FINANCIAL & MANAGEMENT ACCOUNTING
PROF. RANJAN DASGUPTA
UNIT 5:
COST ACCOUNTING
ACCOUNTING
FINANCIAL ACCOUNTING
COST ACCOUNTING
MANAGEMENT ACCOUNTING
COST ACCOUNTANCY
COST ACCOUNTING
COSTING
COST ACCOUNTANCY?
The Terminology published by the Institute of Cost & Management Accountants (ICMA), London:
the application of costing and cost accounting principles, methods and techniques 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.
THE FOLLOWINGS FALL UNDER THE PURVIEW OF COST ACCOUNTANCY: COST ACCOUNTING COSTING COST CONTROL TECHNIQUES BUDGETING & COST AUDIT
COST ACCOUNTING?
Institute of Cost & Management Accountants (ICMA), London: process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units.
IN ANOTHER WAY:
KOHLER:
that branch of accounting dealing with the classification, recording, allocation, summarisation and reporting of current and prospective costs.
DEFINITION IMPLIES THE FOLLOWING ASPECTS OF COST ACCOUNTING: COST COST COST COST COST CLASSIFICATION RECORDING ALLOCATION DETERMINATION/FINDING REPORTING
COSTING?
The Terminology published by the Institute of Cost & Management Accountants (ICMA), London: the technique and process of ascertaining costs.
DEFINITION EMPHASISES TWO IMPORTANT ASPECTS: THE TECHNIQUE & PROCESS OF COSTING
ASCERTAINMENT OF COST
YOU HAVE TO KNOW:
COST CONCEPT
COST OBJECT
COST UNIT
COST
EXPENSE
COST CENTRE
COST RESPONSIBILITY CONVENTIONS CENTRE
COST CONTROL VS. COST REDUCTION
COST ALLOCATION VS. COST APPORTIONMENT
METHODS OF COSTING CLASSIFICATION OF COSTS
COST ACCUMULATION & COST ASSIGNMENT
TYPES/ TECHNIQUES OF COSTING
COST CONCEPT/COST:
(a) The amount of expenditure (actual or notional) incurred on or attributable to a specified article, product or activity. (here the word cost is used as a noun) (b) To ascertain the cost of a given thing. (here the word cost is used as a verb)
EXPENSE:
The costs of running the business during the specific accounting period may be termed as expenses. Expenses are always linked with generation of revenue. Expenses may be of two types; 1) Revenue Expenses, & 2) Capital Expenses.
COST Vs. EXPENSE:
AICPA COMMITTEE ON TERMINOLOGY: Cost can be defined as; the amount measured in money, of cash expended or other property transferred, capital stock issued, services performed or a liability incurred in consideration of goods or services received or to be received.
Expenses can be defined as; all expired costs which are deductible from revenue.
COST OBJECT:
Anything for which a separate measurement of cost is desired. Examples of cost objects include a product, a service , a project , a customer , a brand category , an activity , a department , a programme.
COST CENTRE:
ICMA, London Terminology:
It is defined as; A location, person or an item of equipment (or group of these) in respect of which costs may be ascertained and related to cost units. and used for the purpose of Cost Control. Cost Centres are of two types, viz., Personal and Impersonal.
In a manufacturing concern there are two main types of Cost Centres as indicated below :
Production Cost Centre : It is a Cost Centre where raw material is handled for conversion into finished product. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops are examples of Production Cost Centres. Service Cost Centre : It is a Cost Centre which serves as an ancillary unit to a Production Cost Centre. Power house, gas production shop, material service centres, plant maintenance centres are examples of Service Cost Centres.
COST UNIT:
ICMA, London Terminology:
It is; A quantitative unit of product, service or time (or combination of these) in relation to which costs are ascertained. or expressed.
One may, for instance, determine the cost per tonne of steel, per tonne kilometre of a transport service or cost per machine hour. Sometime, a single order or a contract constitutes a cost unit. A batch which consists of a group of identical items and maintains its identity through one or more stages of production may also be considered as a cost unit. Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value.
RESPONSIBILITY CENTRE:
It is defined as an activity centre of a business organisation entrusted with a special task. Under modern budgeting and control, financial executives tend to develop responsibility centres for the purpose of control. Responsibility centres can broadly be classified into three categories. They are;
Cost Centres ; Profit Centres ; & Investment Centres.
COST CONTROL Vs. COST REDUCTION:
COST CONTROL:
The guidance and regulation, by executive action of the cost of operating an undertaking. COST REDUCTION: The achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.
To exercise cost control, broadly speaking the following steps should be observed:
Determine clearly the objective, i.e., pre-determine the desired results; Measure the actual performance; Investigate into the causes of failure to perform according to plan; & Institute corrective action.
The three-fold assumptions involved in the definition of cost reduction may be summarised as under :
There is a saving in unit cost. Such saving is of permanent nature. The utility and quality of the goods and services remain unaffected, if not improved.
COST ALLOCATION Vs. COST APPORTIONMENT:
ICMA, London:
Allocation of Expenses (or Cost) means:
the allotment of whole items of cost to cost centres or cost units. In other words, overhead expenses/costs identifiable to a department is charged to that department only, and, this is called allocation.
ICMA, London:
Apportionment of Expenses (or Cost) means: the allotment to two or more departments or cost centres of proportions of common items of cost on estimated basis of benefit received. In other words, apportionment is, therefore, charging to a cost centre or a department a fair share of an overhead expense/cost.
TECHNIQUES OF COSTING:
ABSORPTION COSTING
STANDARD COSTING MARGINAL COSTING ACTIVITYBASED COSTING UNIFORM COSTING
VARIABLE COSTING
DIFFERENTIAL COSTING
LIFE CYCLE COSTING
TARGET COSTING
METHODS OF COSTING:
JOB COSTING
PROCESS COSTING
FARM COSTING
BATCH TERMINAL/ MULTIPLE/ COSTING CONTRACT COMPOSITE COSTING COSTING
SINGLE/ OUTPUT COSTING
OPERATION COSTING
OPERATING COSTING
CLASSIFICATION OF COSTS:
CLASSIFICATION ON THE BASIS OF
ELEMENTS OF COST/ NATURE OF EXPENSES
BEHAVIOUR
NORMALITY INVESTMENT
TIME
FUNCTIONS/ ACTIVITIES
CONTROLLABILITY
IDENTIFIABILITY/ THE RELATION TO COST CENTRE
FOR MANAGEMENT DECISION MAKING
NATURE OF PRODUCTION PROCESS
CLASSIFICATION ON THE BASIS OF ELEMENTS OF COST/ NATURE OF EXPENSES:
MATERIAL COST
LABOUR COST
EXPENSES
DIRECT
INDIRECT/ OVERHEADS
CLASSIFICATION ON THE BASIS OF FUNCTIONS/ACTIVITIES:
PRODUCTION COST
SELLING COST/ OVERHEAD
RESEARCH & DEVELOPMENT (R&D) COST
ADMINISTRATION COST/OVERHEAD
DISTRIBUTION COST/OVERHEAD
CLASSIFICATION ON THE BASIS OF BEHAVIOUR:
FIXED COST
VARIABLE COST
SEMI-FIXEDSEMI-VARIABLE COST
CLASSIFICATION ON THE BASIS OF CONTROLLABILITY:
CONTROLLABLE COST
UNCONTROLLABLE COST
CLASSIFICATION ON THE BASIS OF NORMALITY:
NORMAL COST
ABNORMAL COST
CLASSIFICATION ON THE BASIS OF IDENTIFIABILITY/ THE RELATION TO COST CENTRE:
DIRECT COST
INDIRECT COST
MATERIAL LABOUR
EXPENSES
MATERIAL
EXPENSES
LABOUR
CLASSIFICATION ON THE BASIS OF INVESTMENT:
CAPITAL COST
REVENUE COST
CLASSIFICATION ON THE BASIS OF NATURE OF PRODUCTION PROCESS:
BATCH COST
OPERATION COST
CONTRACT COST JOINT COST
PROCESS COST
OPERATING COST
CLASSIFICATION ON THE BASIS OF TIME:
HISTORICAL COST
STANDARD COST ESTIMATED COST
PRE-DETERMINED COST
CLASSIFICATION ON THE BASIS OF- FOR MANAGEMENT DECISION MAKING:
MARGINAL COST
RELEVANT COST IMPUTED COST SUNK COST
ABNORMAL COST
DIFFERENTIAL COST
OPPORTUNITY COST
AVOIDABLE COST
UNAVOIDABLE COST
REPLACEMENT COST
NORMAL COST
COST ACCUMULATION & COST ASSIGNMENT: Cost Accumulation: Collection of cost data in some organized way through an Accounting System. Cost Assignment: Tracing (for direct costs) & the allocating (for indirect costs) of accumulated costs to a cost object to help decision making and facilitate product or customer profitability analysis.
NEED/OBJECTIVES OF COSTING:
TO RECORD & ANALYSE THE EXPENSES WITH A VIEW TO KNOW THE COST OF A UNIT OF OUTPUT, OF A JOB, OF A PROCESS OR OF AN OPERATION. IT INVOLVES, THEREFORE, ALLOCATION OF EXPENDITURE.
TO EXERCISE CONTROL OVER COST. COSTING EXERTS CONTROL OVER ALL ELEMENTS OF COST IN DETAIL, IN ORDER TO MINIMISE COST & MAXIMISE PROFIT.
TO HELP FORMULATING POLICIES. COSTING HELPS THE MANAGEMENT BY SUPPLYING ACCURATE & RELIABLE COST-RELATED INFORMATION SO THAT THE MANAGEMENT CAN ADOPT A SOUND POLICY ON ANY MATTER.
TO HELP THE MANAGEMENT IN FIXING THE SELLING PRICE. SELLING PRICE IS FIXED BY ADDING THE MARGIN OF PROFIT TO COST OF SALES AS ASCERTAINED BY COSTING.
TO HELP THE MANAGEMENT IN ITS EFFORT TO MAXIMISE OUTPUT AND PROFIT. BY BEP ANALYSIS, COSTING CAN ASCERTAIN THE APPROPRIATE OUTPUT THAT GIVES THE DESIRED AMOUNT OF PROFIT.
TO HELP IN COST NEGOTIATION. TO FORECAST. LONG-TERM FORECAST REQUIRES THE CONSIDERATION OF FACTORS LIKE, SALES, CAPITAL EXPENDITURE, PROFIT EXPECTED, ETC. THE OVERALL GUIDING FACTOR IS THE RETURN ON CAPITAL EMPLOYED (ROCE).
TO DO THE PLANNING OF CAPITAL EXPENDITURE & CAPITAL STRUCTURE. THE VALUABLE STATISTICS, SUCH AS, OPERATING COSTS, COST BEHAVIOUR AT DIFFERENT LEVELS OF ACTIVITIES, RAPIDITY OF TURNOVER, WORKING CAPITAL REQUIREMENTS, ETC. ARE SUPPLIED BY COSTING. TO HELP FACING THE DEPRESSION. IN AN ATTEMPT TO FACE THE DEPRESSION, STEPS LIKE, COST CONTROL, COST REDUCTION, SELECTING NEW PRODUCTS OR PRODUCT-MIX, CREATING COST-CONSCIOUSNESS, ETC. ARE TAKEN WITH THE SUPPORT OF COSTING. TO DO THE PLANNING TO CLOSE DOWN, IF NEEDED. TO HELP CHOOSING BETWEEN MAKING & BUYING.
ADVANTAGES/ MERITS/ IMPORTANCE OF COSTING:
ELIMINATION OF WASTES, LOSSES & INEFFICIENCIES COST REDUCTION DETECTION OF REASONS FOR PROFIT/LOSS ADVICES ON VARIOUS MATTERS TO THE MANAGEMENT, HELPFUL IN DECISION MAKING* FIXATION OF THE SELLING PRICE COST CONTROL ASSISTING THE GOVERNMENT, TRADE UNIONS, ETC.
MARGINAL ANALYSIS OF COST FIXATION OF RESPONSIBILITY FOR DIFFERENT INDIVIDUALS HELPING PREPARATION OF FINAL ACCOUNTS UNDER THE FINANCIAL ACCOUNTING SYSTEM PREVENTION OF FRAUDS, ETC., THEREBY HELPING THE MANAGEMENT, THE GOVERNMENT AND OTHERS CONNECTED WITH THE ORGANISATION FACILITATES INTER-PERIOD AND INTERFIRM COMPARISONS ASSISTS IN INCREASING PROFITABILITY GUIDES FUTURE PRODUCTION POLICY
Decision Making:
MAKE OR BUY
CAPACITY
SALES VOLUME
PROFIT
PRICE
OPERATE OR SHUT
EXPORT PRICE
NEW MODEL
COST CONVENTIONS:
CLASSIFICATION OF EXPENSES ACCORDING TO NATURE OF COST CLASSIFICATION OF COSTS INTO FIXED & VARIABLE CLASSIFICATION OF COSTS INTO NORMAL & ABNORMAL PRINCIPLE OF EXCEPTION ESTABLISHMENT OF STANDARDS CLASSIFICATION OF COSTS AS CONTROLLABLE & UNCONTROLLABLE CONSISTENCY
COST CONTROL TO BE EXERCISED THROUGH CLOSE CONTACT WITH THOSE WHO INCUR THE COSTS COST SHOULD REPRESENT SACRIFICE INVOLVED WHEN A BUSINESS IS OPERATING AT AN EFFICIENT LEVEL OF OPERATION THE SYSTEM OF COST ACCOUNTING SHOULD BE DESIGNED SO AS TO MEET THE SPECIFIC REQUIREMENTS OF A BUSINESS
Cost Accounting Vs. Financial Accounting:
FA
Compulsory
Final Financial Results to Stake Holders Subjective Recording
Factor
Need
CA
Obligatory
Purpose
Cost Information
Recording Objective Recording Profit Analysis Product Wise
Total Profit/Loss
External Transactions
Contents
Internal
FA
Once/Twice Inadequate Historical Cost or Market
Factor
Periodicity Control Nature
CA
Daily/weekly/monthly
System at Place
Historical/Predetermined
Valuation
Cost Price
MANAGEMENT ACCOUNTING CONTRASTED WITH COST ACCOUNTING:
Dimension
Main Emphasis Collection of Data
Management Accounting
Impact & Effect Aspect of Costs Derived both from the Cost & Financial Accounts
Cost Accounting
Ascertainment, Allocation, Distribution & Accounting Aspect of Costs Derived from the Cost Books & Accounts & Provide to Management Accounting
Scope
Approach Purview
Broader
Forward-Looking The Management Accountant has the Responsibility to Suggest Corrective Actions on Weaknesses The Management Accountant has more tools & techniques, such as, Marginal Costing, Cash Flow Statement, Budgetary Control, etc. Both Short & Long-Term Assisting Management in its Functions & Evaluating the Performance of the Management
It cannot be Installed without a Proper Cost Accounting System Tailored to Requirement & Summarized Money/Physical Units For Use by Non-Accountants
Narrower
Historical & Past-Oriented The Cost Accountant is only Responsible to Compare the Actual with the Budgeted Performance The Cost Accountant does not have so much tools & techniques, only a few, such as, Cost Sheet, etc. Short-Term Planning Only Concerned with Assisting the Management in its Functions
It can be Installed without a Management Accounting System Standardized Money Somewhat Technical
More Tools & Techniques
Time Horizon Concerned With
Installation Style & Details Unit of Account Nature of Data
THE COST SHEET OR STATEMENT OF COST
COST SHEET IS OF 2 TYPES:
GENERAL COST SHEET ESTIMATED COST SHEET
THE FORMAT OF A COST SHEET OR STATEMENT OF COST
M/s. XYZ Ltd. Cost Sheet for the year ended 31.03.09 Output:
Particulars
Raw Materials Consumed: Opening Stock of Raw Materials Add: Purchase of Raw Materials Add: Expenses on Purchase (Carriage Inward, etc.) Less: Purchase Return/Return Outward
Amount (in Rs.)
Amount (in Rs.)
()
Particulars
Less: Abnormal Loss of Raw Materials (if any) Less: Closing Stock of Raw Materials RAW MATERIALS CONSUMED Add: Direct Wages (Productive Labour) Add: Direct Expenses/ Chargeable Expenses Add: Royalty (if any) PRIME COST
Amount Amount (in Rs.) (in Rs.)
()
()
Particulars
* IF IT IS GIVEN THAT WIP IS AT PRIME COST, THEN: Adjustment for WIP at Prime Cost: Add: Opening Stock of WIP Less: Closing Stock of WIP
Amount Amount (in Rs.) (in Rs.)
()
PRIME COST
Add: Factory Overheads: Factory Rent, Power Indirect Materials
Particulars
Indirect Wages Supervisors Salary Factory Assets Depreciation Consumable Stores, etc. Less: Sale of Scraps Adjustment for WIP at Manufacturing Cost: Add: Opening Stock of WIP Less: Closing Stock of WIP
Amount Amount (in Rs.) (in Rs.)
() ()
Particulars
Amount Amount (in Rs.) (in Rs.)
FACTORY COST/WORKS COST Add: Office & Administration Overheads: Office Rent, Electricity Office Assets Depreciation Directors Fees Auditors Fees Bank Charges Office & Admin. Salaries Other Office Expenses, etc.
Particulars
Amount (in Rs.)
Amount (in Rs.)
COST OF PRODUCTION Adjustment for Stock of Finished Goods: Add: Opening Stock of Finished Goods Less: Closing Stock of Finished Goods ( Note 2) COST OF GOODS SOLD
()
Particulars
Add: Selling & Distribution Overheads: Salesmens Commission, Salary, etc. Traveling Expenses Carriage Outward Advertisement Delivery-Men Expenses Insurance on Finished Goods Sales Tax, Bad Debts, etc.
Amount (in Rs.)
Amount (in Rs.)
TOTAL COST/COST OF SALES
Particulars
Add: PROFIT (balancing figure) SALES/SELLING PRICE
Amount Amount (in Rs.) (in Rs.)
YOU HAVE TO REMEMBER:
3. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units Produced. 4. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units Sold. 5. Items not to be considered in Cost Sheet: (i) Income Tax Paid, (ii) Cash Discount (Received & Paid), (iii) Donations, Dividends (Received & Paid), (iv) Preliminary Expenses/ Goodwill Written Off, (v) Transfer to Reserves, (vi) Interest (Received & Paid), (vii) Rent Receivables, (viii) Losses on the Sales of Investments, Building etc., (ix) Profits made on the Sale of Fixed Assets, (x) Transfer Fees Received.
GENERAL COST SHEET OR STATEMENT OF COST
COST SHEET- PROBLEM 1:
THE ACCOUNTS OF P.K.MANUFACTURERS LTD. FOR THE YEAR ENDED 31.12.08 SHOW THE FOLLOWING; PARTICULARS
STOCK OF RAW MATERIALS AS ON 01.01.08 RAW MATERIALS PURCHASED BAD DEBTS W/O TRAVELLING SALESMENS SALARIES & COMMISSION DEPRECIATION W/O ON OFFICE
AMOUNT (IN RS.)
67,200
PARTICULARS
FURNITURE RENT, RATES, TAXES & INSURANCE (FACTORY) PRODUCTIVE WAGES DIRECTORS FEES GENERAL EXPENSES GAS & WATER (FACTORY)
AMOUNT (IN RS.)
420 11,900
2,59,000
9,100
1,76,400 8,400 4,760 1,680
10,780
PARTICULARS
TRAVELLING EXPENSES SALES MANAGERS SALARY DEPRECIATION ON PLANT & MACHINERY CASH DISCOUNTS ALLOWED REPAIRS TO PLANT & MACHINERY CARRIAGE & CARTAGE OUTWARDS
AMOUNT (IN RS.)
PARTICULARS
AMOUNT (IN RS.)
10,010
2,940 DIRECT EXPENSES 6,00,000 RENT, RATES & 15,000 INSURANCE (OFFICE) 18,200 GAS & WATER (OFFICE) STOCK OF RAW MATERIALS AS ON 4,060 31.12.08 6,230
2,800 560 87,920
6,020
THE MANAGERS SALARY IS TO BE APPORTIONED IN THE RATIO OF 2:1 IN BETWEEN FACTORY AND OFFICE. PREPARE A COST SHEET/STATEMENT OF COST GIVING THE DETAILS OF PRIME COST, WORKS COST, COST OF PRODUCTION, COST OF SALES & TOTAL PROFIT.
SOLUTION OF PROBLEM 1:-
P.K. Manufacturers Ltd. Cost Sheet for the year ended 31.12.08 Output:
Particulars/Elements of Cost Raw Materials Consumed:
Raw Materials as on 01.01.08 Add: Materials Purchased Less: Raw Materials as on 31.12.08 Add: Productive Wages
Amount (in Rs.)
67,200 2,59,000 3,26,200
Amount (in Rs.)
(87,920)
2,38,280 1,76,400
Particulars/Elements of Cost
Add: Direct Expenses PRIME COST Add: Factory Overheads: Rent, Rates, Taxes & Insurance (Factory) Gas & Water (Factory) Managers Salary (2/3 of Rs. 15,000) Depreciation on Plant & Machinery Repairs to Plant & Machinery
Amount (in Rs.)
Amount (in Rs.) 10,010 4,24,690
11,900
1,680 10,000 18,200
6,230 48,010
Particulars/Elements of Cost
FACTORY COST/WORKS COST Add: Office & Administration Overheads: Depreciation W/O on Office Furniture Directors Fees General Expenses (W.N.1) Managers Salary (1/3 of Rs. 15,000) Rent, Rates & Insurance (Office) Gas & Water (Office)
Amount (in Rs.)
Amount (in Rs.) 4,72,700
420
8,400 4,760 5,000
2,800 560
Particulars/Elements of Cost
Amount (in Rs.)
Amount (in Rs.) 21,940 4,94,640
COST OF PRODUCTION Add: Selling & Distribution Overheads: Travelling Salesmens Salaries & Commission Travelling Expenses (W.N.2) Bad Debts W/O Carriage & Cartage Outwards
10,780
2,940 9,100 6,020
Particulars/Elements of Cost
Amount (in Rs.)
Amount (in Rs.) 28,840 5,23,480 76,520 6,00,000
TOTAL COST/COST OF SALES Add: PROFIT (balancing figure) SALES
WORKING NOTES:
1) It has been assumed that General Expenses is related to Office & Administration. 2) It has also been assumed that Travelling Expenses have been incurred in connection with sales.
3) Cash Discounts Allowed has been treated as a financial charge and excluded from Cost Accounts.
COST SHEET- PROBLEM 2:
THE ACCOUNTS OF M/S. BANI TRADERS FOR THE YEAR ENDED 30.06.08 SHOW THE FOLLOWING; PARTICULARS
STOCK OF RAW MATERIALS AS ON 01.07.07 RAW MATERIALS PURCHASED W-I-P AS ON 01.07.07: AT PRIME COST Add: MANUFACTURING EXPENSES
AMOUNT (IN RS.)
12,500
PARTICULARS
FINISHED GOODS AT COST AS ON 01.07.07 (8,000 UNITS) FREIGHT ON RAW MATERIALS PURCHASED LOSS OF MATERIALS BY FIRE FACTORY EXPENSES
AMOUNT (IN RS.)
60,000
1,10,000
5,000
15,000
3,000 18,000
5,000
70,000
PARTICULARS
CHARGEABLE EXPENSES DIRECT LABOUR ADMINISTRATIVE EXPENSES SELLING EXPENSES DISTRIBUTION EXPENSES SALE OF FINISHED GOODS (28,000 UNITS) RAW MATERIALS AS ON 30.06.08
AMOUNT (IN RS.)
PARTICULARS
AMOUNT (IN RS.)
25,000 W-I-P AS ON 30.06.08: 1,35,000 AT PRIME COST RS. 2/UNIT Add: MANUFACTURING RS. 1/UNIT EXPENSES 15,000
10,000 8,000 18,000
STOCK OF FINISHED GOODS 4,00,000 AS ON 30.06.08 (10,000 UNITS) 20,000
Assume Sales are made on FIFO basis
PREPARE A COST SHEET/STATEMENT OF COST GIVING THE DETAILS OF PRIME COST, WORKS COST, COST OF PRODUCTION, COST OF SALES, TOTAL PROFIT & PROFIT P.U..
SOLUTION OF PROBLEM 2:-
M/S. BANI TRADERS Cost Sheet for the year ended 30.06.08 Output: 30,000 Units Per Unit Per Unit Total Total Particulars/ Amount Amount Amount Amount Elements of Cost (in Rs.) (in Rs.)
(in Rs.) (in Rs.)
RAW MATERIALS CONSUMED: Raw Materials as on 01.07.07 Add: Raw Materials Purchased Add: Freight on Raw Materials Purchased Less: Loss of Materials by Fire Less: Raw Materials as on 30.06.08
12,500 1,10,000 5,000 1,27,500 (5,000) (20,000)
Total Total Particulars/ Elements of Cost Amount Amount (in Rs.) (in Rs.)
Per Unit
Per Unit
Amount Amount (in Rs.) (in Rs.)
Add: Direct Labour Add: Chargeable Expenses Add: W-I-P AT PRIME COST: As on 01.07.07 Less: As on 30.06.08 PRIME COST Add: Factory Expenses Add: Manufacturing Expenses
1,02,500 1,35,000 25,000
3.4166 4.5000 0.8333
15,000 (10,000) 5,000 2,67,500 70,000 0.1666 8.9165 2.3333
Total Total Particulars/ Elements of Cost Amount Amount (in Rs.) (in Rs.)
As on 01.07.07 Less: As on 30.06.08 FACTORY/WORKS COST Add: Administrative Expenses Rs. (2 30,000) COST OF PRODUCTION Add: Finished Goods at Cost as on 01.07.07 Less: Stock of Finished Goods as on 30.06.08 COST OF GOODS SOLD 3,000 (8,000)
Per Unit
Per Unit
Amount Amount (in Rs.) (in Rs.)
(5,000) 3,32,500
(0.1666) 11.0832
60,000 3,92,500
60,000
(1,30,832)
2.0000 13.0832
(70,832) 3,21,668
Total Total Particulars/ Elements of Cost Amount Amount (in Rs.) (in Rs.)
Add: Selling Expenses Rs. (1 28,000) Add: Distribution Expenses COST OF SALES/ TOTAL COST Add: PROFIT SALES
Per Unit
Per Unit
Amount Amount (in Rs.) (in Rs.)
28,000 15,000 3,64,668 35,332 4,00,000 1.2619
WORKING NOTES: 1) We know that;
Opening Stock + Units Produced = Units Sold + Closing Stock
According to the given information:
Opening Stock = 8,000 Units Units Sold = 28,000 Units Closing Stock = 10,000 Units
SO,
Units Units Units Units Produced Produced Produced Produced = = = = ? (Units Sold + Closing Stock) Opening Stock (28,000 + 10,000)Units 8,000 Units 30,000 Units
2) Calculation of Value of Finished Goods as on 30.06.08: = Rs. (13.0832 10,000) = Rs. 1,30,832
As we have assumed FIFO Method of Sales:
UNITS SOLD: 28,000
OPENING STOCK: 8,000
UNITS PRODUCED: 30,000 10,000
CLOSING STOCK 10,000
ESTIMATED COST SHEET OR STATEMENT OF COST
COST SHEET- PROBLEM 3:
THE FOLLOWING DATA RELATE TO THE MANUFACTURE OF A STANDARD PRODUCT DURING THE MONTH IN JULY, 2008: RAW MATERIALS CONSUMED RS. 25,000 MANUAL AND MACHINE LABOUR WAGES ( DIRECTLY CHARGEABLE) - RS. 15,000 CHARGEABLE EXPENSES RS. 4,500 MACHINE HOURS WORKED 1,000 MACHINE HOUR RATE RS. 2.50 ESTABLISHMENT & GENERAL EXPENSES RS. 4,700
SELLING & DISTRIBUTION OVERHEADS P.U. RS. 0.08 UNITS PRODUCED 10,000 UNITS SOLD 8,000 SELLING PRICE P.U. RS. 6
(a) YOU ARE REQUIRED TO PREPARE A COST SHEET IN RESPECT OF THE ABOVE SHOWING THEREIN THE COST P.U. UNDER EACH ELEMENT OF COST AND THE PROFIT FOR THE PERIOD. ALSO, SHOW THE PERCENTAGE THAT THE WORKS OVERHEAD COST BEARS TO THE MANUAL
AND MACHINE LABOUR WAGES AND THE PERCENTAGE THAT THE ESTABLISHMENT AND GENERAL EXPENSES BEAR TO THE WORKS COST. (b) WHAT PRICE SHOULD THE COMPANY QUOTE TO PRODUCE 1,000 UNITS OF ANOTHER PRODUCT WHICH WILL REQUIRE AN EXPENDITURE OF RS. 8,000 FOR RAW MATERIALS AND RS. 6,000 FOR DIRECT WAGES, SO THAT IT WILL YIELD A PROFIT OF 25% ON THE COST OF SALES?
SOLUTION OF PROBLEM 3:-
(a) Cost Sheet for the month ended July, 2008 Output: 10,000 Units
Total Total Particulars/ Elements of Cost Amount Amount
Per Unit Per Unit
(in Rs.)
(in Rs.)
Amount Amount (in Rs.) (in Rs.) 2.50 1.50 0.45 4.45 0.25 4.70
RAW MATERIALS CONSUMED MANUAL & MACHINE LABOUR WAGES CHARGEABLE EXPENSES PRIME COST FACTORY OVERHEAD RS. (2.50 1,000) FACTORY COST
25,000 15,000 4,500 44,500 2,500 47,000
Total Total Particulars/ Elements of Cost Amount Amount (in Rs.) (in Rs.)
ESTABLISHMENT & GENERAL EXPENSES COST OF PRODUCTION Less: CLOSING STOCK OF FINISHED GOODS RS. (51,700 2/10) COST OF GOODS SOLD SELLING & DISTRIBUTION OVERHEADS RS. (0.08 8,000) COST OF SALES Add: PROFIT SALES RS. (6 8,000) 4,700
Per Unit
Per Unit
Amount Amount (in Rs.) (in Rs.) 0.47
51,700
10,340 41,360 640
5.17
0.08
42,000 6,000 48,000
5.25 0.75 6.00
CALCULATION OF WORKS OVERHEAD COST TO MANUAL & MACHINE LABOUR WAGES:
RS. 2,500 = RS. 15,000 = 16.67% Ans. 100
CALCULATION OF ESTABLISHMENT & GENERAL EXPENSES TO WORKS COST:
RS. 4,700
= RS. 47,000 = 10% 100
(b) Cost Sheet (Estimated) for the year ended 2009 Output: 1,000 Units
Total Total Particulars/ Elements of Cost Amount Amount
Per Unit Per Unit
(in Rs.)
(in Rs.)
Amount Amount (in Rs.) (in Rs.) 8.00 6.00 0.45 14.45 1.00 15.45 1.545 16.995
RAW MATERIALS CONSUMED MANUAL & MACHINE LABOUR WAGES CHARGEABLE EX. PRIME COST FACTORY OVERHEAD FACTORY COST ESTABLISHMENT & GENERAL EXPENSES COST OF PRODUCTION
8,000 6,000 450 14,450 1,000 15,450 1,545 16,995
Total Total Particulars/ Elements of Cost Amount Amount (in Rs.) (in Rs.)
SELLING & DISTRIBUTION OVERHEADS RS. (0.08 1,000) COST OF SALES
Per Unit
Per Unit
Amount Amount (in Rs.) (in Rs.)
80
0.08
17,075 4,268.75
21,343.75
17.075 4.26875
21.34375
Add: PROFIT RS. (25/100 17,075)
SALES
WORKING NOTES: 1) CALCULATION OF NO. OF MACHINE HOURS WORKED:
1,000
= 10,000 = 100 HOURS Ans. 1,000
1,000 = 10,000 = RS. 100 1,000
COST SHEET- PROBLEM 4:
IN 2008, THE ACCOUNTS OF A COMPANY MANUFACTURING MINI GENERATORS DISCLOSED THE FOLLOWING PARTICULARS: MATERIALS USED RS. 16,00,000 DIRECT WAGES RS. 17,40,000 FACTORY OVERHEAD EXPENSES RS. 2,82,000 ESTABLISHMENT & GENERAL EXPENSES RS. 2,78,000
YOU ARE ASKED TO PREPARE A STATEMENT SHOWING THE PRICE AT WHICH THE COMPANY SHOULD SELL GENERATORS DURING 2009 ASSUMING; (a) THAT IT IS ESTIMATED THAT EACH GENERATOR WILL REQUIRE MATERIALS WORTH RS. 2,900 AND AN EXPENDITURE IN DIRECT WAGES RS. 1,200. (b) THAT DURING 2009, THE FACTORY OVERHEAD EXPENSES WILL BEAR THE SAME RATIO TO DIRECT WAGES AS IN 2008.
(c) THAT THE PERCENTAGE OF ESTABLISHMENT & GENERAL EXPENSES ON FACTORY COST WILL BE THE SAME IN 2009 AS IN 2008. (d) THAT THE COMPANY HAS DECIDED TO EARN A PROFIT OF 10% ON SELLING PRICE.
SOLUTION OF PROBLEM 4:-
A Company Cost Sheet for the year ended 2008 Output:
Particulars/Elements of Cost
MATERIALS USED DIRECT WAGES PRIME COST FACTORY OVERHEAD EXPENSES WORKS COST ESTABLISHMENT & GENERAL EXPENSES TOTAL COST
Amount (in Rs.)
Amount (in Rs.)
16,00,000 17,40,000 33,40,000 2,82,000 36,22,000 2,78,000 39,00,000
A Company Estimated Cost Sheet for the year ended 2009 Output: Amount Amount Particulars/Elements of (in Rs.) (in Rs.) Cost
MATERIALS USED DIRECT WAGES PRIME COST FACTORY OVERHEAD EXPENSES RS. (16.2069% OF RS. 1,200) WORKS COST ESTABLISHMENT & GENERAL EXPENSES RS. (7.6753% OF RS. 4,294.48) 2,900.00 1,200.00 4,100.00 194.48
4,294.48 329.61
Particulars/Elements of Cost
TOTAL COST/ COST OF SALES Add: PROFIT RS. (4,624.09 10/90) SELLING PRICE
Amount (in Rs.)
Amount (in Rs.) 4,624.09 513.79
5,137.88
WORKING NOTES: 1) CALCULATION OF THE RATIO OF FACTORY OVERHEAD EXPENSES TO DIRECT WAGES:
FACTORY OVERHEAD EXPENSES = DIRECT WAGES RS. 2,82,000 100 = 16.2069% RS. 17,40,000 100
WORKING NOTES:
2) CALCULATION OF THE RATIO OF ESTABLISHMENT & GENERAL EXPENSES TO WORKS COST:
ESTABLISHMENT & GENERAL EX. = WORKS COST RS. 2,78,000 100 = 7.6753% RS. 36,22,000 100
COST SHEET- PROBLEM 5:
THE JAY ENGINEERING CO. LTD. MANUFACTURED AND SOLD 1,000 SEWING MACHINES IN 2008. FOLLOWING ARE THE PARTICULARS OBTAINED FROM THE RECORDS OF THE COMPANY: MATERIALS CONSUMED RS. 80,000 WAGES PAID RS. 1,20,000 MANUFACTURING EXPENSES RS. 50,000 SALARIES RS. 60,000 RENT, RATES & INSURANCE RS. 10,000
SELLING EXPENSES RS. 30,000 GENERAL EXPENSES RS. 20,000 SALES RS. 4,00,000 THE COMPANY PLANS TO MANUFACTURE 1,200 SEWING MACHINES IN 2009. YOU ARE REQUIRED TO SUBMIT A STATEMENT SHOWING THE PRICE AT WHICH THESE MACHINES WOULD BE SOLD AS TO SHOW A PROFIT OF 10% ON SELLING PRICE.
THE FOLLOWING ADDITIONAL INFORMATION IS PROVIDED TO YOU: (a) PRICE OF MATERIALS WILL RISE BY 20% ON THE PREVIOUS YEARS LEVELS. (b) WAGE RATES WILL GO UP BY 5%. (c) MANUFACTURING EXPENSES WILL RISE IN PROPORTION TO THE COMBINED COST OF MATERIALS AND WAGES. (d) SELLING EXPENSES P.U. WILL REMAIN UNCHANGED. (e) OTHER EXPENSES WILL REMAIN UNAFFECTED BY THE RISE IN OUTPUT.
SOLUTION OF PROBLEM 5:-
Jay Engineering Co. Ltd. Cost Sheet for the year ended 2008 Output: 1,000 Sewing Machines Per Unit Per Unit Total Total Particulars/ Amount Amount Amount Amount Elements of Cost (in Rs.) (in Rs.)
(in Rs.) (in Rs.)
MATERIALS CONSUMED WAGES PAID PRIME COST MANUFACTURING EXPENSES FACTORY COST OFFICE & ADMIN. OVERHEADS: SALARIES RENT, RATES & INS. GENERAL EXPENSES 80,000 1,20,000 2,00,000 50,000 2,50,000 80.00 120.00 200.00 50.00 250.00
60,000 10,000 20,000
60.00 10.00 20.00
Total Total Particulars/ Elements of Cost Amount Amount (in Rs.) (in Rs.)
90,000 3,40,000 30,000 3,70,000 30,000 4,00,000
Per Unit
Per Unit
Amount Amount (in Rs.) (in Rs.) 90.00 340.00 30.00 370.00 30.00 400.00
COST OF PRODUCTION SELLING EXPENSES COST OF SALES Add: PROFIT SALES
Jay Engineering Co. Ltd. Cost Sheet for the year ended 2009 Output: 1,200 Sewing Machines Per Unit Per Unit Total Total Particulars/ Amount Amount Amount Amount Elements of Cost (in Rs.) (in Rs.)
(in Rs.) (in Rs.)
MATERIALS CONSUMED (W.N. 1) WAGES PAID (W.N. 2) PRIME COST MANUFACTURING EXPENSES (W.N. 3) FACTORY COST OFFICE & ADMIN. OVERHEADS: SALARIES 1,15,200 96.00
1,51,200 2,66,400
66,600 3,33,000
126.00 222.00
55.50 277.50
60,000
50.00
Total Total Particulars/ Elements of Cost Amount Amount (in Rs.) (in Rs.)
RENT, RATES & INS. GENERAL EXPENSES COST OF PRODUCTION SELLING EXPENSES COST OF SALES Add: PROFIT (W.N. 4) SALES 10,000 20,000
Per Unit
Per Unit
Amount Amount (in Rs.) (in Rs.) 8.33 16.67
90,000 4,23,000 36,000 4,59,000 51,000 5,10,000
75.00 352.50 30.00 382.50 42.50 425.00
WORKING NOTES: 1) CALCULATION OF MATERIALS CONSUMED COST (TOTAL) IN 2009:
MATERIALS PRICE P.U. IN 2008 RS. 80 MATERIALS PRICE P.U. IN 2009 RS. (80 + 20% OF RS. 80) = RS. 96 MATERIALS CONSUMED COST (TOTAL) IN 2009: RS. (96 1,200) = 1,15,200
WORKING NOTES: 2) CALCULATION OF WAGES PAID IN 2009:
WAGES PAID P.U. IN 2008 RS. 120 WAGES PAID P.U. IN 2009 RS. (120 + 5% OF RS. 120) = RS. 126 WAGES PAID (TOTAL) IN 2009: RS. (126 1,200) = 1,51,200
WORKING NOTES: 3) CALCULATION OF MANUFACTURING EXPENSES IN 2009:
TOTAL MANUFACTURING EXPENSES IN 2008 RS. 50,000 MANUFACTURING EXPENSES 100 IN 2008 PRIME COST RS. 50,000 = 100 = 25% RS. 2,00,000
SO, IN 2009, MANUFACTURING EXPENSES WILL BE: RS. (1,15,200 + 1,51,200) 25% = RS. (25% OF RS. 2,66,400) = RS. 66,600
WORKING NOTES: 4) CALCULATION OF PROFIT IN 2009:
LET US ASSUME THAT SELLING PRICE WILL BE RS. 100. PROFIT IS 10% OF SELLING PRICE (GIVEN), I.E., RS. 10. SO, COST WILL BE: RS. (100 10) = RS. 90 RATIO OF PROFIT TO COST IS: RS. (10/90) = 1/9. SO, RS. (4,59,000 1/9) = RS. 51,000 WILL BE THE PROFIT IN 2009.
ASSIGNMENT NO. 1:
COST SHEET- PROBLEM 6:
THE ACCOUNTS OF P.K.MANUFACTURERS LTD. FOR THE YEAR ENDED 31.12.08 SHOW THE FOLLOWING; PARTICULARS
STOCK OF RAW MATERIALS AS ON 01.01.08 RAW MATERIALS PURCHASED BAD DEBTS W/O SALARIES TO ADMINISTRATIVE STAFF REPAIRS TO PLANT
& MACHINERY
AMOUNT (IN RS.)
1,88,000
PARTICULARS
INDIRECT WAGES RENT, RATES & TAXES (FACTORY) DIRECT WAGES PAID RENT, RATES & TAXES (OFFICE) GENERAL CHARGES FREIGHT INWARD
AMOUNT (IN RS.)
16,000 12,000 2,38,400 6,400
8,32,000
18,800
40,000
24,800
42,400
32,000
PARTICULARS
FREIGHT OUTWARD DIRECTORS FEES MANAGERS SALARY DEPRECIATION ON PLANT & MACHINERY SALESMENS SALARIES & COM. TRAVELLING EXPENSES DEPRECIATION ON FURNITURE
AMOUNT (IN RS.)
PARTICULARS
AMOUNT (IN RS.)
14,000
20,000 CASH DISCOUNTS ALLOWED 24,000 ELECTRICITY 48,000 CHARGES (FACTORY) FUEL (FOR 28,400 BOILER) STOCK OF RAW MATERIALS AS ON 33,600 31.12.08
48,000 64,000 2,00,000
12,400
2,400
THE MANAGERS TIME IS SHARED BETWEEN THE FACTORY AND THE OFFICE IN THE RATIO OF 20:80. FROM THE ABOVE DETAILS YOU ARE REQUIRED TO PREPARE A STATEMENT SHOWING; (a) PRIME COST, (b) WORKS COST, (c) COST OF PRODUCTION, (d) COST OF SALES/TOTAL COST.
ANSWERS:
(a) RS. 10,90,400 (b) RS. 13,10,800 (d) RS. 15,12,800
ASSIGNMENT NO. 2:
COST SHEET- PROBLEM 7:
FROM THE FOLLOWING PARTICULARS RELATING TO PRODUCTION AND SALES FOR THE YEAR ENDED 31.12.2007, PREPARE A STATEMENT OF COST SHOWING THE PRIME COST, FACTORY/WORKS COST, COST OF PRODUCTION, COST OF GOODS SOLD (COGS) , COST OF SALES, SALES, PROFIT AND ALSO P.U. COST OF SALES AND P.U. PROFIT.
PARTICULARS
RAW MATERIALS WORK-IN-PROGRESS FINISHED GOODS (AT COST) 3,000 UNITS 2,500 UNITS
AS ON AS ON 01.01.07 31.12.07 (AMT. RS.) (AMT. RS.) 16,000 19,600 12,600 4,600
16,400 ?
Other Information for the Year: Purchase of Raw Materials Rs. 1,11,600 Sales of Finished Goods Rs. 2,83,500 (40,500 Units) Productive Wages Rs. 67,200 Office & Administrative Expenses Rs. 20,800 Selling & Distribution Expenses Rs. 0.50 Per Unit Sold Machine Hours Worked Rs. 8,000 Hours Machine Hour Rate (MHR) Rs. 2.50 Assume that sales are made on the basis of First-in-First-out (FIFO) principle.
ANSWERS:
PRIME COST = RS. 1,75,200 WORKS COST = RS. 2,03,200 COST OF PRODUCTION = RS. 2,24,000 CLOSING STOCK OF FINISHED GOODS = RS. 14,000 COST OF GOODS SOLD = RS. 2,26,400 COST OF SALES = RS. 2,46,650 (P.U. = RS. 6.09) PROFIT = RS. 36,850 (P.U. = RS. 0.91)
ASSIGNMENT NO. 3:
COST SHEET- PROBLEM 8:
IN RESPECT OF A FACTORY, THE FOLLOWING FIGURES HAVE BEEN OBTAINED FOR THE YEAR ENDED 31.12.2008. COST OF MATERIALS RS. 1,50,000 DIRECT WAGES RS. 1,25,000 FACTORY OVERHEAD RS. 75,000 ADMINISTRATION OVERHEAD RS. 84,000 SELLING OVERHEAD RS. 56,000 DISTRIBUTION OVERHEAD RS. 35,000 PROFIT RS. 1,05,000
A WORK ORDER HAS BEEN ISSUED IN 2009 AND THE FOLLOWING EXPENSES HAVE BEEN ESTIMATED: COST OF MATERIALS RS. 3,000 DIRECT WAGES RS. 2,000 ASSUMING THAT, IN 2009, FACTORY OVERHEAD WILL GO UP BY 20%, DISTRIBUTION OVERHEAD WILL GO DOWN BY 10% AND SELLING AND ADMINISTRATION OVERHEADS WILL EACH GO UP BY 12%.
STATE AT WHAT PRICE SHOULD THE PRODUCT BE SOLD, SO AS TO EARN THE SAME RATE OF PROFIT ON THE SELLING PRICE AS IN 2008.
NOTE: Administration, Selling and Distribution Overheads are based on Works Cost.
ANSWERS:
SELLING PRICE = RS. 11,729 RELATIONS IN 2008: i) Factory Overhead/Direct Wages = 72% ii) Administration Overhead/Works Cost= 25.89% iii) Selling Overhead/Works Cost= 17.26% iv) Distribution Overhead/Works Cost = 8.63% v) Rate of Profit in 2008 = 20% of Cost
