CONTENTS About the author I-5 Acknowledgement I-7 Preface I-9 Chapter-heads I-11 1 INTRODUCTION u Cost 1 u Costing 2 u Cost accounting 2 u Cost accountancy 2 u Classification of costs 3 u Distinction between financial accounting and cost accounting 6 u Major limitations of financial accounting and how these are overcome by cost accounting 6 u Objectives of cost accounting 7 u Essentials of a good costing system 7 u Importance/advantages of cost accounting 8 u Limitations or objections to cost accounting 9 u Certain important terms 10 u Cost unit 10 u Cost object 10 u Responsibility centre 11 I-13
I-14 CONTENTS u Cost centre 12 u Profit centre 12 u Costing systems 13 u Costing methods and techniques 13 u Techniques of costing 14 u Past Examination Questions 16 2 COMPONENTS OF TOTAL COST & COST SHEET u Prime cost 23 u Factory cost 23 u Office cost 23 u Total cost 23 u Adjustments for inventories 24 u Cost sheet 24 u Meaning of cost sheet 24 u Items excluded from cost accounts 25 u Practice of important concept 26 u Past Examination Questions 48 3 MATERIAL u Introduction 53 u Direct materials 53 u Indirect materials 54 u Concept and objectives of materials/inventory control 54 u Steps in material control 56 u Purchase procedure 56 u Certain important terms 57 u Material issue procedure 64 u Inventory systems 65 u Bin card or stock card 66 u Stores ledger 67 u Problems and solutions - Materials control 71 u Questions for your practice 104 u Past examination questions 108 4 LABOUR u Meaning of labour 111 u Direct labour 111 u Indirect labour 112
CONTENTS I-15 u Labour turnover 113 u Incentive schemes 116 u Types of incentives systems 117 u Meaning of certain important terms 123 u Group bonus system 135 u Incentive system for indirect workers 135 u Profit sharing schemes 136 u Co-partnership 137 u Elements of wages 137 u Important formulae 138 u Premium bonus plan 138 u Differential piece rate system 138 u Combination of time and piece rate 138 u Practical problems 139 u Problem based on incentive bonus 145 u Question for your practice 170 u True/false questions 172 u Past examination questions 174 5 CALCULATION OF MACHINE HOUR RATE u Question for your practise 188 6 ACCOUNTING FOR OVERHEADS u Meaning of overhead 189 DIVISION I : CLASSIFICATION OF OVERHEADS u Meaning of classification of overheads 189 u Bases of classification of overheads 189 u Classification overheads by function 190 u Classification of overheads by behaviour/variability 192 u Classification of overheads by element 193 u Methods of segregating semi-variable overheads into fixed and variable overheads 194 DIVISION II : COLLECTION OF OVERHEADS u Meaning of collection of overheads 194 u Standing order system 194 DIVISION III : ALLOCATION OF OVERHEADS u Meaning 195
I-16 CONTENTS u Examples of allocation of overheads 195 u Format of statement showing the allocation of overheads 196 DIVISION IV : APPORTIONMENT OF OVERHEADS u Meaning 196 u Examples of apportionment of overheads 197 u Basis of apportionment of overheads 197 u Secondary distribution of overheads 200 DIVISION V : ABSORPTION OF PRODUCTION OVERHEADS u Meaning of absorption of overheads 213 u Methods of absorption of production overheads 213 u Percentage of direct material cost method 213 u Percentage of direct labour cost method 214 u Percentage of prime cost method 214 u Direct labour hour rate 215 u Machine hour rate 215 u Rate per unit of production 216 u Requisites of a good method of absorption of production overheads 216 u Under and over absorption of overheads 223 u When may the situation of under/over-absorption of overheads arise? 223 u Meaning of under-absorption of overheads 223 u Meaning of over-absorption of overheads 224 u Causes of under/over absorption of overheads 224 u Treatment/disposal of under/over absorbed overheads 224 u Actual overhead rates vs. pre-determined overhead rates 227 u Actual overhead rate 227 u Pre-determined overhead rate 228 u Distinction between actual and pre-determined overhead rate 228 u Blanket overhead rate vs. departmental overheads rates 229 u Blanket overhead rate 229 u Departmental overheads rate 229 u Distinction between blanket overhead rate and departmental overhead rates 230 u True/false questions 231 u Past examination questions 233 7 MARGINAL COSTING u Features 238 u Advantages of marginal costing 238
CONTENTS I-17 u Limitations of marginal costing 239 u Marginal costing and absorption costing 240 u Certain important terms used under marginal costing 242 u Miscellaneous issues 259 u Problem based on key factor 259 u Make or buy decisions 265 u Miscellaneous questions 273 u Problems for your practice 276 u Theoretical problem 277 8 BUDGETARY CONTROL u Meaning of budget 282 u Meaning of forecast 282 u Difference between a forecast and a budget 283 u Elements of budget 283 u Budgeting 283 u Objectives of budgeting 284 u Meaning of budgetary control 284 u Advantages of budgetary control 284 u Limitations to budgetary control 285 u Essentials of an effective budgetary control system 286 u Steps in budgetary control 287 u Certain important budgets 290 u Programme budget 292 u Activity-based budgeting 292 u Zero base budgeting 293 u Practical questions 296 u Control ratios 320 u Past examination questions from ICSI 324 9 CONTRACT COSTING u Meaning of contract costing 328 u Distinction between job costing and contract costing 329 u Procedure for contract costing 329 u Work certified 330 u Retention money 331 u Cash received 331 u Work uncertified 332
I-18 CONTENTS u Notional profit 332 u How to account for profit on incomplete contracts? 333 u Cost plus contract 334 u Escalation clause and de-escalation clause 335 u Practical problems 335 u Past examination questions 351 10 JOB & BATCH COSTING u Definition of job costing 354 u Features of job costing 354 u Objectives of job costing 355 u Pre-requisites for job costing 355 u Advantage of job costing 355 u Limitations of job costing 356 u Batch costing 356 u Features of batch costing 356 u Economic batch quantity 357 u Theoretical problems 358 u Practical problems 358 11 OPERATING COSTING u Meaning of operating costing 372 u Internal and external services 372 u Broad areas of operating costing 372 u Characteristics of operating costing 373 u Cost unit 373 u Importance/benefits of operating costing 373 u Transport costing 374 u Cost classification in transport costing 374 u Normal and abnormal losses 374 u Absolute and commercial ton-kms. 375 u Practical problems 375 12 RECONCILIATION u Need for reconciliation 401 u Theoretical problems 404 u Practical problems 404
CONTENTS I-19 13 PROCESS COSTING u Meaning of certain important terms 433 u Difference between job costing and process costing 435 u Practical problems 436 14 JOINT PRODUCTS AND BY PRODUCTS u Meaning of certain important terms 477 u Treatment of by-product cost in costing accounting 478 u Methods of apportionment of joint costs 479 u Practical problems 480 15 STANDARD COSTING u Direct material variances 517 u Direct labour variances 520 u Overheads variances 523 u Variable overheads variances 523 u Fixed overheads variances 524 u Sales variances 527 u Sales margin/profit variances 528 u Practical questions 530 16 COST - BOOK KEEPING u Meaning of cost book-keeping 575 u Non-integrated accounting 575 u Integral accounting 578 u Theoretical questions 581 u Practical problems 582 17 ACTIVITY-BASED COSTING u Introduction 600 u Meaning of Activity Based Costing (ABC) 600 u Basics of A B C 601 u Distinction between traditional absorption costing and activity based costing 601
I-20 CONTENTS u Objectives of activity based costing 602 u Terminology of activity based costing 602 u Stages in developing activity based costing system 603 u Different types of activities 603 u Importance of Activity Based Costing (ABC) 604 u Uses of activity based costing 605 u Limitations of activity based costing 605 u Review 606 u Review questions 606 u Practical problems 606 18 COST ACCOUNTING RECORDS AND COST AUDIT u Cost audit 611 u Provisions of Companies Act, 1956 pertaining to cost accounting records 611 u Provisions of Companies Act, 1956 pertaining to cost audit 612 u Purpose of cost audit 613 u Scope of cost audit 614 u Advantages of cost audit 615 u Appointment of cost auditor 615 u Rights and responsibilities of cost auditor 616 u Cost audit techniques 617 u Cost audit programme 618 u Cost audit report 619 19 RATIO ANALYSIS u Ratio and accounting ratio 620 u Meaning of ratio analysis 620 u Inter-firm comparison 621 u Time series analysis 621 u Benchmarks 621 u Advantages of ratio analysis 622 u Importance of ratio analysis to various parties interested in financial statements 622 u Limitations of ratio analysis 623 u Classification of ratios 625 u Liquidity ratios 625 u Solvency ratios 629 u Activity ratios 633
CONTENTS I-21 u Profitability ratios in relation to sales 640 u Expenses ratios 642 u Profitability ratios in relation to investment 643 u Practical problems 647 20 CASH FLOW STATEMENT (AS-3 REVISED) u Meaning of cash flow statement 675 u What is meant by term cash flows? 675 u When does the flow of cash arise? 675 u For what period should the cash flow statement prepared? 676 u Objectivies of cash flow statement 676 u Uses of cash flow statement 676 u Limitations of cash flow statement 677 u Classification of activities 678 u Operating activities 681 u How to compute cash from operating activities 682 u Calculation of cash flow from operating activities from income statement and additional information by indirect method 686 u Calculation of cash flow from operating activities from balance sheets only 688 u Investing activities 691 u Financing activities 693 u Analysis of the changes in non-current items 696 u Treatment of changes in intangible non-current assets (e.g. goodwill, patent, trademarks, copyrights) 696 u Treatment of changes in tangible non-depreciable non-current assets (e.g. investments, land) 697 u Treatment of changes in tangible depreciation non-current assets (e.g. plant & machinery, furniture & fixture) 697 u Treatment of proposed dividend 705 u Treatment of interim dividend 706 u Treatment of provision for tax 707 u How to prepare a cash flow statement 709 u Practical questions 712 21 FUND FLOW STATEMENT u Meaning of fund 738 u Meaning of flow of funds 739 u Steps for preparation of fund flow statement 740 u Difference between cash flow and fund flow 752