Module I- (Introduction to costing)

Cost
Cost refers to the total expense incurred on the production and sale
of articles.
Costing
Costing simply refers to the techniques and process of ascertaining
costs.
Cost Accounting
It is a specialised branch of accounting which involves classification,
accumulation, assignment and control cost.
General principles of cost accounting
 A cost should be related to its causes.
 A cost should be charged only after it has been incurred.
 The convention of prudence should be ignored.
 Abnormal costs should be excluded from cost accounts.
 Past costs not to be charged to future period.
 Principles of double entry should be applied wherever necessary.
Objectives of cost accounting
 To ascertain the cost of production of goods manufactured.
 To provide cost data for fixation of selling price.
 To ascertain profitability of each product.
 To advise management on future expansion policies.
 To provide a perpetual inventory of stores and other materials.
Scope of cost accounting
 Cost classification
 Cost recording
 Cost allocation
 Cost ascertainment
 Cost comparison
 Cost control
 Cost audit
 Cost reporting
Difference between Financial accounting and Cost accounting
Financial Accounting Cost Accounting
The purpose of financial The purpose of cost accounting
accounting is to keep complete is reducing and controlling cost.
record of the financial
transactions.
These are accounts of whole It is only a part of whole
business. accounts.
Valuation of stock at cost or Valuation of stock at cost price.
market price.
Financial accounting are Cost accounting are concerned
concerned with external with internal transactions.
transactions.
Only historical costs are Both historical and
recorded. predetermined costs are
recorded.
It discloses net profit and loss of It discloses profit and loss of
the business. each product, job or service.
Forecasting is not at all possible Forecasting is possible through
budgeting techniques.
It emphasises the measurement It aims at ascertainment of cost.
of profitability.
It records only actual cost. It records both actual and
estimated cost.
It does not guide the It provides adequate data for
formulation of pricing policy. formulating pricing policy.
These are guided by GAAP. No specific guidance.
Only monetary information is Non-monetary informations like
provided. physical unit is also used.
It does not guide the It provide adequate data for
formulation of pricing policies. pricing policies.
It report operating results and It gives information to
financial position at the end of management as and when
the accounting year. desired.
Difference between Cost accounting and Management accounting
Cost Accounting Management Accounting
It is used for cost control and It is used for managerial decision
cost reduction. making.
The scope of cost accounting is The scope of management
narrow. accounting is broader.
Statutory audit is mandatory for No statutory audit requirement.
big business.
It is used for management, It is only for management.
shareholders and vendors.
It considers only quantitative It considers both quantitative
data. and qualitative data.
Only cost accounting principles Principles of cost accounting and
are used. financial accounting are used.
Cost accounting is restricted to It uses financial as well as cost
cost related data. accounting data.
It deals with both present and It deals with future transactions.
future transactions.
Importance / Merits/ Advantages of cost accounting
 It helps in making estimates.
 It eliminates wastage.
 It makes comparison possible.
 It helps in inventory control.
 It provides data for periodical profit and loss account.
 It helps in determining efficiency.
 It provides continuous employment and high remuneration to
employees.
Limitations/ Demerits/ Disadvantages of cost accounting
 It lacks uniform procedure.
 It is very costly.
 It cannot affordable to small business.
 Modern methods of costing is inapplicable to many industries.
 It is based on certain conventions and assumptions.
 Confusion regarding non-cost items.
Functions of cost accounting
 It helps ascertainment of accurate cost of each job, product and
process.
 It helps in management in decision making.
 It helps in management in formulation of policies.
 It helps in optimum utilization of resources.
 It helps in fixing prices of goods or services.
 It helps in cost control.
 It helps in inter firm and intra firm comparison.
 It helps in implementation of incentive wage system.
 To provides cost data to government and trade union.
Cost unit
The unit cost is the price incurred by a company to produce, store
and sell one unit of a particular product.
Cost Centre
It is the smallest organisational sub unit for which separate cost
collection is attempted.
Profit centre
It is a business unit or segment that generates revenues and incurs
cost.
Difference between profit centre and cost centre
Profit Centre Cost Centre
These are autonomous. These are not autonomous.
It is created because of It is created for accounting
decentralisation of operations. convenience of cost and their
control.
Profit centres has a profit target. Cost centres does not have
target cost.
Cost Classification
 Direct Cost
Direct costs are those costs which are incurred for a particular
product which can be identified with a particular cost centre to cost
unit.
 Indirect cost
Indirect costs are those costs which are incurred for the benefit of a
number of cost centre and cannot be identified with a particular cost
centre.
 Fixed Cost
Fixed costs are predetermined costs that remains same throughout a
specific period.
 Variable cost
It is a cost that changes the quantity of goods and services that
business produces changes.
 Semi variable cost
These are costs which are partly fixed and partly variable.
 Product cost
These are those costs which are traceable to the product.
 Period cost
These are those costs which are incurred for a period and treated as
expense.
Difference between product cost and period cost
Product cost Period cost
It is charged to product or It is not charged to product or
services. services.
It is a variable cost. It is a fixed cost.
It is a manufacturing cost. It is non-manufacturing cost.
Sunk cost
Sunk cost means cost which was incurred in the past and not
relevant for decision making.
Opportunity cost
It is the value of a benefits scarified in favour of an alternative course
of action.
Types, Methods and Techniques of costing
 Job Costing
It refers to a system of costing in which cost are ascertained in terms
of specific jobs or orders which are not comparable with each other.
 Process costing
It is a method of costing used mainly in manufacturing where units
are continuously mass produced through one or more processes.
 Unit costing
The unit cost is the price incurred by a company to produce, store
and sell one unit of a particular product.
 Operating costing
It is the mix of job costing and process costing. This method is
applicable where services are rented rather than goods produced.
 Marginal costing
Marginal costing means the additional cost to produce each
additional unit.
 Uniform costing
It is a system of costing under which several undertakings use the
same cost principles and practices.
 Direct costing
It is a method where only the variable manufacturing costs are
assigned to inventory and cost of goods sold.
 Absorption costing
This is the technique of costing where in the total cost is charged to
cost unit.
 Standard costing
It is defined as a benchmark measurement of resource usage, set in
defined conditions.
 Budgetary costing
A process of preparation, implementation and operation of budget is
called budgeting.
 Historical costing
It is the ascertainment of costs after they have been incurred. It aims
at ascertaining cost actually incurred on work done in the past.
 Departmental costing
When costs are ascertained by department, the method is called
departmental costing.
Elements of costing
1. Direct material
It refers to the raw materials that are directly used in the production
process of goods and services of the company.
2. Indirect material
Indirect material are those material that are used in the production
process but that are not directly traceable to the product.
Eg: Glue, oil, tape, cleaning supplies, etc.
3. Direct labour
It is the amount of effort exerted by employees to convert raw
materials into finished goods.
4. Direct expenses
It is the expense that is related to the purchase of product.
5. Overhead
It is the aggregate of the cost of indirect material, indirect labour and
such other expenses.

JUBAIR MAJEED
RAHUL MURALI

9947050644 (WhatsApp only)

 Module II- (Materials)
Materials
Material refers to things used for producing an article or providing a
services. It is classified into two direct material and indirect material.
Direct material
It refers to the raw materials that are directly used in the production
process of goods and services of the company.
Indirect material
Indirect material are those material that are used in the production
process but that are not directly traceable to the product.
Eg: Glue, oil, tape, cleaning supplies, etc.
Material cost control
It is a systematic control over purchasing, storing and consumption
of materials. It maintain a regular and timely supply of materials and
it minimize over and under stocking.
Objectives/ Importance of material cost control
 To avoid the situation of under stocking.
 To avoid the situation of over stocking.
 To avoid wastage and losses.
 To minimise the total cost of material.
 To maintain proper and up to date records.
 To provide required information to the management.
 To ensure procurement of material.
 To ensuring optimum utilization of material.
 To ensure proper storage of material.
Essentials/ Requirements/ Principles of sound material control
 Proper coordination among various departments.
 Proper cooperation among various department.
 Purchase should be made by a centralized department.
 Proper classification and codification of materials.
 Separate inspection department.
 Proper system of internal check.
 Standard forms should be used for orders.
 Material should be purchased at the right time.
 Material requirement should be properly planned.
Purchase order
It is a legal document by a buyer send to a supplier or vendor to
authorise a purchase.
Centralized purchasing
When all the purchases are made by one specialized department, it is
called centralized purchasing.
Advantages of centralized purchase
 Reduces cost of purchases.
 Ensure uniform quality of materials.
 Advantages of bulk purchases.
 Exercise effective control over inventories.
 Involves less clerical works.
Disadvantages of centralized purchase
 It may cause delay in getting materials.
 It is not suitable for plants.
 Huge cost are required.
 It may result in wrong purchase.
 It is not possible to enjoy benefits of local purchase.
Decentralized purchasing
When purchases are made by the individual department separately,
it is called decentralized purchasing.
Functions of purchase department
 To prepare purchase budget.
 To formulate purchase policies and procedures.
 To place purchase orders.
 To choose the most favourable source of supply.
 To receive purchase requisition.
 To purchase the right quality of material.
 To verify and pass the invoice for payment.
Basic steps in purchasing materials
 Receiving purchase requisition
 Inviting quotations and tenders
 Selecting the supplier
 Placing purchase order
 Receiving of material
 Inspection of materials
 Checking the invoice
 Making payment
Stores control
It simply means control over storage of materials. The main objective
of stores control is to reduce the material cost.
Functions/ Duties/ Responsibilities of Stores dept. (Storekeeper)
 To issue purchase requisition.
 To receive material.
 To keep material in proper places.
 To make store neat and clean.
 To take stock at periodical intervals.
 To maintain bin card for each material.
 To protect material from theft and damage.
 To prevent the entry of unauthorized persons.
 To report on waste, scrap and obsolete stock.
 To maintain up to date records related to stores.
Types of stores
1. Centralized stores
2. Decentralized stores
3. Central stores with sub stores
Inventory
It is the raw material used to produce goods as well as the goods that
are available for sale.
Perpetual inventory system
This is a system of verification of materials. It is a system of records
maintained by the controlling departments which reflects the
physical movements of stock and their current balance.
Advantages of perpetual inventory system
 Quick valuation of closing stock.
 Lesser investment in materials.
 Helpful in formulating proper purchase policies.
 Adequacy of working capital.
 Immediate detection of theft and leakages.
 Beneficial in ascertaining efficiency of stores organisation.
 Overstocking and understocking can be avoided.
 It provide a moral check on the stock keeper.
Bill of materials
A bill of material is centralised source of information used to
manufacture a product.
Material abstract
It is a document which classify the records of issue of material,
material return or transfer. It is a material issue analysis sheet.
Material requisition
It is a document authorizing the store keeper to issue material stated
therein to consuming department.
Material inspection note
It is a report prepared by the inspection department after inspecting
the material received.
Periodic stock taking
It refers to physical verification of entire stock once in a specific
period preferably annually and generally on the last day of an
accounting year.
Continuous stock taking
It means stock taking is conducted on regular basis.
Advantages of continuous stock taking
 Improved stock management
 Prevent unnecessary wastage and losses.
 Improved stock management.
 No need to shut down operations.
 Eliminate delay in production and delivery.
 Prime cost
Prime cost is the total direct cost of production including raw
materials and labour.
Bin Card (Stock card)
It is the record maintained under the perpetual inventory system by
the stores department and shows the quantities of the materials
received, issued and balance. It is also known as stock card.
Advantages of bin card
 It shows the stock position at any time.
 It helps in preparing purchase requisition.
 It helps in implementing perpetual inventory system.
 It enable proper financial statements without dely.
 It helps in effective stores control.
Stores Ledger
It is a ledger which provides information for the pricing of material
issued and the money value at any time of each items of stores.
Difference between bin card and stores ledger
Bin card Stores ledger
It is attached to the bin. It is kept in the cost office.
It is maintained by storekeeper. It is maintained by cost clerk.
It is a record of quantity only. It is a record of quantity and value.
It is a recording document. It is an accounting record.
It is kept inside the stock room. It is kept outside the stock room.
Transactions are recorded Summarized transactions are
individually. recorded.
Entries are posted when Entries are posted after
transactions take place. transactions took place.
Techniques/ Methods of inventory control (Material/ store control)
 Classification and codification of material
 Double bin system
 Stores stock levels
 Economic order quantity
 Material turnover ratio
 Stock verification system
 Imprest system
 ABC analysis
 VED analysis
 JIT techniques
Economic order quantity (EOQ)
The quantity of material to be ordered at one time is known as
economic order quantity. It is the ideal order quantity a company
should purchase to minimize inventory costs.
ABC analysis
It is an inventory management technique that determine value of
inventory items based on their importance to business.
Advantages of ABC analysis
 It ensure effective cost control.
 It helps to use working capital in a better way.
 It reduces clerical costs.
 It leads to reduction in storage costs.
 It helps to maintain high stock turnover ratio.
 Investments in materials can be regulated.
VED analysis
It is an inventory management technique that classifies inventory
based on its functional importance.
JIT (Just In Time)
It is an inventory management method whereby labour, material and
goods are scheduled to arrive exactly when needed in the
manufacturing process.
Objectives of JIT
 To reduce inventories.
 To increase flexibility.
 To improves space utilization.
 To reduce set up time.
 To reduce load time.
 To provide customer satisfaction.
 To eliminate over production.
Advantages of JIT
 Reduction in inventory.
 Optimum utilization of working capital.
 Elimination of wastes.
 Increased productivity.
 Quality improvement.
 Greater customer satisfaction.
Reordering level
It is that point of level of stock of a material where the storekeeper
starts the process of initiating purchase requisition for fresh supplies
of that materials.
Safety lock level
It is also known as minimum level. It is the minimum quantity of
material which must be maintained in hand at all times.
Maximum level
It is the maximum of stock which should be held in stock at any
period of year
Danger level
It is a level of stock at which normal issue of materials are stopped
and issues are made only under specific instructions.
FIFO (Fist in First Out)
Under this method, material received first are issued first.
Applicability of FIFO
 Increased warehouse space.
 Keeps stock handling to a minimum.
 Enhanced quality control.
 Warranty control.
 Warehouse operations are more streamlined.
Advantages of FIFO method
 It is simple and easy to operate
 Materials are issue at actual costs.
 Closing stock is valued at market price.
 In condition of falling prices, this method give better results.
Disadvantages of FIFO method
 This method increases the possibility of clerical errors.
 This method is unsuitable in terms of rising prices.
 Issue price does not reflect the current market conditions.
LIFO (Last in First Out)
This method is a just reverse of FIFO method. Under this method,
material received last are issued first.
Advantages of LIFO method
 It is simple to operate.
 It is easy to understand.
 It is more suitable in time of rising prices.
 It is useful when transactions are not too many.
 It provides tax benefits to the business.
 Materials are issued at actual price.
Disadvantages of LIFO method
 This method involve considerable amount of clerical work.
 It is difficult to control the cost of jobs.
 The value of closing stock does not reflect the current market
conditions.

JUBAIR MAJEED
RAHUL MURALI

9947050644 (WhatsApp only)

 Module III- (Labour and Overheads)
Direct labour
Direct labour refers to the labour which can be identified with a
particular product or job. It is the workforce directly engaged in the
manufacturing activities.
Indirect labour
Indirect labour refers to the labour which cannot be identified with a
particular job or product. It is the workforce not directly engaged in
the manufacturing activities.
Labour cost
Labour cost refers to the total expenditure incurred by employers for
the employment of employees.
Labour cost control
Labour cost control means control over the cost incurred on labour.
It is a system which ensures proper employment of labour and its
effective utilization.
Importance/ Objectives/ Advantages of labour cost control
 It minimize labour cost per unit of production.
 It control ideal time, overtime, labour turnover etc.
 It increases the labour productivity.
 It helps in absorption of overhead.
 It improves profitability and prosperity of firm.
 It facilitate effective utilization of skilled labours.
Techniques of labour cost control
 Assessment of manpower requirement
 Time and motion study
 Job evaluation and merit rating
 Labour productivity
 Wages system/ Incentive system
 Control over time keeping and time booking
 Control over labour turnover
 Control over casual/ contract and other workers.
Time keeping
The process of recording the time arrival and departure of workers is
known as time keeping.
Objectives/ Purpose of time keeping
 To facilitate preparation of pay roll.
 To meet statutory requirements.
 To maintain discipline in attendance.
 To calculate overtime.
 To control labour cost.
 To introduce incentive plan of wage payment.
Methods of time keeping
 Manual methods
 Attendance register method
 Disc or token method
 Mechanical methods
 Time recording clocks
 Dial time recorder
 Key recorder
 Biometric time attendance system
Time Booking
It is the recording of time spend by the workers on different jobs or
work.
Objectives/ Purpose of time booking
 To ensure the time spend by a worker in a factory.
 To ascertain labour cost of each individual job.
 To ascertain unproductive time or ideal time.
 To know the efficiency of workers.
 To prevent waste of labour time.
Methods of time booking
 Daily time sheet
 Weekly time sheet
 Job card
Difference between time keeping and time booking
Time keeping Time booking
It record attendance time of It is a record work time of
workers. workers.
It is a statutory obligation. It is not statutory required.
It is the first step in time It is the second step in time
recording. recording.
It is Maintained by the time It is maintained by departmental
keeper. supervisors.
It is for the purpose of wage It ensure wage paid are properly
calculation. ensured.
The purpose is to enable The purpose is to ascertain
preparation of pay roll. labour costs of job.
Merit rating
It is a labour cost control technique. It aims at evaluating the workers
actually performing the jobs.
Wages abstract
It is a document showing distribution of wages by job, department
etc. It is also called wage analysis sheet. It is prepared by costing
department.
Payroll (Wage sheet)
It is a sheet containing the details of wage payable to the workers.
It is a consolidated statement of wage payable to each workers.
Must roll method
Attendance register or must roll method record the time of arrival
and departure by a time recording staff or by putting signature by
the workers themselves.
System/ Methods of wage payment
1. Time wage system or time rate system
2. Piece wage system or piece rate system
3. Incentive wage system
Time wage system or time rate system
Under this method of wage payment, the workers is paid at an
hourly, daily, weekly or monthly rate.
Advantages of time rate system
 It is simple to understand.
 It is easy to operate.
 It guarantees minimum wages to workers.
 Quality of output become superior.
 It is acceptable to the workers and trade union.
 It ensure careful handling of tools and equipments.
Disadvantages of Time rate system
 Workers are not motivated.
 Strict supervision negatively affect.
 It encourages go slow of work.
 It does not provide incentive to work hard.
 Ideal time is considerably increased.
 Workers become lazy.
 Workers try to avoid work.
Piece rate wage system
Under this system of wage payment, a fixed rate is paid for each unit
produced, job completed or an operation performed.
Advantages of piece rate wage system
 Workers are paid according to their merits.
 Workers are motivated to increase production.
 Profit per unit increases.
 Idle time is minimized.
 The employer can make quotations confidently.
 Less case of defective tools and machinery.
 Less supervision is required.
 Inefficient workers are motivated to become efficient.
Disadvantages of piece rate system
 This system opposed by trade union.
 Minimum wage are not guaranteed.
Halsey Premium Plan
Under this method, the worker is given wages for the actual time
taken and a bonus equal to half of wages for time saved.
Advantages of Halsey Premium Plan
 It is simple to calculate.
 It guarantees time wages to workers.
 Helpful in reducing labour cost per unit.
 It motivates efficient workers.
 Helps to reduce production cost.
Disadvantages of Halsey Premium Plan
 Quality of work suffers.
 Workers criticize this method on the ground that the employer
gets a share of wages of the time saved.
Rowan Plan
Under this method bonus is that proportion of the wages of the time
taken which the time saved bears to the standard time allowed.
Advantages of Rowan Plan
 It guarantees time wages to workers
 The quality of work does not suffer
 Labour cost per unit is reduced.
 Fixed overhead cost is reduced.
Disadvantages of Rowan Plan
 Workers do not get the full benefit of the time saved by them.
 Very efficient and not so efficient workers may get the same
bonus.
Ideal time
There is a difference between the time booked to different jobs or
work orders and time recorded at the factory gate. This difference is
known as ideal time.
Normal ideal time
Normal ideal time refers to the ideal time which is normal and which
cannot be avoided.
Abnormal ideal time
Abnormal ideal time refers to ideal time due to abnormal reasons.
It can be avoided.
Over time
It is the work done beyond the normal working period in a day or
week.
Time and motion study
It is a technique for recording the time of performing a specific job
which is carried out under specific conditions.
Machine hours rate (MHR)
It simply means cost of running a machine per hour. It is the hourly
cost in terms of factory overheads to operate a particular machine.
Dual hour rate
This is the combination of machine hour rate and direct labour hour
rate.
Tenders or Quotation
It is an offer made by a person to supply certain goods at a specified
price.
Overhead cost (On cost)
On cost means overhead cost. It is the indirect cost incurred in the
factory, office and selling and distribution department.
Primary distribution of overhead
It means the allocation and apportionment of overhead to both
production and services department directly or an agreed ratio or
proportion.
Classification of overhead
 Function wise classification
 Manufacturing overhead
It is the total cost involved in operating all production facilities of a
manufacturing business. It is also called factory overhead or work
overhead.
 Administrative overhead
It is the general business expenses not related to production,
marketing or research costs.
 Selling and distribution overhead
The expenses incurred by an organisation in carrying out its selling
activities.
 Behavioural wise classification
 Fixed overhead
It is a set of cost that do not vary as a result of changes in activity.
 Variable overhead
It is a cost of operating a firm that fluctuate with the level of business
or manufacturing activity.
 Semi variable overhead
It is a cost composed of a mixture of both fixed and variable
components.
Apportionment of overheads
The process of charging proportionate amount of overheads to
various departments on suitable basis is called apportionment of
overheads.
Allocation of overheads
It is the process of charging full amount of the overhead cost to a
particular department or cost centre.
Difference between cost allocation and cost apportionment
Cost allocation Cost apportionment
It deals with allotment of whole It deals with allotment of
item to the cost. proportionate items of cost.
It is a direct process. It is an indirect process.
It is a simple process. It is a complicated process.
It is accurate. It is only approximate.
There is no need to choose base. It is done on some suitable base.
Absorption of overhead
It means charging of overheads of a particular cost centre to its
different cost units by means of overhead absorption rates.
Difference between apportionment and absorption of overheads
Apportionment Absorption
It is the allotment of proportion It is the allotment of overheads
of cost to the cost centres. to cost units.
It starts before absorption. It starts after apportionment.
Suitable or equitable bases are Percentage rate of overheads
used. are used.

JUBAIR MAJEED

8089778065 (WhatsApp only)

 Module IV- (Methods of costing)
Job Costing
It means ascertaining costs of an individual job, work order or
projects separately.
Features of job costing
 Each job is treated as unit.
 A separate job cost sheet is made out for each job.
 The duration of the job is usually a short period.
 A separate working progress ledger is maintained for each job.
 Profit or loss is determined for each job independently.
Advantages of job costing
 It helps to control future cost.
 It helps to ascertain cost and profit of each job.
 It helps in future production planning.
 It helps to distinguish profitable jobs from unprofitable jobs.
 It helps to identify defective works.
 Selling prices of special orders can easily be fixed.
Disadvantages of job costing
 Job costing involves more clerical works.
 It is more expensive
 It does not facilitate cost control.
Job costing procedure
 Receiving enquiry and sending quotations
 Receiving of order
 Production order
 Allotting production order number
 Recording of cost
 Completion of job
 Ascertainment of profit or loss
Job evaluation
It is the assessment of the relative worth of a job within a company.
Job specification
Job specification is a statement of minimum acceptable human
qualities necessary to perform a job properly.
Specific order costing
It is a method of costing applicable where the work consist of
separate jobs of which is authorized by specific order.
Contract Costing
It is a form of specific order costing in which cost are attributed to
individual contracts.
Features of contract costing
 Contracts are generally at large size.
 Contract itself is a cost unit.
 A separate account is maintained for each contract.
 They are normally carried out for long period and completed.
 Common indirect expenses are apportioned over different
contracts.
Work in progress
It is the unfinished contract at the end of the accounting period and
it includes amount of work certified and amount of work uncertified.
Work certified
The sales value of work completed as certified by the architect is
known as work certified.
Work uncertified
It means work which has been carried out by the contractor but has
not been certified by the architect.
Retention money
The unpaid balance of work certified or the amount held back or
retained by contractee is known as retention money.
Difference between job costing and contract costing
Job costing Contract costing
Each job is treated as cost unit. Each contract is treated as cost
unit.
Job work is executed in factory Contract work is executed at the
premises. site of the contract.
 Indirect cost are higher than Indirect cost are lower than
those under contract costing. those under job costing.
Job costing take less time for Contract costing takes more
completion. time for completion.
It is influenced by the individual It is influenced by the specific
condition and general policy of clauses of the contract.
the organization.
Process costing
Process costing is the method of costing used to ascertain the cost of
a product at each process.
Features of process costing
 Production is continuous.
 Products are standardised.
 Products are homogeneous.
 Products passes through two or more process.
 Products are not distinguishable in processing stage.
 The finished products of one process becomes the raw materials
of the subsequent process.
Advantages of process costing
 It is easy to compute average cost.
 It is simple.
 It is less expensive.
 It is possible to ascertain the process cost at short intervals.
Disadvantages of process costing
 Process cost are only historical.
 Difficult to value losses, waste, scrap etc.
 Difficult to value work in progress.
 These are not accurate. It’s only an average cost.
Difference between process costing and job costing
Process costing Job costing
Production is continuous Production according to
customers order.
Production is for stock. Production is not for stock.
Work in progress always exist. Work in progress may or may
not exist.
All units produced are Each job is different.
homogeneous.
There is a regular transfer of There is no such transfer.
cost of one process to another
process.
Each job is separate and Product lose their individual
independent of others. entities as they are
manufactured in a continuous
flow.
Normal process loss
This is the loss which is unavoidable on account of inherent nature of
production process.
Abnormal process loss
Any loss caused by unexpected or abnormal conditions such as plant
break down, substandard material, accident etc. Such loss are called
abnormal process loss.
Abnormal gain
It is the excess of actual production over normal output. It is also
called abnormal effective.
Operating costing
It is the method of costing designed to find out cost of operating or
rendering a service. It is also called service costing.
Continuous operation cost
It is a costing method which is used where the goods or services
being costed are the results of continuous operation or process.
Cost sheet
Cost sheet is a statement showing various components of total cost
of output of a particular product or services produced during a
particular period.
Advantages of cost sheet
 It disclose the total cost and cost per unit of the product.
 It helps in fixing up selling price.
 It helps in formulating definite useful production policy.
 It enable control over cost of production.
 It facilitate comparison.
 It helps in submission of quotations.
Batch costing
It is a method of costing used in concerns that produce goods in
batches. Batch consist of a particular number of identical products.
Cost of each batch is ascertained separately.
Unit costing
It is a method of costing used to ascertain the cost of producing a
unit of output.

JUBAIR MAJEED

8089778065 (WhatsApp only)

 Module V- (Cost control techniques)
Budget
A financial plan expressed in terms of money for a period is called
budget.
Budgeting
A process of preparation, implementation and operation of budget is
called budgeting.
Budgetary control
Budgetary control is a system of using budget for planning and
controlling cost.
Objectives of budgetary control
 To control activities.
 To evaluate performance of managers.
 To motivate managers.
 To eliminate wastes.
 To aid the planning of annual operation.
 To coordinate activities of the organisation.
 To communicate plans with responsibility centre managers.
Steps involved in budgetary control
 Setting up of organisational goals.
 Formulating plans for achieving goals.
 Translating plans into budget.
 Relating responsibility of executives to requirements of a policy.
 Recording and reporting actual performance.
 Continuous comparison of actual with budget.
 Find out deviations.
 Focusing attention on significant deviations.
 Find out the reasons for deviations.
 Presentation of information to the management.
 Taking corrective action.
 Revision of budgets.
Essentials of budgetary control system
 Support by top management
 Formal organisation
 Clear cut objectives
 Budget committee
 Adequate accounting system
 Periodic reporting
 Flexibility
 Effective communication
Budget Manual
It is a written document which guides the executives in preparing
various budgets.
Budget period
A period for which a budget is prepared and employed is called
budget period.
Classification of budget
 Classification according to time
 Long term budget
A budget for a period of five to ten years is called long term budget.
 Short term budget
A budget for a period of one to two years is called short term budget.
 Current budget
A budget covers a period of one month is called current budget.
 Classification according to flexibility
 Flexible budget
It is a dynamic budget. It gives different budgeted cost for different
level of activity.
 Fixed budget
It is a budget does not change with changes in the level of activity.
 Classification according to function
 Master budget
It is the summary of all budgets. It summarises sales, production,
purchases, fiancé, labour etc.
 Functional budget
Functional budgets are those which are prepared by heads of
functional departments for their respective departments. It is also
called operating budgets or financial budgets.
Types of functional budgets
1. Sales budgets
It forecast the total sales expressed in quantities and money. It is
prepared by the sales manager.
2. Production budget
It is the forecast of the quantity of production for the budget period.
3. Material budget
It shows the estimated quantity of raw material required for the
production for a budget period.
4. Purchase budget
It shows the quantity of different types of materials to be purchased
during the budget period.
5. Cash budget
It is a statement showing cash inflows and cash outflows over the
budgeted period.
Zero based budgeting (ZBB)
It is a recent trend in budgeting and it starts from zero base. It is
particular used of service departments and government.
Advantages of ZBB
 It starts from zero.
 It is useful for service department and government.
 It ensure active participation of managers.
 It helpful to management in making optimum allotment of scarce
resources.
 It promote high level of motivation at the level of unit managers.
Difference between traditional budgeting and ZBB
Traditional budgeting ZBB
Begins with previous year Begins with zero, a base.
budget.
Focus on money. Focus on goals and objectives.
Prepare annually. Prepare once in every five years.
 Produces a single level of Produces alternative level of
expenditure for an activity. expenditure.
Resources are allotted not on Resources are allotted on basis
the basis of cost benefit analysis. of cost benefit analysis.
Difference between fixed and flexible budget
Fixed budget Flexible budget
Based on the assumption that Based on the assumption that
business condition do not business conditions change.
change.
Comparison between actual and Comparison between actual and
budgeted cost is not possible. budgeted cost is possible.
Costs are not classified Costs are classified according to
according to variability. variability.
Prepared for a single level Prepared for a range of
activity. activities.
Not useful for control price Useful for cost control pricing
fixation. decision etc.
Standard cost
Standard cost is a predetermined cost for evaluating the actual
performance. It is the expected cost of producing one unit.
Standard Costing
Standard costing is a technique which uses which uses cost and
revenue for the purpose of control through variance analysis.
Difference between standard costing and budgetary control
Budgetary control Standard costing
It is based on past performance. It is based on technical estimate.
It fix minimum limits. It fix targets.
It does not required It requires standardisation of
standardisation of product. product.
Budget are expressed in total. Standard are expressed per unit
of production.
It is applicable to all types of It is applicable to manufacturing
organisations. organisation.
Budget consider both income It considers only expenditure.
and expenditure.
 It is a projection of financial It is a projection of cost
accounts. accounts.
Objectives of standard costing
 Performance measurement.
 Cost control.
 Stock valuation
 Establishing selling prices.
 Profit planning.
 Decision making.
Advantages of standard costing
 Cost control
 Aid to management
 Quick reporting
 Management by exception
 Utilization of resources
 Delegation of authority
 Inventory valuation
 Coordination
 Economy
Limitations of standard costing
 Difficult to establish accurate cost standard.
 It is costly for small industries.
 Revision of standard is costly.
 It is not suitable to job order industries.
 It is not suitable to non-standard products.
 It would be a failure, if management doesn’t have interest in it.
Steps in standard costing
 Establishment of cost centres.
 Classification and codification of accounts.
 Establishment of standards.
 Ascertainment of actual costs.
 Comparison of standard and actual costs.
 Analysis of variance.
 Reporting of variance.
Analysis of variance (Variance)
It is the difference between standard cost and comparable actual
cost incurred during a period.
Managerial uses/ Benefits variance analysis
 It facilitates management by exception.
 It helps in compare performance of different departments.
 It helps in future planning.
 It helps in formulating policies.
 It helps in developing team spirit among managerial personnel.
 It identify the cause for variance.
Material cost variance
Material variance are popularly known as material cost variance. It is
the difference between standard cost and actual cost of material
used.
Labour cost variance
It is also called wage variance. It is the difference between standard
cost of labour and actual cost of labour.
Overhead variance
It is the difference between standard overhead cost and actual
overhead incurred.
Types of standards
 Basic standard
It is a standard which is established for some base year and remain in
use for a long period of time.
 Current standard
It is a standard which is established for use over a short period of
time related to current conditions.
 Expected standard
This is the standard which is anticipated during a future specified
budget period. This is also called ideal standard.
 Normal standard
It is the average standard which is anticipated can be attained over a
future period of time, preferably long enough to cover one trade
cycle.
Budget key factor
It is a factor in the activities of an undertaking which at a particular
point in time or over a period limit the volume of output. It is also
called limiting factor.
Angle of incidence
It is the angle formed between sales line and total cost line after
breakeven point in the break even chart.
Difference between forecast and budget
Budget Forecast
It is prepared by management Estimate future trend based on
for future period. historical data.
Usually done for short term. Usually done for long term.
It is a static statement. It is flexible.