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All About ACCOUNTING..!!

0

COSTING

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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 oftheir classification

1. Classification by nature

2. Functional Classification

3. Classification on basis of behavior

What is COST..?

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Costis a resource sacrificed or forgone to achieve

a specific objective.An actual costis the cost incurred (a historical cost)

as distinguished from budgeted costs.

A cost objectis anything for which a separatemeasurement of costs is desired.

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Classification of Cost(On the basis of Nature)

Cost

Direct Indirect

DirectMaterial

DirectLabour

Directexpenses

IndirectMaterial

IndirectLabour

IndirectExpenses

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What is Direct and indirect cost?

Direct Costs

Example: Paper on which

Sports I l lustratedmagazine

is printed

Indirect Costs

Example: Lease cost for

Time-Warner building

housing the senior editors

of its magazine

COST OBJECT

Example: SportsI l lustrated magazine

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Classification of Cost (Functional)

Cost

PrimeCost

Factorycost

Cost ofProdn

Cost ofsales

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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

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Classification of Cost (Behavioural)

Cost

VariableCost

Fixedcost

SemiVariable

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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?

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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/-

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Variable CostVariable 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 volumeof 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/-

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Fixed CostFixed Cost is the cost that do not vary

With the volume of production.

Also fixed cost decreases as the volumeof production increases

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Cost Sheet

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Cost sheet is a statement, which shows various

components of total cost of a product.Cost Sheet is adocument which provides for the assembly of theestimated detailed cost in respect of a cost centre or acost 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

What is COSTSHEET..?

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Cost sheet is a statement, which shows various

components of total cost of a product.Cost Sheet is adocument which provides for the assembly of theestimated detailed cost in respect of a cost centre or acost 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

What is COSTSHEET..?

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Marginal Costing

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Marginal Costis the amount of any given volume of output

by which aggregate costs are changed if the volume ofoutput is increased by one unit.

whereas

Marginal costingis the ascertainment of marginal costs andof the effect on profit of changes in volume or type ofoutput by differentiating between fixed cost andvariable cost

Also known as CVP analysis

What is Marginal Costing

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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 tothe level of output.

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3. When graphed, the behavior of total revenues

and total costs is linear (straight-line) in relationto output units within the relevant range

(and time period).

4. The unit selling price, unit variable costs, andfixed costs are known and constant.

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5. The analysis either covers a single product or

assumes that the sales mix when multipleproducts are sold will remain constant as the

level of total units sold changes.

6. All revenues and costs can be added andcompared without taking into account the time

value of money.

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Operating income

= Total revenues from operationsCost of goods sold and operating costs

(excluding income taxes)

Net income = Operating income

Income taxes

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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)

1.What is Contribution?

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What is Break even point?

Sales

Variableexpenses Fixedexpenses

Total revenues = Total costs

=

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04284

126

168210252294336378

0 1000 2000 3000 4000 5000

Units

$

(000)

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Sales

Variableexpenses Fixedexpenses

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.

h b d

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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 plan of operations. a basis for allocating resources.

a communication and authorization device. a device for motivating and guiding implementation. a guideline for operations and gauge for controlling operations. a basis for performance evaluation.

What is budget

B d l

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Budgetary control is the use of the comprehensive system of budgeting to aid

management in carrying out its functions like planning, coordination andcontrol.

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.

Budgetary control

Wh t ti l f b d t t l?

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Organization of budgetary control

Budget Centers

Budget Manual

Budget officers

Budget Committee

Budget period

What are essentials of budgetary control?

Cl ifi ti f B d t

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ACCORDING TO ACCORDING TO ACCORDING TO

TIME FUNCTION FLEXIBILITY

Long term budget 1. Sales budget 1. Fixed budget

Short term budget 2. Production budget 2. Flexible budget

Current budget 3. Material Budget

4.Direct Labor Budget

5. Purchase budget

6. Personnel budget

7. R & D budget

8. Capital Expenditure budget

9. Cash Budget

10. Master bud et

Classification of Budget

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Wh t i Fl ibl B d t?

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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.

What is Flexible Budget?

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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 Variable expense

Salaries = 50000/- Materials = 200000/-

Rent & taxes=40000/- Labor = 250000/-

Depreciation = 60000/- Others = 40000/-

Administration = 70000/-

Semi-Variable Expense

Repairs = 100000/- Indirect Labor = 150000/-

Others = 90000/-

Example

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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 Sales

60% 1100,000

70% 1300,000

90% 1500,000

Example

Sales Budget

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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

Sales Budget

Factors effecting Sales Budget

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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

Factors effecting Sales Budget

Format of sales budget

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Format of sales budget

April May June Quarter

Sales in units 20,000 25,000 35,000 80,000

Selling price

per unit x 30 x 30 x 30 x 30

Total sales 600,000 750,000 1,050,000 2,400,000

Sales Budget

For the First Quarter Ended J

une 30, 2007

Production Budget

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The production budget is prepared in relation to the sales

budget. It Shows the units that must be produced to meetanticipated sales.

It is derived from the budgeted sales units (per sales budget)

plus the desired ending finished goods less the beginningfinished goods units.

The production requirement formula is:

Production Budget

Determining the budgeted units of production:

Budgeted Budgeted Desired Beginning

Production Sales Ending Inventory

(in units) (in units) Inventory (in units)

(in units)

= +

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Factors effecting Production Budget

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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

Factors effecting Production Budget

Production Budget

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1. Prepare Production budget for each month for the six month ending,

31

st

dec 2010.The units sold for different month are as follows

July 1100 units Aug 1100 units

Sep 1700 Oct - 1900

Nov 2500 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

Production Budget

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Material Budget

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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.

Material Budget

Factors effecting Material Budget

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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

Factors effecting Material Budget

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Labour Budget

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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

Labour Budget

Labour Budget

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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

Labour Budget

Factory O.H Budget,

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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 itoperations

Factory O.H Budget,

O.H Budget,

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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

O.H Budget,

Selling and Distribution Overhead Budget

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A selling and general administrative expense budgetdelineates 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 arediscretionary



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SalesBudget

Production

Budget

Direct

Labour

Budget

Cash

Budget

Ending

Inventory

Budget

Direct

Materials

Budget

Selling and

Administrative

Budget

Manufacturing

Overhead

Budget

Budgeted Income Statement

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The budgeted income statement estimates the expectedoperating income from the budgeted operations

A budgeted income statement allows management aglimpse of the likely operating result upon completion of thebudgeted operation

Once the budget income statement has been approved,it becomes the benchmark against which the performanceof the period is evaluated

udgeted co e State e t

ZBB

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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 whatactivities 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

All Ab t ACCOUNTING !!ZBB

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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 existed-

to start at zero

the purpose of ZBB is to reevaluate and reexamine all programs and

expenditures for each budgeting cycle

All Ab t ACCOUNTING !!Application of ZBB

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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.

pp


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Identification of decision units.

The existing organization structure identifies the units in the hierarchy forwhich 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. It must have well defined & measurable impacts

3. It must have well defined & measurable objectives

pp


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Development of Decision Package

A. The mutually exclusive decision package; the purpose here is to identify foreach 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 toperform 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.

pp

All About ACCOUNTING !!Application of ZBB

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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

pp

All About ACCOUNTING !!Strength of ZBB

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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

g

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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.

All About ACCOUNTING !!Weakness of ZBB

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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 decisionpackages. This make the ranking process difficult.

All About ACCOUNTING !!Weakness of ZBB

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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.

All About ACCOUNTING !!Performance Budgeting

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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.

Following matters are clearly mentioned in the budget.

1. Objective of the organization

2. Cost of activity

3. Quantitative measurement to measure performance

4. Quantity of work to be performed under each activity

All About ACCOUNTING !!Steps in Performance Budgeting

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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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