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ASSIGNMENTS
PROGRAM: MFC
SEMESTER-II
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Study COUNTRY
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INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
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1)
Cost accounting is the accounting of the cost. It is made of two
words- Cost and Accounting. The term cost denotes the total of all
expenditures involved in the process of production. Thus, it covers
the costs involved in the production and the cost involved while
receiving it. Accounting, on the other hand, collects and maintains
financial records of each income and expenditure and make avail
of such information to the concerned officials. Thus, cost
accounting is a practice and process of cost which determines the
profitability of a business concern by controlling the cost with the
application of accounting principle, process and rules.
Cost is defined as the resources consumed to accomplish a
specified objective.
Cost Accounting is a system used to record, summarize and report
cost information. Cost information is presented in the form of
special reports to the internal users, such as managers in the
company, which is used in deciding how to operate the
organization.
These
decisions
are
simply
the
choices
Ascertainment
of
Profitability: Cost
accounting
Balance
Sheet
also
submitted
to
the
management
periodically.
Fixation
or
Selling
Prices: Cost
accounting
guides
2)
CLSSIFICATION OF COST
Cost classification is the process of grouping costs according to
their common characteristics. A suitable classification of costs is
very helpful in identifying a given cost with cost centers or cost
units. Costs may be classified according to their nature, i.e.,
material, labor and expenses and a number of other
characteristics. Depending upon the purpose to be achieved and
requirements of a particular concern the same cost figures may
be classified into different categories. The classification of costs
can be done in the following ways:
1. By Nature of Element
2. By Functions
3. By Traceability
4. By Variability
5. By Controllability
6. By Normality
7. By Capital or Revenue
8. By Time
9. By Association with Product
10. According to Planning and Control
11. For Managerial Decisions
12. Others.
Each classification will be discussed in detail in the following
paragraphs:
1. By Nature of Element
The costs are divided into three categories i.e. Materials, Labor
and Overheads. Further sub-classification of each element is
possible; for example, material can be classified into raw material
components, spare parts, consumable stores, packing material,
etc.
Materials: Materials are the principal substances that go into the
production process and are transformed into finished goods.
Materials are further classified as direct materials and indirect
materials. Direct materials are that materials that can be directly
identified with and easily traced to finished goods. In
manufacturing organizations, the cost of direct materials
constitutes a major proportion of the finished product cost. All the
other materials that go into the production of the finished goods
3)
E-Commerce example :
4)
Generally idle time means that time for which the employer
pays, but from which he obtains no production. Otherwise it is
the difference between the time for which workers are paid
but the workers do not work. So it is a loss to the
organisation. It can be minimized but, cannot be controlled
during idle time, the workers remain due and contribute
nothing towards production. It is the difference between
actual hour and actual hour worked. There are two types of
idle times:
1.
Normal idle time: The normal idle time is that idle time
which cannot be fully avoided but effective effort should be
made to reduce it.
2.
5)
Cost-volume-profit analysis looks primarily at the effects
of differing levels of activity on the financial results of a
business
In any business, or, indeed, in life in general, hindsight is a
beautiful thing. If only we could look into a crystal ball and find
out exactly how many customers were going to buy our product,
we would be able to make perfect business decisions and
maximise profits.
Take a restaurant, for example. If the owners knew exactly how
many customers would come in each evening and the number
and type of meals that they would order, they could ensure that
staffing levels were exactly accurate and no waste occurred in the
kitchen. The reality is, of course, that decisions such as staffing
UCM
Q = 200,000 + 300,000
20
Therefore Q = 25,000 units.
Finally, the answer can be read from the graph, although this
method becomes clumsier than the previous two. The profit will
be $300,000 where the gap between the total revenue and total
cost line is $300,000, since the gap represents profit (after the
break-even point) or loss (before the break-even point.)
A contribution graph shows the difference between the variable
cost line and the total cost line that represents fixed costs. An
advantage of this is that it emphasises contribution as it is
represented by the gap between the total revenue and variable
cost lines.
This is not a quick enough method to use in an exam so it is not
recommended.
Margin of safety
The margin of safety indicates by how much sales can decrease
before a loss occurs, ie it is the excess of budgeted revenues over
break-even revenues. Using Company A as an example, lets
assume that budgeted sales are 20,000 units. The margin of
safety can be found, in units, as follows:
Product y
Sales price
$50
$60
Variable cost
$30
$45
$15
Budgeted sales
(units)
20,000
10,000
Produ
Produ
ct x
ct y
Sales price
$50
$60
Variable cosr
$30
$45
$20
$15
10,000
C/S ratios
0.25
0.4
0.3437
ratio
Cumulat
ive
Cumulat
Contribu
profit/lo
Reven
ive
Prod
tion
ss
ue
revenue
uct
$'000
$'000
$'000
$'000
(Fixed
costs)
(200)
1,000,0 1,000,00
X
400
200
00
150
350
600,00 1,600,00
Cumulat
ive
Cumulat
Contribu
profit/lo
Reven
ive
Prod
tion
ss
ue
revenue
uct
$'000
$'000
$'000
$'000
change. In reality, this assumption may not hold true as, for
example, economies of scale may be achieved as volumes
increase. Similarly, if there is a change in sales mix, revenues
will change. Furthermore, it is often found that if sales volumes
are to increase, sales price must fall. These are only a few
reasons why the assumption may not hold true; there are
many others.
The total cost and total revenue functions are linear. This is
only likely to hold a short-run, restricted level of activity.
SECTIONB:
1)
Standard
Costing
Standard
costing
is
the
practice
of
2)
Flexible budget
A flexible budget includes formulas that adjust expenses based on
changes in actual revenue or other activities. The result is a
budget that is fairly closely aligned with actual results. This
Many costs are not fully variable, instead having a fixed cost
component that must be derived and then included in the flex
budget formula.
3)
A responsibility center is a functional entity within a business that
has its own goals and objectives, dedicated staff, policies and
procedures, and financial reports. Such a center is used to tie
specific responsibility for revenues generated, expenses incurred,
and/or funds invested to individuals.This allows the senior
managers of a company to trace all financial activities and results
of a business back to specific employees. Doing so preserves
accountability, and may also be used to calculate bonus
payments for employees.
A responsibility center may be one of four types,
1. Cost Center
A cost center is an organizational sub-unit such as department or
division, whose manager is held accountable for the costs
incurred in that division. For example, a Power
and Airco Department can can be defined as a cost center within
CASE STUDY:
A retail dealer in garments is currently selling 24000 shirts
annually. He supplies the following details for the year ended
31st December, 2007.
Rs
Selling Price per shirt 40
Variable Cost per shirt 25
Fixed cost:
Staff salaries for the year 120000
General office cost for the year 80000
Advertising costs for the year 40000
As a cost accountant of the firm, you are required to answer the
following each part independently:(i) Calculate the break-even point and margin of safety in sales
revenue and no of shirts sold.
(ii) Assume that 20000 shirts were sold in a year. Find out the net
profit of the firm.
(iii) If it is decided to introduce selling commission of Rs 3 per
shirt, how many shirts would require to be sold in a year
to earn a net income of Rs 15000.
Answer:
(i) BREAK-EVEN POINT, MARGIN OF SAFETY IN SALES REVENUE,
NUMBER OF SHIRTS SOLD.
Breakeven point of revenue = Fixed Costs C/S
where
C= selling price per unit variable cost per unit = Rs. (40-25) =
Rs. 15
S= selling price per unit = Rs. 40
Fixed costs= Rs. (120,000+80,000+40,000) = Rs. 240,000
Break Even Point revenue = 240,00015/ 40 =Rs. 640,000
Number of shirts at Break Even = Rs. 640 000 Rs. 40 = 16 000
shirts
Margin of Safety in Sales Revenue
= Annual Sales- Break Even point revenue
= Rs. 4024,000 Rs. 640,000
= Rs. 960,000 - Rs. 640,000
= Rs. 320, 000
Number of Shirts associated with Margin of Safety in Sales
Revenue
= Rs. 320 000 Rs. 40
= 8 000 shirts
Therefore:
Break even point revenue = Rs. 640,000 (16 000 shirts)
Margin of safety in sales revenue = Rs. 320,000 (8000 shirts)
(ii)NET PROFIT OF THE FIRM ASSUMING 20000 SHIRTS WERE
SOLD IN A YEAR
Total Sales = 20, 000 x Rs. 40 = Rs. 800, 000
Variable Cost per unit = Rs.25
Total Variable Cost = 20, 000 x Rs. 25 = Rs. 500, 000
Net Profit= Total Sales- (Fixed+ variable Costs)
Net Profit = Rs. 800, 000- Rs. (240, 000+ 500, 000)
Net profit = Rs. (800, 000- 740, 000)
Net Profit =Rs. 60, 000
(iii)SHIRTS REQUIRED TO BE SOLD IN A YEAR TO EARN A NET
INCOME OF RS 15, 000, IF A SELLING
COMMISSION OF RS 3 PER SHIRT IS INTRODUCED
Net Income Profit = Rs. 15, 000
Variable cost = Rs. 25/unit
Sales Commission = Rs. 3/unit
Total Variable costs = Rs. 28/unit
Let the number of shirts be x, then:
Profit = Total Sales (Fixed Costs + Variable Costs)
15, 000 = 40x - (240,000+ 28x)
15, 000 = 40x - 240,000 - 28x
15, 000 = 12x - 240,000
SECTION C
1
2
3
4
5
6
7
8
9
10
D
C
D
D
B
E
D
D
C
B
11
12
13
14
15
16
17
18
19
20
D
D
A
C
B
C
C
A
E
A
21
22
23
D
E
B
31
32
33
D
C
B
24
25
26
27
28
29
30
C
A
E
D
B
E
A
34
35
36
37
38
39
40
E
A
B
C
C
B
B
Reference
http://www.publishyourarticles.net/knowledge-hub/costaccounting/what-are-the-objectives-of-cost-accounting/320/
http://www.careerride.com/fa-abc-analysis.aspx
http://www.lokad.com/abc-analysis-(inventory)-definition
http://www.publishyourarticles.net/knowledge-hub/costaccounting/what-is-idle-time-in-cost-accounting/439/
http://www.answers.com/Q/What_is_idle_time_and_what_are_its_c
auses
http://www.accaglobal.com/zm/en/student/exam-supportresources/fundamentals-exams-study-resources/f5/technicalarticles/CVP-analysis.html
http://accountlearning.blogspot.com/2010/11/responsibilitycenters-for.html