Cost & Management Accounting

Syed Sohail Ahmed M.Com, DAIBP, FCMA,

Cost Accounting
Syed Sohail Ahmed M.Com, DAIBP, FCMA,

FORM OF BUSINESS

Trading

Service
Manufacturing

TRADING BUSINESS Transactions

Mr. Afaq commenced business with cash investment of Rs 75,000.

Paid Shop Rent for three months at Rs 5.000 per month. Bought Furniture for Rs 12,000 cash. Purchased goods for Rs 2,000 cash. Purchased goods from AAA Store Rs 5,000 & paid cash. Sold goods for Rs 7,000 cash. Sold merchandise to HHH Traders for Rs 13,000. Paid advertising expenses Rs 500. Paid Cash Rs 8,000 to J.J. Store on account. Purchased Equipment from Modern Equipment House Rs 15,000. The payment of Rs 3,000 was made & Afaq has promised to pay the remaining amount in a week. Received Cash from Noble Store Rs 22,000. Withdrew cash for personal use Rs 2,000.

SERVICE BUSINESS Transactions

Jamil opened a Training Center with cash investment of Rs 95,000

Paid Office Rent for six months at Rs 5.000 per month.

Purchased Furniture Rs 12,000 on account from J.J. Store.

Purchased Office Supplies (Stationery) for Rs 2,000 on credit from P Stationers. Rendered services and collected cash Rs 24,000. Paid Electricity Bill for the month Rs 1,500
Rendered services and sent bill to Noble Traders Rs 47,000

Paid Cash Rs 8,000 to J.J. Store on account.

Purchased Equipment from Modern Equipment House Rs 15,000. The payment of Rs 3,000 was made and Mr. Afaq has promised to pay the remaining amount in a week.

Received Cash from Noble Traders Rs 22,000. Withdrew cash for personal use Rs 2,000.

MANUFACTURING Transactions
During the month, the following transactions took place in City Sugar Mill.

Purchased Materials on a/c from Arshad Co. Rs 35,000. Materials issued to production Rs 29,000 & Supplies 5,000 Freight paid in cash for material received Rs 1,000. Materials returned to the vendor during the month Rs 600. Payroll for the period was distributed as: direct labour Rs 38,000, indirect labour balance of payroll. Employee payroll deductions: Income tax 10% & EOBI 1% Employer s contribution: Social security 6% and EOBI 5%. Depreciation: building Rs 4,000, machinery Rs 6,000 Factory overhead charged at Rs 30 per direct labour hour. Insurance expired Rs 2,000. Factory overhead charged to production at 2.40 per direct labour hour. 20,000 direct labour hours were used. Cost of goods manufactured was Rs 89,000. Goods costing Rs 70,000 were sold on a/c for Rs 120,000.

What is Cost Accounting?

A

systematic, disciplined study to analyze and ascertain cost of product, service or idea. of cost resulting reduction of cost by identifying the abnormal losses and leakage of material usage, wastage of labour time and overhead cost.

Control

Cost Definition
Commonly

used as an amount require to buy something or to pay for service. to cost accounting, cost is defined with reference to classification, such as by function, Behavior, Time, attribute & Control etc.

According

Cost Classifications
By

Nature or Function

Production
Selling & Distribution

By

Behaviour

Administration Finance Variable Fixed Semi Variable Stepped

Cost Classifications
By

Time

Period Cost Product Cost

By Management

Controllable Cost Non-Controllable Cost

By

Attribute

Direct

Cost Indirect Cost

10

Cost of Production: Elements

Direct Direct

Material Labour

= Variable = Variable

Factory

Overhead = Variable & Fixed

11

Direct Material - Variable

The material that forms an integral part of the finished goods and that can be included directly in calculating the cost of the product .

Raw Material Raw Cotton Gypsum Clay Iron Ore Wheat Oil Seed Bamboo Pulp Crude Oil

Finished Product Cotton Bales Cement Iron & Steel Flour Oil & Ghee Paper
Petrol, Diesel & Gasoline

12

Direct Material

Direct Material Purchased from supplier and placed to Store (Material Debit & A/Payable Credit) Defective Material Returns to Supplier
(A/Payable Debit & Material Credit)

Direct Material issued to production

( W. I. Process Debit & Material Credit)

Excess Material Returns back to Store from Production (Material Debit & W.I. Process Credit)

13

Direct Material Cost - Computation

Material Inventory Jan.1 Material Purchase

Material Inventory Jan. 31

Cost of Material Consumed

Rs. 4,000 86,000 90,000 6,000 84,000

Material

Requisition (Evidence)

14

Direct Labour - Variable

The Labour is applied directly to the materials comprising the finished product.

Direct Labour Machine Operator Car Driver Faculty Telephone Operator Cashier Pilot Advocate Chemist

Industry Factory Plant Rent a Car University P.T.C.L. Bank Airline Solicitors firm Pharmaceutical

15

Direct Labour Cost Labour wage

= No. of Hours worked (x) wage per hour
4,000 Hours (x) 50 =Rs 200,000

16

Factory Overhead Variable & Fixed

Indirect Labour Depreciation Insurance Factory Repair & Maintenance Indirect Material - Supplies Fuel Electric & Power Telephone

Fixed Fixed Fixed Variable Variable Variable Semi Variable Semi Variable

17

Statement of Cost of Goods Manufactured

Cost of Direct Material Consumed Direct Labour Cost incurred (4000 Hr) Factory Overhead Applied (@ 30) Total Manufacturing Cost Work in Process Jan.1 Work in Process Jan.31 Cost of goods manufactured

84,000 200,000 120,000 404,000 24,000 428,000 32,000 396,000

18

Statement of Cost of Goods Sold

Finished Goods Jan. 1 Cost of goods manufactured

(As per statement)

Rs

Finished Goods Jan. 31 Cost of goods sold Adjust. of under /over applied FOH Cost of goods sold (Adjusted)

60,000 396,000 456,000 50,000 406,000 - Nil 406,000

19

Statement of Comprehensive Income

Sales Revenue Cost of goods sold Gross Profit Selling & Distribution Exp. Administrative Exp Net Income

Rs 650,000 (406,000) 144,000 40,000 50,000 90,000 54,000

(As per statement)

20

Costing Documents

Syed Sohail Ahmed M.Com, DAIBP, FCMA,

21

Material Control - (Store Department)

Functions:

To Raise Material Requirements

Issue Material Purchase Requisition TO Purchase Deptt To prepare Goods Received Note Proper management for issuance to production depttr.

To Receive Goods from Suppliers

To Place Goods for quick Retrieval

22

Material Control - (Store Department)

Functions:

To Issue Material to Production Deptt

Honor the Material Requisition Duly Signed by the Authority

To Maintain Record of Material Receipt, Issue and Balance ( Perpetual Inventory

System) FIFO, LIFO or AVERAGE Method (BIN CARD)

23

Material Control - (Store Department)

ORDERING COST
Costs relates to Placing order till receipt of Physical Material,

Salary & allowances etc. of Purchase Deptt. Depreciation - fixed assets Pur. Deptt. Tel. fax. Telex charges Advertisement Stationery AND FREIGHT

24

Material Control - (Store Department)

CARRYING/ HOLDING COST

Costs relates to Store Department

Salary & allowances etc. of Store Deptt. Depreciation - fixed assets Store Utilities Charges Stationery AND INTEREST ON BANK FINANCE

25

Scrap Material

Material Issued to Production

Work in Process (Debit) & Material (Credit)

Material Return back to Store Same Condition

Material (Debit) & Work in Process (Credit)

Material Return back to Store Scrap (Less Value)

Scrap Material (Debit) , F.O.H Loss in value (Debit) & Work in Process (Credit)

26

Spoiled Work

Material issued to Production, Labour cost of production and F.O.Head applied to Production

W.I.P. Material (Debit) and Material (Credit) W.I.P. Labour (Debit) and Payroll (Credit) W.I.P. FOH (Debit) and FOH Appiied (Credit)

Defective Goods / Work returned back to Store

General Work Loss charged to Production (FOH) Specific Order Loss charged to Order

27

Documents - Materials

Material Requision

Prepared by: Production Department Issued to: Store Department Purpose: Request for issuance of Mterial Nature: Internal Document Simple format Prepared by: Store Department Issued to: Purchase Department Purpose: Request for Purchase of Material Nature: Internal Document Simple format

Purchase Requisition

28

Documents - Materials

Purchase Order

Prepared by: Purchase Department Issued to: Vendor (Supplier of Goods etc.) Purpose: Order for purchase of material Nature: External Document Formal Letter Head Prepared by: Vendor Issued to: Accounts Department Purpose: To demand payment of the material sold
Nature: Standard Format

Invoice

29

Documents - Materials

Debit Note

Prepared by: Store Department Issued to: Vendor Purpose: To inform about quantity of goods being return
Nature: Formal

Credit Note

Prepared by: Vendor Issued to: Accounts Department Purpose: Proof of the goods received and purchaser will not have to pay for them.

30

Documents Labour Cost

Payroll Salary sheet

Prepared by: Accounts & HR Department Base Wage Payment Period: Attendance (Time In Out) Overtime: Premium % Downtime: Record from Production deptt.

31

Documents Factory Overhead

Budgeted Cost Variable & Fixed

Past Record, Forecast for future. Activities: To be Attended Payment Vouchers Bills etc.

Cost Incurred Actual

32

Costing Systems

Syed Sohail Ahmed M.Com, DAIBP, FCMA,

33

Costing Systems

Standard Costing Standard Products for all Job Order Costing Specific Products per Order

Batch Costing
Service Costing

Specific lot for control

General Service for all

Contract Costing

Long Term Projects

35

Standard Costing

Flour

Cloth

Ghee
Cement

Crockery
Electronic Goods

Automobiles
Computer

Books etc
School & College Furniture

Toys
Office Furniture

Readymade Clothing
Electric Fittings etc.

36

Job Order Costing

Tailoring

Vehicle Repairing
Specific Furniture Tool Repairing Special Purpose Vehicle Draper

37

Batch Costing

Medicine - Limited LIfe

Paint - Various colours of one product

Newspaper News for Specific Areas

Confectionery - Flavor

38

Service Costing

Educational Institutions Auditors Airlines Shipping Companies Insurance Solicitors

Engineering Consultants Transportation Hotels

39

Contract Costing

Roads
Motorways Bridge Plaza Societies, Housing Schemes

40

Managerial Accounting

Syed Sohail Ahmed M.Com, DAIBP, FCMA,

41

Managerial Accounting
It

refers to the process of Identifying, Measuring, Analyzing, Interpreting and communicating information in pursuit of an organizations goal

.
42

Management Functions
Planning Controlling

Organizing
Decision

Making

43

Planning
A process of making Plan for future course of action. Examples:

Budgets (Production, Procurement etc.) Product Pricing

Other Plans

44

Which product or services should be sold Where should they be sold What are the responsibilities of each management position Who should be hired to fill these positions How much does it cost to manufactdure a product or offer a service. What is the most profitable combination of products or services What will happen to profit if selling price are increase or decrease. How much operating capacity is needed in the form of people, fund, inventory and fixed assets

45

Product: Pricing Model

Material ( 3 Kg. @ Rs 100 per Kg.) = 300 Labour (4 Hours @ Rs 200 per hr) 800 Factory overhead ( 4 hrs x Rs150*) 600 Total Production Cost 1,700 Selling & Distribution Exp (20%) 340 Administrative & General Exp (10%) 170 Finance Cost (15% of Rs 2,210) 332 Total Product Cost 2,542 Profit on Product (20%) 508 Price of the Product (Ex- Sales Tax) 3,050

46

C o n t r o l

Performance Evaluation is an essential managerial step needed to identify slack areas and reward for good results.

Controlling with managerial accounting is defined as the comparison of actual results with the planned performance (standards) and to take corrective measures to Guard against recurrence in future.

47

 Develop

a Product or Service

Prepare

Cost Standard Material, Labour and Overhead

48

Organizing

Plans are only piece of papers until they are implemented. The Organizing function provides the structure within which management will work to implement the plans. It identifies the work to be performed, the Persons responsible for the various activities and the relationship exists between the different parts of the entity.

49

Directing
Deals with day to day management of the entity. Actions, Decision Making, Communication and leadership are combined in the Directing Functions. Problems are solved, questions are answered, disagreements are resolved.

50

Decision Making
Management

decision making regardless of the level with in the organization are the time dimension involved is concerned with the selection between alternatives.

51

Which Product to Produce and to stop How to Produce them Make or Buy How to Sale them Method feasible What Prices to charge Refer Market From where to buy Raw Material Cost When to Replace Equipment CBA How to allocate scare resources Max. Whether to expand production capacity

52

 Make
Shut

or Buy Decision

down Operation

Price for one off order Special Offer

Product

need further Processing or should be sold now

53

Good Luck

54