Costing Introduction Material Cost Labor/Employee Cost Overheads Methods of Costing Techniques of Costing Cost Sheet Definitions Cost
Overheads Methods of Costing
Responsibility
Cost Centers: Accountable for
incurrence of cost
Revenue: Accountable for
generation of revenue
Profit: Responsible for
generation of revenue and
incurrence of expenditure
Investment: Responsible for
profatibility, capital investment
decision making
Classification of
By Nature or Element
By Variability of Behavior
By Functions
By Controllability
By Normality
By cost for Managerial Decision Making
Imputed Cost: Notional cost
for which no involvement of
cash
Capitalized Cost: Initially
recorded as assets and later
treated as expenses
Discretionary Cost: such cost
are not tied to cause and effect
relationship
Engineered Cost: Clear cause
and effect relationship
Explicit cost: Out of pocket cost
involving immediate payment
of cash ex: salary, interest,
Implicit Cost: Do not involve
any immediate cash payment,
not recorded in books, also
called economic cost
Period Cost: These are those
costs which are necessary for
production and which will not
be incurred if there is no
production, also called
inventory cost, ex: direct
material, Direct labor
Period Cost:These are those
costs which are not necessary
for production and are incurred
even if there is no production,
ex: Showroom rent, salary
Cost Control
Preventive Action, ends when
target are achieved
Cost Reduction
Corrective Action, no visible end
Costing.mmap - 2/12/2021 - Anvesha Arora
Inventory Control
Bin cards & Stock Ledge
Valuation of Material issue
Techniques of Costing Cost Sheet Definitions Cost Accounting Activity Based Costing Lean System
Definitions Single or Output Uniform Costing Conversion Cost = Direct Integrated/Integral Activity based costing (ABC) is Lean: Reduce Waste and
Classification Labor+ Direct Expense + an alternative to traditional way Improve Speed, Six Sigma:
Marginal (Indirect labor+ Indirect of overhead accounting. reduce Defect and Improve
Costing materials+ indirect expense) Capability
CAS-7 Cement, Daily, Mining, Coal, Bricks, In this accounting methods cost
=Prime Cost- Direct material + Traditional Methods based on
Paper, Steel, Sugar Mills, Dairies, and financial accounting
Factory/Production/ Factory/Manufacturing OH Machine hours labour hours, Leans means small steps in
Job Ticket : Job tickets are Breweries, Flour Mills records are integrated
Manufacturing OH ABC is based on Cost Driver Improvement and BPS is giant
given to all workers where time
Leap
for commencing the job is Batch Costing Non-integrated/cost control Usefulness of ABC
recorded as well as the time Back flush accounting is a manufacturing
Imputed Cost are notional cost
when the job is completed Stock Keeping do not involve any cash outlay accounting system where the costing of a product
expense,Deprecation, Repair Pen, Toy, Drugs, Tyres, Tubes, In this cost and financial and the inventory consumed are calculated at the
Labor Cost Card : This card is Maintenance of factory Capitalized Cost, initially they When High amount of
Shoes, Drugs transactions are kept separately point of completion of the manufacturing process
meant for a job, which involves overhead
building, Indirect Labor, are recorded as assent and later
several operations or stages of Tools of lean System
Primary Packaging, Insurance Each batch is treated as a cost unit. treated as expense Wide-Range of Products
completion. Instead of giving one Cost of Plant and Machinery
card to each worker, only one Batch costing is type of Job Costing Cost Object is anything for
Presence of non-volume related activities
card is passed on to all workers which a separate measurement
Office and Administrative OH JIT: Reduce Waster through
So there must be a level of quantity at which is required Stiff competition
Time and Job Card: This card is sum of etup machine cost and carrying cost Pull Production
a combined record, which costs is minimum. Such a level is called Difference Between Standard
shows both, the time taken for Definitions
Salary of staff, repair and Economic Batch Quantity (EBQ) and this level cost and actual cost is called
completion of the job as well as maintenance of office building, both the cost are equal Variance Takt Time, Heijunka, SMED, Cell Build
the attendance time. Depreciation of Office Building,
Stationary, Account and Audit time spent by worker in factory ABC costing is an accounting methodology that assigns
Idle Time: Difference between JIDOKA: Reduce Waste
Expense is called time keeping costs to activities rather than product or services and
employee paid and time spent Through Controlling Defects
apportion cost over cost
Allocation is the process of
Selling and Distribution OH object/jobs/products/customer/services.
identification of overheads with
Unavoidable: Tea break, to cost centers. Cost Pool: It represents a Poke Yake, Andon, Automation,
reach, Gap between Jobs Job Costing group of various individual cost 5 Whys, Line Stops, Build In
Salesman Commission, Apportionment is done in case items. Quality
(treated as direct cost)
Advertisement, Sales office of those overhead items which
Normal Idle time: Wait for Job, expense cannot be wholly allocated to a Under ABC OH-cost is allocated
Furniture making, Repairing, Tools of Kaizen
Material, Instructions (treated For Cost sheet Costs are particular department. based on activities, in
Printing press, Painting
as prodiction cost) Delivery Van, Transit classified on the basis of traditional methods OH-costs
Insurance, Secondary Costs which are ascertained were grouped under cost
Job Costing is same as batch Functions
Abnormal: Breakdown of packaging, Warehouse and Cold after they have been incurred centers and later cost is 5S. TPM,Value Stream
costing except job itself become a
machine, Unavailability of storage Expense, Bed Debt are known as Historical Cost assigned to product cost on the Mapping, PDCA, Quaity Circle
cost unit
Raw material basis such as direct labor/prime
In standard price method
Suitable for diverse nature of Jobs cost
Concealed idel time: Cleaning, materials are priced at
Grass cutting(P&L account) pre-determined rate In traditional methods costing
Accounting for OHs Contract Costing
Marginal Cost is an increase in overheads are first related to
Work Measurment aims at Maximum possible productive
total cost that results from a cost centers and later cost is
determining the effective time one unit increase in output capacity of a plant when no
assigned to cost units (product,
required to complete a job Allocation Contract Costing is also known as Terminal operating time is lost is called service, time or combination)
costing. It is variant of Job Costing Marginal Cost= Prime Cost+ VOH Theoretical Capacity
in ABC OH are related to
Overtime: Actual houral more Apportionment
Master budget denotes the activities or grouped into cost
than normal time Most of the cost are direct in nature Variable cost or marginal cost is
pools, later they are related to
also termed as direct cost, summary of Functional Budget
Depreciation is taken as part of direct Cost cost objects
Wage Plans activity cost, volume cost or
out-of-pocket cost Costing approach that uses
Work Certified always in terms
of contract price broad average for charging
Fixed Cost is also called time
overhead uniformly to products
Differential Piece Rate (3) cost, period cost, standby cost,
Work Uncertified always in or services is known as cost
capacity cost, or constant cost
terms of ocst smoothing or peanut butter
costing.
Taylor Debit
Cost smoothing can lead to one product
under cost and one more cost its called cross
subsidization
If the workers are efficient, they Material, Labor, Depreciation,
should be paid @ 120% of the Money to subcontractor ,
Cooper's Cost Hierarchy
normal piece rate and if they Overheads
are inefficient, they should be
paid @ 80% of the normal piece Credit
rate Unit Level Activities: Those
activities for which the
Merrick consumption of resources can
Material Returned, be identified with the number
WIP, Work Certified of units produced
Re-Apportionment and Work Uncertified
Up to 83% of production - Normal piece Batch level Activities: Activities
rate such as setting up of machines
83% to 100% of production - 110% of
ordinary piece rate Product Level Activities: These activities are
Above 100% of production - 120% of performed to support different product in line
ordinary piece rate example: Designing the products, producing
parts specifications
Gant Task and Bonus
Facilities level activities: These
are the activities which can not
If Service department provide
be directly attributed to
service only to production
combination of time rate, individual units. These
department Direct Method is used Retention Money: Sometimes some part of
bonus and piece rate plan. activities are necessary to
money that is due to contractor is held back as a
sustain the manufacturing
Production below standard - Guaranteed If SD provide service to not only PD but safeguard available to the contractee in case the
process. Example: maintenance
time rate does nor receive services from other SD contractor is not able to fulfill one or more of
of building, Plant security.
Production at standard - Bonus of 20% use Non-Reciprocal/Step-Ladder, the conditions
[normally] of time rate Step-Down method
Practical applications of ABC
Production above standard - High piece rate
Standard Costing
for the entire output If SD1 provide service to not
only PD but also other SD2 and Cash Ratio: The contractee may pay a fixed
Bonus System Plan (Hasley and Rowen) SD2 provide Service to SD1 use percentage, say 80% or 90% of the work As a Decision Making Tool
reciprocal Method certified, depending upon the term of the
contract. This is known as Cash Ratio
To increase performance and
Simultaneous: Cost of one profitability of organization
service department to
production department using ABC can help in find specific
Cost Plus Control: The value of control is
percentage. cost for an activity
Under Hasley Weir plan determined by adding an agreed % of profit
employee gets 33.33% instead to the total cost. It is used when contract of
Trial and Error: Cost of one cost can't be calculated reasonably. As Activity based Management
of 50% service cost center is
apportioned to another service
Barth Variable Sharing Plan Escalation Clause: Contractor can revise the
cost center.
price of contract in case of increase of The use of ABC tool to manage
Repeated: Cost of one service prices of material, labor etc due to macro the cost of activity level is
department is apportioned to economic or any other reason. known as activity based
PD and SD management
De escalation Clause or Reserve Clause’ to
provide for any future decrease in price etc. Various analysis in ABM
Absorption so that the benefit may be passed on to the
Labor/Employee Turnover contractee
Cost driver Analysis
Charging of OH to cost Units Process Costing
Activity Analysis
Absorption Basis •Textiles mills , weaving
• Chemical works Value added activities
• Oil refining
% of direct material/prime • Cement manufacture Non-value added activities
cost/direct labor cost/labor • Paper manufacture
• Food processing Performance analysis
hour rate/machine hour rate/
rate per unit of output • Steel mills
• Paint manufacture ABM in Business
• Soap making
• Sugar works
• Confectionaries (Biscuits) Cost Reduction
Cost of Labor Turnover
• Plastic manufacture, etc
Business Process
Operation costing is Re-engineering: Examining
1. Preventive Cost: Preventive Costs also known as Hybrid business process and making a
refer to all those items of expenditure Product Costing substantial change ro how org.
which are incurred in order to keep currently operate
the Type of OH Rates FIFO at current Cost, Oldest
workers satisfied ex: Medical Service, Inventory SOld IFrst Benchmarking: Comparing one
Welfare segment of ABC to another
LIFO , Newest Inventory Sold First
segment
2. Replacement Costs are those costs which are
During Inflation use FIFO and
incurred for the recruitment and training of new Performance management
During Deflation use LIFO
hands and the resulting losses, wastages and
lowering of productivity due to the inexperience and Abnormal Gain and Loss Facilitate Activity Based
inefficiency of the new labor force. Budgeting (ABB)
ABB analyses the resource
input or cost of each activity so
helps in better planning and
Blanket OH rate refers to budgeting.
computation of one single
overhead rates for whole
Process A/c
factory, it is different from
Departmental OH rate which
refer to separate OH for each
cost center or department Debit Side
Treatment of Under
and Over absorbed Materials used
OH
Employee Cost/Labor
Direct Expense
Depreciation, repairs,
maintenance, insurance
Production Overheads
Rent, power, light, gas, water bills
Capacity Abnormal Process Gain/yield
Credit Side
Installed/Rated capacity Historical Costing
Practical/Operational capacity
Normal Process loss
Normal Capacity It is ascertainment of cost after
Abnormal Process Loss
they have been incurred
Actual capacity
Idle capacity Absorption Costing
Credited to process account but
debited to Costing profit and
loss account
Normal Idle It is practice of charging all
Transfers costs, both variable and fixed to
Ab-normal Idle operation. This differs from
Finished Stock marginal costing where fixed
Costing of Special Items cost are excluded.
Cost of Sales
Sales Budget And Budgetary Controls
Abnormal Gain A/c
Master Budget is also called
Summary Budget
Debit Side
Budgeted P/L statement
Normal Loss
Budgeted Balance Sheet
Costing P&L A/c
Budgeted Cash
Flow Statement/
Credit Side Cash Budget
Principal Budget Factor: A
factor which limits the activities
By
of the organization
Process- 1
A/C Flexible Budget: recognize the
difference b/w variable,
abnormal Gain
semi-variable and fixed cost
depending on activity levels
Operating/Service
In ZBB budget are prepared for
each activities rather than
functional department
Budgeted Ratio
Multiple/composite
Bicycles, Soft drinks