bal sr 2sem

8/9/2019 bal sr 2sem

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COST & MANAGEMENTCOST & MANAGEMENT

ACCOUNTING ACCOUNTINGProf. Ranjan Kumar BalProf. Ranjan Kumar Bal

PP


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COURSE OUTLINECOURSE OUTLINEConceptual Knowledge

Methods & TechniquesPlanning & Control Tools

Managerial Decision Making


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What is Common?What is Common?Lakshmi Niwas MittalKumar Mangalam BirlaIndra Nooyi

Osama Bin Laden


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ACC OUNTING IS THE L ANGU AGE OF BUSINESS.ACC OUNTING IS THE L ANGU AGE OF BUSINESS.

Serves as a means of c ommuni c at ionCommunicates / reports the events

Anthony & Reece:

Accounting is not exactly a f oreignla ngu a ge ; the problem of learning it is more

like that of an Ameri c a n learning to speakEnglish as it is spoken in Gre at Bri ta in .


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ACC OUNTING IS ANACC OUNTING IS ANINFORM ATION SYSTEM.INFORM ATION SYSTEM.

INPUT (Raw Data)

SYSTEM PROCESSES (Men &Equipment)OUT PUT (Reports &

Information)


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OUTPUTS OF ACC OUNTINGOUTPUTS OF ACC OUNTING

F inancial Statements

Tax ReturnsManagerial Data and ReportsSpecial Reports


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CUSTOMERS OF ACCOUNTINGCUSTOMERS OF ACCOUNTING

External Customers

Internal Customers

Cus tomer i s the king.


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USERS OF ACC OUNTING INFORM ATIONUSERS OF ACC OUNTING INFORM ATION

ManagementShareholders and InvestorsLenders

CreditorsEmployeesCustomers

Govt. and Regulatory AgenciesOthers: General Public , Media, Consumer Organizations, Researchers & Analysts


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WHY TO READ ?WHY TO READ ?Personal LifeProfessional Life

An Investment for F uturePlanning, Controlling & DecisionMakingBusiness Strategy


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EVOLUTION OF ACC OUNTINGEVOLUTION OF ACC OUNTING

Stewardship AccountingF

inancial AccountingCost AccountingManagement Accounting


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B ALAN C E SHEETB ALAN C E SHEETas at 31as at 31 stst March, 2005March, 2005

LIABILITIESShare Capital

Reserve and SurplusSecured LoansUnsecured LoansCurrent Liabilities andProvisions

ASSETSF ixed Assets

InvestmentsCurrent Assets AndLoans & AdvancesMiscellaneousExpendituresProfit & Loss A/C


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BALANCE SH EETBALANCE SH EET

as at 31as at 31stst

March, 2008March, 2008SOURCES OF F UNDSShareholders FundLoan Funds

APPLICATION OF FUNDSF ixed AssetsInvestments

Current Assets, Loans & AdvancesLe ss Current Liabilities & ProvisionMiscellaneous Expenditure


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PROFIT & LOSS A/CPROFIT & LOSS A/Cfor the year ending 31for the year ending 31 stst March 2008.March 2008.

I. IncomeII. ExpenditureIII. Profit before TaxIV. Provision for TaxationV. Profit after TaxVI. Ba la n c e b/ f f rom l a s t ye a r

VII. Profit available for appropriationApp ro p riations

VIII. Balance transferred to Balance Sheet


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CASH F LOW STATEMENTCASH F LOW STATEMENTf or the year ending 31f or the year ending 31 s t s t March,2008 March,2008

Cash flow from o p erating activities

Cash flow from investing activitiesCash flow from financing activitiesNet cash increase(decrease) in cash & CECash & CE at beginning of the periodCash & CE at the end of the period.


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F .A.F .A. -- LIMITATIONSLIMITATIONSF ocuses on reporting to ex tern a l p a r t iesBased on GAAPsNo emphasis on future ; Postmortem Analysis

No emphasis on influencing the be hav iour of the managers and employeesF ailed to meet the information needs of them a n a gers for planning, controlling, decisionmaking No De ta iled In f orm at ion


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COST & MANAGEMENT ACCOUNTINGCOST & MANAGEMENT ACCOUNTING(COMA)(COMA)

Provides information to managers for planning, controlling & decision making.

The controller : The Chief Management Accountant

The Controller is compared to a shipsnavigator , with the President (CEO)being the ships captain.


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ROLE OF THE ACCOUNTANTROLE OF THE ACCOUNTANTTO MANAGE INF ORMATION

An Information Technologist

SCORE KEEPING ATTENTION DIRECTINGPROBLEM SOLVING


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CUSTOMERCUSTOMER DRIVEN FOCUS INDRIVEN FOCUS INMANAGEMENT ACCOUNTING SYSTEMMANAGEMENT ACCOUNTING SYSTEM

VISION STATEMENT OF MANAGEMENT ACCOUNTINGGROUP AT JOHNSON & JOHNSON

Delight our c us tomers .Develop alternative me a suremen t sys tem .Keep it simple .Utilize 20% of time on Accounting & 80% on

a n a lysis.Be the bes t .


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ABILITIES & SKILLS for ABILITIES & SKILLS for Management AccountantsManagement Accountants A Survey A SurveyCommuni c at ion (or a l, wri tt en &

presen tat ion) skills Ability to work on ate a m Analytical /problem-sol v ing skillsSolid unders ta nding of accountingUnderstanding of how a business f un c t ions.Compu ter skills


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THE MANAGEMENT ACCOUNTANT ANDTHE MANAGEMENT ACCOUNTANT ANDSTRATEGIC DECISIONSSTRATEGIC DECISIONS

The management accountant hel p s to formulatestrategy by answering questions such as :W ho are our most important c us tomers ?H ow sensi t ive are their purchases to prices, quality,and service ?W ho are our most important suppliers ?W hat subs t itu te products exist in the market place,

and how do they differ from our product?Is the industry dem a nd growing or shrinking ?Is there o ver c a p a c ity ?


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IMPORTANCE OF COMAIMPORTANCE OF COMAH elps in achieving the m a in obje c t ive of theorganizationIdentifies unpro f ita ble activities.Improves efficiency/F acilitates c os t c on t rol .H elps in planning & preparation of budge ts .H elps in in ven tory c on t rol .F acilitates de c ision m a king .


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COMA Vs. FINANCIAL ACCOUNTINGCOMA Vs. FINANCIAL ACCOUNTINGSimil a ri t iesSimil a ri t ies

Both are br a n c h es of Accounting. Are concerned with systematic re c ordingand presentation of financial data.Both follow same prin c iples of Dr. and Cr.Both have the same sour c e of recordingtransactions.Both have the common go a l of a ssis t ingthe organization they serve.Both are complementary to each other .


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COMA Vs. FINANCIAL ACCOUNTING :COMA Vs. FINANCIAL ACCOUNTING :Diff eren c esDiff eren c es

PurposePeriodicity of reportingCustomers served

Audit Accounts preparedTax assessment

Actual and standard

Profit and LossMonetary and Non-monetaryRelative efficiencyC onstrained by G AA P


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COST AND MANAGEMENTCOST AND MANAGEMENTINFORMATION SYSTEMINFORMATION SYSTEM

COST ACCOUNTING INF ORMATION SY STEMOPERATIONAL CONTROL SY STEM

OBJECTIVES OF CMIS:To provide information for c os t ing out services,products and other objects of interest to management.

To provide inf orm

ation for decision making.To provide information for pl a nning a nd c on trol.


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COST MANAGEMENTCOST MANAGEMENTIdentifies, collects, measures,classifies, & reports informationUseful to managers in costing,planning, controlling, & decisionmaking.

Cost Accounting : Evolving into Cost Mgt.It is associated with Mgt. Accounting


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THE VALUE CHAIN OF THE BUSINESS FUNCTIONTHE VALUE CHAIN OF THE BUSINESS FUNCTION

R&DDesignProduction

MarketingDistributionCustomer service

Accounting helps managers:To administer each of the business functions.To coordinate the functions of value chain.


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ENH ANCING TH E VALUE OF COMA SY STEMENH ANCING TH E VALUE OF COMA SY STEM

Cus tomer F ocusVa lue C ha in & Supply Chain AnalysisKey Success F actors C ost & efficiency,

Quality, Time, Innovation, etc.(D istinct or Extinct)

Continuous Improvement (K a izen ) &Benchmarking


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W e are running harder W e are running harder just to stand still. just to stand still.

If you re not going f orward,If you re not going f orward,you are going backward. you are going backward.


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Q UESTIONSQ UESTIONSM anagement Accounting should not fit thestraightjacket of Financial Accounting. Explain.

A le a ding m a n a gemen t obser ver s tat ed, The most successful companies are those

that have an obsession for their customers. Is this statement pertinent to managementaccountants? Explain.


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CH

ANGECH

ANGEChange is the only constantin todays world.


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MANAGEMENT AND COMAMANAGEMENT AND COMA Provides adequate, timely and reliable in f orm at ion . H elps management in managing and controlling c os ts . Provides cost-benefit approach for resour c e allocation. H elps in de c ision m a king : P ricing

P rod uct-mix P ro f it-vol ume deci s ions

H elps: F ormulation & execution of budge ts & standards. H elps in making special studies and in ves t ig at ions .

W ith ou t proper c os t a nd m a n a gemen t a cc oun t ing,de c ision would be like ta king a jump in th e d a rk.


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COST TERMINOLOGYCOST TERMINOLOGYCost : Resources sacrificed or

Amount of expenditure incurredCosting : Process of cost accumulation &cost assignment

Cost Object : Anything for which a measurement of

cost is desired.Cost Accumulation : Collection of cost data in someorganized way.

Cost Assignment : Cost Tracing & Cost Allocation.

Cost Tracing : Assigning direct cost.Cost Allocation : Assigning indirect costs.Cost Driver : A variable that causally affects /

influences costs over a given time span


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COST CLASSIF ICATIONCOST CLASSIF ICATION

WHY ?

To Achieve a Purpose / ObjectiveC ontrol, Deci s ion Making

To F acilitate Communication /Reporting


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COST CLASSIF ICATIONCOST CLASSIF ICATION

Behaviour Elements

ControlDecision MakingF unctions

Nature


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ELEMENTS OF COSTELEMENTS OF COSTMATERIAL : Direct Vs. IndirectLABOUR : Direct Vs. IndirectEXPENSES : Direct Vs. Indirect

Dire c t c os t of a cost object : Traced in aneconomically feasible (cost effective) way.


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OVERH EADSOVERH EADSManufacturing or F actoryOffice & AdministrationSelling & Distribution


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OTH ER CONCEPTS OF COSTOTH ER CONCEPTS OF COSTF ixed, Variable & Semi-variableControllable & Uncontrollable

Relevant & IrrelevantIncremental & DecrementalShutdown & Sunk costTraceable & UntraceableJ oint cost & Conversion cost


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RELATIONSH IP OF COSTSRELATIONSH IP OF COSTS

Direct & VariableDirect &F ixedIndirect & VariableIndirect &F ixed


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METH ODS & TECH NIQ UESMETH ODS & TECH NIQ UESMETH ODS

- J ob Costing

- Process Costing

TECH NIQ UES

- Marginal Vs. Absorption Costing- Standard Vs. H istorical Costing


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COST ACCOUNTINGCOST ACCOUNTINGOBJ ECTIVES :

To determine product costs

To facilitate planning & controlTo supply information for decision

making


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IN GODW E TRUST,IN GODW E TRUST,EVERY BODY ELSE BRINGS DATAEVERY BODY ELSE BRINGS DATA

TO TH E TABLE.TO TH E TABLE.

INFOSIS INFOSIS


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COST ESTIMATIONCOST ESTIMATIONS tat emen t o f Cos t : F or each cost object

or cost centre.Diff eren t Columns : Total cost / Cost per

unit / Previous period costs / Budgetedcosts / Variable & F ixed costs ..

Sour c es o f Data : F .A. & C.A.Time Period : A month or week


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WHY A COST SH EET ?WHY A COST SH EET ?F ixing selling priceSubmitting quotations

Planning & control of costTo know relative efficiency of productsDecision making


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ST ATEMENT OF C OSTST ATEMENT OF C OST

C OST SHEETPrime Costs or Direct CostsDM + DL + DE = PC

Production or W orks or F actory CostsPC + P. O H . = F C

Office Costs or Cost of Production*F C + O. OH . = COP

Total Cost or Cost of SalesCOP + S. O H . = TC* Assu mption : O ff ice & Admn. Overhead s relate to prod uction.


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TREATMENT OF STOCKTREATMENT OF STOCKRaw MaterialW IPF inished Goods

T reatment o f the amo unt realized f rom thes ale o f s crap s / wa s te s ?


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ITEMS NOT AFF ECTING COST SH EEITEMS NOT AFF ECTING COST SH EE

Income TaxDividends to Share H oldersInterest on Loans

Capital LossDonationsCapital Expenditure

Discount on Shares & DebenturesUnderwriting CommissionW riting off Goodwill

Commission to MD


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ESTIMATED COST SH EETESTIMATED COST SH EETConsiders all probable changes in costPrep a r at ion :

- Prepare a Cost Sheet- Establish relationship- Estimate OH costs- Prepare Estimated Cost Sheet


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CASECASEThe following information are obtained from the

records of AB cycles for the month of August:Direct materials : Rs. 19, 80, 000Direct labour : 18, 00, 000F actory overheads : 5, 80, 000 Administrative overheads : 3, 90, 000

Outputs for the month : 2,000 cycles.W hat price the company should quote for an

order of 100 cycles?N ote: Factory overhead s are ab s orbed on the

ba s i s of direct labo ur and admini s trativeoverhead s on the ba s i s of work s co s t.


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TH E F OLLOW ING DATA RELATE TO A COMPANY:Expected sales : 50,000 units

Direct material cost : Rs. 2.50 per unitDirect labour cost : Rs. 2.00 per unitVariable Overhead : Rs.1.50 per unitF ixed cost : Rs. 1.50 per unit

Selling price : Rs.10 per unitThe firm expects to get a special export order for 10,000units at a price of Rs. 7.25 per unit.Ad v ise w h e th er th e expor t order s h ould be a cc ep ted or no t .The company has a capacity to produce 60,000 units.


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INFERENCES:

An organization has di ff eren t c os ts havingdifferent nature.

E xample: Fixed, Variable, Mixed C os t

These costs be hav e di ff eren t ly to changes inthe level of business activity.

Understanding this rel at ions h ip h elps in

planning, control and developing successfulbusiness strategies.


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Cost of a product / process can be ascertained by :1. Absorption costing

2. Marginal costingABSORPTION COSTING

Traditional or full cost method :Cost of a product = V. C. + F. C.

Variable costs are directly charged to the product.F ixed costs are apportioned on suitable basis.

DISADVANTAGES:It assumes that pri c es are simply a f un c t ion o f c os ts .It includes p a s t c os ts which may not be relevant to the

pricing decision at hand.

MARGINAL COSTING


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MARGINAL COSTING

- Direct Costing / Variable Costing- A Technique of Costing

Meaning : Ascertainment of marginal cost by differentiatingbetween F.C. and V.C. and of the effect on profit of changes in volume or type of output.

Cos t o f a produ c t : Only VCs are considered: Product cost

FCs : Charged against the revenue of the period.FC = Period costs

Val uation o f inventory at M. C .

C ontribution = C = S - V = F + PPrice = M. C . + C ontribution


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MARGINAL COST

Economists : The cost of producingone additional unit of output is the

marginal cost of production.I ncl ude an element o f F C

A ccountants : MC is equal to theincrease in total VC.


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SEGREGATION OF SEMI-VARIABLE COSTS

Levels of output compared to levels of expenditure Method :The variable element in semi- vc = Change in amt. of exp.

Change in activity/qnty.

High-low method (Range Method) : Similar to the previousmethod

Me th ods o f le a s t squ a resY = a + bx, whereY = Semi-VC, a = F C, b = VC, x = Production in units


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ABSORPTION COSTING Vs. MARGINAL COSTINGABSORPTION COSTING Vs. MARGINAL COSTING

1. Rec

o very of

F.OH. Abs. C osting : Both F . OH . and V. O H . are chargedto productionM ar. C osting : Only V. OH . is charged to production

and F .OH

. transferred to P. & L. A/C.2 . Va lu at ion o f Closing S to c k Abs. C osting : W IP at works cost and F . goods atcost of production.M ar. C osting : W IP and F . Goods -- Only VCs areconsidered.

3 . Pro f it Vs. Opening a nd Closing S to c k


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UTILITY OF MARGINAL COSTINGUTILITY OF MARGINAL COSTING

Helps in de termining th e volume of production.Helps in sele c t ing production lines .

Helps in de c iding w h e th er to shut down or contin ue.


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MARGINAL COSTING Vs. ABSORPTION COSTING

Th e f ollowing in f orm at ion rel at es to ABC Comp a ny f or th eye a r 2004 -05 :S a les 1 0 ,000 uni ts at Rs. 5 e a c h;Produ c t ion 1 5 ,000 uni ts at th e f ollowing c os ts:

Rs.Dire c t m at eri a ls 1 5 ,000Dire c t la bour 30 ,000Va ria ble expenses 6, 000

Fixed expenses 1 2 ,000

De termine ne t prof it .


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Inc ome S tat emen t f or th e ye a r 2004 -05

Marginal Absorptioncosting Rs. Costing Rs.

Sales 50,000 50,000

Cost of Production:Direct materials 15,000 15,000Direct labour 30,000 30,000Variable overhead 6,000 6,000F ixed overhead _ 12,000

51,000 63,000Less Closing Stock 17,000 21,000


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Cost of goods sold 34,000 42,000Contribution(50,000- 34,000) 16,000

4,000

Less F ixed Overhead 12,000

Net profit 8,000

Valuation of closing stock:Marginal costing = (5000/15,000) x 51,000

= Rs. 17,000 Absorption costing = (5000/15,000) x 63,000

= Rs. 21,000Note: Difference in profit is due to the difference in

stock valuation.


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CASEF rom the following cost, production and sales data of AB Motors Ltd., preparecomparative income statement for three years under

(i) Absorption costing method, and (ii) Marginal costing method.Indicate the unit cost for each year under each method. Also evaluate closingstocks. The company produces a single article for sale.

PARTICULARS Y EARS2003 2004 2005

Rs Rs. Rs.Selling price per unit 20 20 20Variable Mfg. Cost per unit 10 10 10Total fixed manufacturing cost 5000 5000 5000Opening stock - 500

Units produced 1000 1500 2000Units sold 1000 1000 1500Closing stock - 500 1000


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C = S V = F + P


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C = S - V = F + P

At BEP, P = 0; Thus, C = F

Or, Units at BEP x Contribution per unit = F

Or, BEP(units) = F / Contribution per unit

BEP (sales) = (F / Cont. per unit) x S.P. per unit = (F/ C) x S = F/c/s

= F / p/v ratio


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C ontribution Margin Ratio =P/V ratio =

Contribution / Sales = C / S= Change in Profit / Change in

Sales

MOS = Total Sales BEP

BREA K EVEN ANALYSIS FORBREA K EVEN ANALYSIS FOR


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BREA K EVEN ANALYSIS FORBREA K EVEN ANALYSIS FORMULTIPLE PRODUCTSMULTIPLE PRODUCTS

A multi products Company has a sales ratio of 2: 3: 5for models X, Y and Z respectively.Total fixed cost for the year are Rs. 2,00,000.The other information are as follows:

Model X ModelY Model ZSales Price Rs. 50 Rs. 25 Rs. 10Variable Costs Rs. 30 Rs. 15 Rs. 8

Contribution Margin Rs. 20 Rs. 10 Rs. 2WH AT IS ITS BEP ?


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BREA K EVEN ANALYSIS FOR MULTIPLE PRODUCTSBREA K EVEN ANALYSIS FOR MULTIPLE PRODUCTS A market basket a pp roach is used to compute the

breakeven point in units.The average market basket is based on the sales ratio andconsists of 10 units with a total contribution of Rs. 80 = { (2 x Rs. 20) + (3 x Rs.10) + (5 x Rs.2) }

BEP in market baskets = F C / Contribution of one baskets= Rs.200,000 / Rs.80 = 2,500 baskets.

To fill 2,500 baskets : The following units for each model.Model X : 5000 units ( 2,500 x 2)Model Y : 7500 units (2,500 x 3)Model Z : 12500 units (2,500 x 5)


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COSTCOST VOLUMEVOLUME PROFIT ANALYSISPROFIT ANALYSISExamines the behaviour of to ta l re venues, to ta l

c os ts and oper at ing in c ome : As changes occur in the

ou tpu t le vel , the selling pri c e, the va ria ble c os t per uni t , and / or the f ixed c os ts of a product .

One of the decision models One aspect of CVP Analysis : BEP Analysis A use f ul te c h nique f or planning profits

(budgeting), pricing decisions, sales-mixdecisions and production capacity decisions.


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Sensi t iv ity An a lysis & Un c er ta in tySensi t iv ity An a lysis & Un c er ta in tyA w hat -if te c h niqueAn a lyze th e sensi t iv ity o f th eir de c isions tochanges in underlying assumptions.Ma n a gers use th is te c h nique to ex a mine -H ow a result will change : I f th e origin a lpredi c ted d ata a re no t a c h ie ved or if a n underlying a ssump t ion c ha nges.


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CC--VV--P ANALY SISP ANALY SIS

INCOME TAXI.T. : No effect on BEP

S VC F C = Op. Income=Target Net Income / (1-T)Desired Sales in Units = ?

Desired Sales in Rupees = ?


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DODO--ALL SOF TW ARE ALL SOF TW ARESP = Rs.2,000 per unitVC = Rs.1,200 per unitF C = Rs.20,000

The organisation anticipates selling 40 units.

1. Deci s ion to Adverti s eProposed Advertisement = Rs.5,000Effect : Increase in Sales by 10%DECISION ?


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2. Deci s ion to red uce S. P .

Propos a l : Reduce SP to Rs.1,750

Eff

ec

t : Increase in Sales by 10 unitsPurchase from W hole-seller at Rs.1,150 per unit.

DECISION ?


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RELEVANT COSTS & REVENUESRELEVANT COSTS & REVENUESExpected future costsExpected future revenuesDiffer among the alternative courses of action

Insourcing or Outsourcing products or services. Accepting or Rejecting special order.

Shutdown or Continue.Qualitative & Quantitative Relevant Information

COST ALLOCATION / APPORTIONMENTCOST ALLOCATION / APPORTIONMENT


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COST ALLOCATION / APPORTIONMENTCOST ALLOCATION / APPORTIONMENT

An ines c a p a ble problem in every organization.H ow s ho u ld the co s t s of s ervicedepartment s be allocated among

prod uction department s ?H ow s ho u ld the man u f act uring overhead be allocated to individ ual prod uct s in a

mu lti-prod uct company ?The answers are seldom clearly

right or clearly wrong.


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PURPOSES OF COST ALLOCATIONPURPOSES OF COST ALLOCATIONTo pro v ide in f orm at ion f or e c onomi c de c ision :

P ricing deci s ions; Make or b uy deci s ions .To mo t ivat e m a n a gers a nd employees :

T o p us h high margin prod uct s or s ervice s

To jus t if y c os ts or c ompu te reimbursemen t :Reimb ur s ement f or a con su lting f irm that i s paid a

percentage o f the co s t s aving sTo me a sure in c omes a nd a sse ts f or ex tern a lrepor t ing : - val uation o f inventory

SURVEY OF COMPANY PRACTICESURVEY OF COMPANY PRACTICE


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SURVEY OF COMPANY PRACTICESURVEY OF COMPANY PRACTICEWh y a llo c at e c orpor at e a nd o th er suppor t c os tsWh y a llo c at e c orpor at e a nd o th er suppor t c os ts

to di v isions a nd dep a r tmen ts ?to di v isions a nd dep a r tmen ts ?U. S. A.To remind profit-center managers that indirect costs exist andthat profit-center earnings must be adequate to cover those costTo encourage use of central services.To stimulate profit-center managers to control service costsU.

K.To acknowledge that divisions would incur such costs if they

were not provided centrally.To make division managers aware that central costs exist.To stimulate divisional managers to put pressure on centralsupport managers to control costs.To stimulate divisional managers to economize in usage of central services.

C A C A CA CC A C A CA C


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C RITERI A FOR C OST ALLO CA TION DE C ISIONC RITERI A FOR C OST ALLO CA TION DE C ISION

CAUSE AND EFFECT:R ent- Floor area occupied

BENEFITS RECEIVED:FAIRNESS OR EQUITY:

G overnment contracting ABILITY TO BEAR:

C orporate executives salaries on thebasis of divisional operating income.


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COST POOL POSSIBLE ALLOCATION BASECOST POOL POSSIBLE ALLOCATION BASE

Corporate executive Sales ; Assets employed ; salaries : Operating incomeLegal Department : Estimated time or usage ;

Sales ; AssetsMarketing Department : Sales ; No. of sales

personnelPayroll Department : No. of employees ;

Payroll RupeesPersonnel Department : No. of employees ; Payroll Rupees


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ACCOUNTING AND CONTROL OF OH COSTSACCOUNTING AND CONTROL OF OH COSTS

ClassificationCodificationCollection

Allocation and apportionmentto cost centers

Absorption in costs of products,services etc.


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WHY TO CLASSIF Y ?WHY TO CLASSIF Y ?E ff e c t ive c os t c on t rol : Flexible B udget s Ab s orption o f co s t

De c ision M a king : C V P Analy s i s


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CODIFICATIONCODIFICATION

Numeral method : N umber s

Mnemonic Method :Symbol s / Letter s

Mixed


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COLLECTION OF MANUFACTURING OHsCOLLECTION OF MANUFACTURING OHs

Material Issue Analysis Sheet / Material AbstractW ages Analysis SheetCash BookSubsidiary Records

Plant Register : Depreciation Asset Register : DepreciationJ ournal : Outstanding expenses


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DISTRIBUTION OF OVERHEAD COSTSDISTRIBUTION OF OVERHEAD COSTSPrim a ry Dis tribu t ion:Departmentalization o f overhead toP rod uction and s ervice department s .Se c ond a ry Dis tribu t ion :Re-di s tribu tion o f s ervice department s co s t s among prod uction department s .

Re-apportionment Fin a l Dis tribu t ion : AbsorptionOverhead co s t s of prod uction department s aredi s tribu ted among the unit s prod uced.


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CH ALLENGEY OUR CURRENTCH ALLENGEY OUR CURRENT

PRACTICES AND ENH ANCEPRACTICES AND ENH ANCEY OUR H ORIZONY OUR H ORIZONII MBII MB


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ACTIVITY BASED COSTINGACTIVITY BASED COSTING

REF INING A COSTING SY STEM :WHY ?

Intense competition Advances in IT

A BC systemA BC system


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A BC system A BC systemC alculates the costs of individ ual

activitie s :

Assign costs to c os t obje c tssuch as products and servicesOn the basis of the a c t iv it ies

needed to produce eachproduct or service.


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A SIMPLE COSTING SYSTEM:A SIMPLE COSTING SYSTEM:

A single indirect cost rate toallocate cost to productsW

eak cause-and-effect relationshipCost Smoothing : Under-costing &Over-costing

Product cost cross-subsidization


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ABC : BENEF ITS ABC : BENEF ITSObtaining true product cost

Cost ManagementBetter decision making


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PROCESS : ABCPROCESS : ABCDirect cost tracing

Indirect-cost poolsCost-allocation bases

IMPLEMENTING ABC StIMPLEMENTING ABC St


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IMPLEMENTING ABC: StepsIMPLEMENTING ABC: StepsIdentify the Products : Cos

tObje

c tsIdentifyDire c t Cos t of the products

Select the Cost Allocation Ba ses : For allocating indirect co s t s to the prod uct sIdentify the Indire c t Cos ts : Ass ociated with eachco s t-allocation ba s e.Compute the Rat e per uni t of each cost- allocationbase : U s ed to allocate indirect co s t s to the prod uct sCompute the To ta l Indire c t Cos ts allocated to theproductsCompute the To ta l Cos ts of the products : Adding all direct and indirect co s t s a ss igned to the prod uct

PLASTIM CORPORATIONPLASTIM CORPORATION


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PLASTIM CORPORATIONPLASTIM CORPORATIONManufactures lenses for the rear lamps

(tail lights) of automobilesContract with G Motors : T o su pply C L5 , a complex len s ($137 per len s)

S3, a s imple len s ($63 per len s)Operating at full capacity & incurs very low

marketing costs.

Minimal customer-service costs.Business Environment : Very competitive withrespect to S3.

P Pl i C iP Pl i C i


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Pro c ess : Pl a s t im Corpor at ionPro c ess : Pl a s t im Corpor at ionDesign products and processesManufacturing operationsShipping and distribution

G. Motors purchasing manager : A new competitor o ff ering to su pply the S3 len s at a price o f $ 5 3

.Plastims management is worried.

Options for Plastim:Options for Plastim:


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Options for Plastim:Options for Plastim:

Lower its selling price.Give up G. Motors business.

Reduce cost.

Exis t ing Cos t ing Sys temExis t ing Cos t ing Sys tem


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g g yg g y60,000 15,000S3 CL5

Total($) Per Unit($) Total($) Per Unit($)Direct Material 1125,000 18.75 675,000 45.00Direct labour 600,000 10.00 195,000 13.00To ta l Dire c t Cos t 17 25 ,000 28 .7 5 8 70 ,000 58 .00Indirect cost

Allocated 1800,000 30.00 585,000 39.00To ta l Cos t 3525 ,000 58 .7 5 1455 ,000 9 7. 00

Actual indirect Actual total cost in indirect cost poolcost rate =

Actual total quantity of cost allocation base= 2385,000 / 39750(Labour H ours)= $60 per Labour hour

S3 : Uses 30,000 labour hours = $1800,000CL5 : Uses 9,750 labour hours = $585,000


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Possible Reasons :Possible Reasons :Plastims technology and processare inefficient in manufacturing

and distributing S3 lens.Ineffective cost management.

Is costing system over-costing theS3 lens ?


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SEVEN ACTIVITIES OF PLASTIMSEVEN ACTIVITIES OF PLASTIM

Design products and processes : $ 450,000Set up of molding machines : $ 300,000Manufacturing operations : $ 637,500

Cleaning and Maintenance : $ 270,000Shipment set up : $ 81,000Distribution : $ 391,500

Administration : $ 255,000

Guidelines f or re f ining th e c os t ing sys tem :Guidelines f or re f ining th e c os t ing sys tem :


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Guidelines or re ining t e os t ing sys tem :Guidelines or re ining t e os t ing sys tem :

Dire c t Cos t Tr a c ing

To identify some costs or cost pools that can be reclassifiedas direct costs instead of indirect costs (improves costaccuracy) E xample: C leaning and maintenance activity

Indire c t Cos t Pools

To create smaller cost pools linked to the different activities:Plastim : Subdivides- One direct activity cost pool & Sixindirect activity cost pool

Cos t Allo c at ion B a ses A measure of activity performed serves as the cost

allocation base for each activity-cost pool

Ac t iv ityAc t iv ity Cos t Rat es f or Indire c tCos t Rat es f or Indire c t Cos t poolsCos t pools Activity Total Cost-allocation OH allocation


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yCost Base Rate

Design $ 450,000 100 parts- $ 500 per part-square feet square foot

Setups of $ 300,000 2000 $ 150 per setup-Molding Setup-hours hour MachinesManufacturing $ 637,500 12,750operations Molding $ 50 per molding

machine hours machine-hour Shipment $ 81,000 200 $ 405 per

shipmentSetup

Distribution $ 391,500 67,500 $ 5.80 per cubicCubic feet foot shipped

Administration $ 255,000 39,750 $ 6.4151 per Direct manuf.

Direct manuf.Labour hours labour hour

Produ c t Cos t using ABCProdu c t Cos t using ABC


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Produ c t Cos t using ABCProdu c t Cos t using ABCS3(60000)

CL5(15,000)Total($) Per unit($) Total($) Per unit

Direct Costs :Direct Materials1125,000 18.75 675,000 45.00Direct Labour 600,000 10.00 195,000 13.00Direct Mold Cleaning120,000 2.00 150,000 10.00

To ta l Direc

t Cos ts1,845

,000

30

.75

1,020

,000

68

.00

Indirect Costs :


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Indirect Costs :Design a c t iv ity c os ts:S3, 30 parts-sq.ft.*$4,500 135,000 2.25CL5, 70 parts-sq.ft.*$4,500 315,000 21.0Se tup a c t iv ity c os ts:S3, 500 setup-hours*$150 75,000 1.25CL5, 1,500 setuphours*$150 225,000 15.00Ma nu f a c turing oper at ionsAc t iv ity c os ts:S3,9,000 mouldingMachine hours*$50 450,000 7.50

CL5,3,750 mouldingMachine hours* $50 187,500 12.50

S h ipping se tup a c t iv ity:S3 100 hi *$405 40 500 0 67


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S3, 100 shipments*$405 40,500 0.67CL5, 100 shipments*$405 40,500 2.70Dis tribu t ion a c t iv ity:

S3,45,000 cubic feetShipped*$5.80 261,000 4.35CL5, 22,500 cubicfeet shipped*$5.80 130,500 8.70Adminis tr at ion a c t iv ity:S3,30,000 dir. Manuf.Labour-hours*$6.4151 192,453 3.21CL5,9,750 Dir. Manu.Labor-hours*$6.4151 62,547 4.17To ta l indire c t c os ts: 1,1 53 ,953 19 .23 9 61, 04 64 .0 7

Total Costs $ 2,998,953 $49.98 $1,981,047 $132.07

WH O SAID TH ESE W ORDS ?WH O SAID TH ESE W ORDS ?


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WH O SAID TH ESE W ORDS ?WH O SAID TH ESE W ORDS ?A m a n a gers job is to pursueth e in teres ts o f so c ie ty.Customer is the only valid reasonfor the existence of a business.E ntreprene ur s hip and innovation

are not inborn characteri s tic s .Ma n a gemen t is nei th er a n a r t nor a s c ien c e, bu t a pr a c t ic e.

PETER F DRUCKERPETER F DRUCKER


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PETER F . DRUCKERPETER F . DRUCKERF ather of Modern Management.The most enduring Management Thinker of our Time : Business W eekBorn in Austria:1909; Died in Los Angeles:2005Studied Law in Germany at H amburg UniversityReceived Ph.D. from F rankfurt University inInternational Law.

Moved to London & Taught Economics.Married Doris & Moved to America as aCorrespondent for several British Newspapers.Professor of Management at New Y orkUniversity.

W itho t proper cost andW itho t proper cost and


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W ithout proper cost andW ithout proper cost and

management accounting,management accounting,decision would be likedecision would be like

taking a jump in the dark.taking a jump in the dark.


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COST ACCOUNTING SYSTEMCOST ACCOUNTING SYSTEM

Determines per uni t c os t .H elps management in pl a nning andc on trolling costs.

Provides information for de c ision m a kingUsed to develop timely information about:- C os t o f prod ucing s peci f ic prod uct s .

- C os t of

per f orming s peci

f ic

f unction s / s ervice s .

CASCAS


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CASCAS

Most widely used in manufacturing companies Also used in services sector: Banks Accounting firms

IT sector Govt. agencies

U S congress ha s p a ssed legisl at ion requiringh ospi ta ls to me a sure a nd repor t th e av er a geuni t c os t o f th eir produ c t .

Wh y to f ind uni t c os t?Wh y to f ind uni t c os t?


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Wh y to f ind uni t c os t?Wh y to f ind uni t c os t?Basis for inventory valuation.Measurement of cost of goods sold.Useful in fixing selling prices.Deciding : Products to manufacture.Evaluating the efficiency of operations

Controlling costs.

DESIGNING COSTING SY STEMDESIGNING COSTING SY STEM


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DESIGNING COSTING SY STEMDESIGNING COSTING SY STEM

Cost-benefit ApproachTailored to fit the operations/functions

F acilitate decision making

Cos t ing Sys tem : Only one s ource o f inf ormation f or Manager s combinenon-co s t inf ormation & non- f inancial

per f ormance mea su re s

BUILDINGBUILDINGBLOCK CONCEPTSBLOCK CONCEPTS


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BUILDINGBUILDING--BLOCK CONCEPTSBLOCK CONCEPTS

Cost ObjectDirect Costs of a Cost Object

Indirect Costs of a Cost ObjectC os t T racing

C os t AllocationC ost Pool & C ost Allocation B ase

CASCAS


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CASCASDELL COMPUTERW

IPRO

W ill they have same CAS ?

Two b a si c types o f CA sys tem:Two b a si c types o f CA sys tem:


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Two b a si c types o f CA sys tem:Two b a si c types o f CA sys tem:

Two extremes of produ c t c os t ing :JOB ORDER COST SYSTEM

PROCESS COST SYSTEM

JOB ORDER COST SYSTEMJOB ORDER COST SYSTEM


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JOB ORDER COST SYSTEMJOB ORDER COST SYSTEM

Used by c omp a nies:Producing one-o f -a -kind productsTailor products to thespecifications of individualcustomers

APPLICATIONSAPPLICATIONS


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APPLICATIONS APPLICATIONSShip / Aircraft Building, Printing,Defense Contractors, H ospitals,Motion Picture Studios, F urniture Makers,

Accounting F irms, Advertising Industries,Consultancy F irms, Construction F irms.

JOBJOB


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JOBJOB

Represents the goods manufactured atone time to fill a particular order Unique F eature : C os t are acc umu lated

s eparately f or each job .

J OB COST SH EET : J OB-COST RECORDH eart of J OCS

JOB COSTINGJOB COSTING


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JOB COSTINGJOB COSTING A method of ascertaining cost. Also known as Spe c if ic Order Cos t ing .Production : Alway s again s t c us tomer s order s

and not f or s tock .Each J ob : Di ff erent characteri s tic s and need s s pecial

treatment .Each job undertaken : A co s t unit or co s t object .

A separate job cost sheet : T o a s certain pro f it or lo ss f or each job .

No uniformity in the flow of production from onedepartment to another in respect of jobs.

GENERAL APPROACH TO J CGENERAL APPROACH TO J C


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GENERAL APPROACH TO J .C.GENERAL APPROACH TO J .C.

Identify the J ob : Cos t Obje c tIdentify the Dire c t Cos ts of the J ob

Select Cost-AllocationBa ses

Identify the Indire c t Cos tsCompute the Rat e per Unit of BaseCompute the Indirect Costs a llo c at edCompute To ta l Cos t of the J ob

ACTUAL COSTING Vs NORMAL COSTINGACTUAL COSTING Vs NORMAL COSTING


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ACTUAL COSTING Vs. NORMAL COSTING ACTUAL COSTING Vs. NORMAL COSTINGDire c t Cos t : Actual Rates Actual RatesIndire c t Cos t : Actual Rates Budgeted Rates

B oth M ethods U se :

Actual Q uantities of Inputs for Tracing Direct costs Actual Q uantities of Allocation Bases

for Allocating Indirect CostsSome organization s us e b udgeted rate s to a ss ign

both direct co s t s & indirect co s t s , to job s .

JOB COST SHEETJOB COST SHEET


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JOB COST SHEETJOB COST SHEETJ ob Number ---------- Product --------------Date Started ------------- Date Completed --------------Number of units ------------

DIRECT MATERIALDate Requisition Number Q uantity Unit Price Cost

DIRECT LABOURDate Time Card Number H ours Rate Cost

MANUFACTURING OVERHEADDate Activity Base Application Rate Cost

COST SUMMARYCOST SUMMARY


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COST SUMMARYCOST SUMMARYC os t I tem T otal C os t U nit C os t

Total Direct Material usedTotal Direct Labour

Manufacturing Overhead appliedCos t o f Finis h ed Goods m a nu f a c tured

J ob costing is a compromise betweenactual costing and standard costing .


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CONTRACT COSTINGCONTRACT COSTING


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CONTRACT COSTINGCONTRACT COSTINGOne type of spe c if ic order c os t ingUsed in c iv il engineering worksEach contract : Separate accounts for each

contract

AS 7 : Construction ContractsF ixed Price ContractsCost Plus Contracts

COSTSCOSTS


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Materials Labour

Direct Expenses Indirect Expenses

Plant and machinery :Depreciation

W IP : Presen ted in th e B a la n c e S h ee tW IP : Presen ted in th e B a la n c e S h ee t


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W IP : Presen ted in th e B a la n c e S h ee tW IP : Presen ted in th e B a la n c e S h ee t

Balance Sheet as at.. Assets

W ork in p rogress :

Value of work certifiedCost of work uncertified

Le ss Reserve for unrealized profitLe ss Amount Received from contractee

Pro f it on In c omple te Con tra c ts:Pro f it on In c omple te Con tra c ts:


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Pro it on In omple te Con tr a ts:Pro it on In omple te Con tr a ts:Work Comple ted : Less tha n 1/ 4 th : No profit

Work Cer t if ied : More tha n 1/ 4 th bu t less tha n ha lf :Profit = 1/3 x Notional Profit x (Cash Received / W ork

Certified)

Work Cer t if ied : H a lf or more tha n ha lf :Profit = 2/3 x Notional Profit x (Cash Received / W ork

Certified)

Con tr a c t is a lmos t c omple te :Profit = Estimated Profit x (W ork Certified / Contract Price)

or, Estimated Profit x (Cash Received / Contract Price)

PHARMACEUTICAL INDUSTRYPHARMACEUTICAL INDUSTRY


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PH ARMACEUTICAL INDUSTRYPH ARMACEUTICAL INDUSTRY

Multi-ProductsProduction in batchesIdentical products in a batch

U se Process C osting


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PROCESS COSTINGPROCESS COSTING

A me th od o f c os t ing

Costing o

f pro

cess : Converting rawmaterials into finished products.

Find Ou t : Cost of operating each

process.

APPLICATIONSAPPLICATIONS


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Ma nu f a c turing Indus tries: Iron andSteel, Cement, Textiles, Soap

Making, Biscuits, F ood ProductsMining Indus t ries : Oil, CoalCh emi c a l Indus tries : Drugs & MedicinesPubli c Ut ility Ser v ic es : Electricity, W ater

Supply

CHARACTERISTICS : Pro c ess Cos t ingCHARACTERISTICS : Pro c ess Cos t ing


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ggProdu c t ion : ContinuousProdu c ts : Processed in one or more processes.Produ c ts : H omogeneous, Identical and Standardized.The F inished Product of one process : Raw Material of

the next process.Cos ts : Collected process-wise.Un av oid a ble w a s ta ge : Generally arises at different

stages.Diff eren t produ c ts with or withoutby-produ c ts :

Simultaneously produced.

JOB COSTING VS. PROCESS COSTINGJOB COSTING VS. PROCESS COSTINGJ ob costing: Production is by specific orders


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J ob costing: Production is by specific orders.P roce ss co s ting: P rod uct s are homogeneo us .

Costs are determined by jobs or batches.C os t s are complied on time ba s i s .Each job is separate and independent.P rod uct s los e their identity : contin uous f low.

There may or may not be anyW

IP.T here i s W I P a s prod uction i s contin uous .There is normally no transfers from one job to another.P rod uct s move f rom one proce ss to another.

Control is difficult. More managerial attention is required.P roper control i s comparatively ea s ier.Unit cost of a job is calculated.U nit co s t o f a proce ss i s calc ulated.

AUSTRALIA : COSTING SY STEMAUSTRALIA : COSTING SY STEM


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AUSTRALIA : COSTING SY STEM AUSTRALIA : COSTING SY STEM

Textiles% Chemicals% Refining% Printing%

Process 91 75 100 20

J ob 18 25 25 73

Other 12 13

Norm a l LossInherent in the processing operation ; Unavoidable.


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Inherent in the processing operation ; Unavoidable.Cost of Normal Loss : Absorbed by good units

produced.Abnorm a l LossCaused by unexpected or abnormal conditions viz.,

carelessness, accident, bad plantdesignValue of Abnormal Loss

=( Normal cost of Normal output / Normal output) xUnits of Abnormal Loss

Abnorm a l G a in Actual Loss < ExpectedCalculation : Similar to Abnormal Loss.

Join t Produ c ts or Co-produ c ts


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Represent two or more products,

Separated in the course of the same processingoperation,Usually requiring further processing.

E xample : Oil Industry : Ga s oline, F uel Oil,Lubricant s , Kero s ene.

By- produ c tRecovered from materials discarded in a main processor from the production of some major products.

WHY ALLOCATEJ OINT COSTS?WHY ALLOCATEJ OINT COSTS?


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W ALLOCATEJ OINT COSTS?W ALLOCATEJ OINT COSTS?

Computation of cost of goods sold,Cost reimbursement under contracts,

Insurance-settlement computations.

APPROACH ES F OR APPROACH ES F OR


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ALLOCATINGJ OINT COSTS ALLOCATINGJ OINT COSTS

Using market based data : Revenue

Using physical measures : W eight

INTER PROCESS PROFITINTER PROCESS PROFITO f i f d


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Out put of one process is transferred toa subsequent process at a pri c e.

W HY ?To show cost of production in relationto the market price.To make each process stand on itsown efficiency and economies.To induce competition amongstdifferent processes : Lead s to co s t

control .

BALANCE SHEET: ADJUSTMENTSBALANCE SHEET: ADJUSTMENTS


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BALANCE SHEET: ADJUSTMENTSBALANCE SHEET: ADJUSTMENTS

Adjust : The closing balance of inventoriesas it includes unearned profit.

Create : A provision to reduce the stock toactual cost price.

EQUIVALENT FULL UNITS OREQUIVALENT FULL UNITS OREQUIVALENT PRODUCTIONEQUIVALENT PRODUCTION


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EQUIVALENT PRODUCTIONEQUIVALENT PRODUCTION

EP : Production of a process in terms of completed unitsW IP : C reate s problem to f ind o u t co s t per unit .

To overcome this problem : E xpre ss the partially completed unit s in eq u ivalent f u ll unit s of completed prod uct .

Material Cost per unit =T otal co s t o f direct

material s us ed / E qu ivalent f u ll unit s prod uced

W ork done by a Ma nu f a c turing Dep a r tmen t :W ork done by a Ma nu f a c turing Dep a r tmen t :


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Completing opening W IP units.W orking on units started and

completed.W orking on closing W IP units.

STATEMENT OF EQUIVALENT PRODUCTIONSTATEMENT OF EQUIVALENT PRODUCTIONl


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Units Portion Equivalentcompleted full

in J uly unitsOpening W IP :(60% completed in J une) 5,000 40% 2,000

Unit s started &Completed : 37,000 100% 37,000

To ta l uni ts c omple ted : 42 ,000

Closing W IP :(25% completed) 4,000 ` 25% 1,000

To ta l Equi va len t Uni ts : 40 ,000


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HMTHMT


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HMTHMTF ive Divisions :

Machine Tools ;

Tractors ; Industrial Machinery;

Engineering and Components ; Consumer Products .

SEGMENT PERFORMANCE ANALYSISSEGMENT PERFORMANCE ANALYSIS


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AS- 17 : SEGMENTBusiness SegmentGeographical Segment

Segment : A di s ting u i s hable component o f an organization:

Engaged in providing products and servicesSubject to risks and returns that different fromother segments.

SEGMENT / DIVISIONSEGMENT / DIVISION


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A sub-unitH eaded by a man fully responsiblefor its operation.

A Responsibility Center A Decision Unit

W HY DIVISIONALIZATION?W HY DIVISIONALIZATION?


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V S O O ?V S O O ?

DecentralizationMeasurement & evaluation of performanceTraining ground for top mgt. personnelPlanning and allocation of resources.Controlling operations

RESPONSIBILITY ACCOUNTINGRESPONSIBILITY ACCOUNTING


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A Con trol De v ic eR. A. c olle c ts a nd repor ts

planned and actual accounting information

about the input and output of responsibility centers.

Pro c ess o f R.A.Pro c ess o f R.A.


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Pro ess o R.A.Pro ess o R.A.Iden t if y : Responsibility Centers (Decision UnitsDe f ine : Extent of Responsibility for each R.C.Spe c if y : Controllable and Uncontrollable

Activities at Various Levels of Responsibility.Acc oun t ing sys tem : To Accumulate Informatio

of R. C.Prep a re

: Performance Reports.

Wh y responsibili ty Cen ters?Wh y responsibili ty Cen ters?


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Defines the corporateobje c t ives

and goals of R.C.Determines the c on tribu t ion of a R. C.Provides a b a sis f or e va lu at ion .Mo t ivat es the managers.Provides a system of c loser c on trol .H elps Ma n a gemen t by ex c ep t ion .Facilitates de c en tr a lizat ion .

Sets realistic pl a ns a nd budge ts f or R.C. .Creates a sense of c os t c ons c iousness .

Requiremen ts o f e ff e c t iv e R. A.Requiremen ts o f e ff e c t iv e R. A.


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Requiremen ts o e e t iv e R. A.Requiremen ts o e e t iv e R. A.

A sound org a niz at ion s tru c ture .Div iding the organization into RCs.

Accurate and acceptable budge ts .Top management suppor t .H ealthy organizational en v ironmen t

COST CENTREMa n a ger : Accountable only for costs incurred.


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Ou tpu t of cost center : Not measured in monetaryterms.

Eva lu at ion : Actual cost vs. Budgeted costEmployed in : Legal Dept, Accounting Dept, Public

Relation Dept, H R Dept.

REVENUE CENTREMa n a ger : Accountable for revenues only.

Eva lu at ion : Actual Revenue Vs. Budgeted RevenueEmployed in : Sales Dept., Product Centre.

PROFIT CENTREMa n a ger : H eld responsible for both costs (inputs)

d ( ) f


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and revenues (outputs), i.e., profits

Inpu ts & ou tpu ts :Capable of financial measurement.Me a sures effectiveness and efficiency and motivatesmanagers.Employed in : Production Dept., production centers.

INVESTMENT CENTREMa n a ger : Responsible for costs, revenues &investment in assets used.

Eva lu at ion : By profit and ROI A measure of o ver a ll per f orm a n c e , and facilitatesc omp a rison .

RESPONSIBILITY & CONTROLLABILITYRESPONSIBILITY & CONTROLLABILITY


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Con troll a bili ty : Degree of influence that aspecific manager has over costs, revenues, &related items for which he or she is responsible.Manager should avoid over-emphasizing

controllability & fixing blames.R.A. is more far-reaching : Emphasis on

h um a n a spe c ts

R.A. focuses on information, knowledge &behaviour, not on control.

ASSIGNING REVENUE & COSTS ASSIGNING REVENUE & COSTSTO SEGMENTSTO SEGMENTS


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TO SEGMENTSTO SEGMENTSREVENUE : Assigning revenue : Electronic Cash Register

COSTS : Two ApproachesClassify costs : F ixed & Variable

C ontrib u tion Margin ApproachCharge each segment :

Traceable V.C. & Traceable F .C. Ab s orption C os ting Approach


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RI Appro a c h :RI Appro a c h :Pioneer : General Electric Co


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Pioneer : General Electric Co.RI = Income Minimum Return

on Investment

EVA : A specific type of RI= After-tax operating income

W

eighted average cost of capital(Total Assets Current Liability)

Return on SalesReturn on Sales


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Income to Revenue (or Sales) Ratio A component of ROI

COMPARING PERFORMANCE MEASURES :ROIRI

EVAROS


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FINANCIAL PERFORMANCEFINANCIAL PERFORMANCEMEASURESMEASURES A Sur v eyA Sur v ey


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MEASURESMEASURES A Sur v eyA Sur v eyC O M PANY C O U NT R Y P M F ord Motors US Income, ROS, ROIGuinness UK Income, RI, EVA

Krones Germany Revenues, IncomeMayne Nickless Australia ROI, ROSMitsui J apan Revenues, Income

Pirelli Italy Income, Cash-flowSwedish Match Sweden ROI

SIX SIGMASIX SIGMA


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SIX SIGMASIX SIGMAPioneer: Motorola

A Management Philosophy

Setting extremely high objectivesCollecting data

Analysing resultsReduce defects in products &

services STANDARD COSTING ANDSTANDARD COSTING AND

VARIANCE ANALYSISVARIANCE ANALYSIS


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VARIANCE ANALYSISVARIANCE ANALYSISObje c t iv e : Cost ControlAcc oun t ing sys tem :

H i s torical C os ting Standard C os ting

S ta nd a rdS ta nd a rd


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A measure of desiredperformance.

A predeterminedcriterion for evaluatingthe actual performance

W HY STANDARDS ?W HY STANDARDS ?


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Cost ControlPricing Decision

Performance AppraisalCost AwarenessManagement by Objective

TYPES OF STANDARDSTYPES OF STANDARDS


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Ideal standards

Expected standardsCurrent standards

Basic standards

PROCESS OF DEVELOPINGPROCESS OF DEVELOPINGSTANDARDSSTANDARDS


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Varie s f rom company to company :The standard committee

Technical inputPast experienceOther inputsCoordination

S ta nd a rd Cos t ingS ta nd a rd Cos t ing


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gg A control deviceNot a separate method of product costingUsed with any method of product costing :

Job or Pro c ess Cos t ingGenerally used in manufacturing concerns

S ta nd a rd Cos t ing in v ol v esS ta nd a rd Cos t ing in v ol v es ::


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Ascertainment of standard costMeasurement of actual cost

Comparison Analysis of variance and takingappropriate action where desired

VARIANCESVARIANCES


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Fav our a ble V a ria n c e &Un f av our a ble V a ria n c e

Con troll a ble V a ria nc

e &Un c on troll a ble V a ria n c e

Va ria n c es:Va ria n c es:


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Sales VariancesCost Variances

Cos t Va ria n c es:Direct material cost variances

Direct labour cost variancesOverhead cost variances

DIRECT MATERIAL COST VARIANCESDIRECT MATERIAL COST VARIANCES1. Material Cos t variance = Standard cost for actual output -

Actual cost of material used


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Actual cost of material used

=Q

s. Ps Q

a. Pa2. Mat. Pri c e var. = Q a (Ps Pa)3. Mat. Qu a n t ity var. = Ps ( Q s Q a) = Us a ge V a ria n c e

= E ff ic ien c y V a ria n c e4. Mat. Mix var. = Ps (Smqa Q a) = Standard Price (Revised

standard mix Actual mix)5. Mat. Yield var. = Ps ( Q s Smqa) = Sub-us a ge variance= (Actual yield Standard yield) x Standard

cost per unit of output1 = 2 + 3 , 3 = 4 + 5

Note : Q s = Standard Q uantity ; Q a = Act ual Q uantity ; P s = Standard P rice ; P a = Act ual P rice ; Smqa = Standard Mix in Act ual Q uantity.

DIRECT LABOUR COST VARIANCEDIRECT LABOUR COST VARIANCE1. Labour Cos t var. = Standard cost of labour for actual


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output Actual cost of labour = H s.Rs H a.Ra

2. Labour Rat e o f P a y var. = H a (Rs Ra)3. Labour E ff ic ien c y var.= Rs ( H s H a)4. L. Mix or G a ng Composi t ion var.= Rs (Smha H a)5. L. Ne t E ff ic ien c y var. = Rs ( H s Smha)6. Idle Time var.= No. of H ours Lost (Abnormal) x Rs

1 = 2 + 3 , 3 = 4 + 5 + 6N ote : H a = Act ual ho ur s worked

VARIABLE OVERHEAD VARIANCESVARIABLE OVERHEAD VARIANCESV i bl O h d C t V i


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Va ria ble O ver h e a d Cos t Va ria n c e= St. V. OH Ac. V. OH= AO . SRO AO . ARO

= SH

. SVRH

AH

. AVRH

Va ria ble O ver h e a d Spending V a ria n c e= AH (SVRH AVRH )

Va ria ble OH E ff ic ien c y Va ria n c e= SVRH (SH AH )

FIXED OVERHEAD VARIANCESFIXED OVERHEAD VARIANCESFixed O ver h e a d Cos t Va ria n c e


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Fixed O er e d Cos V ri n e

= Standard Cost Actual Cost= AO . SRO AO . ARO= SH . SFRH AH . AFRH

Fixed O ver h e a d Expendi ture V a r.= Budgeted Cost Actual Cost= BO . SRO AO . ARO

= BH .SF RH - AH .AF RH

Fixed O ver h e a d Volume V a ria n c e= Standard Cost Budgeted Cost= AO . SRO BO . SRO = SRO (AO BO)

=SFRH

(SH

BH

)

SALES VARIANCESSALES VARIANCES


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Sales Va lue Var. = Actual Value of Sales Budgeted Value of SalesSales Pri c e Var. = Act. Q uantity sold

(AP SP)Sales Volume Var. = SP(A Q BQ )Sales Mix Var. = SP(A Q - Smqa)

POSSIBLE CAUSES OF COST VARIANCESPOSSIBLE CAUSES OF COST VARIANCESMat. Pri c e Var. : Changes in actual price, F ailure to

purchase anticipated quantity Not taking


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purchase anticipated quantity, Not taking

cash discounts, Changes in freight costMat. Qu a n t ity Var. : Poor material handling, Inefficientmachine operator, Pilferage, W aste,Labour Turnover.

Lab. E ff ic ien c y Var. : Defective machine and equipment,Poor supervision, Inexperienced employee,Insufficient training, Poor working condition

OH Volume Var. : F ailure to use normal capacity, Lack of sales order, Machine break down, Defectivematerials, Labour troubles, Power failure

OH Expendi ture/E ff ic ien c y Var. = Same cause as Labour Efficiency Variance.

RESPONSIBILITY FOR COST VARIANCESRESPONSIBILITY FOR COST VARIANCESV ariance Persons R esponsible


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p

Mat.Pri c e

Variance : Purchase Agent or Purchase Manager Mat. Qu a n t ity Variance : Plant Supt. , Dept. Supervisors,

Machine Operators, Q ualityControl Dept.

Labour Rat e o f P a y Variance : Personnel Manager, Dept.Supervisors, Plant SuperintendentLabour E ff ic ien c y Variance : Plant SuperintendentOH Expendi ture Variance : Variable portion : Foremen or

Supervisor ; Fixed portion : Top Mgt.OH Volume Variance : Top Mgt.

F ew businesses plan to fail,F ew businesses plan to fail,


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p ,p ,but many of those that flop,but many of those that flop,

failed to plan.failed to plan.


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STRATEGY AND PLANSSTRATEGY AND PLANS


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LONG-RUN PLANNINGLON G-R UN BU DGET SSTRATEGY

SH

ORT-RUN PLANNINGS H OR T -R UN BU DGET S

Budge tBudge tA fi i l d / i i


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A financial and / or quantitative statement prepared and approved prior to adefined period of time , o f the

policy to be p ur su ed d uring that period f or the purpo s e o f attaining a given objective .Pl a nning f or th e f u ture activitiesSurvey of p ast events, p resent

happenings and the future things.

BUDGET Vs. STANDARDBUDGET Vs. STANDARD


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S ta nd a rd : A carefully determined price,cost or quantityBudge t : A broader term

Budge ted Cos ts : Need not be based onstandardS ta nd a rd = Budge t : W hen standards areused to obtain budgeted inputs or outputs


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BUDGETING PROCEDUREBUDGETING PROCEDUREV aries widely f rom company to company .


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Common s teps:Obtaining es t im at es from each sub-unitor division or department.

Co-c

oordinat

ing estimates.Communi c at ing the budget toresponsible managers.

Implemen t ing the budget plan.Reporting interim progress : Performance

Report

PrePre--requisi te f or In trodu c t ion o f requisi te f or In trodu c t ion o f Budge ta ry Con trolBudge ta ry Con trol


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g yg y

BUDGET CENTREORGANISATION CHARTBUDGET COMMITTEEBUDGET MANUALBUDGET PERIODPRINCIPAL BUDGET FACTOR

FIXED BUDGET vs. FLEXIBLE BUDGETSFIXED BUDGET vs. FLEXIBLE BUDGETS

FIXED BUDGET


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Remain unchanged irrespective of level of activity obtained.Prepared for a particular level of activity Acts as a target for the forthcoming periodNot adjusted with actual activity

FLEXIBLE BUDGETSDesigned to c ha nge in relation to the level of activity attainedPrepared for a r a nge o f a c t iv it iesRecognizes the be hav ior of costs: fixed ~ semi-fixed ~ variableFacilitates per f orm a n c e me a suremen t and control

BEHAVIOURAL DIMENTIONS OF BUDGETINGBEHAVIOURAL DIMENTIONS OF BUDGETING


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Implications of Participative BudgetingExcessive Pressure Created by BudgetBudgetary Slack (Cushion)Top Management SupportInter-Departmental Conflict

OPERATING AND FUNCTIONAL BUDGETSOPERATING AND FUNCTIONAL BUDGETS

Sales Budget


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Sales BudgetProduction BudgetProduction Cost Budget

Direct Materials Budget Direct Labour Budget Factory Overhead BudgetCost of Goods Sold Budget

Selling Expense Budget Administrative Expense BudgetBudgeted Income Statement

FINANCIAL BUDGETSFINANCIAL BUDGETSCapital Expenditure Budget


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p p gR & D Budget

Cash Budget

Budgeted Balance Sheet

NON-FINANCIAL BUDGETS- Space, Equipments, W orkers


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MASTER BUDGETMASTER BUDGET


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Normally c omprises :Budgeted P.& L. A/C ; Budgeted Balance Sheet ;

Budgeted Cash F low Statement.

Re ve a ls: Top management go a ls of incomes, expenditure, cashflows and financial position.


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BUDGET PRACTICES: Master BudgetBUDGET PRACTICES: Master BudgetU S : 91%


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U.S. : 91%U.K. : 100%J apan : 93%H olland : 100%

Australia : 100%BUDGET GOALS:

U.S. : ROIJ apan : Sales

W hat reduces effectiveness of Budgeting?W hat reduces effectiveness of Budgeting?SURVEY OF CF Os IN TH E U.S. :


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Lack of well-defined strategyLinkage of strategy to operational goalsLack of individual accountability for

results.Lack of meaningful performance

measures

SAIL Vs. TATA STEEL

ROLLING BUDGETROLLING BUDGET


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A Continuous Budget A Plan : Always available for aspecified future period

Adding a period in the future as theperiod just ended is dropped

ELECTROLUX : A four-quarter rolling budget

KAIZEN BUDGETINGKAIZEN BUDGETING


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Kaizen : Continuous ImprovementContinuous Improvement GoalsIncorporates continuousimprovement during the budgetperiod into the budget numbers

J APANESE COMPANIESCitizen W atch Co.

ACTIVITY ACTIVITY --BASED BUDGETINGBASED BUDGETING


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Incorporating Activity-basedCost Drivers into Budgets

F ocuses on the BudgetedCost of Activities

Budget for each Activity

ZERO BASE BUDGETINGZERO BASE BUDGETING A method of budgeting


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g g

All Activities :Eva lu at edEvery item of expenditure :F ullyJus t if ied

Involves starting from scratch or zeroZBB & GOVT.

STEPS OF ZBBSTEPS OF ZBB


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Iden t if y each separate activity : A decision package

Eva lu at e: Each decision packageConsider : Alternatives for each

decision package.Ra nk : Decision packages - priority

for resource allocation.

Alloc

at e :Resources to the acka es

Budge t ingBudge t ing is the commonis the commona cc oun t ing toola cc oun t ing tool companies use forcompanies use for


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gg companies use for companies use for pl a nningpl a nning andand c on trollingc on trolling whatwhat

they must do to satisfy their they must do to satisfy their c

us tomersc

us tomers and succeed in theand succeed in them a rke t pl a c em a rke t pl a c e ..

bal sr 2sem

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