2 -_:,": . .... ....,.......-....- .--,......-.__.

(.i )
Ratio Analysis: Utility and LimItations ot !\.ccounting RatiOS
Calculation of Accounting RatioS-Ratio A.nalysis for Liquidity, Solvency,
Profttabillty and Leverage. (20 hrs.)
Even
Unit-
V
Marginal Costing: The concept_Break-Even A.nalysis_Break
Chart-Importance and assumptions-A.pplication of Pro!it Volume Ratio
Different types ofproblems (with special emphasis decision making problems).
('20 hrs.) .
Budgel and B ContrOl: Procedure and Utility_Preparation of
different types of Budgets including Flexible Budget. (IS hrs.)
,

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Part I-Fundamental Principles
r
1
Nature and Scope of
".-"'-
Cost Accounting
.
'iL. I. Introduction
is a branch of accounting and has been dcvc
loped due to limitations of financial accounting. Financial accoUllt
Ing is primarily concerned with record keeping directed towallls
,,, .. ,,'
, ,.,,,,,,,,,n
..,., "-,.\.,,,
,II.
thi! preparation of Profit and Loss Account and Balance Sheet. rt >11'
:'prOvic:Jes information regarding the profit and loss that business
"',
-j,nterprise is making and also its financial position on a particular
date. The information concerning the business enterprise Is 'help
. ful to the management to control ina,gcnenil'waythe major functions
'"
of a business viz., finance, administration, prcduction and
bution' but details regarding operating efficiency of these divisions
are lacking. In fact, the development in the field of cost accounting
is so quick and fields covered by it ate expanding so much in mag
nitude that it becnmes difficult for the management to lay down
JlIanagement policies; to guide the management decfsions or evaluate
operating mnnagemcnt performance with the information provided
by financial accounting.
;I. Limitations of Fil!ancial Accounting
:;"-..
'. The following limitation' of financial accounting have led to
-1he development of cost accounting I
1. No clear idflQ 0 0 erQtin e ciency. acc.ounting
.does not ive c ear plcture of operotinp t' douy when prices are
rising or decreasing on account of inflation or trade de.pression. It
,f
i. possible that profits may be inore. or less not because of efficiency
or inefficiency but becaUse of infiation or trade depression.
\
" ...
1
il
..
.......,- "-<'"

y- !t:I
:.:r ; ,..., . \'F
and Scope of COSI Aceounling /. 3
Nalure and Scope of CO.II Accollllli\lS
... not provide day-to-day eost information to the manageroeat
1'2
fIK 'making ell'octive plans for the coming year and the period aiHr
WI as financial data are summarised at the end of the .accountilll
2. \f:fukness nol s otted"ol{1 bJ' resul,,,
e
disc oses on Ythe nel resull nf7Tit ,o!/ecm aCliv;lies of /I
t
bus;nes> us a It does not iodicate profit or loss of eac:n
departmenl. job. process or contract. It not disclose the exU
ll
cauSO of in.ffic..ncy i.e. it not tell where t\.. weakllC$S is
beluse it discloses lhe net profit of all tnc activities of a busine
as a whole. It can bc compared with a reading on thermometer.
A (.1' m'. than 98'4
0
or less tban 98'4
0
discloses diat
1re
sonl<t'.,ing IS wrong with human body but the euct disease i.-.ot
discl"s.:d. Sim,larly, loss or less profit disclosed by the profit a1'li
loS> ..cc.>u is " signal of bad performance of the bUSiness but tile
nl
eXi.\ct.cause (")1' $uch performance is not known.
3. Nol 1><'10(01 in tile In financial accouD\iJ!.&
C,),IS arc nOlUvuilable as an aid in determ'lninlprires of the prod\lllU.
services. production order and lines of products.
r
4. No dos.'; J:jllio/J-O] expens.... anti !!SCOIln/S. In financial
ls
aecoll t erc" no such system by which accovn ar< classified '"
ntin data regarding costs by departments. products in as to live
the manufacturing divlSions; by units of prod""t lUtes and sales
t.... ritories ; by departments. services and functions in the adminis
tratIve division. Further expenses are not cla18i6cd as to diteet
and indirect itemS and are not assigned 10 the prodUcts at each
slug of production to sho'" the controllable and uncontrollable
e
it(:]llS of overhead costs
S, N.<l.du,u f<l,_('!!!!I''!!i,,,,"n It does
0<'1 sup\>ly lIse}id "ara 10 manageme
niTor
COatP"'rft;oR with previoUS
p>riod and for uking various financial decisions as introdUction of
n'W prodUcts. replacement of labour by machines, price in nonlllll
" or sp,cial c"cumstances. producing a part in the factof)' or buying
'\
it iron' outside market. production of a product to be continued or
g'"en up. priorilY uccorded to different products. investment to be
m:l in new p:-o,,",ucts or not etc,
de
CoIt. It does not provide for a prvpn
,.,,'IIrvl ol"materials and supplies. wages. labour and overheads.
t
7. NV,S!Qi.',!ards to assess Ihep-erformance. Il1linancial accouo
.there' is no "'ell d.eve!op.d sys;em of slandards to 3\>praise the
effic,encY of the organIsatIon tn the use of materials labour and
overhead costs by comparing the wock of labourers, saleSlDlln
an \ ex""utives. which should have bee!, accomplished in 'prOducing
lted
"nJ selhllg a g,ven ,numb.. ?f products ,n an allo period of time,
tl not prOVIde Inform,tlOI\ to as'"'ss the performance of various
perwns and departntents and to see that tile cost do not exceed
a rcas.,nabk lim'.t for a quantum of work of the requisite
q,,3 lity. .
. . lnformalion. Financial accounting
IS maully tells abOul tM C(lllt ,.lroady incurred. It
..Iio<!.
9, No Anall'sis 0 Loss's. It does not provide
-mysis a oSSe," due to e ec Ive material. idle time. idle plant and
a..upment. In other words. no distinction is made between avoid
.... and unavoidable wastage.
)0. Inade I/ale in ormation or re rls. It does not
.a*qvate In ormation for repor/,f to outSIde agencies such as banks,
'\ .,vernment, insurance companies and trade associa.tions.
II. No QJI.rwt!r [or certain Financial aCCQuDHng will
;,;'if;',,-,,- help (0 IIn.,'wn such queslions as-(o) Should an attempt be m.ade
." .. tell more products or is the factory operating to capacity 1 (b) If u
.. -.ler or contract is accept"", is the price obtainable sufficient to
-"'''" .JIIow a profit 1 (0) If the manufacture or sale of product A were
and ell'orts made to increase the sale of B. what would
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,,)'';;'k the e/foct on the net profit 1 (d) Why the profit of last year is of
U
I .>'. _b a small amount despite the fact that output was increased
. ....tantially 1 (e) If a machiue is purchased to carry olit a job. at
pseaent done by hand, 'what ell'ect willthis have on profits 1 . (f)
Wage rates having been increllSed 50 P,aise per hour. should selbDI.
,nee be increased, and if, so, bY'hdw,much 1 ;
3. Meuln Ore"!
. <;Ost and
of expen the deterrnmation of the costs of
. fIOCI\lCts or serviCj,s, lhe presentation of suitably arranged
..<Iata for purposes of control and guidance of management. It
iMlod.. the ascertainment of-the cost of every order. job, contract.
process,. service or unif as may be appropriate. It deals with tlie
-.t of production. selling and distribution. It is thus the provision
.., sooh analysis and classification of expenditure as will enable
.tela! cost 'of any pa'11c)llar unit of production or service to be
._rtained with reasonaljje degree. Idf accuracy and at the same .time
10 disclose exactly how such total cost is constituted Vi.e. the value
e{ JJ1a<tel'ial used, the amount of labour and other expenses incurred)
Ie as to control and reduce its cost. Thus. cost accounting relates to
collection, classification, ascertainment of cost and its accounting
_ control relating to the various elements of. cost, It establishes
and standard costs and actual cost, of operations, processes,
llepartments or products and the anal)',is of variances, profitabiQty
.... social use of funds. ,
Cost AceountaDcy is the application of costing and cost accoUD
tia.& principles. methods and techniques to the science. art and
,...,tice of cost control and the ascertainment of profitability. It
_odes ihe presentation of information derived therefrom for pur
...... of managerial decision-making. Thus. cosl occountancy is (he
_ -nee, -and of a cost accountal1t. It is science ,because
1 .
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Nature and Scope of Cost
,1'4
it i. a body of systematic knowledge having certain principle.
a CQst, accountant should possess for proper discharge of Iti.
responsibilities. It is an 01'1 as it requires the ability and skill with
wh,d, a cost a"countant is able to apply the principles of cost
accountancy various managerial problems. Practice includes the
continuous efforts of a cost accountant in the field -of cost account
ancy. Such ef'f<Jrts also include the presentation of information for
the of lnanagerial decisioo#making and keeping statistical
records.
Cost Accounting
The sc(\pe ("If cost accounting is very and- includes the
following:
'(I) Cast Ascertainme"l. It deals with the coUection and
analysis of e;.;.p::nse5, tlle of production of the different
productS at the different stages of manufacture and the hnking up of
production with the expenses. In f,\ct, the -varying procedures for
the collection of expenses give rise to the different systems of
as Historical or Actual costs, Estimated costs, Standard costs etc.
Again Ute varying procedures for the measurement of prodnclion
have resulted in different methods of costing as Specific Order Costing,
Operation Costing. For linking up of produetion with the
e<pmses the different techniques of costing such as marginal eo!t
technique, the total cost dtrect cost technique ete. have
been evolved. All the three i.e, systems, methods and technique'
can be used in onc concern simultaneously.
(ii) Cost Accounting. It is the,process of accounting for CObt
which begins with 'recording of expenditure and ends with the pre
paration of statistical data. It is fonnal mechanism by means of
which costs of products or services are ascertained and controlled.
Cost can be ascertained either by following the historical or predeter
mined system of costing. Cost can be predetermined either by
standard costing or estimated costing. If the and financial
accounts kept separately th.en their reconcIliation is also to
done in order to verify the accuracy of both sets of accounts.
(iii) Cost Control. Cost Control is the guidance and regula
tion by executive action of the costs of operating an undertaking:
It aims at f;fuiding t1.le adual towards the line of targets; regulates
the actuals if they deviate or vary from the targets; this guidance
and is done by an r:cecutive action. The cost can be
controlled by standard costing, control. proper presenta
tion and reporting of cost data and cost audit.
()f Cost Accounting .
. The objectives of cost accounting are asce.rtainment. of cost,
xation of selling price, proper recording and presentation of cost

data to the management for measuring efficiency and for cost
control. The aim is to know the methods by which expenditure on
materials, wages and overhead is recorded, classified and allocated

".;..
... , Jrillllreand Scope of Cosl Accounting I'S
" """that tIle cost of produets and serviees may be accurately ascertain
ed; these eosts may he related to sales and profitability maybe
4ltermined_ Yet witl' the development of and induS\1y,
iII"objoctives are changing day by day. The lollowing are the main
': -,' of cost accounting:
\-';:<f (0) To ascertain the cost per: unit .9Q the different products
by a business concern.'

If*\'.::::- . (b) To a C1.nalysis of cost both by processes or
"f'''''..,.raltons and by dIfferent elcments of cost.
(c) To disclose sources of wastage whether of material, time
e,'<pens.e Or in the use of machinery, equipment and tooJs and to
fKPare such reports which may be necessary to control such
,ge. .
(d) To provide requisite data and serve as a guide to price
'ssg of products manufactured or services rendered.
t'j, (d To ascertain thc profitability of each of tite products and
the management as to how these profits can be maximised'.
(&:t (f) To ex.ercise cuntrol of stocks of raw materials,
W'or,k.il1-progress, consumable store and finIshed goods in order to
!:'minimi,e the "apitallocked up in these stocks.
'1):-, (g,l To reveal sources of economy by installing and impk,ment
'illS iJ.system of cost control for labour and overheC1ds.
" (iI) To adv,se management on future expansion policies and
J'f0poscd capital projects.
(i) To present and interpret data for management' planning,
dedsion-making and control. "
i j) To help in the preparation of budgets and implementation
.,f
',:: (k) To organise an effective information system so that
, dill'erent levels of- management may get the required informalion
at the right time in right form for carrying out their individual
rtq3QnsibiJities in an efficient manner.
(/) To guide management in the fonnulation and implemen
tation of incentive honus pluns based on and cost

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(!Il) To supply useful data to the management to take various
_ decisions such as introduction of new products, replacement
of labour by machine etc.
'- (n) To help in snpervising the. working of punched card
3c<:ounting or data processing through computers.
f (0) To organi.e the internal audit systems to ensure effectiv.
I ",m'\dng of different departments.
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, ,.X\Ill_. 11*1_
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Nalurf' ana Scope of Cost Accounting 1'7
Naturc and Scope or Cos! Accounti;,,"

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(v) 11 helps in by disclosing the sources of
programmes with the hell' of 10" or and !'y suggesting such controh:. so that
lpJ To organise cost reduction
liil'feront departmental manas
ers
.
(q) To provide speCialised services of cost audit in ordtc to
I
, p(Cvent the errors and frauds and to facilitate 'Proll'yt and reli I"
t
\;oformation to the managell'ent.
l (r) To find out costing profit or loss identifying "fill
revenues the costs of those products or services by selling which tile
";
reyenues have resulted.

\II
Broadly speaking, the above objectives can be re_grouped uader
the f&lIowing three headS :
(a) Ascertainment and analysis of cost and income by prod"d"
function and respdns\bility. r 1
(bJ Accumulation and utilisation of cost data for cOlll
pijrposes to have the minimum 'Possible cost consistent with m"in
too:ance of "uabty. This objective is achieved through filtatioll or
targets, ascertainment of actuals, comparison of actuals with tar!Cts"
analy515 of reasons of deviations between actuals and targets 11;01
reyorting deviations to the ll'anagement for taking corrective lIe,,"on
(c) Providing useful d'ata to the management for tal;:"'lg
decisions.
r,.l1\6. of
r{h, The main advamages of cost accounting are given belo'll :
'-1;; f'1pfitable and unprafitJlb'e acti,'ilies ore d(.rdas<d and sups
can be tiken to eliminate or reduce those activiti'.S from which little
or no benefit is obtained or to change the method of production in
order "to nlake such activities more profitable.
ell
v (ii) JI enables a eanefm 1()_m,e.!'J)![f Jhe efficiency and,.li/ /0
maintain and improve ir. This is done with the help of va,uable
available for the purpose of comparison. For example,
if material spent upon a 'Pair of shoes in 19 x) comes to Rs. 60' lnd
for a similar pair of shoes the amount is Rs. 6S in 19 x 4, the increase
'may be due to increase in prices of material or more wastage ill the
use of materials or inefficiency at the time of buying or unnecessarily
high price. paid.
V'(iii) Ir plW ides illforillatioll lIPOIl which
not
and
contracts or jobs, quotationsl'an be
given unless the cost of completlOg the cOntractS can be found out
v' (il') lJ...JllidfS future .J1!tJ."-uelipn policies. It explains the cost es
incurred ana profit made in \mes'Of1jusiness and proce..
and thereby provides data on the basis of whi:ch' production clln be
approprio\e\Y planned.
,\
,
and inefficiencies of all -departments may be detected and
Jk'tVented.
". 'J,;d) It enables D perhulical determination of pmjits 01' !O."Sf'S
YtWIDUt resort to stocktaking.
It I'l.,liablv data for comp:tril1g costs in different
for different volume. of output, in dilf<lent departments and
processes nnd in dilferent establishments. This helps in maintaining
c<:'sts" at' the lowest point copsistent with the most etl1cicnt operating
cOli(;iitions. '
...ixiii) Thc exact cause vf a decrease Of' afl il1cl"f:'a.\'(' ill flR.r,1fil or
-/<JS!i can be detected. A concern may suffer not because thc CClst (\f
production is high or prices are low but also Ihe .:'lutput is
..ucb below tbe capacity of the concern. This fact is. revealed by
.-'"
the accounts only.
>-tiX) Cost Accounling discloses the relati!'f effic;mcies (Jf dillc
relit w(Jrkers and thereby facilitates the introduction of suit'lblc
plans of wage paymenl to reward efficiency and to provide ndcqui\t"e.
incentive to the less efficient workers. A good srstcll1 of c('Isting
prosperity of the business and thus greater security
of serv.lce and adequate reward to workers,
'--) It enables the creditors and inveslor. to judge the fi"""cial
str(ingth and creditworthiness of the business. A SOl/lid business
cOIU.:ef'u')i,'ith a g(Jod..system l?fcQstiflg can ottracl more il1l'l'.\'ICfS than
a similar concern without an adequate system of costing.
HelpfUl 10 G01'l'l'lImenl. It facilitates the assessment of
Excise Duty and Income Tax' and the formulation of policies
regarding industry, export, import, taxation etc. It also facilitates the
preparation of national plans for economic development. It pr\)\'idcs
ready figures for use by the for application ,to problems
like price fixation; price control, tariff protcction, wage level fixation,
payment, of dividends or settlement of disputes.
liii) Helpjullo Consumers. The ultimate aim o!" costing j::; to
rt:duce cost of production to the ll',inimum and maxirnise the pn.)llts
of the business. A part of the brnefit resulting from the red\lction (If
the cost is usually passed on to the consumers in lhe form of lower
prices. "Besides, the installation oJ a costing system will infuse "::Orl
fidence in the mind' of the public ab(\ut Ihe fairness of the prj">,,
char.ed. "
Efficiency of Public Enterpri.'N!,'i. Costing bus a )11('fC
Important role to pl:"ly in public enterprises than in private
prises. In public primary objective is not to r'aise pn)lir
but it \s to serve the society by. providing quality goods at
.. .. ....... .--..--.=' IIIIlI!!W1!!!l::IIII::"-.
lV(J.!-W\' and Scope of COSI ,Accounting j'!r
,.. .
"'ita each other because a manager cannot control unless h'e" h.as
rolit
plaaneo a course of action.
rato;. Therefore, whatever limited information the usual V an4
e
loss account can give in case of a vrivate enterprise, is not avai1a:bi
in c.s of a vublic entetl'rise. The efficiency of a public sector call.
e
therefore, be best judged by comparing its cost of production with "'he
cost of production of its counterpart in the private sector. Public
euterprises lack the personal initiative. and interest of private
good systern of costing ensures efficient and effective conttol
through a proper analysis of their working. It provides for graded
financial control over eJ<penditure and avords conliict of authoTitY.
\1\ It measures efficiency and prolitahility of the undertaking to justify
,I,j
its running in the public sector. It helps the management in l\Xblg
" rtuonable selling V
rice
for the products manufactured or serVices
rendered.
7. CostiDg--AD Aid to Management t
Planning, decision-making and control a<e three illlportan
functions of the management. It is desirable to have a brief disC\ls
_,sr.n of these functions. i
Plallning. Planning is thinking in advance i.e, 100k l1g a\\ead
aud deciding in advance what to do, hoW to do it, when to oq, it
"ntl who is to do it. In planning, tbe management is concemed With
l'!)'ing down objectives and determining the courses of actions to be
out of the several alternatives available to achieve those
o1'Jj,ctivos. Tnus, planning is concerned with future and
f",,,..ulates budgets to meet the objectives of the organisation.
Decision Makillg. Since management has to make a choice
of one course of action out of the several alternative courses of
action available, it involves decision-making. All rational decisron"
are based on accounting information. Decisions may relate to
various problems like (i) FiJ<ation of price'; (ii) Whether or not
price should be reduced for increased level of sales; (iii) Whether a
change in production should be followed; (iv) Whether or ....ot
f.ctory should operate at full capacity; (v) DeterminatiDn of tile
most profitable levels of production; (vi) Whether to make or ):luy
a spare part; (vii) Whetner a new product should be introduced
t
in
the market; (,.iii) Whether the product should be,eJ<ported or nll ;
UK) Whether a particular market should bo tapped or not;
(x) Whether a product should be discontinued to avoid the vresent
Joss; and (xi) Whether or not an investment in n particular asset
,.\
will be worth while.
nl
Controlling. Controllin]; is that part of the managelM
whereby managers compare actual performance against the
planned performance, find out the deviatIons and take remedial sWl'"
to remove the deviations. Immediate action should be taken .to
remove tile deviations to make an improvement in the performance
because promptness is the essence of an elTective control. T1\tlS,
control helps correction. Planning and conlrolling are interlinKed
The above functions of management cannot be s;:ltisfactcri))'
carried out by financial accountmg bocause of its limitations.
accounting is very helpful in p=rforming the functions of plannrng,
and controlling effectively.
Cost accounting helps the management in carrying out effici
ently its functions (i.e. planning, budgeting, decision-making,
control: pricing and evaluation of operatinlJ efficiency) by
.developing practical cost procedures that provide information useful
r
in controlling the operations of the business enterprise. <tost
at.::counting does this by analysing, recording, standardising, fo.re
a
casting.. comparing, reportini and recommending. Cosl accounting
method. supply the basis of factual inforros,tion on which manage
ment can build up its prosentation of planning and control. In fact,
cost accounting i. so closely allied to the management thilt iris
diiicult to indicate where work of the cost accountant ends and
mi.m;"gcrial control bc:gins. To quote Blocker and U
1
e/rn1a, "In
ger.en.\t
l
it may be said that cost accounting is to serve managernent
in, execution of policies and in the comparison of actual and
esfim,ted results in order th.t the value of <acl1 policy be apprnised
I
and <hanged to meet futhre conditions."
A good system of cost accounting serves the J,Tlanagement In
the (o11owing ways:
(al Classification and Snb-divisions of Costs. Costs arc collected
","d classified by various ways in order to provide mformation to the'
lJ1anagemi'nt for contreI purposes and to ascertain the profitability
of each area of activity. It enables a concern to.. measure the
cfficien.::y. and then to maintain and improve it. Unprofitable
are disclosed and steps can be taken to ll1ake an
ment in those activities.
(hi Control of Materials, Labour and Overhead Costs. An
efficient check is provided on slores and materials. Stores Ledger
aup Abstracts are maintained which provide an effective;
cllecK on the stores and material used in a business, By adopting
the ma<imum limit for sto,", the total capital outlay is controlled
and total financial loss due to over-stocking is obviated. Information
of stock of various m"terials and stores is constantly available.
help,s in planning the prod'uction according to availability of
malerial< and fresh stocks can be arranged in time. Loss due to
or. pilferage or any other Jnischief is detected and st.e'Ps
mas. therefore, taken to minimise such loss in future. An efficient
on labour and machines is provided by giving detailed infor
mlt!!on about the availability of machine and lab:>ur capacity. The
work is so planned that nO section IS over-worked and no section
remains idle. The maintenance of time and job cards for workers
__ '2;,: > ,
1'10 Na/ure and Scope of Cost AccoU/ll;tfg
discloses the loss incurred by idle tinte and indicates thedirecl!ttn"
ill which losses may be minimIsed. The relativo advantages of
.remunerating labour on the time or piece work or premium pl....
may be ascertained. It also moasures the efficiency of the wage
.iiystem in use. Cost Accounting thus provides a detailed controt of
milterials and stores and labour cests. Various techniques of W\1lte
rials control are applied in order to avoid the lockin& up
of capital in stock of matcrials and stores. Idle time should be kt,pt
:illi as low as possible. By having proper classification of overheads 'i"to
,';11
.controllable and uncontrollable "r fixed and varia!>le, it helpS.to
control the overhead costs. .
(e) Business Policies. Business Policy may require the o"""i,
delation of alternative methods and procedures and this is facilitated
by cost information correctly presented. For example, by Ille .. id,
o(.OOst reports managemt::nt" can, d\:cide whether the manufactt.t:re
of certain products increases overhead expenditure disproportionately
or whether to treat by::J3l'Oducts even at a loss, to make pos&ible a
more important trade in nnother product. Thus, it helps tne
management to take vital decisions such as introduction of a new
.product, selection of a most profitable product mix, utilisatioll of
spare capacity, exploration of additional market, whether to 'l1Iake
or buy, problem of limiting factor, replacement of existing as.<ets,
appraisal of proposed investment to meet expan.ion programme etc.
with the .help of marginal costing techniques and differential cost
analysis.
(d) Budgeting. It provides the use of budgets and perfor
mance reports and enables the management to corre,ct incfficielicics
before they enter into business. It is a co-ordinated plan of action
for every responsible person for comparing the actual results with. the
budgets. Two important cost accounting tools for helping managers
are budgets and performance reports. Budgets are financial and/or
quantitative statement> preparcd and approved prior to a delined
period of time. of the pC'licies te be pursued during that period for
the purpose of attaining objectives of the management. Thus.
budgets are the formal quantification< of the plan. of the manage
,
ment. Performance reports measure actual performance and gi.ve
accounts of comparisons of budgets with actual results which
facilitate acti0n agalnst those persons whose paformance is less than
::'

the performance specified in the budgcts. Thi< techniquo of control
'.
through performancc reports is technically known as manage-"
':!
menf by exceptioll, wh\ch is the practice of concentrating on areas
whosc performance is not upto the mark as it was 1l1anned 'nd
ignoring areas that are running smoothly as these were planned.
(e) Standards for Measuring Efficiency. It Ilrovides [[Ie
use of standards to assist management in making estimates and plans
for future and to provide the basis of management of efficiency.
Actuals are compared with predetermined standards to determill.
,
"j the opcrati ng efficiency.
;,i
N"/ure and Scope of Cost Acc.ulII;ng ..l7i t
I
I
(J) Besl ;... or Ii""'etI Resources; In all varied field!. We
are concerned io make the best use of-limited resources thllf are
anilable to us. Thus the intention is to obtain the maximum out
I put from a given input. Cost Accounting provides the reliable daln'
of costs with regard to materials, wages and other expenses. These
ktlp management to get maximum output at the minimum costll)' .
inaicating Where economies may be affected, waste eliminated a)ld'
eBJciency increased; some of the loss occasioned by redUced turn"".t'
and falling prices may be aVC'ided.
(g) IlJStrulllent or Maaagement Control. ,It provides manage_
ment with valuable data for planning, budgeting and control sf
cO,tii. The organisation and management of \lndertaking must
be planned and controlled in such a way that the desired
of prOduction is aChieved at the least possible cost in relation to
the scheduled quantity of the product. The measurement ortbe
degree to which this objective is attained, is provided by cost
.----.....
acCOunting. An efficient system of cost accounting is, thus regarde-d
a8" an important part in the efforts of any management to "cure
business stability.
(h) Cost Audit. The operation of a system of cost audi, in
the organisation will assist in prevention of errors and fraUds. "It
will help to improve cost accounting methods and techniques to
fatilitate prompt and reliable information to the management.
(t) Special Factors. It informs the management about
special factors SUch as opti.mum profitability, seasC'nl\1 variationii iR
vQlume and COSlS, idle time of labour and idle capacity of tile
machine etc. Tt also helps to curtail the losses duting the offseason.
cn Price Determination. It helps 'the management to 0"
the remunerative selling prices of various items of goods in'differeUl
circumstances. During the period of depression a businessman h;ts
to become very watchfUl and vigilant in traCking down the conceal
,
,.
ed inefficiencies and Sources of wastage, so that he may reduce U,.
"
cost of production to the minimum. He has to resort to'pricc cut
to such an extent so as to recover variable cost.. Cost AccouBt

ing makes a distinction between fixed and variable costs and hclps
the businessman in the determination of prices in the depression
c{ , period. The fixation of prices cannot be properly done unless prope.
figures of cost are available. If prices are fixed without costing
informatiC'n, it is possible that prices quoted may be too high or too

low. In periods of depression. it may become necessary to redu<!e
,1-':
the prices even below total coot. Tt is only Costing which will guide
the businessman in this matter.
(k) Expansion. Management is able to formUlate expansion
polioy On the basis of estimates of cost of production at various levels
provided by the Cost Accountant.
'"., .. , ,..,,, ' "" ..,..
1:;. " .11" """_

-.iii
ill-
"""'"
----
----
- - .="" ..... '- =.= _u_._

._... _. __..
CPY' II

N61ure and Scope .ofCosl Aceounl;lIg
Nalurt and Scope of eM' AccoHntillf

:jjsJ"
1.13
plelll capacity, plant utilisation, volume of sales etc. Tbt """'t
1'12
aceountant point. out the facts and where possible, suggests remc
.lie.; management must make the final decision on policy. For
example, if course (b) were followed. the overhead which had been
8. Financial Accounting \S. Cost AccouDdDg
Both financial and cost accounting arc tlt< branches of account
absorbed by Product C, may have to be absorbed by Products A and
ing whose main object is t,) provide information by recording the
B or if course (c) were followed market research may have to be
business transactions ,y,tematically and scientifically so th.t it m')
eai}JIoyed to determine consumer reactions.
serve the purpose of the management for policy formulation and
. controlling and to pnwid
e
necessary protection to the outsiders.
The main differences between financial and cost accounting are
Both "re bn.ed on doubl< entry system and their role, are supple
civlmas under:
melltary. The orcill"ry truding account is l\ locked storehou,e
of most v.luable information. to which co,t ,ystem is the key.
'i\
Financial accounting costs very broadly, whil< the cost
le
\ accounting does this in much greater detail. In order to illustra
Cos, ..(cccunting F;nan'Cial Accollnrllf8
thlS fact, let uS examine the following: two statements:
1. It provides information about the I. It provides informati.on to lhc
Under Accounting
business in a general way. It tells management for proper p1annioe.
>'
Material..
70.000
1,50,OUO
about the profit and loss aod operation. control' and dec:isior.
,.--..:... fioancial position of the bWlnesS
Wages
50.000 to owners and other outside
Other expenses parties.
::!,70,OOO
.2. These accounts are kept in such a 2. These accounts are gcocraJly
'Total cost
way as to meet the requirements kept voluntarily to mee;t tbe
of Companie! Act and Income requirements of the,managemeDt_
Sale" 1.00,000
But now Companies Act has made
Profit of "..lies) 30.000
Tax Act.
it obligatory to keep COst records
in some manufacturing indusrries. : 'I
This reveal' an uppar<ntly satisfactory profit of RS. 30,000
',I:
which represents 10% of sales. However, the information is too 3. It classifies, records aDd analyses 3. It records the expenditure ill an
.'\'
. general to be of great use to the management, who needs to knoW
the transactions in a subjective objective manner i.e. aceordinr
manner I.e. according to the
"
to the purposes for whkh the
the profit or loss of each product so that polky decision can be
costs are incurred. nature of expenses.
made. With this end in vieW and assuming that three products A,
Band C were manufactured, cost accounting records could reveal 4. It provides a detailed system (or
aspect without attaching any
4. It lays emphasis on the recording
control for matcrials. labour and
",',
a position something like the following: Total iinportance to control. overhead costs with the help cof
Product C
standard cosling and budgeliJry
Product A rroduct B
Rs.
Rs. cOlltrol.
\ Rs. Rs. 'c,
1,50,000
65,000

. S. It reports operating results and .5. It gives",infoml<ltion through coSt
37,000
70;<100
48,000
30,000 financial position usually at thc reports to management as and'
25,000
50,000
15,000 when desired. end of rhe 11',000
Wages
18,000
15,000
Other cx.pen
ses
6. Financial accounts are the 6. Cost Accounting is only a port
2.70.000
,
.1,12,000
oounts of the whole business. They of the financial accounts and -
80,000
7&.000
are independent in nature and closes profil or loss of each pro Tola\ cost
),00,000
disclose the net profit. Dr loss of duct, job or service.
-
89,600
, 1,08,000
30.000 the business as a whole.
1,02,400 (_ )22,400
Sale:;
28,000 ' .. ' 10
24,400
::'
7. The costs are reported in ..,. The costs are broken down on ;l :1: ProfIt 26
, 24
gate in financial accounts. unit basis in cost aCCOUnts.
The statom clearly reveuls to management that products
profit t%)
'6., I.
Finandal accounts relate to 8. Cost Accounts relate to trar1sac
ent
A and B are obtaining approximately 25 % profit but the product meretal transactions of the tions, connected with the mamt
C is pulling down the total profit to 10%. Thus management may
ness .and'inc1ude all expe7tJes vir., I facture of goods and services and
manufacturing, office, selling and I includc only those
(a) investigate thoroughly product C to find out possible economies,
distribution etc. Which entcr inlo the productioll.
(bJ stop production of C, (e) increase selling price of C, (d) prodllce
C as !',loss leader, i.e., produce and sell in the hope of encouragillll
1'i
consumers also to buy A. and B provided there are nO changes in
1',1 l'

\\1
12
I
"UK''''''''''
,.-0------
.-". - -

.
1<111- and &ope of Cost 1'15
(ii) Thae a large numbtr of convettJions, es#males and
':'.ble faclOrs such as classification of cost ,nto its elements, i(il.ue
ef materials on av.,}r:age or standard price, apportionment of over.
1'.1'4 Nfl/lire a
lld
of Cosl AfI-
9. F,nancial ace.ounts are I 9. Cost .............. "'" ... :=
'-cad expense'S, arbitrary allvcation of joint costs, diviSion of over
with t:rt:ltrnaltrOflsadioll S i.e. tran* \ widl. i_crlflll
sactiO be..... the bUsi..... do not fOnll doe llMii or ...,,,....
head into fixed and 'ariable CQMS, division of costs into normal and
, n
I
ns on side and third or receipt or <ash. concern one
abnormal and controUable and non-controllable and adoptiono(
parties on tbe other. 'fhese tran
....,inal and standard costs due to which it b:comes difficult to
\
I form the basis for pay
exact costs. Moreover, no onC c...l is suitable for all purposes
I
ment or receipt of cash.
10. i..r.,,-;eo> ..... under all circumstances. Virtually its calculation depends on
units is also (I it ..
wiIIt ry at ....
1(1, MonetarY information is only * us<o to which thc data aN rcquircd to bo put to. Because I>f
l'sed (i.t'- only monetary transac
_ .. *"usion of some items of on estimated basis it is dHficult to
tton
S
arc rc,-'Ordcdl .
e actual true cos\. On tllis basis when the valuation of stock is
i\
cost ...-U - ponIY'"
. . . that will not be based on true facts and naturally tbe profit
fll<:." and liaU'" ud ,...w.
11. Financial aCCOllOl' deal rna'only \ 1\. _ulated from the cost records will not be true.
r 'will' aclll(li !m:Is Drill
cst-
\
No such rclcs ;t U
t
(iii) For getting the benefits of coot accounting many forf1lQli
(juidaDCO .- be bad :::; ... Qre tu bf' obserwed by a small and medium size cQncern due to
\1. in devising or operalinS a System l 12.
a bodY of
of financial accounting rtIe,renee wlUch the establishment and running costs are so much that it
.
can be made in case of difficulty . .-omes difficult for these concerns to alford its cost. Th\18 cost
"fO the company laW, case deci
-,ounting can be used only by big concerns.
sions and to the canons of sound
professional practice. Cost ,aI.tt'
(;'-) The conlribution of cost accounting for hOlldlingfuturistic
info......u- .... the ........ ...,
.6inmtions hDS nO! be-en muck. For example, it has not evolved' so n. rlnancia\ accounts do not provide \ 13.
eneies or van- ...
. information on the rela';\'( effi,d fw any tool for handling inftationary situation.
.....:bi..,y.
of various workers. plants

It ObJeetlnllS all.last Cost A""....tfa&
and roachineJY StocU OR vatooo4 at-
Stocks art "alued at cost or roar \ 14. A'number of objections are generally raised again.t tbe inlto
:.! k,ct price wbkheve
r
is leSS Cost is DOt.,.iy a duetion of costing' on various grounds. The,following are some of
':::.
poeiti.. - ..... - a -
tile important objec\ions \I8ually raised : ....
1S. :financial at:Counung is a 'POSitive \ 15.
.....ti.. ..- " 1a
science. because it is subject to elodea lIoduIi<l- of 1: IS 'PII'
I. Wanl of necessMa" It has been argued that costing is of
Iepi rigidity with reprd to t1>t'
_,,,,I ... .....
preparation of the financial atate- """,nt OrlglR and diat prospered in tbe past and are still
Costilli is an . . --.
that is to aay, .. ....... - ..... prospering without the aid of costing and, expenditUte r:\","

.ovel'l1 it arc iarIeb' cea Nt' '
i.. in a costing syslem would be an
by the ...
'\
J
expendIture. ThIS argument overiooRs the fact that modern uidll8
pOlicY of the ..
'\
tries are running under highly competitive conditions and tbat
iesDect to whK:h its to to' ,
manufacturer should know the actual cost of production to d .
I'"be
bow far he can red uce the seUing price. Many ind\I8trial failures
io the. past may bo attributed to the lack .of knOWledge on the part .
'.,. ) LimltatioDS of Cost h,,!!!!!!dn of manufacturer of actual cost of productIon and, therefore, seUing
. Cost accounting like otber bralll:)les of ao;ouotllDC"i i.lIOt ..
products below cost...
eKa

science but is an art whicb bas cleYeloped tbroup> theories ...
2. It is argued that modern methods of cost
accounting practice baoed ct on reasoDing.and co_on ""_. .....
tbecties can be proved or disproved in tbe Iish
t
nf COftv;",tiotlS aiil
ing are inapp,ca6le to m.ny typos of industries. It i. Irue that
'I;
costing cannot be applied with advantage to trading concerns and
basic principles of cost acc<>\l1tting. These l'rillCil'lc8 are
ances
I\ot ...
concerns of small size. But in many cases some melltods of cOsting
but changing witn the cnange of ti",e and eire\lll\st . n.e
cen always be devised to suit the requirements of the business. It
following. are the mailt limitations of cost ao;o"nting :
should b1 clearly understood that there is no stereotyped system of
(i) Cos, accounling locks" uniform It is
costing which can applied to all types of industries. Tbe system
Ihat IWO equally competent cost accountall
ts
may at
of costing should be so devised as to suit the business but not the
results frOJi the same infonnatioD. Keeping in view thislitDit,.sioll.
to suit the system.
all cost accounting results can be takell as mere ':.
'

U'i
;f.
",' "1..
1\
,
."
r
i
!:
1'16 Nature of Stope of Cost Aaollntlllj{
3. Failure ill many cases. It is argued that the adoption uf
,osting system failed to produce the desired results in many case..
and. therefore, the system is defective. The failure of a system
De due to several causes such as apathy or indifference of the
....anagement. lack of adequate facilities. non-co-operation or oppo
oition from the employees. So it is hasty to find fault with Ire
,ystem. if it fails to produce the desired results.
4. apr! rulings. It is argued that aftu
,orne time. acosting system degenerates into a mailer of forms and.
rulings. This is not the fault of the system. It is thc fault of tbe
way in which the system is maintained. Forms and rulings ar..:
e.'sential for a costing system but they must be revised and brouglit
up-to-date in the light of altered conditions. If this is not done, the
system is bound to degenerate into a merc matter of forms arlG
r\llings.
5. tXPflllsi"e. [t is said that the cost involved in installing
and wor ing a cost system is out of all prop.ortions to the benefils
derived therefrom. It may be stated in this connection that a costinI'
system must be a profitable investment and should produce benefits
commensurate with the expenditure incurred on the system. If
care is taken to devise a costing system to suit the requirements of
the industry and avoid unnecessary elaboration, expenditure incurred
in Installing and operating the system will be a profitable investmeJ>!
and will bring adequate return.
11. COSTING SYSTEM
11.1. c;.IIaracteristics.m: aD Ideal Costing System,
An ideal system of costing is that which achieves the objectives
of a costing system and brings all advantages of costing to the
business. The. following are the main characteristics which an
ideal system of costing should possess or the points which should be.
taken into consideration before installing a costing system.
(i) i'iJJjt.abili1JdQ.Jhe "->;1/aS. A c.osting system must be devised
according to the nature, conditions, requirements and size of the
business. Any system which serves the purposes of the business and
supplies necessarv information for running the bU5iness efficiently
.n ideal system.
(ii) SimolicitI' The system of costing should be simplc and
plain so that it may be easily understood even by a person of average
intelligence. The facts. figures and other informations provided by
cost accounting must bc presented in the right form at thc right time
to the right person in order to makc it more meaningful.
(iii) E!exibiU./J1.. The system of costing m,,,t be flexible so that
it may bc changed according to changed conditions and circum
...........
.'-"
. Halu" and Scope of Cost Accounting
t{'.. ,,: . . .,
1'17
..SUUlces. The system without such fiexibili\)' will be outmoded
"1Iecailse of fast changes in business and industry. Thus, the sysrem
must have the capacity of expansion or contranion without
'ebanges.
. 4
(iv) Economical. A costmg system is like other economic ""ods.
It costs money Just hke economic goods. If the system is too expensive,
Ill;ay be to. pay as buyers are not to
.;,,".cpiay for the goods If these are expenSIve as compared to their utll'lv.
"A costing system should not be expensive and must be adapted
.according to the financial capacity of the business. The benefit> to
. be derived from the system must be more than its costs as manage
.::_nt will be wilHng to ins!all the system when its perceived expected
0'. lIeDefits exceed Its expected. costs. In sh9rt, thesystem
be economical takmg mto conSideration the' requirements .of
... c business.
(v) Comparability. TIle costing system must be such so that
it may provlaeracts and figures necessary to the management for
the performance by comparing it with the past figures, or
.'figures of other concerns or against the industry as a whole or other
,p,;departments of the same concern.
J'''' . (vi) Capabiliry of presenting information attire desired tillle.
i;.. ""Ihe system must provide accurate and timely information so that
'<itmay be helpful to the management for taking decisions and suit
action for the purpose of cost control.
. '.
(vii) Minimum changes in the exjsting set up. The existing
'system of delegation and division of authority and responsibility must
not be disturbed with the costing system. As far as possible the
system must be such so that it may least disturb the existing organi
'sational set up.
" (viii) Uniformity ofJ9PIlS. A!I an.d etc. neccs
sary to the. system SfIould umform. m sIze and quahty of paper.
Greater effiCIency can be obtamed by uSIng col""r of the paper to
distinguish different forms. Printed forms should contain ins.tructions
.as to their use and disposal.
(ix) Minimum clerical work. The filling of the forms by fore

men and workers shoiild involve as little clerical work as possible

as most of workers are not well educated. To ensure' reliable
statistics, every original entry should be supported by an examiner's
siptatures.
,.. (x) Efficient system of "'alerial cOIJ),ol. There should be an
.efficient system of stores and stock control as materials usually
.a@unt for a greater proportion of the total cost.
(xi) AA-equate wage There should be a well defined
WAge procedure for recP.Tdlng the tIme spent by workers on different
jobs, for preparing the. wage sheets and for the pf wages.
1'19
)c,.lft! * r D- au:... -
i

!!!!".
1'18 Nature and Scope of Co,t Aceoun!ifIK
!:::"1iI',
Thus the introduction of well defined wage system wiU help to cOntrol
l'
the cost of labour.
,t
(xjj) . A sound plan shouldb:
deVised for the collection, allocatIon, apportionment and absorptloB
of overheads in order to ascertain the cost accurately.
(xiii) If possible .. an;'c'a/ accounts,
the cost and financial accounts should be inlerlocked into one inte
gral accounting scheme. If this is not possible, the systems should
be so devised that the two sels of accounts are capable of easy
reconciliation.
(;dl') IJ,uties and responsibilities oLiillt. aCcoulllalll.
a good system of cost accounting the duties and responsibilities of the
cost accountant should be clearly defined. The cost accountant
should have access to all works and depariments.
, :1
-I' To conclude, the primary criterion for an ideal costing system
is : How well it helps achieve ma.nagement goals in relation to its
C08t '1
11.2. Inst ollation of a Costing System
'i: .,
The fundamental factors that a Cost Accountant should con
sider while introducing a system of costing are:
i\
(i) The existing organisation should be disturbed as little as
possible.
(ii) There should be a gradual and smooth intr'oduction of
the system.
(iii) WhIle over-elaboration of records snould be avoided
;t wou(J be false economy to prune out essentials and impair
efficiency.
11.3. for lostallation
The steps to be taken in installing a costing system are:
t. Tlte o!Jjeclive to be achieved through tlle costing sy.stem. The
costing systcm will be simple if the objective is only to detennine
cost but it will have to be elaborate if the objective is to have
. informatioi'l' which will help the managem,mt in exercising control
and taking decisions.
. 2. StU"(ving the existhg o.rganisaljon and routine. In this
the points to b''': noted are-the of the business

and of the opcrationsor process carried on, ex.tent of responsibility
.;,:' and authority attached to the vaiious functionaries, the lay-out of
the factory with particular to the'manufacturing

meats, the methods of dealing with wastage of materials, the system
b
of ti'me recording and the of computing and paying wages,
'
;:f;-',,;,.,
(m.d Scope of COSl Accounrrng
"
of iSSUing orders for prOduction to the factory and the
"'-"unt of fixed, semi-variable and variable overheads.
3. Deciding Ihe struc;/ll'e of cust aCCOU/lts. What system of
. :''''<:ust accounting is suitable and the extent of details required can be
..'......ded after a thorough sludy of the manUfactUring process alld
. ""'ir ancillary The strUClurc of cost aCCOunts Sllould follow
.'c. natuml production line. the sequence can be simple, analytical
"iN synthetic. The designing of the systel1l should be SUch that
.t",\;!

,!iii,'
"i,'
l}f'",,fl.
[<".'
;':';."office
f:t':"ihe),
V' dcpend On
'I"
".
'.'. ,p:ly rolls.
'Ilacre is na gradual' build up of the Cost at caGh significant stage 9
'F"Oductio as tJ"le Product prlj('(:ecfs to completion.
f
. 4. D"'l'llihl"g llie cust I'arn TIlis cntails a thorough stUdy
. of factory conditions and decisions are to be made about c)assij]ca_
.lion of cost into direct and ind,rect, grouping of indirect costs into
,production. sellin". administl'ation etc., treatment of wastes of all
.::,,tinds, methOds of pricing 'ssues, methods of recovering ovcrhcads
calCUlation "f ovcrhead rates. A complete Cost "Ccou'nting code
:.:'1(Should be drawn up so that expenditure may bc qUiCkly classified in
office as to both source and cause.
5. rlltl'Oduei/lg lire system. No Costing system can be expected
ft!"Clion e1!'ectivoly unless of a/l the o1!icials could ,be
,Wi:; :"obtamod. Belore the system IS put lOto effect, the ImpliCatIOns of tne
li)'stem should be explained t'o all indicating to them .tlle benents
that will aC''tue to each and to the business as a Whole. However,
}:,,:l'i:<nnplete the system is, it should be intrOduced only by stages and
existing routines and practices should he utilised unless there are
grounds to sUpersede them. For example, a start Could be
,l<"'-made with the stores by introducing prop'r aCCOunts of r<ceipts and
opening of bin cards, storcs ledgers etc. .
6. Orgam.,ilig tlte COst O./lice. It is always better that the cost
is situated adjacent to the factory so that delay in routi.ng
'1<-(>utdOc"ments Or in clearing up discrepancies and dOubt" is aVoided.
i:,1The 'costing stalf 111ust be allowed to havo access to tile works if
aro to POl'fonn their dutics properly.. Thc size of staff Would
the volume of Work involved. A costing organisation is
not Worth its existenCe If it cannot present figures witll speed and
accuracY.and obsel'Y< simplicit), in tile preSentation cf r.,);It" The
dUlies of cost office fall into ti,e follOWing sp:,ercs :
. (i) Store,,' Accounl'. Posting of matcrials receipts and stores
issucs in stores ledgers, preparing material abstracts.
... (Ii) i.abolil' ACCdtr/lting. Evaluation of time shet'l:s, job cards
Cleo, prepal'ina labour abstracts. Tn some cases preparalion of actual
'cr
.
process
Oii) CU.I,
or service accounts.
.'CCClfllrS. Pouir,g of all eost aCCOUnts wll.ther job
.-1,
(1"1) Crm Contror. POsting cost control accounts ftom data
'-i':'Stipplied f1'om sections (i) to (if) above. Preparation of s!>'cial

,
N'iiiiire and Scope of Cost Accounting '\ . l' 21
\'20 Nature and Scope of Cost Accounting
4. SllOrtmre of Thert' may be of cost
;,'.......;..11'
at-cuuntants to handle the work of cost analysis, cost control iand'
""''<:!:
,
t
oost roduction. The work of costing department cannot be
,J', special investigation and preparation of periodical trading statc
statistical and other inforn,ation for nlanagement for carrying out
without the availability of trained staff.
\' , 5. Heal')' cost of operating the .fv'ifelll. The cost of ope'rating
ments.
a !sys1en-r-i'ilaYbe heavy unless the costing system is properly designed
;: deparU should function independently, the cost accountant
'j
7. Relationship of cos/ offia /0 otllel' departments. The cost
to, the requirements of each specially. The system
cral
mayI be to provide information which is required by aU levels nent
being made directlY r<sponsible to the Gen Manager or
Managing Director. The costing system should be designed to
:lor m:anagclnent. It may involve additional paper work. Thus. the
managetnent at all levels. The cost accountant, therefore" ''''''cation cost of the system will be heavy.
r
should design l'ti$ of rocords and reports etc., with this
\ end in vieW. K" 'must know and understand the problems faced in
t1
I L 5. Steps to Overcome Practical Difficulties
the process of prl'lduction. and try to translate thcm into finll:nci:
To overcome the above difficulties, following 'teps. are
implications '0 correct decision may be taken.
:
To sun' up, a cost systeln should be pcrfected in a manner
I. S!,pport from the lop management. Before the installation
that w',11 enable cost of sales to be computed; provide means for or operation of a costing system, there must be firm commitment to
valuing inventories; aid in the control and management of a com -, tae system on the part of j he top man"agement. This will 'clC't\te cost
pany. measUN the efficiency of men, materials and machines, identify
consciousnes') and interest in CDst improvement among technic,at.
waste' collected bY cost codes so as to pave the way for cost reduc
"j
production and top management.
tion, make possible inter-firm comp"iso
n
, provide data for pricing
2. Ul,lity of system 10 existing staff. The existine;
and poliCY decision and form a basis for the preparation ,of various
ing staff should be impressed about the need to supplement the
analytical reports.
ex-i,ting accounting system. It will broaden the job of
'.
accQUIHant and will creat new opportunitie-s for the account1ng
11.4.
staff,
Practical difficulties, apart from technical costing problems
which a cost accountant has to face in installing a costing system, 3. lVurkers' cunfidence Jor cooperation. The various cmpJr.yee,;
mUit be properly cducated regarding the benefits which can be
- obtained from SUcJl a system. Workers' confidence sl'ould be 'gained
are
/1. Lack of -,uppOl't frol>1 to!' m.Ol1agemenl. In most of the
in the system to got their co-opcration before steps are taken to put
cases, the costaccoUii'trng systeiiiis-introduCe(\Without the support
in practice.
,..
of the topmanagcment in all the functional areas. Even managinf'
director or chairman often introduces such system without consulting ,i 4. Training of exi,\'/lng accounting stajj: The existing staff
tllO departmental heads. The departmental managers treat it as an working in the accounts department must be properly trained in
interference in their work involved in a costing system. Thus it costing methods and techniques with the help of the Institute of Cost
creatO' fear in the n,ind of the departmental managers as they treat and Works Accountants of India, Calcutta.
the system as a device to check their activities.
'5. Cost System according to specific requirements of the
1. !i,tafJ. Whenever a
rern. The system should be installed and operated acecrding to the
ne'" system is Introduced rcsistance is natural, as the existing staff a,
of a specific cas(\ so that it may not entail heavy
ry<ay feel that they would lose their importance and may be unsure .
""it on the concern. It should avoid additional unnecessary work
as far as possible. The system, when installed and operated, will
'of their position in the
3. The fer< lri' provIde many benefits to the concern as compared to the cost and
, ::
lnel1. and other staff may also resent the additional p.aper prove beneficial to the concern.
work which may arise because of introduction of costing systfm and
6. Proper supervisi01l. There should be proper supervision
111UY not co_operate with other departments ill providing the infer
after installation and continuous efforts on the part of the cost
mation which is absolutely necessary fer the smooth and efficient
act:ountant to make the system snccessful, and to achieve the
working of any accounting system.
"

,1',1
!,

.
;:
U:::ii;;liiiliiilil
Nature and Scope of Cost Accounti'"
1'22
cost presentation and cost
desired goal of cost ascertainment.
control.
n. Cost Unit
It is a devicl;:: for t11e purpose of breaking uporseparatlng cal
into smaller .sub-divisions attributable to products and selvices. It
is the \lnit of product, service or t,me in relation to which costS1"aY
be ascet.tained, e.g., tonne in case of coal. It must be clearly deli ned
t
and 'elected before the process of cost fhlding can be started. It mll.
not be toO big or too small and must be so selected that expenditlll'e
\
,. can be associated with it and is appropriate to the needs of the
business, For instance, in case of brick kiln, the unit shOuld not be
i
ear;h brick but \,000 bricks ; normally, it is the same unit by wllich
f wholesale transactions are entered into. In case of industlies render
ing service, usually the unit is 'a compound of two measures since tile
single mea,ure may be meaningless. For exaJI1ple. in case of goods
transport the unit will be tonne.km-
the
effort involved in
"
one tonne of goodS for a distance of one kilometre.
.y of Costing
'I':
The methods to be used for the ascertainment of cost of prodUC
tion differ from industry to industry. It primarily depend> on
"r'
the manufacturing process and also on the methods of mcasuring 'be
departmental and finished products. Basically, there are twO methods
of costing (as per latest lCMA Terminology) viz: (i) specific Order
Costing (or job/terminal costiag) and (ii) operation Costing (or
process or period costing.)
{ibleifi;'J'der Cos/iug is tI,e category of basic costing methods
applica e were the work consists of separate jobs, batches or
contracts each of Which is authorised by a specific ortler or contract.
In this category are included job costing, batch costing and contract
'.,
,II' costing.
Operatiun Cos' is thc category of basic costing metllod. /
applica e were standardizcd goods or services reslli
t
from a sequence
of repetitixe and more or less continuous opelations or process to
, whlch.'cos are charged before being averaged over unit' produced
ts
.during the period.
All these methOds are di'scuss
ed
briefly as under:
. .'
I. . Job CoslilJ%. Under this method. costs are collected aDd
accumuLated tor each job, work order or project separately. Eaoh
iob can be separately identified; so it becomes essential to aDalit'se
the cost according to each job. A job card is prepared for each
job for cost accumulation. This method is applicable to printers,
machine tool manufacturers, foundries and general engineering
workshops.
t,
Nilture and Scope of Cost Accounting
)"23
2. Contract Costmg. When the job is big and splead over
JoBg poriods of tIme, the method of contract costing is used. A
"'"te account is kipt for each. individual contract. This method
iS'Used by civil engineering contractors. constructional and
..chanical engineering finns etc.
3. .Balch Costing. This is an extension of job costing. A
ba.tch m.yrep",sent a number of small orders passed through the
r.:tory tn batcl\. Each batch is treated as a unit of cost and
mtely Called. The cost pOI unit is determined by dividing the cost
of the batcl! by the nllmber of unit. produced in a This
_hod is mainlyapplied in biscuits manufacture, garments \1\anu
&cture and spare parts and components manufacture.
4. Proc,,,s Costing: This is suitable for industries whtre
paduction IS manufacturing is carried on by and
-U defined the finiShed product of one proccss becomes
dae raw material of the subsequent plocess, differcnt products with
.' or without by-products arc produced simultaneously ,at the same
-process and products produced during a particular process are'
'f{<{,..',liuctly identical. As finished products arc obtained at the end of
process, it wiU be necessary to ascertain not only the cost 'of
process but also .cost per unit each process. A .'eparate
,,..:':' aceount IS opened for each process to WhICh all expcndlture Incnrred
J>" thereon is charged. The cost per unit is obtained by averaging the
F expenditure incurred on the process during a certain pericd. Hence,
tillS is' known as average costing. A. the products are
ia a continuous ?rocess
l
this is also k.nown as continuous cO$ting.
Pr""o" costing is generally foUowed in Textile Industries, Chemical
"ledustries, Manufacture e.tc.
S. (Olle)'c!peration CoS/ing. This is suitable for industriu
where manufacture IS coritmuous and units are identIcal. This
method is applied in industries like mines, quarries, oil drilling,
Wewerics, cement works. brick works etc. I"n all these -industries
tIoere IS natural or standard unit of cost. For example, a bal'rel of
beer in breweries
J
a tonne of coal "in collierics, one thousand of
bricks in brickworks etc. The object of this method is to a>certain
the cost por unit of output and the cost of each item of such cost.
Here cost accounts take the fonn of oost sheets prepared for a defi
Bite period. Thc cost per unit is determined by dividing the total
...penditure ,incurred dllring a given period by the number of units
produced during that period.
6. Se1'l'ice Cosling. This is suitable for industrie:s# which
render scrvices as distinct from those which manufacture g(jbds. Th'is
is applied in transport undertakings, power supply companies,
municipal sorviccs. hospitals, hotels etc. This method is nsed to
ascertain tile cost of services rendered. There is usually a compound
BIlit in such undertakings, e.g. tonne..kilometre (transport undertnk
ing), kilowatt-hour (power supply) and patient day, (hospita:!s),
:t
--:
,
Nature and Scupe of Cost Accounting
I' 24
er
lufO consists of a num
15er
ot mSUOCl operations. It refers to conv
,i,)n co,t Le. cost of convcrting thc raw materials into finished goods.
:f- l\lis mothod takes into consideration the rejections in each operation
'l'
I'''' calcula i.,!! input units and cost. The clifferent operations in
t and triln. The cost per
7. lMultiple) Operation Costing, This method of roanufac-
L':
.nacl'ine screw knurl, thread
,
unit is delennincd with reference to final output.
8. It represents the app\\cation of more
l
than one IncthO of costing in respect of the s"ne prodUCt. Ihis is
d
.uitable for industries where a number of conwoncnt parts are sepa
ral.ely produced and subsequently assembled into a final prodUCt.
In ,ueb industries each component differs from the otl1ers as to
price, material used and process of manufacture undergone. So it
'will be necessary to aseertain tl1e cost of each coml'0nent. For this
purpose, process costing may bo To a"certain the cost of
the final product hatch ma I he al'\,.led. ,his method is
bi
""\
usecl in factories manufacturint\ <:y :\es, "",."no ,". ,,,gine,, radios,
'.' f typewriters, aeroplanes and other '.'" e', piC' ;., '"1',-,, '. Thi' method
.1\.
has been dropped frOln the lalCs
t
C I MI\ r,,, ,"co' . '
'.'
JA.( Types of CostiJIg .
Following arC the main 'yPOS of co,ling f,w ",,:0\ toilltng costs:
'
I. uniform 0'-W
JJg
. It 'is the usc of same llrinciples
"ncl!or ptactic by ,everal underlaking
s
for ""m11\OI\ control or
es
,> cOlnpadson of costs,
a
"
2. MarG!nal Costing. It is 'thC ascertainment of n1argin l
<C,1St by fixed and variable cost. It is used to II
'\'
'
._ ,1,,1. as<ertain the effect of ch<\nges.in volume or type of output 01\ profit.
). >: :1' I .3. Stundo Costing. A cmnparisol\ i' Inade of t\1e actual
rd
.
"<,st wilh'apre-arranged standard and' the co,t of any deviatiOI\
-. .'
(called var'lances) is analyscd by causes. TIlis pcmiits the manage
(
ment to inveSlig ., the reasons for thesc variances and 10 take suit-
J at

lS
ah\e corrective action.
'.
4. Hislorical costing. It is ascertaiOl
11ent
of cos after they
""vo b,en!ilcurrer It aims at a,certaining costs actnally

vI> work done in the past. It has a Un1ited utility, though compari
..
sons of costs over different periods may yield good results.
%::
es
5. Direct Cow.ng. It is the practice of charging 0.1\ dIrect
c"sl'. variable and some fixed costs relating to operations, I'rocess

or p,od lcaving all other costs to be written off against pTofits \n
ucts
Wl1kh they aris\.....
6.. Ahs.!"J'.lio Costing. Itis the practice of charging an costs,
n
both vanaiilc "nd fixecl 10 operatIOnS, processes or products. Tlti5 ed
differs from nla,ginal costing where fi"ed costs are e"clud .
NaIUl:(> and Scope (If Cost Accounting
1'25
]5. EYolution and Developmont of-Cost Accounting
Widespread grl)wth of industrialisation in the western world
during the last half of the 19th gave rise to the development
of cost acc\\,,-mting, \Vith the of the factory ::;ystc111.
for cost information was felt to bring efficiency in pr<Jduc
tion. In .spite of this, there was slow. of cost accounting
during the 19th century, To quote EldolJ S. Hendriksl'lJ, "Not until
tile last 20 years of tile 19th century was t1
r
ere much liternture on the
subject of cost accountll1g in England and even tlicn vcry little was to
be found in the United States. Most of the until this time
.:mphasized the procedures for the calculation ('fprime costs only."
Scv\:ral reasvut' for tl\C late development of cost aCl.:ounting
..:-z.n attri buted as given bcloy.. ;
1. Overheads (i.e. indin:ct costs) constituted a small part of
10t.:11 (\.l'?t in the early p0riod of the factory system as. costly machj
was unCOffil.non during those days. Necessity of cost accounting
i' fdt more if overheads form a significant porti<Jn of t()tal cost as we
will in the Ct)llrse of our discus:iion in the book.
2. A among the cost accountants to kiJep their,
m\:thods strictly secret \Vas also for slow devc1op
m... 01' cost accounting.
3. Until the late 19th and early 20th centurics, manufacturing
simple and firms werc producing a small variety of
products. Because of these facts also, development in eosl accounting
",as slow.
Th. mosl rapid development in cost accounting took place
1914 with the growth of heavy industry and mass production
methods when costs (i.e. overheads) other than materials and labour
wnstituted a significant portion of the total cost of production. The
.aentific managem.nt movement led by Taylor gavc imlletus to the
development of cost accounting because it contributcd to the use
standard costs jn planning manufacturing operations and in
evaluating performance. .
Ihe development of cost accounting in India is of recent origin
:lno it started gaining importance after the indepondence of the
country when the Indian Government started laying emphllsis on tha'
iadwltrial development of the country. Further, provision of cost
alldit under section 233 B of the Companies Act has given impetus 10
the of cost accounting in India. The Vivian Bose
Enquiry Commission brought to light the various malpractipes pre
.,.lent in the manufacturing establishments and it was thought that
the financial audit for the audit of financial accounts at the end of
the year was insufficient to judge the real efficiency of working of
.anufacturing organisations. As a result, the concept of cost audit,
..
Natllre and Scope of Cost AccOllnting
.,.... ' .....-_."'.::.._,o,""._.
..,._'"
1'26 Nalllre and Scape of COSI

emerged to get the best utilisation of the resources of the country
1'27
2. Complete the fOJlowing blank spaces:
which are used in the manufa<;:turing organisations and the Govern.""
ment was given the power for ordenng cost audit under section 233 B .
of the Companies Act, 1956. The Government may appoint a cost
auditor to conduct cost audit where it is necessary
(a) so to do in the opinion cf the Government under ""ction
\
233 B of the Companies Act; 1956 ;
(b) to ascertain correct cost of certain units when Government
. is approached for protection or financial help; .
(c) to ascertain correct cost of contract given to private finns.
:; i; I',! " .
under 'cost plus' basis;
(d) to fix reasonable of certain items of production so as
to prevent undue profitt;erin.z.
.;
QUESTIONS
\,"
1
A. Objective Type
,
I. lndicatc which of the following statements arc true/false:
(0) Financial accounlli infomlalion 'fur income dClcrminution.
,.
(h) Cost Accounts provide information for :lsccno.ining the
, position as on a parlicular date.
'1', .'
(c) Cost accounting helps in the ascertainmcnt of cost bcfureho.ml.
':\
(dl The orcost accounting includes cost ilsecnainmclli.
prcsentation and cost control. .
(c) Cost accounling is not needed if are beyond thc c(lntrul IJf Ihe
\..
firm.
(f). Cost accounting will not be necCS":lry if acCounlS provide the
necessary analysis.
(g) Cost accounting is nothing but" post-moncm of:past C(,1StS.
. (II) Cost accounting is uc:,eful only in such organisation" 11';; have' Pl"t,'flt as
the aIm.
,;1
(i) Cost nccounting i" an in"trument of cantrn!.
.0) Cost accounting is nothing more \h;11l il delllikd nn'll:.,i<; of
expenditure.
(k) in construction industry. contract costing is llS.d.
(I) Basically there are twO of t;"osting viz. (1) Specillc ofder
costing, ar.d (2) costing.
(m) Service cost,jng is uscd in industries produ.:ing sooct".
(II) Job coc:,tif':lg applicable to printers.
..
'.',':'1'
, t (0) Operation costing is' also known as job costing.
Ans. [True: (a), (c), (til, (f). (i); (k) ; (1); (II); Fal,e : (1)). (e), (g). (h),
':, (i); (III) ; (a)].


(0) Costing is a technique of......
WIt'ountina.
(b) Cost accounting h3S been developed beeause of of financia:
-, (e) C"", aCCOilntanc:y i. the SCience, art and of a COst account.
. (d) The ordinary trading is a locked .torehou,e of most
'lII'ormation to which COSt system is the .
(e) Cost aCCOunts deal partly with fact. and figures and partly with .
(f) The method of Costing used in a refinery is ..
(I) .... costing is used in transport undertakings.
(h) Cost unit in a college may be a .
(I) In industry, cost unit is ..
(j) In......... CO.,ing, the COSt of a group of products is ascertained.
I , ,
.. A... [(a) ascertainin. COst; (h) limitation.; (c) practice; (d) key;!.
;<
.'

t,:e.;"pany

(c esloma.tes (f) process (,.) service (h) .tIIdent (i) number (j) batch.]
3. Indicate which of the following faU under the category "methOd; or
attina" Or "techniques of Costing" or "system of COsting."
(i) Differential costing (ii) Contract costing
(h'i) Standard costing Uv) Uniform 'costing /
(v) Process Costing (vi) Batch'costing /
('ii) .. COSting (,iii) Historical COsting/
Cix) Marginal COsting (x) Job Costing. /
Aos, [Method'_(ii), M, (vi). ('ii), (x) ; .
Technique'_(i), (ix) ; SY51em-{iii), (Vi), (Viii)].

4. Name the methods of co,ting most appropriale 10 the
(i) Ship bUilding (ii) Toy manufacturing (iii) R.cadymade garmc/H;
Chemical Works (,) R.oad tran.port Company (vi) Painters and Decorators
t:.,,) Cement manufacturing (Viii) Soap manufacturing Cix) Bicycle manufac_
"-"'g (x) Brewery (xi) Blectric SUpply Company (Xii) Oil Refinery (,"..Jii'
W""'ing Pross (xiv) Bngineering Company (xv) COllicry (.n'i) Pharm"""u"e"l
(XVii) Ga. Company (Xl'iii) Constructional Bngineer.
Au. [(i) Contract (ii) /latch (iii) Batch (Iv) Process (v) Serv:ce (vi) Job
i;,'''' One Operation (Viii) Process (ix) Multiple (x) One Operalion (Xi) Servioc
Process (>'iii) Job (Xiv) Contract Costing Ba!ch '(fuU) (XViii) Contract] (xv) One Operation (xvi)
SIoert Answer Type
J. Give tbreeflimitations of financial accounting.
,tint.
2..- .slate three POints of similarities belween financial aCCounting and cos:
'III
.... "
Concepts and Classifications j'31
The difference between the cost or' sales and selling price
.upresents profit or loss.
L
2
. . Illustration 1. Ascertain the prime cost, works cost, cost of
poduction. total cost and profit fr0111 the undermentioned figures:
Direct Materials Rs. 5,000 ; Direct Lab,?ur Rs. 3,000; Direct
-.J
'j'
Expenses Rs. 500; Factory Expenses Rs. 1,500; Administration
Expen,", R. 800 ; Selling Expense. Rs. 700 and Sales Rs. 15,000.
SoIuUon
u
cost-Ana\vsis, Concepts
Prime Cosr
=Direct .M"ateriaJs+Direcr L3.bour+Dircct Expenses
-'OO=Rs. 8,500.
\r and C\assifications
Works Cost
= Prime Cos.t+ Faclory Expenses
=8,500+ l,500=Rs. 10,000.
l't
Cost of Production =Works Cost+Administration Expenses

=IO,OOO+800=Rs.IO,800
'.\
fotal Cost
I. Elements of Cost = Cost of Production +Selling Expenses
Mere knowledge of total cost cannot satisfy tbe needs of =JO,800+700=Rs.IJ,500.
Profit
C;i
management. For 1'r per control and managerial decisions, manage =Sales-Tofal Cost
o
ment is to be jlfovided witb necessary data to analyse and clasSify =Rs. 15.000-Rs. 1I.500=Rs. 3,500.
costs. For this purpose, tbe total cost is analysed by elements of Now all these terms will be examined in detail one bYone.
eN! i.e. by tbe nature of cxpense,. Strictly speaking, the elements
1. Direct Materials are those materials which can be identified
of cost are three i.t'. materials, labour and otber expenses. TIlese
.in the product and can be coveniently measured and directly charged
clements of cost are furtber analysed into different elements as
,
'to the product. Thus, these material' directly enter the product and
iHusiratecl in the following chart: . fonn a part of the finished prod uct. For example, timber in'
Elements of Cost
';-(urniture making, cloth in dress making, bricks in building a house.
,;:,.
I:The following are normally classified as direct materials:
\
\ I
.,
Materials Labour other Exrnses ';'j' (i) All raw materials like )ute in of gunny
, \
;.l>ags, pig iron in foundry, and fruits 1Il cannIng lIldustry.
Indi"ee! Di)ect IndJeet -'
(ii) Mutcrials specifically purchased for a specific job, process
\ \ \
Direct
;<;,' order like glue for book-binding, starch Powder for dressing
t t t

__ - overheads
"
.'.'
"., (iii) Part,l' or componellts purchased -or produced like batteries
,--,--_-r------\ - <
. (or transistor-radios and tyres cycles.
\ Ad'! t' S11! ,.1
Production 01' mlnlstra IOn e 109 DlStnbution
Work' Over- overheads Overheads Overheads (iv) PI'/'mary. packillg mllterial.' like cartons, wrappings, card.
I' .. urd boxes, etc: . . 'ill .
,
heads
By the above elements of cost, the foHowing divisions
. However, . 1Il SOllie cases, though the matertal IS a part of the
,nished product yot it is not treated as direct material; for example,
oj cost are obtained: .!:wlng in dress making and nails in furniture making.
l. Prime Cost =Direct Materials+Direct
boca usc they are used. in comparatively sinal! quantities. and
Labour + Direct Expcns
es
.
>1t:tt would b. futile elaboration to make an analysis of them for the
<)""':'rpose of direct charge. Such materials are treated as indirect
2. Works or Factory Cost =Prime Cost + Works or
. Factory Overheads,
terials, Thus. it can be concludod that the ease and the feasibility
.th . which- a matial can be traced. into the c!'lmpositiQn 0'1' q
3. Cost of Production = W0rks Cost+Administra-
IlIiished '., terial. prodlict will detennine what is to be treated' as direct .
tien overheads.
eH
4. 'l'otal Cost 0f Cost of Sales =Cost of Production+S
ing and Distribution Over
heads.
,,"'!W' "'_=.... "w'-'
[
132 cost_Analysis,
.CDst-Analysis, Concepts and ClassijicPtions
These have been discussed in a subsequent chapter.
Overheads can also be classified as
labour and indirect expenses.
.. quent chapter.
":z, Expenses excluded from Costs
, The total
.. ""penses which are a charge against profit.
df,e relating (0 capital assets,
distribution of profits ond
pari of ti.e costs. Examples of such expenses
dends, abnormal wastage cf material, abnormal idle time, interest on
<:apital given 0' received, expenses
shares and debentures, pront or
investments, excessive depreciation, appropriation of profits, writing
"If goodwill, preliminary expenses
.cash discount, debentures
.with business i.e., transfer fees,
and capital expenditure,
Ilirect labour if they .rc 3. Cost Sheet or Statement of Cost
Cost sheet is a statement
for S\3c\)
etc" though not
Similarly
alte l1l; the
ri
ef the product.
Wages
by of
Df materia!
! ..
Concepts ami Classt!ird';'''s
C. Dir"ct laboll is all labour expended
on
in
r
con'truction, cDmposition, confirmation 0' ce>nditi
In simple wDrds, it is that labOur whicn can be convciently identi
fied 0' attributed whDlly to a partiCular )ob, product or process or
expended in converting ,aW materials inlO'finished gDods.
of sucll labour alC \<nown as direct wages. Thus, Ct 'indudes payment
made to the following groUPS of labour:
(i) Labe\l,,'- engaged on tne production of the prod"ct
\i
ce
01 in carrying out of an operation or l'ro ...
(iil Labour cngaf,ed in aicing the manufacture
(<:.,
" "
.upervisio , maintenance, tools setting, transportation
n
etc.
(iii) Inspectors, . etc. specially
p,oducti
on
.
The wages paid to supetviso(S, inspectors,
/\
direct labour, can be t,eated as
engaged on specific product or proeess and the hours t1,ey spend on
it can be measured withOut much of an effort.
where the cost is not significant like the wages of trainees or
..
apprentices, tMir labour though directlY spent 011 " product is "ot
treate" as direct labour.
3, .Direct (or Chargeable) E:xpenses include aU ewendiwres othL1
than di,ect .material or direct labour that are specifically incurret,
e
for a particular product or process. Such er-pens is
c
charg,ed directly
to the particular cost centre as part of the prim cost. Er-ample;
of direct er-penses a,e: (i) Er-eise duty, un Royalty on produClion,
y
es
Vii) Architect Dr Surveyor'S fees, (h') Co.
t
of ,cctif)'(ng defectivC
wo <, (v) Travelling expenses to the site, (l'i) Experimental er-pens
of pilot pro)ects, (\'iii) Expenses of designing, or drawings Df patterns
d
or ro , (viii) Rel'ai" and maintenance 0f plant obtaiq,e<l tact or.
odel . hi,., and (i:x) Bire of special equipment obtained for a cont
4. Q,)'er!I may be defined as the aggregate 'of the cost of
eads
indirect fila'eri , indirect labour and sucn other eXl'enses including
als
services as be charged direct 10 specific cost
'11 . units. ,hus overheads are all expenses other than dilect expenses.
\n general termS, overheads cDmprise all expenseS incurred fDr or
;,.
in connection with the general Drganisation Gf the whole or part of
se
the undertaking i.e. thc cost Df operating SUl,lplies and services used
by the undertaking and including the l11aintenance of capital as ".
The n1ain groupS intD whieh cverhead
s
may be suv_divided are
(i) Manufacturing ovelh'eads: (if) Administration overhead'
(iii) Sell\ng overheads; (11') Research and Development overhead'.
1.33
indirect materials, indirect
These are .1sD discussed in a subse
cost of a product should include only those items of
Items of expenses .chich
carital {(JSS(?S, paymeJ1ts by way of
lIIallers of pllre }inance shouid "ot foYm a
are- income-tax, divi
of raising capital, disco"nt on
IDss from the sale of asset or
and undetwriting cDmmission;
interest, incomes Which are not connected
rent, interest, dividend received
designed to show the output of a
particular accounting period alongwith break-up of costs, The dl\t.a
incorporated in cost sheet are collected from various statements cf
".. ' acrouuts which have been written in cost accounts, either day-to-day
.. 'or regular records,
'? There is no fixed form for preparation of cost sheet but in order
r to make 'tbe cost sbeet more useful it is generally presented in colun'
nar form. The columns are for the total cost of current l'eriod, per
unit for the current period. total "'"'st and per unit cost for a preced
ing period and total and per unit cost for budget period and so on.
The information to be incorporated in cost sheet would depend upon
the re'luirement of management for the purpose of contrDI.
f,
Cost sbeet is a memorandum statement. TherefDre, it does
not form part of double entry cost accounting records" lnspite Df
this. the relationship between cost sl,eet and financial' accounts
,; which are maintained on double entry system is very impcrtant as
1 CO$t sheet derives its data from nnancial accounting, In case pre
i determined rates are not used, the entire data required fDr prepara
'\ Uon of cost sheet is derived from financial accounting. Therefore,
;.p:rlodically it becomes necessary to reconcile the information Dbtain
cost accounting and nuancial accounting separately.
i< .... The main advantages of cost shee1'ar.e: (I) It diU/OS'S Ihe
":.-ut4/ costond,the cost per unit of the units produced during the

;., ,&lYen period. (2) It enables a manufacturer to keep a close watch
' .
#f-";;

"'Dow" 'Analysis, Concepts alld Classifications c'
1'35
cost-Analysis, Concepts and Classifications
'.: i:.t;:>::" Repairs and Renewals: . Advertising
" 1,250
1'34 Factory Plant 3,500 Warehouse charges
500
alld control oV.er the 'co,t of l'roductio
n
. (3) By l'roviding a com
Office P"em;ses 500 Sales
parative study of the variou, elelllent' of current co,t with the '1,89,500
result' and standard co,t,', it i' po"ible to find out the cau,e' of Carriage outward 375 Income-tax
10.000
variatilns in co,t, and to eliminate tbe adver,efactorS and conditio;;'
Transfer to Reserves 1,000 Dividend
which go to increase the total cost. (4) It act' a' a guide to the 2,000
n,.Ilur"cturer and help' him in formulatjag a useful produc Discount on shares definite ro
t;o" policY' (5) It hell" infixing up tlle' selling price mo accU written off
500
F
rately. (6) 1\ helps the bu,ine,sman to minimise tlle cost of
tion wben tl,er is a cut throat competition. (7) e1t hell" the
'on
busines,m to
e
,ubmit 'iuotation, yjith re>,onabl degree of STATEMENT OF COST AND PROFIT
an
accur3CY tender' for the ,ul'l'ly of good', .
i::
SPECIMEN OF COST SHEET OR STATBMENT OF COST
Rs. unitS:
Rs. Direct malerials
"'te,,
Cost per unit
-r--
,----,. \
---------\ -------
Tolal Cost

RS.
Prime Cost --
Total Cost or Cost 0/ Sales
, Cost 0/ ProductiOl
1
Add: Selling and Distribution overheads
Works Cost
Adal: Adniinistration overheads
Add: Works overheads
Direct Materials
Direct Labour
Direct Expenses
J,oo,OOO Dirt:et wages

25,000 Direct expenses

5,000


r#.'.'
Prime Cost
-
1,30,000 ,AIJ: Factory Overheads:
.
F'- Wages of foreman
2,500
Electric power (':."
500
1.. ;}, Storekeeper'S wages
,:,'
1,000
'j.t' , Oil and wa1er
500 'I .
Factory rent
5,000 . \'
Repairs and Renewals-Factory Plant ",",'.
3,500
Factory lighting
" 1,500
Depreciation-Factory PJant
500
'"
Consumable Slores
:b
: i 2,500,/
,
-<
""-'l
F'actory Cost
&Id: Administration Overheads:
1'\
:3,
Office rent
2,500
. Repairs and Renewals-Office Premises ,
"
:
'500
19, , Office lighting
500 \
Depreciation: Office premises
'j 1,250
Manager's salary
5,000
i Directors' fees
\ 1,250
l\\ustration 2. Calculate prime Co,t, Factory Cost, Cost Office stationery
500
\
Telephone charges
of production, Co,t of sale, and Pront from the folloyjing' parti-
125
Rs.
Postage and Telegrams
250
.cu\ar'i't : R'.
Del'reciatio
n
:
Cost p[ProducliOJI
\,00,000
500
Factory Plant
';;JfM: SeIling and Distribution Overheads: .
Direct material'
I . Cariage outward
",'1 25,000
1,250
Office Premise' Salesmen's salaries
:1,1 Direct -wages
1,250 5,00
0
2,sj)O
Travelling expenses
i'l
Direct expen,e,
Con,umable stores
Advertising
SOO
2,500 5,000
1,250
:',i:\\, \t
Manager" salary Warehouse charges
.' ,'I:',j
Wage' of fore1Il
an
500
500 1.250
Director,' fees
\
Electric l'0wer
1,500
Ligbting: Factory office 'tationery
125 .: '....
375
500 500 PrOfit COrl of Soles
ollice
Telel'hone chargeS
250: !'
17,500
1,47,500
11.875

1,59,375
3,875
-
1,63,2SO
26,2SO
1
1,000
Storekeeper'S yjag
es
po,tage andTel.eg
ramS
1,250 "....---- _
__w I 1,89.500
500
Salestnen's salaries

Oil and water
',',- 5,000 500,'
Rent: Factory
Travelling expen'es
", 2,500
'C' ','i;".. " . 'fi.
ollice
''':-''",>&. >:i.
-----
-----
-----
---
----
-------
-----
'fl


<1.
%1
i
} j1'jt
", : '. I
" .. ' .'
'
; ..

... ,'. i 11\:"
'. "

,; tr
;
iF,'.
_. ';"

. "',c

L
i' 'I


:1;,
1 \
?:,"/!"I,
:
\.',i'l

\
'1'-" .
f ,Ii
r
(
.
. '; I
\
"i",;

.f -',i;
,1'1 ;
.. (
1
"
>:M
. ,Oil

\dl,'\
't ,
.':1
I
\
l
i'"
;:..
""'. ",

Cost-Analysis, Concepts and Classification.
1'36
Noles: (I) Transfer to reserve, income-tax and dividend are
excluded from cost accounts being items of appropriation of profit,
so these items have not been included in cost.
(2) Discount all s11ares written off being an item of
r3.ting nature is excluded fro]11 cost.
4. Trca tlUent of Stock
Stock rco..uires special treatment while preparing a cost sheet.
Stock may be 0 f raw materials, work-in-progress and finished goods.
Stock of Raw Malerials
If opening stock of raw Inatcl'ials, purchases of raw
and closing stock of raW materials. are glven, then with the
the folk-wing, raw materials consumed can be calculated:
Opening Stock of Raw Materials
Add: Purchases of Raw Materials
Less: Closing Stock of Raw Materials
Cost of Raw Materials Consumed
Stock of Work-in-Progress
Work-in-progress means units on which some work has been
done but whicl1 are not yet complete, Work-in-progress is valued
at prime cost or works cost basis, but the latter is preferred. Instruc
tions in this respect should be carefully noted from the language of
the qucstion. If it is valned at works or factory cost then opening
and closing stock will be adjusted as follows:
Prime Cost
Add: Factory Overheads Incurred
Add: Work-in-Progress (Beginning)
Less: Work-in-Progress (Closing)
Factory or },(anu!acturing or Works Cost
X
X X X
X X X
X X
X X X
Rs.
X X X
X X X
X X X
X X X
X X X

X X X
maleriul&
help of
Rs,
'X X
'C'>s.t-Analysis, Concepts and Classifications 1'37
Stock of Finlshed Goods
If opening and closing stocks of finisbed goods are also given,
tban these must be adjusted before calculating cost of goods sold
as under:
Rs.
Cost of Production
X X x
Add: Opening Stock of Finished Goods
X X X
X x X
Less: Closing Stock of Finished Goods
x x X
Cost of Goods .old
X X X
IlIustralion 3, The following information has, been obtained
from the records of Left-Centre Corporation for the period from
June 1 to June 30, 19X5 :
Cost of raw materials
Cost of work-in-progress
Cost of stock of finished goods
Transactions during the month are:
Purchases of raw materials
Wages paid
Factory overheads
Administration overheads
Selling and Distribution overheads
Sales
Prepare
(I) Cost Sheet Showing (a) Material.s consumed; (b) Prime
.. cost; (c) Factory cost incurred and factory cost; and
!; (ii) Income statement in traditional form for the six months
" . -shoWing gross profit and net profit.

-),

19X5
on June I
Rs.
30,000
'12,000
60,000
4,50,000
2,30,000
92,000
30,000
20,000
9,00,000
19X5
on Jun<; 30
Rs.
25,000
15,000
55,000
Cost-Analysis, Concepts and Ciassijicatlons
1'39
Dluslration 4, The following extract of costing information
rf'l;

. >
Cost_AnalysiS, concept' alld Clas.<ificatilJll.'
- Rlateslo commodity 'A' for the half year ending 31st December,
;),
l
1'38
"
of raw Rs.
Stock (31st Dec. 19X5) :
Rs.
..-
H.s.,
i,7tl.toO
---
1.21 ,.)0'"

n,OOO
15,toO
----
7,74,1)00
)' or MlFlIllfo(fllrl'(1 or
, materials 1,20,000 Raw Materials
Solution S1' ...1'MEN1' OF CoS1'
22,240
for ,I" mo.'" e"di"g 30th Jfllle, 19X5,
Works overheads 48,000 Finished Products
Rs.
Direct Wages 1,00,000 (2,000 tons)

Jll,(lG(l 32,000
4,IO,llQO
Carriage on Purchases 1,440 Work-In-Progress

Stock (lst July, 19X5) :

(lst July 19X5)
4,800
1;,.
Opening StOCk of RaW Material's
4,1\0,000 - Raw Materials 20,000 Work-in-Progress

Add "PlIrc:hasC of RaW Materials '. Finished Products
(31 st Dec., 19X5) _ 16,000
---;:::."
t
>
4.15.
000
(l,000 tons) 16,000 Sales-Finished Products 3,00,000
".
Less: (.\OS11,g Stock of RaW' Material!>
t
etl -----..---
Selling and distribution overheads are Re. .1 per ton sold.
r:, Cod of MlIlerlul:> (O(lSllrn 6.85,000
16,000 tons of commcdity were prcduced during the period.
92.000

Direct Wages
You arc to ascertain (i) Cost of raw materials used; (ii) Cost iJ;,.
-"7.TiftYJ
", Prime
of output for the period, (iii) Cost of sales, (iv) Net profit for the
-'''; \
Add: r:lctof)'
period, and (,'J Net profit per ton of the commodity.
7.89,00
0
F{lC((lfl' (OS, j""llrr<:<! 'W: --
S.tutiOD Add: opcnillg"work.in-prOgrej;:;
STATEMENT OF COST AND PROFI'f
" I'
: Oo,;>;og for the/ral/year eliding 31st December, 19X5
rClCto Works Cosl
f

, ""
Il'lCO
MES
1' ...TMf.NT
t y\
'00
- ,
lin- "Il'/Hli( re"r C"rtI/i"g 30tll jWIl'. 19X5
Opening Stock of Raw Materials
R:'>,
Add: Purchases of Raw Materials
.;
Carriage on purchases
"
60.000
Sa\C$ 1,14,000

Leu: Closing Stock of Raw Malerials
opening 5\0C:\I. \If fini:ll1
cd
good....
Q\ ""h\ 'J

N.34,OOO
(i) Value of Raw Materials used Add Ficlory of the year
55.000
Add: Direct Wages
goods
'
: .. of finished Prime COSI
Add; Works Overheads
\
Opening Stock or work-in-progress
10,000 "
GI'<"\"\ Profit 20.1)00
'ndirect 't:<'J'!Cn
sc
",:
Admini"W\ltOn cl<.pcnsCs
Selling and D\snibutlon
--- Less: Closing Stock of work.in-progress
(ii) Cost of ampUl for rhe period
Add: Opening Stock of Finished Products
Ncl pflljir
,
ofcuta Sotoetitoes the entire output is not sold, then cost produc-- ,
,,' Less: Stock of Flnished Products
- ..
tion of the goodS sold is to be calculated in order \0 cal \<: tl,e . ",; Cost 0/ goods sold
Units R
(Ton...')
20.000
l,20,OCG
1,440
1,41,440
22,240


2.19,200
48,000
4,800
2,72.000
16.0
Ili,Coo
1,000
2.56.0d0
16,000
1-.
17,000
2,000
2.12,000
32,000'
15,000 2,40.(t()O
Plont or 1055 after adding the selling and distribution overheads.
,
1'41
Concepts alld Classifications
.,c L'\
,
i"
Cost_AnalysiS, ConceptS and ClasSifications
,..,

Indirect Labour
10,000
Factory Supervision
I '40
I,
\ 15,000_
Repairs and Upkeep-Factory
14,000
SeHi"g and uislribution ove:rhead s
'-2,55,000
65,000 on 15,000 tones @ Re. 1 'Per ton
I
, Heat, Light and Power 45,000
\
I
6;300
,

Rates and Taxes
(iii) Cosl of Sales

18,700
tiv) Net Profit of the period Miscellaneous Factory Expenses
I,
Sales 33,600
Sales Commission
11,000
Sales Travelling
(.,) Net Profit per ton- Rs.3 I
\
22,500
Sales Promotion
sl
Distribution Dept.-Salaries and
Sometimes selling price is to be deterrnined on the basis of co Expenses .
J8,000

;Jt
of production but profit percentage is generallY given on sales. For
8,600 u
Office Salaries and Expenses
calct,\atiO of profit, the following formula sho \(. be used:
2,000
' Interest on Borrowed Funds
n
"
Further details are available as follows:
,l"
fl.'
"'I
d
Pro = !':ate percentage on Sale
100 _ RaN Percentage on Salcs
\. :\
fit (i) Closing Inventories:
, '. \'
1,15,000 /
,; l \ Suppose if the profit of 25 % on sales is to be realised and Finished Goods
1,80,000
't... \ '\ total ccst is Rs. 33,000 ; then profit to be added to total cost will be Raw Materials
1,92,000
Work-in-Progress
,II, calculated as under:
, 25)( Rs. 33,000 (;;) Accrued expenses on ;
; , ' 1
Profit=" -\00=25- ="Rs. 11,000.
8,000
'\i:. Direct Labour
!Hustration 5. The following figures are extracted from the 1,200
Indirect Labour
Triol Balance of Gogetter Co, on 30tn September, 1986 :
2,000
Interest on Borrowed FundS
RS. RS.
!iii)
Depreciation to be provided On :
Office Appliances 5%
80,000
Plant and Machinery 10%
1,40,000

Inventories:
1\
Finished SLOC\< Buildings 4%
c',).d
:1'\
RaW MaterialS 2,00,000
(il') Distribution of the following costs:
"I
DistributIOn
Heat, Light and Power to Factory, Ollice and
"'j
,
. '

\7 ,400
in the ratio 8 : I : I.
4,60,50
0
office Appliances,
Rates and Taxes two-thirds to Factory and one-third to
2,00,00
0
Plant &. Machinery
7,68,000
Office.
;,j' Buildings Depreciation on Buildings to Factory, Office and Selling
14,000
in the ratio 8 : I : I.
Sales
\1"'(;("1
3,20,000 With the help of the above information, you are required to
prepare:
Sales Return and Rebates
16,000
'. i
Materials purchased
4,1100
(i) a statement of cost showingvarious elements of cost and
Freight incurred on Materials
\"
(ii) a statement of profit. (G.A. Itller Nov, /986 Modified)
\ ,60,000
purchase Returns
,
Direct Labo
llr

'.
aTit! C{ossificali(JI1S
1'42
Solution
S"f ATEtAENT OF COST
",

"H
,
Adt/:
\\
Le.l'$ :

':\

W\" '
U-" \ , : .
Adel :
5:,,\ 1\
:
, ,
iL
t


I'
!{"'"


, ,
... I "
", \
f\
,'. '".,
''1\ Add: !, "",
r"
\
'." ,
tl, . \ ,': \
.. Less:
'," \ I
":' ,I. !
l,
'I
"
I
I
, \ Add:
, \

V' ,
\ ,i
,.:";j;!" \
.::\\:j\11 ':\ \
, i ." ,
opening Raw Matc:ria! In..,rcntOry
Materinls purchased
Freight on Materi<l\
Returns
Closing Raw Materiat lnventory
i\1Clferial ('of/..'Ulmed
Direct Labour (1.60,OQtH.. 8,0(0)
prime Cost
Facio,.)' O)'i'lo/iellds :
Indirect Labour (18,000;" I ,200)
FactOT}' Supervision
Repairs and upkt:ep--Factory
t4eat, Light and power of 65,000)
Rates and j"xes (.j- of 6,3(0)
Misc. Factory t)(,.penses
Depredation of Plan\ of Ro;. 4,60,500)
Depreciation of Buitding (150 )(2,OO,000.x.
GroS5 Works COS!
Opening Workwin.ProgrcsS inventory
work_inProgresS inventory
Worll.s Cost
AdmiJlistl.atiOT! Expem
es
:
Oftlc
e
Salaries and 'E.:<pcnses
Add:
,'I,.',: '\'1\'
Ii i .
.Clo"ing Finished Goods inventorY
Le.'.') :
cost of GoodS Sold
. \',
\ '
" \
1-.:-'
Depreciation on Offlce Appliances
(5% of Rs.
Depreciation of Bui\ding
Heat, Light and power
Rates and Taxes
Cost of Production
Opening finished Goods inventorY
\ R' \ R',
I
\ 16,000
-4,76.000\
4,Soo
\ 1."4,Soo
\
\ 2,91,WO
---------\
\ ,6S,OOO


19,200
10,000
14,000
52,000
\ 4,200
, IS,7oo
46,050
6,400 I
__I 1,70,550

\
)
-6J,9,15O'
1
2,00,000'
-B,'i9;T50
1
l,'1.,f!1OO
(,->7,7;(1
8,600 \
870 \
17,400)
SOO
6,500 \
2,100
6,56,620'
80,000
\
' 7,36,620
1,15.000
I
\6:2l,62G
Cos/-Analysis, Concepts and Classifications
Nld:. Selling & Dislribution Expenses:
sales Commission
sales Travelling
sates Promotion
Distribution Department-Salaries & Expenses
Heat, Light and Power
Depreciation on Building
Cost of Sales
STATEMENT OF PROFIT
1'43
33,600
11,000

IS,ooo
6,500
800 ,
92,'400
7,14,020
1.D:J:
-"
Sales
Returns
Cost of Sales
Net Operllting Profit
Interest on Borrowed Funds
7,54,000
7,14,020
39,980
4,000
Rs,
7.68,000
14,000
Net Profit 35,980
Illustration 6, Following information has been obtained fronl
tile cost records of Aditya Cbemicals Ltd, for 19X3 :
Finished goods on 1-1-19X3
Raw Material on 1-1-19X3
Work-in-Progress ']-I-J9X3
Direct Labour'
Purchase of Raw Material
Indirect Labour
Heat, Light and Power
Factory Insurance and Tax.es
Repairs to Plant
Factory Supplies
Depreciation-Factory building
Depreciation-Plant
Other information made available is
Factory cost of goods in
Raw material consumed in 19X3
Cost of goods sold in 19X3
Rs,
50,000
10,000
14,000
1,(\0,000
98,000
40,000
20,000
5,000
3,000
5,000
6,000
10,000
19X3 ..Rs, 2,80,000
Rs, 95,000
Rs, 1,69,000