Management Accounting &

Control Systems
 Branches of Accounting

Financial
Cost Accounting
Accounting

Management
Accounting
 Traditional Cost Sheet
Direct materials xx
Direct labor xx
Direct expenses xx
Prime Cost xx
FOH xx
Factory Cost xx
AOH xx
Cost of Production xx
SDOH xx
Total cost/COGS xx
Profit xx
Sales xx
 Comprehensive Cost Sheet
Direct materials
Purchases xx
(+) Op. Stock of RM xx
(-)Cl. Stock of RM xx xx
Direct labor xx
Direct expenses xx
Prime Cost xx
FOH xx
(+) Op. Stock of WIP xx
(-)Cl. Stock of WIP xx xx
Factory Cost xx
AOH xx
Cost of Production xx
(+) Op. Stock of FG xx
(-)Cl. Stock of FG xx
Cost of Goods to be Sold xx
SDOH xx
Total cost xx
Profit xx
Sales xx
 Cost Centre
It is defined as –
 A location – e.g. factory, sales area, admin office,
tool room, etc
 A person – e.g. sales manager, personnel
manager, etc
 An item of equipment – e.g. Machinery P, Q or
Process I, II, etc
 Or a group of the above, in relation to which cost
may be ascertained and used for the purpose of
Cost Control.
 Classification of cost centre
• Based on Type:
Personal cost centre- consists of a person or
group of persons
Impersonal cost centre- consists of a location or
an item of equipment(or group of these)
• Based on Role:
Production cost centre- where RM is processed &
converted to FG. E.g. Machine shops, Assembly
shops
Service cost centre- which serves as an ancillary unit
and renders services to a Production cost centre. E.g.
Power House, Material service centre, plant
maintenance centre.
• Based on Activity:
Operation cost centre- consists of machines/
persons carrying out similar operations-purpose is to
ascertain cost of each operation irrespective of its
location inside the factory.
Process cost centre- consists of machines/ persons
engaged on a specific process or a continuous
sequence of operations. E.g. Oil Mills.
 Cost centre
• A centre for which a standard amount of cost is
pre-determined and used for control.
• Primary responsibility- cost reduction & cost
control
• Performance evaluation- Standard cost (-) Actual
cost
• Control of cost subject to – time, location,
product
• It is a segment of activity for which costs are
accumulated.
 Profit centre
• A centre whose performance is measured in
terms of income earned and cost incurred
• Primary responsibility- Profit earning
• Performance evaluation- Budgeted Profits(-)
Actual Profits
• It is that segment of activity of a business which is
responsible for both revenue & expenses and
discloses the profit of a particular segment of
activity.
• Each profit centre has a target profit.
 Investment centre
• A centre responsible for earning profits and
also for asset utilization.
• Primary responsibility- Earning Return on
Investments(ROI)
• Performance evaluation- Budgeted ROI(-)
Actual ROI
 Cost Unit
• It is a unit of production, service or time in
relation to which costs may be ascertained or
expressed.
• It is a form of measurement of volume of
production or service.
• Generally adopted on the basis of convenience
and practice in the industry concerned
• Differs from one business to other. E.g. number,
weight, area, time, kilometers, etc.
 Classification of Cost
Payment based Time based Controllability
Explicit Historical based
Implicit Current Controllable
Budgeted Non-controllable
Elements based
Materials
Normality based
Labor
Expenses COST Normal
Abnormal
Function based
Production
Administration Decision making
Nature based
Selling based
Variable
Distribution Relevant
Fixed
R&D Irrelevant
Semi-variable
Conversion
Based on payment:
Explicit: costs which involve some cash payment or outflow of
resources. These are actually incurred and can be easily
measured. It is recorded in books of account. E.g.: salaries,
wages, advt. exps, etc
Implicit: costs which do not involve some cash payment at all.
Also known as Notional / Imputed costs. They are not recorded
in books. E.g.: opportunity costs like rent on own bldg., interest
on own capital, etc.

Based on elements:
 Material: cost of tangible, physical input used in relation to
production, e.g., cost of raw materials, consumable stores,
maintenance items, etc.
It includes cost of procurement, freight inwards, taxes &
duties, insurance, etc, directly attributable to the acquisition.
 Labor: cost incurred in relation to human resources of the
enterprise, e.g., wages to workers, salary to office staff, training
exps, incentives, bonus, PF, gratuity, etc
 Expenses: cost of operating and running the enterprise, other
than materials and labor, e.g., factory rent, office maintenance,
payment for bought-out services.

Based on functions:
 Production: the cost of the set of operations commencing with
the supply of materials, labor & services and ends with the
primary packing of product. PC=DM+DW+DE+POH
 Administration: the cost of formulating the policy, directing the
organization and controlling the operations of the undertaking,
which is not directly related to production, e.g., office rent,
accounts dept. expenses, audit & legal expenses, etc.
 Selling: the cost of seeking to create demand and securing orders,
also called Marketing costs. E.g., advt., salaries, commission,
travelling exps to salesmen, cost of samples, show-room exps.
 Distribution: the cost of the sequence of operations which begins
with making the packed product available for dispatch and ends
with making the reconditioned returned empty package, if any,
available for re-use, e.g., distribution packing(secondary pack),
carriage outwards, maintenance of delivery vans, etc.
 R&D: cost of developing a new product and manufacturing
process, improvement of existing products, process and
equipment, finding new uses for known products, solving
technical problems in manufacture & application of product.
 Conversion: the sum of DW, DE and OH cost of converting
materials to the WIP or finished goods.

Based on time:
 Historical: costs relating to the past time period. Cost which has
already been incurred.
 Current: costs relating to the present period
 Budgeted/pre-determined costs: costs relating to the future
period, computed in advance, on the basis of specification of all
factors affecting it.

Based on nature :
 Variable: costs which tend to vary directly in relation to volume of
production. Eg, cost of RM, DW. However variable cost per unit is
constant.
 Fixed: costs which remain constant at various levels of
production. They are not affected by temporary fluctuation in
activity of an enterprise. They are also known as Period costs.
Fixed cost per unit vary inversely with volume of production. Eg,
rent, insurance, etc.
 Semi-variable: costs which are partly fixed and partly variable.
They are partly affected by fluctuation in the level of activity. Eg.
Telephone expenses, electricity, repair & maintenance.
Based on controllability:
Controllable: costs which can be influenced and controlled by
managerial action. However it is subject to time, location and
product.
Non-controllable: costs that cannot be influenced and
controlled by a specific member of the organization.

Based on normality:
Normal: costs which can be reasonably expected to be incurred
under normal, routine and regular operating conditions. They are
included in cost sheet.
Abnormal: costs over and above normal costs, which are not
incurred under normal operating conditions, eg, fines &
penalties, abnormal wastages, etc. they are not considered in
cost of production for decision making, and are charged to P&L
A/c.
Based on Decision making:
Relevant cost: costs which are relevant and useful for decision
making purpose.
Marginal cost: it is the total Variable cost, i.e. Prime cost + VOH,
since, variable cost varies directly with production whereas Fixed costs
remain constant irrespective of volume of production. MC is relevant
for decision making, as this cost will be incurred in future for
additional units of production.
Differential cost: it is the change in cost due to change in the level
of activity or pattern or method of production. Where the change
results in increase in cost it is called Incremental cost, whereas if costs
are reduced due to decrease/ increase of output, the difference is
called Decremental costs.
Opportunity cost: this refers to the value of sacrifice made or
benefit of opportunity foregone in accepting an alternative course of
action. Eg, a firm may finance its expansion plan by withdrawing
money from its bank deposits, then, interest lost on bank deposit is
the opportunity cost for carrying out expansion.
Replacement cost: the cost at which there could be purchase of
an asset or material identical to that which is being replaced or
revalued. It is the cost of replacement at current market price and is
relevant for decision making.
Imputed cost: these are the notional costs appearing in the cost
accounts only, eg., notional rent charges, interest on own capital.
Where alternative capital investment projects are being evaluated,
it is necessary to consider the imputed interest on capital before a
decision is arrived at, as to which is the most profitable project.
These costs are similar to Opportunity costs.
Irrelevant costs: costs which are not relevant or useful for
decision making.
Sunk cost: cost which is already incurred or sunk in the past. Ex: if
a firm has obsolete stock of materials originally purchased for Rs.
50000 which can be sold as scrap now for Rs. 18000 or can be
utilized in a special job, the value of stock already available
Rs.50000 is sunk cost and is not relevant for decision making.
Absorbed fixed cost: fixed costs do not change due to increase or
decrease in activity. Although such fixed costs are absorbed in cost of
production at normal rate, they are irrelevant for managerial decision
making. However if Fixed costs are specific, they become relevant.
Committed cost: cost in respect of which decision has already
been taken, and such decision cannot be altered, eg, entering into
irrevocable rent agreements.

Based on attributability::
Product cost: costs which are assigned to the product and are
included in inventory valuation, also called as Inventoriable costs. Ex:
Manufacturing costs like cost of RM, DW, POH, depreciation of plant,
equipment, etc
Period costs: costs which are not assigned to the products but are
charged as expenses against the revenue of the period in which they
are incurred. Ex: Non-Manufacturing costs like general admin cost,
salesman salary, deprn of office assets, etc. they are not included in
inventory valuation but w/o in the period in which they are incurred.
Product Costing
 Methods of Costing
Methods of finding unit cost of production or
product.

Job costing

Process costing
 JOB COSTING
• It is concerned with finding the cost of jobs, contracts or
other individual orders, which are made to specific
instructions.
• This method is applied in house building, ship building,
engine and machinery construction and repairs,
contractor’s work, garage and repair shops.
• The costing unit for unit cost determination is job or
production order.
• A job may also cover manufacture or assembly of a number
of identical units of a given product.
• It is used when product is made according to customer’s
specification.
•Each job or order is given a number.
•All costs are collected in a form known as Job Order Cost Sheet.
•Different industries follow job costing under different names:
Contract costing: each contract is treated as a job and is given a
separate number. All direct and indirect costs relating to the
contract are collected under this number. It is frequently used in
construction of buildings, dams, roadways, etc.
Multiple or composite costing: in case of automobile and aero
plane industries where components are produced and assembled
into final product, a single system of costing is not possible. One
type of costing is used for components and another type of costing
is used for assembly.
Batch costing: it deals with attribution of cost to batches. A
batch represents similar products processed or manufactured
together as a group. Batch is a cost unit which consists of a group of
identical products which maintain its identity throughout one or
more stages of production. Ex: FMCG, Medicine industries,
 Ascertaining Cost of a Job
Job selling price

Total Costs + Desired Profit

Direct costs + Indirect costs

DM DL DE POH AOH SOH

From Stores Time Journals As % of As % of As % of

Requisition/ Cards/ & Direct factory/ sales
BOM, Job Cards & Vouchers Labor or works value or
Net of Wage Labor cost Works
material analysis hour rate cost
returns Sheets
 PROCESS COSTING
(a)Process costing is used when specific units lose their identity in
manufacturing operations.
(b)It is used in continuous and mass production industries. In such
industries, output consists of like units and each unit is processed
in the same manner and, therefore, it is assumed that same
amount of material, labor and overhead is chargeable to each unit
processed. Conditions for use of process costing: (a) & (b) & (c)
complete standardization of product & process.
It is used in industries such as chemicals, steel, soap, rubber,
vegetable oil, paint industries, refineries, etc.

In other words, process is a distinct stage in manufacturing or

production, wherein Raw material is concerted from one
identifiable form into another, before it is finally converted into
the saleable final product.
 Ascertainment of process cost
• Direct materials:
 cost of materials & supplies for each process are
ascertained from Stores Requisitions.
 For every subsequent process, cost of material consists
of (a) cost of output of previous process transferred in,
and (b) additional material required for the subsequent
process.
• Direct labor:
 Labor cost is ascertained from Job cards & Wage
analysis sheet.
 When workers are engaged in various processes, wages
are apportioned over different processes on an
appropriate basis, e.g. time spent
•Direct expenses:
DE are ascertained through Journal entries or Payment
vouchers.
•Production overheads:
POH are apportioned over different processes by using a
suitable basis, e.g. percentage of DL, Labor hour rate, etc

Note: AOH & SOH may be treated as Period costs, and

directly debited to P&L a/c
 Steps in Overhead Distribution
1. Collection and Classification

On the basis of:

a. Function – Factory, administration, selling
b. Elements – Indirect Material, indirect Labour,
Indirect Expenses
c. Nature - Fixed, Variable, Semi Variable

Variable Cost Per Unit = Change in Cost

Change in Units
 Steps in Overhead Distribution
2. Allocation and Apportionment of Overhead cost
( Primary Distribution)

3. Reapportionment of Overhead Costs

( Secondary Distribution)

4. Absorption of Overheads
(Under Absorption and Over Absorption)
 Steps in absorption of overheads
Computation of OH absorption rate
OH absorption rate= total OH of cost centre
total units in base
Application of these rates to cost units
OH absorbed = No. of units of base in the cost
unit * overhead rate
Methods of absorption of Production OHs
• Direct materials cost % rate: the amount of
OHs to be absorbed by a cost unit is
determined by the cost of direct materials
consumed in producing it.
Overhead rate = Production overheads * 100
direct materials
• Direct labor cost % rate:
Overhead rate = Production overheads * 100
direct labor cost
• Prime cost % rate:
Overhead rate = Production overheads * 100
Prime cost
• Direct labor Hour rate:
Overhead rate = Production overheads
direct labor hours
• Machine Hour rate:
Overhead rate = Production overheads
no. of machine hours
• Rate per unit of output:
Overhead rate = Production overheads
No. of units
When pre-determined rate is employed, overheads absorbed may
not be equal to the amount of actual overheads incurred which
leads to either Under-absorption or Over-absorption of overheads.

Under-absorption- when the amount of OH absorbed is less than

the amount of OH actually incurred, it is called Under-absorption or
under-recovery. This has the effect of under-stating the cost
because the OHs incurred are not fully recovered in the cost of jobs,
processes, etc.

Over-absorption- when the amount of OH absorbed is more than

the amount of OH actually incurred, it is called Over-absorption or
over-recovery. It has the effect of over-stating the cost of jobs,
processes, etc.
MARGINAL COSTING
MARGINAL COSTING
A technique of decision making, which involves;
 Ascertainment of Total Costs

 Classification of costs into:

Fixed cost Variable cost

 Use of such information for analysis and decision
making.
 In other words it is a technique of costing dividing all
the costs into variable cost and fixed cost
 Also called as “Variable costing”
DEFINITION
 Marginal costing is defined as “the accounting
system in which variable costs are charged to
cost units and fixed costs of the period are
written off in full against the aggregate
contribution.”

 Marginal cost is the additional cost of producing

an additional unit of product. It is the total of all
variable cost.
VARIABLE COST

 It is that cost which changes or varies proportionately in

relation to output or quantity

 VC = DM + DL + VOH

 VC per unit remains constant

 Eg : Raw materials, wages on hourly basis, etc

FIXED COST

 It is that cost which remains constant for a given period

of time, irrespective of level of output

 FC = FPOH + FAOH + FSOH

 FC per unit varies inversely with change in level of

output

 Eg : Rent, salary, insurance, etc

SEMI-VARIABLE COST

 It exhibits the characteristics of Fixed and Variable costs

 Eg: Telephone charges, Salary, etc.

COST SHEET
Traditional(function-wise) Marginal(variability)
Direct cost xx Variable cost xx
FOH xx Fixed Cost xx
AOH xx Total cost xx
SOH xx Profit xx
Total cost xx Sales xx
+Profit xx
Sales xx
MARGINAL COST EQUATION
 Fixed cost + Variable cost+ Profit = Selling price
 Contribution = Fixed cost + Profit

= SELLING PRICE – VARIABLE COST

MARGINAL COST SHEET

SALES XX
- VARIABLE COST XX
CONTRIBUTION XX
- FIXED COST XX
PROFIT XX
DECISION MAKING INDICATORS IN
MARGINAL COSTING

Profit Volume Ratio

Break Even Point
-Relation b/w
-No Profit no Loss
Contribution &
situation
sales

Margin of safety
-Difference b/w BES
& Total sales
CONCEPT OF CONTRIBUTION

 The difference between selling price and

marginal cost (variable cost) is called
contribution.

 Contribution = Selling Price – Variable Cost

 Contribution = Fixed Cost + Profit

 Contribution = Fixed Cost - Loss

CONCEPT OF PROFIT VOLUME RATIO
 Relation b/w Contribution & sales
 PVR is used to determine the BEP, sales volume
to earn the desired profit, Profitability of
products.
 P/V Ratio = Contribution *100
Sales

Or Fixed Costs + Profit * 100

Sales

Or Sales – Variable cost * 100

Sales
CONCEPT OF BREAK EVEN POINT

 Represents that volume of sales or production

where there is no profit no loss.

 At BEP total cost line cuts total revenue line.

 Total Revenue = Total Cost

 Total Contribution = Fixed costs

FORMULA

 Break even sales (in Rs.) = Total Fixed Cost

P.V. Ratio

Or Total Fixed cost * selling price per unit

Contribution per Unit

 Break even Point (units) = Total Fixed Cost

Contribution per Unit
ASSUMPTIONS IN BREAK EVEN ANALYSIS
 All costs can be separated into fixed and variable
component

 Fixed cost will remain constant at all volumes of

output

 Variable costs will fluctuate in direct proportion

to volume of output

 Selling price per unit will remain constant at all

levels of output
ASSUMPTIONS IN BREAK EVEN ANALYSIS
 There is only one product or in the case of
multiple products, the sale mix will remain
constant i.e sale of various products will always
be in some predetermined proportions.

 Production and sales will be synchronized.

 Productivity per worker will remain unchanged.

 Methods of production and operating efficiency

will not change
 BREAK EVEN CHART

TR
Amount

profit TC

BEP
25000

loss FC

250 Output