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UNIT – IICOST ACCOUNTING

n It was merely considered to be a techniquefor ascertainment and controlling of costsof products or services.



COST ACCOUNTING

Meaning of Cost: The term cost means “the amount of

expenditure (actual or notional) incurred on,or attributable to, a given thing”.



Objectives of Cost Accounting:

• Determining selling price of the products

• Determining and controlling the efficiency of the firm

• Facilitating preparation of financial andother Statements

• Providing basis for operating policy



Elements of Cost

There are three broad elements of costn Material

n Direct Material – Integral part of the productn

Indirect Material – Ancillary to the businessn Labour

n Direct labour n Indirect labour

n

Expensesn Direct Expensesn Indirect Expenses – Rent, Lighting, Insurance etc.

Overheads



Elements of cost

n Overheads includesn Indirect materialn Indirect labour andn Indirect expenses

Thus, all indirect costs are overheads.n Factory O/Hn Office and Administration O/Hn Selling & Distribution O/Hn



Components of Total CostPrime Cost = Direct Material + Direct labour + Direct Expenses(Direct Cost)

Factory Cost = Prime Cost + Works or Factory O/H(Works cost)

Office Cost = Works cost + Office & Admn. O/H(Total cost of Production)

Cost of Sales = Office cost + Selling & Distribution O/H(Total Cost)



Classification of Cost

n Fixed Cost – The cost which does not vary butremains constant within a given period. (Ex.Rent, Insurance, Salary, etc.)

n Variable Cost – The cost which varies directly inproportion to every increase or decrease in thevolume of output or production. (Ex. Wages,Power, Cost of Direct Material, etc.)

n Semi-Variable Cost – Partly Fixed and PartlyVariable. (Ex. Depreciation, Repairs, etc.)



Standard CostingVARIANCES



VARIANCES

Introduction:

The most significant contribution of stdcosting to the science and art of management is the presentation of ‘variances’.



VARIANCES

Meaning:

In cost accounting, variance meansdeviation of the actual cost from thestandard cost.



VARIANCES

Variances may be Favourable

(positive or credit) or Unfavourable ( or

negative or adverse or debit) depending

upon whether the actual resulting cost is

less or more than the std cost.



VARIANCESFavourable Variance: When the actual cost incurred is less

than the std cost, the deviation is known as

FV. It increase the profit.

Unfavourable Variance:

When the actual cost incurred is morethan the std cost, the deviation is known asUFV. It refers to the loss of the firm.



Uses of variances

n Comparison of actual with std cost which revealsthe efficiency or inefficiency of performance.

n It is a tool of cost control and cost reduction.

n It helps the management to apply the principle of mgt by exception.

n It help the mgt to maximize the profits

n

Future planning and programmes are based onthe variance analysis



Computation of Variancesn

1.Material Variances

2.Labour or wage Variances

3.Overhead variances (a) Variable (b) Fixed

4.Sales Variances

n




The following are the variance in the case of materials:(a) Direct Material Cost Variance (or) MCV = (SQ x SP) – (AQ x AP)(b) Material Price Variance (MPV) = AQ - (SR x AR)

(c) Direct Material Usage (Quantity) Variance (or) MUV = SR – (SQ –AQ)

contd..




(d) Direct Material Mix Variance (DMMV) (i) When actual weight of mix and std weight of mix are the same DMMV = SR (SQ - AQ) or SR (RSQ - AQ)

Std is revised due to the shortage of a particular type of material. The formula is: MMV = SR (RSQ – AQ)

Total weight of actual mix RSQ = x Std

quantity Total weight of standard mix




(d) Direct Material Mix Variance (DMMV)(ii) When actual weight of mix and std weight

of mix are differ from each other, the formula

to find new std mix is, Total weight of actual mix =

Total weight of standard mixRevised MUV = SR (SQ – RSQ)




(e) Material Yield Variance (MYV)

1 When actual mix and std mix are the same,the formula is,

MYV = SYR ( SY – AY ) Std cost of std mix Here SYR = Net Std Output Net Std Output = Gross output – Std loss




(e) Material Yield Variance (MYV)(ii) When the actual mix and std mix differ

from each other, the formula is, Std cost of revised std mix Std rate = Net Std Output MYV = Std Rate ( Actual Std Yield – RSY)



RELATIONSHIP

n MCV = MPV + MUV

n MUV = MMV+ MYV

n MCV = MPV + MMV + M Sub Usage Vn Material sub usage Variance = MUV - MMV



2. Labour or wage Variances

n It arises because of (i) difference in actual rates and std

rates of labour and (ii) the variation in actual time taken by

workers and the std time allotted to them for performing a job.



The various types of labour variances

n Labour Cost Variance

n Labour Rate Variance

n Labour Time or Efficiency Variancen Labour Idle Time Variance

n Labour Mix Variance or Gang Composition

Variancen



2. Labour or wage Variances( the word ‘time’ in place of ‘quantity’)

The following are the variance in the case of labour :(a) Labour Cost or Labour Wage Variance (or) LCV = (ST x SR) – (AT x AR)(b) Labour or Wage Rate Variance (MPV) = AT - (SR x AR)(c) Labour Time or Labour Efficiency Variance

= SR – (ST –AT)(d) Labour Idle Time Variance

2 L b V i




(d) Labour Idle Time Variance = Abnormal Idle Time x Std Hourly Rate(e) Labour Mix Variance or Gang Composition Variance (i) When the total hours i.e. time of the std

composition and actual composition of

workers are same, the formula is LMV = (Std Cost of Std Mix) – (Std Cost of Actual Mix)

2 L b V i




(e) Labour Mix Variance or Gang Composition Variance (LMV) (ii) When the total hours i.e. time of the std

composition and actual composition of workers differ, the formula is:

Total Time of Actual Mix

LMV = x Std cost of std mix - Std cost of

Total Time of Std Mix Actual Mix

2 Labour or wage Variances




(f) Labour Yield Variance (LYV)= Std Cost per unit ( Std production of Actual Mix –

Actual Production)



RELATIONSHIP

n LCV = L Rate V + L Efficiency V

n L Efficiency V = L Mix V+ Idle Time V

n

L Efficiency V = L Yield V + Idle Time Vn Efficiency V = L Mix V + Yield V + Idle Time

Variance



THANK YOU



BREAK EVEN ANALYSIS



BREAK EVEN ANALYSIS

§ Cost – Volume – Profit Analysis is oftenreferred to as “ Break Even Analysis”.

§ BEP is known as “ no profit, no loss”.§ The technique of BEA can be made easy

with the help of graph or mathematicalformula.

§

Graphical representation of BEP is knownas break even chart.



BEA

n The term BEA is used in two senses –narrow sense and broad sense.

In its broad sense, BEA refers to thestudy of relationship between costs, volumeand profit at different levels of sales (or)production.



BEA

In narrow sense, it refers to atechnique of determining that level of operations where total revenues equal totalexpenses, i.e., the point of no profit, noloss.



Significance of Break Even Chart atvarious levels of activity:

1. It will show the VC,FC and Total Costs.

2. Sales Unit or Sales Value can be known.

3. Profit or Loss can be known.4. MOS can be known.

5. Angle of incidence or the intersection of sales line with costs line can also beknown.

Thus, it is very useful for managerialdecision.



Assumptions of BEA

Ø All elements of cost can be segregated into fixed andvariable components.

Ø VC remains constant per unit and thus fluctuatesdirectly in proportion to change in the volume of output.

Ø FC remains constant at all volumes of output.Ø Selling price per unit remains constant at all levels of

output.

Ø Volume of production is only factor that influencescost.

Ø There will be no change in the general price-level.



Loss

ProfitBEP

Total VC

Total FC

Total Revenue

Total Cost

0 P

C

Cost/R

evenue

Volume of Production / Sales

x

y

Construction of BREAK EVEN CHART



Advantages of BEA and Chart

Ø TC,VC and FC can be determined.

Ø Break Even unit or sales value can bedetermined.

Ø CVP relationship can be studied.

Ø Inter-firm comparison is possible.

Ø It is useful for forecasting plans and profits.

ØTotal profits can be selected.

Ø It is helpful for cost control.



Limitations of BEA and Chart

BEC is constructed under some unrealisticassumptions:1.Exact and accurate classification of cost into fixed

and variable is not possible.2.Constant selling price is not true.3.Detailed information cannot be known from the

chart.

4.No importance is given to opening and closingstocks.



THANK YOU

unit3 costing

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