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reporting presents details of cost data in a summarized and aggregate form
...
In order that cost accounting satisfies the requirements of both internal and external reporting, the following are
the different activities which
are
undertaken under cost
accounting system:
1) Cost Determination: "This is the frirst step in the cost accounting system
...
This is a critical activity since the other three activities, explained below,
depend on it
...
Cost
is maintained for costing and financial transactions
...
Meaningful cost analysis depends largely upon the clear
planning
and
controlling
the
understanding of the cost finding methods used in cost accounting
...
In order to use cost information intelligently it is necessary for the managers to have good understanding of
different cost accounting concepts
...
The main functions of cost accounting are:
i) To serve as a guide to price fixing of products
...
ii) To reveal sources of economy in production process
...
v) To exercise effective control on factors of production
...
VIl) To present and interpret data for management decisions
...
x) To facilitate planning and control of business activity
...
xii) To organize the internal audit systems etc
...
Ii provides vital information
necessary for decision making
...
to
make
a
product buy a product?
Whether to accept or reject an export order?
How to utilize the scarce materials profitably'?
6|Page
1
...
Works or Factory Cost = Prime Cost + Works or Factory Overheads
3
...
Total Cost or Cost of Sales = Cost of Production + Selling and Distribution Overheads
Thedifference between the cost of sales and selling price represents profit loss
...
Forexample,bricksinhouses,woodinfurniture ete
...
materials purchasedspecificallyfor ajob or processlike gluefor book making
...
2
...
Examplesareconsumables
ikecotonwaste,Iubricants
...
3
...
productor processor expendedin convertingraw materialsintofinished goods
...
or
Supervision,maintenance tools setting
...
4DirectExpensesareexpensesdirectlyidentifiedto aparticular cost centre
...
job,departmentetearedirectexpenses
...
excise duty,hirechargesof aspecific
plantand equipment,costof any experimental work carried out especially for aparticular job
...
...
Overheads may be sub
dividedinto ) Manufacturing Ovcrheads:GinAdministrationOverheads:
...
It is
usually adopted when there is only one main product and all costs almost are incurred for that product
only
...
Itisa statementofcostsincurred
at eachlevel
...
InaCostsheet alltheelementsofcost istakeninto
consideration
...
Items excluded from Cost Sheet:
1
...
Pure financial incomes like interest received, profit on sale of investment, dividend received, rent received
received, discount received ete
...
No Risk of Spoilage and Obsolescence:
In order to avoid spoilage and obsolescence, a maximum quantity of each material is determined and a proper
method of issue of materials is followed
...
6
...
7
...
Therefore, this requires an internal check on mate
more
part of material control
...
Right Amount of Payment to Suppliers:
serious than misappropriation
13/51
Invoices received from suppliers should be approved for payment only if the items of materials ordered have been
received and properly checked to avoid excess payment to suppliers
...
(a) Centralized Purchasing: In a large organization, manufacturing units are many
...
The advantages of centralized purchasing are:
1
...
2
...
3
...
4
...
5
...
6
...
7
...
8
...
9
...
Factors to be considered when decision regarding centralization has to be taken are geographical separation of
plants, homogeneity of products, type of material bought, location of supplies etc
...
Each plant may have its own particular need
...
2
...
The time lag between indenting and receiving materials can be reduced
...
Technical requirements of each plant can be ascertained
...
Indenting for materials: The stores department prepares indents for the purchase of materials for
replenishment of stocks (regular indents) or for a special job{special indents) and sends it to the purchase
department
...
The quantity indented is equal to the ordering quantity fixed for each item
...
2
...
The suppliers quote their terms of price and delivery/payment
...
Tenders are prepared in triplicate
...
The supplier mentions his terms in the
original
...
The quality of
13|Page
goods and time taken to deliver the goods on previous occasions should be checked
...
3
...
The supplier, stores, inspection
department, store accounting section, purchase department and progress department are sent one copy each
...
From legal point of view, it binds both the parties to the
terms of the contract
...
It significs
the stores department to accept the goods and the accounts department to accept the bill
...
Inspection: The supplier delivers goods at the place specified
...
It is a proof of delivery
...
The inspector checks that the
materials are in accordance with the quality required, standard expected, tolerances allowed etc
...
5
...
After issuing of the Stores Receipt, the Storekeeper isresponsible for the stocks
...
It is prepared in quadruplicate and sent
to the supplier; stores accounting section and purchase department and one copy are retained with the stores
...
The stores accounting section compares the note with the purchase
order
...
Checking and passing of bills for payment: Bills received by the purchase department are forwarded to the
stores
accounting section to check the authenticity regarding quantity and price and the arithmetical accuracy
Special items included in the bills eg:- freight
...
The bill is
later passed for payment
...
The storekeeper is a custodian of all the items kept in the store
The stores should be maintained properly and cost minimized
...
The duties and functions of Store-keeper can be summarized as follows:
i) Materials should be received, unloaded, inspected and then moved to stores
...
in) The stores records should be maintained in an efficient and orderly manner so that materials can be easily
located and information can be obtained for various
departments
...
Suitable storage devices should be installed
...
v)All issues should be properly recorded, efficiently, promptly and accurately
...
vi) The storekeeper is responsible for co-ordination with materials control according to the type of production, size
of the company, the organization structure etc
...
vii) All items should be in its proper place
...
14| P age
physical verification
...
xi) Co-ordination and supervision of staff
instruments, conversion
xii) Periodical review of various scales, measuring
x) Neatness in
xii)
facilitate
stores to
ratios etc
...
(a) Re-ordering Level
Re-ordering
the
of level of stock of a material where the storekeeper starts
materials
...
way that the difference of quantity
minimum level will be sufficient
requirements
the
to meet
15/51
t
production
of
until the fresh
supply
of the materials is
received
...
Here,
maximum re-order
material is
placed
...
cost +
acquisition
same
whatever is the
ordered
total
ordering
cost
quantity purchased,
at one time
...
Since the
care
of
are
the
quantity
is fixed
ordering
per unit of material is
the quantity of a material to be
acquisition
usually excluded when deciding
be taken
This
stock
...
shortage
(b) Economic Ordering Quantity
may
period
period
costs and
cost
carrying
costs
which vary i t h
the quantity ordered
...
Cost of storage space which could have been utilized for some other purpose
...
Cost of bins and racks
3
...
4
...
5
...
6
...
7
...
8
...
Clerical cost etc
...
Cost of staff posted in the purchasing department, inspection section and stores accounts department
...
Cost of stationary postage and telephone charges
...
In other words, the cost varies with the number of orders
...
The
quantity is fixed so that the production is not held up due to shortage of the materials
...
Lead time i
...
time lag between indenting and receiving of the material
...
2
...
3
...
Minimum level is not required in case of a special material which is required against
customer's specific order
...
The quantity is fixed so as to
avoid overstocking as it leads to the following disadvantages
...
Overstocking leads to increase in working capital requirement which could be profitable used somewhere else
...
Overstocking will need more godown space, so more rent will have to be paid
...
It may also lead to obsolescence on account of overstocking
...
There are chances that the quality of materials will deteriorate because large stock will require more time before
they are consumed
...
There may be fear of depreciation in market values of the overstocked materias
...
The purchase officer will make special arrangements to get the materials which reach
at their danger levels so that the production may not stop due to shortage of materials
...
re-order period for emergency purchases
...
Or % (Minimum Stock Level + Maximum Stock Level)
Stores (or Materials) records
In the stores the most important two records kept are bin cards and stores ledger
...
A bin card is a record of the receipt and issue of material and is prepared by the store keeper for
each item of stores
...
In a bin card not only the receipt and issue of material is recorded, minimum quantity, maximum
quantity and ordering quantity are stated on the card
...
b) Stores Ledger: This ledger is kept in the costing department and is identical with the bin card except that
receipts, issues and balances are shown along with their money values
...
16| P age
Store Ledger
Bin Card
1
...
2
Itis maintained by the storekeeper,
...
Itis kept in the cost
3
It is attached to the bin
...
Entries are made by the cost clerk
...
Entries are made on the basis of
office
documents like goods received note, material
requisition note etc
...
Posting are made after the transactions
...
8
Inter departmental transactions are
9
...
5
...
6
...
7
...
Inter departmental transfers are not shown
...
Facilitates physical verification of closing
recorded
recorded for costing purpose
...
stock
Perpetual Inventory System
The Chartered Institute of Management Acountants, London, defines the perpetual inventory as "a system of
records maintained by the controlling department, which reflects the physical movements of stocks and their
current balance"
...
This is helps in avoiding closing down of firm for
physical verification
...
It avoids the disruption of production for physical checking of all items of stores at the end of the year
...
The preparation of Profit and Loss Account and Balance Sheet is possible without physical verification of stock
...
A detailed and more reliable control on the materials in store is obtained
...
As the work of recording and continuous stocktaking is carried out systematically and without undue haste, the
figures are more reliable
...
Continuous stocktaking will make the storekeeper and the stores accountant more vigilant in their work and they
will try to keep the records accurate and up-to-date
...
Planning of production can be done without any fear of shortage as the management is constantly informed of
the stores position
...
An inbuilt system of internal check will be in operation as bin cards and the stores ledger keep a check on each
other
...
Errors and shortage of stock are readily discovered and efforts are made to avoid the shortage of stock in future
...
The capital invested in the stores can be kept under control and efficiently used as stock can be compared with
the minimum and maximum levels
...
It makes available correct stock figures for claim to be lodged with the insurance company for loss on account
of stock destroyed by fire
...
Generally
it is seen that the materials which constitute the least percentage of items in stock may contribute to a large
percentage of value and a large percentage of items may represent a smaller percentage of value of items
consumed
...
Items falling in the first category are treated as 'A' items, of the second category as 'B' items and
items of the third category are taken as 'C' items
...
This
technique of stock control is also known as stock control according to value method or Always Better Control
method or Proportional Parts Value Analysis method
...
Group Percentage of Items Percentage of Costs
Quantity
Type of material
|Value
10%
70%
20%
20%
70%
10%
The significance of this analysis is that a very close control is exercised over the items of A" group which account
for a high percentage of costs while less stringent control is adequate for category 'B and very little control would
suffice for category 'C" items
...
Essential items which reduce the equipment's performance but do not render it inoperative or unsafe; non-
availability of these items may result in temporary loss of production or dislocation of production work
replacement can be delayed without affecting the equipment's performance seriously; temporary repairs are
sometimes possible
...
Material losses
Waste: It comprise of all visible, invisible losses that can not be collected and also unsalable portion of the
collected loss
...
Scrap: It represents the unusable loss which can be sold
...
Scrap may arise
in the form of turning's, filing etc
...
Spoilage: Spoilage
is those materials
components which
damaged
in the manufacturing and operation
process that they can not be repaired or reconditioned
...
Defectives: A
removed
good
in which there is
by applying
additional
cost
a
manufacturing
fault
or
defect is called Defective
goods,
this fault could be
called rectification cost
...
These jobs are debited with the value of materials issued to them
...
However, in practice, it involves minute calculations for including all these expenses
and is a big task compared to the benefit derived from it
...
The most important being: FIFO, LIFO, simple
and weighed average
methods
1) First in First Out (FIFO)
Under this method material is first issued from the earliest consignment on hand and priced at the cost at which
that consignment was placed in the stores
...
The units in the
opening stock of materials are treated as if they are issued first, the units from the first purchase issued next, and so
on until the units left in the closing stock of materials are valued at the latest cost of purchases
...
But in case of rising prices this method is not suitable because the
issue price of materials to production will be low while the cost of replacement of materials will be high
...
2) Last in Last Out (LILO)
Under this method, issues are priced in the reverse order of purchase i
...
, the prices of the latest available
consignment is taken
...
Valuing material issues at the price
of the latest available consignment will help the management in fixing the comp
3) Simple Average Method
In this method, price is calculated by dividing the total of the prices of the materials in the stock from which the
material to be priced could be drawn by the number of the prices used in that total
...
4) Weighted Average Methods
In this method, price is calculated by dividing the total cost of materials in the stock from which the materials to be
priced could be drawn by the total quantity of materials in that stock
...
11
...
10+ 2000 x Rs
...
12 = Rs
...
33
1000+2000+3000
5
...
The quantity
is not issued unless otherwise there is an emergency
...
The earlier materials received are kept as a base and are valued at a price on which they are
acquired
...
It is used along with some other methods such as FIFO, LIFO, average
price method etc
...
StandardI
Method:
The issue price of materials is predetermined or estimated in this method
...
The materials are priced at standard price
irrespective of prices paid for various purchases
...
7