Unit - 5

Cost Accounting

Q1) Define Cost Accounting.

A1) Costing:

The Society of cost control accountants (ICMA) London defines costing as a confirmation of costs, and costing includes the technology and process of confirming costs.

Cost accounting:

The Society of cost management accountants (ICMA) in London defines cost accounting as"the science, art and application of the principles, methods and techniques of cost accounting and cost accounting to the practice of cost management and confirmation of profitability, as well as the presentation of information for the purpose of management decision making". Therefore, cost accounting includes costing, costing, Budget Control, cost control, and cost audit. Costing refers to the process of determining and accounting for the cost of a particular product or activity. It also includes classification, analysis and guessing the production of costs.

Costing:

I.C.M.A.London defines costing as"the process of accounting for costs from the time when expenditures occur or from the time when they are committed to establishing the ultimate relationship with cost centers and cost units."

In practice, costing, costing, and cost accounting are often used interchangeably. Cost accounting refers to the confirmation of costs, the accumulation and measurement of costs of activities, processes, products or services. Cost data is used to create costing sheets or cost sheets. Costing is a professional Department of accounting that helps manage costs to control and create awareness of the importance of costs to the well of the business organization. Managing a business to achieve its objectives requires systematic and useful cost data and reporting.

Evolution of Cost

Widespread interest in the subject of costing can be said to have developed in the Industrial Revolution, which began in 1760. As the factory system was followed by mechanization, simplification, standardization and mass production, costing had to keep up with these developments. Until the 18th century, costing was in the area of Engineers. Integration with financial accounting began when accountants began to audit cost records. Under the influence of financial accountants, costing came to be seen almost exclusively as a means of inventory valuation and profit measurement.

Costing has been found to assist in managing when compiling and providing the required statistical data.  It has developed rapidly and assisted management of providing valuable information to take appropriate decisions in time. Costing sheds light on excessive waste of materials, inefficient labor operations, idle machinery and many other similar factors that are responsible for the reduction of profits in business activities. Management has found that costing can provide valuable assistance in planning, managing and coordinating activities.

Q2) Write short note on Cost Center and Cost units.

A2) Cost center: A cost center is a place, person or asset that can be checked for costs and used for cost management purposes. This is an organizational segment or area of activity that is used to accumulate costs. The different types of cost centers used in manufacturing organizations are personal cost Cantor, impersonal cost center, work cost center and process Center.

Cost units: A cost unit is a unit of the quantity of a product or service for which the cost is likely to be confirmed. There should be a unit of activity for proper confirmation of costs. Every organization has its own units for the measurement of raw materials and finished products. When the unit of activity is determined, it becomes the cost unit of the cost accountant. The cost unit must be suitable for your organization. The following is an example of cost units in different industries :-

Q3) What are the Objectives of Cost Accounting?

A3) Cost accounting goals are usually used to indicate activities in which costs must be determined individually. Activities can be functions for which data is required,sub-divisions of the organization, contracts or other units of work. There is a direct relationship between the information needs of management, the purpose of costing, the technologies and tools used for analysis in costing. Therefore, costing has the following purposes-

a)     Determine the cost of the product.

b)    To facilitate the planning and management of regular business activities.

c)     Provide information for short-term and long-term decisions.

Q4) What are the Methods of costing?

A4) Several methods or types of costing have been designed to suit the needs of individual business requirements. These are job costing and process costing.

All other costing methods are either variants of these two methods or techniques designed for specific purposes, specific opportunities, and specific conditions.

Job costing:this method is good for checking the cost of a job, a specific order, or a batch of finished products.

Where the cost unit is a job consisting of a specific quantity manufactured according to the order. The work can be small or large. It may be as per customer order for stock for final sale. Other variations of job costing are given below: -

a)     Contract costing:this method is used by contractors for construction of architectural bridges etc. Where the unit of cost is the contract. The term of this contract usually extends beyond the current fiscal year.

b)    Batch costing: this method produces economical batches of parts for subsequent assembling manufacturers large engineering companies use this method. Here, costing is done for batches of components, not for a single component.

c)     Multiple costing:this is used in large industries such as automobile, aircraft flat industry etc.Here the cost of parts is calculated separately. Each component is a job sheet. These are then assembled to complete the cost of an airplane or other finished product.

Process costing:this method is used in industry to manufacture products by continuous process. The cost is confirmed over the period by the process or department, but time is given more importance here as it is clear from the costing of the work. Therefore, this is also called period costing. Examples of industries that use process costing are the chemical industry, papermaking and refineries. The process costing can also be changed without:

a)     Work costing:work costing is applied to places where production goes through multiple operations in succession before the final product is manufactured. Wear and tear may occur in each operation. Work costing is used in industries such as Box manufacturing, shoe manufacturing and toy manufacturing. Where the cost unit is the work on which costs are accumulated.

b)    Single or output or individual costing: examples of industries applying this method are mining, quarry and steel production where the production is of a continuous nature and the final product is only one or different grades of the same product.

c)     Behavior costing:this method applies not to figure out the cost of drawing. Examples of industries using this method are transport services, electrical and boiler houses. In transport services, the unit of cost is passenger kilometers, or kilometers kilometers.

Q5) Explain the term Cost Accounting.

A5) Overview of Cost Accounting: In the initial, the road was thought of as a value accounting technique of goods or services backed by historical knowledge. Thanks to the character of the market has recognized that crucial prices don't seem to be as vital as dominant prices. Therefore, the prices compared to clerking, clerking was seen additional as a price management technique. Due to the areas of technological development altogether, value | the worth reduction} is presently put together inside the worth space Accounting. Therefore, it's the road of registration, classification and outline of the prices of Identify the worth of any product or service, plan, manage and cut back those prices and see from information to management to come to a decision.

Line meanings and definitions

“Cost accounting are often a way by that info consists, apportion summed up and understood for three main purposes: (in) elaboration and operational management, (ii) specific decision; and (iii) product Decision. "Charles T. Horngren

“Cost accounting is the strategy of the road from the aim that the unit of expenses incurs of committed to manufacturing your final relationship with value units. Inside the broadest sense, it includes the production of mathematical knowledge, the dear device management strategies and, moreover, the identification of

The profitableness of the activities assigned or planned is written as results of the appliance of accounting and equity accounting Principles, strategies and techniques for crucial prices and to investigate savings and / or surpluses as compared to previous expertise or standards. "- Institute of prices and Management contain the presentation of the info that has therefore been derived for the aim of decision-making in social control positions. –Wheldon

Cost accounting therefore provides management with info for elections of every kind.  This is why the functions have invariably been indistinguishable from management accounting or alleged accounting internal accounting. Wilmot has adopted the road kind as "scan, record, Standardization, Prediction, Comparison, News and suggestions “and the role of a price account itself from "a scholar, news agent and Rophet"

Costing, called the form of management accounting that companies use to classify, summarize, and analyze different costs, helps management make better decisions for cost control and cost savings. The main function of costing is said to be to adjust, record, and identify investment allocations that are appropriate for the investment in determining the cost of goods and services. It also helps present relevant data to administrators involved in searching for services, contracts, or shipping costs.

It also contains information related to production, distribution and sales costs.

Q6) What are the benefits of Cost Auditing.

A6) Benefits of cost auditing:

The main advantage of cost auditing is that it ensures that management has reliable data for price-fixing, decision-making, control, and other purposes. The existence of such an audit system is additionally very helpful in maintaining internal checks. It's also very useful for accounting audits. However, it's important to know that financial and price audits have different purposes.

The former aims to stop fraud and errors, and by presenting the earnings report and record , it's possible to understand things (profit obtained during the year and economic condition at the top of the year) during a true and fair manner. Is aimed toward .

It's not about functional analysis, it's about spending and revenue as an entire . Cost audits are involved within the proper analysis and estimation of data in order that management can quickly obtain the knowledge they have , establishing cost accuracy for every product, job, activity, and so on. Aside from data reliability, cost auditing has certain incidental benefits. Rather, it must be said that cost audits help integrate and realize the advantages expected from costing systems. Following a press release by Minister of Justice HR Go Curry, judicial and company issues highlight the social benefits of cost auditing.

The reasonableness of the worth charged is to properly determine the prices and margins charged by producers and their retailers. Guaranteed only by. Another purpose underlying this step is cheap to take care and efficient for the industries subject to such rules and to scale back costs the maximum amount as possible. Informing about the value . Therefore, counting on this method protects the interests of consumers and may be a clear step towards eliminating social injustice.

Advantages of Cost Audit

(I) Thoroughly check all waste (in-store materials, workers, etc.), promptly identify and report.

(II) Production inefficiencies (or efficiencies) are identified and converted into financial terms.

(III) Exceptional management is possible by establishing individual responsibilities.

(IV) The budget control and standard costing system is greatly facilitated by cost audits by qualified costing personnel.

(V) Records are up to date and information is available for a variety of purposes.

(Vi) Cost audits can uncover many errors and frauds that may not otherwise be revealed. This is because cost auditors take a closer look at spending and compare it to criteria to see the exact reason for the discrepancy.

Q7) Mention the importance of Cost Accounting.

A7) Importance of Cost Accounting

Costing is very important for commercial organizations. It also helps other organizations. One of such areas is the presentation of information in the most useful way. Costing is used to measure, analyze, or estimate costs. Reporting to stakeholders on the profitability and performance of individual products, departments and other segments of an organization, internal or external, or both costing concerns the synthesis and analysis of costs. Its purpose in modern times is to support management in the twin functions of decision-making and control. Therefore, costing is not just about finding costs, but advises on the management, planning and management of organizations and business operations. The Companies Act also stipulates that certain companies must maintain cost accounting records and accounts and conduct audits of cost accounts.

Q8) What are the advantages of Cost Accounting?

A8) Advantages of Cost Accounting are:

a)     Costing reveals areas where materials were overused, Labor ran inefficiently and expenses incurred exorbitantly.

b)    We propose a cost reduction program. Continuous costs in collaboration with technical personnel seeking areas for introducing cost savings bring beneficial results.

c)     Cost accounts find specific causes for profit fluctuations. It points out that you lose products and operations. This indicates the reason for the loss and suggests corrective actions in time.

d)    Provide management with the right data to choose the best option. You can decide whether to buy or manufacture parts, operate the Machine X or Y, accept or reject orders below the cost

e)     The cost account gives the actual costs for price fixing. True supply and demand play an important role in fixing prices. But the cost is an essential guide here.

f)       It provides important data up to in the bid. Bids filled with the help of marginal costing technology are successful.

g)    Standard Costing and Budget Control help maximum efficiency.

h)     Cost comparison helps cost control. Such comparisons can be between different periods of the same department or equivalent operations of different units.

i)       Cost data is useful for external institutions such as governments,courts, etc.To make decisions on tariff regulation,settlement of disputes,fluctuations in wage levels, etc.

j)       It can play with capacity costs to help overcome operational crises.

k)     Marginal costing technology helps to make appropriate short-term decisions in times of trade recession.

l)       Costing lays cost center and responsibility center to ensure proper organizational structure.

m)  Costing provides a permanent inventory system. This enables inventory management and the creation of short-term profit and loss accounts.

n)     The cost of closing the stock of raw materials, work in progress and finished products is readily available in the cost record.

o)     Not all organizations get all the advantages mentioned above.

Q9) Write the Composition of elements of cost.

A9) Composition of elements of cost are:

The manufacturing organization converts raw materials into finished products. To that end, it employs labour and provides other facilities. It is necessary to check the amount spent on all this, while aggregating the cost of production. For this purpose, the cost is mainly classified into various factors. This classification is necessary for accounting and management. The cost elements are

(i) Direct material

(II) Direct labour

(iii) Direct expenses and

(iv) Overhead.

The following chart shows the wide heading of the cost and these acts as the basis for preparing the cost sheet.

Q10) Bombay Manufacturing Company submits the following information on 31-3-2010.

A10)

Bombay Manufacturing Company

Statement of cost for the year ended 31-3-2010.

Q11).  From the following information prepare a statement showing (i) Prime cost (ii) Works cost (iii) Cost of Production (iv) Cost of  Sales (v) Net profit of X Ltd. Which produced and sold 1000 units in June 2009.

A11)

Cost Statement for June 2009

Q12). NRC Ltd. Manufactured and sold 1000 Radio sets during the year 2009. The summarized accounts are given below:

Mfg. / Trading & Profit & Loss A/c

It is estimated that output and sales will be 1200 Radio Sets in the year 2010. Prices of Materials will rise by 20% on the previous year’s level. Wages per unit will rise by 5% Manufacturing expenses will rise in proportion to the combined cost of materials and wages. Selling and distribution expenses per unit will remain unchanged. Other expenses will remain unaffected by the rise in output. Prepare cost sheet showing the price at which the Radio Sets should be sold so as to earn a profit of 20% on the selling price.

A12)

Cost Sheet

Q13). A factory can produce 60,000 units per year at its 100% capacity. The estimated cost of production are as under: -

Direct Material- Rs. 3 per unit

Direct Labour- Rs. 2 per unit

Indirect Expenses:

Fixed- Rs. 1,50,000 per year

Variable- Rs. 5 per unit

Semi-variable- Rs.50,000 per year up to 50% capacity and an extra expenses of Rs.10,000 for every 25% Increase in capacity or part thereof.

The factory produces only against order and not for stock. If the Production programme of the factory is as indicated below and the management desires to ensure a Profit of Rs. 1,00,000 for the year, work out the average selling price at which per unit should be quoted:

First 3 months of the year 50% of capacity remaining 9 months 80% of the capacity. Ignore selling, distribution and administration overheads.

A13)

Q14). In a factory two types of T.V sets are manufactured i.e. black & white + color. From the following particulars prepare a statement showing cost and profit per T.V Set sold. There is no opening or closing stock.

Works overhead is charged at 60% of Prime cost and Office overhead is taken at 20% at Works cost. The selling price of B & W is Rs.60,00 and that of color is 10000. During the period 200 B & W and 400 color T.V. Sets were sold.  The selling expenses are Rs. 50 per T.V. Set.

A14)

Statement of Cost and Profit

Q15) Define Breakeven Analysis.

A15) Break-even analysis is additionally referred to as cost-volume profit analysis. Break-even point analysis is a relationship between asking price, sales volume, fixed costs, variable costs, and profits at various level activity. Break-even analysis may be a widely used technique for studying the cost-volume-profit relationship narrow

Here, the entire cost is adequate to the entire asking price. The broader interpretation refers to the analytical system. Determines expected profits for all levels of activity. It describes the connection between production costs, Production volume and sales value.

Here, CVP analysis is additionally commonly performed, but it's not accurate, but it's called "break-even point analysis". The difference between the 2 terms is extremely narrow. CVP analysis includes full range Break-even analysis is one among the techniques utilized in this process. But as mentioned the above break-even point analysis techniques are so popular in CVP analysis research that the 2 terms are used as a synonym. For the needs of this investigation, we also these two terms to know the concept of break-even analysis, it's helpful to understand the following specific basic terms listed below application

a)     You’ll use break-even analysis to work out your company's break-even point (BEP).

b)    The break-even point is that the level of activity where total revenue is adequate to total cost. At this level, the corporate doesn't make a profit

Q16) Write short note on Contribution

A16) This is a more than the asking price that exceeds the variable cost also called "gross profit". The amount of profit (loss) is often confirmed by deducting fixed costs from contributions. In other words, it had been fixed Costs and benefits correspond to contributions. It is often expressed by the subsequent formula.

Contribution = Selling Price – Variable Cost or Contribution = Fixed Cost + Profit = Contribution – Fixed Cost

Profit / Volume ratio (P / V ratio)

This term is important for studying the profitability and profit ratio of operating a business.

Establish a relationship between contribution and sales. The ratio can be displayed in the following format Percentage too. The expression can be expressed as:

This ratio can also be found by comparing changes Contribution to changes in sales or changes in profits due to changes in sales. Increased contribution .Fixed costs are assumed to be constant at all production levels, which mean increased profits.

Therefore,

P/V Ratio (or, C/S ratio) = Contribution S𝑎𝑙𝑒𝑠 = C S or, P/V Ratio = Sales−Variable Cost S𝑎𝑙𝑒𝑠 = S−V S or, 1- Variable Cost S𝑎𝑙𝑒

This ratio is also known as the "contribution / sales" ratio. This ratio can also be found by comparing changes Contribution to changes in sales or changes in profits due to changes in sales increased contribution. Fixed costs are assumed to be constant at all production levels, which mean increased profits.

Therefore, Thus, P/V Ratio = Change in Contribution by Change in S𝑎𝑙𝑒𝑠 or, P/V Ratio = Change in Profit (or Loss) Change in S𝑎𝑙𝑒

The characteristics of the P / V ratio are as follows.

(I)                Helps administrators see the total amount of contribution to a particular sale.

(II)             The selling price and the variable cost per unit are constant or constant as long as they are constant. It fluctuates at the same rate.

(III)           Not affected by changes in activity level. In other words, the PV ratio of the product. The amount of activity is the same whether it is 1,000 units or 10,000 units.

(IV)          Fixed costs are not considered at all, so the ratio is also unaffected by fluctuations in fixed costs while calculating the PV ratio. For multi-product organizations, PV ratios are very important for management to decide which one to find. The product is more profitable. Management is trying to increase the value of this ratio by reducing variable costs or by raising the selling price.

Q17) Explain Break-even point with its assumptions.

A17) A point that indicates the level of output or sales by dividing the total cost and sales price evenly. There is no profit or loss, it is considered a break-even point. At this point, business income exactly equal to that spending. If production is boosted beyond this level, profits will be generated in the business. And if it decreases from this level, the loss will be incurred by the business. Here it is appropriate to understand the different concepts of marginal costs and break-even points. Go further. This is explained below.

It's neither a profit nor a loss. Therefore, at the break-even point, the contribution is equal to the fixed cost.

Contribution = Fixed cost (1) Break-even point (in units) = Fixed Cost Contribution per unit (2) Break-even point (in amount) = Fixed Cost Contribution per unit x Selling Price per unit Or, = Fixed Cost Total Contribution x Total Sales Or, = Fixed Cost 1− Variable Cost per unit Selling price per unit = Fixed Cost P/V Ratio

Sales at break-even point = break-even point x selling price per unit

At the break-even point, the desired profit is zero. When calculating production or sales

You need to add a fixed amount of "desired profit" or "target profit" "desired profit" or "target profit" The cost of the above formula. For example:

(1)  No. Of units at Desired Profit = Fixed Cost+Desired Profit Contribution per unit (2) Sales for a Desired Profit = Fixed Cost+Desired Profit P/V Ratio

(2)  Sales at break-even point = break-even point x selling price per unit

(3)  At the break-even point, the desired profit is zero. When calculating production or sales

(4)  You need to add a fixed amount of "desired profit" or "target profit" "desired profit" or "target profit"

(5)  The cost of the above formula. For example:

Break-even point analysis: Relationship between selling price, sales volume, fixed costs, variable costs, and profits at various levels activity application.

1. You can use break-even analysis to determine your company's break-even point (BEP).
2. The break-even point is the level of activity where total revenue is equal to total cost.
3. At this level, the company does not make a profit

Break-even point analysis assumptions

1. Related range
2. The relevant range is the range of activities for which fixed costs remain fixed in total.
3. Variable costs per unit remain constant
4. Fixed costs

1. Total fixed costs are assumed to be constant in total Variable cost
2. Total variable costs increase because the number of units produced increases Sales
3. Total revenue increases as the number of units produced increases Safety range

Q18) Write the limitations of Break-even analysis.

A18) limitations of Break-even analysis:

1. Break-even analysis is based on the assumption that all costs and costs can be clearly separated into fixed and variable components. However, in practice, it may not be possible to clearly divide costs into fixed and variable types.

2. Fixed costs are assumed to be constant at all activity levels. It should be noted that fixed costs tend to fluctuate beyond a certain level of activity.

3. Variable costs are assumed to fluctuate in proportion to production volume. In reality, they definitely move in sympathy for the amount of output, but not necessarily in direct proportions.

4. The assumption that the selling price does not change gives a linear revenue line that may not be true. The selling price of a product depends on certain factors such as market supply and demand, competition, etc., so it is also not constant.

5. The assumption that only one product is produced or the product composition remains unchanged is actually difficult to find.

6. Allocating fixed costs to different products causes problems.

7. This assumes that business conditions may not change, but this is not true.

8. It is assumed that the production quantity and the sales quantity are equal and there is no change in the open / closed inventory of the finished product, but these do not actually work.

9. The break-even analysis does not take into account the amount of capital used in the business. In fact, capital used is an important determinant of the profitability of concerns.