ratios 50

51 Funds Flow Statement It is based on Working Capital concept of funds. It measures inflow and outflow of working capital resulting from different business transactions IMPORTANCE OF FUNDS FLOW STATEMENT Dividend Policy Financial Analysis and Control Useful to Bankers and Money Lenders Knowledge of Business Problems Manageri al Policies Financial Planning Helpful in Comparat ive Study 51

52 TRANSACTIONS THAT WILL AFFECT THE FLOW OF FUNDS The following transactions will bring the change in the working capital: 1. Current Assets and Non-Current Assets 2. Current Assets and Non-Current Liabilities 3. Current Liabilities and Non-Current Liabilities 4. Current Liabilities and Non-Current Assets TRANSACTIONS THAT WILL NOT AFFECT THE FLOW OF FUNDS Current Assets and Current Liabilities Non-Current Assets and Non-Current Liabilities Non-Current Liabilities or Non-Current Assets. 52

53 Funds Flow Statement & Balance Sheet Funds Flow Statement Balance Sheet Shows changes in working capital between 2 balance sheet dates Shows the position of assets and liabilities on a specific date Shows only those items which cause changes in working capital Shows the real and personal accounts of a business Aims at presenting flow of funds over a period Aims at depicting the financial position of a business Tool for financial analysis generally Culmination of the accounting process useful for management of a period meant for usage of stakeholders Based on the data from financial statements Based on trial balance Prepared after financial accounts are completed Prepared after income statement is completed 53

54 Steps in Funds Flow Statement Schedule of Changes in Working Capital is prepared from current assets and current liabilities in order to calculate the increase or decrease in working capital 54

55 Schedule of Changes in Working Capital Particulars Previous Year Rs. Current Year Rs. Changes in Working Capital Increase Decrease Current Assets : Cash Debtors Stocks Bill Receivables Marketable Securities or Shortterm Investment Current Liabilities: Creditors Bills Payable Bank Overdraft Outstanding Expenses Short-term Loan Increase or Decrease in Working Capital 55

56 Adjusted P&L A/c It can be calculated in two forms : Particulars Amount Rs. Amount Rs. Net Profit for Current Year Add : Non fund items Depreciation Goodwill, Patents Preliminary Expenses Written off LESS : Non-fund Items and Nontrading Income,already Credited to P & L A/c. Dividend Received Profit on sale Funds from operations 56

57 Profit and Loss Adjustment A/c Particulars To Depreciation Amount Particulars Amount By opening Balance of P&L Appropriation A/c To Goodwill Written off By Dividend Received To preliminary Expenses written off By Over provisions Written Back To Transfer to sinking fund To Loss on sale of fixed Assets By Funds from operations (Balancing Figure) To Closing Balance of P&L Appropriation A/c 57

58 While preparing funds flow statement, the following rules must be remembered An increase in a fixed assets indicates an application of funds A decrease in a fixed assets indicates a source of funds An increase in a fixed liability indicates a source of funds A decrease in fixed liability indicates an application of funds An increase in share capital indicates a source of funds A decrease in share capital indicates an application of funds Source of Funds -Fixed Assets +Fixed Liabilities +Share Capital Application of Funds +Fixed Assets -Fixed Liabilities -Share Capital 58

59 59

Cash Flow Statement Periodic Provides information regarding the liquidity of a firm Explains the reasons for increase or decrease in cash balance from one balance

60 Cash Flow Statement Periodic Provides information regarding the liquidity of a firm Explains the reasons for increase or decrease in cash balance from one balance sheet date to the next Classifies the reasons for the change as an operating, investing or financing activity. Reconciles net income with cash flow from operations. 60

61 61

62 Presentation of Cash Flow Statement Indirect Method Increases in Cash Operating (receipts from revenues) Investing (receipts from sales of noncurrent assets) Financing (receipts from issuing equity and debt securities) Decreases in Cash Operating (payments for expenses) Investing (payments for acquiring noncurrent assets) Financing (payments for treasury stock, dividends, and redemption of debt securities) 62 62

63 Cash Flow Statement Cash flows from operating activities Net Income Adjustments to reconcile net income to net cash provided by **** **** **** operating activities **** + Depreciation expense **** + Loss on sale of long-term assets **** - Gain on sale of long-term assets **** - Increases in current assets other than cash **** + Decreases in current assets other than cash **** + Increases in current liabilities **** - Decreases in current liabilities **** Net cash provided by operating activities **** 63

Investing Activities Cash inflows from investing activities arise from

investing activities arise from Buying fixed assets, investments,

activities arise from Issuing debt, equity securities Cash outflows from

64 Investing Activities Cash inflows from investing activities arise from Selling fixed assets, investments, intangible assets Cash outflows from investing activities arise from Buying fixed assets, investments, intangible assets Financing Activities Cash inflows from financing activities arise from Issuing debt, equity securities Cash outflows from financing activities arise from (Re)Paying dividends, debt, purchasing treasury stock 64

65 Cash flows from operating activities Direct Method Cash Inflows: 1. Collections from customers including cash received from sales (or services) and collections of A/R. 2. Cash receipts of interests or dividends. 3. Collections of other operating receipts (i.e., unearned revenue, rent revenue). Cash Outflows: 1. Payments to suppliers. 2. Payments to employees. 3. Payments for interest expense. 4. Payments for income taxes. 5. Payments for other expenses(i.e., Prepaid expenses; rent expenses). 65

66 Comparison of Direct & Indirect Method Direct method of presentation calculates cash flow from operations by subtracting cash disbursements to supplies, employees, and others from cash receipts from customers. The indirect method calculates cash flow from operations by adjusting net income for non-cash revenues and expenses. Most firms present their cash flows using the indirect method. Only operating activities section is different between the methods, investing and financing sections are the same. 66

determining and presenting the relationship of items and groups of items

67 Ratio Analysis Ratio is a mathematical relationship between 2 items expressed in quantitative form Ratio analysis is the process of determining and presenting the relationship of items and groups of items in the financial statements Rations may be expressed in: o Proportion o Times o Percentage 67

68 Profitability Ratios 68

69 Profitability Ratios 69

70 Turnover Ratios 70

71 Turnover Ratios 71

72 Short Term Solvency Ratios 72

73 Long Term Solvency Ratios 73

74 Unit V - Syllabus Features of marginal costing Advantages & limitations of marginal costing Marginal & absorption costing Cost Volume Profit analysis Break even charts Difference between forecast and budget Objectives of budgetary control Advantages & limitations of budgetary control Classification of budgets Zero based budgeting 74

75 Marginal Costing Marginal Cost is the amount at any given volume of output by which aggregate costs are changed if volume of output is increased or decreased by one unit.it relates to change in output in particular circumstances under consideration. Marginal costing is the ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating fixed cost &variable cost.in this technique of costing only variable cost are charged to operation,processes or products leaving all indirect cost to be written off against profits in period in which they arise. 75

76 Sales = Variable Cost + Fixed Cost + Profit S = VC + FC + P Profit = Sales Variable Cost Fixed Cost P = S-VC-FC 76

77 Marginal Cost Equation Tm Contribution = Sales Variable Cost (or) Contribution = Fixed Cost + Profit C = S VC (or) C = FC + P P/V Ratio = Contribution / Sales * 100 P/V Ratio = C/S*100 Break Even Point = Fixed Cost / PV Ratio BEP (Rs.) = FC/PV Ratio BEP (Units) = Fixed Cost / Contribution Per Unit Required Sales = (Fixed Cost + Profit) / PV Ratio *

78 78

79 Margin of Safety = Profit / PV Ratio (or) Margin of Safety = Actual Sales Break Even Sales MOS = P/PV Ratio (or) MOS = S-BES 79

80 Break Even Point 80

Budget Budget is defined as a financial or quantitative statement

that period for the purpose of attaining a given o je tive ICMA

Control is the process of prparation of budgets for various

81 Budget Budget is defined as a financial or quantitative statement prepared prior to a definite period of time to be pursued during that period for the purpose of attaining a given o je tive ICMA Budgeting refers to the process of preparing budgets Budgetory Control is the process of prparation of budgets for various activities and comparing the budgeted figures for arriving at deviations 81

82 Functional Budgets Purchase Budget Cash Budget Sales Budget Production Budget Materials Budget 82

83 Cash Budget 83

84 Production Budget 84

85 Materials Budget 85

COMMERCE & LAW PROGRAM DIVISION (CLPD) ANSWER KEY TO CS-EXECUTIVE DECEMBER-2014 (ATTEMPT) CODE-C SUBJECT : COST & MANAGEMENT ACCOUNTING

COMMERCE & LAW PROGRAM DIVISION (CLPD) ANSWER KEY TO CS-EXECUTIVE DECEMBER-2014 (ATTEMPT) CODE-C SUBJECT : COST & MANAGEMENT ACCOUNTING 1. If the minimum stock level and average stock level of raw material