Cost Accounting

Chapter 1
Cost – The amount spent to produce or buy something.
Costing – The process of calculating the cost of a product or service.
Cost Accounting – Recording and analyzing all costs to help control and
plan business expenses.
Cost Unit – A unit of product or service for which cost is measured (like
per kg, per hour).
Cost Centre – A department or section where costs are incurred and
tracked.
Profit Centre – A part of a business responsible for generating profits
and tracking revenues and costs.
Sunk Cost – A cost that has already been spent and cannot be
recovered.
Opportunity Cost – The value of the next best alternative foregone
when making a choic

1. Difference Between Costing and Cost Accounting

✅ Costing
 It means calculating the cost of a product or service.
 It is a part of cost accounting.
 It has a limited scope.
 It does not provide detailed information.
 Usually done by cost clerks.

✅ Cost Accounting
 It involves recording, analyzing, and controlling costs.
 It includes costing as a part of it.
 It has a broader scope.
 It gives detailed and useful information for decision-making.
 Usually done by cost accountants.
2. What is the need for Cost Accounting?
 Helps in cost control and cost reduction.
 Assists in determining the selling price.
 Facilitates inventory control.
 Useful for managerial decision-making.
 Ensures optimum use of resources.
 Provides information for comparison and performance evaluation.
3. State any four advantages of Cost Accounting.
 Helps in controlling cost.
 Provides information for decision-making.
 Assists in fixing prices.
 Aids in identifying profitable and unprofitable activities.
4. State any four limitations of Cost Accounting.
 It is expensive to operate.
 It is based on estimates and not always exact.
 Not suitable for small businesses.
 Sometimes fails to integrate with financial accounting.
5. Functions of Cost Accounting
 Recording – Write down all cost-related transactions.
 Classification
 Ascertainment – Find out the total cost of products, jobs, etc.
 Allocation – Divide costs among departments/products.
 Analysis – Find reasons for cost increase or difference.
 Comparison – Compare costs of products or time periods.
 Control – Keep costs within limits using methods like budgeting.
 Audit – Check if cost records are correct.
 Reporting – Give cost reports to managers for decisions.
6. Objectives of Cost Accounting
 Find cost per unit
 Control and reduce cost
 Help fix selling price
 Know profit from each job
 Prepare reports and statements
 Help in decision-making
 Check product/job profitability
 Measure efficiency
 Reduce waste and loss
7. Advantages of Cost Accounting
👉 For Management:

Shows profit/loss in each activity

Helps in taking decisions

Controls material and labour costs

Reduces waste and losses

Helps fix price

Measures performance

Checks department-wise performance

👉 For Employees:

Helps give bonuses and better wages

Improves wage system

Increases job security

Reduces misunderstandings

👉 For Creditors & Investors:

Shows financial health

Confirms good use of capital

Shows if the firm is creditworthy

👉 For Government:

Helps in setting tax, price, wage rules

Useful in planning and budgeting

Helps manage public companies

👉 For Society:

Reduces waste

Brings stable prices

Controls inflation

Creates job

8. Disadvantages / Demerits
 No fixed rules – different for each firm
 Gives data, not solutions
 Can be expensive
 One method may not suit all
 Not useful for small/trading firms
 Based on estimates
9. Criticisms of Cost Accounting
 Too costly for small firms
 Some think it’s not needed
 Not suitable for every business
 Sometimes fails to give good results
10. Methods of Costing
 Job Costing – For individual jobs (e.g. printing, repair)
 Batch Costing – For batches (e.g. biscuits, medicines)
 Contract Costing – For large projects (e.g. roads, buildings)
 Process Costing – For step-by-step production (e.g. textile, paper)
 Unit/Single Costing – For one product in bulk (e.g. cement, bricks)
 Operating Costing – For services (e.g. transport, hotel)
 Operation Costing – For each part of a process (e.g. toy making)
 Multiple Costing – Mix of methods (e.g. car making)
11. Types / Techniques of Costing
 Absorption Costing – Includes all costs
 Marginal Costing – Includes only variable costs
 Direct Costing – Includes only direct cost
 Differential Costing – Compares cost of two choices
 Uniform Costing – Same method used by many firms
 Historical Costing – Costs recorded after spending
 Standard Costing – Compare planned vs actual cost
Materials
Material refers to things used for producing an article or providing a
services. It is classified into two direct material and indirect material.
 Direct material: - It refers to the raw materials that are directly
used in the production process of goods and services of the
company.
 Indirect material: - Indirect material are those material that are
used in the production process but that are not directly
traceable to the product.
Eg: Glue, oil, tape, cleaning supplies, etc.

Inventory – Meaning

Inventory simply refers to stock held by a business.

In a manufacturing firm, inventory includes:

 Raw Materials – Items used in the production process.

 Work-in-Progress (WIP) – Semi-finished goods.
 Finished Goods – Completed products ready for sale.
 Stores and Spares – Other materials like tools, lubricants, etc.

In short, inventory includes all materials and items held in stock,

whether for production or sale.

Material cost control

Material Control Process

The material control process involves the following main steps:

Purchasing ➝ Receiving ➝ Storage ➝ Issuing

It is a systematic control over purchasing, storing and consumption
of materials. It maintain a regular and timely supply of materials and
it minimize over and under stocking.
Objectives/Importance of material cost control
 To avoid the situation of under stocking.
 To avoid the situation of over stocking.
 To avoid wastage and losses.
 To minimise the total cost of material.
 To maintain proper and up to date records.
 To provide required information to the management.
 To ensure procurement of material.
 To ensuring optimum utilization of material. To ensure proper
storage of material.
Essentials/ Requirements/ Principles of sound material control
 Proper coordination among various departments.
 Purchases should be made by a centralized purchasing
department.
 Proper classification and codification of materials.
 Timely procurement of quality materials.
 Regular inspection and verification of materials.
 Maintenance of up-to-date records and stock registers.
Purchase order
It is a legal document by a buyer send to a supplier or vendor to
authorise a purchase. A legal document issued to suppliers for
ordering goods.
Centralized purchasing
When all the purchases are made by one specialized department,
called centralized purchasing
Advantages of Centralized Purchasing

 Reduces cost of purchases.

 Ensures uniform quality of materials.
 Enjoys advantages of bulk purchases.
 Exercises effective control over inventories.
 Involves less clerical work.

Disadvantages of Centralized Purchasing

 May cause delay in getting materials.

 Not suitable for plants located at different places.
 Involves huge administrative costs.
 May result in wrong purchases due to lack of local knowledge.
 Cannot enjoy the benefits of local purchases.

Functions of Purchase Department

 Prepare purchase budget.

 Formulate purchase policies and procedures.
 Place purchase orders.
 Choose the most favourable source of supply.
 Receive purchase requisitions from departments.
 Purchase the right quality and quantity of materials.
 Verify and pass invoices for payment.

Basic Steps in Purchasing Materials

1. Receiving purchase requisition

2. Inviting quotations and tenders
3. Selecting the supplier
4. Placing the purchase order
5. Receiving the material
6. Inspection of materials
7. Checking the invoice
8. Making payment
Stores Control

 It refers to control over storage of materials.

 Main Objective: To reduce material cost by avoiding waste,
theft, and overstocking.

Functions/Duties/Responsibilities of Storekeeper

 Issue purchase requisition.

 Receive materials and place them in proper storage.
 Maintain cleanliness in the store.
 Conduct regular stock-taking.
 Maintain bin cards for each material.
 Protect materials from theft and damage.
 Prevent unauthorized entry into stores.
 Report on waste, scrap, and obsolete stock.
 Maintain up-to-date records of store activities.

Types of Stores

1. Centralized Stores: All inventory is stored in one location, making it

easier to manage and control.

2. Decentralized Stores: Inventory is stored in multiple locations,

which can be beneficial for large organizations with multiple sites.

Perpetual Inventory System

A perpetual inventory system continuously tracks and updates

inventory levels in real-time.

Advantages include:

1. Accurate stock levels: Up-to-date information on inventory levels.

2. Quick valuation: Easy to determine the value of closing stock.

3. Improved management: Helps in formulating purchase policies

and managing working capital.
Other Inventory-Related Terms

1. Bill of Materials: A document listing the materials needed to

produce a product.

2. Material Requisition: A document authorizing the storekeeper to

issue materials.

3. Material Inspection Note: A report on the quality of materials

received.

4. Periodic Stock Taking: Physical verification of stock at regular

intervals (e.g., annually).

5. Continuous Stock Taking: Regular, ongoing verification of stock

levels.

These inventory management techniques help businesses maintain

accurate stock levels, reduce waste, and improve efficiency.

Bin Card (Stock card)

Bin is a place, rack or cupboard where materials are stored. A card is
attached to each bin for indicating the stock position of the bin. This
card is also known as bin card. It is also known as stores card. So, it
shows the particular such as maximum level, minimum level, reorder
level, reorder quantity, stores, code number, description, etc. of the
materials kept in the bin.
Advantages of bin card
 It shows the stock position at any time
 It helps in preparing purchase requisition.
 It helps in implementing perpetual inventory system.
 It enable proper financial statements without dely.
 It helps in effective stores control
Stores Ledger
It is a ledger which provides information for the pricing of material
issued and the money value at any time of each items of stores.

Techniques/Methods of Material/Inventory/Stores Control

1. Classification and codification of materials
2. Double bin system
3. Stores stock levels
4. Economic order quantity
5. Material turnover ratio
6. Stock verification system
7. Imprest system
8. Selective inventory control methods:
(a) ABC analysis
(b) VED analysis
9. JIT inventory technique
1. Classification and Codification of Materials:
Classification of materials refers to grouping materials according to
their nature or characteristics into suitable categories, such as:
1. Metals (iron, aluminium, copper)
2. Raw materials (wood, cotton)
3. Finished goods (products)
2. Double bin system Two-Bin System
The two-bin system involves maintaining two bins for each material:
1. Running Bin: for regular issues
2. Reserve Bin: contains minimum stock, used when the running bin
is empty.
This system helps manage inventory levels and ensures that stock
outs are minimized.
3. Store stock level
It refers to the quantity of inventory or materials maintained in a
store or warehouse.
Stores stock level:
1. Maximum Level
Maximum stock level is the highest quantity of stock that should be
maintained. It is used to avoid overstocking
It's calculated as: Reorder Level + Reorder Quantity - Minimum
Consumption × Minimum Reorder Period.
2. Minimum Level
Minimum stock level is the lowest quantity of stock that should be
maintained. It is also called safety or buffer stock.
It's calculated as: Reorder Level - Normal Consumption × Normal
Reorder Period.
3. Reorder Level
Reorder level is the stock level at which a new order should be
placed.
It's calculated as: Maximum Consumption × Maximum Reorder
Period.
4. Average Stock Level
Average stock level is the average quantity of stock maintained over
a period. It's calculated as: Minimum Level + 1/2 Reorder Quantity.
5. Danger Level
Danger level is the stock level should never be allowed to fall.
Emergency action to be taken.
6. Reorder Period: The time between placing an order and receiving
new stock. It's a critical factor in inventory management.
4. Economic order quantity (EOQ)
The quantity of material to be ordered at one time is known as
economic order quantity. It is the ideal order quantity a company
should purchase to minimize inventory costs.
Benefits of EOQ:
1. Minimizes total inventory cost
2. Reduces inventory costs
3. Improves inventory management
4. Enhances supply chain efficiency
5. Material Turnover Ratio:
The material turnover ratio measures how often inventory is sold
and replaced within a given period.
This ratio helps evaluate inventory management efficiency, with
higher ratios indicating better inventory control and lower ratios
indicating potential overstocking or slow-moving inventory.
6. Stock Verification System
Regularly verifying inventory levels to ensure accuracy.
7. Imprest System
A mix of central and departmental stores to reduce transportation
costs and improve efficiency in large factories. It allows departments
to hold inventory near production areas while the central store
maintains overall control and records.
8. ABC analysis
Categorizing inventory into:
1. A (High-value items): strict control
2. B (Moderate-value items): moderate control
3. C (Low-value items): minimal control
Advantages of ABC analysis
 It ensure effective cost control
 it helps to use working capital in a better way.
 It reduces clerical costs.
 It leads to reduction in storage costs.
 It helps to maintain high stock turnover ratio.
 Investments in materials can be regulated.
VED analysis
It is an inventory management technique that classifies inventory
based on its functional Importance.
Categorizing inventory based on its criticality:
1. V (Vital): essential items
2. E (Essential): important items
3. D (Desirable): non-essential items
JIT (Just In Time)
It is an inventory management method whereby labour, material and
goods are scheduled to arrive exactly when needed in the
manufacturing
Advantages of JIT
 Reduction in inventory.
 Optimum utilization of working capital
 Elimination of wastes
 Increased productivity Quality improvement.
 Greater customer satisfaction.

First-In-First-Out (FIFO) Method:

Materials are issued in the order they are received, meaning the
oldest stock is used first. Closing stock is valued at the latest prices.
Advantages:
1. Matches physical flow of goods
2. Reduces obsolescence and spoilage
3. Valuing closing stock at latest prices reflects current market value
4. Simple to understand and implement
5. Suitable for perishable goods
Disadvantages:
1. May not match cost flow with physical flow in some cases
2. Can lead to higher costs in inflationary periods
3. Requires detailed record-keeping
4. May result in higher profits being reported, leading to higher tax
liability
LIFO (Last in First Out)
This method is a just reverse of FIFO method. Under this method,
material received last are issued first.
Advantages of LIFO method
 It is simple to operate
 it is easy to understand
 It is more suitable in time of rising prices.
 It is useful when transactions are not too many
 it provides tax benefits to the business Materials.
 issued at actual price.
Disadvantages of LIFO method
 This method involve considerable amount of clerical work.
 It is difficult to control the cost of jobs
 The value of closing stock does not reflect the current market
conditions
MODULE III
Direct labour
Direct labour refers to the labour which can be identified with a particular
product or job. It is the workforce directly engaged in the manufacturing
activities.
Indirect labour
Indirect labour refers to the labour which cannot be identified with a particular
job or product. It is the workforce not directly engaged in the manufacturing
activities.
Labour cost
Labour cost refers to the total expenditure incurred by employers for the
employment of employees.
Labour cost control
Labour cost control means control over the cost incurred on labour. It is a
system which ensures proper employment of labour and its effective
utilization.
Importance/ Objectives/ Advantages of labour cost control
 It minimizes labour cost per unit of production.
 It controls ideal time, overtime, labour turnover etc.
 It increases the labour productivity.
 It helps in absorption of overhead.
 It improves profitability and prosperity of firm.
 It facilitates effective utilization of skilled labours.
Techniques of labour cost control
 Assessment of manpower requirement
 Time and motion study Job evaluation and merit rating
 Labour productivity
 Wages system/ Incentive system
 Control over time keeping and time booking
 Control over labour turnover
 Control over casual/ contract & other workers
Time keeping
The process of recording the time arrival and departure of workers is known as
time keeping.
Objectives/ Purpose of time keeping
 To facilitate preparation of pay roll.
 To meet statutory requirements.
 To maintain discipline in attendance.
 To calculate overtime.
 To control labour cost.
 To introduce incentive plan of wage payment.
Methods of time keeping
 Manual methods
 Attendance register method
 Disc or token method
 Mechanical methods
 Time recording clocks
 Dial time recorder
 Key recorder
 Biometric time attendance system

Time Booking
It is the recording of time spend by the workers on different jobs or work.
Objectives/ Purpose of time booking
 To ensure the time spend by a worker in a factory.
 To ascertain labour cost of each individual job.
 To ascertain unproductive time or ideal time.
 To know the efficiency of workers
 To prevent waste of labour time.
Methods of time booking
 Daily time sheet
 Weekly time sheet
 Job card
Difference between time keeping and time booking
TIME KEEPING TIME BOOKING

It record attendance time of workers It is a record work time of workers

It is a statutory obligation It is not statutory required

It is the first step in time recording Its the second step in time recording

It is Maintained by the time keeper It is maintained by departmental

supervisors
It is for the purpose of wage It ensure wage paid are properly
calculation ensured
The purpose is to enable preparation The purpose is to ascertain labour
of pay roll costs of job
Merit rating
It is a labour cost control technique. It aims at evaluating the workers actually
performing the jobs
Wages abstract
It is a document showing distribution of wages by job, department etc. It is also
called wage analysis sheet Its prepared by costing department
Payroll (Wage sheet)
It is a sheet containing the details of wage payable to the workers. It is a
consolidated statement of wage payable to each workers.
Must roll method
Attendance register or must roll method record the time of arrival and
departure by a time recording staff or by putting signature by the workers
themselves.
System/ Methods of wage payment
1. Time wage system or time rate system
2. Piece wage system or piece rate system
3. Incentive wage system
Time wage system or time rate system
Under this method of wage payment, the workers is paid at an hourly, daily,
weekly or monthly rate.
Advantages of time rate system
 It is simple to understand.
 It is easy to operate
 It guarantees minimum wages to workers
 Quality of output become superior
 It is acceptable to the workers and trade union
 It ensure careful handling of tools and equipments.
Disadvantages of Time rate system
 Workers are not motivated
 Strict supervision negatively affect
 It encourages go slow of work
 It does not provide incentive to work hard
 Ideal time is considerably increased
 Workers become lazy
 Workers try to avoid work

Piece rate wage system

Under this system of wage payment, a fixed rate is paid for each unit produced,
job completed or an operation performed.
Advantages of piece rate wage system
 Workers are paid according to their merits.
 Workers are motivated to increase production.
 Profit per unit increases
 Idle time is minimized
 The employer can make quotations confidently.
 Less case of defective tools and machinery.
 Less supervision is required
 Inefficient workers are motivated to become efficient.

Disadvantages of piece rate system

 This system opposed by trade union
 Minimum wage are not guaranteed.
Halsey Premium Plan
 Under this method, the worker is given wages for the actual time taken
and a bonus equal to half of wages for time saved.
Advantages of Halsey Premium Plan
 It is simple to calculate
 It guarantees time wages to workers
 Helpful in reducing labour cost per unit
 It motivates efficient workers.
 Helps to reduce production cost.
Disadvantages of Halsey Premium Plan
 Quality of work suffers.
 Workers criticize this method on the ground that the employer gets a
share of wages of the time saved.
Rowan Plan
Under this method bonus is that proportion of the wages of the time taken
which the time saved bears to the standard time allowed.
Advantages of Rowan Plan
 It guarantees time wages to workers
 The quality of work does not suffer
 Labour cost per unit is reduced.
 Fixed overhead cost is reduced.
Disadvantages of Rowan Plan
 Workers do not get the full benefit of the time saved by them
 Very efficient and not so efficient workers may get the same bonus.

Ideal time
There is a difference between the time booked to different jobs or work orders
and time recorded at the factory gate. This difference is known as ideal time.
Normal ideal time
Normal ideal time refers to the ideal time which is normal and which cannot be
avoided.
Abnormal ideal time
Abnormal ideal time refers to ideal time due to abnormal reasons. It can be
avoided.

Over time
It is the work done beyond the normal working period in a day or week.
Time and motion study
It is a technique for recording the time of performing a specific job which is
carried out under specific conditions.
Machine hours rate (MHR)
It simply means cost of running a machine per hour. It is the hourly cost in
terms of factory overheads to operate a particular machine.
Dual hour rate
This is the combination of machine hour rate and direct labour hour rate.
Tenders or Quotation
It is an offer made by a person to supply certain goods at a specified price.
Overhead cost (On cost)
On cost means overhead cost. It is the indirect cost incurred in the factory,
office and selling and distribution department.
Primary distribution of overhead
It means the allocation and apportionment of overhead to both production and
services department directly / an agreed ratio /proportion.
Classification of overhead
 Function wise classification
 Manufacturing overhead :- It is the total cost involved in operating all
production facilities of a manufacturing business. It is also called
factory overhead or work overhead.
 Administrative overhead :- It is the general business expenses not
related to production, marketing or research costs.
 Selling and distribution overhead :- The expenses incurred by an
organisation in carrying out its selling activities.

 Behavioural wise classification

 Fixed overhead :- It is a set of cost that do not vary as a result of
changes in activity.
 Variable overhead :- It is a cost of operating a firm that fluctuate with
the level of business or manufacturing activity.
 Semi variable overhead :- It is a cost composed of a mixture of both
fixed and variable components.
Apportionment of overheads
The process of charging proportionate amount of overheads to various
departments on suitable basis is called apportionment of overheads.
Allocation of overheads
It is the process of charging full amount of the overhead cost to a particular
department or cost centre.

Difference between cost allocation and cost apportionment

COST ALLOCATION COST APPORTIONMENT
It deals with allotment of whole item It deals with allotment of
to the cost proportionate items of cos
Its a direct process Its an indirect process

It is a simple process It is a complicated process

It is accurate Its only approximate

There is no need to choose base It is done on some suitable base

Absorption of overhead
It means charging of overheads of a particular cost centre to its different cost
units by means of overhead absorption rates.
Difference between apportionment and absorption of overheads
APPORTIONMENT ABSORPTION
It is the allotment of proportion of Its the allotment of overheads to cost
cost to the cost centres units
It starts before absorption It starts after apportionment

Suitable / equitable bases are used Percentage rate of overheads

areused
MODULE IV

1. Job Costing :- It means ascertaining costs of an individual job, work order or

projects separately.
Features of job costing
 Each job is treated as unit.
 A separate job cost sheet is made out for each job.
 The duration of the job is usually a short period.
 A separate working progress ledger is maintained for each job.
 Profit or loss is determined for each job independently.
Advantages of job costing
 It helps to control future cost.
 It helps to ascertain cost and profit of each job.
 It helps in future production planning
 It helps to distinguish profitable jobs from unprofitable jobs
 It helps to identify defective works
 Selling prices of special orders can easily be fixed
Disadvantages of job costing
 Job costing involves more clerical works.
 It is more expensive
 it does not facilitate cost control
Job costing procedure
 Receiving enquiry and sending quotations
 Receiving of order
 Production order
 Allotting production order number
 Recording of cost
 Completion of job
 Ascertainment of profit/loss
Job evaluation :- It is the assessment of the relative worth of a job within a
company.
Job specification :- Job specification is a statement of minimum acceptable
human qualities necessary to perform a job properly.
Specific order costing :- It is a method of costing applicable where the work
consist of separate jobs of which is authorized by specific order.

Contract Costing :- It is a form of specific order costing in which cost are

attributed to individual contracts
Features of contract costing
 Contracts are generally at large size.
 Contract itself is a cost unit.
 A separate account is maintained for each contract.
 They are normally carried out for long period and completed.
 Common indirect expenses are apportioned over different contracts.
Work in progress :- It is the unfinished contract at the end of the accounting
period and it includes amount of work certified and amount of work
uncertified.
Work certified :- The sales value of work completed as certified by the
architect is known as work certified.
Work uncertified :- It means work which has been carried out by the
contractor but has not been certified by the architect.
Retention money :- The unpaid balance of work certified or the amount held
back or retained by contractee is known as retention money.
Difference job costing and contract costing

JOB COSTING CONTRACT COSTING

Each job is treated as cost unit Each contract is treated as cost unit

Job work is executed in factory Contract work is executed at the site

premises of the contract

Indirect cost are higher than those Indirect cost are lower than those
under contract costing under job costing
Job costing take less time for Contract costing takes more time for
completion completion

It is influenced by the individual It is influenced by the specific clauses

condition and general policy of the of the contract
organization

Process costing
Process costing is the method of costing used to ascertain the cost of a product
at each process.
Features of process costing
 Production is continuous
 Products are standardised
 Products are homogeneous
 Products passes through two or more process.
 Products are not distinguishable in processing stage
 The finished products of one process becomes the raw materials of the
subsequent process
Advantages of process costing
 It is easy to compute average cost
 It is simple.
 It is less expensive.
 It is possible to ascertain the process cost at short intervals.

Disadvantages of process costing

 Process cost are only historical.
 Difficult to value losses, waste, scrap etc.
 Difficult to value work in progress.
 These are not accurate. It’s only an average cost.
Difference process costing and job costing

PROCESS COSTING JOB COSTING

Production is continuous Production according to customers
order
Production is for stock Production is not for stock

Work in progress always exist Work in progress may or may not

exist

All units produced are homogeneous Each job is different

There is a regular transfer of cost of There is no such transfer

one process to another process

Each job is separate and independent Product lose their individual entities
of others as they are manufactured in a
continuous flow

Normal process loss

This is the loss which is unavoidable on account of inherent nature of
production process.
Abnormal process loss
Any loss caused by unexpected or abnormal conditions such as plant break
down, substandard material, accident etc. Such loss are called abnormal
process loss.
Abnormal gain
It is the excess of actual production over normal output. It is also called
abnormal effective.
Operating costing
It is the method of costing designed to find out cost of operating or rendering a
service. It is also called service costing.
Continuous operation cost
It is a costing method which is used where the goods or services being costed
are the results of continuous operation or process.
Cost sheet
Cost sheet is a statement showing various components of total cost of output
of a particular product or services produced during a particular period.
Advantages of cost sheet
• It disclose the total cost and cost per unit of the product.
• It helps in fixing up selling price.
• It helps in formulating definite useful production policy
• It enable control over cost of production.
• It facilitate comparison.
• It helps in submission of quotations.
Batch costing
It is a method of costing used in concerns that produce goods in batches. Batch
consist of a particular number of identical products. Cost of each batch is
ascertained separately.
Unit costing
It is a method of costing used to ascertain the cost of producing a unit of
output.
Difference between fixed and flexible budget

FIXED BUDGET FLEXIBLE BUDGET

Based on the assumption that Based on the assumption that
business condition business conditions change

Comparison between actual and Comparison between actual and

budgeted cost is not possible budgeted cost is possible
Costs are not classified according to Costs are classified according to
variability variability

Prepared for a single level activity Prepared for a range of activities

Not useful for control price Useful for cost control pricing
fixation decision etc

Difference standard costing & budgetary control

BUDGETARY CONTROL STANDARD COSTING

It is based on past Performance It is based on technical estimate

It fix minimum limits It fix targets

It consider both income and It considers only expenditure

expenditure
It is a projection of financial accounts It is a projection of cost accounts

Budget are expressed in total Standard are expressed per unit

of production

MODULE V
Budget
A financial plan expressed in terms of money for a period is called budget.
Budgeting
A process of preparation, implementation and operation of budget is called
budgeting.
Budgetary control
Budgetary control is a system of using budget for planning and controlling cost.
Objectives of budgetary control
 To control activities.
 To evaluate performance of managers.
 To motivate managers.
 To eliminate wastes.
 To aid the planning of annual operation
 To coordinate activities of the organisation.
 To communicate plans with responsibility centre managers.
Steps involved in budgetary control
 Setting up of organisational goals
 Formulating plans for achieving goals.
 translating plans into budget.
 Relating responsibility of executives to requirements of a policy.
 Recording and reporting actual performance.
 Continuous comparison of actual with budget.
 Find out deviations.
 Focusing attention on significant deviations
 Find out the reasons for deviations
 Presentation of information to the management
 Taking corrective action.
 Revision of budgets.

Essentials of budgetary control system

 Support by top management
 Formal organisation
 Clear cut objectives
 Budget committee
 Adequate accounting system
 Periodic reporting
 Flexibility Effective communication
Budget Manual
It is a written document which guides the executives in preparing various
budgets.
Budget period
A period for which a budget is prepared and employed is called budget period.
Classification of budget
 Classification according to time
 Long term budget: A budget for a period of five to ten years is called
long term budget.
 Short term budget: A budget for a period of one to two years is called
short term budget.
 Current budget: A budget covers a period of one month is called
current budget.

 Classification according to flexibility

 Flexible budget: It is a dynamic budget. It gives different budgeted
cost for different level of activity
 Fixed budget: It is a budget does not change with changes in the level
of activity.

 Classification according to function

 Master budget: It is the summary of all budgets. It summarises sales,
production, purchases, finance, labour etc.
 Functional budget: Functional budgets are those which are prepared
by heads of functional departments for their respective
departments.Its also called operating budgets / financial budgets
Types of functional budgets
 Sales budgets :- It forecast the total sales expressed in quantities and
money. It is prepared by the sales manager.
 Production budget :- It is the forecast of the quantity of production
for the budget period.
 Material budget: It shows the estimated quantity of raw material
required for the production for a budget period.
 Purchase budget :- It shows the quantity of different types of
materials to be purchased during the budget period.
 Cash budget :- It is a statement showing cash inflows &cash outflows
over the budgeted period
Zero based budgeting (ZBB)
It is a recent trend in budgeting and it starts from zero base. It is particular used
of service departments and government.
Advantages of ZBB
 It starts from zero.
 It is useful for service department and government.
 It ensure active participation of managers.
 It helpful to management in making optimum allotment of scarce
resources.
 It promote high level of motivation at the level of unit managers.

Difference between forecast and budget

BUDGET FORECAST
It is prepared by management for Estimate future trend based on
future period historical data
Its static statement It is flexible.
Usually done for short term Usually done for long term

Difference traditional budgeting and ZBB

TRADITIONAL BUDGETING ZBB

Begins with previous year budget Begins with zero, a base

Focus on money Focus on goals and objectives

Prepare annually Prepare once in every five years
Produces a single level of expenditure Produces alternative level of
for an activity expenditure
Resources are allotted not on the Resources are allotted on basis of
basis of cost benefit analysis cost benefit analysis
Standard cost
Standard cost is a predetermined cost for evaluating the actual performance. It
is the expected cost of producing one unit.
Standard Costing
Standard costing is a technique which uses which uses cost and revenue for the
purpose of control through variance analysis.
Objectives of standard costing
 Performance measurement
 Cost control
 Stock valuation
 Establishing selling prices.
 Profit planning.
 Decision making.

Advantages of standard costing

 Cost control
 Aid to management
 Quick reporting
 Management by exception
 Utilization of resources
 Delegation of authority
 Inventory valuation
 Coordination
 Economy
Limitations of standard costing
 Difficult to establish accurate cost standard
 It is costly for small industries.
 Revision of standard is costly.
 It is not suitable to job order industries
 It is not suitable to non-standard products
 It would be a failure, if management doesn’t have interest in it.
Steps in standard costing
 Establishment of cost centres.
 Classification and codification of accounts.
 Establishment of standards.
 Ascertainment of actual costs.
 Comparison of standard and actual costs.
 Analysis of variance.
 Reporting of variance.

Analysis of variance (Variance)

It is the difference between standard cost and comparable actual cost incurred
during a period.
Managerial uses/ Benefits variance analysis
 It facilitates management by exception.
 It helps in compare performance of different departments.
 It helps in future planning.
 It helps in formulating policies.
 It helps in developing team spirit among managerial personnel.
 It identify the cause for variance.

Material cost variance :- Material variance are popularly known as material

cost variance. It is the difference between standard cost and actual cost of
material used.
Labour cost variance :- It is also called wage variance. It is the difference
between standard cost of labour and actual cost of labour.
Overhead variance :- It is the difference between standard overhead cost and
actual overhead incurred.

Types of standards
 Basic standard :- It is a standard which is established for some base year
and remain in use for a long period of time.
 Current standard :- It is a standard which is established for use over a
short period of time related to current conditions.
 Expected standard :- This is the standard which is anticipated during a
future specified budget period. This is also called ideal standard.
 Normal standard :- It is the average standard which is anticipated can be
attained over a future period of time, preferably long enough to cover
one trade cycle.

Budget key factor

It is a factor in the activities of an undertaking which at a particular point in
time or over a period limit the volume of output. It is also called limiting factor.
Angle of incidence
It is the angle formed between sales line and total cost line after breakeven
point in the break even chart.