Cover
Contents
List of Abbreviations
Part 1 Conceptual Framework
1. Financial Accounting, Cost Accounting and Management Accounting
Learning Obj ectives
Financial Accounting
Objectives
Contents
Accounting System
Measurement Unit
Users of Financial Accounting Infonnation
Limitation of Financial Accounting
Cost Accounting
Cost Accountancy
Costing
Cost Accounting and Management
Objectives of Cost Accounting
Product Costing
Planning and Control
Infonnation for Decisions
Cost Accounting Vs. Financial Accounting
Management Acconnting
Cost Accounting and Management Accounting
Differences Between Management Accounting and Financial Accounting
Cost Accounting, Financial Accounting and Management Accounting
Role of Management Accountant
Advantages of Cost accounting
Methods of Costing
Job Costing
Process Costing
Techniques (Types) of Costing
(1) Historical Costing
(2) Standard Costing
(3) Absorption or Full Costing
(4) Variable or Marginal Costing
(5) Uniform Costing
Costing System
Throughput Costing
Backflush Costing
Installation of a Cost Accounting System
Factors Influencing the Cost Accounting System
Fealures of Cost Accounting System
Difficulties in Installation of a Costing System
Arguments Against Cost Accounting
Cost Centres
Impersonal Cost Centre
Personal Cost Centre
Operation Cost Centre
Process Cost Centre
Cost Units
Cost Accounting Department
Theory Questions
Self Evaluation Questions
2. Cost: Concepts and Classifications
Learning Objectives
Cost
Expenses
Loss
Classification ofCosts
Natural Classification of Costs
Cost Behaviour (In Relation to Changes in Output or Activity or Volume)
Fixed Cost
Variable Cost
Mixed Cost
Degree of Traceability to the Product
Direct Cost
Indirect Cost
Association with the Product
Product Cost
Period Cost
Functional Classification of Costs
Relationship with Accounting Period
Capital Cost and Revenue Cost
Costs for Decision Making and Planning
Opportunity Cost
Sunk Cost
Relevant Cost
Differential Cost
Imputed Cost
Out-of-Pocket Cost
Fixed, Variable and Mixed Costs
Shut Down Cost
Costs for Control
Controllable and Uncontrollable Cost
Standard Cost
Fixed, Variable and Mixed Costs
Other Costs
Joint Cost
Common Cost
Cost Control, Cost Rednction, Cost Management
Cost Control
Cost Reduction
Cost Management
Cost Statement or Cost Sheet
Theory Questions
Self Evaluation Questions
Problems
Part 2 Elements of Cost
3. Materials Control
Learning Objectives
Materials
Concept and Objectives of Materials Control
Purchasing and Receiving Procedure
Creating a Purchase Department
Qualities of Purchase Manager
Some Issues in Materia1s Procurement
Economic Order Quantity (EOQ) (Reorder Quantity)
When to Order (Reorder Level)
Determination of Safety or Minimum Stock Level
Maximum Stock Level
Stores Organisation
Storage Layout
Classification and Codification of Materials
Issue of Materials
Materials Returned to the Storeroom
Matelials Returned to Supplier
Inventory Systems
Inventory Shortages (Losses) and Overages
Inventory Control
Nature ofInventory
Meaning ofInventory Control
Importance ofInventory Control
Inventory Control Techniques
Pareto or ABC Analysis
Classification of the Items ofInventory as per ABC Analysis
Kanban
Just-In-Time (JIT) Method
Inventory Turnover
Detection of Slow-moving and Non-moving or Obsolete Materials
Accounting for Material Losses
Scrap
Spoilage
Spoilage Report
Defectives
Waste ( or Wastage)
Theory Questions
Self Evaluation Questions
Problems
4. Materials Costing
Learning Objectives
Costing M.aterials Received
Discounts
Carriage Inwards on Raw Materials
Material Handling Charges
Costing MaterialS Issued
First-in, First-out (FIFO)
Last-in, First-out (LIFO)
Highest-in, First-out (HIFO)
Base Stock Price
Simple Average
Weighted Average
Periodic Simple Average
Periodic Weighted Average
Moving Simple Average
Moving Weighted Average
Standard Price
Inflated Price
Replacement Price or Market Price
Pricing of MateriaIs Retumed to Vendor
Pricing of Materials Returned to Storeroom
Selection of a Materials Pricing Method
Theory Questions
Self Evaluation Questions
Problems
5. Labour Costs: Accouuting and Control
Learning Objectives
Introduction
Direct Labour and Indirect Labour
Direct Labour
Indirect Labour
Organisation for Labour Control
Personnel Department
Engineering Department
Time-keeping Department
Time-booking
Payroll Department
Cost Accounting Department
Wage Systems
Straight Time
Incentive Wage Plans
Rowan Plan
Profit Sharing and Co-partnership
Bonus Schemes for Indirect Workers
Workstudy
Method Study
Work Measurement
Job Evaluation and Merit Rating
Job Evaluation
Methods of Job Evaluation
Merit Rating
Differences Between Job Evaluation and Merit Rating
Time and Motion stndy
Objectives
Benefits
Labour turnover
Causes of Labour Turnover
Cost of Labour Turnover
Measures to Reduce Labour Turnover
Treatment of Labour Cost-Related Items
Overtime
Treatment of Overtime Premium
Idle Time
Fringe Benefits
Shift Premium
Holiday and Vacation Pay
Learner's or Apprentices' Wages
Attendance Bonuses
Leave with Pay
Employer's Contribution to Insurance
Casual Workers
Out-Workers
Outside Workers
Theory Questions
Problems
6. Factory Overheads: Distribution
Learning Objectives
Concept
Factory Overhead-Fixed, Semi-Variable and Variable
Factory Overheads-Accounting and Distribution
Collection and Codification of Factory Overheads
Methods of Codification
Allocation and Apportiomnent of Factory Overheads
Departmentalisation of Overhead
Benefits ofDepartmentalisation
Primary Distribution
Apportionment of Service Departments Overheads to Producing Departments
Secondary Distnbution
Bases for Secondary Distribution
Inter-departmental Services
Methods
Absorption of Factory Overheads
Meaning of Absorption
Methods of Absorption
Machine Hour Rate
Types of Machine Hour Rate
Selecting an Absorption Rate
Arguments in Favour of Apportionment and Absorption of Overheads
Limitations of Apportiomnent and Absorption
Computation of Total Machine Hours Utilised
Overhead Rates: Actual vs Predetermined (Standard)
Actual Overhead Rate
Predetermined Overhead Rate or Standard Rate
Under- or Over-absorption of Overhead
Theory Questions
Self Evaluation Questions
Problems
7. Administrative and Selling and Distribution Overheads
Learning Objectives
Administrative Overheads
Distribution of Administrative Overheads
Selling and Distribution Overheads
Apportiomnent of Selling and Distribution Overheads
Treatment of Some Items of Expenses
Interest on Capital
Depreciation
Rent
Capacity
Idle Capacity
Set-upTime
Packing Expenses
Research and Development
Bad Debts
Catalogues and Price Lists
Tools
Patterns
Designs
BluePrints
Advertising
Royalties
Theory Questions
Problems
8. Activity-Based Costing (ABC)
Learning Objectives
Meaning of Activity-Based Costing (ABC)
Stages and Flow of Costs in ABC
Cost Drivers
Classification of Activities in Manufacturing Organisations
Comparing ABC with Traditional Costing System
Traditional Costing and Activity-Based Costing System
Target Costing
Kaizen Costing
Life-Cycle Costing
Activity-Based Management (ABM)
Theory Questions
Self Evaluation Questions
Problems
Part 3 Costing Methods and Accounting of Costs
9. Single or Output Costing
Learning Objectives
Nature
Production Statement
Operation Costing
Estimated Cost Sheet
Theory Questions
Problems
10. Job, Contract an!! Batcb Costing
Leaming Objectives
Nature ofJob Costing
Job Cost Sheet and Job Ledger
Recording Costs on Jobs
Materials Costs
Labour Costs
Direct Expenses
Overhead
Recording Completed Jobs
Contract Costing
Recording Costs on Contract
Materials
Wages
Expenses
Plant and Machinery
Sub-Contract
Value and Profit of Contract
First Method
Second Method
Work-in-Progress
Profit on incomplete Contracts
Cost-Plus Contract
Computation of a Conservative Estimate ofthe Profit to be Taken to Profit and Loss Account
Batch Costing
Economic Batch Quantity
Theory Questions
Self Evaluation Questions
Problems
11. Process Costing
Learning Objectives
Nature of Process Costing
Characteristics
Process Costing and Job Costing
Costing Procedures Under Process Costing
Materials
Labour
Direct Expenses
Factory Overhead
Preparation of Process Cost Accounts
Process Costing Having No Process Loss/Gain and No Opening and Closing Work-in-Progress
Process Costing Having Process Losses and/or Gains
Waste
Scrap
Abnormal Gain (Effectives)
Increase in Cost
Decrease in Cost
Process Costing Having Work-in-Progress at Different Stages of Completion
ClosingWork-in-Progress
Equivalent Production Analysis
Situation I (Only Closing Work-in-Progress)
Situation 2 (Closing Work-in-Progress and Process Loss or Gain)
Situation 3 (Opening and Closing Work-in-Progress without Process Loss or Gain)
Situation 4 (Opening and Closing Work-in-Progress with Process Losses or Gains)
Inter-Process Profits
Joint Product and By-Product
Joint Product
By-product
Accounting for Joint Product Cost
Physical Quantity Method
Relative Market or Sales Value Method
Average Unit Cost Method
Weighted Average Cost Method
Accounting for By-Products
Theory Questions
Self Evaluation Questions
Problems
12. Service Costing
Learning Objectives
Service Costing
Nature of Service costing
Transport costing
Composition of Costs
Standing Charges
Running (Variable) Costs
Maintenance Charges
Cost Units
Ascertainment of Costs
Power House Costing
Canteen Costing
Theory Questions
Problems
13. Cost Control Accounts
Learning Objectives
Non-Integrated System
Accounting for Cost Items
Materials
Labour Cost
Overhead
Joumal Entries
Theory Questions
Problems
14. Integrated Acconnting System
Learning Objectives
Meaning and Features ofrntegrated Accounting System
Principal Accotmts
Stock Control Account
Cost of Sales Account
Assets Account
Debtors and Creditors Control Account
Prepayments Account and Outstanding Account
Direct Wages and Overhead Costs Control Account
Departmental or Cost Centre Account
Cash Account
Journal Entries
Distinction between 'Interlocking' and 'Integration' of Cost and Financial Accounts
Theory Questions
Problems
15. Reconciliation of Cost and Financial Accounts
Learning Objectives
Need For Reconciliation
Reasons for Differences in Profit
Items Appropliated or Charged to Profit but Not Found in Cost Accounts
Pruely Financial Matters Not Found in Cost Accounts
Treatment of Items in Cost Books and Financial Books
Differences in the Valuation of Stock and Work-in-progress
Depreciation
Abnormal Losses and Gains
Reconciliation Procedure
Theory Questions
Problems
Part 4 Cost Analysis for Decision Making and control
16. Marginal (Variable) Costing
Learning Objectives
Concept of Marginal Cost, Marginal Costing
Absorption Costing
Difference Between Marginal Costing and Absorption Costing
Income Statements Under Absorption Costing And Marginal Costing
Income Statement under Absorption Costing
Income Statement under Marginal Costing
Reconciliation of Net Income
Inventory Values
Applications (Advantages) of Marginal Costing
Profit Planning
Product Pricing Decisions
Cost Control
Impact afFixed Costs
Managerial Decision Making
Limitations of Marginal Costing
Cost Behavionr
Methods of Determining Cost Behavionr
High and Low Points Method
Scattergraph Method
Least Squares Regression Method
Accounting or Analytical Approach
Cost-Volume-Profit (CVP) AnaJysis
Break-even Analysis
Cash Break-Even Point
Curvilinear Break-even Analysis
ProfitiVoJume (PIV) Analysis
Desired or Target Profit
Multi-Product Situations
Sales Mix and Break-even Point
Desired Profit and Tax
Improving Profit-Volume Ratio .
Cost Indifference Point
Limitations of CVP AnaJysis
Theory Questions
Self Evaluation Questions
Problems
17. Alternative Choices Decisions
Learning Objectives
Decision-Making
Relevant Information
Relevant Revenues
Relevant Costs
Qualitative Factors
Types of Choices Decisions
Make or Buy (Outsourcing Decision)
Add or Drop Products
Sell or Process Further
Operate or Shutdown
Special Orders .
Replace or Retain
Theory Questions
Self Evaluation Questions
Problems
18. Pricing Decisions
Learning Objectives
Factors Influencing Pricing Decisions
Different Methods of Pricing
Fixing Selling Price Below Variable Cost
Target Pricing
Prices Indifference Point
Theory Questions
Problems
19. Standard Costing
Learning Objectives
Historical Costing and its Limitations
Definition of Standard Cost, Standard Costing
Standard Costs and Estimated Costs
Advantages of Standard Costing
Different Types of Standards
Ideal, Perfect, Maximum Efficiency or Theoretic Standards
Normal Standards
Basic Standards
Currently Attainable or Expected Actual Standards
How Tight should Standards be
High Standards
Low (Loose) Standards
Developing or Setting Standard
Materials Standards
Labour Standards
Factory Overhead Cost Standards
Revision of Standards
Variance Analysis
Materials Variance
Labour Variances
Labour Cost Variance
Labour Rate Variance
Overhead variances
1. Total Overhead Cost Variance
2. Variable Overhead Variance
3. Fixed Overhead Variance
4. Variable Overhead Expenditure (Spending or Budget) Variance
5. Variable Overhead Efficiency Variance
6. Fixed Overhead Expenditure (Spending or Budget) Variance
7. Fixed Overhead Volume Variance
8. Fixed Overhead Calendar Variance
9. Fixed Overhead Efficiency Variance
10. Fixed Overhead Capacity Variance
Two-way, Three-way and Four-way Variance Analysis
Sales Variances
(A) Sales Variance based on Turnover
(B) Sales Variance based on Margin (that is Contribution Margin or Profit)
Revision Variance
Disposition of Variance
Managerial Uses of Variances
Analysis of Variances by Responsibilities
Analysis of Variances by Causes
Possible Causes of Standard Cost Variances
Overhead Efficiency Variane:e
Analysis of Variances by Products
Variance Reports to Management
Limitations of Standard Costing
Control Ratios
Theory Questions
Self Evaluation Questions
Problems
20. Budgetiug
Learning Objectives
Concept Of Budgeting
BUdgeting and Forecasting
Concept Of Budgetary Control
Objectives and Functions of BUdgeting
Planning
Coordination
Control and Perfonnance Evaluation
Advantages of Budgeting
Limitations of Budgeting
Budgeting Process
Organisation for Budgeting (The Budget Committee)
Budget Manual
The Budget Period
Short-range Budget
Long-range Budget
Elements ofa Successful Budgeting Plan
Budget Centres
Limiting or Principal Budget Factor
Budgets and Standard Costs
Fixed and Flexible Budgeting
Fixed Bndgeting
Flexible Budgeting
Types of Budgets
Sales Budget
Production Budget
Prodnction Cost Budget
Cost of Goods Sold Budget
Selling Expenses Budget
Administrative Expenses Budget
Budgeted Income Statement
Capital Expenditure Budget
Research and Development Budget
Cash Budget
Budgeted or Projected Balance Sheet
Budgeted Statement of Changes in Financial Position
Master Budget
Revision of Budgets
Zero Base Budgeting (ZBB)
Application of ZBB
Advantages of ZBB
Disadvantages of ZBB
Planning, Programming and Budgeting System (PPBS)
Performance Budgeting
Themy Questions
Self Evaluation Questions
Problems
21. Responsibility Accounting and Divisional Performance Measurement
Learning Objectives
Need ofDecentralisationlDivisionalisation
Types of Responsibility Centres
Cost Centre
Revenue Centre
Profit Centre
Investment Centre
Meaning of Responsibility Accounting
Measuring Divisional Perfonnance
Transfer Pricing
Objectives in Sound Transfer Pricing System
Methods of Transfer Pricing
Theory Questions
Problems
Part 5 Specialised Topics
22. Uniform Costing and Inter-firm Comparison
Learning Objectives
Uniform Costing
Advantages of Un if ann Costing
Disadvantages
Establishing A Uniform Costing System
Areas ofUnifonnity
Unifonn Cost Manual
Inter-finn Comparison
Essentials of Inter-finn Comparison
Benefits ofInter-finn Comparison
Limitations of Inter-finn Comparison
TheOlY Questions
23. Cost Audit
Learning Objectives
Meaning of Cost Audit
Advantages of Cost Audit
Financial Audit and Cost Audit
Efficiency Audit and Cost Audit
Management Audit
Scope of Management Audit
Potent Tool for Managerial Control
Cost Rednction through Improvement in the Perfonnance Efficiency
Preparation Of Cost Audit
Scope ofthe Cost Audit
Value Analysis
Advantages of Value Analysis
Procedure of Value Analysis
Theory Questions
Appendix: Objective Type Questions
Section I: TruelFalse Statements
Section II: Fill in the Blanks
Section III: Matching Statements
Section IV: Multiple Choice Questions
Index