IV.management Accounting_Material (1)

Concept note on Management Accounting Prof. Bhavana Raj Introduction to Management Accounting: Managerial accounting is often referred to as management accounting. The Institute of Management Accountants describes management accounting as the internal business-building role of accounting and finance professionals who design, implement, and manage internal systems that support effective decisions, and support, plan, and control the organization's value-creating operations. In short, managerial accounting supports the decision making process through planning and controlling operations. Planning primarily appears in the budgeting process. Controlling occurs when managers compare actual performance with budgeted amounts to identify differences and then act upon differences that appear to be significant.

Meaning of Management Accounting: The process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day-to-day and short-term decisions.

Unlike financial accounting, which produces annual reports mainly for external stakeholders, management accounting generates monthly or weekly reports for an organization's internal audiences such as department managers and the chief executive officer. These reports typically show the amount of available cash, sales revenue generated, amount of orders in hand, state of accounts payable and accounts receivable, outstanding debts, raw material and inventory, and may also include trend charts, variance analysis, and other statistics. Also called managerial accounting.

Nature of Management Accounting: (1)The term management accounting is composed of 'management' and 'accounting'. The word 'management' here does not signify only the top management but the entire personnel charged with the authority and responsibility of operating an enterprise.

(2)The task of management accounting involves furnishing accounting information to the management, which may base its decisions on it. It is through management accounting that the management gets the tools for an analysis of its administrative action and can lay suitable stress on the possible alternatives in terms of costs, prices and profits, etc. but it should be understood that the accounting information supplied to management is not the sole basis for managerial decisions.

(3)Along with the accounting information, management takes into consideration or weighs other factors concerning actual execution. For reaching a final decision, management has to apply its common sense, foresight, knowledge and experience of operating an enterprise, in addition to the information that is already has.

(4)The word 'accounting' used in this phrase should not lead us to believe that it is restricted to a mere record of business transactions i.e., book keeping only. It has indeed a 'macro-economic approach'. As it draws its raw material from several other disciplines like costing, statistics, mathematics, financial accounting, etc., it can be called an interdisciplinary subject, the scope of which is not clearly demarcated.

(5)Other fields of study, which can be covered by management accounting, are political science, sociology, psychology, management, economics, statistics, law, etc. A knowledge of political science helps to understand authority relationship and responsibility identification in an organization. A study of sociology helps to understand the behavior of man in groups. Psychology enables us to know the mental make-up of employers and employees. A knowledge of these subjects helps to increase motivation, and to control the actions of the people who are ultimately responsible for costs. This builds a better employer-employee relationship and a sound morale.

(6)The subject of management reveals the processes involved in the art of managing, a knowledge of economics assists in the determination of optimum output in the forecasting of sales and production,

etc., and also makes it possible to analyze management action in terms of cost revenues, profits, growth, etc. It is with the help of statistics that this information is presented to the management in a form that can be assimilated.

(7)The subject of management accounting also encompasses the subject of law, knowledge of which is necessary to find out if the management action is ultra-vires or not. It is, therefore, a wide and diverse subject. Management accounting has no set principles such as the double entry system of bookkeeping. In place of generally accepted accounting principles, the philosophy of cost benefit analysis is the core guide of this discipline. It says that no accounting system is good or bad but is can be considered desirable so long as it brings incremental benefits in excess of its incremental costs.

(8) Applying management accounting principles to financial matters can arrive at no single perfect solution. It is, therefore, an inexact science, which uses its own conventions rather than standardized principles. The facts to be studied here can be interpreted in different ways and the precision of the inferences depends upon the skill, judgment and common sense of different management accountants. It occupies a middle position between a fully matured and an infant subject.

(9)Since management accounting is managerially oriented, its data is selective in nature. It focuses on potential opportunities rather than opportunities lost. The data is operative in nature catering to the operational needs of a firm. It details events, monetary and non-monetary. The nature of data, the form of presentation and its duration are mainly determined by managerial needs. It is quite frequently reported as it is meant for internal uses and managerial control. An accountant should look at his enterprise from the management's point of view. Whenever he fails to do that he ceases to be a management accountant.

(10)Management accounting is highly sensitive to management needs. However, it assists the management and does not replace it. It represents a service phase of management rather than a service to management from management accountant. It is rather highly personalized service. Finally, it can be said that the management accounting serves as a management information system and so enables the management to manage better.

FUNCTIONS OF MANAGEMENT ACCOUNTING: The basic function of management accounting is to assist the management in performing its functions effectively. The functions of the management are planning, organizing, directing and controlling. Management accounting helps in the performance of each of these functions in the following ways:

(i) Provides data: Management accounting serves as a vital source of data for management planning. The accounts and documents are a repository of a vast quantity of data about the past progress of the enterprise, which are a must for making forecasts for the future.

(ii) Modifies data: The accounting data required for managerial decisions is properly compiled and classified. For example, purchase figures for different months may be classified to know total purchases made during each period product-wise, supplier-wise and territory-wise.

(iii) Analyses and interprets data: The accounting data is analyzed meaningfully for effective planning and decision-making. For this purpose the data is presented in a comparative form. Ratios are calculated and likely trends are projected.

(iv) Serves as a means of communicating: Management accounting provides a means of communicating management plans upward, downward and outward through the organization. Initially, it means identifying the feasibility and consistency of the various segments of the plan. At later stages it keeps all parties informed about the plans that have been agreed upon and their roles in these plans.

(v) Facilitates control: Management accounting helps in translating given objectives and strategy into specified goals for attainment by a specified time and secures effective accomplishment of these goals in an efficient manner. All this is made possible through budgetary control and standard costing which is an integral part of management accounting.

(vi) Uses also qualitative information: Management accounting does not restrict itself to financial data for helping the management in decision making but also uses such information which may not be capable of being measured in monetary terms. Such information may be collected form special surveys, statistical compilations, engineering records, etc.

SCOPE OF MANAGEMENT ACCOUNTING: Management accounting is concerned with presentation of accounting information in the most useful way for the management. Its scope is, therefore, quite vast and includes within its fold almost all aspects of business operations. However, the following areas can rightly be identified as falling within the ambit of management accounting:

(i) Financial Accounting: Management accounting is mainly concerned with the rearrangement of the information provided by financial accounting. Hence, management cannot obtain full control and coordination of operations without a properly designed financial accounting system.

(ii) Cost Accounting: Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost techniques play a useful role in operation and control of the business undertaking.

(iii) Revaluation Accounting: This is concerned with ensuring that capital is maintained intact in real terms and profit is calculated with this fact in mind.

(iv) Budgetary Control: This includes framing of budgets, comparison of actual performance with the budgeted performance, computation of variances, finding of their causes, etc.

(v) Inventory Control: It includes control over inventory from the time it is acquired till its final disposal.

(vi) Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other statistical methods make the information more impressive and intelligible.

(vii) Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income statements and the related reports, cash flow and funds flow statements, scrap reports, etc.

(viii) Taxation: This includes computation of income in accordance with the tax laws, filing of returns and making tax payments.

(ix) Office Services: This includes maintenance of proper data processing and other office management services, reporting on best use of mechanical and electronic devices.

(x) Internal Audit: Development of a suitable internal audit system for Internal control.

FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING:

Basis for distinction FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

1 Format Financial accounts are supposed to be in accordance with a specific format by IAS so that financial accounts of different organizations can be easily compared.

No specific format is designed for management accounting systems.

2 Planning and control

Financial accounting helps in making investment decision, in credit rating.

Management Accounting helps management to record, plan and control activities to aid decision-making process.

3 External Vs. Internal A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors.

A management accounting system produces information that is used within an organization, by managers and employees.

4 Focus Financial accounting focuses on history.

Management accounting focuses on future & Present.

5 Users Financial accounting reports are primarily used by external users, such as shareholders, bank and creditors.

Management accounting reports are exclusively used by internal users viz. managers and employees.

6 Reporting frequency and duration

Well-defined - annually, semi-annually, quarterly.

As needed - daily, weekly, monthly.

7 Optional? Preparing financial accounting reports are mandatory especially for limited companies.

There are no legal requirements to prepare reports on management accounting.

8 Objectives The main objectives of financial accounting are :i) to disclose the end results of the business, and ii) to depict the financial condition of the business on a particular date.

The main objectives of Management Accounting are to help management by providing information that used by management to plan, evaluate, and control.

9 Legal/rules Drafted according to GAAP - General Accepted Accounting Procedure.

Drafted according to management suitability.

10 Accounting process Follows a full process of recording, classifying, and summarizing for the purpose of analysis and interpretation of the financial information.

Cost accounts are not preserved under Management Accounting. The necessary data from financial statements and cost ledgers are analyzed.

11 Segment reporting Pertains to the entire organization or materially significant business units.

May pertain to smaller business units or individual departments, in addition to the entire organization.

12 Nature of information

Focus on quantitative information. Focus on both qualitative and quantitative information.

COST ACCOUNTING VS MANAGEMENT ACCOUNTING:

Basis for distinction COST ACCOUNTING MANAGEMENT ACCOUNTING

1 External Vs. Internal Cost Accounting is that branch of accounting information system which records, measures and reports information about costs.

A management accounting system produces information that is used within an organization, by managers and employees.

2 Objectives The primary purpose of the Cost Accounting is cost ascertainment and

The main objectives of Management Accounting are

its use in decision-making performance evaluation.

to help management by providing information that used by management to plan, evaluate, and control.

3 Accounting process Cost Accounting preserves cost accounts by maintaining double-entry accounting process if felt necessary. Cost Ledger is used under it.

Cost accounts are not preserved under Management Accounting. The necessary data from financial statements and cost ledgers are analyzed.

FINANCIAL ACCOUNTING VS COST ACCOUNTING:

Basis for distinction FINANCIAL ACCOUNTING COST ACCOUNTING

1 Purpose It is prepared for providing information about the final results of the business activities as a whole for a particular period to its proprietors, outsiders etc.

The main purpose of Cost Accounting is to provide information to the management for the proper planning, control and decision making.

2 Need Financial Accounts are maintained as per the requirements of Companies Act and Income Tax Act.

Cost accounts are maintained to, to meet the requirements of the Management.

3 Recording Transactions are classified, recorded and analyzed subjectively.

In cost accounting, transactions are classified, recorded and analyzed objectively according to the purpose for which costs are incurred.

4 Analysis of profit Financial accounting reveals the profit of a business as a whole.

Cost accounting shows the profit made on each product, job or process.

5 Accounting Period Financial accounts are prepared for a definite period.

Cost reports are prepared frequently and submitted to the management may be daily, weekly, etc.

6 Stock Valuation In financial accounts, stocks are valued at cost price or market price whichever is less.

Cost accounting stocks are valued at cost.

7 Dealings Financial counts deal with actual facts and figures.

In cost accounting, emphasis is on both actual facts and estimates or predetermined costs.

8 Relative Efficiency Financial accounts dont reveal the relative efficiency of each department or section.

Cost account provides information on the relative efficiencies of various plant and machinery.

CONCEPTS OF COST: The term cost means the amount of expenses [actual or notional] incurred on or attributable to specified thing or activity. As per Institute of cost and work accounts (ICWA) India, Cost is measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services.

CLASSIFICATION OF COSTS: The different bases of cost classification are: (1) By time (Historical, Pre-determined). (2) By nature or elements (Material, Labor and Overhead). (3) By degree of traceability to the product (Direct, Indirect). (4) Association with the product (Product, Period). (5) By Changes in activity or volume (Fixed, Variable, Semi-variable). (6) By function (Manufacturing, Administrative, Selling, Research and development, Pre-production). (7) Relationship with accounting period (Capital, Revenue). (8) Controllability (Controllable, Non-controllable). (9) Cost for analytical and decision-making purposes (Opportunity, Sunk, Differential, Joint, Common, Imputed, Out-of-pocket, Marginal, Uniform, Replacement). (10) Others (Conversion, Traceable, Normal, Avoidable, Unavoidable, Total).

1. Classification on the Basis of Time:

(a) Historical Costs: These costs are ascertained after they are incurred. Such costs are available only when the production of a particular thing has already been done. They are objective in nature and can be verified with reference to actual operations. (b) Pre-determined Costs: These costs are calculated before they are incurred on the basis of a specification of all factors affecting cost. Such costs may be:

(i) Estimated costs: Costs are estimated before goods are produced; these are naturally less accurate than standards. (ii) Standard costs: This is a particular concept and technique. This method involves: (a) setting up predetermined standards for each element of cost and each product; (b) comparison of actual with standard to find variation; (c) pin-pointing the causes of such variances and taking remedial action. Obviously, standard costs, though pre-determined, are arrived with much greater care than estimated costs.

2. By Nature or Elements: There are three broad elements of costs:

(1) Material: The substance from which the product is made is known as material. It can be direct as well as indirect.

(a)Direct material: It refers to those materials which become a major part of the finished product and can be easily traceable to the units. Direct materials include: (i) All materials specifically purchased for a particular job/process. (ii) All material acquired and latter requisitioned from stores. (iii) Components purchased or produced. (iv) Primary packing materials. (v) Material passing from one process to another.

(b) Indirect material: All material which is used for purposes ancillary to production and which can be conveniently assigned to specific physical units is termed as indirect materials. Examples, oil, grease, consumable stores, printing and stationary material etc. (2) Labor: Labor cost can be classified into direct labor and indirect labor.

(a) Direct labor: It is defined as the wages paid to workers who are engaged in the production process whose time can be conveniently and economically traceable to units of products. For example, wages paid to compositors in a printing press, to workers in the foundry in cast iron works etc.

( b)Indirect labor: Labor employed for the purpose of carrying tasks incidental to goods or services provided, is indirect labor. It cannot be practically traced to specific units of output. Examples, wages of store-keepers, foreman, time-keepers, supervisors, inspectors etc. (3) Expenses: Expenses may be direct or indirect. (a)Direct expenses: These expenses are incurred on a specific cost unit and identifiable with the cost unit. Examples are cost of special layout, design or drawings, hiring of a particular tool or equipment for a job; fees paid to consultants in connection with a job etc. (b)Indirect expenses: These are expenses which cannot be directly, conveniently and wholly allocated to cost centre or cost units. Examples are rent, rates and taxes, insurance, power, lighting and heating, depreciation etc.

It is to be noted that the term overheads has a wider meaning than the term indirect expenses. Overheads include the cost of indirect material, indirect labor and indirect expenses. overheads may be classified as (a) production or manufacturing overheads, (b) administration overheads, (c) selling overheads, and (d) distribution overheads.

3. By Degree of Traceability to the Products : Cost can be distinguished as direct and indirect.

(a)Direct Costs: The direct costs are those which can be easily traceable to a product or costing unit or cost center or some specific activity, e.g. cost of wood for making furniture. It is also called traceable cost. (b)Indirect Costs : The indirect costs are difficult to trace to a single product or it is uneconomic to do so. They are common to several products, e.g. salary of a factory manager. It is also called common costs.

Costs may be direct or indirect with respect to a particular division or department. For example, all the costs incurred in the Power House are indirect as far as the main product is concerned but as regards the Power House itself, the fuel cost or supervisory salaries are direct. It is necessary to know the purpose for which cost is being ascertained and whether it is being associated with a product, department or some activity.

Direct cost can be allocated directly to costing unit or cost center. Whereas Indirect costs have to be apportioned to different products, if appropriate measurement techniques are not available. These may involve some formula or base which may not be totally correct or exact.

4. Association with the Product :Cost can be classified as product costs and period costs.

(a) Product Costs: Product costs are those which are traceable to the product and included in inventory values. In a manufacturing concern it comprises the cost of direct materials, direct labor and manufacturing overheads. Product cost is a full factory cost. Product costs are used for valuing inventories which are shown in the balance sheet as asset till they are sold. The product cost of goods sold is transferred to the cost of goods sold account. (b)Period Costs: Period costs are incurred on the basis of time such as rent, salaries, etc., include many selling and administrative costs essential to keep the business running. Though they are necessary to generate revenue, they are not associated with production, therefore, they cannot be assigned to a product. They are charged to the period in which they are incurred and are treated as expenses.

Selling and administrative costs are treated as period costs for the following reasons: (i) Most of these expenses are fixed in nature. (ii) It is difficult to apportion these costs to products equitably. (iii) It is difficult to determine the relationship between such cost and the product. (iv) The benefits accruing from these expenses cannot be easily established. The net income of a concern is influenced by both product and period costs. Product costs are included in the cost of the product and do not affect income till the product is sold. Period costs are charged to the period in which they are incurred.

5. By Changes in Activity or Volume : Costs can be classified as fixed, variable and semi-variable cost. (I)Fixed Costs: The Chartered Institute of Management Accountants, London, defines fixed cost as the cost which is incurred for a period, and which, within certain output and turnover limits, tends to be unaffected by fluctuations in the levels of activity (output or turnover). These costs are incurred so that physical and human facilities necessary for business operations, can be provided. These costs arise due to contractual obligations and management decisions. They arise with the passage of time and not with production and are expressed in terms of time. Examples are rent, property-taxes, insurance, supervisors salaries etc. It is wrong to say that fixed costs never change. These costs may vary depending on the circumstances. The term fixed refer to non-variability related to the relevant range. Fixed cost can be classified into the following categories for the purpose of analysis: (a) Committed Costs: These costs are incurred to maintain certain facilities and cannot be quickly eliminated. The management has little or no discretion in this cost, e.g., rent, insurance etc. (b) Policy and Managed Costs: Policy costs are incurred for implementing particular management policies such as executive development, housing, etc. Such costs are often discretionary. Managed costs are incurred to ensure the operating existence of the company e.g., staff services. (c) Discretionary Costs: These are not related to the operations and can be controlled by the management. These costs result from special policy decisions, new researches etc., and can be eliminated or reduced to a desirable level at the discretion of the management. (d) Step Costs: Such costs are constant for a given level of output and then increase by a fixed amount at a higher level of output. (II)Variable Cost: Variable costs are those costs that vary directly and proportionately with the output e.g. direct materials, direct labor. It should be kept in mind that the variable cost per unit is constant but the total cost changes corresponding to the levels of output. It is always expressed in terms of units, not in terms of time. Management decisions can influence the cost behavior patterns. The concept of variability is relative. If the conditions upon which variability was determined changes, the variability will have to be determined again.

(III) Semi-fixed (Semi-Variable) costs: Such costs contain fixed and variable elements. Because of the variable element, they fluctuate with volume and because of the fixed element; they do not change in direct proportion to output. Semi-variable costs change in the same direction as that of the output but not in the same proportion. Depreciation is an example; for two shifts working the total depreciation may be only 50% more than that for single shift working. They may change with comparatively small changes in output but not in the same proportion.

6. Functional Classification of Costs : A company performs a number of functions. Functional costs may be classified as follows: (a) Manufacturing/production Costs: It is the cost of operating the manufacturing division of an undertaking. It includes the cost of direct materials, direct labor, direct expenses, packing (primary) cost and all overhead expenses relating to production. (b) Administration Costs: They are indirect and covers all expenditure incurred in formulating the policy, directing the organization and controlling the operation of a concern, which is not related to research, development, production, distribution or selling functions. (c) Selling and Distribution Cost: Selling cost is the cost of seeking to create and stimulate demand e.g. advertisements, market research etc. Distribution cost is the expenditure incurred which begins with making the package produced available for dispatch and ends with making the reconditioned packages available for re-use e.g. warehousing, cartage etc.

It includes expenditure incurred in transporting articles to central or local storage. Expenditure incurred in moving articles to and from prospective customers as in the case of goods on sale or return basis is also distribution cost. (d) Research and Development Costs: They include the cost of discovering new ideas, process, products by experiment and implementing such results on a commercial basis. (e) Pre-production Cost: When a new factory is started or when a new product is introduced, certain expenses are incurred. There are trial runs. Such costs are termed as pre-production costs and treated as deferred revenue expenditure. They are charged to the cost of future production.

7. Relationships with Accounting Period : Costs can be capital and revenue. Capital expenditure provides benefit to future period and is classified as an asset. On the other hand, revenue expenditure benefits only the current period and is treated as an expense. As and when an asset is written off, capital expenses to that extent becomes cost. Only when capital and revenue is properly differentiated, the income of a particular period can be correctly determined. It is not possible to distinguish between the two under all circumstances. 8. Controllability : Cost can be Controllable and Non-Controllable.

(a) Controllable Cost: The Chartered Institute of Management Accountants defines controllable cost as cost which can be influenced by its budget holder. (b)Non-Controllable Cost: It is the cost which is not subject to control at any level of managerial supervision. The difference between the terms is very important for the purpose of cost accounting, cost control and responsibility accounting. A controllable cost can be controlled by a person at a given organizational level. Controllable cost are not totally controllable.

Some costs are partly controllable by one person and partly by another e.g., maintenance cost can be controlled by both the production and maintenance manager. The term controllable costs is often used to mean variable costs and non-controllable costs as fixed.

Belkaoni has mentioned the following fallacies about controllable costs:

(i) All variable costs are controllable and fixed are not. (ii) All direct costs are controllable and indirect costs are not. (iii) All long-term costs are controllable. Sometimes the time factor and the decision making authority can make a cost controllable. If the time period is long enough, all costs can be controlled. Proper delegation helps in establishing clear responsibility and controllability. But all costs can be controlled by one or another person. The authority and responsibility of cost control is delegated to different levels, though the managing director is responsible for all the costs. 9. Costs for Analytical and Decision Making Purposes:

(a) Opportunity Costs: Opportunity cost is the cost of selecting one course of action and the losing of other opportunities to carry out that course of action. It is the amount that can be received if the asset is utilized in its next best alternative. Edwards, Hermanson and Salmonson define it as the benefits lost by rejecting the best competing alternative to the one chosen. The benefit lost is usually the net earnings or profit that might have been earned from the rejected alternative Example: Capital is invested in plant and machinery. It cannot be now invested in shares or debentures. The loss of interest and dividend that would be earned is the opportunity cost. Another example is when the owner of a business foregoes the opportunity to employ himself elsewhere. Opportunity costs are not recorded in the books. It is important in decision making and comparing alternatives. (b) Sunk Costs: A sunk cost is one that has already been incurred and cannot be avoided by decisions taken in the future. As it refers to past costs, it is called unavoidable cost.

The National Association of Accountants (USA) defines a sunk cost as an expenditure for equipment or productive resources which has no economic relevance to the present decision making process. This cost is not useful for decision making as all past costs are irrelevant. CIMA defines it as the past cost not taken into account in decision making. It has also been defined as the difference between the purchase price of an asset and its salvage value. (c) Differential Cost: Differential cost has been defined as the difference in total cost between alternatives, calculated to assist decision making. Differential cost is the increase or decrease in total costs resulting out of:

(a) Producing and distributing a few more or few less of products; (b) A change in the method of production/distribution; (c) An addition or deletion of a product or a territory; and (d) The selection of an additional sales channel. The differential cost between any two levels of production is the difference between the marginal costs at these two levels and the increase or decrease in fixed costs, if any. These costs are usually specific purpose costs as they are determined for a particular purpose and under specific circumstances.

Incremental cost measures the addition in unit cost for an addition in output. This cost need not be the same at all levels of production. It is usually expressed as a cost per unit whereas the differential cost is measured in total. The former applies to increase in production and is restricted to the cost only, whereas the differential cost has a comprehensive meaning and application in the sense that it denotes both increase or decrease. Differential costs is useful in planning and decision making and helps to choose the best alternative. It helps management to know the additional profit that would be earned if idle capacity is used or when additional investments are made. (d) Joint Costs: The processing of a single raw material results in two or more different products simultaneously. The joint products are not identifiable as different types of product until a certain stage of production known as the split-off point is reached. Joint costs are the costs incurred up to the point of separation. One product may be of major importance and others of minor importance which are called by-products.

Bierman and Djckman define it as: Joint costs relate to a situation in which the factors of production by their basic nature result in two or more products. The jointness results from there being more than one product, and these multi-products are the result of the methods of production or the nature of raw material and not of a decision by management to produce both. The National Association of Accountants defines it as follows: Joint costs relate to two or more products produced from a common production process or element-material, labor or overhead or any combination thereof or so locked together that one cannot be produced without producing the other. Joint costs can be apportioned to different products only by adopting a suitable basis of apportionment. (e) Common Costs: Common costs are those costs which are incurred for more than one product, job, territory or any other specific costing object. They are not easily related with individual products and hence are generally apportioned. The National Association of Accountants defines the term as the cost of services employed in the creation of two or more outputs which is not allocable to those outputs on a clearly justified basis. It should be kept in mind that management decisions influence the incurrence of common costs e.g. rent of the factory is a common cost to all departments located in factory. (f) Imputed Costs: Some costs are not incurred and are useful while taking decision pertaining to a particular situation. These costs are known as imputed or notional costs and they do not enter into traditional accounting systems. Examples: Interest on internally generated funds, salaries of owners of proprietorship or partnership, notional rent etc. (g) Uniform Costs: They are not distinct costs as such. Uniform costing signifies common costing principles and procedures adopted by a number of firms. They are useful in inter-firm comparison. (h) Marginal Costs: It is the aggregate of variable costs, i.e., prime cost plus variable overheads. Thus, costs are classified as fixed and variable.

(i) Replacement Costs: This is the cost of replacing an asset at current market values e.g. when the cost of replacing an asset is considered, it means the cost of purchasing the asset at the current market price is important and not the cost at which it was purchased. (j) Out of Pocket Cost: It involves payment to outsiders i.e. gives rise to Cash Expenditure as opposed to such costs as depreciation which dont involve any cash expenditure. Such costs are relevant for price fixation during recession or when make or buy decision is to be made. 10. Other Costs : (i) Conversion Cost: It is the cost of a finished product or work-in-progress comprising direct labor and manufacturing overhead. It is production cost less the cost of raw material but including the gains and losses in weight or volume of direct material arising due to production. (ii) Normal Cost: This is the cost which is normally incurred at a given level of output in the conditions in which that level of output is achieved.

(iii) Traceable Cost: It is the cost which can be easily associated with a product, process or department.

(iv) Avoidable Costs: Avoidable costs are those costs which under the present conditions need not have been incurred. Example: (a) Spoilage in excess of normal limit; (b) Unfavorable cost variances which could have been controlled. (v) Unavoidable Costs: Unavoidable costs are those costs which under the present conditions must be incurred. (vi) Total Cost: This is the sum of all costs associated to a particular unit, or process, or department or batch or the entire concern. It may also mean the sum total of material, labor and overhead. The term total cost however, is not precise, it needs to be made precise by using terms that indicate the elements of cost included. (vii) Value Added: Strictly, it is not cost. It means the selling price of the product/service less the cost of materials used in the product or the service. Often depreciation is also deducted for ascertaining value added.

CLASSIFICATION OF COST ON THE BASIS OF:

Nature (or) Elements

Function Variability Normality Decision_ making & Controllability

(1)Material Cost

(1)Production Cost

(1)Fixed Cost (1)Normal Cost (1)Controllable Cost

(2)Labor Cost

(2)Administration Cost

(2)Variable Cost

(2)Abnormal Cost (or) Semi-Fixed Cost

(2)Uncontrollable Cost

(3)Other Expenses

(3)Selling Cost (3)Semi-Variable Cost

(3)Sunk Cost

(4)Distribution Cost

(4)Opportunity Cost

(5)Replacement Cost

(6)Conversion Cost

Basic Cost Concepts: To get the results we make efforts. Efforts constitute cost of getting the results. It can be expressed in terms of money; it means the amount of expenses incurred on or attributable to some specific thing or activity. The term cost is used in this very form. In reference to production/manufacturing of goods and services cost refers to sum total of the value of resources used like raw material and labor and expenses incurred in producing or manufacturing of given quantity.

Elements of cost: Cost of production/manufacturing consists of various expenses incurred on production/manufacturing of goods or services. These are the elements of cost which can be divided into three groups: (1) Material, (2) Labor and (3) Expenses.

(1)Material: To produce or manufacture material is required. For example to manufacture shirts cloth is required and to produce flour wheat is required. All material which becomes an integral part of finished product and which can be conveniently assigned to specific physical unit is termed as Direct Material. It is also described as raw material, process material, prime material, production material, stores material, etc. The substance from which the product is made is known as material. It may be in a raw or manufactured state. Material is classified into two categories:

(a)Direct Material: Direct Material is that material which can be easily identified and related with specific product, job, and process. Timber is a raw material for making furniture, cloth for making garments, sugarcane for making sugar, and Gold/ silver for making jewellery, etc are some examples of direct material.

(b)Indirect Material: Indirect Material is that material which cannot be easily and conveniently identified and related with a particular product, job, process, and activity. Consumable stores, oil and waste, printing and stationery etc, are some examples of indirect material. Indirect materials are used in the factory, the office, or the selling and distribution department.

(2)Labor: Labor is the main factor of production. For conversion of raw material into finished goods, human resource is needed, and such human resource is termed as labor. Labor cost is the main element of cost in a product or service. Labor can be classified into two categories:

(a) Direct Labor: Labor which takes active and direct part in the production of a commodity. Direct labor is that labor which can be easily identified and related with specific product, job, process, and activity. Direct labor cost is easily traceable to specific products. Direct labor costs are specially and conveniently traceable to specific products. Direct labor varies directly with the volume of output. Direct labor is also known as process labor, productive labor, operating labor, direct wages, manufacturing wages, etc. Cost of wages paid to carpenter for making furniture, cost of a tailor in producing readymade garments, cost of washer in dry cleaning unit are some examples of direct labor.

(b) Indirect Labor: Indirect labor is that labor which cannot be easily identified and related with specific product, job, process, and activity. It includes all labor not directly engaged in converting raw material into finished product. It may or may not vary directly with the volume of output. Labor employed for the purpose of carrying out tasks incidental to goods or services provided is indirect labor. Indirect labor is used in the factory, the office, or the selling and distribution department. Wages of store-keepers, time-keepers, salary of works manager, salary of salesmen, etc, are all examples of indirect labor cost.

(3)Expenses: All cost incurred in the production of finished goods other than material cost and labor cost are termed as expenses. Expenses are classified into two categories:

(a)Direct expenses: These are expenses which are directly, easily, and wholly allocated to specific cost center or cost units. All direct cost other than direct material and direct labor are termed as direct expenses. Direct expenses are also termed as chargeable expenses. Some examples of the direct expenses are hire of special machinery, cost of special designs, moulds or patterns, feed paid to architects, surveyors and other consultants, inward carriage and freight charges on special material, Cost of patents and royalties.

Note: (1) Cost center means a location, person, or item of equipment or group of these for which costs may be ascertained and used for the purpose of cost control. 2. Cost object is anything for which a separate measurement of cost is desired. It may be a product, service, project, or a customer.

(b)Indirect expenses (An item of overheads): These expenses cannot be directly, easily, and wholly allocated to specific cost center or cost units. All indirect costs other than indirect material and indirect labor is termed as indirect expenses. Thus,

Indirect Expenses = Indirect cost Indirect material Indirect labor

Indirect expenses are treated as part of overheads. Rent, rates and taxes of building, repair, insurance and depreciation on fixed assets, etc, are some examples of indirect expenses.

OVERHEADS: MEANING: The term overhead has a wider meaning than the term indirect expenses. Overheads include the cost of indirect material, indirect labor and indirect expenses. This is the aggregate sum of indirect material, indirect labor and indirect expenses.

Overhead = Indirect material + Indirect labor + Indirect expenses

Overheads are classified into following three categories:

(1)Factory/works/ production overheads: All indirect costs incurred in the factory for production of goods are termed as factory/works overheads. Such costs are concerned with the running of the factory or plant. These include indirect material, indirect labor and indirect expenses incurred in the factory. Some examples are as follows:

(a)Indirect materials: i. Grease, oil, lubricants, cotton waste etc.

ii. Small tools, brushes for sweeping, sundry supplies etc. iii. Cost of threads, gum, nails, etc. iv. Consumable stores v. Factory printing and stationery

(b)Indirect wages: i. Salary of factory manager, foremen, supervisors, clerks etc.

ii. Salary of storekeeper iii. Salary and fee of factory directors and technical directors iv. Contribution to ESI, PF., Leave pay etc. of factory employee.

(c)Indirect expenses: i. Rent of factory buildings and land

ii. Insurance of factory building, plant, and machinery iii. Municipal taxes of factory building iv. Depreciation of factory building, plant & machinery, and their repairs & maintenance charges v. Power and fuel used in factory

vi. Factory telephone expenses.

(2)Office and administrative overheads: These expenses are related to the management and administration of the business. They are incurred for the direction and control of an undertaking. These represent the aggregate of the cost of indirect material, indirect labor, and indirect expenses incurred by the office and administration department of an organization. Some examples are as follows: Office printing and stationery, Cost of brushes, dusters etc. for cleaning office building and equipments, Postage and stamps. Salary of office manager, clerks, and other employees, Salary of administrative directors, Salaries of legal adviser, Salaries of cost accountants and financial accountants, Salary of computer operator. Rent, insurance, rates and taxes of office building, Office lighting, heating and cleaning, Depreciation and repair of office building, furniture, and Equipment etc., Legal charges, Bank charges, Trade subscriptions, Telephone charges, Audit fee etc.

(3)Selling and distribution overheads: Selling and distribution overheads are incurred for the marketing of a commodity, for securing order for the articles, dispatching goods sold or for making efforts to find and retain customers. These expenses represent the aggregate of indirect material, indirect labor, and indirect expenses incurred by the selling and distribution department of the organization. These overheads have two aspects (i) procuring orders (ii) executing the order. Based upon this concept the selling and distributions are studied separately.

I. Selling overheads: Indirect costs incurred in relation to the procurement of sale orders are termed as selling overheads. Some of the examples of selling overheads are as follows:

(1)Indirect material: (i) Catalogues, price list (ii) Printing and stationery (iii) Postage and stamps (iv) Cost of sample

(2)Indirect wages: (i) Salaries of sales managers, clerks and other employees (ii) Salaries and commission of salesmen and technical representatives (iii) Fees of sales directors

(3)Indirect expenses: (i) Advertising (ii) Bad debts (iii) Rent and insurance of showroom (iv) Legal charges incurred for recovery of debts (v) Travelling and entertainment expenses (vi) Expenses of sending samples (vii) Market research expenses.

II. Distribution overheads: Indirect costs incurred in relation to the execution of the sales order is termed as distribution overheads. Some of the examples of distribution overheads are as follows:

(1)Indirect material: (i) Cost of packing material (ii) oil, grease, spare parts etc. for maintaining delivery vans

(2)Indirect wages: (i) Salaries of go down employees (ii) Wages of drivers of delivery vans (iii) Wages of packers and dispatch staff.

(3)Indirect expenses:

(i) Packing expenses (ii) Go down rent, insurance, depreciation, and repair etc. (iii) Freight carriage outwards and other transport charges. (iv) Running expenses of delivery vans, repair, and depreciation. (v) Insurance in transit etc.

CLASSIFICATION OF COST: Costs are classified into following categories:

1. Cost behavior basis 2. Cost inventory basis 3. Cost Relation to Cost Centre basis

(a) Fixed Cost (a) Product cost (a) Direct costs

(b) Variable cost (b) Period cost (b) Indirect costs

(c) Semi-variable cost

1. Cost behavior basis:

(a) Fixed Cost (FC): A cost that remains constant within a given period of time and range of activity in spite of fluctuations in production. Per unit fixed cost varies with the change in the volume of production. If the production increases fixed cost per unit decreases and as there is decrease in production, the fixed cost per unit increases. Rent and insurance of building, depreciation on plant and machinery, salary of employees etc., are some examples of fixed costs. The fixed cost per unit decreases as the total number of output units increase.

(b) Variable cost (VC): Variable costs are those cost which vary directly in proportion to change in volume of production/output. The cost which increases or decreases in the same proportion in which the units produced is termed as variable cost. Direct material, direct labor, direct expenses, variable overheads are some examples of variable cost.

Variable costs, per unit same but total goes on fluctuating depending upon volume of production/level of activity.

The variable cost per unit same and does not change if the total number of output units increases.

(c) Semi-variable cost: A cost contains both fixed and variable component and which is thus partly affected by fluctuations in the level of activity. Semi-variable costs is that cost of which some part remains fixed at the given level of production and other part varies with the change in the volume of production but not in the same proportion of change in production. For example, expenses may not change if output is up to 50% capacity but may increase by 5% for every 20% increase in output over 50% but up to 70%. For example, Telephone expenses of which rent portion is fixed and call charges are variable.

Segregation of semi-variable cost: Semi-variable costs are segregated into fixed and variable cost by using the following formula:

Semi-variable cost = Fixed cost + variable cost

Variable cost per unit = change in cost/change in output

2. Costs by inventory: Product cost and period cost:

(a)Product costs are those cost which are charged and identified with the product and included in stock value. In other words, the costs that are the cost of manufacturing a product are called product cost. Product cost includes direct material, direct labor, direct expenses, and manufacturing overheads.

(b)Period costs are those costs which are not charged to products but are written off as expenses against revenue of the period during which these are incurred. They are not transferred as a part of

value of stock to the next accounting year. They are charged against the revenue of the relevant period. Period costs include all fixed costs and total administration, selling and distribution costs.

3. Cost Relation to Cost Centre: Direct and Indirect costs:

All costs are subdivided into direct and indirect costs. The concept of direct and indirect cost is of basic importance in costing. Costs which are easily and directly allocated to products or units are termed as direct cost. Direct costs include all traceable costs. In the process of manufacturing of a product, materials are purchased, wages are paid to labor, and certain other expenses are also incurred directly. All these expenses are called as direct costs.

The expenses incurred on those items which are not directly charged to a single product because they are incurred for many products are termed as indirect Costs. The example of indirect costs are Oil and scrap materials, [indirect materials], salary of factory supervisors [indirect labor], rent rates and depreciation [indirect expenses]. Indirect costs often referred to as overheads have to be apportioned to different products on suitable criterion/criteria.

EXPENSES EXCLUDED FROM COSTING: The following items of expenses are excluded from computation of total cost: (1)Capital expenditure/ Capital losses: (a)Purchase of fixed assets such as plant and machinery, land and building, etc. (b)Loss on sale of fixed assets (c)Abnormal losses (d)Preliminary expenses (e)Patents written-off, etc. (2)Transfer to reserves (3)Income Tax paid (4)Dividend paid (5)Bonus paid to shareholders (6)Financial items include cash discount, interest in debentures, interest on loans, interest on own capital etc. (7)Any appropriation of profits.

COST SHEET (OR) STATEMENT OF COST: Cost Sheet or a Cost Statement is a document which provides for the assembly of the estimated detailed elements of cost in respect of cost centre or a cost unit. The analysis for the different elements of cost of the product is shown in the form of a statement called Cost Sheet.

The statement summarizes the cost of manufacturing a particular list of product and discloses for a particular product:

(I)Prime Cost: Prime Cost is also called as Direct Cost of First Cost or Flat Cost. It consists of direct material, direct labor and direct expense. These costs can be easily identifiable with the products.

Prime Cost = Direct Materials Costs + Direct Labors Costs + Direct Expenses

(II)Works Cost (or) Factory Costs: This cost is also known as, Works Costs (or) Production Costs (or) Manufacturing Costs. It consists of the total of all items of expenses incurred in the manufacturing of a product. In other words, it comprises of prime cost plus factory overheads.

Works Cost (or) Factory Costs = Prime Cost + Factory Overheads

SPECIMEN OF COST SHEET: Cost Sheet for the period

Particulars Total Cost (Rs.) Cost per Unit (Rs.)

Direct Materials:

Opening Stock of Raw Materials XXXXX

Purchases XXXXX

Carriage Inwards XXXXX

Less: Closing Stock of Raw Materials XXXXX

Direct Materials Consumed XXXXX

Add: Direct Wages XXXXX

Direct Expenses XXXXX

Prime Cost [1] XXXXX XXXXX

Add: Works or Factory Overheads: XXXXX XXXXX

Indirect Materials

Indirect Labor

Factory , Rent and Rates

Factory, Lighting and Heating

Power and Fuel

Repairs and Maintenance

Cleaning

Drawing Office Expenses

Cost of Research and Equipments

Depreciation of Factory Plant

Factory Stationery

Insurance of Factory

Factory or Works Managers Salary

Other Factory Expenses XXXXX XXXXX

Total Factory Cost XXXXX XXXXX

Add: Opening Stock of Work-in-Progress

Less: Closing Stock of Work-in-Progress

Works Cost (or) Factory Cost [2]

Add: Office and Administrative Overheads:

Office, Rent and Rates

Office Salaries

Lighting and Heating

Office Stationery

Office Insurance

Postage and Telegrams

Office Cleaning

Legal Charges

Depreciation of Furniture and Office

Equipments and Buildings Audit Fees XXXXX XXXXX

Bank Charges and Commission XXXXX XXXXX

Total Cost of Production [3] XXXXX

Add: Opening Stock of Finished Goods XXXXX XXXXX

Less: Closing Stock of Finished Goods XXXXX

Cost of Production [4] XXXXX XXXXX

Add: Selling and Distribution Overheads:

Showroom Rent and Rates

Salesmens Salaries

Salesmens Commission

Sales Office , Rent and Rates

Travelling Expenses of Salesmen

Warehouse Rent and Rates

Advertisement Expenses

Warehouse Staff Salaries

Carriage Outwards

Sales Managers Salaries

Repairs and Depreciation of Delivery Van

Sample and Free Gifts

Bad Debts, Debt Collection Expenses XXXXX XXXXX

Cost of Sales [5] XXXXX

Profit / Loss [6] XXXXX

Sales XXXXX

(III)Cost of Production: If office and administrative overheads are added to factory costs (or) works costs , cost of production is arrived at. In other words, cost of production includes factory cost and office and administrative overheads. This cost is also known as, Office on Cost (or) Administration Cost.

Cost of Production = Factory Cost + Office and Administrative Overheads

(IV)Total Cost (or) Cost of Sales: Cost of Sales is also known as Total Cost. It represents cost of production plus selling and distribution expenses incurred for a particular product. In other words, total cost is ascertained by adding selling and distribution overheads to cost of production of goods sold. When profit is added to the cost of sales, sales can be arrived at. In practice, the selling price is fixed for a particular product on the basis of cost of sales.

Total Cost (or) Cost of Sales = Cost of Production + Selling and Distribution Overheads

COMPONENTS OF TOTAL COST: The components of Cost Sheet also forms the components of total cost , as summarized below:

Stage Components Arrived at

I Direct Materials + Direct Labor + Direct Expenses Prime Cost (or) Direct Cost

II Prime Cost + Works Overheads (or) Factory Overheads Factory Cost (or) Works Cost (or) Manufacturing Cost

III Works Cost + Office Overheads + Administrative Overheads

Cost of Production

IV Cost of Production + Selling Expenses + Distribution Expenses

Total Cost (or) Cost of Sales

V Total Cost or Cost of Sales +Profit or Loss Sales /Selling Price

Note: If profit percentage is given on sales, it must be converted to percentage on cost. For example, if profit is 10% on sales, it indicates sale is 100% , profit is 10%. The cost of the product is = 100 -10 = 90. Therefore, Profit to cost = 10/90 = 11.11 %.

TREATMENT OF STOCK (OR) INVENTORIES: While preparing a cost statement it is essential to require a special treatment of stock. Stock may be grouped as raw materials, work-in-progress and finished goods. (I) STOCK OF RAW MATERIALS: When opening stock of raw materials, purchases of raw materials and closing stock of raw materials are given, the raw materials consumed during a particular period can be calculated with the help of the following: COST OF RAW MATERIALS CONSUMED:

Opening Stock of Raw Materials XXXXX

Add: Purchase of Raw Materials XXXXX

XXXXX

Less: Purchase Returns XXXXX

XXXXX

Add: Carriage Inwards XXXXX

Taxes and duties on materials purchased XXXXX

XXXXX

Less: Closing Stock of Raw Materials XXXXX

Cost of Raw Materials Consumed XXXXX

(2)STOCK OF WORK-IN-PROGRESS: Work-in-progress is otherwise called as, Semi-Finished Goods. In other words, work-in-progress means the units of production on which some work has been done but which are not yet completely finished. Work-in-progress is valued or prime cost nor work cost basis, but the latter is preferred. If it is valued at works (or) factory cost then the opening and closing stock of work-in-progress are adjusted as given below: COST OF PRODUCTION (FACTORY COST) (OR) WORKS COST (OR) MANUFACTURING COST:

Prime Cost XXXXX

Add: Factory Overheads XXXXX

XXXXX

Add: Opening Stock of Work-in-Progress XXXXX

XXXXX

Less: Closing Stock of Work-in-Progress XXXXX

Cost of Production (Factory Cost) (or) Works Cost (or) Manufacturing Cost XXXXX

(3)STOCK OF FINISHED GOODS: If opening and closing stock of finished goods are given , they are to be adjusted before calculating cost of goods sold. COST OF GOODS SOLD:

Cost of Production XXXXX

Add: Opening Stock of Finished Goods XXXXX

XXXXX

Less: Closing Stock of Finished Goods XXXXX

Cost of Goods Sold XXXXX

METHODS OF COSTING: The general fundamental principles of ascertaining costs are the same in every system of cost accounting, but the methods of analysis and presenting the costs vary from industry to industry. Different methods are used because business enterprises vary in their nature and in the type of products or services they produce or render.

(1)Job Costing :It refers to a system of costing in which costs are ascertained in terms of specific jobs or orders which are not comparable with each other. Industries where this method of costing is generally applied are printing press, automobile garage, repair shop, ship-building, house building, engine and machine construction, etc.

(2)Contract Costing: Although contract costing does not differ in principle from job costing, it is convenient to treat contract cost accounts separately. The term is usually applied to the costing method adopted where large scale contracts at different sites are carried out, as in the case of building construction. (3)Batch Costing : This method is also a type of job costing. A batch of similar products is regarded as one job and the cost of this complete batch is ascertained. It is then used to determine the unit cost of the articles produced. It should, however, be noted that the articles produced should not lose their identity in manufacturing operations. (4)Terminal Costing :This method is also a type of job costing. This method emphasizes the essential nature of job costing, i.e. the cost can be properly terminated at some point and related to a particular job. (5)Operation Costing :This method is adopted when it is desired to ascertain the cost of carrying out an operation in a department, for example, welding. For large undertakings, it is frequently necessary to ascertain the cost of various operations. (6)Process Costing :Where a product passes through distinct stages or processes, the output of one process being the input of the subsequent process, it is frequently desired to ascertain the cost of each stage or process of production. This is known as process costing. This method is used where it is difficult to trade the item of prime cost to a particular order because its identity is lost in volume of continuous production. Process costing is generally adopted in textile industries, chemical industries, oil refineries, soap manufacturing, paper manufacturing, tanneries, etc. (7)Unit or Single or Output or Single-output Costing :This method is used where a single article is produced or service is rendered by continuous manufacturing activity. The cost of whole production-cycle is ascertained as a process or series of processes and the cost per unit is arrived at by dividing the total cost by the number of units produced. The unit of costing is chosen according to the nature of the product. Cost statements or cost sheets are prepared under which various items of expenses are classified and the total expenditure is divided by total quantity produced in order to arrive at unit cost of production. This method is suitable in industries like brick-making, collieries, flour mills,cement manufacturing, etc. This method is useful for the assembly department in a factory producing a mechanical article e.g., bicycle. (8)Operating Costing :This method is applicable where services are rendered rather than goods produced. The procedure is same as in the case of single output costing. The total expenses of the operation are divided by the units and cost per unit of service is arrived at. This method is employed in railways, road transport, water supply undertakings, telephone services, electricity companies, hospital services, municipal services, etc. (9)Multiple or Composite Costing: Some products are so complex that no single system of costing is applicable. It is used where there are a variety of components separately produced and subsequently assembled in a complex production. Total cost is ascertained by computing component costs which are collected by job or process costing and then aggregating the costs through use of the single or output costing system. This method is applicable to manufacturing concerns producing motor cars, aeroplanes, machine tools, type-writers, radios, cycles, sewing machines, etc. (10)Departmental Costing :When costs are ascertained department by department, the method is called Departmental Costing. Usually, for ascertaining the cost of various goods or services produced by the department, the total costs will have to be analyzed, say, by the use of job costing or unit costing.

TECHNIQUES OF COSTING :The following techniques of costing are used by the management for controlling costs and making managerial decisions:

(1)Historical (or Conventional) Costing :It refers to the determination of costs after they have been actually incurred. It means that cost of a product can be calculated only after its production. This system is useful only for determining costs, but not useful for exercising any control over costs. It can serve as a guidance for future production only when conditions continue to be the same in future.

(2)Standard Costing :It refers to the preparation of standard costs and applying them to measure the variations from standard costs and analyzing the variations with a view to maintain maximum efficiency in production. What is done in this case is that costs of each article are determined before-hand under current and anticipated conditions, but sometimes they are determined before-hand under normal or ideal conditions. Then actual costs are compared with the pre-determined costs and deviations known as variances are noted down. Thereafter, the reasons for the variances are ascertained and necessary steps are taken to prevent their recurrence.

(3)Marginal Costing :It refers to the ascertainment of marginal costs by differentiating between fixed costs and variable costs and the effect on profit of the changes in volume or type of output. In this case, only the variable costs are charged to products or operations while fixed costs are charged to profit and loss account of the period in which they arise.

(4)Uniform Costing :A technique where standardized principles and methods of cost accounting are employed by a number of different companies and firms, is termed as uniform costing. This helps in comparing performance of one firm with that of another. (5)Direct Costing :The practice of charging all direct costs to operations, process or products leaving all indirect costs to be written off against profits in the period in which they arise, is termed as direct costing. (6)Absorption Costing :The practice of charging all costs both variable and fixed to operation, process or products or process is termed as absorption costing.

(7)Activity Based Costing :In a business organization, Activity-Based Costing (ABC) is a method of assigning the organization's resource costs through activities to the products and services provided to its customers. It is defined as a technique of cost attribution to cost units on the basis of benefits received from indirect activities, e.g. ordering, setting up, assuring quality. ABC involves identification of costs with each cost driving activity and making it as the basis of apportionment of costs over different products or jobs on the basis of the number of activities required for their completion. It is basically used for apportionment of overheads costs in an organization having products that differ in volume and complexity of production. Under this technique, the overhead costs of the organization are identified with each activity which is acting as a cost driver i.e. the cause for incurrence of overhead cost. Such cost drivers may be purchase orders issued, quality inspections, maintenance requests, material receipts, inventory movements, power consumed, machine time, etc. Having identified the overhead costs with each cost centre, cost per unit of cost driver can be ascertained. The overhead costs can be assigned to jobs on the basis of number of activities required for their completion. This is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominately been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives. ABC principles are used: (i) to focus management attention on the total cost to produce a product or service, and (ii) as the basis for full cost recovery. Support services are particularly suitable for activity-based resourcing because they produce identifiable and measurable units of output. Activity-Based Costing encourages managers to identify which activities are value addedthose that will best accomplish a mission, deliver a service, or meet a customer demand. It improves operational efficiency and enhances decision-making through better, more meaningful cost information.