CMA Inter Cost Accounting Book PDF

COST ACCOUNTING For CMA - Inter “Live as if you were to die tomorrow. Learn as if you were to live forever.” Mahatma Gandhi © SJC Institute LLP This bo...

COST ACCOUNTING For CMA - Inter “Live as if you were to die tomorrow. Learn as if you were to live forever.” Mahatma Gandhi © SJC Institute LLP This book shall not be reproduced or shared by photocopying, recording, or otherwise by any unauthorised person without prior written permission from the publisher. All disputes are subject to Kolkata Jurisdiction |1 CMA Inter Cost Accounting  Scoring Mantras for Costing Subject 1. Concept 2. Presentation 3. Speed 4. Accuracy 2 |CMA Inter Cost Accounting ICMAI Mat wise Contents Sl. Chapter Name Page No. No. 1. Basics of Cost Accounting 1.1 – 1.30 2. Cost Ascertainment - Elements of Cost 2.1 – 2.78 Unit 1 : Material Cost (CAS 6) 2.2 – 2.17 Unit 2 : Employee Cost (CAS 7) 2.18 – 2.38 Unit 3 : Direct Expenses (CAS 10) 2.39 – 2.43 Unit 4 : Overheads (CAS 3) 2.44 – 2.77 Part A : Analysis of Semi Variable Cost 2.46 – 2.47 Part B : Primary and Secondary Distribution 2.48 – 2.54 Part C : Absorption Costing 2.55 – 2.63 Part D : Machine Hour Rate 2.64 – 2.69 Part E : Miscellaneous 2.70 – 2.73 3. Cost Accounting Standards 3.1 – 3.10 4. Cost Book Keeping 4.1 – 4.32 Unit 1 : Cost Sheet 4.2 – 4.9 Unit 2 : Control Accounts 4.10 – 4.16 Unit 3 : Reconciliation 4.17 – 4.26 5. Methods of Costing 5.1 – 5.62 Unit 1 : Unit, Batch and Job Costing 5.2 – 5.11 Unit 2 : Contract Costing 5.12 – 5.23 Unit 3 : Process Costing and WIP Valuation 5.24 – 5.34 Unit 4 : Joint and By Products 5.35 – 5.42 Unit 5 : Service Costing 5.43 – 5.55 6. Cost Accounting Techniques 6.1 – 6.54 Unit 1 : Marginal Costing 6.2 – 6.22 Unit 2 : Standard Costing 6.23 – 6.36 Unit 3 : Budget and Budgetary Control 6.37 – 6.54 Theories to be studied from ICMAI Mat, Class Notes, Revision Book and Divya Jadi Booti Book. Practice more questions from Divya Jadi Booti Book. |3 CMA Inter Cost Accounting  Revision Sequence for Cost Accounting Related chapters should be revised together to save time and boost confidence. Block A: Material Cost Employee Cost Block B: Overheads Cost Sheet Unit, Batch and Job Costing Block C: Control Accounts Reconciliation Block D: Process & Operation Costing Joint Product and By product Contract Costing Service Costing Block E: Budget and Budgetary Control Marginal Costing Standard Costing Block F: Cost Accounting Standards Direct Expenses Theories 4 |CMA Inter Cost Accounting  THE THREE TIER PREPARATION MODEL Break the myth that Taking Tuition = Exam Preparation Tier 1 : Taking Tuition 1. Class Notes : Presentation 2. Class Work : Participate in Calculations 3. Home Work : Always Do It ! Tier 2 : Self Study 1. Revision of Class Notes 2. Solving Institute Material and Scanner Tier 3 : Audit Yourself Take a Mock Test to check your shortcomings - Remember its a 3 hours Game where your Question paper has been prepared in best way to defeat you. Never Skip Any Tier or Shift Load of One Tier on Another |5 CMA Inter Cost Accounting  HOW TO MAKE NOTES 1. Copy Pagination 2. Copy Indexation 3. Every Chapter Should Start from Fresh Page 4. Two Colour Pen (a) Heading : To help you see what’s going on (b) Content : To show inside matter (c) Highlighter : To show what’s new that you could not have understood by your own 5. Easy Referencing In Note book : Use Solution to Question No.......... , Page No......... In Study Materials : Use “Exercise Book No.......... , Page No......... Why Should I follow these? To make your revision Super Productive To be able to do study of 300 hours in 15 hours 6 |CMA Inter Cost Accounting  HOW TO STUDY THEORIES Follow these - to be able to Score 1. Read to understand the Concept 2. Note your understanding aside the para 3. Read it again to check the english used 4. Memorise it - At least to the extent of 50% - This helps to write concrete answer  To Memorise  Make a Summary Chart  Use Memories  Teach someone or yourself 5. Keep Revising  Revision during walk, eat, commuting, whenever you are free |7 CMA Inter Cost Accounting 8 |CMA Inter Cost Accounting  Basics of Cost Accounting Chapter 1 Basics of Cost Accounting 1. Why Cost Accounting? Without Cost Accounting, a company will not be able to fix its price and would never earn its profit in a certain way. Further Cost Accounting is not just about fixing the price. As price is fixed on the basis of estimated costs, the actual costs can still fluctuate. With the help of reports from Cost Account- ing, we get insights on actual costs also, so as to take steps to control its fluctuation (called as Cost Control) Customers always want more and that too at a lower price. So, there will be continuous pressure for cost reduction. One need to work very meticulously to reduce the cost, without compromis- ing the quality, to fulfill the customer needs. The insight for this is also provided through Cost Accounting (called as Cost Reduction) 2. Cost Accounting in itself is Costly To setup a Cost Accounting System, a company needs to invest a lot on its team, process, softwares. Only for some companies in India, it is mandatory – under Cost Records and Audit Rules. Hence, the benefits should be ascertained while getting into details of cost structure. The more detail you want for cost, the more costly it would be to derive the information. It is said that Cost Accounting System should be implemented in an economic feasible manner. 3. What is Cost? For understanding purpose, it is better to assume the term cost as the amount that we can charge from our customers/products for the goods or services or efforts. (Product Costs) We cannot charge each and every item of cost to products/customers. This is due to tradition, industrial practices, company’s own policies or regulations. The costs that are not charged are to be borne by our company itself. (Period Costs) A company should have a list of both the costs – amount charged and not charged. And if it is not economically feasible, then the list of amount charged can be prepared, so that all the remaining are uncharged. It is the amount of resource utilised in production of goods or rendering of services, expressed in monetary terms. | 1.1 CMA Inter Cost Accounting  Basics of Cost Accounting 4. Cost vs Expenses Expense are the outflows whose benefit have been utilised during the period. All the expenses are debited to P/L but all cost may not be. E.g. Opportunity Cost is a cost but not an expense. 5. Items Excluded from Cost There are certain items which are included in financial accounts of a manufacturing concern but shall not to be included in cost accounts since they are not related to cost of production. These items fall into three categories: Appropriation of profits: (i) Appropriation to sinking funds (ii) Dividends paid (iii) Taxes on income and profits (iv) Transfers to general reserves (v) Excess provision for depreciation of buildings, plant etc. and for bad debts (vi) Amount written off – goodwill, preliminary expenses, underwriting commission, discount on debentures issued; expenses of capital issue etc. (vii) Capital expenditures specifically charged to revenue (viii) Charitable donation Matters of pure finance: (a) Purely financial charges: (i) Losses on sale of investments, buildings, etc. (ii) Expenses on transfer of company’s office (iii) Interest on bank loan, debentures, mortgages, etc. (iv) Damages payable (v) Penalties and fines (vi) Losses due to scrapping of machinery (vii) Remuneration paid to the proprietor in excess of a fair reward for services rendered (b) Purely financial incomes: (i) Interest received on bank deposits (ii) Profits made on the sale of investments, fixed assets, etc. (iii) Transfer fees received (iv) Rent receivable (v) Interest, dividends, etc. received on investments. 1.2 |CMA Inter Cost Accounting  Basics of Cost Accounting (vi) Brokerage received (vii) Discount, commission received Abnormal gains and losses: (i) Losses or gains on sale of fixed assets. (ii) Loss to business property on account of theft, fire or other natural calamities. In addition to above abnormal items (gain and losses) may also be excluded from cost accounts. Alterna- tively, these may be taken to costing profit and loss account. 6. Costing It is the process of determination of cost of a product or service. According to CIMA “an organisation’s costing system is the foundation of the internal financial information system for managers. It provides the information that management needs to plan and control the organisation’s activities and to make decisions about the future.” 7. Cost Accounting Cost Accounting may be referred to as the process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs. 8. Cost Accountancy The application of costing and cost accounting principles, methods and technique to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making. 9. Cost Accounting System - Non Integrated and Integrated Non Integrated System Integrated System Separate accounts are maintained for cost No separate accounts are maintained for cost and financial transactions and financial transactions. It is independent system of accounting. Under this, the cost and financial accounts are dependent to each other. Under this, it is necessary to prepare reconcil- Under this, it is not necessary to prepare iation statement to reconcile the profit reconciliation statement to reconcile the between cost and financial accounting. profit between cost and financial accounting. Cross checking is not possible in this system Cross checking is possible since they are since they are independent to each other. dependent to each other. | 1.3 CMA Inter Cost Accounting  Basics of Cost Accounting 10. Cost Accounting with the use of IT The impact of IT in Cost Accounting may include the following: (i) After the introduction of ERPs, different functional activities get integrated and as a consequence, a single entry into the accounting system provides custom made reports for every purpose and saves an organisation from preparing different sets of documents. Reconciliation process of results of both cost and financial accounting systems becomes simpler and less cumbersome. (ii) A move towards paperless environment can be seen where documents like Bill of Material, Material Requisition Note, Goods Received Note, labour utilisation report etc. are no longer required to be prepared in multiple copies, the related department can get e-copy from the system. (iii) Information Technology with the help of internet (including intranet and extranet) are helping in resource procurement and mobilisation. For example, production department can get materials from the stores without issuing material requisition note physically. This enables an entity to shift towards Just-in-Time (JIT) approach of inventory management and production. (iv) Cost information for a cost centre or cost object is ascertained with accuracy in timely manner. Each cost centre a cost object is codified and all related costs are assigned to the cost objects or cost centres using assigned codes. This automates the cost accumulation and ascertainment process. The cost information can be customised as per the require- ment. For example, when an entity manufactures or provides services, managers are able to receive information job-wise, batch-wise, process-wise, cost centre wise etc. (v) Uniformity in preparation of report, budgets and standards can be achieved with the help of IT. ERP software plays an important role in bringing uniformity irrespective of location, currency, language and regulations. (vi) Cost and revenue variance reports are generated in real time basis which enables the management to take control measures immediately. (vii) IT enables an entity to monitor and analyse each process of manufacturing or service activity closely to eliminate non value added activities. 11. Classification of Costs It means the grouping of costs according to their common characteristics. The important ways of classification of costs are: (i) By Nature or Element Costs should be gathered together in their natural grouping such as Material, Labour and Other Direct expenses. Items of costs differ on the basis of their nature. The elements of cost can be classified in the following three categories. 1. Material 2. Labour 3. Expenses Material Cost: Material cost is the cost of material of any nature used for the purpose of production of a product or a service. It includes cost of materials, freight inwards, taxes & duties, insurance...etc directly attributable to acquisition, but excluding the trade discounts, duty drawbacks and refunds on account of GST etc. 1.4 |CMA Inter Cost Accounting  Basics of Cost Accounting Labour Cost: Labour cost means the payment made to the employees, permanent or temporary for their services. Labour cost includes salaries and wages paid to permanent employees, temporary employees and also to the employees of the contractor. Here salaries and wages include all the benefits like provident fund, gratuity, ESI, overtime, incentives etc Expenses: Expenses are other than material cost or labour cost which are involved in an activity. (ii) By Relation to Cost Centre or Cost Unit If expenditure can be allocated to a cost centre or cost object in an economically feasible way then it is called direct otherwise the cost component will be termed as indirect. According to this criteria for classification, material cost is divided into direct material cost and indirect material cost, Labour cost is divided into direct labour and indirect labour cost and expenses into direct expenses and indirect expenses. Indirect cost is also known as overhead. (a) Direct Materials: Materials which are present in the finished product (cost object) or can be economically identified in the product are termed as direct materials. For example, cloth in dress making; materials purchased for a specific job etc. However, in some cases a material may be direct but it is treated as indirect; because it is used in small quantities, it is not economically feasible to identify that quantity. Those materials which are used for purposes ancillary to the business are also treated as Indirect Materials. (b) Direct Labour: Labour which can be economically identified or attributed wholly to a cost object is termed as direct labour. For example, employee engaged on the actual production of the product or in carrying out the necessary operations for converting the raw materials into finished product. (c) Direct Expenses: All expenses other than direct material or direct labour which are specially incurred for a particular cost object and can be identified in an economical- ly feasible way are termed as Direct Expenses. For example, hire charges for some special machinery, cost of defective work etc. (d) Indirect Materials: Materials which do not normally form part of the finished product (cost object) are known as indirect materials. These are : Stores used for maintaining machines and buildings (lubricants, cotton waste, bricks etc.) Stores used by service departments like power house, boiler house, canteen etc. (e) Indirect Labour: Labour cost which cannot be allocated but can be apportioned to or absorbed by cost units or cost centres is known as indirect labour. Examples of indirect labour includes salary paid to foreman and supervisors; maintenance workers; etc. | 1.5 CMA Inter Cost Accounting  Basics of Cost Accounting (f ) Indirect Expenses: Expenses other than direct expenses are known as indirect expenses. These cannot be directly, conveniently and wholly allocated to cost centres. Factory rent and rates, insurance of plant and machinery, power, light, heating, repairing, telephone etc., are some examples of indirect expenses. (g) Overheads: The aggregate of indirect material costs, indirect labour costs and indirect expenses is termed as Overheads. The main groups into which overheads may be subdivided are as follows: Production or Works Overheads: Indirect expenses which are incurred in the factory and for the running of the factory. E.g.: rent, power etc. Administration Overheads: Indirect expenses related to management and administration of business. E.g.: office rent, lighting, telephone etc. Selling Overheads: Indirect expenses incurred for marketing of a commodity. E.g.: Advertisement expenses, commission to sales persons etc. Distribution Overheads: Indirect expenses incurred for dispatch of the goods E.g.: warehouse charges, packing(secondary) and loading charges. (iii) By Functions A business enterprise performs a number of functions like manufacturing, selling, research etc. Costs may be required to be determined for each of these functions and on this basis functional costs may be classified into the following types: (i) Production or Manufacturing Costs (ii) Administration Costs (iii) Selling & Distribution cost (iv) Research & Development costs (a) Production or Manufacturing Costs: Production cost is the cost of all items involved in the production of a product or service. These refer to the costs of operating the manufacturing division of an undertaking and include all costs incurred by the factory from the receipt of raw materials and supply of labour and services until production is completed and the finished product is packed with the primary packing. The followings are considered as Production or Manufacturing Costs: (1) Direct Material (2) Direct Labour (3) Direct Expenses and (4) Factory overhead, i.e., aggregate of factory indirect material, indirect labour and indirect expenses. Manufacturing cost can also be referred to as the aggregate of prime cost and factory overhead. (b) Administration Costs: Administration costs are expenses incurred for general management of an organization. These are in the nature of indirect costs and are also termed as administrative overheads. For understanding administration cost, it is necessary to know the scope of administrative function. Administrative function in any organization is primarily concerned with following activities: (1) Formulation of policy (2) Directing the organization and (3) Controlling the operations of an organiza- tion. But administrative function will not include control activities concerned with production, selling and distribution and research and development. (Administrative cost will include the cost of only those control operations which are not related to production, selling and distribution and research and development) 1.6 |CMA Inter Cost Accounting  Basics of Cost Accounting In most of the cases, administration cost includes indirect expenses of following types: (1) Salaries of office staff, accountants, directors (2) Rent, rates and depreciation of office building (3) Postage, stationery and telephone (4) Office supplies and expenses (5) General administration expenses. (c) Selling & Distribution Costs: Selling costs are indirect costs related to selling of products or services and include all indirect costs in sales management for the organization. Distribution costs are the costs incurred in handling a product from the time it is completed in the works until it reaches the ultimate consumer. Selling function includes activities directed to create and stimulate demand of company’s product and secure orders. Distribution costs are incurred to make the saleable goods available in the hands of the customer. Following are the examples of selling and distribution costs: (1) Salaries and commission of salesmen and sales managers (2) Expenses of advertisement, insurance (3) Rent, rates, depreciation and insurance of sales office and warehouses (4) Cost of insurance, freight, export, duty, packing, shipping, etc., (5) Maintenance of Delivery vans (d) Research & Development Costs: Research & development costs are the cost for undertaking research to improve quality of a present product or improve process of manufacture, develop a new product, market research etc. and commercializa- tion thereof. R&D Costs comprises of the following: (1) Development of new product (2) Improvement of existing products (3) Finding new uses for known products (4) Solving technical problem arising in manufacture and application of products (5) Development cost includes the costs incurred for commercialization/implementa- tion of research findings. Pre-Production Costs: These are costs incurred when a new factory is in the process of establishment, a new project is undertaken, or a new product line or product is taken up but there is no established or formal production to which such costs may be charged. Preproduction costs are normally treated as deferred revenue expenditure and charged to the costs of future production. (iv) By Variability or Behaviour Based on this classification, costs are classified into three groups viz., fixed, variable and semi-variable. (a) Fixed costs: These are the costs which are incurred for a period, and which, within certain output and turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or turnover). They do not tend to increase or decrease with the changes in output. For example, rent, insurance of factory building etc., remain the same for different levels of production. (b) Variable Costs: These costs tend to vary with the volume of activity. Any increase in the activity results in an increase in the variable cost and vice-versa. For example, cost of direct material, cost of direct labour, etc. (c) Semi-variable costs: These costs contain both fixed and variable components and are thus partly affected by fluctuations in the level of activity. Examples of semi variable costs are telephone bills, gas and electricity etc. | 1.7 CMA Inter Cost Accounting  Basics of Cost Accounting (v) By Controllability Costs here may be classified into controllable and uncontrollable costs. (a) Controllable Costs: Cost that can be controlled, typically by a cost, profit or investment centre manager is called controllable cost. Controllable costs incurred in a particular responsibility centre can be influenced by the action of the manager heading that responsibility centre. For example, direct costs comprising direct labour, direct material, direct expenses and some of the overheads are generally controllable by the shop floor supervisor or the factory manager. (b) Uncontrollable Costs: Costs which cannot be influenced by the action of a specified member of an undertaking are known as uncontrollable costs. For example, expendi- ture incurred by, say, the tool room is controllable by the foreman in-charge of that section but the share of the tool-room expenditure which is apportioned to a machine shop is not controlled by the machine shop foreman. (vi) By Costs for Managerial Decision Making According to this basis, cost may be categorised as follows: (a) Opportunity Cost: This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, a firm financing its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan. Similarly when a building leased out on rent to a party is got vacated for own purpose or a vacant space is not leased out but used internally, say, for expansion of the production programme, the rent so forgone is the opportunity cost. (b) Imputed Costs: These costs are notional costs which do not involve any cash outlay. Interest on capital, the payment for which is not actually made, is an example of imputed cost. These costs are similar to opportunity costs. (c) Implicit Costs: These costs do not involve any immediate cash payment. They are not recorded in the books of account. They are also known as economic costs. It is the opportunity cost of resources already owned by the firm. Example: Expanding a factory on the land already owned. (d) Replacement Cost: Replacement cost is the cost of an asset in the current market for the purpose of replacement. Replacement cost is used for determining the optimum time of replacement of an equipment or machine in consideration of maintenance cost of the existing one and its productive capacity. This is the cost in the current market of replacing an asset. For example, when replacement cost of material or an asset is being considered, it means that the cost that would be incurred if the material or the asset was to be purchased at the current market price and not the cost, at which it was actually purchased earlier, should be take into account. (e) Relevant Costs: Relevant costs are costs which are relevant for a specific purpose or situation. In the context of decision making, only those costs are relevant which are pertinent to the decision at hand. Since we are concerned with future costs only while 1.8 |CMA Inter Cost Accounting  Basics of Cost Accounting making a decision, historical costs, unless they remain unchanged in the future period are irrelevant to the decision-making process (f ) Marginal Cost: The amount at any given volume of output by which aggregate costs increases if the volume of output is increased or decreased by one unit. (g) Differential Cost: (Incremental and decremental costs). It represents the change (increase or decrease) in total cost (variable as well as fixed) due to change in activity level, technology, process or method of production, etc. For example, if any change is proposed in the existing level or in the existing method of production, the increase or decrease in total cost or in specific elements of cost as a result of this decision will be known as incremental cost or decremental cost. (g) Capitalized Costs : These are costs which are initially recorded as assets and subsequently treated as expenses. Example, installation expenses on the erection of a machine are added to the cost of a machine. (h) Product Costs and Period Costs Product Costs: These are the costs which are associated with the purchase and sale of goods (in the case of merchandise inventory). In the production scenario, such costs are associated with the acquisition and conversion of materials and all other manufac- turing inputs into finished product for sale. Hence, under marginal costing, variable manufacturing costs and under absorption costing, total manufacturing costs (variable and fixed) constitute inventoriable or product costs. Period Costs: These are the costs, which are not assigned to the products but are charged as expenses against the revenue of the period in which they are incurred. All non-manufacturing costs such as general & administrative expenses, selling and distribution expenses are recognised as period costs. (i) Out-of-pocket Cost: It is that portion of total cost, which involves cash outflow. This cost concept is a short-run concept and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out-of-pocket costs can be avoided or saved if a particular proposal under consideration is not accepted. (j) Explicit Costs: These costs are also known as out-of-pocket costs and refer to costs involving immediate payment of cash. Salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are some examples of explicit costs involving immediate cash payment. (k) Sunk Costs: Historical costs incurred in the past are known as sunk costs. They play no role in decision making in the current period. For example, in the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost and therefore, not considered. (l) Shut Down and Absolute Cost Shut down Costs: Those costs, which continue to be, incurred even when a plant is temporarily shut-down e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant. In other words, all fixed costs, which cannot be avoided during the temporary closure of a plant, will be known as shut down costs. | 1.9 CMA Inter Cost Accounting  Basics of Cost Accounting Absolute Cost: These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute amount may be called absolute costs and are base costs on which further analysis and decisions are made. (m) Engineered Costs: These are costs that result specifically from a clear cause and effect relationship between inputs and outputs. Engineered costs are elements of cost for which the “right” or “proper” amount of costs that should be incurred can be estimated with a reasonable degree of reliability. Examples of inputs are direct material costs, direct labour costs etc. Examples of output are cars, computers etc. (n) Managed Cost or Programmed Cost or Discretionary Costs: As opposed to engineering costs, this relate to such items where no accurate relationship between the amount spent on input and the output can be established and sometimes it is difficult to measure the output. Examples are advertisement cost, research and development costs, etc. (o) Common Costs: These are costs which are incurred collectively for a number of cost centres and are required to be suitably apportioned for determining the cost of individual cost centres. Examples are: Combined purchase cost of several materials in one consignment, and overhead expenses incurred for the factory as a whole. (p) Normal and Abnormal Cost Normal Cost: It is the cost which is normally incurred at a given level of output under the conditions in which that level of output is normally attained. Abnormal Cost: It is the cost which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is charged to Costing Profit and loss Account. (q) Controllable and Non-Controllable Costs: Controllable Cost is that cost which is subject to direct control at some level of managerial supervision. Non-controllable Cost is the cost which is not subject to control at any level of managerial supervision. (vii) Classification by nature of Production or Process Batch Costing: Batch Costing is the aggregate cost related to a cost unit which consists of a group of similar articles which maintains its identity throughout one or more stages of production. In this method, the cost of a group of products is ascertained. The unit cost is a batch or group of identical products instead of a single job, order, or contract. This method is applicable to general engineering factories which produces components in convenient economical batches. If in a cycle manufacturing unit, rims are produced in batches of 2,500 units each, then the cost will be determined in relation to a batch of 2,500 units. Process Costing: When the production process is such that goods are produced from a sequence of continuous or repetitive operations or processes, the cost incurred during a period is considered as Process Cost. The process cost per unit is derived by dividing the process cost by number of units produced in the process during the period. Process Costing is employed in industries where a continuous process of manufacturing is carried out. 1.10 |CMA Inter Cost Accounting  Basics of Cost Accounting Costs are ascertained for a specified period of time by departments or process. Chemical industries, refineries, gas and electricity generating concerns may be quoted as examples of undertakings that employ process costing. Operation Cost: Operation Cost is the cost of a specific operation involved in a production process or business activity. The cost unit in this method is the operation, instead of process. When the manufacturing method consists of a number of distinct operations, operation costing is suitable. Operating Cost: Operating cost is the cost incurred in conducting a business activity. Operating cost refer to the cost of undertakings which do not manufacture any product but which provide services. Industries and establishments like power house, transport and travel agencies, hospitals, and schools, which undertake services rather than the manufacture of products, ascertain operating costs. The cost units used are Kilo Watt Hour (KWH), Passenger Kilo-meter and Bed in the hospital, etc. Operating costing method constitutes a distinct type of costing but it may also be classed as a variant of Process Cost since costs in this method are usually compiled for a specified period. Contract Costing: Contract cost is the cost of contract with some terms and conditions between contractee and contractor. This method is used in undertakings, carrying out, building or constructional contracts like constructional engineering concerns, civil engineering contractors. The cost unit here is a contract, which may continue over more than one financial year. Joint Costs: Joint costs are the common cost of facilities or services employed in the output of two or more simultaneously produced or otherwise closely related operations, commodities or services. When a production process is such that from a set of same input two or more distinguishably different products are produced together, products of greater importance are termed as Joint Products and products of minor importance are termed as By-products and the costs incurred prior to the point of separation are called Joint Costs. For example in petroleum industry petrol, diesel, kerosene, naphtha, tar is produced jointly in the refinery process. By-product Cost: By-product Cost is the cost assigned to by-products till the split-off point (viii) Classification by Time: A cost item is related to a specific period of time and cost can be classified according to the system of assessment and specific purpose as indicated in the following ways : Historical Costs: Historical Costs are the actual costs of acquiring assets or producing goods or services. They are post-mortem costs ascertained after they have been incurred and they represent the cost of actual operational performance. Historical Costing follows a system of accounting to which all values are based on costs actually incurred as relevant from time to time. Predetermined Costs: Pre-determined Costs for a product are computed in advance of production process, on the basis of a specification of all the factors affecting cost and cost data. Predetermined Costs may be either standard or estimated. | 1.11 CMA Inter Cost Accounting  Basics of Cost Accounting Standard Costs: A predetermined norm applies as a scale of reference for assessing actual cost, whether these are more or less. The Standard Cost serves as a basis of cost control and as a measure of productive efficiency, when ultimately posed with an actual cost. It provides management with a medium by which the effectiveness of current results is measured and responsibility of deviation placed. Standard Costs are used to compare the actual costs with the standard cost with a view to determine the variances, if any, and analyse the causes of variances and take proper measure to control them. Estimated Costs: Estimated Costs of a product are prepared in advance prior to the performance of operations or even before the acceptance of sale orders. Estimated Cost is found with specific reference to product in question, and the activity levels of the plant. It has no link with actual and hence it is assumed to be less accurate than the Standard Cost. 1. Incremental Cost vs Differential Cost Differential cost represents the change (increase or decrease) in total cost (variable as well as fixed) due to change in activity level, technology, process or method of production, etc and they may be the relevant costs for certain short run decisions involving two alternatives If any change is proposed in the existing level or in the existing method of production, the increase or decrease in total cost or in specific elements of cost as a result of this decision will be known as incremental cost or decremental cost. Incremental cost represents the additional total cost resulting from a group of additional units of output. 2. Incremental Cost vs Variable Cost If any change is proposed in the existing level or in the existing method of production, the increase or decrease in total cost or in specific elements of cost as a result of this decision will be known as incremental cost or decremental cost. Incremental cost represents the additional total cost resulting from a group of additional units of output. Variable cost is the cost of elements which tends to directly vary with the volume of activity. Variable cost has two parts (i) Variable direct cost (ii) Variable indirect costs. Variable indirect costs are termed as variable overheads. Example: Direct labour, Outward Freight...etc. 3. Conversion Cost vs Value Added Conversion Cost is the cost of converting raw materials into finished goods. It comprises of Direct Labour and Factory Overhead or it can be computed as - Sales - Profit - Materials Value Added is an enhancement made by a company / individual to a product or service before offering it for sale to the end customer. It is calculated as - Sales - Materials 4. Standard cost vs Budgeted Cost Budgeted costs: Future costs, for transactions and operations expected to take place over the coming period, based on forecasts and established goals. Fixed costs are 1.12 |CMA Inter Cost Accounting  Basics of Cost Accounting budgeted differently than variable costs. For example, if sales volume is forecast to increase by 10 percent, variable costs will definitely increase accordingly, but fixed costs may or may not need to be increased to accommodate the volume increase. Standard costs: Costs, primarily in the area of manufacturing, that are carefully engineered based on detailed analysis of operations and forecast costs for each component or step in an operation. Developing standard costs for variable production costs is relatively straightforward because most are direct costs. In contrast, most fixed costs are indirect, and standard costs for fixed costs are necessarily based on more arbitrary methods. 12. Cost Objects Cost object is anything for which a separate measurement of cost is required. Cost object may be a product, a service, a project, a customer, a brand category, an activity, a department or a programme etc. Examples of cost object are: Product Smart phone, Tablet computer, SUV Car, Book etc. Service An airline flight from Delhi to Mumbai, Concurrent audit assignment, Utility bill payment facility etc. Project Metro Rail project, Road projects etc. Activity Quality inspection of materials, Placing of orders etc. Process Refinement of crudes in oil refineries, melting of billets or ingots in rolling mills etc. Department Production department, Finance & Accounts, Safety etc. 13. Cost units It is a unit of product, service or time (or combination of these) in relation to which costs may be as - certained or expressed. Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value. Examples of Cost unit: Industry or Product Cost Unit Automobile Number Cement Ton/ per bag etc. Chemicals Litre, gallon, kilogram, ton etc. Power Kilo-watt hour (kWh) Steel Ton | 1.13 CMA Inter Cost Accounting  Basics of Cost Accounting 14. Cost driver A Cost driver is a factor or variable which effect level of cost. Generally, it is an activity which is responsible for cost incurrence. Level of activity or volume of production is the example of a cost driver. An activity may be an event, task, or unit of work etc. Examples of cost drivers are number of machines setting ups, number of purchase orders, hours spent on product inspection, number of tests performed etc. 15. Responsibility Centres With the growth of an organisation, its functions, organisational structure and other related functions are also growing in terms of volume and complexity. To have a better control over the organisation, management delegates its responsibility and authority to various departments or persons. These departments or persons are known as responsibility centres and are held responsible for performance in terms of expenditure, revenue, profitability and return on investment. There are four types of responsibility centres: (i) Cost Centres CIMA defines a cost centre as “a location, a person, or an item of equipment (or a group of them) in or connected with an undertaking, in relation to which costs ascertained and used for the purpose of cost control”. The manager of a cost centre is held responsible for control of cost of his cost centre. The selection of suitable cost centres or cost units for which costs are to be ascertained in an undertaking depends upon a number of factors such as organization of a factory, condition of incidence of cost, availability of information, requirements of costing and management policy regarding selecting a method from various choices. Based on the control, cost centres can be of two types - (a) Personal Cost Centre and (b) Impersonal Cost Centre. A personal cost centre consists of person or group of persons. An impersonal cost centre consists of a location or item of equipment or group of equipments. In a manufacturing concern, the cost centres generally follow the pattern or layout of the departments or sections of the factory and accordingly, there are two main types of cost centres as below: (i) Production Cost Centre: These centres are engaged in production work i.e engaged in converting the raw material into finished product, for example Machine shop, welding shops...etc (ii) Service Cost Centre: These centres are ancillary to and render service to production cost centres, for example Plant Maintenance, Administration...etc The number of cost centres and the size of each vary from one undertaking to another and are dependent upon the expenditure involved and the requirements of the management for the purpose of control. (ii) Revenue Centres The responsibility centres which are accountable for generation of revenue for the entity. Sales Department for example, is the responsible for achievement of sales target and revenue generation. Though, revenue centres does not have control on the all expenditures 1.14 |CMA Inter Cost Accounting  Basics of Cost Accounting it incurs but some time expenditures related with selling activities like commission to sales person etc. are incurred by revenue centres. (iii) Profit Centres Profit centre is a segment of a business that is responsible for all the activities involved in the production and sales of products, systems and services. Thus a profit centre encompasses both costs that it incurs and revenue that it generates. Profit centres are created to delegate responsibility to individuals and measure their performance. (iv) Investment Centres These are the responsibility centres which are not only responsible for profitability but also has the authority to make capital investment decisions. The performance of these responsibility centres are measured on the basis of Return on Investment (ROI) besides profit. Examples of investment centres are Maharatna, Navratna and Miniratna companies of Public Sector Undertakings of Central Government. 16. Cost Allocation When items of cost are identifiable directly with some products or departments such costs are charged to such cost centres. This process is known as cost allocation. Wages paid to workers of service department can be allocated to the particular department. Indirect materials used by a particular department can also be allocated to the department. Cost allocation calls for two basic factors - (i) Concerned department/product should have caused the cost to be incurred, and (ii) exact amount of cost should be computable. 17. Cost Apportionment and Basis of Apportionments When items of cost cannot be directly charged to or accurately identifiable with any cost centres, they are prorated or distributed amongst the cost centres on some predetermined basis. This method is known as cost apportionment. The predetermination of suitable basis of apportionment is very important and usually following principles are adopted -(i) Service or use (ii) Survey method (iii) Ability to bear. 18. Cost Absorption Ultimately the indirect costs or overhead as they are commonly known, will have to be distrib- uted over the final products so that the charge is complete. This process is known as cost absorption, meaning thereby that the costs absorbed by the production during the period. Usually any of the following methods are adopted for cost absorption - (i) Direct Material Cost Percentage (ii) Direct Labour Cost Percentage (iii) Prime Cost Percentage (iv) Direct Labour Hour Rate Method (v) Machine Hour Rate, etc. 19. Under Absorption vs Over Absorption Overheads are absorbed in Cost Accounts on a certain predetermined estimated basis and in Financial Accounts, actual amounts incurred are recorded. If there is any over or under absorption it leads to difference in the profits of both sets of books. After the year end the total | 1.15 CMA Inter Cost Accounting  Basics of Cost Accounting amount of actual factory overheads is known. There is bound to be some difference between the actual amount of overheads and the absorbed amount of overheads. The difference has to be adjusted keeping in view of such differences and the reasons therefore. 20. Cost Management Cost Management is an application of management accounting concepts, methods of collections, analysis and presentation of data to provide the information needed to plan, monitor and control costs. 21. Management Accounting Management Accounting is the application of the principles of accounting and financial management to create, protect, preserve and increase value for the stakeholders of for-profit and not-for-profit enterprises in the public and private sectors. 22. Cost Accounting Vs Management Accounting Cost Accounting Management Accounting An object of cost accounting to find out a cost An object of management accounting is of a product or a service. to make available various information to the management for planning and other activities. In cost accounting both past and present data In the normally data are used for future are used. policies and planning. Cost accounting having a narrow scope Its scope is very wide, it includes financial because mainly it determines the cost. account, cost account report to management etc Cost accounting is an old method. Management accounting is a modern concept. In case of cost accounting, some principles In case of management accounting, for and methods are adopted and from time to reporting to management no specific rule or time same principles are used. principle is adopted. 23. Cost Accounting Vs Financial Accounting Cost Accounting Financial Accounting It provides information to the management It provides the information about the business for proper planning, operation, control and in a general way. i.e Profit and Loss Account, decision making. Balance Sheet of the business to owners and other outside partners. It records the expenditure in an objective It classifies, records and analyses the transac- manner, i.e according to the purpose for tions in a subjective manner, i.e according to which the costs are incurred. the nature of expense. 1.16 |CMA Inter Cost Accounting  Basics of Cost Accounting It gives information through cost reports to It reports operating results and financial management as and when desired. position usually at the end of the year. Cost Accounting is only a part of the financial Financial Accounts are accounts of the whole accounts and discloses profit or loss of each business. They are independent in nature. product, job or service. Cost Accounts are concerned with internal Financial Accounts are concerned with transactions, which do not involve any cash external transactions i.e. transactions payment or receipt. between business concern and third party. 24. Objectives of Cost Accounting The primary objective of cost accounting is to contribute to profitability through Cost Reduction and Cost Control. The following Objectives of Cost Accounting can be identified - a. Ascertainment of Cost b. Determination of Selling Price c. Ascertainment of Profit d. Managerial Decision Making 25. Cost Control vs Cost Reduction Cost Control Cost Reduction Cost Control represents efforts made towards Cost Reduction represents the achievement achieving target or goal. in reduction of cost. The process of Cost Control is to set up a Cost Reduction is not concern with target, ascertain the actual performance and maintenance of performance according to compare it with the target, investigate the standard. variances, and take remedial measures. Cost Control assumes the existence of Cost Reduction assumes the existence of standards or norms which are not challenged. concealed potential savings in standards or norms which are therefore subjected to a constant challenge with a view to improve- ment by bringing out savings. Cost Control is a preventive function. Costs Cost Reduction is a corrective function. It are optimized before they are incurred. operates even when an efficient cost control system exists. Cost Control lacks dynamic approach. Cost Reduction is a continuous process of analysis by various methods of all the factors affecting costs, efforts and functions in an organization | 1.17 CMA Inter Cost Accounting  Basics of Cost Accounting 26. Scope of Cost Accounting The scope of Cost Accountancy is very wide and includes the following: (a) Cost Ascertainment: The main objective of Cost Accounting is to find out the Cost of product / services rendered with reasonable degree of accuracy. (b) Cost Accounting: It is the process of Accounting for Cost which begins with recording of expenditure and ends with preparation of statistical data. (c) Analysis of Cost: It is the process of locating the factors responsible for difference in actual cost from the budgeted costs and fixing up of responsibility for differences in cost. It provides better cost management and helps in taking strategic decisions. (d) Cost Control: It is the process of regulating the action so as to keep the element of cost within the set parameters. (e) Cost Reports: This is the ultimate function of Cost Accounting. These reports are primarily prepared for use by the management at different levels. Cost reports helps in planning and control, performance appraisal and managerial decision making. (f ) Cost Audit: Cost Audit is the verification of correctness of Cost Accounts and check on the adherence to the Cost Accounting plan. Its purpose is not only to ensure the arithme- tic accuracy of cost records but also to see the principles and rules have been applied correctly. 27. Cost and Management Accounting - Roles and Functions, Users of information Role: The role of a cost and management accounting system is to: Provide relevant information to management for decision making, Assist management for planning, measurement, evaluation and controlling of business activities, Help in allocation of cost to products and inventories for both external and internal users. Functions: The functions of Cost and Management accounting includes: (i) Collection and accumulation of cost for each element of cost. (ii) Assigning costs to cost objects to ascertain cost. (iii) Cost and Management Accounting department sets budget and standards for a particular period or activity beforehand and these are compared with the assigned and ascertained cost. Any deviation with the set standards are analysed and reported. All this exercise is done to control costs. (iv) The main function of Cost and Management Accounting is provision of relevant informa- tion to the management for decision making. An Information system environment is set up which is popularly known as Management Information System (MIS). The MIS provides relevant and timely information related to both internal and external to the organisation to enable management at all levels to take decisions. Decisions include cost optimisation, price fixation, implementation of any plan related with product, process, marketing etc. 1.18 |CMA Inter Cost Accounting  Basics of Cost Accounting (v) The performance of a responsibility centre is measured and evaluated against the set standards. The function of Cost and Management Accounting is to gather data like time taken, wastages, process idleness etc., analyse the data, prepare reports and take necessary actions. Users: The users of the information can be broadly categorised into internal and external to the entity. Internal Users Internal users, who use the cost and management accounting information may include the followings: (a) Managers: The managers use the information (i) to know the cost of a cost object and cost centre (ii) to know the price for the product or service (iii) to measure and evaluate performance of responsibility centres (b) Operational level staff: The operational level staff like supervisors, foreman, team leaders require information (i) to know the objectives and performance goals for them (ii) to know product and service specifications like volume, quality and process etc. (iii) to know the performance parameters against which their performance is measured and evaluated. (iv) to know divisional (responsibility centre) profitability et (c) Employees: Employees are concerned with the information related with time and attendance, incentives for work, performance standards etc. External Users External users, who use the Cost and Management Accounting information may include the followings: (a) Regulatory Authorities: Regulatory Authorities are concerned with cost accounting data and information for different purpose which includes tariff determination, providing subsidies, rate fixation etc. To do this the regulatory bodies require information on the basis of some standards and format in this regard. (b) Auditors: The auditors while conducting audit of financial accounts or for some other special purpose audit like cost audit etc. require information related with costing and reports reviewed by management etc. (c) Shareholders: Shareholders are concerned with information that effect their investment in the entity. Management communicates to the shareholders through periodic communique, annual reports etc. regarding new orders received, product expansion, market share for products etc. | 1.19 CMA Inter Cost Accounting  Basics of Cost Accounting 28. Essentials of Good Cost Accounting System a. Easy to operate, practical, simple and capable of meeting the requirements of a business concern. b. The data to be used by the system should be accurate. c. The system should handle and report relevant data for use of managerial decision making. d. The senior managers must have a faith in the system and must look for its constant development. e. There must be cooperation and participation of executives from various departments of the concern. f. The system must be cost effective i.e., the benefits derived from the system should exceed the amount spent on it. 29. Pre requisites of Installation of Costing System Before setting up a system of cost accounting the under mentioned factors should be studied: (i) Objective: The objective of costing system, for example whether it is being introduced for fixing prices or for insisting a system of cost control. (ii) Nature of Business or Industry: The Industry in which business is operating. Every business industry has its own peculiarity and objectives. According to its cost information requirement cost accounting methods are followed. For example, an oil refinery maintains process wise cost accounts to find out cost incurred on a particular process say in crude refinement process etc. (iii) Organisational Hierarchy: Costing system should fulfil the information requirements of different levels of management. Top management is concerned with the corporate strategy, strategic level management is concerned with marketing strategy, product diversification, product pricing etc. Operational level management needs the information on standard quantity to be consumed, report on idle time etc. (iv) Knowing the product: Nature of product determines the type of costing system to be implemented. The product which has by-products requires costing system which account for by-products as well. In case of perishable or short self-life, marginal costing method is required to know the contribution and minimum price at which it can be sold. (v) Knowing the production process: A good costing system can never be established without the complete knowledge of the production process. Cost apportionment can be done on the most appropriate and scientific basis if a cost accountant can identify degree of effort or resources consumed in a particular process. This also includes some basic technical know-how and process peculiarity. (vi) Information synchronisation: Establishment of a department or a system requires substantial amount of organisational resources. While drafting a costing system, informa- tion needs of various other departments should be taken into account. For example, in a typical business organisation accounts department needs to submit monthly stock 1.20 |CMA Inter Cost Accounting  Basics of Cost Accounting statement to its lender bank, quantity wise stock details at the time of filing returns to tax authorities etc. (vii) Method of maintenance of cost records: The manner in which Cost and Financial accounts could be inter-locked into a single integral accounting system and how the results of separate sets of accounts i.e. cost and financial, could be reconciled by means of control accounts. (viii) Statutory compliances and audit: Records are to be maintained to comply with statutory requirements and applicable cost accounting standards to be followed. (ix) Information Attributes: Information generated from the Costing system should possess all the attributes of information i.e. complete, accurate, timeliness, relevant etc. to have an effective management information system (MIS) 30. Limitations of Cost and Management Accounting The limitations of cost accounting are: a. Expensive: It is expensive because analysis, allocation and absorption of overheads requires considerable amount of additional work, and hence additional money. b. Requirement of reconciliation: The results shown by cost accounts differ from those shown by financial accounts. Thus, preparation of reconciliation statements is necessary to verify their accuracy. c. Duplication of work: It involves duplication of work as organization has to maintain two sets of accounts i.e., Financial Accounts and Cost Accounts. d. Inefficiency: Costing system itself does not control costs but its usage does 31. GACAP - Generally Accepted Cost Accounting Principles (GACAP) GACAP - Generally Accepted Cost Accounting Principles (GACAP) contains a summary of the Cost accounting principles currently followed by business entities in India in preparing and presenting cost information in the context of general purpose cost statements for statutory reporting and covered by Cost Audit. It explicitly incorporates the principles already contained in the Cost Accounting Standards 1– 13 issued by the Cost Accounting Standards Board (CASB) in India without necessarily repeating them. In areas not covered by the standards, it reflects the cost accounting principles found in the Cost Accounting Record Rules (CARR) prescribed for the 44 industries in the past. Where somewhat conflicting principles have been laid down by the CARR in different industries, attempt has been made to harmonize the principles so as to evolve a generally acceptable framework. Because the Rules were framed at different points of time spread over many years, it is likely that the principles contained in the Rules and the practice based on them do not reflect current concepts. | 1.21 CMA Inter Cost Accounting  Basics of Cost Accounting It also reflects the Cost Accounting Principles contained in the Guidance Notes and other publications issued by ICAI from time to time. Cost Accounting principles which are gathering wide spread acceptance in Indian Companies for management reporting, even though not adopted for statutory cost reporting (for example, Activity Based Costing), are mentioned with suitable caveats regarding their lack of applicabili- ty for general purpose cost statements for statutory reporting, where applicable. The document stipulates the main principles in bold letters followed by explanation in normal type. The objectives of this document are: 1. to codify the GACAP as applied in the Indian industry; 2. to narrow down diversities in cost accounting practices facilitating the process of develop- ment of cost accounting standards; 3. to provide a reference source to industry and practitioners in preparation and attestation of Cost Statements, where specific cost accounting standards are yet to be issued; 4. to provide a reference source to all the stakeholders in the understanding and interpreting the cost statement; and, 5. to provide a base for monitoring the evolution of new concepts and practices in cost accounting and to codify them as and when they become generally accepted. 32. Cost Accounting Standards Board Objective of formulating Cost Accounting Standards, after recognizing the need for structured approach to the measurement of cost so as to provide guidance to the user organizations, government bodies, regulators, research agencies, academic institutions and others to achieve uniformity and consistency in classification, measurement and assignment of costs. The composition of the CASB will be broad based and ensure participation of all interest groups in the standard setting process. The chairman of the CASB will be nominated by the council of the Institute. Apart from six members of the council nominated on the CASB the following will be represented on the CASB : (a) A nominee of the Central Government representing Ministry of Corporate Affairs (b) Adviser (Cost), Cost Audit Branch, Ministry of Corporate Affairs, Government of India (c) A nominee of the Central Government representing the Central Board of Indirect Taxes and Customs, Government of India (d) A nominee of the Central Government representing the Central Board of Direct Taxes (e) Two members of the institute representing leading companies (f ) Four nominees from regulators i.e. CAG, RBI, SEBI, IRDA,TRAI...etc. (g) Two nominees from professional institutions i.e. ICAI and ICSI (h) Three nominees of industry associations viz ASSOCHAM, CII, FICCI. etc. 1.22 |CMA Inter Cost Accounting  Basics of Cost Accounting (i) Two nominees from academic institutions like IIM, MDI, Universities etc. (j) Four eminent practicing members of the institute (k) President is authorized to include a maximum of two eminent persons having knowledge and expertise in the Cost and Management Accounting / Accounting Standards not falling under the categories as defined in the constitution. The following will be the functions of the CASB : (a) To issue the framework for the Cost Accounting Standards (b) To equip the Cost & Management Accounting professionals with better guide lines on cost Accounting Principles (c) To assists the members in preparation of uniform cost statements under various statutes (d) To provide from time to time interpretations on Cost Accounting Standards (e) To issue application guidance relating to particular standard (f ) To propagate the Cost Accounting Standards and to persuade the users to adopt them in the preparation and presentation of general purpose Cost Statement (g) To persuade the government and appropriate authorities to enforce Cost Accounting Standards, to facilitate the adoption thereof, by industry and corporate entities in order to achieve the desired objectives of standardization of Cost Accounting Practices (h) To educate the users about the utility and the need for compliance of Cost Accounting Standards 33. Treatment of Certain Items in Costing (i) Interest and financing charges : It includes any payment in nature of interest for use of non-equity funds and incidental cost that an entity incurs in arranging those funds. Example of interest and financing charges are interest on borrowings, financing charges in respect of finance leases, cash discount allowed to customers. The term interest and financing charges, finance costs and borrowing costs are used interchangeably. It does not include imputed costs. Interest and financing charges shall be presented in the cost statement as a separate item of cost of sales. (ii) Depreciation : Depreciation “is the diminution in the intrinsic value of an asset due to use and/ or the lapse of time.” Depreciation is thus the result of two factors viz., the use, and the lapse of time. We know that each fixed asset loses its intrinsic value due to their continuous use and as such the greater the use the higher is the amount of depreciation. The loss in the intrinsic value may also arise even if the asset in question is not in service. Assignment of Depreciation : It shall be traced to the cost object to the extent economically feasible. Where it is not directly traceable it should be assigned using either or two principles i.e. (i) Cause and Effect and (ii) Benefit received. (iii) Packing expenses : Cost of primary packing necessary for protecting the product or for convenient handling, should become a part of the production cost. The cost of packing to facilitate the transportation of the product from the factory to the customer should | 1.23 CMA Inter Cost Accounting  Basics of Cost Accounting become a part of the distribution cost. If the cost of special packing is at the request of the customer, the same should be charged to the specific work order or the job. The cost of fancy packing necessary to attract customers is an advertising expenditure. Hence, it is to be treated as a selling overhead. (iv) Fringe benefits : These are the additional payments or facilities provided to the workers apart from their salary and direct cost-allowances like house rent, dearness and city compensatory allowances. These benefits are given in the form of overtime, extra shift duty allowance, holiday pay, pension facilities etc. These indirect benefits stand to improve the morale, loyalty and stability ofemployees towards the organisation. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by means of a supplementary wage or labour rate; otherwise these may be collected as part of production overheads. (v) Expenses on removal and re-erection of machines : Expenses are sometime incurred on removal and re-erection of machinery in factories. Such expenses may be incurred due to factors like change in the method of production; an addition or alteration in the factory building, change in the flow of production, etc. All such expenses are treated as production overheads. When amount of such expenses is large, it may be spread over a period of time. If such expenses are incurred due to faulty planning or some other abnormal factor, then they may be charged to costing Profit and Loss Account. (vi) Bad debts : There is no unanimity among different authors of Cost Accounting about the treatment of bad debts. One view is that ‘bad debts’ should be excluded from cost. According to this view bad debts are financial losses and therefore, they should not be included in the cost of a particular job or product. According to another view it should form part of selling and distribution overheads, especially when they arise in the normal course of trading. Therefore bad debts should be treated in cost accounting in the same way as any other selling and distribution cost. However extra ordinarily large bad debts should not be included in cost accounts (vii) Training expenses : Training is an essential input for industrial workers. Training expenses in fact includes wages of workers, costs incurred in running training department, loss arising from the initial lower production, extra spoilage etc. Training expenses of factory workers are treated as part of the cost of production. The training expenses of office; sales or distribution workers should be treated as office; sales or distribution overhead as the case may be. These expenses can be spread over various departments of the concern on the basis of the number of workers on roll. Training expenses would be abnormally high in the case of high labour turnover such expenses should be excluded from costs and charged to the costing profit and loss account. (viii) Canteen expenses : The subsidy provided or expenses borne by the firm in running the canteen should be regarded as a production overhead. If the canteen is meant only for factory workers therefore this expenses should be apportioned on the basis of the number of workers employed in each department. If office workers also take advantage of the canteen facility, a suitable share of the expenses should be treated as office overhead. (ix) Carriage and cartage expenses : It includes the expenses incurred on the movement (inward and outwards) and transportation of materials and goods. Transportation expenses 1.24 |CMA Inter Cost Accounting  Basics of Cost Accounting related to direct material may be included in the cost of direct material and those relating to indirect material (stores) may be treated as factory overheads. Expenses related to the transportation of finished goods may be treated as distribution overhead. (x) Expenses for welfare activities : All expenses incurred on the welfare activities of employees in a company are part of general overheads. Such expenses should be apportioned between factory, office, selling and distribution overheads on the basis of number of persons involved. (xi) Night shift allowance : Workers in the factories, which operate during night time are paid some extra amount known as ‘night shift allowance’. This extra amount is generally incurred due to the general pressure of work beyond normal capacity level and is treated as production overhead and recovered as such. If this allowance is treated as part of direct wages, the jobs/ production carried at night will be costlier than jobs/production performed during the day. However, if additional expenditure on night shift is incurred to meet some specific customer order, such expenditure may be charged directly to the order concerned. If night shifts are run due to abnormal circumstances, the additional expendi- ture should be charged to the costing profit and loss account. (xii) Research and Development Expenses : The Terminology defines research expenses as “the expenses of searching for new or improved products, new application of materials, or new or improved methods.” Similarly, development expenses are defined as “the expenses of the process which begins with the implementation of the decision to produce a new or improved product.” Theory Check 1. Differential cost is the change in the cost due to change in _________ from one level to another. 2. Management accounting is primarily concerned with ________. 3. In Cost Accounting stock are valued at ________ only. 4. Profit is the resultant of two varying factors viz ________ and ________. 5. ________ cost are historical costs which are incurred in the past. 6. A responsibility centre in which a manager is responsible for costs only is called _______. 7. ___________ costs are not considered for decision making because all past costs are not relevant. 8. _____ expenses are not included in the cost sheet 9. Ticket Counter in a metro is an example of ______ centre. | 1.25 CMA Inter Cost Accounting  Basics of Cost Accounting Some Practical Understandings 1. Find profit percentage on cost if profit percentage on sales is - (a) 20% (b) 25% (c) 50% 2. Find average rate per unit Units Rate per unit 1,000 20 24,000 25 1.26 |CMA Inter Cost Accounting  Basics of Cost Accounting 3. Solve this equation X = 10,000 + 10% of Y Y = 6,000 + 20% of X 4. Distribute the cost of departments X and Y, to departments till the amount becomes zero to the departments A, B and C. Service Total Cost Department A Department B Department C Department X 10,000 50% 20% 30% Y 5,000 40% 40% 20% | 1.27 CMA Inter Cost Accounting  Basics of Cost Accounting 5. Solve this equation (96,000 + 42,000 X)(1+Y) = 1,51,500 (67,500 + 30,000 X) (1+Y) = 1,06,875 6. The space required per unit of product A and B is 2:1. The quantity held in inventory of A is 1,000 units and of B is 800 units. The total cost of inventory handling is ₹ 5,60,000. Find cost allocable to A and B. 7. A bus has three category of seats – Sleeper, Recliner and Ordinary. The fare per seat of Recliner is to be two times of Ordinary and for Sleeper is to be four times of Recliner. The number of seats in a bus is 10 ordinary, 20 recliner and 20 sleeper and all the seats are always fully occupied. Find the fare per seat to be charged to get an accumulated revenue of ₹ 50,000. 1.28 |CMA Inter Cost Accounting  Basics of Cost Accounting 8. A company produced – 200 units of Product A and 500 units of Product B. 1 unit of A is equivalent to 3 units of Product B. (a) Find the equivalent production in terms of Product B. (b) If the total cost of during the period is ₹ 22,000, find cost per unit of Product A and B. 9. At the end of a period, the Department X of a factory has 1,000 units of Finished goods and 800 units of Closing WIP (Degree of Completion) is 50%. Find the equivalent production in terms of Finished Goods. 10. There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing department works 8 hrs a day but Saturdays are half day. The machine work at 90% capacity throughout the year and 2 % is reasonable for breakdown. Find the total productive machine time in a year. | 1.29 CMA Inter Cost Accounting  Basics of Cost Accounting 11. Normal available hours per month per worker - 208, Absenteeism (without pay) hours p.m. per worker – 18, Leave (with Pay) hours per worker p.m. - 20, Normal idle time Unavoidable hours per worker p.m. - 10. There are six workers and eight machines. A machine cannot be worked without a worker wholly engaged on it. How many hours of productive work can be done in a six month period? 12. A worker signed in the factory register at 10.10 am and left after signing out at 6.20pm. During the day, he worked on Job A from 10.30am to 1.00pm. Then he took a lunch break from 1.00pm to 1.30pm. He was allotted another Job after lunch immediately, which he continued to work till 6.00pm. How many hours was the time clocked by the worker and the time booked for the jobs? 13. A company has two products – P and Q. Sales Value of P is ₹ 4,00,000 and of Q is ₹ 2,50,000. The total cost of manufacturing both the products are ₹ 3,20,000. Both the product earns the same average profit, computed on overall basis. What can be the share of cost of the products? 1.30 |CMA Inter Cost Accounting  Cost Ascertainment - Elements of Cost  Chapter 2 Cost Ascertainment - Elements of Cost Unit 1 Material Cost (CAS 6) Unit 2 Employee Cost (CAS 7) Unit 3 Direct Expenses (CAS 10) Unit 4 Overheads (CAS 3) CMA Inter Cost Accounting | 2.1  Cost Ascertainment - Elements of Cost Material Cost (CAS 6)  Unit 1 Material Cost (CAS 6) CAS 6 deals with principles and methods of determining the Material Cost. Material for the purpose of this standard includes raw materials, process materials, additives, manufactured / bought out components, sub-assemblies, accessories, semi finished goods, consumable stores, spares and other indirect materials. This standard does not deal with Packing Materials as a separate standard is being issued on the subject. 1. Material Cost Computation - CAS 6 2. Material Cost Control Techniques a. Economic Order Quantity b. Stock Levels c. Inventory Turnover Ratio d. Store Ledger Card e. Perpetual Inventory System f. ABC Analysis g. Material Purchase Procedures h. Material Issue Procedures i. Material Storage procedures j. Waste, Scrap, Spoilage and Defective. k. VED Analysis l. FSND Analysis m. JIT Inventory Management 2.2 |CMA Inter Cost Accounting  Cost Ascertainment - Elements of Cost Material Cost (CAS 6) Ex. Book No. Pg. No. 1 At what price per unit would the component be entered in the stores ledger if the following invoice was received from supplier: 200 units @ ₹ 5 1000 Less: Discount @ 20% 200 800 Add: IGST @ 15% 120 920 Packing Charges (5 non returnable containers) 50 970 A 2% discount will be given for payment in 30 days. Documents substantiating payment of IGST is enclosed for claiming GST input. Material Cost Computation GST Credit Effect Ex. Book No. Pg. No. 2 CMA Mat, RTP Dec'18 The particulars relating to 1,200 kgs. of a certain raw material purchased by a company during June, were as follows:- Lot prices quoted by supplier and accepted by the Company for placing the purchase order : Lot upto 1,000 kgs. @ ₹ 22 per kg. Between 1,000 - 1,500 kgs, @ ₹ 20 per kg. Between 1500 -2000 kgs. @ ₹ 18 per kg. Trade discount – 20%. Additional charge for containers @ ₹ 10 per drum of 25 kgs. Credit allowed on return of contain- ers, @ ₹ 8 per drum. GST at 12% on raw material and 5% on drums. Total fright paid by the purchaser ₹ 240 Insurance at 2.5% (on net invoice value) paid by the purchaser. Stores overhead applied at 5% on total purchase cost of material. The entire quantity was received and issued to production. The containers are returned in due course. Draw up a suitable statement to show : (a) Total cost of material purchased and (b) Unit cost of material issued to production. CMA Inter Cost Accounting | 2.3  Cost Ascertainment - Elements of Cost Material Cost (CAS 6)  Material Cost Computation Ex. Book No. Pg. No. 3 CMA Mat A cast iron foundry is importing forged steel moulds for making its castings. The moulds are of four different sizes A,B,C and D and their CIF values are US $4,140; 4,160; 6,340, and 7,875 respectively. Customs duty may be assumed at 45% and clearing charges 5% of CIF value. The number of castings that can be made out of each mould it: A - 1,000 B - 2,000, C - 1,800 and D - 1,500. The weight of each casting out of A is 300 kg. B - 400 kg. C - 500 kg and D - 700 Kg. The casting suffer a normal rejection of 10%. You are required to calculate the average cost of mould per tonne of saleable casting. (For conversion assume US $ 1 = ₹ 8) Material Cost Computation Imported Materials Ex. Book No. Pg. No. 4 A Co is buying a material in Lots of 800 Units, which is a bi-monthly supply. The cost per unit is ₹ 50 and the ordering Cost per order is ₹ 100. Inventory Carrying Cost is estimated to be one- fourth of the unit value in respect of material storage only. The general rate of return on investment is 5%. Required : I. Find the Cost of maintaining inventory when current policy is applied? II. What would be the inventory Cost if EOQ is applied? III. Is it advisable to order 1600 units every time if a price discount of 10% is received? Economic Order Quantity Supplier's Offer 2.4 |CMA Inter Cost Accounting  Cost Ascertainment - Elements of Cost Material Cost (CAS 6) Ex. Book No. Pg. No. 5 A Co. uses a purchased component in an assembly. It follows a policy of economic Order Qty for procurement of component. The purchase price of the component is ₹ 800 each and the Cost of carrying one unit is 15% p.a. The cost of placing an order is ₹ 150. The Co. has estimated the total Cost of carrying and order placement at ₹ 36000. The Supplier has offered a discount of 3% on purchase price if the entire requirement of the component is covered in two-purchase order in a year. Required : (a) Find EOQ and (b) Compare the discounted cost and EOQ. Economic Order Quantity Computation of Annual Consumption CMA Mat, MTP Dec'17, Dec'17, RTP Dec'18, Ex. Book No. Pg. No. 6 MTP Jun'19, MTP Dec'20, Work Book From the following particulars with respect to a particular item of materials of a manufacturing company, calculate the best quantity to order: Ordering quantities (tonne) Price per ton Amount (₹) Less than 250 6.00 250 but less than 800 5.90 800 but less than 2,000 5.80 2,000 but less than 4,000 5.70 4,000 and above 5.60 The annual demand for the material is 4,000 tonnes. Stock holding costs are 20% of material cost p.a. The delivery cost per order is ₹ 6.00 Economic Order Quantity At different price levels CMA Inter Cost Accounting| 2.5  Cost Ascertainment - Elements of Cost Material Cost (CAS 6)  Ex. Book No. Pg. No. 7 Lead time 15 days. Annual Consumption 30,000 kgs @ ₹ 20 per kg Ordering Cost per order ₹ 30 Storing cost per annum 20% Find EOQ and Total Inventory Cost if safety stock is kept. Economic Order Quantity With Safety Stock Ex. Book No. Pg. No. 8 CMA Mat, RTP Dec'18 M/s Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation during the year 2015: Average monthly market demand 2,000 Tubes Ordering Cost ₹ 100 per order Inventory carrying cost 20% per annum Cost of tubes ₹ 500 per tube Normal usage 100 tubes per week Minimum usage 50 tubes per week Maximum usage 200 tubes per week Lead time to supply 6 – 8 weeks Compute from the above: (i) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5% is it worth accepting? (ii) Re-order level (iii) Minimum level of stock (iv) Maximum level of stock Stock Levels Annual Consumption 2.6 |CMA Inter Cost Accounting  Cost Ascertainment - Elements of Cost Material Cost (CAS 6) Ex. Book No. Pg. No. 9 A factory uses the following three materials for producing its product and the related informa- tion is also available: Material Usage Per Unit Delivery Week Re Order Qty (Kg) (Kgs) Min Av