Costing PPT

Cost & Management Accounting

MMS –II.RPIMS

Mumbai UniversityProf Anil Yadavrao Gaikwad.

Cost & Management Accounting –MMS IInd Semester -RPIMS

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Course Content Cost & Management Accounting

1. Terminology of cost- cost classification by elements, variability, cash flow etc2. Preparation of cost sheet

3. Methods of costing- with special reference to job costing, process costing, services costing

4. Direction and relationship among financial accounting, cost accounting and management accounting

5. Marginal costing (Break-even analysis) a) Computation of break even point, margin of safety b) Application of Break even analysis to export pricing profit planning, Make v/s buy, operate

v/s shut down

6. Budgetary Control- Function Budgets, Cash Budgets, Master Budgets- Flexible Budgeting- Zero based Budgeting- Responsibility and Performance Budgeting

7. Responsibility Accounting- Cost Centers. Profit centers and investment centers Transfer pricing, Use of responsibility accounting in performance evaluation.


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Project Work1. Costing Methodology in a Software Company – A Case Study

2. Costing Methodology in a Construction Company – A Case Study

3. Costing Methodology in a BPO / Call Centre – A Case Study

4. Costing Methodology in a Consulting Company– A Case Study

5. Costing Methods and ISO Certification

6. Costing Methodology in Entertainment Company – Case Study


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Reference Books

1. Principles and Practice of Cost Accounting

By

N K Prasad & A K Prasad

2. Cost Accounting – A Managerial Emphasis

By

Charles T Horngren


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Cost Centre Concept

Cost Centre is defined as a location, person or item of equipment ( or group of these) for which cost may be ascertained and used for the purpose of cost control.

A cost center is part of an organization that does not produce direct profit and adds to the cost of running a company. Examples of cost centers include research and development departments, marketing departments, help desks and customer service.

Although not always demonstrably profitable, a cost center typically adds to revenue indirectly or fulfills some other corporate mandate. Money spent on research and development, for example, may yield innovations that will be profitable in the future. Investments in public relations and customer service may result in more customers and increased customer loyalty.

Because the cost center has a negative impact on profit (at least on the surface) it is a likely target for rollbacks and layoffs when budgets are cut. Operational decisions in a contact center, for example, are typically driven by cost considerations. Financial investments in new equipment, technology and staff are often difficult to justify to management because indirect profitability is hard to translate to bottom-line figures.


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Cost Centre Concept

Cost Centers are of two types :-A. Impersonal & B. Personal Cost Centers

A. Impersonal Cost Centre consists of a location or item of equipment ( or Group of these)

B. A personal cost centre consists of a person or group of persons

In manufacturing concerns, cost centers follow the pattern of layout of Dept or Section of the Factory.


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Profit Centre Concept

Profit Centre is a segment of business that is responsible for all activities involved in the production and sales of products, system and services. Thus a profit centre encompasses both costs that it incurs and revenue that is generated.


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Cost Objective

Many Accountants use the term cost objective to denote any activity for which costs are required to be determined separately.

A Standard definition specifies cost objective as “a function, organizational sub-division, contract or other work unit for which cost data are required and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects and so forth.

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What is Cost Sheet? Cost sheet is a statement of cost. In other words, when costing information are set

out in the form of a statement, it is called cost sheet. It is usually adopted when there is only one product is produced and all costs are incurred for that product only. Cost sheet may be prepared for a week, monthly, quarterly or yearly indicating various components of cost as prime cost, works cost, cost of production, cost of goods sold, total cost and also profitability on a production.

The preparation of cost sheet depends on the cost data available. Due to differences in the nature of cost data there are three different cost sheet Performa may be used.

(a) Cost sheet with break up cost: These types of cost sheet contains two column as total cost, cost per unit of out put.

(b) Cost Sheet with treatment of Stock: This type of cost sheet is maintained in case of manufacturing concern. Generally there are three types of stock as (1) Stock of Raw material, (2) Stock of work in progress and (3) Stock of finished goods. The treatment of stock in cost sheet has been given in a separate Performa.

(c) Estimated cost sheet or price quotation: Price quotation means quoting the minimum Price for obtaining a specific order. The quotation is send in the form or estimated cost sheet having one column. In estimated cost sheet all elements of cost and overhead expenses are calculated in the following manner.

1. Estimated Direct Material2. Estimated Labor Cost3. Estimated Overheads



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What is Cost Sheet?Direct Cost and Indirect Cost


Direct Material Direct Cost

or

Prime Cost

Direct Labour

Direct Expenses


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What is Cost Sheet?Direct Cost and Indirect Cost


Indirect Material

Indirect Costindirect Labour

Indirect Expenses


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Direct Cost and Indirect Cost

Direct Cost OR Prime Cost

+

Indirect Cost

+

Factory (Works, Production OR Manufacturing) Overheads

=

Total Factory Cost OR Cost of Production



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Total Factory Cost OR

Cost of Production+

Administrative Overheads+

Selling & Distribution Overheads =

Cost of Sales+

Profit=

Sales



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Direct Cost and Indirect CostDirect Cost OR Prime Cost

+Indirect Cost

+Factory (Works, Production OR Manufacturing) Overheads

=Total Factory Cost OR Cost of Production

+Administrative Overheads

+Selling & Distribution Overheads

= Cost of Sales

+Profit

=Sales



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Direct Material +

Know as Prime CostDirect Labour +

Direct Expenses +

Indirect Material +

Indirect Labour +

Indirect Expenses +

Factory Overheads + = Production Cost or Total Factory Cost

Administrative Overheads += Cost of Sales

Selling & Distribution Overheads +

Profit = Sales


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Several methods or types of costing have been designed to suit the needs of individual business conditions.

The basic principles underlying all these methods are the same viz. to collect and analyze the expenditure according to the elements of costs and to determine the cost for each cost centre and / or cost unit.

The main consideration that applies to the choice of a particular method of costing is the nature of the manufacturing or business operations carried out or the service rendered by the concern.

Methods of Costing and Types of Costs


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Basically, there are two main systems of costing viz.

1. Job Costing and

2. Process Costing

All other types are either variants of these two systems of costing or are just techniques used for particular purpose, under specific conditions and on specific occasions.



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1. Classification of cost methods on the basis of nature of production or manufacturing process:-

A. Job CostingVariation of job costing are :-

i. Batch Costingii. Terminal or Contract Costingiii. Multiple or Composite Costing

B. Process CostingVariations of Process Costing are :-

i. Operation Costingii. Single or Output Costingiii. Operating Cost



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2. Classification of cost methods on the basis of Time:-

A. Historical Cost

B. Pre-Determined Costsi. Estimated Costing

ii. Standard Costing



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3. Costs for Managerial Decision Making :-

i. Marginal Costing

ii. Incremental ( or Differential ) Cost

iii. Uniform Costing

iv. Opportunity Cost

v. Replacement Cost

vi. Sunk Cost

vii. Relevant Cost



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4. Costs According to Functions (Manufacturing & Non-Manufacturing Cost):-

i. Manufacturing or Production Cost

ii. Administrative Cost

iii. Selling and Distribution Cost

iv. Research & Development Cost

v. Pre-Production Cost



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5. Classification of Costs on the basis of their variability in relation to output:-

i. Fixed Cost

ii. Variable Cost

iii. Semi-Variable and Semi-Fixed Cost



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6. Classification of Costs based on establishment of relationship between input and output:-

i. Engineering Cost

ii. Managed Cost, discretionary or programmed Cost

7. Controllable and Uncontrollable costs



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8. Other Types of CostsCosts which arises in a particular contests and which are used for particular purposes are :-

i. Conversion Costii. Common Costiii. Traceable Cost or Directly Attributable Costiv. Joint Costv. Avoidable Costvi. Unavoidable Costvii. Total Cost



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The essential features of cost accounting are : Determination of costs, planning and control of costs, cost analysis and furnishing of information to managements for decision making, and cost reduction. Cost Control and determination of costs and cost reporting are just tools or means to achieve effective control.

Cost control is defined as the regulation by executive action of the costs of operating an undertaking, particularly where such action is guided by cost accounting.

Cost control is exercised through numerous techniques some of which are standard costing, budgetary control, Estimated Costing, Inventory Control, Quality Control and Performance evolution, analysis and reporting.

Cost Control


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Cost Control involves the Following Steps :

1. Establish the Plan

2. Inform the persons who are involved directly in the Cost Centre

3. The plan is implemented and performance is recognized

4. The actual performance is measured with the pre-determined plan and variances

5. The variances re-reviewed and decision taken.

Cost Control


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The Advantages of Cost Control 1. Achieving the expected return on capital employed by

maximizing or optimizing profit

2. Increase in productivity of the available resources

3. Reasonable Price for the Customers

4. Continued employment and job opportunity for the workers

5. Economic use of limited resources of production

6. Increased Credit-worthiness

7. Prosperity and Economic Stability of the Industry

Cost Control


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Advantages of Cost Accounting i. A cost system reveals unprofitable activities, losses or inefficiencies occurred in any form such

as :-

a. Wastage of Man Power, Idle Time and Lost Time

b. Wastage of Material in the form of spoilage, excessive scrap etc. and

c. Wastage of resources

ii. Cost Accounting locates the causes for decrease or increase in the profit or loss of the business.

iii. Cost Accounts furnish suitable data information to the management to serve as guides in making decisions involved financial consideration.

iv. Cost Accounting is useful for price fixation purpose.

v. With the application of standard costing and budgetary control methods, the optimum level of efficiency is set.

vi. Cost comparison helps in cost control.

vii. A cost system provides ready figures for use by the Government, Wage Tribunal Boards and Labour and Trade Unions for application to problems like Price Fixation, Administered Price Determination, Price Control, Tariff Protection, Wage Level Fixation, Payment of Dividends, or Settlement of Disputes.

Cost Control


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Advantages of Cost Accounting …continue

viii. When a concern is not working to full capacity due to various reasons such as shortage of demands or bottlenecks in production, the cost of idle capacity can be readily worked out and revealed to the management

ix. Introduction of cost reduction program combined with operations research and value analysis techniques leads to economy. There is a continuous all around effort towards finding out new and improved methods in order to reduce costs.

x. Marginal Costing is employed for suggesting courses of action to be taken; it is a useful tool for the management for making short-term decisions. The effectiveness of marginal cost technique becomes more apparent in times of trade depression when orders may have to be accepted at a price lower than the total cost.

xi. Determination of cost centers or responsibility centers to meet the needs of a cost accounting systems ensures that the organizational structure of the concern has been properly laid out. Responsibilities can be properly defined and fixed on individuals.

xii. A perpetual inventory system which includes a procedure for continuous stock taking is an essential features of a cost system. This is of importance for exercising inventory control and at the same time it facilitates the preparation of periodical profit and loss accounts.

xiii. The Operation of a system of cost audit in an organization not only prevents manipulation and fraud but also assists in furnishing correct and reliable cost data to the management as well as outside parties like the shareholders, the consumers and the Govt. It also highlights weak areas that need to be taken care of to improve performance.

xiv. Cost of the closing stock of raw materials, WIP, FG can be easily obtained from cost records to arrive at the profit or loss of the business on realistic basis.

Cost Control


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There cannot be a readymade Cost System for a business. Such system has to be specifically designed for a particular business to meet the specific needs.

Following points should be looked into & prerequisites satisfied before installing a cost system:-i. The nature, method and stages of production, number of varieties and the quantity of each product and such other technical

aspects should be examined.

ii. The Size, layout and organization of the factory should be studied.

iii. The methods of purchase, receipt, storage and issue of materials should be examined and modified wherever considered necessary

iv. The wage payment methods should be studied.

v. The requirement of the management and policy adopted by them towards cost control should be kept in view.

vi. The cost of the system to be installed should be considered. It is needless to emphasize that the instillation and operations of the system should be economic.

vii. The system should be simple and easy to operate.

viii. The system can be effectively run if it is appropriate and properly suited to the organization.

ix. Forms & records or original entry should be so designed as to involve minimum clerical work and expenditure

x. The system should be so designed that cost control can be effectively exercised.

xi. The system should incorporate suitable procedure for report to the various. Levels of management.

xii. The system should be easy to integrate with ERP / SAP System available in the organization .

Installation of a Cost System


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Like any other system of accounting Cost Accountancy is nor an exact science but and art developed through theories and accounting practices based on reasoning and keen common sense.

No cost cane be said to be exact as they incorporate a large number of conventions, estimations and flexible factors such as :-

i. Classification of cost into its elements.

ii. Materials issue pricing based on average or standard costs

iii. Allocation of direct Labour and direct materials costs in the absence of correct and complete data

iv. Division of overhead into fixed and variable

v. Apportionment of overhead expenses and their allocation to cost centers or cost units

vi. Arbitrary allocation of joint costs, and

vii. Adoption of standard costs and marginal costs.

Limitations of Cost Accounting


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Job Order Costing


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Job Order Costing

Costing PPT

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