ACKNOWLEDGEMENT

A research study can’t be completed without the guidance, inspiration and co-operation from various
quarters. This study also be the imprints of many persons.

I would like to express my gratitude to Mrs. Anju arora my internal guide, for her kind mentorship and
guidance in assisting me with my final project. Her academic inputs provided me with insights that were
invaluable for completing this project.
 DECLARATION

This is to certify that information embodied in the present report is based on my original work and
has not been submitted in part or full for any other purpose.

SAGAR VERMA

ROLL NO. 4241

 Index

Distinguish between :

• Program and Performance Budgeting.

• Standard cost and Estimated cost.

• Absorption costing and Marginal costing.

• Marginal cost and Relevant cost.

• Product cost and Period cost.

 Project
Of
Management Accouting

Made by:
Name-Sagar Verma
B.com (h) 3rd year
Section-A
ROLL NO – 4241

Teacher Incharge: Mrs. Anju Arora

 PROGRAM AND PERFORMANCE BUDGETING

PROGRAM BUDGETING

It was developed in early 1960s to overcome the limitations of conventional budgeting. It proves
more effective for government programmes launched mainly for the benefits of the society. A
budgeting approach which helps n reviewing and evaluating on-going programmes as well as new
programmes to justify all resources.

The program budget allocates money to major program areas, focusing on the expected results of
services and activities to be carried out. Program areas often utilized by government entities
include public safety, public works, human services, leisure services, and general government.
The emphasis of program project’s is on the attainment of long-term local community goals.

PERFORMANCE BUDGETING

It was first used by the Hoover commission in the US in the year 1949 and then applied in the
defence budget in 1960s. This approach helps in poviding an alternative to normal industrial
budgting in non- industrial enterprise. It pays more emphasis to the corporate objectives and gives
little attention to the money aspect of different objects.

A performance budget allocates money to various programs within an organization and also
details the service level on which the budget is predicated. The service level is identified by the
use of performance measures. In addition to controlling costs, the primary orientation of the
performance budget is that of improving the internal management of the program.

Both the program and performance budget use indicators to measure financial and operational
performance, but the budgets have a different focus. A performance budget emphasizes
management efficiency, whereas a program budget emphasizes the benefits that the local
community gains from municipal expenditures.
 ABSORBTION COSTING AND MARGINAL COSTING
S.No. ABSOBTION COSTING
1. Both fixed cost and variable cost are
treated as product cost.
2. Fixed cost incurred during the period is
distributed over the number of units
produced during that period.
3. The Difference between sales and total
cost is profit or loss.
4. Cost per unit varies at different levels of
output.
5. Stock of work-in-progress and finished
goods are valued at total cost i.e. at
variable cost and huge share of fixed
cost.
6. There may be over and under absorbtion
of fixed cost.
7. The difference in size of opening and
closing stock has an impact on profit
figures.
8. It is of limited use for manegerial
decision- making.
MARGINAL COSTING
Only variable cost are taken as product cost
and charged to profit and loss account.
Entire fixed cost incurred during the period
is charged to that period only.
The difference between sales and variable
cost is contribution.
Varable cost per unit remains constant at all
levels of output.
Stock of work- in- progress and finished
goods are valued at variable cost only.
There is no such problem of under and over
absorbtion.
Profit figure is not influenced by the
difference between closing stock and
opening stock.
It is used in taking manageral decisions.
9. It is used for external management. It is suitable for internal management.
 STANDARD COST AND ESTIMATED COST

S.No. STANDARD COST ESTIMATED COST

1. It is pre- determnined cost on a It is predetermined based on past

scientific basis taking into performance adjusted according to the
consideration all the factors relating anticipated changes.
into consideration all the factors
relating to costs e.g., raw material
consumption, labour efficiency,
machine efficiency etc.
2. It is ascertained and applied when It can be used in any business situation or
standard costing system is in decision making which does not require
operation. accurate cost.it is used in budgetary control
system and historical costing system.

3. Its emphasis is on what should be the Its emphasis is on the level of costs not to
cost. be exceeded.

4. T is used for analysis of variances It is used in decision making and seletion of

and cost control purposes. alternative with maximum profitability. It is
also used in prices fixation and tendering.

5. It is determined for each element of It is determined generally for the period.

cost in the process of business
generally on unit basis i.e., standard
hour, standard unit etc.

6. It is used as a regular system of The use of estimated cost is restricted to

accounts from which variances are statistical data only.
found out.
 Marginal cost and Relevant cost

Relevant Costs
In order to qualify for relevancy, a cost must meet two criteria: (i) They affect the future and (ii) they
differ among alternatives.
Normally, the following are relevant Costs:
DIFFERENTIAL COST
• A differential cost is the difference in cost items under two or more decision alternatives
specifically two different projects or situations. Where same item with the same amount appears
in all alternatives, it is irrelevant. For example, a plot of land can be used for a shopping mall or
entertainment park. The plot is irrelevant since it would be used in both the cases. Similarly,
future costs and benefits that are identical across all decision alternatives are not relevant.
• An example of differential cost would be of a company which is selling its products through
distributors. It is paying them a commission of Rs.16 million. Any alternate which costs lesser
would be considered. Let us suppose that the company is planning to appoint salespersons to
sell its products and cancells the contracts with distributors. In this case, the selling expense is
expected to be to Rs.12 million. There is cost differential Rs.4 million (Rs.16 m - 12m). This a
good sign but the risk would have to considered for changing the channel of distribution. If there
is low risk, it would be prudent to go for own arrangements for sales.
• Differential costs must be compared to differential revenues. In case, switching over to direct
sales bring additional revenues of Rs.2 million, it would increase the net benfit to Rs.6 million.
This would provide more comfort to the decision maker while considering a change in the
distribution channel.

INCREMENTAL OR MARGINAL COST

• Where as differential cost is a difference between the cost of two independent alternatives,
incremental or marginal cost is a cost associated with producing an additional unit. In case of a
university, it could be cost of admiting another student. Even operating a second shift is an
example of incremental cost. It would be noted that the two decisions are not independent as
second shift depends upon first shift.
• Increamental cost must be compared with incremental reveues to arrive at a decision.

OPPORTUNITY COST
• It is cost of opportunity foregone. Mr. Ahmed Shah left a bank job which was paying him
Rs.15,000 per month and got admission in a University. Monthly fee-charge in the university is
Rs.10,000 per month. For Ahmed Shah, this would be Rs.25,000 per month (Rs.10,000 +
Rs,15,000).
• Farhana is a fresh graduate from a business university. She got two offers, one of Rs.25,000
from an investment bank and another of Rs.15,000 for a teaching-assistant in a university.
Another of her class-fellow, Shabana got the same offer from the same university. While
Shabana would be happy to join the university, Farahan would not as she would lose an
opportunity to serve at the bank for Rs.25,000.
 • Whenever an organisation is deciding to go for a particular project, it should not ignore
opportunities for other projects.

It should consider :-
(1) What alternative opportunities are there?
(2) Which is the best of these alternative opportunities?

Marginal costing

• Marginal costing distinguishes between fixed costs and variable costs as convention ally
classified.
• The marginal cost of a product –“ is its variable cost”. This is normally taken to be;
• Direct labour, direct material, direct expenses and the variable part of overheads.
• Marginal costing is formally defined as:
‘the accounting system in which variable costs are charged to cost units and the fixed
costs of the period are written-off in full against the aggregate contribution. Its special
value is in decision making’.
• The term ‘contribution’ mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. Thus
MARGINAL COST =
VARIABLE COST DIRECT LABOUR+DIRECT MATERIAL+DIRECT EXPENSE+VARIABLE
OVERHEADS

In economics and finance, marginal cost is the change in total cost that arises when the quantity
produced changes by one unit. That is, it is the cost of producing one more unit of a good. If the good
being produced is infinitely divisible, so the size of a "unit" is infinitesimal, then assuming the cost
function is differentiable the marginal cost (MC) function is the first derivative of the total cost (TC)
function with respect to quantity (Q). Note that the marginal cost will change with volume, as a non-
linear and non-proportional cost function includes

• variable terms dependent to volume,

• constant terms independent to volume and occurring with the respective lot size,
• jump fix cost increase or decrease dependent to steps of volume increase.

In general terms, marginal cost at each level of production includes any additional costs required to
produce the next unit. If producing additional vehicles requires, for example, building a new factory,
the marginal cost of those extra vehicles includes the cost of the new factory. In practice, the analysis
is segregated into short and long-run cases, and over the longest run, all costs are marginal. At each
level of production and time period being considered, marginal costs include all costs which vary
with the level of production, and other costs are considered fixed costs.
If the cost function is differentiable, the marginal cost is the cost of the next unit produced referring to
the basic volume.

If the cost function is not differentiable, the marginal cost can be expressed as follows.

A number of other factors can affect marginal cost and its applicability to real world problems. Some
of these may be considered market failures. These may include information asymmetries, the
presence of negative or positive externalities, transaction costs, price discrimination and others.
 Product cost and Period cost.

Product cost
A manufacturer’s product costs are the direct materials, direct labor, and manufacturing overhead
used in making its products. (Manufacturing overhead is also referred to as factory overhead, indirect
manufacturing costs, and burden.) The product costs of direct materials, direct labor, and
manufacturing overhead are also “inventoriable” costs, since these are the necessary costs of
manufacturing the products.

For financial accounting purposes, product costs include all the costs that are involved in acquiring
or making product. In the case of manufactured goods, these costs consist of direct materials, direct
labor, and manufacturing overhead. Product costs are viewed as "attaching" to units of product as the
goods are purchased or manufactured, and they remain attached as the goods go into inventory
awaiting sale. So initially, product costs are assigned to an inventory account on the balance sheet.
When the goods are sold, the costs are released from inventory as expense (typically called Cost of
Goods Sold) and matched against sales revenue. Since product costs are initially assigned to
inventories, they are also known as inventoriable costs. The purpose is to emphasize that product
costs are not necessarily treated as expense in the period in which they are incurred. Rather, as
explained above, they are treated as expenses in the period in which the related products are sold.
This means that a product cost such as direct materials or direct labor might be incurred during one
period but not treated as an expense until a following period when the completed product is sold.

Product costs cling to the units of products purchased or manufactured. If a unit is unsold, the
product costs will be reported as inventory, a current asset on the balance sheet. The product
costs for a retailer will be the amount paid to the supplier plus any freight-in. Product costs for
a manufacturer will be the direct materials, direct labor, and manufacturing overhead. Product
costs will be reported on the income statement as the cost of goods sold expense in the period
that the units of product are sold.

Period cost

Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be
assigned to the products or to the cost of inventory. The period costs are usually associated with the
selling function of the business or its general administration. The period costs are reported as
expenses in the accounting period in which they

1) best match with revenues,

2) when they expire, or
3) in the current accounting period. In addition to the selling and general administrative expenses,
most interest expense is a period expense.

The distinction between product costs and period costs is important for

1) properly measuring net income during a period of time and

2) reporting the proper cost of inventory on the balance sheet.

Period costs do not cling or attach to the units of product and will not be included in the cost of
inventory. For example, the interest incurred by a retailer to finance its operations will be expensed in
the period in which the interest occurs. Interest is not deferred by adding it to the cost of the units in
inventory. Similarly, selling expenses and general administrative salaries are expensed in the period
that the employees earn those salaries, the same period in which the company incurs the salaries
expense. The insurance premiums that a company pays for nonmanufacturing protection will be
expensed in the period in which the insurance premiums expire. (Insurance premiums for the factory
building will be included in the manufacturing overhead which will be part of the products’ cost.)

Period costs are all the costs that are not included in product costs. These costs are expensed on
the income statement in the period in which they are incurred, using the usual rules of accrual
accounting that we learn in financial accounting. Period costs are not included as part of the cost of
either purchased or manufactured goods. Sales commissions and office rent are good examples
of period costs. Both items are expensed on the income statement in the period in which they are
incurred. Thus they are said to be period costs. Other examples of period costs are selling and
administrative expenses.