Fma II

All About ACCOUNTING..!!
COSTING
What is COST..?
The main object of costing is to ascertain the cost of each product, process, department, services or operation. The ascertainment of cost involves
further study, analysis and classification of cost.

Cost analysis is break-up of total cost into certain elements or sub-division. Cost may be classified into different categories depending upon the purpose of
their classification
1. 2. 3. Classification by nature Functional Classification Classification on basis of behavior
Cost is a resource sacrificed or forgone to achieve a specific objective. An actual cost is the cost incurred (a historical cost) as distinguished from budgeted costs. A cost object is anything for which a separate measurement of costs is desired.
Classification of Cost(On the basis of Nature)
Cost
Direct
Indirect
Direct Material
Direct Labour
Direct expenses
Indirect Material
Indirect Labour
Indirect Expenses
What is Direct and indirect cost?
Direct Costs Example: Paper on which Sports Illustrated magazine is printed Indirect Costs Example: Lease cost for Time-Warner building housing the senior editors of its magazine
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COST OBJECT Example: Sports Illustrated magazine
Classification of Cost (Functional)
Cost
Prime Cost
Factory cost
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Cost of Prodn
Cost of sales
Prime Cost = Direct material + Direct Wages + Direct expenses Factory Cost = Prime cost + Factory overheads
Total Cost of production = Factory Cost + office and administration overheads
Cost of sales=Cost of production +Selling and Distribution expense
Classification of Cost (Behavioural)
Cost
Variable Cost
Fixed cost
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Semi Variable
What is Fixed and Variable cost?
In a bicycles a handlebar Of 52/- each is used. What is the total handlebar cost when 1,000 bicycles are assembled?
What is variable cost?
1,000 units 52/- = 52,000/What is the total handlebar cost when 3,500 bicycles are assembled? 3,500 units 52/- = 182,000/-
Variable Cost
Variable Cost is the cost that vary almost in direct proportion to the volume of production.
Example are direct material, labor and expenses Also variable cost increases as the volume of production increases
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Fixed Cost
Bicycles incurred 94,500/- in a given year for the leasing of its plant. This is an example of fixed costs with respect to the number of bicycles assembled.
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Fixed Cost
What is the leasing (fixed) cost per bicycle when Bicycles assembles 1,000 bicycles?
94,500 1,000 = 94.50/What is the leasing (fixed) cost per bicycle when Bicycles assembles 3,500 bicycles?
94,500 3,500 = 27/12
Fixed Cost
Fixed Cost is the cost that do not vary With the volume of production.
Also fixed cost decreases as the volume of production increases
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Cost Sheet
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What is COSTSHEET..?
Cost sheet is a statement, which shows various components of total cost of a product. Cost Sheet is a document which provides for the assembly of the estimated detailed cost in respect of a cost centre or a cost unit.
It indicates break up of total cost It calculates the total cost and cost per unit of the units produced It facilitates comparison It helps the management in fixing selling price It acts as a guide to the management and helps in formulating production policy It enable to keep control over cost of production
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What is COSTSHEET..?
Cost sheet is a statement, which shows various components of total cost of a product. Cost Sheet is a document which provides for the assembly of the estimated detailed cost in respect of a cost centre or a cost unit.
It indicates break up of total cost It calculates the total cost and cost per unit of the units produced It facilitates comparison It helps the management in fixing selling price It acts as a guide to the management and helps in formulating production policy It enable to keep control over cost of production
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Marginal Costing
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What is Marginal Costing
Marginal Cost is the amount of any given volume of output

by which aggregate costs are changed if the volume of output is increased by one unit. whereas
Marginal costing is the ascertainment of marginal costs and
of the effect on profit of changes in volume or type of output by differentiating between fixed cost and variable cost Also known as CVP analysis
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Assumptions of Marginal Costing
1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold. 2. Total costs can be divided into a fixed component and a component that is variable with respect to the level of output.
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3. When graphed, the behavior of total revenues and total costs is linear (straight-line) in relation to output units within the relevant range (and time period). 4. The unit selling price, unit variable costs, and fixed costs are known and constant.
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5. The analysis either covers a single product or assumes that the sales mix when multiple products are sold will remain constant as the level of total units sold changes. 6. All revenues and costs can be added and compared without taking into account the time value of money.
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Operating income = Total revenues from operations Cost of goods sold and operating costs (excluding income taxes) Net income = Operating income Income taxes
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1.What is Contribution?
Contribution is the difference between sales and variable cost. It may be defined as excess of selling price over variable
cost
CONTRIBUTION = SALES VARIABLE COST Also, CONTRIBUTION = FIXED COST + PROFIT(-LOSS)
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What is Break even point?
Sales
Variable expenses
Fixed expenses
Total revenues = Total costs
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378 336 294 252 210 168 126 84 42 0 0 1000 2000 3000 4000 5000 Units
$(000)
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Sales
Variable expenses
Fixed expenses
Total revenues = Total costs
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Budgeting
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There are three managerial Functions Planning
Directing
Controlling
Budget is used for this third managerial function. In Budget we compare actual with standards set in budgeting and use this information for controlling cost. A budget is a monetary and a quantitative expression of business plans and policies to be pursued in the future period of time.
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What is budget
WHAT IS A BUDGET? A plan expressed in money.
It is prepared and approved prior to the
budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by Zero-based budgeting. Budget is a a a a a a plan of operations. basis for allocating resources. communication and authorization device. device for motivating and guiding implementation. guideline for operations and gauge for controlling operations. basis for performance evaluation.
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Budgetary control
Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its functions like planning, coordination and control. This system involves: Division of organization on functional basis into different sections known as a budget centre.
Preparation of separate budgets for each budget centre.

Consolidation of all functional budgets to present overall organizational objectives during the forthcoming budget period.
Comparison of actual level of performance against budgets.

Reporting the variances with proper analysis to provide basis for future course of action.
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What are essentials of budgetary control?

Organization of budgetary control Budget Centers
Budget Manual
Budget officers Budget Committee Budget period
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Classification of Budget
ACCORDING TO
TIME
ACCORDING TO
FUNCTION
ACCORDING TO
FLEXIBILITY
Long term budget

Short term budget Current budget
1. Sales budget
2. Production budget 3. Material Budget
1. Fixed budget
2. Flexible budget
4.Direct Labor Budget

5. Purchase budget 6. Personnel budget 7. R & D budget 8. Capital Expenditure budget 9. Cash Budget
32 10. Master budget
What is Fixed Budget?

Fixed Budget This
is defined as a budget which is designed to remain unchanged
irrespective of the volume of output or turnover attained. This budget will, therefore, be useful only when the actual level of activity corresponds to the budgeted level of activity.
This budget is suitable under static conditions
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What is Flexible Budget?

Flexible Budget
CIMA defines this budget as one which, by recognizing the difference in behavior between fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations. Therefore a flexible budget consist of budget for different level of activity. It varies with the level of activity attained. This budget is useful where activity level changes from time to time.
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Following information are given to you at 50% (5000 units) capacity level. Prepare a flexible budget and forecast profit at 60%, 70% and 90% capacity. Material per unit=50/Labor per unit=20/-
Variable OH=15/Fixed OH=50000/Administration(5 % Variable)=10/- per unit Selling OH(10 % fixed)=6/- per unit Distribution expenses(10% fixed)=5/- per unit
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Following is the information given for 50% capacity. prepare the profit or
loss at 60%, 70% Fixed expense Salaries = 50000/Rent & taxes=40000/Depreciation = 60000/Administration = 70000/Semi-Variable Expense Variable expense Materials = 200000/Labor = 250000/Others = 40000/-
Repairs = 100000/Others = 90000/-
Indirect Labor = 150000/-
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Example
It is estimated that fixed expenses will remain constant at all capacity. Semi-Variable expenses will not change between 45% and 60% capacity, will rise by 10% between 60% and 75% capacity, a further increase of 5% when capacity crosses 75%. Estimated sales at various level of capacity Capacity 60% 70% Sales 1100,000 1300,000
90%
1500,000
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Sales Budget
A sales budget is a estimate of expected sales during a budgeted period. Sales budget is the starting point of the
budgeting system. A sales budget shows expected sales in

units at their expected selling prices A firm prepares the sales budget for a period based on the
forecasted sales level, production capacity for the budget

period, and long-term plan and short-term goal of the firm A sales budget is the cornerstone of budget preparation because a firm can complete the plan for other activities only after it identifies the expected sales level
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Factors effecting Sales Budget

Past sales figures and trends Salesmens Estimates Plant capacity Availability of raw material and other supplies Order in hand Seasonal fluctuation Financial Aspect Adequate return on capital employed
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Format of sales budget

Sales Budget For the First Quarter Ended J une 30, 2007
April
May
June
Quarter
Sales in units Selling price per unit Total sales
20,000
x 30 600,000
25,000
x 30 750,000
35,000
80,000
x 30 x 30 1,050,000 2,400,000
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Production Budget
The production budget is prepared in relation to the sales
budget. It Shows the units that must be produced to meet

anticipated sales. It is derived from the budgeted sales units (per sales budget)
plus the desired ending finished goods less the beginning

finished goods units. The production requirement formula is:
Determining the budgeted units of production: Budgeted Production (in units) Budgeted Sales (in units) Desired Ending Inventory (in units) Beginning Inventory (in units)
+
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Stages in production planning

1. Production planning 2. Consideration of Plant capacity 3. Stock quantity to be held 4. Considering sales budget
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Factors effecting Production Budget
1. Production planning The time tag between the production in the factory and sales is considered. 2. The stock of goods to be maintained in factory godown and at the sales centers 3. The level of production needed to meet the sales program
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Production Budget
1. Prepare Production budget for each month for the six month ending, 31st dec 2010.The units sold for different month are as follows July 1100 units Sep 1700 Nov 2500 Aug 1100 units Oct - 1900 Dec 2300 Jan 2011- 2000
Note There is no WIP at the end of any month Finished goods equal to half the sales for next month will be in stock at the
end of each month
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Material Budget
The information in the production budget becomes the basis for preparing several manufacturing-related budgets
A direct materials usage budget shows the direct materials required for
production and their budgeted cost
Total direct Desired direct materials + materials needed in ending inventory production
Total direct materials purchase for the period
Direct materials beginning inventory
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Material Budget
Raw material budget can also be calculated by multiplying the rate of consumption of raw material with the units to be produced
The purchase department will be able to plan the purchase of raw material with the help of raw material budget
Raw material budget also enables the fixation of minimum stock level,
maximum stock level and reorder level.

The budgeted cost of raw material can be determined with this budget Two type of budget is prepared under this, estimate of different type of raw material, and procurement of raw material budget.
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Factors effecting Material Budget
1. Raw material required for the budgeted output
2. %age of raw material to total cost of the product.

3. Companys stocking policy
4. Time lag between placing of the orders

5. The seasonal nature in the availability of raw materials
6. Price trend in the market
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Direct labour budget
To prepare the direct labor budget, a company would use Its production budget The direct labor budget enables the personnel department to plan for hiring and repositioning of employees
A good labor budget helps the firm to avoid emergency hiring, prevent labor shortages, and reduce or eliminate the need to lay off workers Firms usually prepare labor budget for each type of labors. For example, for each skill requirement.
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Labour Budget
Labor budget is classified into two types Labor requirement Budget Labor recruitment budget
Labor requirement budget is prepared on the basis of
Production budget
Scale of Pay Hours to be spent.
Labor recruitment budget is prepared on the basis of Labor requirement budget.
Labor available in each department

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Labour Budget
Production cost of a factory for a year is as follows Direct Material- 120000/Direct Wages- 90000/Production O.H-Fixed -40000/-, Variable- 60000/During the coming year it is estimated that
The average rate for direct labour remuneration will fall from .90/- per hour to .75 per hour
Production efficiency will be reduced by 5% Price per unit of direct material and other Overhead will remain unchanged Direct labour hours will increase by 33.33%
Make Labour Budget

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Factory O.H Budget,
A factory overhead budget often includes all production costs other than direct materials and direct labor
Unlike direct materials and direct labor, manufacturing overhead costs include costs that vary in direct proportion with the units manufactured as well as costs that vary with either the kind of facilities the firm has or the way in which the firm carries out it operations
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O.H Budget,
Prepare a manufacturing over head budget and ascertain the manufacturing overhead at 50% and 70%. The following particular
are given at 60% capacity

Variable O.H = Indirect material- 6000/-, Indirect Labour-18000/Fixed O.H = Depreciation-16500/-, Insurance- 4500/-, Salaries-15000/Semi-variable O.H =Electricity(40% Fixed, 60% Variable)= 30000/Repairs (80% fixed)= 3000/-
Direct labour hours= 186000hrs
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Selling and Distribution Overhead Budget
A selling and general administrative expense budget delineates plans for all non-manufacturing expenses This budget serves as a guideline for selling and administrative activities during the budget period Many selling and general administrative expenditures are discretionary
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Selling and Distribution Overhead Budget
Sales Budget
Ending Inventory Budget Direct Materials Budget
Production Budget
Selling and Administrative Budget
Direct Labour Budget
Manufacturing Overhead Budget
Cash Budget
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Budgeted Income Statement
The budgeted income statement estimates the expected operating income from the budgeted operations A budgeted income statement allows management a glimpse of the likely operating result upon completion of the budgeted operation Once the budget income statement has been approved, it becomes the benchmark against which the performance of the period is evaluated
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ZBB
The zero base budgeting is not based on the incremental approach and previous figures are not adopted as the base.
Zero is taken as the base and a budget is developed on the basis of likely
activities for the future period.
A unique feature of ZBB is that it tries to help management answer the question, Suppose we are to start our business from scratch, on what activities would we spent out money and to what activities would we give the highest priority?
ZBB is most appropriate in controlling the staff and support areas. This budget focuses on reviewing activity utilization. Funds required for each activity should be justified
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ZBB
Zero Based Budgeting implies that managers need to build a budget from the ground up, building a case for their spending as if no baseline existedto start at zero
the purpose of ZBB is to reevaluate and reexamine all programs and expenditures for each budgeting cycle
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Application of ZBB
Practical application of ZBB involves the use of the Decision Package. All budgetary procedures involve an identification of organizational objectives. In the context of these objectives, ZBB involves three stages:
1. Identification of decision units.
2. Development of decision package.

3. Review and ranking of decision packages.
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Application of ZBB
Identification of decision units.
The existing organization structure identifies the units in the hierarchy for
which budgets are prepared. These could responsibility centers, cost

centers, profit centers, investment centers, program categories or program elements. This is the starting point for identifying decision units for ZBB. Decision units should have the following characteristics:
1.
A specific manager should be clearly responsible for the operation of the program
2. 3.
It must have well defined & measurable impacts It must have well defined & measurable objectives
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Application of ZBB
Development of Decision Package
A. The mutually exclusive decision package; the purpose here is to identify for
each decision unit the alternative ways of performing its functions so as to

enable management to choose the best alternative. One such alternative will be to abolish the decision unit which is not performing it functions at all.
B. The incremental decision package; Here, each manager identifies different levels of effort ( and associated costs ) and their impact on the function. i.e.
there will be a Minimum Level, below which it would be impossible to

perform the function; a Base Level, which reflects the current level of activity; and Improvement Level, which shows the effect of increases over the current level.
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Application of ZBB
Review of Decision Package
Once the decision packages have been prepared, they are ranked on an ordinal scale i.e 1st, 2nd, 3rd, etc. in order of priority. Due to large number of decision packages, the ranking process would take place at a number of levels
Allotment of Funds to the selected Decision Package
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Strength of ZBB
ZBB unlike incremental traditional line item budget, it dose not assume that last years allocation of resources is necessarily
appropriate for the current year, all the functions of an organization

are re-evaluated annually from a zero base. The systematic nature of such a fundamental review imposes a discipline on the organization which has produced in practice secondary advantages It produces in a readily accessible form more and better management information. This in turn will improve the quality of managements decision Another advantage that stems from this improved management information is that its production involves the participation of lower level management in the budgetary process, and the smaller the
decision units, the greater this involvement will become

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Strength of ZBB
It produces in a readily accessible form more and better management information. This in turn will improve the quality of
managements decision
Improved discipline in developing budgets. More meaningful budget discussions during plan review sessions. More appropriate for activities which are not directly related to production. Opportunity to get a critical appraisal of its activities Focuses on analysis and decision making Optimum allocation of recourses
Motivation and coordination.

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Weakness of ZBB
It produces in a readily accessible form more and better management information. This in turn will improve the quality of
managements decision. In practice the effects of different levels of

effort on each alternative mutually exclusive decision package are not considered, due to the short budgetary cycle and the need for expediency. But this might lead to a sub-optimal allocation of
resources
By incorporating performance measures in the formation of decision packages, it forces managers to establish a preference for
effectiveness, efficiency, or equity as they try to rank decision

packages. This make the ranking process difficult.
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Weakness of ZBB
The implementation of a ZBB system requires a great deal of time on the part of agency staff, limiting their ability to perform other
important functions
Paper work increase a lot Cost of preparing a Zero-Base Budget is very costly May lay more emphasis on short term benefit Cost and Benefit of the packages must be continuously updated to get best result.
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Performance Budgeting
Performance Budgeting is a budget based on functions, activity and

projects. Here input cost is related to the end result and is linked to the performance.
Here the budget is linked to a particular responsibility centre and performance is closely analyzed.
1. 2. 3.
Following matters are clearly mentioned in the budget. Objective of the organization Cost of activity Quantitative measurement to measure performance
4.
Quantity of work to be performed under each activity
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Steps in Performance Budgeting

Establishment of well defined responsibility centre.
A program of expected performance in physical units of that centre. A forecast of expenditure under various classification head to meet physical plan.
Lastly evaluating performance under two stages
1. Actual performance is compared with physical target in order to determine the variance and adjusting the original rupee budget into a budget allowance for actual production 2. Actual expenditure is compared with actual result Performance reporting is prepared.
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Fma II

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All About ACCOUNTING..!!

All About ACCOUNTING..!!

further study, analysis and classification of cost.

All About ACCOUNTING..!!

Classification of Cost(On the basis of Nature)

All About ACCOUNTING..!!

What is Direct and indirect cost?

All About ACCOUNTING..!!

COST OBJECT Example: Sports Illustrated magazine

Classification of Cost (Functional)

All About ACCOUNTING..!!

All About ACCOUNTING..!!

Total Cost of production = Factory Cost + office and administration overheads

Cost of sales=Cost of production +Selling and Distribution expense

Classification of Cost (Behavioural)

All About ACCOUNTING..!!

What is Fixed and Variable cost?

All About ACCOUNTING..!!

What is variable cost?

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

94,500 3,500 = 27/12

All About ACCOUNTING..!!

Also fixed cost decreases as the volume of production increases

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

All About ACCOUNTING..!!

What is Marginal Costing

All About ACCOUNTING..!!

Marginal Cost is the amount of any given volume of output

Marginal costing is the ascertainment of marginal costs and

Assumptions of Marginal Costing

All About ACCOUNTING..!!

Assumptions of Marginal Costing

All About ACCOUNTING..!!

Assumptions of Marginal Costing

All About ACCOUNTING..!!

Assumptions of Marginal Costing

All About ACCOUNTING..!!

All About ACCOUNTING..!!

What is Break even point?

All About ACCOUNTING..!!

Total revenues = Total costs

What is Break even point?

All About ACCOUNTING..!!

What is Break even point?

All About ACCOUNTING..!!

Total revenues = Total costs

All About ACCOUNTING..!!

All About ACCOUNTING..!!

There are three managerial Functions Planning

All About ACCOUNTING..!!

It is prepared and approved prior to the

All About ACCOUNTING..!!

Preparation of separate budgets for each budget centre.

Comparison of actual level of performance against budgets.

What are essentials of budgetary control?

All About ACCOUNTING..!!

All About ACCOUNTING..!!

Long term budget