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SOCIAL AUDIT
INTRODUCTION
Governments are facing an ever-growing demand to be more accountable and
socially responsible and the community is becoming more assertive about its right
to be informed and to influence governments' decision-making processes. Faced
with these vociferous demands, the executive and the legislature are looking for
new ways to evaluate their performance. Civil society organisations are also
undertaking !ocial "udits to monitor and verify the socialperformance claims of
the organisations and institutions.
!ocial "udit is a tool through which government departments can plan,manage and measure non-financial activities and monitor both internal and
external conse#uences of the departments' social and commercial operations.
!ocial "udit gives an understanding of the administrative system from the
perspective of the vast ma$ority of people in the society for whom the
veryinstitutional %administrative system is being promoted and legitimised. !ocial
"udit of administration means understanding the administrative system and its
internal dynamics from the angle of what they mean for the vast ma$ority of the
people, who are not essentially a part of the !tate or its machinery or the ruling
class of the day, for whom they are meant to work.
!ocial "udit is an independent evaluation of the performance of an organisation as
it relates to the attainment of its social goals. &t is an instrument of social
accountability of an organisation. &n other words, !ocial "udit may be defined as
an in-depth scrutiny and analysis of the working of any public utility vis-a-vis its
social relevance. !ocial "uditing is a process that enables an organisation to assess
and demonstrate its social, economic and environmental benefits. &t is a way of
measuring the extent to which an organisation lives up to the shared values and
ob$ectives it has committed itself to. &t provides an assessment of the impact of an
organisation's nonfinancial ob$ectives through systematic and regular monitoring based on the views of its stakeholders. !takeholders include employees, clients,
volunteers, funders, contractors, suppliers and the general public affected by the
organisation. !takeholders are defined as those persons or organisations who have
an interest in, or who have invested resources in the organisation. ata &ron and
!teel Company (&!C)*, +amshedpur, implemented !ocial "udit in and is
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the first company in &ndia to do so. !ocial "udit gained significance after the /rd
"mendment of the Constitution relating to 0anchayat 1a$ institutions.
Principles of Social Audit
he foremost principle of !ocial "udit is to achieve continuously improving
performances relative to the chosen social ob$ectives. 2ight specific key principles
have been identified from !ocial "uditing practices around the world.
• Multi-Perspective/Polyvocal: "im to reflect the views (voices* of all those
people
(stakeholders* involved with or affected by the organisation%department%
programme.
• Copre!e"sive: "ims to (eventually* report on all aspects of the organisation's
work
and performance.
• Participatory: 2ncourages participation of stakeholders and sharing of their
values.
• Multi#irectio"al: !takeholders share and give feedback on multiple aspects.
• Re$ular: "ims to produce social accounts on a regular basis so that the conceptand the
practice become embedded in the culture of the organisation covering all the
activities.
Coparative: 0rovides a means whereby the organisation can compare its own
performance each year and against appropriate external norms or benchmarks3 and
provide for comparisons to be made between organisations doing similar work and
reporting in similar fashion.
• %eri&ie#: 2nsures that the social accounts are audited by a suitably experienced
person or agency with no vested interest in the organisation.
• Disclose#: 2nsures that the audited accounts are disclosed to stakeholders and the
wider community in the interests of accountability and transparency.
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hese are the pillars of !ocial "udit, where socio-cultural, administrative, legal
and democratic settings form the foundation for operationalising !ocial "udit.
DISTIN'UIS( )*T+**N ,INANCIAL AUDIT AND SOCIAL AUDIT
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Benefits of Social Auditing
. *"!a"ces reputatio": he information generated from a !ocial "udit can
provide crucial knowledge about the departments4%institutions4 ethical performanceand how stakeholders perceive the services offered by the government. he social
angle in the delivery of services, real or perceived, can be a ma$or factor adding
to the reputation of the department and its functionaries.
5. Alerts policyaers to stae!ol#er tre"#s: !ocial"uditing is a tool that helps
managers understand and anticipate stakeholder concerns. his tool provides
essential information about the interests, perspectives and expectations of
stakeholders facilitating the interdependency that exists between the government
and the community.
/. A&&ects positive or$a"isatio"al c!a"$e: !ocial "uditing identifies specific
organi6ational improvement goals and highlights progress on their implementation
and completeness. "lso, by integrating !ocial "udit into existing management
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systems, employees responsible for day-to-day decision making can more
effectively consider stakeholders' issues and concerns.
7. I"creases accou"ta.ility: 8ue to the strong emphasis on openness and
accountability for government departments, the information disclosed needs to be
fair and accurate. !ocial "uditing uses external verification to validate that the
!ocial "udit is inclusive and complete. "n externally verified audit can add
credibility to the department's efforts. 9ut the greatest demonstration of a !ocial
"udit's authenticity must be seen in how the performance of the department
improves over time in relation to its mission, values and ob$ectives.
:. Assists i" re-orie"ti"$ a"# re-&ocusi"$ priorities: !ocial "uditing could be a
useful tool to help departments reshape their priorities in tune with people'sexpectations.
;. Provi#es i"crease# co"&i#e"ce i" social areas: !ocial "udit can enable
departments% institutions to act with greater confidence in social areas that have
been neglected in the past or have been given a lower priority.
Social Audit Vs Other Audits
!ocial "udit is often misinterpreted as another form of audit to determine the
accuracy of financial or statistical statements or reports and the fairness of the
facts they present. " conventional financial audit focuses on financial records and
their scrutiny by an external auditor following financial accountancy principles,
whereas the concept of !ocial "udit is more comprehensive, having a greater scope
than that of traditional audit. &n general, !ocial "udit refers to a process for
measuring, understanding and improving the social performance of an activity of
an organisation. !ocial "uditing is again distinct from evaluation in that it is an
internally generated process whereby the organisation itself shapes the !ocial "udit
process according to its stated ob$ectives. &n particular, it aims to involve allstakeholders in the process. &t measures social performance in order to achieve
improvement as well as to report accurately on what has been done.Financial audit
is geared towards verification of reliability and integrity of financial information.
!imilarly, operation audit looks at compliance with policies, plan procedures, laws,
regulations, established ob$ectives and efficient use of resources. )n the contrary,
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!ocial "udit examinesperformance of a department%programme vis-
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Six Key Steps for Social Audit
1 Preparatory Activities
• =nderstand key principles of !ocial "udit.
• >ist core values of the department%programmes.• >ist down social ob$ectives the department is working towards or
programmes it aims to contribute.
• ?atch activities with ob$ectives.
• >ist current practices and delivery systems.
• Fix the responsibility for doing !ocial "udit in the department.
5. De&i"i"$ Au#it )ou"#aries a"# I#e"ti&yi"$ Stae!ol#ers
• 2laborate key issues for !ocial "uditing based on thesocial ob$ectives.
• 0repare a statement of purpose,
• ob$ectives, key issues and activities for !ocial "uditing.
• &dentify key stakeholders for consultation (Government and Civil !ociety*.
• Forge consensus on audit boundaries3 identify stakeholders and formalise
commitments.
/. Social Accou"ti"$ a"# )oo-eepi"$
• !elect performance indicators for social accounting.
• &dentify which existing records can be used.
• &dentify what additional data to be collected, who would collect this data,
when and how.
• &dentify when stakeholders would be consulted and for what.
• 0repare a social accounting plan and timeline.
• 0lan for monitoring social accounting activities.
7. Prepari"$ a"# Usi"$ Social Accou"ts
• 0repare social accounts using existing information,data collected and views
of stakeholders.
• &dentify key issues for action.
• ake stock of ob$ectives, activities and core values.
• !et targets for future.
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2 Social Au#it a"# Dissei"atio"
• 0resenting social accounts to !ocial "uditor.
• !ocial "uditor verifies data used, assess the interpretation and comment on
the #uality of social accounting and reporting.
• !ocial accounts revised in accordance with !ocial "uditor4s
recommendations.
• !ocial "uditor has to collect information from the stakeholders regarding
programme implementation and benefits accrued tothem.
• 8isseminate !ocial "uditor4s consolidated report to the decision-making
committee that includes stakeholders.
• 8isseminate report to civil society.
•
9egin next cycle of social accounting.
3 ,ee#.ac a"# I"stitutio"alisatio" o& Social Au#it
• Feedback for fine-tuning policy, legislation, administrative functioning and
programming towards social ob$ectives.
• Follow-up action.
• 1eviewing support to civil society for its participation
• &nstitutionalisation of the process.
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History of Social Audit
he word 'audit' is derived from >atin, which means 'to hear'. &n ancient times,
emperors used to recruit persons designated as auditors to get feedback about the
activities undertaken by the kings in their kingdoms. hese auditors used to go to
public places to listen to citi6ens' opinions on various matters, like behaviour of
employees, incidence of tax, image of local officials etc.
Charles ?edawar pioneered the concept of !ocial "udit in 5 with the
application of the idea in medicine policy, drug safety issues and on matters of
corporate, governmental and professional accountability. "ccording to ?edawar,
the concept of !ocial "udit starts with the principle that in a democracy the
decision makers should account for the use of their Charles ?edawar pioneered the
concept of !ocial "udit in 5 with the application of the idea in medicine policy,
drug safety issues and on matters of corporate, governmental and professional
accountability. "ccording to ?edawar, the concept of !ocial "udit starts
with the principle that in a democracy the decision makers should account for the
use of their powers, which should be used as far as possible with the consent and
understanding of all concerned.
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Budgeting and Budgetary Control
Introduction
Budgeting has come to be accepted as an efcient method o
short-term planning and control. It is employed, no doubt, in large
business houses, but even the small businesses are using it at
least in some inormal manner. Through the budgets, a business
wants to know clearly as to what it proposes to do during an
accounting period or a part thereo. The technique o budgeting is
an important application o anagement !ccounting. "robably,
the greatest aid to good management that has ever been devisedis the use o budgets and budgetary control. It is a versatile tool
and has helped managers cope with many problems including
in#ation.
DEFINITION OF BUDGET
The $hartered Institute o anagement !ccountants, %ngland,
de&nes a 'budget' as under( ) ! &nancial and*or quantitative
statement, prepared and approved prior to de&ne period o time,o the policy to be persued during that period or the purpose o
attaining a given ob+ective.) !ccording to Brown and oward o
anagement !ccountant )a budget is a predetermined statement
o managerial policy during the given period which provides a
standard or comparison with the results actually achieved.)
%ssentials o a Budget !n analysis o the above said de&nitions
reveal the ollowing essentials o a budget(
/ It is prepared or a de&nite uture period.
0/ It is a statement prepared prior to a de&ned period o time.
1/ The Budget is monetary and I or quantitative statement o
policy.
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2/ The Budget is a predetermined statement and its purpose is to
attain a given ob+ective. ! budget, thereore, be taken as a
document which is closely related to both the managerial as well
as accounting unctions o an organi3ation.
Forecast Vs Budget
4orecast is mainly concerned with an assessment o probable
uture events. Budget is a planned result that an enterprise aims
to attain. 4orecasting precedes preparation o a budget as it is an
important part o the budgeting process. It is said that the
budgetary process is more a test o orecasting skill than anything
else. ! budget is both a mechanism or pro&t planning and
technique o operating cost control. In order to establish a budget
it is essential to orecast various important variables like sales,
selling prices, availability o materials, prices o materials, wage
rates etc.
Diference between Forecast and Budget
Both budgets and orecasts reer to the anticipated actions and
events. But still there are wide di5erences between budgets and
orecasts as given below(
Forecasts
/ 4orecasts is mainly concerned with anticipated or
probable events
0/ 4orecasts may cover or longer period or years
1/ 4orecast is only a tentative estimate
2/ 4orecast results in planning
6/ The unction o orecast ends with the orecast o likely
events
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7/ 4orecast usually covers a speci&c business unction
8/ 4orecasting does not act as a tool o controlling
measurement.
Budgets
/ Budget is related to planned events0/ Budget is planned or prepared or a shorter period1/ Budget is a target &9ed or a peri:d.2/ ;esult o planning is budgeting6/ The process o budget starts where orecast ends and
converts it into a budget7/ Budget is prepared or the business as a whole
8/ "urpose o budget is not merely a planning device butalso a controlling tool.
BUDGETA! CONTO"
Budgetary $ontrol is the process o establishment o budgets
relating to various activities and comparing the budgeted &gures
with the actual perormance or arriving at deviations, i any.
!ccordingly, there cannot be budgetary control without budgets.
Budgetary $ontrol is a system which uses budgets as a means oplanning and controlling.
!ccording to I.$..!. %ngland Budgetary control is de&ned by
Terminology as the establishment o budgets relating to the
responsibilities o e9ecutives to the requirements o a policy and
the continuous comparison o actual with the budgeted results,
either to secure by individual actions the ob+ectives o that policy
or to provide a basis or its revision.
Brown and oward de&nes budgetary control is )a system o
controlling costs which includes the preparation o budgets, co-
ordinating the department and establishing responsibilities,
comparing actual perormance with the budgeted and acting upon
results to achieve ma9imum pro&tability.)
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The above de&nitions reveal the ollowing essentials o budgetary
control(
/ %stablishment o ob+ectives or each unction and section o
the organi3ation.0/ $omparison o actual perormance with budget.
1/ !scertainment o the causes or such deviations o actual rom
the budgeted perormance.
2/ Taking suitable corrective action rom di5erent available
alternatives to achieve the desired ob+ectives.
Ob#ecti$es o% Budgetary Control
Budgetary $ontrol is planned to assist the management or policy
ormulation, planning, controlling and co-ordinating the general
ob+ectives o budgetary control and can be stated in the ollowing
ways(
/ "lanning( ! budget is a plan o action. Budgeting
ensures a detailed plan o action or a business over a periodo time.
0/ $o-ordination( Budgetary control co-ordinates the
various activities o the entity or organi3ation and secure co-
operation o all concerned towards the common goal.1/ $ontrol( $ontrol is necessary to ensure that plans and
ob+ectives are being achieved. $ontrol ollows planning and
co-ordination.
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&co'e and Tec(ni)ues o% &tandard Costing and Budgetary
Control
&co'e*
/ Budgets are prepared or di5erent unctions o businesssuch as production, sales etc. !ctual results are compared
with the budgets and control is e9ercised. =tandards on the
other hand are complied by classiying, recording and
allocation o the e9penses to cost units. !ctual costs are
compared with standard costs.0/ Budgets have a wide range o coverage o the entire
organi3ation. %ach operation or process is divided into
number o elements and standards are set or each suchelement.
1/ Budgetary control is concerned with origin o
e9penditure at unctional levels. =tandard costing is
concerned with the requirements o each element o cost.2/ Budget is a pro+ection o &nancial accounts whereas
standard costing pro+ects the cost accounts.
Tec(ni)ue*
/ Budgetary control is e9ercised by putting budgets and actuals
side by side. >ariances are not normally revealed in the accounts.
=tandard costing variances are revealed through accounts.
0/ Budgetary control system can be operated in parts. 4or
e9ample, !dvertisement Budgets, ;esearch and ?evelopment
Budgets, etc. =tandard costing is not put into operation in parts.
1/ Budgetary control o e9penses is broad in nature whereas
standard costing system is a ar more technically improved
system by means o which the variances are analysed in detail.
e)uisites %or Efecti$e Budgetary Control
The ollowing are the requisites or e5ective budgetary control (
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/ $lear cut ob+ectives and goals should be well de&ned.
0/ The ultimate ob+ective o realising ma9imum bene&ts should
always be kept uppermost.
1/ There should be a budget manual which contains all detailsregarding plan and procedures or its e9ecution. It should also
speciy the time table or budget preparation or approval, details
about responsibility, cost centers etc.
2/ Budget committee should be set up or budget preparation
and efcient e9ecution o the plan.
6/ ! budget should always be related to a speci&ed time period.
672 ! Te@lbook o 4inancial $ost and anagement !ccounting
7/ =upport o top management is necessary in order to get the
ull support and co-operation o the system o budgetary control.
8/ To make budgetary control successul, there should be a
proper delegation o authority and responsibility.
A/ !dequate accounting system is essential to make the
budgeting successul.
/ The employees should be properly educated about the
bene&ts o budgeting system.
C/ The budgeting system should not cost more to operate than
it is worth.
/ Dey actor or limiting actor, i any, should consider beore
preparation o budget.
0/ 4or budgetary control to be e5ective, proper periodic
reporting system should be introduced.
Organi+ation %or Budgetary Control
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In order to introduce budgetary control system, the ollowing are
essential to be considered or a sound and efcient organi3ation.
The important aspects to be considered are (
. :rganisation $hart0. Budget $enter
1. Budget :fcer
2. Budget $ommittee
6. Budget anual
7. Budget "eriod
8. Dey 4actor
Ad$antages o% Budgetary Control
The advantages o budgetary control may be summari3ed asollows (
/ It acilitates reduction o cost.
0/ Budgetary control guides the management in planning and
ormulation o policies.
1/ Budgetary control acilitates e5ective co-ordination o
activities o the various departments and unctions by settingtheir limits and goals.
2/ It ensures ma9imi3ation o pro&ts through cost control and
optimum utili3ation o resources.
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6/ It evaluates or the continuous review o perormance o
di5erent budget centers.
7/ It helps to the management efcient and economic production
control.8/ It acilitates corrective actions, whenever there is inefciencies
and weaknesses comparing actual perormance with budget.
A/ It guides management in research and development.
/ It ensures economy in working.
C/ It helps to adopt the principles o standard costing.
"i,itations o% Budgetary Control
Budgetary $ontrol is an e5ective tool or management control.
owever, it has certain important limitations which are identi&ed
below(
/ The budget plan is based on estimates and orecasting.
4orecasting cannot be considered to be an e9act science. I the
budget plans are made on the basis o inaccurate orecasts thenthe budget progamme may not be accurate and ine5ective.
0/ 4or reasons o uncertainty about uture, and changing
circumstances which may develop later on, budget may prove
short or e9cess o actual requirements.
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1/ %5ective implementation o budgetary control depends upon
willingness, co-operation and understanding among people
reasonable or e9ecution. Eack o co-operation leads to inefcient
perormance.
2/ The system does not substitute or management. It is mere
like a management tool.
6/ Budgeting may be cumbersome and time consuming process.
INTRO!"TION
he costs that vary with a decision should only be included in decision analysis.
For many decisions that involve relatively small variations from existing practice
and%or are for relatively limited periods of time, fixed costs are not relevant to the
decision. his is because either fixed costs tend to be impossible to alter in theshort term or managers are reluctant to alter them in the short term. ?arginal
costing distinguishes between fixed costs and variable costs as convention ally
classified. he marginal cost of a product @Ais its variable costB. his is normally
taken to be3 direct labor, direct material, direct expenses and the variable part of
overheads.
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>ike ?arginal costing or $ob costing, ?arginal costing is not a distinct method of
ascertainment of cost but is a techni#ue which applies existing methods in a
particular manner so that the relationship between profit the volume of output
can be clearly brought out. ?arginal costing ascertains marginal or variable costs
the effect on profit, of the changes in volume or type of output, bydifferentiating between variable costs fixed costs. o any type of costing such as
historical, standard, ?arginal or $ob3 the ?arginal costing techni#ue may be
applied.
=nder the ?arginal of ?arginal costing, from the cost components, fixed costs are
excluded. he difference which arises between the variable costs incurred for
activities the revenue earned from those activities is defined as the gross margin
or contribution. &t may relate to total sales or may relate to one unit.
For the business as a whole, Contribution earned by specific products or group of
products, are added so as to calculate the Dpool4 of total contribution. he fixed
costs of the business are paid from this Dpool4 then the part of the total
contribution which remains becomes the profit of the business as a whole.
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M*ANIN' O, MAR'INAL COSTIN'
&t is the amount by which total cost increases when one extra unit is produced,or the amount of cost which can be avoided by producing one unit less.
"ccordingly, marginal cost may also be defined as the variable cost incurred due to
a specific activity. &t is concerned with variable costs, because fixed costs by
definition do not change with the volume produced.
D*,INATION O, MAR'INAL COSTIN'
he )fficial C.&.?." Costs of the erminology defines ?arginal costing as, he
accounting system in which variable costs are changed to costs units and fixed period are
written off in full against the aggregate contribution. &ts special value is in decision-making
E"ccordingly, ?arginal cost ariable cost 8irect material H 8irect labor
H8irect expenses H ariable overheads.
?arginal costing is formally defined asI Dthe accounting system in which variablecosts are charged to cost units and the fixed costs of the period are written-off in
full against the aggregate contribution. &ts special value is in decision making4. he
term Dcontribution4 mentioned in the formal definition is the term given to the
difference between !ales and ?arginal cost. hus ? " 1 G & J " > C ) !
" 1 & " 9 > 2 C ) ! 8 & 1 2 C > " 9 ) = 1 H8&12C
?"21&">H8&12C 2K02J!2H"1&"9>2 )21L2"8! C)J1&9=&)J
!">2! - ?"1G&J"> C)!. he term marginal cost sometimes refers to the
marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation.
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#$AT!R$S O# %AR&INA' "OSTIN&
• Classification of costs into fixed costs variable costs is done under
?arginal costing system. "lso semi-fixed or semi-variable cots get further
classified into fixed variable elements.
• o the product, only variable elements of cost, which constitute marginal
cost, are attached.
• "fter the marginal cost marginal contribution are taken into consideration3
price is fixed.
• From the total contribution for any period, fixed cost for the period are
deducted.
• he profitability of a department or product is decided by the marginal
contribution.
• "t variable production cost, the valuation of work-in-progress finished
product is made.
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AVANTA&$S O# %AR&INA' "OSTIN&
• "s there is involvement of computation of variable costs only in ?arginal
costing, it is easy to understand operate the same.
• "mong different products or departments, arbitrary apportionment of fixed
costs is avoided the under-recovery or over-recovery problems are
eliminated.
• "ny attempt of measurement of relative profitability of different products or
different departments becomes complicated due to the arbitraryapportionment of fixed costs.
• "nalysis of contribution, break even charts analysis of cost-volume-
profit-analysis are resulted out of a ?arginal costing system3 for making
short term decisions all of these are important.
• ?ore uniform realistic figures are resulted out of ?arginal costing system
because fixed overhead costs are excluded from valuation of stock work-
in-progress.
• "pportionment of responsibility of control can be more easily done since to
each level of management only variable costs are presented over which they
have control.
• he effects of their decisions can be more readily seen by all levels of
management- sometimes even before taking of an action.
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%AR&INA' "OSTIN& V(S ABSORPTION "OSTIN&
he difference between ?arginal costing absorption costing is as belowI
. =nder ?arginal costingI for product costing inventory valuation, only
variable cost is considered whereas, under absorption costing3 for product
costing inventory valuation, both fixed cost variable cost are
considered.
5. =nder ?arginal costing, there is a different treatment of fixed overhead.
Fixed cost is considered as period cost by 0rofit%olume ratio (0% ratio*,
profitability of different products is $udged. )n the other hand, under
absorption costing system, the fixed cost is charged to cost of production. "reasonable share of fixed cost is to be borne by each product thereby
sub$ective apportionment of fixed overheads influences the profitability of
product.
/. =nder ?arginal costing, the presentation of data is so oriented that total
contribution contribution from each product gets highlighted. =nder
absorption costing, the presentation of cost data is on conventional pattern.
"fter deducting fixed overhead, the net profit of each product is determined.
7. =nder ?arginal costing, the unit cost of production does not get affected by
the difference in the magnitude of opening stock closing stock. Mhereas,
under absorption costing, due to the impact of the related fixed overheads,
the unit cost of production get affected by the difference in the magnitude of
opening stock closing stock.
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"ONTRIB!TION ANA')SIS
Contribution is the most important concept in ?arginal costing. &t is, as seen above
e#ual to !ales >ess ariable Cost. Contribution is the profit before ad$usting the
fixed costs. ?arginal costing is concerned with the Nproduct costsN rather than the
Nperiods costsN. Contribution indicates the
Pro#uct pro&it 4 pro#uct I"coe 0 pro#uct cost ie
Co"tri.utio" 4 sale %alue 0 %aria.le cost
?arginal costing assumes that ht excess of sales value over variable costs
contributes to a fund which will cover fixed costs as well as provide the concernNs
profits. he amount of contribution is credited to the marginal profit and loss
account. he fixed costs are debited to the marginal profit and loss account. &f the
contribution is e#ual to the fixed costs, the concern is said to break- even profit. &f
the contribution is less than the fixed costs, there will be net loss. hus, the fixed
costs which are period costs do not affect the product cost. Fixed costs are directly
ad$usted in the profit and loss account prepared for the relevant period. he
concept of contribution plays a key role in assisting the management in taking
many important decisions such as-. 8eciding the break-even point,
5. 8eciding which article to produce, or continue or discontinue to produce,
/. 8eciding the #uantity of each article to be produce or sold,
7. Fixing the selling price, especially in a trade depression, or for a special
order.
he difference between contribution and accounting profit is explained below.
Jo.
.
5.
/.
Contribution
&t is a concept used in ?arginal
costing.
&t is before deducting Fixed Costs.
"t break- over point, Contribution is
e#ual to fixed cost.
0rofit
&t is an accounting concept.
&t is after deducting Fixed Costs.
0rofit arises only when !ales go
beyond the break- even point.
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Assu*ptions and 'i*itations !nderlying
BR$AK+$V$N ANA')SIS
. "ll costs are classified as either fixed or variable. &f not impossible or
impractical, dividing costs into the variable and fixed cost elements as an
extremely difficult $ob. his is attributable to the inherent nature or
characteristics of the cost per se.
5. Fixed costs remain constant within the relevant range. Fixed costs remain
unchanged at any level of activity within the relevant range, even at the 6ero
level.
/. he behavior of total revenues and total costs will be linear over the
relevant range, i.e. will appear as a straight line on the 92 chart. his is
based on the idea that variable costs vary in direct proportion to volume3 the
fixed costs remain unchanged, hence drawn as a straight hori6ontal line on
the graph within the relevant range3 and that selling price is constant.
7. &n case of multiple product companies, the selling prices, costs and
proportion of units (sales mix* sold will not change. his cannot always be
correct. !ales mix ratio may be due to the change in the consuming habits of
customers. !elling prices of the individual products may likewise change
due to competition, popularity and salability of the products, etc.
:. here is no significant change in the inventory levels during the period
under review. !tated in another way, production volume is assumed to be
almost (if not exactly* e#ual to the sales volume, which causes an immaterial
(or none at all* difference between the beginning and ending inventories.
;. )ther assumptions which have already been discussed in the preceding
numbers, are again credited and highlighted here as followsI
o =nit selling price will remain constant.
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o =nit variable cost will not change. (his may include
prices of the factors of production like material costs, labor costs
etc.
Cost-%olue-Pro&it 5C%P6 A"alysis
Cost-olume-0rofit (C0* "nalysis analysis is defined as a systematic
examination of the relationships among costs, activity levels, or volume, and
profit. C0 analysis establishes the relationship of profit to level of sales. "nd one
of these relationships is the 9reak-even analysis.
!ince direct connection of expenses to production cannot be conclusively
established under functional classification of costs, analysis under C0 is directed
towards cost behavior3 the way costs behave or change with respect to a change in
the activity level. Costs can be classified according to its behavior asI
. ,i7e# Costs
hese are costs that do not change regardless of changes in the level of
activity within a relevant range. &n other words, they remain constantregardless of the change in the activity level per total3 however, fixed cost
per unit is inversely proportional to the activity level.
5. %aria.le Costs
&n total, these costs change directly and proportionately with the level of
activity. "s the activity level increases, variable cost per total will also
increase proportionately to the increase in activity level. Lowever, variable
cost per unit remains constant, within the relevant range.
/. Sei-%aria.le Costs
Costs that varies with the change of activity level but not proportionately,
they are called semi-variable costs. hey may either increase at an
increasing rate or increase at a decreasing rate. " typical example of this is
the cost of electricity (increasing at an increasing rate* because it is sub$ect
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to graduated brackets, thus, the greater the consumption, the higher the rate
per kilowatt hour as they will be categori6ed in a higher bracket.
7. Sei-,i7e# Costs his kind of costs has the characteristics of both variable and fixed cost
and is usually known as the step function cost or step cost. >ike semi-
variable cost, semi-fixed cost increases with activity level but not
proportionately. "nd like fixed cost, it is constant for some stretches of
activity levels.
:. Mi7e# Costs
Costs that cannot be identified by a single cost behavior pattern are called
mixed costs. his kind of cost is composed of variable and fixed cost. Me
have concluded earlier that costs are more meaningful when they are
classified according to behavior. Mhen costs therefore are mixed, it is
important that we know how to segregate them. !ome tools and techni#ues
popularly used are the Ligh->ow ?ethod, !catter Graph ?ethod,
1egression "nalysis, and Correlation .
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INTODUCTION TO O-EATING CO&TING
It is a method o costing applied by undertakings which provide
service rather than production o commodities. Eike unit costing
and process costing, operating costing is thus a orm o operation
costing.
The emphasis under operating costing is on the ascertainment o
cost o rendering services rather than on the cost o manuacturing a product. It is applied by transport companies,
gas and water works, electricity supply companies, canteens,
hospitals, theatres school etc. Fithin an organisation itsel certain
departments too are known as service departments which provide
ancillary services to the production departments. %.g.
aintenance department, power house, boiler house, canteen,
hospital, internal transport.
The inormation concerning the business enterprise is very helpul
to the management to control it in an efciently way. !s the other
branches like &nancial accountancy and management
accountancy, the cost accountancy also serves the important
inormation to the management regarding the operating
efciency o the business. It becomes very easy or management
to lay down management policies, to guide management
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decisions or evaluate operating management perormance with
the inormation provided by cost accounting.
The term operation in business terminology reers to an activity o
the business. It is very important to study the operations o the
business in detail because depends on the operations, which it
perorms. The management should always concentrate on the
efciency o the operation and also the costs associated to the
operations. It is very important to control the costs associated to
the operations or the enterprises like manuacturing companies,
companies engaged in the process o e9traction o materials rom
earth like, coal mines etc.
Generally, the above mentioned business enterprises depend on
the operation that it has to be perormed in to produce in to
produce the &nal output. The costs associated with such
operations are generally higher. These costs are called as
Hoperating costs.
The costs, which are incurred to perorm the operation o theenterprise, are called as operating costs. These costs are to be
accounted or in order to arrive at the total costs o operation or
process, which helps in determining the price o the &nal product.
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“Cost accounting is the classifying, recording and appropriate
allocation of expenditure for the determination of the costs of
products or services, and to the presentation of suitably;arranged data for the purposes of control and guidance of
management.”
It includes the ascertainment o the costs o every process,
operation, services or contrast as may be appropriate. It deals
with the cost o production, selling and distribution. It thus, the
provision o such analysis and classi&cation o e9penditure as will
enable the total cost o any particular unit o production to be
ascertained with reasonable degree o accuracy and at the same
time to disclose e9actly how such total cost is constituted i.e. the
value o material used, the amount o labour and other e9penses
incurred/ so as to control and reduce the cost.
:perating $osts are the costs incurred by undertakings which do
not manuacture any product but provide a service. =uch
undertakings or e9ample are J Transport concerns, Gas
agenciesK %lectricity LndertakingsK ospitalsK Theatres etc.Because o the varied nature o activities carried out by the
service undertakings, the cost system used is obviously di5erent
rom that ollowed in manuacturing concerns.
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E&&ENTIA" FEATUE& OF O-EATING CO&T& AE A&
FO""O.&*
/ The operating costs can be classi&ed under three categories.
4or e9ample in the case o transport undertaking these three
categories are as ollows(
a/ Operating and running charges. It includes e9penses o
variable nature. 4or e9ample e9penses on petrol, diesel,
lubricating oil, and grease etc.
b/ Maintenance charges. These e9penses are o semi-variable
nature and include the cost o tyres and tubes, repairs and
maintenance, spares and accessories, overhaul, etc.
c/ Fixed or standing charges. These includes garage rent,
insurance, road licence, depreciation, interest on capital, salary o
operating manager, etc.
0/ The cost unit used is a double unit like passenger-mileK
Dilowatt-hour, etc.
It can be implemented in all &rms o transport, airlines, bus-
service, etc., and by all &rms o ?istribution Lndertakings.
T/E FEATUE& OF CO&T ACCOUNTING*
. It is a process o accounting or costs.
0. It records income and e9penditure relating to goods and
services
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1. It provides statistical data on the basis o which uture
estimates are prepared and quotations are submitted.
2. It is concerned with cost ascertainment, cost control and cost
reduction.
6. 4inally it involves the preparation o right inormation to the
right person at the right time so that it may be helpul to
management or planning, evaluation o perormance,
control and decision-making
ADVANTAGE& OF CO&T ACCOUNTANC!
. It enables a concern to measure the efciency and than tomaintain and improve it. This can be done with the help o
comparison o data made available o the previous periods
and current period.
0. It provides inormation upon which estimates and tenders are
based.
1. It guides or uture production polices. It e9plains the cost
incurred and there by provides data on the basis o which
production can be appropriately planned.
2. The e9tract cause o decrease or increase in pro&t*loss can be
detected. ! concern may su5er not because o the cost o
production is high or prices are low but also because the
output is much below the capacity o the concern.
6. %fciency o public enterprises. $osting has a more important
role to play in public enterprises than in private enterprises.
The primary ob+ective o the public enterprises is not to raise
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pro&ts but it is to serve the society by providing quality good
at cheaper rates.
O-EATING CO&TING* A BIEF EVIE.
It is de&ned as the re&nement o process costing. It is concerned
with the determination othe cost o each operation rather than
the process. In those industries where a process consistso
distinct operations, the method o costing applied or used is
called operation costing.:peration costing o5ers better scope or
control. It acilitates the computation o unitoperation cost at the
end o each operation by dividing the total operation cost by totalinputunits. The two costing methods included under this head are
process costing and servicecosting.
-re'aration o% Cost &(eet under O'erating Costing
4or preparing a cost sheet under operating cost, costs are usuallyaccumulated or a speci&ed period vi3., a month, a quarter, ora year etc.!ll o the accumulated costs should be classi&ed under the
ollowing three heads(. 4i9ed costs or standing charges(Fhich are the same whether the operation is closed or running at
CCM capacity. 4i9ed $ostsinclude items such as the rent o the
building. These generally have to be paid regardless owhat state
the business is in.
0. >ariable costs or running charges, 4uel, ?river Fages,
?epreciation, oil etc./(
Fhich may increase depending on whether more production is
done, and how it is doneproducing CC items o product might
require C days o normal time or take 8 days iovertime is used.
It may be more or less e9pensive to use overtime production
depending onwhether aster production means the product can be
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more pro&table/. >ariable $osts includeindirect overhead costs
such as $ell "hone =ervices, $omputer =upplies, $redit
$ard"rocessing, %lectrical use, Nanitorial =upplies, :fce "roducts,
"ayroll =ervices, Telecom,Lniorms, Ltilities, or Faste ?isposal
etc.
1. =emi-variable costs or maintenance costs. =upervision salary,
;epairs and aintenance/
Lnder operating costing, the per unit cost o service may be
calculated by dividing the totalcost or the period by the total
units o service in the period.
:verhead costs or a business are the cost o resources used byan organi3ation +ust tomaintain its e9istence. :verhead costs areusually measured in monetary terms, but non-monetary overheadis possible in the orm o time required to accomplish tasks.%9amples o overhead costs include(
• payment o rent on the ofce space a business occupies
• cost o electricity or the ofce lights
• some ofce personnel wages
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depending on whether it is made by the owneror was purchasedas a constructed system/.:perating costs are incurred by allequipment J unless the equipment has no cost to operate,requires no personnel or space and never wearsout any
e9amplesQ perhaps intangibles, though not equipment, per se/. Insome cases,equipment may appear to have low or no operatingcost because either the cost is notrecogni3ed or is being absorbedin whole or part by the cost o something else. %quipment operating costs may include(
• =alaries or Fages o personnel
• !dvertising
• ;aw materials
• Eicense or equivalent ees such as $orporation yearly
registration ees/ imposed by agovernment
• ;eal estate e9penses, including
• ;ent or Eease payments
• :fce space rent
• urniture and equipment
• investment value o the unds used to purchase the land, i
it is owned insteado rented or leased
• property ta9es and equivalent assessments
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• :perations ta9es, such as ees assessed on transportation
carriers or use o highways
• 4uel costs such as power or operations, uel or production
• "ublic Ltilities such as telephone service, Internet
connectivity, etc.
• aintenance o equipment
• :fce supplies and consumables
• Insurance premium
• ?epreciation o equipment and eventual replacement costs
unless the acility has nomoving parts it probably will wearout eventually/
• ?amage due to uninsured losses, accident, sabotage,
negligence, terrorism and routinewear and tear.
• Ta9es on production or operation such as subsidence ees
imposed on oil wells/
• Income ta9es
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=ome o these are not applicable in all instances. 4or e9ample,
• ! solar panel placed on one's home or use in generating
electric power generally hasonly capital costsK once it'srunning there are no personnel costs, utility costsordepreciation and it uses no e9tra land that wasn't alreadypart o the place where it islocated/ so it has no realoperating costsK however there may need to be taken
intoaccount costs o replacement i damaged.
• !n automobile or any other item purchased or personal use
has no salary cost because the owner does not chargethemselves or operating the device.
• !n item which is leased may have some or all o these costs
included as part o the purchase price.
It might be questionable to assert that the cost o ten e9trapeople on the sales orce are an incremental cost or an overheadcost, since the wages or these people are both overhead andincremental. The sta5s needed to keep the shop operational aremostly considered as overhead.
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INDEX!1 J). &>2 0"G2 J).
1 TOPI" ,SO"IA' A!IT
Introduction
Principles Of Social Audit
Benefits Of Social Auditing
Social Audit Vs Other Audits
Six Ke Steps !or Social Audit
"istor Of Social Audit
# TOPI" -Budgeting and Budgetary Control
Introduction
DE!INI$ION O! B%D&E$
B%D&E$A'( )ON$'O*
O+,ecti-es of Budgetar )ontrol
Ad-antages of Budgetar )ontrol
*i.itations of Budgetar )ontrol
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/ TOPI" .0AGINA"CO&TING
Introduction
DE!INA$ION O! 0A'&INA* )OS$IN&
!EA$%'ES O! 0A'&INA* )OS$IN&
ADVAN$A&ES O! 0A'&INA* )OS$IN&
0A'&INA* )OS$IN& VS ABSO'P$ION )OS$IN&
2 TOPI" /O-EATING CO&TING
Introduction
ESSEN$IA* !EA$%'ES O! OPE'A$IN& )OS$S
Preparation of )ost Sheet under Operating )osting
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A PRO8*CT R*PORT ON
ASocial Au#itB
9)u#$etary Co"trol
9Mar$i"al Costi"$
9Operati"$ Costi"$
!=9?&28 9O
D!a;al N Trive#i
1)>> J)I ;
MCo S*M- I I
("8"JC28 C)! "CC)=J&JG*
"C"82?&C O2"1I 5P:-;
=nder the guidance of
PRO, CA NITIN
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!=9?&28 ) =J&21!&O )F ?=?9"&,
.Q.Q1&!LJ" ?2J)J C)>>2G2 )F C)??21C2 "J8 !C&2JC2
9L"J8=0 (2"!* ?=?9"& - 7PPP75
"$RTI#I"AT$
&, 0rof . CA Niti" >2G2 )F C)??21C2 "J8 !C&2JC2, 9L"J8=0 (2"!*, ?umbai -7PPP75
of ?.com 0art & ("8"JC28 C)! "CC)=J&JG * has completed her pro$ect on
ASocial Au#it = )u#$etary Co"trol= Mar$i"al Costi"= Operati"$ Costi"$
during the academic year 5P:-; he information submitted is true and original to
the best of my knowledge.
RRRRRRRRRRRRRRRRRRRR RRRRRRRRRRRRRRRRRRR
0ro$ect Guide 2xternal guide
RRRRRRRRRRRRRRRRRRRRR
RRRRRRRRRRRRRRRRRRR
Co-coordinator 0rincipal
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?ate (
$"'ARATION #RO% TH$ ST!$NT
& D(A+AL N TRI%*DI ROLL NO 3>= !tudent of .Q.Qrishna ?2J)J
College )f Commerce and !cience, 9handup (2"!* ?umbai 7PPP75, studying
in ?.Com 0art- & hereby declare that & have completed the pro$ect on A "8"JC28
C)!&JGB under the guidance of pro$ect guide Pro& CA NITIN
8/16/2019 Dhawal Costing
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0laceI 9handup
ACast but not the least, & wish
to avail myself of this opportunity, to express a sense of gratitude and love
to my friends and my beloved parents for their mutual support, strength,
help and for everything.
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0>"C2I 9L"J8=0 !ignature
8"2I
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