Costing Summary Navin Classes

COST DAY BEFORE EXAM
a) I, CA Navneet Mundhra, present to you this summary module for Costing
b) The module contains summary of all the chapters.
c) This module will help you to revise the topics as and when you wish with
minimum efforts and maximum coverage.
d) The module also covers the important theoretical aspects of chapters so

as to ensure full coverage.
CA NAVNEET MUNDHRA
Navneet Mundhra, qualified as Chartered

Accountant at the age of 20 along with 8
papers cleared in actuaries from IAI, is a
co-founder of Navin Classes. He is 1st
division B. Com(H) graduate from St.
Xavier’s College, Kolkata and was only
student to secure 100 out of 100 in
Mathematics in B.Com(H) among 750
students. He provides qualitatively superior
coaching facility for professional such as
CA, CS and CMA. He plays with numbers
and mesmerize students with his expertise.
CA NAVNEET MUNDHRA NAVIN CLASSES

COST SHEET

COST SHEET
1. ELEMENTS OF COST:
Material Labour Expense
Direct Indirect Direct Indirect Direct Indirect
Prime cost Overhead
Production/ Office & Selling &

Factory/ Administration Distribution
Manufacturing/ Overhead Overhead
Works Overhead

COST SHEET
2. OLD STATEMENT OF COST SHEET:
Particulars Amount Amount
Opening stock of raw material xxx

Add: purchases and costs related to it xxx
Less: Closing stock of raw material (xxx)
Raw material consumed xxx
Direct labour or productive wages xxx
Direct expenses or chargeable expenses xxx
Prime cost xxx
Production/manufacturing/factory/works overhead xxx
Gross factory cost of FG and WIP xxx
Less: sale of indirect material/scrap (xxx)
Net factory cost of FG and WIP xxx
Add: Opening stock of WIP xxx
Less: Closing stock of WIP (xxx)
Net factory cost of FG xxx
Office and administrative overhead xxx
Cost of production xxx
Add: Opening stock of FG xxx
Less: Closing stock of FG (xxx)
Cost of goods sold xxx
Selling and distribution overhead xxx
Cost of sales xxx
Add: Profit xxx
Sales xxx

COST SHEET
3. NEW STATEMENT OF COST SHEET:

Opening stock of raw material xxx
Add: purchases and costs related to it xxx
Less: Closing stock of raw material (xxx)
Raw material consumed xxx
Direct labour or productive wages xxx
Direct expenses or chargeable expenses xxx

Prime cost xxx
Production/manufacturing/factory/works overhead xxx
Gross factory cost of FG and WIP xxx

Add: Opening stock of WIP xxx
Less: Closing stock of WIP (xxx)

Net factory cost of FG xxx
Office and administrative overhead(production nature) xxx
Research and development cost & Quality test cost xxx
Primary packing xxx

Less: sale of scrap (xxx)
Cost of production xxx

Add: Opening stock of FG xxx
Less: Closing stock of FG (xxx)
Cost of goods sold xxx
Selling and distribution overhead xxx

Office & Administrative overhead xxx
(General or marketing nature) xxx
Cost of sales
Add: Profit xxx
Sales xxx

COST SHEET
4. SPECIAL ITEMS TREATMENT:

A) PACKING COST: packing cost are divided into two types according to their
nature namely primary packing cost and secondary packing cost. In simple
terms primary packing cost are those packing cost without which the product
cannot be sold whereas secondary packing cost are those cost which are
incurred to market or brand the product. In old cost sheet statement primary
packing is included in either raw material consumed or direct expenses
depending upon whether they are produced or brought from outside
respectively whereas in New cost sheet statement primary packing is included
in cost of production. In both old and new cost sheet statement secondary
packing is included in selling and distribution overheads.
B) ABNORMAL COSTS: Any abnormal cost shall not be included in cost sheet
statement. Example of abnormal costs car cost arising out of pandemic or cost
associated with employees due to sudden lockdown,etc.
C) SUBSIDY / GRANT / INCENTIVES: Any such type of amount received or

receivable are reduced from the cost objects to which such amount pertains.
Say for example if the subsidy is received for raw material then the amount of
subsidy shall be reduced from the cost of raw material.
D) PENALTY, FINE, DAMAGES AND DEMURRAGE: These types of expenses

are not included in cost sheet statement.
E) INTEREST AND OTHER FINANCIAL COST: If any interest or financial cost

are incurred due to loan taken from third party for acquisition of any asset
related to production then such cost shall be included in office and
administrative overheads of general nature that is it shall be shown as a
separate item in COS. Interest or financial cost of borrowed funds for capital
structure purpose shall not be the part of cost statement.

COST SHEET
5. ADVANTAGES OF COST SHEET:
A) It provides the total cost figure as well as cost per unit of production
figure.
B) It helps in cost comparison.
C) It facilitates the preparation of cost estimates required for submitting

tenders.
D) It provides sufficient help in arriving at the figure of selling price.
E) It facilitates cost control by disclosing operational efficiency.

BUDGET

BUDGET
1. COST ON THE BASIS OF VARIABILITY:
i
-
Variable cost Fixed cost Semi variable cost
Per unit variable cost is Total fixed cost Total semi variable cost
constant And total remains same increases with increase
variable cost increases irrespective of units in units but per unit
proportionately with change hence per unit semi variable cost
increase in units fixed cost decreases decreases
Break up of semi variable cost
V.C. per unit = Total FC =

( change in TC)/(change in units) TC - TVC
2. TYPES OF BUDGETS:
Capacity wise Functional wise Master budget Period wise

BUDGET
3. CAPACITY WISE BUDGET:
Fixed budget Flexible budget
budget designed to remain budget which, by recognizing the

unchanged irrespective of the difference between fixed, semi-
level of activity actually attained variable and variable costs is
designed to change in relation to
the level of activity attained
4. FUNCTIONAL WISE BUDGET:

The various types of functional budgets to be prepared will vary according
to the size and nature of the business.
The various commonly used functional budgets are:
(i) Sales budget
(ii) Production budget
(iii) Plant utilisation budget
(iv) Direct-material usage budget
(v) Direct-material purchase budget
(vi) Direct-labour (personnel) budget
(vii) Factory overhead budget
(viii) Production cost budget
(ix) Ending-inventory budget
(x) Cost-of-goods-sold budget
(xi) Selling and distribution cost budget
(xii) Administration expenses budget
(xiii) Research and development cost budget
(xiv) Capital expenditure budget
(xv) Cash budget

BUDGET
5. MASTER BUDGET:
the summary budget, incorporating its component functional budgets,
which is finally approved, adopted and employed.” When all the necessary
functional budgets have been prepared, the budget officer will prepare
the master budget which may consist of budgeted profit and loss account
and budgeted balance sheet. These are in fact the budget summaries.
When the master budget is approved by the board of directors, it
represents a standard for the achievement of which all the departments
will work
Format of master budget-
⑦
Particulars Amount
Sales xxx
Less: COGS (as done in cost sheet) (xxx)
Gross profit xxx
Less: Selling and distribution overheads (xxx)
Less: General and marketing nature
Office and administration overheads (xxx)
Operating profit or EBIT xxx
Less: Interest (xxx)
Net profit before tax or EBT xxx
Less: Tax (xxx)
Net profit after tax or EAT xxx

BUDGET
6. PERIOD WISE BUDGET:
Long-term budget Short-term budget Current budget
Long term budgets is a budget prepared covering a period of more than a

year. The Budgets are prepared to depict long term planning of the business.
The period of long term Budgets varies between three to ten years. These
budgets are useful for those industries where gestation period is long i.e.,the
business entities manufacturing machinery, electricity etc
Short term budgets are generally for one or two years and are in the form of
monetary terms. The consumer’s good industries like Sugar, Cotton, and textile
use short term budgets
Current budget is a budget which is created which is established for use over a
short period of time and is related to current conditions
7. BUDGETARY RATIOS:
Budget ratios provide information about the performance level, i.e., the
extent of deviation of actual performance from the budgeted performance
and whether the actual performance is favourable or unfavorable. If the
ratio is 100% or more, the performance is considered as favourable and if
ratio is less than 100% the performance is considered as unfavourable.
The following ratios are usually used by the management to measure
development from budget.

BUDGET
Capacity Usage Ratio: This relationship between the budgeted number of
working hours and the maximum possible number of working hours in a
budget period.
Standard Capacity Employed Ratio: This ratio indicates the extent to

which facilities were actually utilized during the budget period.
Level of Activity Ratio: This may be defined as the number of standard

hours equivalent to work produced expressed as a percentage of the budget
of standard hours.
Efficiency Ratio: This ratio may be defined as standard hours equivalent of

work produced expressed as a percentage of the actual hours spent in
producing the work.
Calendar Ratio: This ratio may be defined as the relationship between the
number of working days in a period and the number of working as in the
relative budget period.
(i) Efficiency Ratio = Standard Hours / Actual Hours
(ii) Activity Ratio = Standard Hours / Budgeted Hours
(iii) Calendar Ratio = Available working days / Budgeted working days
(iv) Standard Capacity Usage Ratio = Budgeted Hours / Max. possible hours
in the budgeted period
(v) Actual Capacity Usage Ratio = Actual Hours worked / Max. possible
working hours in a period
(vi) Actual Usage of Budgeted Capacity Ratio = Actual working Hours /

Budgeted Hours

BUDGET
8. ZERO BASED BUDGETING(ZBB):
Zero-based Budgeting (ZBB) is defined as a method of budgeting which

requires each cost element to be specifically justified, though the activities
to which the budget relates are not being undertaken for the first time. The
cost of each activity has to be justified and without justification, the budget
allowance is zero.
Zero based budgeting differs from the conventional system of budgeting

because it mainly starts from scratch or zero and not on the basis of trends
or historical levels of expenditure. In the customary budgeting system, the
last year’s figures are accepted as they are, or cut back or increases are
granted. Zero based budgeting on the other hand, starts with the premise
that the budget for next period is zero so long the demand for a function,
process, project or activity is not justified for each rupee from the first
rupee spent.
Zero-based Budgeting (ZBB) is an emergent form of budgeting which arises

to overcome the limitations of incremental (traditional) budgeting system.
ZBB is an activity based budgeting system where budgets are prepared for
each activities rather than functional department. Justification in the form of
cost benefits for the activity is required to be given. The activities are then
evaluated and prioritized by the management on the basis of factors like
synchronisation with organisational objectives, availability of funds, regulatory
requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-
corporate entities like Government department, local bodies, not for profit
organisations, where these entities need to justify the benefits of
expenditures on social programmes like mid-day meal, installation of street
lights, provision of drinking water etc.
In case of corporate entities, ZBB is best suited for discretionary costs like
research and development cost, training programmes, advertisement etc.

BUDGET
9. PERFORMANCE BUDGET(PB):
Performance budgeting (PB) involves evaluation of the performance of an

organisation in the context of both specific as well as overall objectives of
the organisation. This requires complete clarity about both the short-term as
well as long-term organisational objectives. The responsibility of the various
levels of management should be predetermined in terms of results expected
from them and the authority vested in them. In other words, performance
budgeting requires fixing of the responsibility of each executive in
organisation and the continuous appraisal of his performance. It is,
therefore, considered to be synonymous with responsibility accounting.
Performance Budgeting provide a meaningful relationship between estimated

inputs and expected outputs as an integral part of the budgeting system. A
performance budget is one which presents the purposes and objectives for
which funds are required, the costs of the programmes proposed for
achieving those objectives, and quantitative data measuring the
accomplishments and work performed under each programme. Thus PB is a
technique of presenting budgets for costs and revenues in terms of
functions. Programmes and activities are correlating the physical and
financial aspect of the individual items comprising the budget.
10. BUDGETARY CONTROL:

It is the system of management control and accounting in which all the
operations are forecasted and planned in advance to the extent possible and
the actual results compared with the forecasted and planned results.
Budgetary Control Involves:

1. Establishment of budgets
2. Continuous comparison of actuals with budgets for achievement of targets.
3. Revision of budgets after considering the changes in the circumstances.
4. Fixation of the responsibility for failure to achieve the budget targets.

BUDGET
The following steps are necessary for establishing a good budgetary control
system:
1. Determining the objectives to be achieved, over the budget period, and

the policy or policies that might be adopted for the achievement of these
objectives.
2. Determining the activities that should be undertaken for the achievement

of the objectives.
3. Drawing up a plan or a scheme of operation in respect of each class of

activity, in quantitative as well as monetary terms for the budget period.
4. Laying out a system of comparison of actual performance by each person,

or department with the relevant budget and determination of causes for the
variation, if any.
5. Ensuring that corrective action will be taken where the plan has not been
achieved and, if that is not possible, for the revision of the plan.
11. BUDGET COMMITTEE AND BUDGET OFFICER:

The budget committee is a group of representatives of various functions in an
organisation. As all functions are inter-related and as any change in one’s
target will have its impact on that of the other, it is necessary to discuss the
targets so that a mutually agreed programme is finally decided. This is called
coordination in budget-making. It is a powerful force in knitting together
various activities of the business and enforcing real control over operations.
The Chief Executive is ultimately responsible for the budget programme but
it will be better if the large part of the supervisory responsibility is
delegated to an official designated as Budget Officer The budget Officer
should have knowledge of the technical side of the business and should
report to the president or CEO of the business entity.

BUDGET
The responsibility for successfully introducing and implementing Budgetary

Control System rests with the Budget Committee acting through the Budget
Officer. The Budget Committee would be composed of all functional heads
and a member from the Board to preside over and guide the deliberations.
The main responsibilities of the Budget Committee/Budget Officer are to:
1. Assist in the preparation of the separate budget for various departments by

coordinating the work of the accounts department, which is normally
responsible to compile the budgets—with the relevant functional departments
like Sales, Production, Plant maintenance etc.;
2. Forward the budget to the individual departments’ heads who are re-
sponsible to implement the budget. The Budget Officer should guide them in
overcoming any practical difficulties, in its working;
3. Prepare the periodical budget reports for circulation to the individuals

concerned;
4. Follow-up action to be taken on the budget reports;
5. Prepare an overall budget working report for discussion at the Budget

Committee meetings and to ensure follow-up on the lines of action suggested
by the Committee;
6. Prepare periodical reports for the Board meeting. Comparing budgeted

Profit and Loss Account and the Balance Sheet with the actual results
attained.
It is necessary that every budget should be thoroughly discussed with the

functional heads before it is finalised.

BUDGET
It is the duty of the Budget Officer to see that the periodical budget
reports are supplied to the recipients at regular intervals so as to enable
them to take remedial action.
The efficiency of the Budget Officer, and through him of the Budget
Committee, will be judged more by the smooth working of the system and
the agreement between the actual figures and the budgeted figures.
Budgets provides basis for giving an incentive for better performance, It is

up to the Budget Officer to see that attention of the different functional
heads is drawn to the deviations so as to face the challenge in a successful
manner.
12. BUDGET MANUAL:
The budget manual is a booklet specifying the objectives of an organisation

in relation to its strategy. The budget is made to decide how much an
organisation would earn and spend and in what manner. In the budget, the
organisation sets its priorities too.
CIMA, London, defines budget manual as, “A document which sets out the
responsibilities of the persons engaged in, the routine of, and the forms and
records required for, budgetary control.”
Effective budgetary planning relies on the provision of adequate information

to the individuals involved in the planning process. Many of these
information needs are contained in the budget manual. A budget manual is a
collection of documents that contains key information for those involved in
the planning process.

MARGINAL
COSTING

MARGINAL COSTING
1. SIMPLE INCOME STATEMENT UNDER MARGINAL COSTING:
Revenue (A) xxx

Product Cost:
- Direct Materials xxx
- Direct employee (labour) xxx
- Direct expenses xxx
- Variable manufacturing overheads xxx
Product (Inventoriable) Costs: (B) xxx
Product Contribution Margin {A – B} xxx
- Variable Administration overheads xxx
- Variable Selling & Distribution overheads xxx
xxx
Contribution Margin: (C) xxx
Fixed Manufacturing expenses xxx
Fixed non-manufacturing expenses xxx
Period Cost: (D) xxx
Profit/ (loss) {C – D} xxx
{ }
Sales/Revenue xxx
V.C. (xxx)
Contribution xxx
F.C. (xxx)
Profit xxx

MARGINAL COSTING
2. MARGINAL COSTING v/s ABSORPTION COSTING:

Marginal costing Absorption costing
1.Only variable costs are considered Both fixed and variable costs are
for product costing and inventory considered for product costing and
valuation. inventory valuation.
2.Fixed costs are regarded as Fixed costs are charged to the cost
period costs. The Profitability of by production. Each product bears
different products is judged by a reasonable share of fixed cost
their P/V ratio. thus the profitability of a product
is influenced by the apportionment
of fixed costs.
3.Cost data presented highlight the Cost data are presented in

total contribution of each product. conventional pattern. Net profit of
each product is determined after
subtracting fixed cost along with
their variable costs.
4.The difference in the magnitude The difference in the magnitude

of opening stock and closing stock of opening stock and closing stock
does not affect the unit cost of affects the unit cost of production
production. due to the impact of related fixed
cost.
5.In case of marginal costing the In case of absorption costing

cost per unit remains the same, the cost per unit reduces, as the
irrespective of the production as production increases as it is
it is valued at variable cost. fixed cost which reduces,
whereas, the variable cost remains
the same per unit.

MARGINAL COSTING
The above two approaches will compute the different profit because of the
difference in the stock valuation. This difference is explained as follows in
different circumstances.
1. No opening and closing stock: In this case, profit / loss under

absorption and marginal costing will be equal.
2. When opening stock is equal to closing stock: In this case, profit / loss
under two approaches will be equal provided the fixed cost element in both
the stocks is same amount.
3. When closing stock is more than opening stock: In other words, when
production during a period is more than sales, then profit as per absorption
approach will be more than that by marginal approach. The reason behind
this difference is that a part of fixed overhead included in closing stock
value is carried forward to next accounting period.
4. When opening stock is more than the closing stock: In other words,
when production is less than the sales, profit shown by marginal costing will
be more than that shown by absorption costing. This is because a part of
fixed cost from the preceding period is added to the current year’s cost of
goods sold in the form of opening stock.

MARGINAL COSTING
3. INCOME STATEMENT MARGINAL COSTING & ABSORPTION COSTING:

Sales Sales
Less:Variable manufacturing costs Less: Production cost
Direct material consumed Direct material consumed
Direct labour Direct labour cost
Variable manufacturing Variable manufacturing overhead
overhead Fixed manufacturing overhead
Cost of Goods Produced Cost of Production
Add: Opening stock of finished Add: Opening stock of finished goods

goods (Value at cost of previous period’s
(Value at cost of previous period) production)
Less: Closing stock of finished Less: Closing stock of finished goods

goods (Value at current variable (Value at production cost of current
cost) period)
Cost of Goods Sold Cost of Goods Sold
Add: Variable administration, Add: (or less) Under (or over)

selling and dist. overhead absorption of fixed Manufacturing
overhead
Total Variable Cost
Add: Administration costs
Selling and distribution costs
Contribution
(Sales – Total variable costs) Total Cost
Less: Fixed costs (Production, Profit (Sales – Total cost)

admin., selling and dist.)
Profit

MARGINAL COSTING
4. IMPORTANT TERMS:
Profit Volume Ratio
Contribution Contribution p.u. in Contribution in Profit

Sales Sales p.u. in Sales in Sales
Cost Profit Volume ( CVP ) Theory
Assumptions Analysis
1. Selling price per unit is 1. PV ratio does not depends
constant irrespective of upon number of units
number of units
2. PV ratio does not depends
2. Variable cost per unit upon total fixed cost
is constant irrespective
3. PV ratio changes due to
of number of units
change in selling price per
3. Total fixed cost is unit or variable cost per unit
constant irrespective of or any combination of it
number of units
Break even Point (BEP) or Break even Sales (BES)

in units in ₹
TFC TFC
Contribution p.u. PV Ratio

1
MARGINAL COSTING
Margin of safety (MOS)

in units in ₹
Profit Profit
Contribution p.u. PV Ratio
100% of Total Sales = % of BES + % of MOS
Angle of incidence
TR
F
TC
THC
Ce
Angle Intoiden
BES C
tf
TFC
#
BE P units
Angle of incidence = in TR
in TC/TVC

MARGINAL COSTING
5. WHAT IF:
A) There are two or more products:
In such case overall PV ratio would be calculated using weighted average

technique where weights of each PV ratio of each product would be its total
sales value.
B) There is any limiting factor:
What is a Limiting Factor?

Limiting factor is anything which limits the activity of an entity. The factor
is a key to determine the level of sale and production, thus it is also known
as Key factor. From the supply side the limiting factor may either be Men
(employees), Materials (raw material or supplies), Machine (capacity), or
Money (availability of fund or budget) and from demand side it may be
demand for the product, other factors like nature of product, regulatory and
environmental requirement etc. The management, while making decisions, has
objective to optimise the key resources upto maximum possible extent.
Now say if labour hours are limiting factor then we would first calculate
contribution per labour hour for every product and then rank them in
descending order i.e. rank 1 to highest contribution per labour hour.
Allocate the available labour hours to rank one product and then rank two
and so on until the labour hours gets exhausted. Hence we would get the
optimum product mix.

STANDARD
COSTING

STANDARD COSTING
1. WHAT IS STANDARD COSTING & WHY:
Standard costing is a method of cost and management accounting which

starts with setting of standards and ends with reporting of variances to
management for taking corrective actions. The Official Terminology of
CIMA, London defines standard costing as “Control technique that reports
variances by comparing actual costs to pre-set standards so facilitating
action through management by exception.”
Standards or Standard costs are established to evaluate performance of a

responsibility centre. Apart from performance evaluation and cost control,
standard costs are also used to value inventory where actual figures are
not reliably available and to determine selling prices particularly while
preparing quotations.
2. COST CARD:
STANDARD FOR
BUDGET/ STANDARD ACTUAL
ACTUAL
ITEMS
INPUT RATE AMT INPUT RATE AMT INPUT RATE AMT
Budgeted data for Budgeted data for Actual data for

budgeted output actual output actual output

STANDARD COSTING
3. VARIANCES:
FAVOURABLE ADVERSE
OR
UNFAVOURABLE
Favourable variances are those which are profitable for the company and
adverse variances are those which causes loss to the company. While
computing cost variances favourable variance means actual cost is less than
standard cost. On the other hand, adverse variance means actual cost is
exceeding standard cost.
Favourable variance in short denoted by capital ‘F’ and adverse variances

by capital ‘A’.
4. MATERIAL RELATED VARIANCES:
MATERIAL COST VARIANCE

(MCV)
Standard cost for actual output (-) Actual cost
MATERIAL PRICE/RATE VARIANCE MATERIAL USAGE VARIANCE

(MPV) (MUV)
(SR/Input (-) AR/Input) x AI (SI for AO (-) AI) x SR/Input
MCV = MPV + MUV

STANDARD COSTING
NOTE: SR means Standard Rate

AR means Actual Rate
SI means Standard Input
AI means Actual Input
AO means Actual Output
Now if there are 2 or more types of materials:
MATERIAL USAGE VARIANCE

(MUV)
(SI for AO (-) AI) x SR/Input
MATERIAL MIX VARIANCE MATERIAL YIELD VARIANCE

(MMV) (MYV)
(RSI (-) AI) x SR/Input (SI for AO (-) RSI) x SR/Input
NOTE: RSI means Revised Standard Input i.e. Total actual input in the ratio
of Standard input
MUV = MMV + MYV

STANDARD COSTING
5. LABOUR RELATED VARIANCES:
LABOUR COST VARIANCE

(LCV)
LABOUR EFFICIENCY IDLE TIME

LABOUR RATE VARIANCE
VARIANCE VARIANCE
(LRV)
(LEV) (ITV)
(SR/Time (-) AR/Time) x ATT
(ST for AO (-) APT) (-) IT x SR/Time
x SR/Time
LCV = LRV + LEV + ITV
NOTE: ATT means Actual Total Time = APT + IT

APT means Actual Productive Time
IT means Idle Time
ST means Standard Time
Now if there are 2 or more types of labour:
LABOUR EFFICIENCY VARIANCE

(LEV)
(ST for AO (-) APT) x SR/Time
LABOUR GANG VARIANCE LABOUR NET EFFICIENCY VARIANCE

(LGV) (LNEV)
(RST (-) APT) x SR/Time (ST for AO (-) RST) x SR/Time

STANDARD COSTING
NOTE: RST means Revised Standard Time i.e. Actual Productive Time in the
ratio of Standard Time
LEV = LGV + LNEV
6. VARIABLE OVERHEAD RELATED VARIANCES:
VARIABLE OVERHEAD COST VARIANCE

(VO/HCV)
VARIABLE O/H RATE VARIANCE VARIABLE O/H IDLE TIME

(VO/HRV) EFFICIENCY VARIANCE
(SR/Time (-) AR/Time) x ATT VARIANCE (ITV)
(VO/HEV) (-) IT x SR/Time
(ST for AO (-) APT)
x SR/Time
VO/HCV = VO/HRV + VO/HEV + ITV VO/HEV = VO/HMV + VO/HNEV

Now if there are 2 or more types of labour:
VARIABLE O/H EFFICIENCY VARIANCE
(VO/HEV)
(ST for AO (-) APT) x SR/Time
VARIABLE O/H MIX VARIANCE VARIABLE O/H NET EFFICIENCY

(VO/HMV) VARIANCE
(RST (-) APT) x SR/Time (VO/HNEV)
(ST for AO (-) RST) x SR/Time

STANDARD COSTING
7. FIXED OVERHEAD RELATED VARIANCES:
FIXED OVERHEAD COST VARIANCE

(FO/HCV)
FIXED OVERHEAD FIXED OVERHEAD

VOLUME VARIANCE EXPENDITURE VARIANCE
(FO/HVV) (FO/HEV)
(AO (-) BO) x SR/Output Budgeted cost (-) Actual cost
FIXED O/H FIXED O/H

EFFICIENCY CAPACITY
VARIANCE VARIANCE
(FO/HEffV) (FO/HCapV)
(ST for AO (-) APT)
(ATT (-) BT x AD) x SR/Time
x SR/Time BD
IDLE TIME FIXED O/H

VARIANCE CALENDAR
(ITV) VARIANCE
(-) IT x SR/Time (FO/HCalV)
(AD (-) BD) x SR/Day
FO/HCV = FO/HVV + FO/HEV
FOHVV = FO/HEffV + ITV + FO/HCapV + FO/HCalV

PROCESS
COSTING

PROCESS COSTING
1. WHAT IS PROCESS COSTING:
PROCESS I PROCESS II
Output Output
Conversion cost Conversion cost
Input Input
Loss Loss
2. PROCESS A/C WITHOUT WIP:
If NL = AL If NL < AL If NL > AL
Q R T Q R T Q R T Q R T Q R T Q R T
Input x x x NL xxx Input x x x NL xxx Input x x x NL xxx
CC x Output x x x CC x Output x x x CC x Output x x x
Ab NL x x x Ab Gain x x x
xxx xxx xxx xxx xxx xxx
NOTE ON INPUT: Material (DM/RM/T/F from previous process)
NOTE ON OUTPUT: T/F to next process or F.G.
RATE OF OUTPUT: Total Cost (-) NL scrap realisation

Input units (-) NL units

PROCESS COSTING
NOTE ON NORMAL LOSS(NL): The loss which arises normally during a

process. It is generally a fixed percentage of input.
Q R T
QxR
NL x x x
NL units Realisation Value(RV) if

any otherwise 0
NORMAL LOSS A/C

Q R T Q R T
Process A/c NL RV x Bank A/c NL RV x
NOTE ON ABNORMAL LOSS(Ab NL): Total Actual loss (-) NL units

Q R T
QxR
Ab NL x x x
Ab NL units Same as Rate of output QxR

ABNORMAL LOSS A/C
Q R T Q R T
Process A/c Ab NL x x Bank A/c Ab NL RV x
Costing P/L A/c (B.F.) x

PROCESS COSTING
NOTE ON ABNORMAL GAIN(Ab Gain): NL units (-) total Actual loss
Q R T
QxR
Ab Gain x x x
Ab Gain units Same as Rate of output
ABNORMAL GAIN A/C

Q R T Q R T
NL A/c x RV x Process A/c x x x
Costing P/L A/c (B.F.) x
NORMAL LOSS A/C(if there is Ab Gain)

Q R T Q R T
Process A/c NL RV x Bank A/c Actual loss RV x
Abnormal gain A/c x x x
(Extra realised amount)

PROCESS COSTING
3. PROCESS A/C WITH CLOSING WIP:
CASE I - No Opening WIP
Step 1: Calculation of Equivalent units
Input units Output units Material Conversion Cost(CC)

DOC(%) Eq units DOC(%) Eq units
New mat T/f to next
or T/f process or
from F.G
previous
Cl WIP
process
Total
Notes: 1)Eq units = output units x DOC(%)

2)DOC = Degree of completion
3)DOC of output t/f to next process or F.G. is always 100% in all
respect
4)DOC of Closing WIP would be given in question (if not assume
100% for Material and 50% for CC)
5)If DOC for DM and RM or Labour and Factory O/H is different
then make separate column for each
Step 2: Calculation of cost per Eq units
Particulars Total Cost Eq units Cost / Eq units

(a) (b) (a/b)
Material From process A/c From Step 1
CC

PROCESS COSTING
Step 3: Calculation of Value of output and Closing WIP
Particulars Eq units Cost / Eq units Value

(a) (b) (axb)
Output T/F Mat
or FG CC
Total
Cl WIP Mat
CC
Total
CASE II - With Opening WIP (using FIFO Method)

T/f to next
Op WIP
process or F.G
New mat - from Op WIP
or T/f - from Current
from Production
previous
process Cl WIP
Total

PROCESS COSTING

3)DOC of output t/f to next process or F.G. from current production
is always 100% in all respect and DOC of output from Op WIP is
[100% - DOC of Op WIP]

(a) (b) (a/b)
Material From process A/c

CC only of current From Step 1
Production

(a) (b) (axb)
Output T/F Material
or FG CC
(+) Op WIP Value
Total
Cl WIP Material
CC
Total

PROCESS COSTING
CASE III - With Opening WIP (using Weighted Average Method)

T/f to next
Op WIP
process or F.G
New mat - from Op WIP
or T/f - from Current
from Production
previous
process Cl WIP
Total

3)DOC of output t/f to next process or F.G. from current production
and DOC of output from Op WIP both is always 100% in all
respect

PROCESS COSTING

(a) (b) (a/b)
Material
— Op WIP Value
— Current Cost
CC
— Op WIP Value
— Current Cost

(a) (b) (axb)
Output T/F Mat
or FG CC
Total
Cl WIP Mat
CC
Total

PROCESS COSTING
CASE IV - Treatment of NL and Abnormal loss or Abnormal gain in above

cases
Normal loss:
1) While calculating equivalent units normal loss units must be
considered in output column but not in Equivalent unit column
2) Recovery of normal loss that is realisable value of normal loss must
be reduced from the main input cost
Abnormal loss:
1) While calculating equivalent units abnormal loss units must be
considered in output column as well as in Equivalent unit column
2) DOC(%) of Abnormal loss would be that of unit scrapped (if not
given take 100% in all respect)
3) The recovery of abnormal loss is directly recorded into abnormal
loss account so it will not be included in above calculation
Abnormal Gain:
1) While calculating equivalent units abnormal gain units must be
reduced from output column as well as from Equivalent unit column
2) DOC(%) of Abnormal gain would be always 100% in all respect

PROCESS COSTING
4. INTER PROCESS PROFIT:
To control cost and to measure performance, different processes within an

organization are designated as separate profit centres. In this type of
organizational structure, the output of one process is transferred to the
next process not at cost but at market value or cost plus a percentage of
profit. The difference between cost and the transfer price is known as
inter-process profits.
The advantages and disadvantages of using inter-process profit, in the case of

process type industries are as follows:
Advantages:
1. Comparison between the cost of output and its market price at the stage
of completion is facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold
out.
Under this type of sums we draw process account as follows:
PROCESS A/C
Cost Profit Total Cost Profit Total

PROCESS COSTING
5. OPERATION COSTING:
This product costing system is used when an entity produces more than one
variant of final product using different materials but with similar conversion
activities. Which means conversion activities are similar for all the product
variants but materials differ significantly. Operation Costing method is also
known as Hybrid product costing system as materials costs are accumulated
by job order or batch wise but conversion costs i.e. labour and overheads
costs are accumulated by department, and process costing methods are used
to assign these costs to products. Moreover, under operation costing,
conversion costs are applied to products using a predetermined application
rate. This predetermined rate is based on budgeted conversion costs.
For example, a company is manufacturing two grades of products, Product-

Deluxe and Product- Regular. Both the products pass through a similar
production process but require different quality and quantities of raw
materials. The cost of raw material is accumulated on the basis of job or
batches or units of two variants of products. But the costs for the
conversion activities need not to be identified with the product variants as
both the Products requires similar activities for conversion. Hence,
conversion activity costs are accumulated on the basis of departments or
processes only. Example of industries are ready made garments, Shoe
making, jewelry etc.

JOINT & BY
PRODUCT

JOINT & BY PRODUCT
1. WHAT IS JOINT PRODUCT/ BY PRODUCT/ CO PRODUCT :
Joint Products - Joint products represent “two or more products separated

in the course of the same processing operation usually requiring further
processing, each product being in such proportion that no single product can
be designated as a major product”.
In other words, two or more products of equal importance, produced,
simultaneously from the same process, with each having a significant relative
sale value are known as joint products. For example, in the oil industry,
gasoline, fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all
produced from crude petroleum. These are known as joint products.
By-Products - These are defined as “products recovered from material

discarded in a main process, or from the production of some major products,
where the material value is to be considered at the time of severance from
the main product.”
Thus by-products emerge as a result of processing operation of another
product or they are produced from the scrap or waste of materials of a
process. In short a by-product is a secondary or subsidiary product which
emanates as a result of manufacture of the main product.
Examples of by-products are molasses in the manufacture of sugar, tar,
ammonia and benzole obtained on carbonisation of coal and glycerin obtained
in the manufacture of soap.
The main points of distinction as apparent from the definitions of Joint

Products and By-Products are:
(a) Joint products are of equal importance whereas by-products are of small
economic value.
(b) Joint products are produced simultaneously but the by-products are
produced incidentally in addition to the main products.

JOINT & BY PRODUCT
Co-Products - Joint products and co-products are used synonymously in

common parlance, but strictly speaking a distinction can be made between
two. Co-products may be defined as two or more products which are
contemporary but do not emerge necessarily from the same material in the
same process. For instance, wheat and gram produced in two separate farms
with separate processing of cultivation are the co-products. Similarly, timber
boards made from different trees are co-products.
PROCESS II
Split off point/Separation point
> CC 7 F.G.1
ut
PROCESS I
t p ut1 Inp
Ou
CC Ou
t pu
Input t2
Joint cost or F.G.2

common cost or
pre-separation cost
Subsequent cost or further processing cost or
post separation cost

JOINT & BY PRODUCT
2. TREATMENT OF JOINT COST AMOUNG JOINT PRODUCTS:
(i) Physical Unit Method: This method is based on the assumption that the
joint products are capable of being measured in the same units. Accordingly,
joint costs here are apportioned on the basis of some physical base, such
as weight, numbers etc. In other words, the basis used for apportioning
joint cost over the joint products is the physical volume of material present
in the joint products at the point of separation. Any loss arises during the
joint production process is also apportioned over the products on the same
basis. This method cannot be applied if the physical units of the two joint
products are different. The main defect of this method is that it gives equal
importance and value to all the joint products.
(ii) Average Unit Cost Method: Under this method, total process cost (upto
the point of separation) is divided by total units of joint products produced.
On division average cost per unit of production is obtained.
Average unit cost = Total process cost (upto the point of separation)
Total units of joint product produced.
This is a simple method. The effect of application of this method is that all
joint products will have uniform cost per unit. If this method is used as
the basis for price fixation, then all the products may have more or less
the same price. Under this method customers of high quality items are
benefitted as they have to pay less price on their purchase.

JOINT & BY PRODUCT
(iii) Contribution Margin Method: According to this method, joint costs are
segregated into two parts - variable and fixed. The variable costs are
apportioned over the joint products on the basis of units produced (average
method) or physical quantities. In case the products are further processed
after the point of separation, then all variable cost incurred be added to the
variable costs determined earlier. In this way total variable cost is arrived
which is deducted from their respective sales values to ascertain their
contribution. The fixed costs are then apportioned over the joint products on
the basis of the contribution ratios.
(iv) Market value at the point of separation: This method is used for the
apportionment of joint costs to joint products upto the split off point. It is
difficult to apply this method if the market value of the products at the
point of separation is not available. It is a useful method where further
processing costs are incurred disproportionately.
To determine the apportionment of joint costs over joint products, a factor
known as multiplying factor is determined. This multiplying factor on
multiplication with the sales values of each joint product gives rise to the
proportion of joint cost.
Joint Cost
Multiplying factor = x 100
Total Sales Revenue
(v) Market value after further processing: Here the basis of apportionment
of joint cost is the total sales value of finished products and involves the
same principle as discussed above.
The use of this method is unfair where further processing costs after the
point of separation are disproportionate or when all the joint products are
not subjected to further processing. The net realisable value method which
is discussed as below overcomes the shortcoming of this method.

JOINT & BY PRODUCT
(vi) Net Realisable Value at Split-off Point Method: In this method of joint
cost apportionment the followings are deducted from the sales value of joint
products at final stage i.e. after processing:
(a) Estimated profit margins,
(b) Selling and distribution expenses, if any, and
(c) Post split- off costs.
The resultant figure so obtained is known as net realisable value of joint
products. Joint costs are apportioned in the ratio of net realisable value.
The net realisable value at split-off point method is widely used in the
industries.
This method is used when the realisable value of joint products at split-off is
not known.
3. TREATMENT OF JOINT COST AMOUNG BY PRODUCTS:
The following methods may be adopted for the accounting of by-products

and arriving at the cost of production of the main product:
(i) Net Realisable Value method: The realisation on the disposal of the by-
product may be deducted from the total cost of production so as to arrive
at the cost of the main product. For example, the amount realised by the
sale of molasses in a sugar factory goes to reduce the cost of sugar
produced in the factory.
When the by-product requires some additional processing and expenses are
incurred in making it saleable to the best advantage of the concern, the
expenses so incurred should be deducted from the total value realised from
the sale of the by-product and only the net realisations should be deducted
from the total cost of production to arrive at the cost of production of the
main product.

JOINT & BY PRODUCT
Separate accounts should be maintained for collecting additional expenses

incurred on:
(a) further processing of the by-product, and
(b) selling, distribution and administration expenses attributable to the by-
product.
(ii) Standard cost in Technical Estimates: By-products may be valued at

standard costs. The standard may be determined by averaging costs recorded
in the past and making technical estimates of the number of units of
original raw material going into the main product and the number forming
the by- product or by adopting some other consistent basis.
This method may be adopted where the by-product is not saleable in the
condition in which it emerges or comparative prices of similar products are
not available.
(iii) Comparative price: Under this method, the value of the by-product is
ascertained with reference to the price of a similar or an alternative
material.
Suppose in a large automobile plant, a blast furnace not only produces the
steel required for the car bodies but also produces gas which is utilised in
the factory. This gas can be valued at the price which would have been paid
to a gas company if the factory were to buy it from outside sources.
(iv) Re-use basis: In some cases, the by-product may be of such a nature
that it can be reprocessed in the same process as part of the input of the
process. In that case the value put on the by-product should be same as
that of the materials introduced into the process. If, however, the by-
product can be put into an earlier process only, the value should be the
same as for the materials introduced into the process.

JOINT & BY PRODUCT
4. TREATMENT OF BY PRODUCTS IN COST ACCOUNTING:
By-product cost can be dealt in cost accounting in the following ways:
(a) When they are of small total value: When the by-products are of small
total value, the amount realised from their sale may be dealt in any one the
following two ways:
1. The sales value of the by-products may be credited to the Costing Profit
and Loss Account and no credit be given in the Cost Accounts. The credit to
the Costing Profit and Loss Account here is treated either as miscellaneous
income or as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from
the total costs. The sale proceeds in fact should be deducted either from
the production cost or from the cost of sales.
(b) When the by-products are of considerable total value: Where by-
products are of considerable total value, they may be regarded as joint
products rather than as by-products. To determine exact cost of by-products
the costs incurred upto the point of separation, should be apportioned over
by-products and joint products by using a logical basis. In this case, the
joint costs may be divided over joint products and by-products by using
relative market values; physical output method (at the point of split off) or
ultimate selling prices (if sold).
(c) Where they require further processing: In this case, the net realisable
value of the by-product at the split-off point may be arrived at by
subtracting the further processing cost from the realisable value of by-
products.
If total sales value of by-products at split-off point is small, it may be
treated as per the provisions discussed above under (a).
In the contrary case, the amount realised from the sale of by-products will
be considerable and thus it may be treated as discussed under (b).

MATERIAL
COST

MATERIAL COST
1. WHAT IS MATERIAL COST:
The general meaning of material is all commodities/ physical objects used

to make the final product. It may be direct or indirect.
(i) Direct Materials: Materials, cost of which can be directly attributable to

the end product for which it is being used, in an economically feasible way.
(ii) Indirect Materials: Those materials which are not directly attributable to
a particular final product.
Direct Materials constitute a significant part for manufacturing and

production of goods. Being an input and a significant cost element, it requires
adequate management attention.
2. COMPUTATION OF MATERIAL COST:

₹
Price/unit before taxes x No of Material Purchased xxx
(-) Trade Discount (xxx)
(-) Quantity Discount (xxx)
(-) Subsidy/Grant/Incentives (xxx)
(+) IGST/CGST & SGST/Custom Duties(ie Indirect taxes) xxx
(If input credit is not available)
(+) Toll tax/Road tax xxx
(+) Insurance charges xxx
(+) Commission or Brokerage xxx
(+) Loading & unloading charges and Freight Inward xxx
(+) Cost of non returnable containers xxx
Material Cost xxx

MATERIAL COST
NOTE: Following items are not considered above:
1. Cash Discount: It is treated as interest and finance charges. It is ignored.

2. Indirect taxes: If input credit is available.
Unless mentioned specifically IT is not added with the cost of purchase.
3. Demurrage: Demurrage is a penalty imposed by the transporter for delay in
uploading or offloading of materials. It is an abnormal cost and not
included with cost of purchase
4. Detention charges/Fine: Detention charges/fines imposed for noncompliance

of rule or law by any statutory authority. It is an abnormal cost and not
5. Penalty: Penalty of any type is not included with the cost of purchase.
6. Cost of Returnable Containers: If the containers are returned and their
costs are refunded, then cost of containers should not be considered in the
cost of purchase.
3. INVENTORY CONTROL:
Setting up quantitative levels ABC technique Ratio technique

MATERIAL COST
4. SETTING UP QUANTITATIVE LEVELS:
(a) Consumption or usage per time period: How much direct material is required
to produce finished goods in that particular time period
Minimum consumption Normal consumption Maximum consumption
If not given calculate Average consumption as
(Minimum consumption + Maximum consumption)

2
(b) Lead time/Delivery time/Reorder period: Time gap between date of place
of order to supplier and date of receipt of order from supplier
Minimum lead time Normal lead time Maximum lead time
If not given calculate Average lead time as
(Minimum lead time + Maximum lead time)

2

MATERIAL COST
(c) Reorder Quantity(ROQ): How much to order (it would be given in question
if not use Economic Reorder Quantity Theory by Wilson to calculate EOQ and
use EOQ as ROQ)
THEORY OF EOQ
Assumptions Formula
I) Annual requirement of input(A) is
known in advance and is spread
2Ao
evenly throughout the year EOQ=
c
II) Ordering cost per order(o) is
constant irrespective of order size
III) carrying cost per input per
annum(c) is constant
Some interpretations and inferences
- A would be given or can be calculated by two methods:

(1) Annual demand of output x Input required/unit of output
(2) Normal Consumption per time period x no of time period per annum
Method 2 is preferred for exam purpose
- o would be given in ₹/order
- c would be given ₹/input/annum or if given in % then calculate it as
Purchase cost x carrying cost %
- Total Ordering Cost(TOC) are the costs which are associated with the
purchase or order of materials such as cost to invite quotations,
documentation works like preparation of purchase orders, employee cost
directly attributable to the procurement of material, transportation and
inspection cost etc.

MATERIAL COST
TOC = No of order per annum x Ordering cost per order

A
= x o
ROQ
TOC
ROQ
- Total Carrying Cost(TCC) are the costs for holding/ carrying of

inventories in store such as the cost of fund invested in inventories, cost
of storage, insurance cost, obsolescence etc.
TCC = Average inventory of input x carrying cost per input per annum
= Opening stock + closing stock xc

2
ROQ + 0
= xc
2
= ROQ
xc
2

MATERIAL COST
TCC
ROQ
- At EOQ , TOC + TCC together is minimum and both are equal
TOC, TCC, (TOC + TCC) (TOC+TCC)

TCC
TOC
ROQ
EOQ
- Total Cost = Total Purchase Cost + Total Ordering Cost + Total Carrying Cost

MATERIAL COST
(d) Reorder level(ROL): When to order i.e. at what quantity level we should
order
ROL = maximum consumption per time period x Maximum lead time period
(e) Maximum Stock level: Highest stock level at a point of time in the year
Maximum stock level = ROQ/EOQ + ROL - (Minimum consumption per time

period x Minimum lead time period)
(f) Minimum Stock level/ Safety Stock: Lowest practical stock level at a
point of time in the year.
Minimum Stock level/ Safety Stock = ROL - (Normal consumption per time
period x Normal lead time period)
(g) Average Stock level: This is the quantity of material that is normally
held in stock over a period. It is also known as normal stock level. It can be
calculated by 2 methods:
Maximum stock level + minimum stock level

1)
2
ROQ/EOQ
2) Minimum stock level +
2
(h) Danger Stock level: It is the level at which normal issues of the raw
material inventory are stopped and emergency issues are only made.
Danger Stock level = minimum consumption/time period x emergency lead time

MATERIAL COST
(i) Buffer Stock: Some quantity of stock may be kept for contingency to be
used in case of sudden order, such stock is known as buffer stock.
5. ABC TECHNIQUE:
This system exercises discriminating control over different items of inventory
on the basis of the investment involved. Usually the items are classified into
three categories according to their relative importance, namely, their value
and frequency of replenishment during a period.
(i) ‘A’ Category: This category of items consists of only a small percentage i.e.,
about 10% of the total items handled by the stores but require heavy
investment about 70% of inventory value, because of their high prices or
heavy requirement or both. Items under this category can be controlled
effectively by using a regular system which ensures neither over-stocking nor
shortage of materials for production. Such a system plans its total material
requirements by making budgets. The stocks of materials are controlled by
fixing certain levels like maximum level, minimum level and re-order level.
(ii) ‘B’ Category: This category of items is relatively less important; they may
be 20% of the total items of material handled by stores. The percentage of
investment required is about 20% of the total investment in inventories. In
the case of these items, as the sum involved is moderate, the same degree of
control as applied in ‘A’ category of items is not warranted. The orders for
the items, belonging to this category may be placed after reviewing their
situation periodically.
(iii) ‘C’ Category: This category of items does not require much investment; it
may be about 10% of total inventory value but they are nearly 70% of the
total items handled by store. For these category of items, there is no need of
exercising constant control. Orders for items in this group may be placed
either after six months or once in a year, after ascertaining consumption
requirements. In this case the objective is to economies on ordering and
handling costs.

MATERIAL COST
6. RATIO TECHNIQUE:
Inventory Turnover Ratio: Computation of inventory turnover ratios for
different items of material and comparison of the turnover rates provides a
useful guidance for measuring inventory performance. High inventory
turnover ratio indicates that the material in the question is a fast moving
one. A low turnover ratio indicates over-investment and locking up of the
working capital in inventories.
Inventory Turnover Ratio = Cost of materials consumed during the period

Cost of average stock held duirng the period
Average stock = 1/2 (opening stock + closing stock)
365 days
Average no. of days of Inventory holding =
Inventory Turnover Ratio
By comparing the number of days in the case of two different materials, it

is possible to know which is fast moving and which is slow moving. On this
basis, attempt should be made to reduce the amount of capital locked up,
and prevent over-stocking of the slow moving items.
7. STORE LEDGER ACCOUNT:

Purchase Department Store Production Department
Issue Material Issue Material
> R I >
t I R <
Return Material I Return Material
Shortage

MATERIAL COST
STORE LEDGER ACCOUNT
DATE RECEIPT ISSUE BALANCE

Qty Rate Amount Qty Rate Amount Qty Rate Amount
Receipt from purchase department would be recorded at the rate of purchase
Receipt from production department in form of return would be recorded as

per original transaction recorded rate
Issue to production department would be recorded at the rate calculated using

valuation technique like FIFO or LIFO or simple average or weighted average
Issue to purchase department in form of return would be recorded as per the

original transaction recorded rate
Shortage or deficiency would be recorded under issued column as per valuation

technique followed
8. IMPORTANT SHORT NOTES:
Bin Cards: It is a quantitative record of inventory which shows the quantity of

inventory available in a particular bin. Bin refers to a box/ container/ space
where materials are kept. Card is placed with each of the bin (space) to record
the details of material like receipt, issue and return. It is maintained by store
department.

MATERIAL COST
Stock Control Cards: It is also a quantitative record of inventory maintained

by stores department for every item of material. In other words, it is a record
which shows the overall inventory position in store. Recording includes receipt,
issue, return, in hand and order given.
Inventory Stock- Out: Stock out is said to be occurred when an inventory item
could not be supplied due to insufficient stock in the store. The stock- out
situation costs to the entity not only in financial terms but in non-financial
terms also. Due to stock out an entity not only loses overheads costs and profit
but reputation (goodwill) also due to non- fulfilment of commitment. Though it
may not be a monetary loss in short term but in long term it could be a
reason for financial loss.
While deciding on the level of inventory, a trade-off between the stock out
cost and carrying cost is made so that overall inventory cost can be minimized.
Just in Time (JIT) Inventory Management: JIT is a system of inventory

management with an approach to have a zero inventories in stores. According
to this approach material should only be purchased when it is actually
required for production. JIT is based on two principles
(i) Produce goods only when it is required and
(ii) the products should be delivered to customers at the time only when they
want.
It is also known as ‘Demand pull’ or ‘Pull through’ system of production. In
this system, production process actually starts after the order for the
products is received. Based on the demand, production process starts and the
requirement for raw materials is sent to the purchase department for
purchase.

LABOUR
COST

LABOUR COST
1. WHAT IS LABOUR COST:
Benefits paid or payable to the employees of an entity, whether permanent,

or temporary for the services rendered by them. Employee cost includes
payments made in cash or kind.
Employee cost are broadly classified as direct and indirect employee cost.
(i) Direct Employee (Labour) Cost

Benefits paid or payable to the employees which can be attributed to a cost
object in an economically feasible manner. This can be easily identified and
allocated to an activity, contract, cost centre, customer, process, product etc.
(ii) Indirect Employee (Labour) Cost

Benefits paid or payable to the employees, which cannot be directly
attributable to a particular cost object in an economically feasible manner.
2. COMPUTATION OF LABOUR COST:
From view point of employee From view point of employer

Gross Earnings & Net Earnings Labour Cost or Cost to Company
Particulars: (CTC)
Basic Salary or Basic Pay xxx
Dearness Allowance xxx CTC = Gross Earnings (+) Employer’s
House Rent Allowance xxx Contribution to PPF, ESIP, etc.
Bonus xxx
Overtime Premium xxx Net Earnings = Gross Earnings (-)
Other Fringe Benefits xxx Employee’s Contribution to PPF,
Gross Earnings xxx ESIP, etc.

LABOUR COST
3. MEANING & COMPUTATION OF BASIC PAY:
Normal wages paid to employee for actual hours worked. It can be fixed
sum on time basis or fixed rate on per time basis or as per piece basis.
Generally it is as per fixed rate per time (hours) basis.
Basic Pay = Normal Rate/Hour x Actual hours worked

or
Normal lump sum amount per time period
or
Normal piece rate x No of output produced
4. MEANING & COMPUTATION OF DEARNESS ALLOWANCE:
Extra amount paid over & above basic pay to employee to counter the
effect of inflation. It can be a fixed sum on time basis or a percentage of
basic pay or can be calculated as per cost of living index.
Dearness Allowance = % of basic pay

or
lump sum amount
or
Basic pay x (Current year index (-) Base year index)
Base year index

LABOUR COST
5. MEANING & COMPUTATION OF HOUSE RENT ALLOWANCE:
Amount paid for house rent. It can be a fixed sum or a percentage of basic
pay.
House Rent Allowance = % of basic pay

or
lump sum amount
6. MEANING & COMPUTATION OF BONUS:
It is an incentive scheme for workers for working efficiently. It is

calculated as per one of the two schemes one given by Halsey and other
given by Rowan.
NOTE:
1)Bonus is given if and only if workers are efficient i.e. TT < TA
2)Time taken(TT): Actual hours worked = Actual hrs/Output x Actual output
3)Time allowed(TA): Standard hours or time to be taken =
Standard or Budgeted hrs/Output x Actual output
4)Time saved(TS): TA (-) TT
Bonus as per Halsey Scheme = 30% - 70% of TS x Basic Rate/hour

= 50%(generally) of TS x Basic Rate/hour
Bonus as per Rowan Scheme = TT/TA of TS x Basic Rate/hour

LABOUR COST
7. MEANING & COMPUTATION OF OVERTIME PREMIUM:
Work done beyond normal working hours is known as ‘overtime work’.

Overtime payment is the amount of wages paid for working beyond normal
working hours. Overtime payment consist of two elements-
(i) Normal wages for overtime work and
(ii) Premium payment for overtime work.
NOTE: For sums element (i) is included in Basic pay amount as we calculate
Basic pay for actual total hours worked
Overtime premium amount = Overtime worked x Premium Rate/Hour
Overtime worked = Total time worked (-) Normal Time to be worked as per
the contract
Premium Rate/hour = Basic Rate/hour x Premium
As per the Factories Act 1948 “Where a worker works in a factory for more
than nine hours in any day or for more than fourty eight hours in any week,
he shall, in respect of overtime work, be entitled to wages at the rate of
twice his ordinary rate of wages.”

LABOUR COST
8. MEANING OF OTHER FRINGE BENEFITS:
Non-monetary benefits which an employee receives by virtue of employment.

Such non-monetary benefits may include:
(i) Medical facilities;
(ii) Educational and training facilities;
(iii) Recreational and sports facilities;
(iv) Housing and social welfare; and
(v) Cost of subsidised canteen and co-operative societies.
Such benefits are generally given in an industrial establishment. In some
cases, the provision of benefits is compulsory. Therefore, while computing
the wage cost per worker, the monetary value of such non-monetary
benefits should also be taken into account.
IMP NOTE: Effective Rate = Net Earnings / Actual time taken
9. LABOUR TURNOVER RATIOS:
Employee turnover or labour turnover in an organisation is the rate of change

in the composition of employee force during a specified period measured
against a suitable index.
The standard of usual employee turnover in the industry or locality or the

employee turnover rate for a past period may be taken as the index or norm
against which actual turnover rate is compared.

LABOUR COST
Methods to calculate labour turnover ratios:
A) Separation method:
Number of workers separated x 100%
Average number of workers
B) Replacement method:
Number of workers replaced
x 100%
C) New Recruitment method:
Number of workers newly recruited x 100%
D) Flux or Summation method:
Addition of all the above possible methods as per question
NOTES:
1) Number of workers separated/discharged/left = Number of workers
retired (+) Number of workers retrenched (+) Number of workers resigned
(+) Number of workers died
2) Number of workers replaced are those against number of workers

separated therefore worker replaced and newly recruited are different
3) Average number of workers =

Opening no of workers (+) Closing no of workers
2
4) Closing number of workers = Opening number of workers (-) Number of
workers separated (+) Number of workers replaced (+) Number of workers
newly recruited

LABOUR COST
5) Number of accession or no of workers recruited and joined = Number of

workers replaced (+) Number of workers newly recruited
6) Annual effective turnover rate =
Any of the above ratio x No of period in a year

Specified period
10. TIME KEEPING:
It refers to correct recording of the employees attendance time. Correct

recording of employees attendance time is of utmost importance where
payment is made on the basis of time worked.
Where payment is made by results viz; straight piece work, it would still be
necessary to correctly record attendance for the purpose of ensuring that
proper discipline and adequate rate of production are maintained.
The objectives of time- keeping are as follows:
(i) For the preparation of payrolls.
(ii) For calculating overtime.
(iii) For ascertaining and controlling employee cost.
(iv) For ascertaining idle time.
(v) For disciplinary purposes.
(vi) For overhead distribution.
Methods of Time-keeping: Attendance Register method, Metal Disc/ Token

method, Punch Card Attendance, Bio- Metric Attendance system,etc.

LABOUR COST
11. TIME BOOKING:
Time keeping just records the time spent by an employee in the premises for
production but it does not show how much time a person spent on a
particular job. Time booking refers to a method wherein each activity of an
employee is recorded. This data recorded is further used for measure the
time spent on a particular job for costing, measurement of efficiency, fixation
of responsibility etc.
For the collection of all such data, a separate record, generally known as Time
(or Job) card, is kept.
The time (or job) card can be of two types:
One containing analysis of time with reference to each job and the other with
reference to each employee
12. IDLE TIME:
The time during which no production is carried-out because the worker

remains idle but are paid. In other words, it is the difference between the
time paid and the time booked. Idle time can be normal or abnormal. The
time for which employees are paid includes holidays, paid leaves, allowable
rest or off time etc.
Normal idle time: It is the time which cannot be avoided or reduced in the
normal course of business.
Abnormal idle time: Apart from normal idle time, there may be factors which
give rise to abnormal idle time.

LABOUR COST
Causes of Normal Idle Time
1. The time lost between factory gate to production place,

2. The interval between one job and another,
3. The setting up time for the machine,
4. Normal rest time, break for lunch etc.
Treatment of Normal Idle Time Cost
It is treated as a part of cost of production. Thus, in the case of direct

workers an allowance for normal idle time is considered setting of standard
hours or standard rate.
In case of indirect workers, normal idle time is considered for the
computation of overhead rate.
Causes of Abnormal Idle Time
1. Idle time may also arise due to abnormal factors like lack of coordination
2. Power failure, Breakdown of machines
3. Non-availability of raw materials, strikes, lockouts, poor supervision, fire,
flood etc.
Treatment of Abnormal Idle Time Cost
Abnormal idle time cost is not included as a part of production cost and is
shown as a separate item in the Costing Profit and Loss Account. The cost of
abnormal idle time should be further categorised into controllable and
uncontrollable. For each category, the break-up of cost due to various factors
should be separately shown. This would help the management in fixing
responsibility for controlling idle time. Management should aim at eliminating
controllable idle time and on a long- term basis reducing even the normal idle
time. This would require a detailed analysis of the causes leading to such idle
time.

OVERHEADS

OVERHEADS
1. WHAT IS OVERHEADS:
Overheads are the expenditure which cannot be conveniently traced to or

identified with any particular cost unit. Such expenses are incurred for output
generally and not for a particular work order e.g., wages paid to watch and
ward staff, heating and lighting expenses of factory etc.
Overheads also represent expenses that have been incurred in providing

certain ancillary facilities or services which facilitate or make possible the
carrying out of the production process; by themselves these services are not
of any use.
2. SOME IMPORTANT TERMS:
(a) DEPARTMENT:
There are 2 departments:
Production department & Service department
Production departments are those departments which directly take part in
the production of goods or providing services & service departments are
those departments which do not directly take part in the production of goods
or providing services. Such departments provide auxiliary services across the
entity and renders services to other cost centres and in some cases to
outside parties. Examples of service departments are engineering, quality
control and assurance, laboratory, canteen, stores, time office, dispensary etc.
(b) COST ALLOCATION: The term ‘allocation’ refers to the direct assignment
of cost to a cost object which can be traced directly. It implies relating
overheads directly to the various departments. The estimated amount of
various items of manufacturing overheads should be allocated to various cost
centres or departments. For example- if a separate power meter has been
installed for a department, the entire power cost ascertained from the meter
is allocated to that department.

OVERHEADS
(c) COST APPORTION: There are some items of estimated overheads (like
the salary of the works manager) which cannot be directly allocated to the
various departments and cost centres. Such unallocable expenses are to be
spread over the various departments or cost centres
To apportioning these overheads over different departments benefiting

thereby, it is necessary at first to determine the proportion of benefit
received by each department and then distribute the total expenditure
proportionately on that basis. But the same basis of apportionment cannot
be followed for different items of overheads since the benefit of service to
a department in each case has to be measured differently. Some of the
bases that may be adopted for the apportionment of expenses are stated
below:
Overhead Cost Bases of Apportionment
Rent and other building expenses Floor area or floor space
Supervision & Labour welfare Number of workers

General overhead
Depreciation, Repairs and Capital values

maintenance & Insurance
Lighting expenses (light) No. of light points
Electric power (machine operation) Horse power of machines
Material handling & Stores overhead Value of materials

OVERHEADS
(d) REAPPORTIONMENT: The process of assigning service department

overheads to production departments is called reassignment or re-
apportionment. At this stage, all the factory overheads are collected under
production departments.
The cost allocation & cost apportionment is called primary distribution &
re-apportionment of the service department cost to the production
department is known as secondary distribution.
Methods for Re-apportionment: The re-apportionment of service department

expenses over the production departments may be carried out by using any
one of the following methods:
(i) Direct re-distribution method.
(ii) Step method of secondary distribution or non-reciprocal method.
(iii) Reciprocal Service method.
(e) ABSORPTION: After completing the distribution as stated above the

overheads charged to department are to be recovered from the output
produced in respective departments. This process of recovering overheads of
a department or any other cost center from its output is called recovery or
absorption.
The overhead expenses can be absorbed by estimating the overhead (as

assigned above) and then working out an absorption rate. When overheads
are estimated, their absorption is carried out by adopting a pre-determined
overhead absorption rate.
As the actual accounting period begins, each unit of production automatically

absorbs a certain amount of factory overheads through pre-determined rates.
During the year a certain amount will be absorbed over the various products.
This is known as the total amount of absorbed overheads.

OVERHEADS
3. FORMAT OF PRIMARY DISTRIBUTION:
Production dept Service dept

ITEMS BASIS Total
P1 P2 S1 S2
DM DL DE Allocated
Overheads Allocated or
Apportioned
Total
4. DIRECT REDISTRIBUTION METHOD:
Service department costs under this method are apportioned among

production department only, ignoring services rendered by one service
department to others
Basics of reappointment would be given in sums
5. NON RECIPROCAL METHOD:
This method gives cognizance to the services rendered by service department

to another service department. The sequence here begins with the
department that renders maximum number of services to the other service
department(s). In other words, the cost of the service department that
serves the largest number of services to the other service department(s)

OVERHEADS
and production department(s) is distributed first. After this, the cost of

service department serving the next largest number of departments is
apportioned.
This process continues till the cost of last service department is apportioned.
The cost of last service department is apportioned among production
departments only.
Suppose two or more service departments provides service to equal number
of departments or service department renders to a service department and
receives service from same service department then we must re-apportion
the cost of that service department whose overhead value is maximum and
then that service department is not allowed to receive any other service.
6. RECIPROCAL METHOD:
This method recognises the fact that where there are two or more service
departments they may render services to each other and, therefore, these
inter-departmental services are to be given due weight while re- distributing
the expenses of the service departments.
6(a) Repeated Distribution Method:

Under this method, service departments’ costs are distributed to other
service and production departments on agreed percentages and this process
continues to be repeated, till the figures of service departments are either
exhausted or reduced to too small a figure.
For exam purpose we must carry on the distribution till 3 cycles unless
otherwise stated. Overheads of the last service department of the last cycle
should be reapportioned only among production departments

OVERHEADS
6(b) Simultaneous Equation Method:

According to this method firstly, the costs of service departments are
ascertained. These costs are then re-distributed to production departments
on the basis of given percentages.
Step 1: Frame the equations and solve them to get the total cost
Total cost of a service department after reapportionment =
Cost before reapportionment + given % of service received from other service
department
Step 2: Reapportionment
Reapportion the total cost in the given ratio or percentage
7. RECOVERY RATE:
This rate is determined in advance by estimating the amount of the overhead

for the period in which it is to be used. It is computed by the following
formula:
Pre-determined Rate = Budgeted amount of overheads / Budgeted base
Blanket Overhead Rate Departmental Overhead Rate
Total overheads for the co Overheads of department

Total number of units of base for the co Corresponding base
Base depends upon industry. It can be Labour Hours, Machine Hours, % of

Direct Labour, % of prime cost,etc.

OVERHEADS
8. UNDER OR OVER RECOVERY OF OVERHEADS:
Under Recovery Over Recovery
O/H Absorbed < Actual O/H Incurred O/H Absorbed > Actual O/H Incurred
Amount of Under Recovery Amount of Over Recovery
Actual O/H Incurred - O/H Absorbed O/H Absorbed - Actual O/H Incurred
NOTES:
(a) O/H Absorbed or O/H Recovered or O/H Charged or O/H Applied =
Recovery rate x Actual Base
(b) Actual O/H Incurred is the normal nature actual overhead cost. Abnormal
nature actual overheads are not taken here as it is a costing P/L item.
Treatment of under or over recovery
The general view is that if the balances are small they should be transferred
to the Costing Profit and Loss Account and the cost of individual products
should not be increased or reduced as these would be representing normal
cost.
Where, however the difference is large and due to wrong estimation, it would
be desirable to adjust the cost of products manufactured, as otherwise the
cost figures would convey a misleading impression. Such adjustments usually
take the form of supplementary rates. Supplementary rate is calculated as
below:
Under or Over absorbed O/H
Equivalent Units produced

OVERHEADS
Supplementary overhead rate as calculated above is applied to finished goods,

semi-finished goods (WIP) and goods finished and sold. Therefore, under/ over
absorbed overheads are distributed among the unsold stock of finished goods,
semi-finished goods (WIP) and cost of sales (goods produced and sold).
The accounting is done as follows:
In case of Under-absorption
Finished goods stock Debit Finished stock units x Supplementary rate
No impact on current year profit
Stock of WIP Debit Equivalent completed units x Supplementary rate
Cost of Sales Debit Units sold x Supplementary rate
Current year profit is reduced by such amount

In case of Over-absorption
Finished goods stock Credit Finished stock units x Supplementary rate
Stock of WIP Credit Equivalent completed units x Supplementary rate
Cost of Sales Credit Units sold x Supplementary rate
Current year profit is increased by such amount

OVERHEADS
However, over or under recovery of overheads due to abnormal reasons (such

as abnormal over or under capacity utilisation) should be transferred to the
Costing Profit and Loss Account.
9. MACHINE HOUR RATE (MHR):
By the machine hour rate method, manufacturing overhead expenses are

charged to production on the basis of number of hour machines are used on
jobs or work orders. Here each machine or group of machines is treated as a
cost centre.
Budgeted O/H
MHR =
Effective Machine Hours
The above costs are further divided into fixed cost or standing charges and
variable cost. Costs which remain constant irrespective of operation of machine
are treated as fixed cost or standing charges. Examples of fixed cost include
insurance premium for machine, rent for premises, supervisor’s salary,
depreciation (if relates to effluxion of time) etc.
Costs which vary with the operation of the machine are treated as variable
cost. Examples of variable cost include cost for power, cost for consumables
(lubricants, oils etc.), repairs and maintenance, depreciation (if it relates to
activity) etc.
NOTE ON OPERATOR WAGES
Some people even prefer to add the wages paid to the machine operator in
order to get a comprehensive rate of working a machine for one hour. Hence
such MHR is called Comprehensive MHR.
Effective Machine Hours = Total MH (-) Unproductive Setup & Maintenance time

ACTIVITY
BASED
COSTING

ACTIVITY BASED COSTING
1. WHAT IS ACTIVITY BASED COSTING:
Activity Based Costing is an accounting methodology that assigns costs to

activities rather than products or services. This enables resources & overhead
costs to be more accurately assigned to products & services that consume
them. ABC is a technique which involves identification of cost with each cost
driving activity and making it as the basis for apportionment of costs over
different cost objects/ jobs/ products/ customers or services.
2. SOME IMPORTANT TERMS:
(a) Activity – Activity, here, refers to an event that incurs cost.
(b) Cost Object–It is an item for which cost measurement is required

e.g. a product or a customer.
(c) Cost Driver–It is a factor that causes a change in the cost of an activity.
(d) Cost Pool-It represents a group of various individual cost items. It consists
of costs that have same cause and effect relationship. Example machine set-up.
Some of the examples of cost drivers for different activity pools in a production
department are stated below:
Activity Cost Pools Related Cost Drivers
Ordering and Receiving Materials cost Number of purchase orders
Setting up machines costs Number of set-ups
Machining costs Machine hours
Assembling costs Number of parts
Inspecting and testing costs Number of tests
Painting costs Number of parts
Supervising Cost Direct labour hours

3. ABSORPTION COSTING V/S ACTIVITY BASED COSTING:
In traditional absorption costing overheads are first related to cost centres

(Production & Service Centres) and then to cost objects, i.e., products. In ABC
overheads are related to activities or grouped into cost pools. Then they are
related to the cost objects, e.g., products. The two processes are, therefore,
very similar, but the first stage is different, as ABC uses activities instead of
functional departments (cost centres). The problem with functional
departments is that they tend to include a series of different activities,
which incur a number of different costs that behave in different ways.
Activities also tend to run across functions; for instance, procurement of
materials often includes raising a requisition note in a manufacturing
department or stores. It is not raised in the purchasing department where
most procurement costs are incurred. Activity costs tend to behave in a
similar way to each other i.e., they have the same cost driver. Therefore, ABC
gives a more realistic picture of the way in which costs behave.

JOB &
CONTRACT
COSTING

JOB & CONTRACT COSTING
1. WHAT IS JOB COSTING & ITS FORMAT:
According to this method, costs are collected and accumulated according to

jobs, contracts, products or work orders. Each job or unit of production is
treated as a separate entity for the purpose of costing. Job costing is carried
out for the purpose of ascertaining cost of each job and takes into account
the cost of materials, employees and overhead etc.
Job Cost Sheet

DM, DL & DE ie Prime Cost xxx
Add: Factory O/H(based on
budgeted absorption rate) xxx
FC/WC xxx
Add: Ofc & Adm O/H (of
production nature) xxx
COP/COGS xxx
Add: Ofc & Adm O/H (of
general nature) xxx
Add: Selling & Dist O/H xxx
COS xxx
Add: Profit xxx
Sales xxx
Job which are of Short Period ie less than or equal to one year are
ascertained through Job Cost Sheet. The basic principles enunciated for the
job costing method are valid essentially for all types of industry. For example,
printing; furniture; hardware; ship-building; heavy machinery; interior
decoration, repairs and other similar work.

2. WHAT IS CONTRACT COSTING & ITS FORMAT:
Contract costing is a form of specific order costing where job undertaken is

relatively large and normally takes period longer than a year to complete.
Contract costing is usually adopted by the contractors engaged in any type
of contracts like construction of building, road, bridge, erection of tower,
setting up of plant etc.
A contract takes longer period to complete and the result of the contract
can be known only after the completion of the contract. To have a better
control over the contract and cost, it is necessary to have an idea of
profitability of contracts at regular intervals or atleast in a year. For this
purpose, a contractor needs to calculate expected profit or notional profit for
a contract. It also helps in profit comparison for a period and provide a good
basis for performance measurement and evaluation of those who are engaged
in the contract. The expected or notional profit in respect of each contract in
progress (i.e. incomplete contracts) is transferred to the costing profit and
loss account (consolidated) for the year to determine overall profitability of
the contractor.

In the books of Contractor

Start date _____ Contract no. _______
Expected End date_______ Contractee Name ________
Dr. Contract Account Cr.
To Opening WIP(WC+WUC) By Material returned to store
or supplier (at cost)
To Opening Stock of Material By Material transferred to other
To Material received from store, project or sale of material at cost
supplier or other projects + profit/(loss)]
To Costing P/L (profit from t/f By Costing P/L (loss from t/f of
of material) material)
By Costing P/L (Abnormal loss of

material)
[Note: No treatment of NL]
By Closing Stock of Material
To Wages & other expenses By Costing P/L (Abnormal idle time)

(on accrual basis) [Note: No treatment of NIT]
To Purchase or Opening WDV of FA By Closing WDV of FA
Or
To Depreciation on FA
By COWTD (bal fig)

To COWTD b/d By Closing WIP — WC

— WUC
To Notional Profit (bal fig) Or By Notional Loss (bal fig)
NOTES:
1) WC = Contract Price x % of Work Certified (done by contractee)
COWTD
2) WUC = x % of WUC
% of Work done (as per contractor)
3) % of WUC = % of Work done (-) % of Work Certified
4) Retention Money = Value of work certified – Payment actually made
5) Estimated Profit = Contract Price (-) COWTD (-) Further estimated cost
6) Escalation Clause: Escalation clause in a contract empowers a contractor

to revise the price of the contract in case of increase in the prices of
inputs due to some macro- economic or other agreed reasons. A contract
takes longer period to complete and the factors based on which price
negotiation is done at the time of entering into the contract may change
till the contract completes. This protect the contractor from adverse
financial impacts and empowers the contractor to recover the increased
prices. As per this clause, the contractor increases the contract price if
the cost of materials, employees and other expenses increase beyond a
certain limit. Inclusion of such a clause in a contract deed is called an
“Escalation Clause”.
Escalation Claim Amount = (AR - SR) x Standard Input

UNIT &
BATCH
COSTING

UNIT & BATCH COSTING
1. WHAT IS UNIT COSTING:
Unit costing is that method of costing where the output produced is identical
and each unit of output requires identical cost. Unit costing is synonymously
known as single or output costing, but these are sub-division of unit costing
method. This method of costing is followed by industries which produce single
output or few variants of a single output. Under this method costs, are
collected and analysed element wise and then total cost per unit is
ascertained by dividing the total cost with the number of units produced.
This method of costing, therefore finds its application in industries like paper,
cement, steel works, mining, breweries etc. These types of industries produce
identical products and therefore have identical costs.
2. WHAT IS BATCH COSTING:
Batch Costing is a type of specific order costing where articles are

manufactured in predetermined lots, known as batch. Under this costing
method, the cost object for cost determination is a batch for production
rather output as seen in unit costing method.
A batch consists of certain number of units which are processed

simultaneously to be for manufacturing operation. Under this method of
manufacturing, the inputs are accumulated in the assembly line till it reaches
minimum batch size. Soon after a batch size is reached, all inputs in a batch
is processed for further operations.

UNIT & BATCH COSTING
Reasons for batch manufacturing may be either technical or economical or

both. For example, in pen manufacturing industry, it would be too costly to
manufacture one pen of a particular design at a time to meet the demand of
one customer. On the other hand, the production, of say 10,000 pens, of the
same design will reduce the cost to a sizeable extent.
3. ECONOMIC BATCH QUANTITY (EBQ):
As the product is produced in batches or lots, the lot size chosen will be
critical in achieving least cost of operation. Primarily, the total production
cost under batch production comprises of two main costs, namely,
1. Machine Set Up Costs and
2. Inventory holding costs.
If the size is higher, the set up cost may decline due to lesser number of set
ups required; but units in inventory will go up leading to higher holding costs.
If the lot size is lower, lower inventory holding costs are accomplished but
only with higher set up costs. Economic batch quantity is the size of a batch
where total cost of set-up and holding costs are at minimum.
The economic batch size or Economic Batch Quantity may be determined by

calculating the total cost for a series of possible batch sizes and checking
which batch size gives the minimum cost. Alternatively, a formula can be
derived which is similar to determination of Economic Order Quantity (EOQ).
The objective here being to determine the production lot (Batch size) that
optimizes on both set up and inventory holding cots formula. The
mathematical formula usually used for its determination is as follows:
D = Annual demand for the product

2DS S = Setting up cost per batch
EBQ =
C C = Carrying cost per unit of
production

OPERATING
COSTING

OPERATING COSTING
1. WHAT IS OPERATING OR SERVICE COSTING:
It is application of cost concepts in ascertainment of cost or providing

services.
2. WHAT IS SERVICE COST UNIT:
To compute the Service cost, it is necessary to understand the unit for

which the cost is to be computed. All the costs incurred during a period are
collected and analyzed and then expressed in terms of a cost per unit of
service.
One specific issue with service costing is the difficulty in defining a realistic
cost unit that represents a suitable measure of the service provided. The
cost unit to be applied needs to be defined carefully and frequently, a
composite cost unit may be deemed more appropriate.
Service industry Unit of cost

Transport Services Passenger- km., (In public transportation)
Quintal- km., or Ton- km. (In goods carriage)
Hotels Guest Days or Room Days
Hospital Patient per day or room per day
Educational Institutes Per course, per student, per batch, per lecture
Electricity Supply service Kilowatt- hour (kWh)
IT & ITES Cost per project
Insurance Per policy
Toll services Per km or per vehicle
Cinema Per ticket
Bank or Financial Per transaction, per services (e.g. per letter of
Institutions credit, per application, per project etc.)

OPERATING COSTING
NOTE:
In case of goods transportation services there are 2 types of tonne-km —
A) Absolute Tonne-km =
∑(Weight Carried x Distance)1+ (Weight Carried x Distance) +........................
2
..............+(Weight Carried x Distance) n
B) Commercial Tonne-km =
(W1+ W2 + ........... + Wn )
∑(Distance + Distance + ..................+ Distancen) x
1 2
n
3. TOTAL COST & TOTAL REVENUE PER SERVICE COST UNIT :
For preparing a statement of cost or a cost sheet for service sector, costs are
usually collected and accumulated for a specified period viz. A month, quarter
or a year, etc. The cost statement for services may be prepared either on the
basis of functional classification as done for product costing or on the basis
of variability. Cost sheet on the basis of variability is prepared classifying all
the costs into three different heads:
1. Fixed costs or Standing charges
2. Variable costs or Operating expenses
3. Semi-variable costs or Maintenance expenses
NOTES:
1)In the absence of information about semi-variable costs, the costs would be
shown under fixed and variable heads only.
2)Treatment of Depreciation- fixed or variable?

If related to effluxion of time or calculated on time basis, will be treated as
fixed. However, if the depreciation is calculated on the basis of activity level
or usage, it will be treated as variable cost.

OPERATING COSTING
3)Treatment of Interest:
Interest and finance charges shall be presented in the cost statement as a
separate item of cost of sales. In general, interest is treated as fixed cost,
unless otherwise given.
4) Revenue or Fee = Cost + Markup or Margin
4. SHORT NOTE ON BOT APPROACH:
In recent years a growing trend emerged among Governments in many

countries to solicit investments for public projects from the private sector
under BOT scheme. BOT is an option for the Government to outsource public
projects to the private sector.
With BOT, the private sector designs, finances, constructs and operate the
facility and eventually, after specified concession period, the ownership is
transferred to the Government. Therefore, BOT can be seen as a developing
technique for infrastructure projects by making them amenable to private
sector participation.
The fundamental principle in determining user levy is, 'if the price for a
transport facility is set at a level that reflects the benefit, each user gains
from improvements in the facility, it will result in traffic flow levels that
equate social costs with user benefits.'

COST
ACCOUNTING
SYSTEM

COST ACCOUNTING SYSTEM
1. DIFFERENT COST ACCOUNTING SYSTEMS:
To operate business operations efficiently and successfully, it is necessary to

make use of an appropriate accounting system. Such a system should state in
clear terms whether cost and financial transactions should be integrated or
kept separately (Non- integrated). Where cost and financial accounting
records are integrated, the system so evolved is known as integrated or
integral accounting system. In case cost and financial transactions are kept
separately, the system is called Non- Integrated Accounting system or Cost
Control System. While non-integrated system of accounting necessitates
reconciliation between financial and cost accounts but no reconciliation is
required under integrated accounting system.
2. NON INTEGRATED ACCOUNTING SYSTEM:
It is a system of accounting under which separate ledgers are maintained for

both cost and financial accounts. This system is also known as cost ledger
accounting system. Under this system the cost accounts restrict itself to
recording only those transactions which relate to the product or service
being supplied. Items of expenses which are related to sales, production or
other matters of factory management are the ones dealt with in such
accounts. This leads to the exclusion of certain expenses like interest, bad
debts and revenue/income from ‘other than the sale of product or service’.
Non-Integrated Accounting Systems contain fewer accounts as compared to

financial accounting system due to the exclusion of purchases, expenses and
also Balance Sheet items like fixed assets, debtors and creditors. Items of
accounts which are excluded are represented by an account known as Cost
ledger control account.

The main accounts which are usually prepared when a separate Cost Ledger
is maintained are as follows:
(1) Cost Ledger Control Account - This account is also known as General
Ledger Adjustment Account. This account is made to complete double entry.
All items of expenditure are credited to this account. Sales are debited to
this account and net profit/loss from Costing Profit & Loss Account is
transferred to this account. The balance in this account at the end of the
particular period represents the net total of all the balances of the
impersonal accounts.
(2) Stores Ledger Control Account – This account is debited for the purchase
of material and credited for issue of materials from the stores. The balance
in this account indicates the total balance of all the individual stores
accounts. Abnormal losses or gains if any in this account are transferred to
Costing Profit & Loss Account. Entries are made on the basis of goods
received notes and stores requisitions etc.
(3) Wages Control Account - This account is debited with total wages paid
(direct and indirect). Direct wages are further transferred to Work-in-
Process Control Account and indirect wages to Production Overhead;
Administration Overhead or Selling & Distribution Overhead Control Accounts,
as the case may be. Wages paid for abnormal idle time are transferred to
Costing Profit & Loss Account either directly or through Abnormal Loss
Account.
(4) Manufacturing/Production/Works/ Factory Overhead Control Account -

This account is debited with indirect costs of production such as indirect
material, indirect employee, indirect expenses (carriage inward etc.).
Overhead recovered is credited to this Account. The difference between
overhead incurred and overhead recovered (i.e. Under Absorption or Over
Absorption of Overheads) is transferred to Overheads Adjustment Account.

(5) Work-in-Process Control Account - This account is debited with the total
cost of production, which includes—direct materials, direct employee, direct
expenses, production overhead recovered, and is credited with the amount of
finished goods completed and transferred. The balance in this account
represents total balances of jobs/works-in-process, as shown by several job
accounts.
(6) Administrative Overhead Control Account - This account is debited with

overheads incurred and credited with overhead recovered. The overhead
recovered are debited to Finished Goods Control Account, if administrative
overhead is related with production activities otherwise to Cost of Sales A/c.
The difference between administrative overheads incurred and recovered is
transferred to Overhead Adjustment Account.
(7) Finished Goods Control Accounts - This account is debited with the value
of goods transferred from Work-in-process Control Account and
administration costs recovered (if relates to production activities). This
account is credited with Cost of Sales Account. The balance of this account
represents the value of goods unsold at the end of the period.
(8) Selling and Distribution Overhead Control Account - This account is

debited with selling and distribution overheads incurred and credited with
the selling and distribution overheads recovered. The difference between
overheads incurred and recovered is transferred usually to Overhead
Adjustment Account.
(9)Cost of Sales Account - This account is debited with the cost of finished
goods transferred from Finished Goods Control Account for sale, General
Administrative overhead recovered, Selling and distribution overhead
recovered. The balance of this account is ultimately transferred to Sales
Account or Costing Profit & Loss Account.

(10) Costing Profit & Loss Account – This account is debited with cost of
sales, under-absorbed overheads and abnormal losses and is credited with
sales value, over-absorbed overhead and abnormal gains. The net profit or
loss in this account is transferred to Cost Ledger Control Account.
(11)Overhead Adjustment Account - This account is to be debited for under-

recovery of overhead and credited with over-recovery of overhead amount.
The net balance in this account is transferred to Costing Profit & Loss
Account.
Note: Sometimes, Overhead Adjustment Account is dispensed with and under/

over absorbed overheads is directly transferred to Costing Profit & Loss
Account from the respective overhead accounts.
3. INTEGRATED ACCOUNTING SYSTEM:
Integrated Accounts is the name given to a system of accounting, whereby

cost and financial accounts are kept in the same set of books. Obviously,
then there will be no separate sets of books for Costing and Financial
records. Integrated accounts provide or meet out fully the information
requirement for Costing as well as for Financial Accounts. For Costing it
provides information useful for ascertaining the cost of each product, job,
process and operation of any other identifiable activity and for carrying
necessary analysis. Integrated accounts provide relevant information which is
necessary for preparing profit and loss account and the balance sheet as per
the requirement of law and also helps in exercising effective control over
the liabilities and assets of its business.

In non-integrated system, a cost ledger control account or general ledger

adjustment account is used in cost ledger. But in the integrated accounting
system, general ledger adjustment account is eliminated and detailed accounts
for assets and liabilities are maintained. In other words, following accounts
are used for “General Ledger Adjustment Account/ Cost Ledger Control
Account” of non- integrated system:
(a) Bank account

(b) Receivables (Debtors) account
(c) Payables (Creditors) account
(d) Provision for depreciation account etc.
In integrated system, all accounts necessary for showing classification of cost

will be used but the cost ledger control account of non-integrated accounting
is replaced by use of following accounts:
(a) Bank account
(b) Receivables (Debtors) account
(c) Payables (Creditors) account
(d) Provision for depreciation account
(e) Fixed assets account
(f) Share capital account
4. RECONCILIATION OF COST AND FINANCIAL ACCOUNTS:
The reconciliation of the balances of two sets of accounts is possible by

preparing a Memorandum Reconciliation Account. In this account, the items
charged in one set of accounts but not in the other or those charged in
excess as compared to the other are identified and collected. These items of
differences are either added or subtracted from the profit as shown by one
of the accounts. Finally the profits from two sets of accounts are
reconciled.

Causes of differences in Financial and Cost Accounts:
1. Items included in Financial Accounts only:

(a) Purely Financial Expenses:
(i) Interest on loans or bank mortgages.
(ii) Expenses and discounts on issue of shares, debentures etc.
(iii) Other capital losses i.e., loss by fire not covered by insurance etc.
(iv) Losses on the sales of fixed assets and investments
(v) Goodwill written off
(vi) Preliminary expenses written off
(vii) Income tax, donations, subscriptions
(viii) Expenses of the company’s share transfer office, if any.
(b) Purely Financial Income
(i) Interest received on bank deposits, loans and investments
(ii) Dividends received
(iii) Profits on the sale of fixed assets and investments
(iv) Transfer fee received.
(v) Rent receivables
2. Item included in Cost Accounts only (notional expenses):

(i) Charges in lieu of rent where premises are owned
(ii) Interest on capital at notional figure though not incurred
(iii) Salary for the proprietor at notional figure though not incurred
(iv) Notional Depreciation on the assets fully depreciated for which book value
is nil.

3. Items whose treatment is different in the two sets of accounts:

The objective of cost accounting is to provide information to management for
decision making and control purposes while financial accounting conforms to
external reporting requirements. Hence there are chances that certain items
are treated differently in the two sets of accounts. For example, LIFO method
is not allowed for inventory valuation in India as per the Accounting Standard
2 issued by the Council of the ICAI. However, this method may be adopted
for cost accounts as it is more suitable for arriving at costs which may be
used as a base for deciding selling prices. Similarly cost accounting may use a
different method of depreciation than what is allowed under financial
accounting.
4. Varying basis of valuation:

It is another factor which sometimes is responsible for the difference. It is
well known that in financial accounts stock are valued either at cost or
market price, whichever is lower. But in Cost Accounts, stocks are only valued
at cost.
5. Under or over recovery of Overheads

SELF NOTES

SELF NOTES

NAVIN CLASSES CA NAVNEET MUNDHRA
COSTING CHAKRA
COVERING 360° OF COSTING THEORY
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CA INTER COSTING THEORY

CONTENT
Chapter No. Chapter Name Page No.
1 Introduction to Cost and Management Accounting 1-7
2 Material Cost 8-11
3 Employee Cost 12-13
4 Overheads 14-15
5 Activity Based Costing 16-17
6 Cost Sheet 18
7 Cost Accounting System 19-20
8 Unit and Batch Costing 21
9 Job Costing & Contract Costing 22
10 Process & Operation Costing 23
11 Joint Products & By Products 24
12 Service Costing 25-26
13 Standard Costing 27
14 Marginal Costing 28-29
15 Budget and Budgetary Control 30-33
CHAPTER- 1
INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING
Q 1. Differentiate between "Cost Accounting and Management Accounting".
Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting

(i) Nature It records the quantitative aspect It records both qualitative and
only. quantitative aspect.
(ii) Objective It records the cost of producing a It provides information to
product and providing a service. management for planning and co-
ordination.
(iii) Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of It uses both past and present figures. It is focused with the projection of
data figures for future.
(v) Development Its development is related to Its development is related to the need
industrial revolution. of modern business world.
(vi) Rules and It follows certain principles and It does not follow any specific rules
Regulation procedures for recording costs of and regulations.
different products.
Q 2. Give any five examples of the impact of use of Information Technology in Cost Accounting.
Example of Impact of Information Technology in cost accounting may include the following:
(i) After the introduction of ERPs, different functional activities get integrated and as a consequence a
single entry into the accounting system provides custom made reports for every purpose and saves an
organisation from preparing different sets of documents. Reconciliation process of results of both cost
and financial accounting systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of Material, Material
Requisition Note, Goods Received Note, labour
utilisation report etc. are no longer required to be prepared in multiple copies, the related department
can get e-copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet) helping in
resource procurement and mobilisation. For example, production department can get materials from
the stores without issuing material requisition note physically. Similarly, purchase orders can be
initiated to the suppliers with the help of extranet. This enables an entity to shift towards Just-in-Time
(JIT) approach of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in timely manner.
Each cost centre and cost object is codified and all related costs are assigned to the cost objects or cost
centres using assigned codes. This automates the cost accumulation and ascertainment process. The
cost information can be customised as per the requirement. For example, when an entity manufacture
or provide services, are able to know information job-wise, batch-wise, process-wise, cost centre wise
etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the help of IT. ERP
software plays an important role in bringing uniformity irrespective of location, currency, language and
regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables the management
to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or service activity
closely to eliminate non value added activities.
Q 3. Why are cost and management accounting information are required by the staff at operational
level? Describe.
Operational level staffs- The operational level staffs like supervisors, foreman, team leaders are
requiring information
(i) to know the objectives and performance goals for them
(ii) to know product and service specifications like volume, quality and process etc.
(iii) to know the performance parameters against which their performance is measured and evaluated.
(iv) to know divisional (responsibility centre) profitability etc.
Q 4. Explain Opportunity Cost.
Opportunity Cost - This cost refers to the value of sacrifice made or benefit of opportunity foregone
in accepting an alternative course of action. For example, a firm financing its expansion plan by
withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is
the opportunity cost for carrying out the expansion plan.
Q 5. Mention and explain types of responsibility centres.
There are four types of responsibility centres:
(i) Cost Centres: The responsibility centre which is held accountable for incurrence of costs which are
under its control. The performance of this responsibility centre is measured against pre-determined
standards or budgets. The cost centres are of two types:
(a) Standard Cost Centre and (b) Discretionary Cost Centre
(ii) Revenue Centres: The responsibility centres which are accountable for generation of revenue for
the entity. Sales Department for example, is the responsible for achievement of sales target and
revenue generation. Though, revenue centres does not have control on the all expenditures it incurs
but some time expenditures related with selling activities like commission to sales person etc. are
incurred by revenue centres.
(iii) Profit Centres: These are the responsibility centres which have both responsibility of generation
of revenue and incurrence of expenditures. Since, managers of profit centres are accountable for both
costs as well as revenue, profitability is the basis for measurement of performance of these
responsibility centres. Examples of profit centres are decentralised branches of an organisation.
(iv) Investment Centres: These are the responsibility centres which are not only responsible for
profitability but also has the authority to make capital investment decisions. The performance of these
responsibility centres is measured based on Return on Investment (ROI) besides profit.
Q 6. Specify the types of Responsibility centres under the following situations:
(i) Purchase of bonds, stocks, or real estate property.
(ii) Ticket counter in a Railway station.
(iii) Decentralized branches of an organization.
(iv) Maharana, Navratna and Miniratna public sector undertaking (PSU) of Central Government.
(v) Sales Department of an organization.
Types of
Particulars Responsibility
Centre
(i) Purchase of bonds, stocks, or real estate property. Investment Centre
(ii) Ticket counter in a Railway station Revenue Centre
(iii) Decentralized branches of an organization. Profit Centre
(iv) Maharatna, Navratna and Miniratna public sector undertaking (PSU) of Investment Centre
Central Government.
(v) Sales Department of an organization. Revenue Centre
Q 7. State the Method of Costing to be used in the following industries:
(i) Real Estate (ii) Motor repairing workshop (iii) Chemical Industry
(iv) Transport service (v) Assembly of bicycles (vi) Biscuits manufacturing
Industry (vii) Power supply Companies (viii) Car manufacturing Industry
(ix) Cement Industry (x) Printing Press
Method of costing used in different industries:
S. No. Industries Method of Costing

(i) Real Estate Contract Costing
(ii) Motor Repairing Workshop Job Costing
(iii) Chemical Industry Process Costing
(iv) Transport Service Service/Operating Costing
(v) Assembly of Bicycles Unit/ Single/Output/Multiple Costing
(vi) Biscuits Manufacturing Industry Batch Costing
(vii) Power Supply Companies Service/Operating Costing
(viii) Car Manufacturing Industry Multiple Costing
(ix) Cement Industry Unit/Single/Output Costing
(x) Printing Press Job Costing
Q 8. Identify the methods of costing from the following statements:
(i) Costs are directly charged to a group of products.
(ii) Nature of the product is complex and method cannot be ascertained.
(iii) Costs ascertained for a single product.
(iv) All costs are directly charged to a specific job.
(v) Costs are charged to operations and averaged over units produced.
Method of costing followed:
Situation Method of costing

(i) Costs are directly charged to a group of products. Batch costing
(ii) Nature of the product is complex and method Multiple costing
cannot be ascertained.
(iii) Cost is ascertained for a single product. Unit/ Single/Output costing
(iv) All costs are directly charged to a specific job Job costing
(v) Costs are charged to operations and averaged over Process costing
units produced.
Q 9. State the method of costing that would be most suitable for:
(i) Oil Refinery (ii) Interior Decoration (iii) Airlines Company (iv) Advertising (v) Car Assembly
S. No. Industry Method of Costing

(i) Oil Refinery Process Costing
(ii) Interior Decoration Job Costing
(iii) Airlines Company Operation/ Service Costing
(iv) Advertising Job Costing
(v) Car Assembly Multiple Costing
Q 10. Explain 'Job Costing' and 'Batch Costing'.
Job costing: In this method of costing, cost of each job is ascertained separately. It is suitable in all
cases where work is undertaken on receiving a customer’s order like a printing press, motor work shop,
etc. This method of costing is used for non- standard and non- repetitive products produced as per
customer specifications and against specific orders. Jobs are different from each other and
independent of each other. Each Job is unique.
Batch Costing: It is the extension of Job costing. Homogeneous products are produced in a continuous
production flow in lots. A batch may represent a number of small orders passed through the factory in
batch. Each batch here is treated as a unit of cost and thus separately costed. Here cost per unit is
determined by dividing the cost of the batch by number of units produced in the batch.
Q 11. Mention the Cost Unit of the following Industries: (i) Electricity (ii) Automobile (iii) Cement (iv)
Steel (v) Gas (vi) Brick Making (vii) Coal Mining (viii) Engineering (ix) Professional Services (x)
Hospital
S. No. Industry Cost Unit Basis

(i) Electricity Kilowatt-hour (kWh)
(ii) Automobile Number
(iii) Cement Ton/ per bag etc.
(iv) Steel Ton
(v) Gas Cubic feet
(vi) Brick making 1,000 bricks
(vii) Coal mining Tonne/ton
(viii) Engineering Contract, job
(ix) Professional services Chargeable hour, job, contract
(x) Hospital Patient day
Q 12. Mention the cost units (physical measurements) for the following Industry/product:
(i) Automobile (ii) Gas (iii) Brick works (iv) Power (v) Steel
(vi) Transport (by road) (vii) Chemical (viii) Oil (ix) Brewing (x) Cement
Industry or Product Cost Units

Automobile Number
Gas Cubic feet
Brick works 1,000 bricks
Power Kilo-watt hour (kWh)
Steel Tonne
Transport (by road) Passenger- kilometer or Tonne-kilometer
Chemical Litre, gallon, kilogram, tonne etc.
Oil Barrel, tonne, litre
Brewing Barrel
Cement Ton/ per bag etc.
Q 13. Differentiate between Cost Control and Cost Reduction.
Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction

Cost control aims at maintaining the costs in Cost reduction is concerned with reducing costs. It
accordance with the established standards. challenges all standards and endeavours to
improvise them continuously
Cost control seeks to attain lowest possible cost Cost reduction recognises no condition as
under existing conditions. permanent, since a change will result in lower cost.
In case of cost control, emphasis is on past and In case of cost reduction, it is on present and
present. future.
Cost control is a preventive function Cost reduction is a corrective function. It operates
even when an efficient cost control system exists
Cost control ends when targets are achieved. Cost reduction has no visible end and is a
continuous process.
Q 14. Briefly explain the essential features of a good Cost Accounting System.
The essential features, which a good cost accounting system should possess, are as follows:
(a) Informative and simple: Cost accounting system should be tailor-made, practical, simple and
capable of meeting the requirements of a business concern. The system of costing should not sacrifice
the utility by introducing inaccurate and unnecessary details.
(b) Accurate and authentic: The data to be used by the cost accounting system should be accurate and
authenticated; otherwise it may distort the output of the system and a wrong decision may be taken.
(c) Uniformity and consistency: There should be uniformity and consistency in classification,
treatment and reporting of cost data and related information. This is required for benchmarking and
comparability of the results of the system for both horizontal and vertical analysis.
(d) Integrated and inclusive: The cost accounting system should be integrated with other systems like
financial accounting, taxation, statistics and operational research etc. to have a complete overview and
clarity in results.
(e) Flexible and adaptive: The cost accounting system should be flexible enough to make necessary
amendment and modifications in the system to incorporate changes in technological, reporting,
regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output. For this, an active
role of management is required for the development of such a system that reflects a strong conviction
in using information for decision making.
Q 15. Define cost objects and give examples of any four cost objects.
Cost object is anything for which a separate measurement of cost is required. Cost object may be a
product, a service, a project, a customer, a brand category, an activity, a department or a programme
etc.
Examples of cost objects are:
Product Smart phone, Tablet computer, SUV Car, Book etc.

Service An airline flight from Delhi to Mumbai, Concurrent audit assignment, Utility bill
payment facility etc.
Project Metro Rail project, Road projects etc.
Activity Quality inspection of materials, Placing of orders etc.
Process Refinement of crudes in oil refineries, melting of billets or ingots in rolling mills etc.
Department Production department, Finance & Accounts, Safety etc.
Q 16. Briefly explain the ‘techniques of costing’.
Techniques Description
Uniform When a number of firms in an industry agree among themselves to follow the same
Costing system of costing in detail, adopting common terminology for various items and
processes they are said to follow a system of uniform costing. Advantages of such a
system are:
i. A comparison of the performance of each of the firms can be made with that of
another, or with the average performance in the industry.
ii. Under such a system, it is also possible to determine the cost of production of
goods which is true for the industry as a whole. It is found useful when tax-relief or
protection is sought from the Government.
Marginal It is defined as the ascertainment of marginal cost by differentiating between fixed
Costing and variable costs. It is used to ascertain effect of changes in volume or type of
output on profit.
Standard It is the name given to the technique whereby standard costs are pre-determined
Costing and and subsequently compared with the recorded actual costs. It is thus a technique
Variance of cost ascertainment and cost control. This technique may be used in conjunction
Analysis with any method of costing. However, it is especially suitable where the
manufacturing method involves production of standardised goods of repetitive
nature.
Historical It is the ascertainment of costs after they have been incurred. This type of costing
Costing has limited utility.
• Post Costing: It means ascertainment of cost after production is completed.
• Continuous costing: Cost is ascertained as soon as the job is completed or even
when the job is in progress.
Absorption It is the practice of charging all costs, both variable and fixed to operations,
Costing processes or products. This differs from marginal costing where fixed costs are
excluded.
Direct Direct costing is a specialized form of cost analysis that only uses variable costs to
costing make decisions. It does not consider fixed costs, which are assumed to be associated
with the time periods in which they are incurred.
CHAPTER - 2
MATERIAL COST
Q 17. Explain 'Just In Time' (JIT) approach of inventory management.
JIT is a system of inventory management with an approach to have a zero inventories in stores.
According to this approach material should only be purchased when it is actually required for
production.
JIT is based on two principles
(ii) the products should be delivered to customers at the time only when they want.
It is also known as ‘Demand pull’ or ‘Pull through’ system of production. In this system, production
process actually starts after the order for the products is received. Based on the demand, production
process starts and the requirement for raw materials is sent to the purchase department for purchase.
This can be understood with the help of the following diagram:
Q 18. Which system of inventory management is known as 'Demand pull' or 'Pull through' system of
production? Explain. Also, specify the two principles on which this system is based.
Just in Time (JIT) Inventory Management is also known as ‘Demand pull’ or ‘Pull through’ system of
production. In this system, production process actually starts after the order for the products is
received. Based on the demand, production process starts and the requirement for raw materials is
sent to the purchase department for purchase.
It is a system of inventory management with an approach to have a zero inventories in stores.

According to this approach material should only be purchased when it is actually required for
production.
JIT is based on two principles
(ii) the products should be delivered to customers at the time only when they want.
Q 19. Define Inventory Control and give its objectives.
List down the basis to be adopted for Inventory Control.
Inventory Control: The Chartered Institute of Management Accountants (CIMA) defines Inventory
Control as “The function of ensuring that sufficient goods are retained in stock to meet all
requirements without carrying unnecessarily large stocks.”
The objective of inventory control is to make a balance between sufficient stock and over-stock. The
stock maintained should be sufficient to meet the production requirements so that uninterrupted
production flow can be maintained. Insufficient stock not only pause the production but also cause a
loss of revenue and goodwill. On the other hand, Inventory requires some funds for purchase, storage,
maintenance of materials with a risk of obsolescence, pilferage etc. A trade-off between Stock-out and
Over-stocking is required. The management may employ various methods of Inventory control to have
a balance. Management may adopt the following basis for Inventory control:
Q 20. Write a short note on VED analysis of Inventory Control.
Vital, Essential and Desirable (VED): Under this system of inventory analysis, inventories are classified
on the basis of its criticality for the production function and final product. Generally, this classification
is done for spare parts which are used for production.
(i) Vital- Items are classified as vital when its unavailability can interrupt the production process and
cause a production loss. Items under this category are strictly controlled by setting re-order level.
(ii) Essential- Items under this category are essential but not vital. The unavailability may cause sub
standardisation and loss of efficiency in production process. Items under this category are reviewed
periodically and get the second priority.
(iii) Desirable- Items under this category are optional in nature; unavailability does not cause any
production or efficiency loss.
Q 21. Explain FIFO and LIFO method of store issue.
First-in First-out (FIFO) method: It is a method of pricing the issues of materials, in the order in which
they are purchased. In other words, the materials are issued in the order in which they arrive in the
store or the items longest in stock are issued first. Thus each issue of material only recovers the
purchase price which does not reflect the current market price. This method is considered suitable in
times of falling price because the material cost charged to production will be high while the
replacement cost of materials will be low.
Last-in-First-out (LIFO) method: It is a method of pricing the issues of materials. This method is based
on the assumption that the items of the last batch (lot) purchased are the first to be issued. Therefore,
under this method the prices of the last batch (lot) are used for pricing the issues, until it is exhausted,
and so on. If however, the quantity of issue is more than the quantity of the latest lot than earlier (lot)
and its price will also be taken into consideration. During inflationary period or period of rising prices,
the use of LIFO would help to ensure that the cost of production determined on the above basis is
approximately the current one.
Q 22. State how the following items are treated in arriving at the value of cost of material purchased:
(i) Detention Charges/Fines (ii) Demurrage (iii) Cost of Returnable containers (iv) Central Goods and
Service Tax (CGST) (v) Shortage due to abnormal reasons.
S.No. Items Treatment

(i) Detention charges/ Fine Detention charges/ fines imposed for noncompliance of
rule or law by any statutory authority. It is an abnormal cost
and not included with cost of purchase.
(ii) Demurrage Demurrage is a penalty imposed by the transporter for
delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase.
(iii) Cost of returnable containers Treatment of cost of returnable containers are as follows:
Returnable Containers: If the containers are returned and
their costs are refunded, then cost of containers should not
be considered in the cost of purchase.
If the amount of refund on returning the container is less
than the amount paid, then, only the short fall is added with
the cost of purchase.
(iv) Central Goods and Service Tax Central Goods and Service Tax (CGST) is paid on
(CGST) manufacture and supply of goods and collected from the
buyer. It is excluded from the cost of purchase if the input
credit is available for the same. Unless mentioned
specifically CGST is not added with the cost of purchase.
(v) Shortage due to abnormal Shortage arises due to abnormal reasons such as material
reasons mishandling, pilferage, or due to any avoidable reasons are
not absorbed by the good units. Losses due to abnormal
reasons are debited to costing profit and loss account.
Q 23. Write down the treatment of following items associated with purchase of materials. (i) Cash
discount (ii) IGST (iii) Demurrage (iv) Shortage (v) Basic Custom Duty
S. No. Items Treatment

(i) Cash Discount Cash discount is not deducted from the
purchase price. It is treated as interest and
finance charges. It is ignored
(ii) Integrated Goods and Service Tax (IGST) Integrated Goods and Service Tax (IGST) is paid
on interstate supply of goods and provision of
services and collected from the buyers. It is
excluded from the cost of purchase if credit
for the same is available. Unless mentioned
specifically it should not form part of cost of
purchase.
(iii) Demurrage Demurrage is a penalty imposed by the
transporter for delay in uploading or offloading
of materials. It is an abnormal cost and not
(iv) Shortage Shortage in materials are treated as follows:
Shortage due to normal reasons: Good units
absorb the cost of shortage due to normal
reasons. Losses due to breaking of bulk,
evaporation, or due to any unavoidable
conditions etc. are the reasons of normal loss.
Shortage due to abnormal reasons: Shortage
arises due to abnormal reasons such as
material mishandling, pilferage, or due to any
avoidable reasons are not absorbed by the
good units. Losses due to abnormal reasons
are debited to costing profit and loss account.
(v) Basic Custom Duty Basic Custom duty is paid on import of goods
from outside India. It is added with the
purchase cost.
Q 24. Explain obsolescence and circumstances under which materials become obsolete. State the
steps to be taken for its treatment.
Obsolescence: Obsolescence is defined as “the loss in the intrinsic value of an asset due to its
supersession”.
Materials may become obsolete under any of the following circumstances:
(i) where it is a spare part, or a component of a machinery used in manufacture and that machinery
becomes obsolete;
(ii) where it is used in the manufacture of a product which has become obsolete;
(iii) where the material itself is replaced by another material due to either improved quality or fall in
price.
Treatment: In all three cases, the value of the obsolete material held in stock is a total loss and
immediate steps should be taken to dispose it off at the best available price. The loss arising out of
obsolete materials on abnormal loss does not form part of the cost of manufacture.
Q 25. What is Bill of Material? Describe the uses of Bill of Material in following departments: (i)
Purchases Department (ii) Production Department (iii) Stores Department (iv) Cost/Accounting
Department
Bill of Material: It is a detailed list specifying the standard quantities and qualities of materials and
components required for producing a product or carrying out of any job.
Uses of Bill of Material in different department:
Purchase Production Stores Department Cost/Accounting

Department Department Department
Materials are Production is planned It is used as a It is used to estimate
procured according to the reference cost and profit. Any
(purchased) nature, volume of the document while purchase, issue and
on the basis materials required to issuing materials to usage are compared/
of be used. Accordingly, the requisitioning verified against this
specifications material requisition department. document.
mentioned in lists are prepared
it.
CHAPTER - 3
EMPLOYEE COST
Q 26. Discuss the steps involved in setting labour time standards.
The following are the steps involved in setting labour standards:
(a) Standardisation: Products to be produced are decided based on production plan and customer's
order.
(b) Labour specification: Types of labour and labour time is specified. Labour time specification is
based on past records and it takes into account normal wastage of time.
(c) Standardisation of methods: Selection of proper machines to use proper sequence and method of
operations.
(d) Manufacturing layout: A plan of operation for each product listing the operations to be performed
is prepared.
(e) Time and motion study: It is conducted for selecting the best way of completing the job or motions
to be performed by workers and the standard time which an average worker will take for each job. This
also takes into account the learning efficiency and learning effect.
(f) Training and trial: Workers are trained to do the work and time spent at the time of trial run is
noted down.
Q 27. Explain the treatment of Overtime Premium in following situations:
(i) SV & Co. wants to grab some special orders, and overtime is required to meet the same.
(ii) Dept. X has to work overtime to make up a shortfall in production due to some fault of
management in dept. Y.
(iii) S Ltd. has to work overtime regularly throughout the year as a policy due to the workers'
shortage.
(iv) Due to flood in Odisha, RS Ltd. has to work overtime to complete the job.
(v) A customer requested the company MN Ltd. to expedite the job because of his urgency of work.
Treatment of Overtime premium in different situations
Situation Treatment
(i) SV & Co. wants to grab some If overtime is required to cope with general production
special orders, and overtime is programmes or for meeting urgent orders, the overtime
required to meet the same. premium should be treated as overhead cost of the particular
department or cost centre which works overtime.
(ii) Dept. X has to work overtime If overtime is worked in a department due to the fault of another
to make up a shortfall in department, the overtime premium should be charged to the
production due to some fault of latter department (Y).
management in dept. Y.
(iii) S Ltd. has to work overtime The overtime premium is treated as a part of employee cost and
regularly throughout the year as job is charged at an effective average wage rate.
a policy due to the workers’
shortage.
(iv) Due to flood in Odisha, RS Overtime worked on account of abnormal conditions such as
Ltd. has to work overtime to flood, earthquake etc., should not be charged to cost, but to
complete the job. Costing Profit and Loss Account.
(v) A customer requested the Where overtime is worked at the request of the customer,
company MN Ltd. to expedite overtime premium is also charged to the job/ customer directly.
the job because of his urgency of
work.
Q 28. Rowan Premium Bonus system does not motivate a highly efficient worker as a less efficient
worker and a highly efficient worker can obtain same bonus under this system. Discuss with an
example.
Rowan Premium Plan: According to this system a standard time allowance is fixed for the performance
of a job and bonus is paid if time is saved.
Under Rowan System, the bonus is that proportion of the time wages as time saved bears to the
standard time.
Bonus = Time Saved /Time Allowed × Time taken × Rate per hour
Example explaining highly efficient worker and less efficient worker obtaining same bonus:
Time rate (per Hour) ₹ 60
Time allowed 8 hours.
Time taken by ‘X’ 6 hours.
Time taken by ‘Y’ 2 hours.
Bonus = Time Saved/Time Allowed × Time taken × Rate per hour
For ‘X' = 2 hours/8 hours× 6 hours × ₹ 60 = ₹ 90
For ‘Y’ = 6 hours/8 hours× 2 hours × ₹ 60 = ₹ 90
From the above example, it can be concluded that a highly efficient worker may obtain same bonus as
less efficient worker under this system.
Q 29. Discuss any four objectives of 'Time keeping' in relation to attendance and payroll procedures.
The objectives of time-keeping in relation to attendance and payroll procedures are as follows:
(i) For the preparation of payrolls. (ii) For calculating overtime. (iii) For ascertaining and controlling
employee cost. (iv) For ascertaining idle time. (v) For disciplinary purposes. (vi) For overhead
distribution
Q 30. How does the high employee turnover increase the cost of production? Explain.
High employee turnover increases the cost of production in the following ways:
(i) Even flow of production is disturbed; (ii) Efficiency of new workers is low; productivity of new but
experienced workers is low in the beginning; (iii) There is increased cost of training and induction; (iv)
New workers cause increased breakage of tools, wastage of materials, etc. (v) Cost of recruitment and
training increases.
CHAPTER - 4
OVERHEADS
Q 31. Explain Blanket Overhead Rate and Departmental Overhead Rate. How they are calculated?
State the conditions required for the application of Blanket Overhead Rate.
Blanket Overhead Rate: Blanket overhead rate refers to the computation of one single overhead rate
for the whole factory.
This overhead rate is computed as follows:
Blanket Rate = Total overheads for the factory/ Total number of units of base for the factory
Departmental Overhead Rate: It refers to the computation of one single overhead rate for a particular
production unit or department.
This overhead rate is determined by the following formula:
Departmental overhead Rate = Overheads of department or cost centre/ Corresponding base
Conditions required for the Application of Blanket Overhead:
A blanket rate should be applied in the following cases:
(1) Where only one major product is being produced.
(2) Where several products are produced, but
(a) All products pass through all departments; and
(b) All products are processed for the same length of time in each department.
Q 32. State the bases of apportionment of following overhead costs: (i) Air-conditioning (ii) Time
keeping (iii) Depreciation of plant and machinery (iv) Power/steam consumption (v) Electric power
(Machine operation)
Overhead Cost Bases of Apportionment

(i) Air- conditioning Floor area, or volume of department
(ii) Time keeping Number of workers
(iii) Depreciation of plant and Capital values
machinery
(iv) Power/steam consumption Technical estimates
(v) Electric power (machine Horse power of machines, or Number of machine hour,
operation) or value of machines or units consumed. Kilo-watt hours.
Q 33. Explain what is meant by Practical capacity and Normal capacity. How is normal capacity
determined?
Practical capacity: It is defined as actually utilised capacity of a plant. It is also known as operating
capacity. This capacity takes into account loss of time due to repairs, maintenance, minor breakdown,
idle time, set up time, normal delays, Sundays and holidays, stock taking etc. Generally, practical
capacity is taken between 80 to 90% of the rated capacity. It is also used as a base for determining
overhead rates. Practical capacity is also called net capacity or available capacity.
Normal capacity: Normal capacity is the volume of production or services achieved or achievable on
an average over a period under normal circumstances taking into account the reduction in capacity
resulting from planned maintenance.
Normal capacity is determined as under:

Installed capacity xxx
Adjustments for:
(i) Time lost due to scheduled preventive or planned maintenance xxx
(ii) Number of shifts or machine hours or man hours
(iii) Holidays, normal shut down days, normal idle time xxx
(iv) Normal time lost in batch change over xxx xxx
Normal Capacity xxx
Q 34. Suggest one basis of re-apportionment of service department overheads over production
departments in the following instances:
Cost of Service Department Basis

(i) Maintenance and Repair Shop
(ii) Hospital and Dispensary
(iii) Fire Protection
(iv) Stores Department
(v) Transport Department
(vi) Computer Section
(vii) Power House (electric power cost)
(viii) Inspection
(ix) Tool room
(x) Time-keeping
Cost of Service Department Basis

(i) Maintenance and Repair Shop Direct labour hours, Machine hours
(ii) Hospital and Dispensary No. of employees
(iii) Fire Protection Capital values
No. of requisitions, Weight or value of Materials
(iv) Stores Department
issued
Crane hours, Truck hours, Truck mileage, Truck
(v) Transport Department
tonnage
Computer hours, Specific allocation to
(vi) Computer Section
departments
Horse power, Kwh, Horse power × Machine hours,
(vii) Power House (electric power cost)
Kwh × Machine hours
(viii) Inspection Inspection hours
(ix) Tool room Direct labour hours, Machine hours
(x) Time-keeping No. of workers
CHAPTER - 5
Q 35. PP Limited is in the process of implementation of Activity Based Costing System in the
organisation. For this purpose, it has identified the following Business Functions in its organisation:
(i) Research and Development
(ii) Design of Products, Services and Procedures
(iii) Customer Service
(iv) Marketing
(v) Distribution. You are required to specify two cost drivers for each Business Function Identified
above.
Business functions Cost Driver

Research and Development • Number of research projects
• Personnel hours on a project
• Technical complexities of the project
Design of products, services and procedures • Number of products in design
• Number of parts per product
• Number of engineering hours
Customer Service • Number of service calls
• Number of products serviced
• Hours spent on servicing products
Marketing • Number of advertisements
• Number of sales personnel
• Sales revenue
Distribution • Number of units distributed
• Number of customers
• Weight of items distributed
(Any two cost drivers of each business function)
Q 36. Describe the various levels of activities under 'ABC' methodology.
Level of Activities Meaning

1. Unit level activities These are those activities for which the consumption of
resources can be identified with the number of units
produced.
2. Batch level activities The activities such as setting up of a machine or processing
a purchase order are performed each time a batch of
goods is produced. The cost of batch related activities
varies with number of batches made, but is common (or
fixed) for all units within the batch.
3. Product level activities These are the activities which are performed to support
different products in product line.
4. Facilities level activities These are the activities which cannot be directly attributed
to individual products. These activities are necessary to
sustain the manufacturing process and are common and
joint to all products manufactured.
Q 37. What is meant by Activity Based Management (ABM) and discuss how Activity Based
Management can be used in the business?
The term Activity based management (ABM) is used to describe the cost management application of
ABC. The use of ABC as a costing tool to manage costs at activity level is known as Activity Based
Cost Management (ABM). ABM is a discipline that focuses on the efficient and effective management
of activities as the route to continuously improving the value received by customers. ABM utilizes cost
information gathered through ABC.
Activity based management can be used in the following ways in business
(i) Cost Reduction: ABM helps the organisation to identify costs against activities and to find
opportunities to streamline or reduce the costs or eliminate the entire activity, especially if there is no
value added.
(ii) Business Process Re-engineering: Business process re-engineering involves examining business
processes and making substantial changes to how organisation currently operates. ABM is a powerful
tool for measuring business performance, determining the cost of business output and is used as a
means of identifying opportunities to improve process efficiency and effectiveness.
(iii) Benchmarking: Benchmarking is a process of comparing of ABC-derived activity costs of one

segment of company with those of other segments. It requires uniformity in the definition of activities
and measurement of their costs.
(iv) Performance Measurement: Many organisations are now focusing on activity performance as a
means of facing competitors and managing costs by monitoring the efficiency and effectiveness of
activities.
Area Measure
Quality of purchased component Zero defects
Quality of output % yield
Customer awareness Orders; number of complaints
CHAPTER - 6
COST SHEET
Q 38. Explain Direct Expenses and how these are measured and their treatment in cost accounting.
Direct Expense: Expenses other than direct material cost and direct employee cost, which are incurred
to manufacture a product or for provision of service and can be directly traced in an economically
feasible manner to a cost object. The following costs are examples for direct expenses:
(i) Royalty paid/ payable for production or provision of service;
(ii) Hire charges paid for hiring specific equipment;
(iii) Cost for product/ service specific design or drawing;
(iv) Cost of product/ service specific software;
(v) Other expenses which are directly related with the production of goods or provision of service.
The above list of expenses is not exhaustive; any other expenses which are directly attributable to the
production or service are also included as direct expenses.
Measurement of Direct Expenses
The direct expenses are measured at invoice or agreed price net of rebate or discount but includes
duties and taxes (for which input credit not available), commission and other directly attributable
costs.
In case of sub-contracting, where goods are get manufactured by job workers independent of the
principal entity, are measured at agreed price. Where the principal supplies some materials to the job
workers, the value of such materials and other incidental expenses are added with the job charges
paid to the job workers.
Treatment of Direct Expenses
Direct Expenses forms part the prime cost for the product or service to which it can be directly
traceable and attributable. In case of lump-sum payment or one time payment, the cost is amortised
over the estimated production volume or benefit derived. If the expenses incurred are of insignificant
amount i.e. not material, it can be treated as part of overheads.
CHAPTER - 7
Q 39. Explain integrated accounting system and state its advantages.
Integrated Accounting System: Integrated Accounts is the name given to a system of accounting,
whereby cost and financial accounts are kept in the same set of books. Obviously, then there will be
no separate sets of books for Costing and Financial records. Integrated accounts provide or meet out
fully the information requirement for Costing as well as for Financial Accounts. For Costing it provides
information useful for ascertaining the cost of each product, job, and process, operation of any other
identifiable activity and for carrying necessary analysis. Integrated accounts provide relevant
information which is necessary for preparing profit and loss account and the balance sheets as per the
requirement of law and also helps in exercising effective control over the liabilities and assets of its
business.
Advantages of Integrated Accounting System
The main advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation - The question of reconciling costing profit and financial profit does not
arise, as there is only one figure of profit.
(ii) Less efforts - Due to use of one set of books, there is a significant saving in efforts made.
(iii) Less time consuming - No delay is caused in obtaining information as it is provided from books of
original entry.
(iv) Economical process - It is economical also as it is based on the concept of “Centralisation of

Accounting function”.
Q 40. Explain what are the pre-requisites of integrated accounting.
The essential pre-requisites for integrated accounts include the following steps:
• The management’s decision about the extent of integration of the two sets of books. Some concerns
find it useful to integrate up to the stage of prime cost or factory cost while other prefer full integration
of the entire accounting records.
• A suitable coding system must be made available so as to serve the accounting purposes of financial
and cost accounts.
• An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other
adjustment necessary for preparation of interim accounts.
• Perfect coordination should exist between the staff responsible for the financial and cost aspects of
the accounts and an efficient processing of accounting documents should be ensured.
• Under this system there is no need for a separate cost ledger. Of course, there will be a number of
subsidiary ledgers; in addition to the useful Customers’ Ledger and the Bought Ledger, there will be:
(a) Stores Ledger; (b) Stock Ledger and (c) Job Ledger.
Q 41. Indicate, for following items, whether to be shown in the Cost Accounts or Financial Accounts:
(i) Preliminary expenses written off during the year
(ii) Interest received on bank deposits
(iii) Dividend, interest received on investments
(iv) Salary for the proprietor at notional figure though not incurred
(v) Charges in lieu of rent where premises are owned
(vi) Rent receivables
(vii) Loss on sale of Fixed Assets
(viii) Interest on capital at notional figure though not incurred
(ix) Goodwill written off
(x) Notional Depreciation on the assets fully depreciated for which book value is Nil.
S. No. Items Accounts

(i) Preliminary expenses written off during the year Financial Accounts
(ii) Interest received on bank deposits Financial Accounts
(iii) Dividend, interest received on investments Financial Accounts
(iv) Salary for the proprietor at notional figure though not Cost Accounts
incurred
(v) Charges in lieu of rent where premises are owned Cost Accounts
(vi) Rent receivables Financial Accounts
(vii) Loss on the sales of Fixed Assets Financial Accounts
(viii) Interest on capital at notional figure though not incurred Cost Accounts
(ix) Goodwill written off Financial Accounts
(x) Notional Depreciation on the assets fully depreciated for Cost Accounts
which book value is nil
CHAPTER – 8
UNIT AND BATCH COSTING
Q 42. Distinguish between Job costing and Batch Costing.
S. No. Job Costing Batch Costing
1 Method of costing used for non-standard and Homogeneous products produced in a
non-repetitive products produced as per continuous production flow in lots.
customer specifications and against specific
orders.
2 Cost determined for each Job Cost determined in aggregate for the
entire Batch and then arrived at on per
unit basis.
3 Jobs are different from each other and Products produced in a batch are
independent of each other. Each Job is unique. homogeneous and lack of individuality.
CHAPTER - 9
JOB COSTING AND CONTRACT COSTING
Q 43. Distinguish between Job costing and Process Costing.
Job Costing Process Costing

(i) A Job is carried out or a product is The process of producing the product has a
produced by specific orders. continuous flow and the product produced is
homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e., for
production of a given accounting period for each
process or department.
(iii) Each job is separate and Products lose their individual identity as they are
independent of other jobs. manufactured in a continuous flow.
(iv) Each job or order has a number and The unit cost of process is an average cost for the
costs are collected against the same job period.
number.
(v) Costs are computed when a job is Costs are calculated at the end of the cost period.
completed. The cost of a job may be The unit cost of a process may be computed by
determined by adding all costs against dividing the total cost for the period by the output
the job. of the process during that period.
(vi) As production is not continuous Process of production is usually standardized and
and each job may be different, so more is therefore, quite stable. Hence control here is
managerial attention is required for comparatively easier.
effective control.
CHAPTER - 10
PROCESS & OPERATION COSTING
Q 44. How will you treat normal loss, abnormal loss and abnormal gain in process costing? Explain.
Normal Loss: It is also known as normal wastage. It is defined as the loss of material which is inherent
in the nature of work. Such a loss can be reasonably anticipated from the nature of the material, nature
of operation, the experience and technical data. It is unavoidable because of nature of the material or
the process. It also includes units withdrawn from the process for test or sampling.
Treatment in Cost Accounts: The cost of normal process loss in practice is absorbed by good units
produced under the process. The amount realised by the sale of normal process loss units should be
credited to the process account.
Abnormal Loss: It is also known as abnormal wastage. It is defined as the loss in excess of the pre-
determined loss (Normal process loss). This type of loss may occur due to the carelessness of workers,
a bad plant design or operation, sabotage etc. Such a loss cannot obviously be estimated in advance.
But it can be kept under control by taking suitable measures.
Treatment in Cost Accounts: The cost of an abnormal process loss unit is equal to the cost of a good
unit. The total cost of abnormal process loss is credited to the process account from which it arises.
Cost of abnormal process loss is not treated as a part of the cost of the product. In fact, the total cost
of abnormal process loss is debited to costing profit and loss account.
Sometimes, loss under a process is less than the anticipated normal figure. In other words, the actual
production exceeds the expected figures. Under such a situation the difference between actual and
expected loss or actual and expected production is known as abnormal gain or yield. So, abnormal gain
may be defined as an unexpected gain in production under the normal conditions. This arises due to
over- estimation of process loss, improvements in work efficiency of workers, use od better technology
in production etc.
Treatment in Cost Accounts: The process account under which abnormal gain arises is debited with
the abnormal gain and credited to abnormal gain account which will be closed by transferring to the
Costing Profit and Loss account. The cost of abnormal gain is computed on the basis of normal
production.
CHAPTER - 11
JOINT PRODUCTS & BY PRODUCTS
Q 45. Narrate the terms ‘Joint Products’ and ‘By-Products’ with an example of each term.
Joint Products - Joint products represent “two or more products separated in the course of the same
processing operation usually requiring further processing, each product being in such proportion that
no single product can be designated as a major product”.
In other words, two or more products of equal importance, produced, simultaneously from the same
process, with each having a significant relative sale value are known as joint products.
For example, in the oil industry, gasoline, fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene
are all produced from crude petroleum. These are known as joint products.
By-Products - These are defined as “products recovered from material discarded in a main process, or
from the production of some major products, where the material value is to be considered at the time
of severance from the main product.” Thus, by - products emerge as a result of processing operation
of another product or they are produced from the scrap or waste of materials of a process. In short, a
by-product is a secondary or subsidiary product which emanates as a result of manufacture of the
main product.
The point at which they are separated from the main product or products is known as split-off point.
The expenses of processing are joint till the split –off point.
Examples of by-products are molasses in the manufacture of sugar, tar, ammonia and benzole obtained
on carbonisation of coal and glycerine obtained in the manufacture of soap.
Q 46. How are By-products treated in Costing?
Treatment of by-product cost in Cost Accounting:
By-product cost can be dealt in cost accounting in the following ways:
(a) When they are of small total value: When the by-products are of small total value, the amount
realised from their sale may be dealt in any one the following two ways:
1. The sales value of the by-products may be credited to the Costing Profit and Loss Account and no
credit be given in the Cost Accounts. The credit to the Costing Profit and Loss Account here is treated
either as miscellaneous income or as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from the total costs. The sale
proceeds in fact should be deducted either from the production cost or from the cost of sales.
(b) When the by-products are of considerable total value: Where by-products are of considerable
total value, they may be regarded as joint products rather than as by-products. To determine exact
cost of by-products the costs incurred upto the point of separation, should be apportioned over by-
products and joint products by using a logical basis.
(c) Where they require further processing: In this case, the net realisable value of the by-product at
the split-off point may be arrived at by subtracting the further processing cost from the realisable value
of by-products.
CHAPTER - 12
SERVICE COSTING
Q 47. Describe Composite Cost unit as used in Service Costing and discuss the ways of computing it.
Composite Cost Unit: Sometime two measurement units are combined together to know the cost of
service or operation. These are called composite cost units. For example, a public transportation
undertaking would measure the operating cost per passenger per kilometre.
Examples of Composite units are Ton- km., Quintal- km, Passenger-km., Patient-day etc.
Composite unit may be computed in two ways:
(i) Absolute (Weighted Average) basis.
(ii) Commercial (Simple Average) basis.
In both bases of computation of service cost unit, weightage is also given to qualitative factors rather
quantitative (which are directly related with variable cost elements) factors alone.
(i) Weighted Average or Absolute basis – It is summation of the products of qualitative and
quantitative factors. For example, to calculate absolute Ton-Km for a goods transport is calculated as
follows.:
∑ (Weight Carried x Distance)1 + (Weight Carried x Distance)2 + …… + (Weight Carried x Distance)n
Similarly, in case of Cinema theatres, price for various classes of seats are fixed differently. For
example–
First class seat may be provided with higher quality service and hence charged at a higher rate,
whereas Second Class seat may be priced less. In this case, appropriate weight to be given effect for
First Class seat and Second Class seat – to ensure proper cost per composite unit.
(ii) Simple Average or Commercial basis – It is the product of average qualitative and total quantitative
factors. For example, in case of goods transport, Commercial Ton-Km is arrived at by multiplying total
distance km., by average load quantity.
∑ (Distance1 + Distance2 + …………. + Distancen) x [(W1 + W2 + ….. + Wn)/n]
In both the example, variable cost is dependent of distance and is a quantitative factor. Since, the
weight carried does not affect the variable cost hence and is a qualitative factor.
Q 48. What do you understand by Build-Operate-Transfer (BOT) approach in Service Costing? How is
the Toll rate computed?
Build-Operate-Transfer (BOT) Approach: In recent years a growing trend emerged among

Governments in many countries to solicit investments for public projects from the private sector under
BOT scheme. BOT is an option for the Government to outsource public projects to the private sector.
With BOT, the private sector designs, finances, constructs and operate the facility and eventually, after
specified concession period, the ownership is transferred to the Government. Therefore, BOT can be
seen as a developing technique for infrastructure projects by making them amenable to private sector
participation.
Toll Rate: In general, the toll rate should have a direct relation with the benefits that the road users
would gain from its improvements. The benefits to road users are likely to be in terms of fuel savings,
improvement in travel time and good riding quality.
To compute the toll rate, following formula may be used
= (Total Cost + Profit)/ Number of Vehicles
Or, to compute the toll rate following formula with rounding off to nearest multiple of five has been
adopted: User fee = Total distance x Toll rate per km.
CHAPTER – 13
STANDARD COSTING
Q 49. Discuss briefly some of the criticism which may be levelled against the Standard Costing
System.
(i) Variation in price: One of the chief problem faced in the operation of the standard costing system
is the precise estimation of likely prices or rate to be paid. The variability of prices is so great that even
actual prices are not necessarily adequately representative of cost. But the use of sophisticated
forecasting techniques should be able to cover the price fluctuation to some extent. Besides this, the
system provides for isolating uncontrollable variances arising from variations to be dealt with
separately.
(ii) Varying levels of output: If the standard level of output set for pre-determination of standard costs
is not achieved, the standard costs are said to be not realised. However, the statement that the capacity
utilisation cannot be precisely estimated for absorption of overheads may be true only in some
industries of jobbing type. In vast majority of industries, use of forecasting techniques, market
research, etc., help to estimate the output with reasonable accuracy and thus the variation is unlikely
to be very large. Prime cost will not be affected by such variation and, moreover, variance analysis
helps to measure the effects of idle time.
(iii) Changing standard of technology: In case of industries that have frequent technological changes
affecting the conditions of production, standard costing may not be suitable. This criticism does not
affect the system of standard costing. Cost reduction and cost control is a cardinal feature of standard
costing because standards once set do not always remain stable. They have to be revised.
(iv) Attitude of technical people: Technical people are accustomed to think of standards as physical
standards and, therefore, they will be misled by standard costs. Since technical people can be educated
to adopt themselves to the system through orientation courses, it is not an insurmountable difficulty.
(v) Mix of products: Standard costing presupposes a pre-determined combination of products both in
variety and quantity. The mixture of materials used to manufacture the products may vary in the long
run but since standard costs are set normally for a short period, such changes can be taken care of by
revision of standards.
(vi) Level of Performance: Standards may be either too strict or too liberal because they may be based
on (a) theoretical maximum efficiency, (b) attainable good performance or (c) average past
performance. To overcome this difficulty, the management should give thought to the selection of a
suitable type of standard. The type of standard most effective in the control of costs is one which
represents an attainable level of good performance.
(vii) Standard costs cannot possibly reflect the true value in exchange: If previous historical costs are
amended roughly to arrive at estimates for ad hoc purposes, they are not standard costs in the strict
sense of the term and hence they cannot also reflect true value in exchange. In arriving at standard
costs, however, the economic and technical factors, internal and external, are brought together and
analysed to arrive at quantities and prices which reflect optimum operations. The resulting costs,
therefore, become realistic measures of the sacrifices involved.
(viii) Fixation of standards may be costly: It may require high order of skill and competency. Small
concerns, therefore, feel difficulty in the operation of such system.
CHAPTER – 14
MARGINAL COSTING
Q 50. Differentiate between "Marginal and Absorption Costing".
Difference between Marginal costing and Absorption costing
S. Marginal Costing Absorption Costing

No.
1. Only variable costs are considered for Both fixed and variable costs are considered for
product costing and inventory valuation. product costing and inventory valuation.
2. Fixed costs are regarded as period costs. Fixed costs are charged to the cost of production.
The Profitability of different products is Each product bears a reasonable share of fixed
judged by their P/V ratio. cost and thus the profitability of a product is
influenced by the apportionment of fixed costs.
3. Cost data presented highlight the total Cost data are presented in conventional pattern.
contribution of each product. Net profit of each product is determined after
subtracting fixed cost along with their variable
costs.
4. The difference in the magnitude of The difference in the magnitude of opening stock
opening stock and closing stock does not and closing stock affects the unit cost of
affect the unit cost of production. production due to the impact of related fixed cost.
5. In case of marginal costing the cost per In case of absorption costing the cost per unit
unit remains the same, irrespective of reduces, as the production increases as it is fixed
the production as it is valued at variable cost which reduces, whereas, the variable cost
cost remains the same per unit.
Q 51. What are the limitations of Marginal Costing?
Limitations of Marginal Costing
(i) Difficulty in classifying fixed and variable elements: It is difficult to classify exactly the expenses
into fixed and variable category. Most of the expenses are neither totally variable nor wholly fixed. For
example, various amenities provided to workers may have no relation either to volume of production
or time factor.
(ii) Dependence on key factors: Contribution of a product itself is not a guide for optimum profitability
unless it is linked with the key factor.
(iii) Scope for Low Profitability: Sales staff may mistake marginal cost for total cost and sell at a price;
which will result in loss or low profits. Hence, sales staff should be cautioned while giving marginal
cost.
(iv) Faulty valuation: Overheads of fixed nature cannot altogether be excluded particularly in large
contracts, while valuing the work-in- progress. In order to show the correct position fixed overheads
have to be included in work-in-progress.
(v) Unpredictable nature of Cost: Some of the assumptions regarding the behaviour of various costs
are not necessarily true in a realistic situation. For example, the assumption that fixed cost will remain
static throughout is not correct. Fixed cost may change from one period to another. For example,
salaries bill may go up because of annual increments or due to change in pay rate etc. The variable
costs do not remain constant per unit of output. There may be changes in the prices of raw materials,
wage rates etc. after a certain level of output has been reached due to shortage of material, shortage
of skilled labour, concessions of bulk purchases etc.
(vi) Marginal costing ignores time factor and investment: The marginal cost of two jobs may be the
same but the time taken for their completion and the cost of machines used may differ. The true cost
of a job which takes longer time and uses costlier machine would be higher. This fact is not disclosed
by marginal costing.
(vii) Understating of W-I-P: Under marginal costing stocks and work in progress are understated.
Q 52. What is Margin of Safety? What does a large Margin of Safety indicates? How can you calculate
Margin of Safety?
Margin of Safety: The margin of safety can be defined as the difference between the expected level of
sale and the breakeven sales.
The larger the margin of safety, the higher is the chances of making profits.
The Margin of Safety can be calculated by identifying the difference between the projected sales and
breakeven sales in units multiplied by the contribution per unit. This is possible because, at the
breakeven point all the fixed costs are recovered and any further contribution goes into the making of
profits.
Margin of Safety = (Projected sales – Breakeven sales) in units x contribution per unit
It also can be calculated as:
Margin of Safety = Profit / P/V Ratio
CHAPTER - 15
BUDGET & BUDGETARY CONTROL
Q 53. Define Budget Manual. What are the salient features of Budget Manual?
Budget Manual: The budget manual is a booklet specifying the objectives of an organisation in relation
to its strategy. The budget is made to decide how much an organisation would earn and spend and in
what manner. In the budget, the organisation sets its priorities too. Effective budgetary planning relies
on the provision of adequate information to the individuals involved in the planning process. Many of
these information needs are contained in the budget manual. A budget manual is a collection of
documents that contains key information for those involved in the planning process. CIMA London
defines budget manual as, 'A document which sets out the responsibilities of the persons engaged in,
the routines of, and the forms and records required for, budgetary control'.
Contents of a budget manual: Typical budget manual may include the following:
(i) A statement regarding the objectives of the organisation and how they can be achieved through
budgetary control;
(ii) A statement about the functions and responsibilities of each executive, both regarding preparation
and execution of budgets;
(iii) Procedures to be followed for obtaining the necessary approval of budgets. The authority of
granting approval should be stated in explicit terms. Whether, one two or more signatures are required
on each document should be clearly stated;
(iv) A form of organisation chart to show who are responsible for the preparation of each functional
budget and the way in which the budgets are interrelated.
(v) A timetable for the preparation of each budget.
(vi) The manner of scrutiny and the personnel to carry it out;
(vii) Reports, statements, forms and other record to be maintained.
(viii) The accounts classification to be employed. It is necessary that the framework within which the
costs, revenue and other financial accounts are classified must be identical both in the accounts and
budget department.
(ix) The reporting of the remedial action.
(x) The manner in which budgets, after acceptance and issuance, are to be revised or amended, these
are included in budgets and on which action can be taken only with the approval of top management
(xi) This will prevent the formation of a ‘bottleneck’ with the late preparation of one budget holding
up the preparation of all others.
(xii) Copies of all forms to be completed by those responsible for preparing budgets, with explanations
concerning their completion.
(xiii) A list of the organization’s account codes, with full explanations of how to use them.
(xiv) Information concerning key assumptions to be made by managers in their budgets, for example
the rate of inflation, key exchange rates, etc. (Any four points)
Q 54. Why is 'Zero Base Budgeting' (ZBB) considered superior to 'Traditional Budgeting'? Explain.
Zero based budgeting is superior to traditional budgeting: Zero based budgeting is superior to
traditional budgeting in the following manner:
• It provides a systematic approach for evaluation of different activities.
• It ensures that the function undertaken are critical for the achievement of the objectives.
• It provides an opportunity for management to allocate resources to various activities after a thorough
– cost benefit analysis.
• It helps in the identification of wasteful expenditure and then their elimination. If facilitates the close
linkage of departmental budgets with corporate objectives.
• It helps in the introduction of a system of Management by Objectives
Q 55. Define Zero Base Budgeting and mention its various stages.
Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the
limitations of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is defined as ‘a
method of budgeting which requires each cost element to be specifically justified, although the
activities to which the budget relates are being undertaken for the first time, without approval, the
budget allowance is zero’.
ZBB is an activity based budgeting system where budgets are prepared for each activities rather than
functional department. Justification in the form of cost benefits for the activity is required to be given.
The activities are then evaluated and prioritized by the management on the basis of factors like
synchronisation with organisational objectives, availability of funds, regulatory requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities like
Government department, local bodies, not for profit organisations, where these entities need to justify
the benefits of expenditures on social programmes like mid-day meal, installation of street lights,
provision of drinking water etc.
ZBB involves the following stages:
(i) Identification and description of Decision packages
(ii) Evaluation of Decision packages
(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources
Q 56. What are the important points an organization should consider if it wants to adopt
Performance Budgeting?
For an enterprise that wants to adopt Performance Budgeting, it is thus imperative that:
• the objectives of the enterprise are spelt out in concrete terms.
• the objectives are then translated into specific functions, programmes, activities and tasks for
different levels of management within the realities of fiscal constraints.
• realistic and acceptable norms, yardsticks or standards and performance indicators should be
evolved and expressed in quantifiable physical units.
• a style of management based upon decentralised responsibility structure should be adopted, and
• an accounting and reporting system should be developed to facilities monitoring, analysis and review
of actual performance in relation to budgets.
Q 57. Explain 'Activity Based Budgeting'.
Activity Based Budgeting (ABB)
• Activity based budgeting analyse the resource input or cost for each activity.
• It provides a framework for estimating the amount of resources required in accordance with the
budgeted level of activity.
• Actual results can be compared with budgeted results to highlight both in financial and non-financial
terms those activities with major discrepancies from budget for potential reduction in supply of
resources.
• It is a planning and control system which seeks to support the objectives of continuous improvement.
• It means planning and controlling the expected activities of the organization to derive a cost-effective
budget that meet forecast workload and agreed strategic goals.
• ABB is the reversing of the ABC process to produce financial plans and budgets.
Q 58. What are the cases when a flexible budget is found suitable?
Flexible budgeting may be resorted to under following situations:
(i) In the case of new business venture due to its typical nature it may be difficult to forecast the
demand of a product accurately.
(ii) Where the business is dependent upon the mercy of nature e.g., a person dealing in wool trade
may have enough market if temperature goes below the freezing point.
(iii) In the case of labour-intensive industry where the production of the concern is dependent upon
the availability of labour.
Suitability for flexible budget:
1. Seasonal fluctuations in sales and/or production, for example in soft drinks industry;
2. a company which keeps on introducing new products or makes changes in the design of its products
frequently;
3. industries engaged in make-to-order business like ship building;
4. an industry which is influenced by changes in fashion; and
5. General changes in sales.
Q 59. What is ‘Budgetary Control System’ and discuss the components of the same.
Budgetary Control System: It is the system of management control and accounting in which all the
operations are forecasted and planned in advance to the extent possible and the actual results
compared with the forecasted and planned results.
Components of Budgetary Control System: The policy of a business for a defined period is represented
by the master budget, the detailed components of which are given in a number of individual budgets
called functional budgets. These functional budgets are broadly grouped under the following heads:
1. Physical budgets: Those budgets which contain information in quantitative terms such as the
physical units of sales, production etc. This may include quantity of sales, quantity of production,
inventories, and manpower budgets are physical budgets.
2. Cost budgets: Budgets which provides cost information in respect of manufacturing, administration,
selling and distribution, etc. for example, manufacturing costs, selling costs, administration cost, and
research and development cost budgets are cost budgets
3. Profit budgets: A budget which enables the ascertainment of profit. For example, sales budget,
profit and loss budget, etc.
4. Financial budgets: A budget which facilitates in ascertaining the financial position of a concern, for
example, cash budgets, capital expenditure budget, budgeted balance sheet etc.
Q 60. State the limitations of Budgetary Control System.
Points Description
1. Based on Estimates Budgets are based on a series of estimates, which are based on the
conditions prevalent or expected at the time budget is established. It
requires revision in plan if conditions change.
2. Time factor Budgets cannot be executed automatically. Some preliminary steps are
required to be accomplished before budgets are implemented. It
requires proper attention and time of management. Management
must not expect too much during the initial development period.
3. Co-operation Required Staff co-operation is usually not available during the initial budgetary
control exercise. In a decentralised organisation, each unit has its own
objective and these units enjoy some degree of discretion. In this type
of organisation structure, coordination among different units is
required. The success of the budgetary control depends upon willing
co-operation and teamwork.
4. Expensive The implementation of budget is somewhat expensive. For successful
implementation of the budgetary control, proper organisation
structure with responsibility is prerequisite. Budgeting process start
from the collection of information to for preparing the budget and
performance analysis. It consumes valuable resources (in terms of
qualified manpower, equipment, etc.) for this purpose; hence, it is an
expensive process.
5. Not a substitute for Budget is only a managerial tool and must be intelligently applied for
management management to get benefited. Budgets are not a substitute for good
management.
6. Rigid document Budgets are sometime considered as rigid documents. But in reality, an
organisation is exposed to various uncertain internal and external
factors. Budget should be flexible enough to incorporate ongoing
developments in the internal and external factors affecting the very
purpose of the budget.

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COST DAY BEFORE EXAM

a) I, CA Navneet Mundhra, present to you this summary module for Costing

b) The module contains summary of all the chapters.

d) The module also covers the important theoretical aspects of chapters so

Navneet Mundhra, qualified as Chartered

CA NAVNEET MUNDHRA NAVIN CLASSES

CA NAVNEET MUNDHRA NAVIN CLASSES

Material Labour Expense

Direct Indirect Direct Indirect Direct Indirect

Prime cost Overhead

Production/ Office & Selling &

CA NAVNEET MUNDHRA NAVIN CLASSES

2. OLD STATEMENT OF COST SHEET:

Particulars Amount Amount

Opening stock of raw material xxx

CA NAVNEET MUNDHRA NAVIN CLASSES

Particulars Amount Amount

Direct labour or productive wages xxx

Direct expenses or chargeable expenses xxx

Gross factory cost of FG and WIP xxx

Less: Closing stock of WIP (xxx)

Primary packing xxx

Cost of production xxx

Cost of goods sold xxx

Selling and distribution overhead xxx

CA NAVNEET MUNDHRA NAVIN CLASSES

4. SPECIAL ITEMS TREATMENT:

C) SUBSIDY / GRANT / INCENTIVES: Any such type of amount received or

D) PENALTY, FINE, DAMAGES AND DEMURRAGE: These types of expenses

E) INTEREST AND OTHER FINANCIAL COST: If any interest or financial cost

CA NAVNEET MUNDHRA NAVIN CLASSES

5. ADVANTAGES OF COST SHEET:

B) It helps in cost comparison.

C) It facilitates the preparation of cost estimates required for submitting

D) It provides sufficient help in arriving at the figure of selling price.

E) It facilitates cost control by disclosing operational efficiency.

CA NAVNEET MUNDHRA NAVIN CLASSES

CA NAVNEET MUNDHRA NAVIN CLASSES

1. COST ON THE BASIS OF VARIABILITY:

Variable cost Fixed cost Semi variable cost

Break up of semi variable cost

V.C. per unit = Total FC =

Capacity wise Functional wise Master budget Period wise

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3. CAPACITY WISE BUDGET:

Fixed budget Flexible budget

budget designed to remain budget which, by recognizing the

4. FUNCTIONAL WISE BUDGET:

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Format of master budget-

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6. PERIOD WISE BUDGET:

Long-term budget Short-term budget Current budget

Long term budgets is a budget prepared covering a period of more than a

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Standard Capacity Employed Ratio: This ratio indicates the extent to

Level of Activity Ratio: This may be defined as the number of standard

Efficiency Ratio: This ratio may be defined as standard hours equivalent of

(ii) Activity Ratio = Standard Hours / Budgeted Hours

(iii) Calendar Ratio = Available working days / Budgeted working days