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Title: Accounting
Description: It contains almost all syllables in accounting and book keeping.
Description: It contains almost all syllables in accounting and book keeping.
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LESSON 1 INTRODUCTION TO ACCOUNTING
Contents
1
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1 Introduction
1
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2
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2
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2
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3 Accounting
1
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1 Meaning
1
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2 Definition
1
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3 Objectives
1
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4 Importance
1
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5 Functions
1
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6 Advantages
1
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7 Limitations
1
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4
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4
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4
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4
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5 Meaning of Debit and Credit
1
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6
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6
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6
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7 Distinction between Book Keeping and Accounting
1
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8
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8
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8
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9 Let us Sum Up
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11 Check your Progress
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13 References
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iv) To study the difference between Book- keeping and Accounting
v)
To study the various branches of Accounting
1
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In other words, wherever money
is involved, accounting is required to account for it
...
The basic function of any language is to serve as a means of
communication
...
1
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MEANING AND DEFINITION OF BOOK- KEEPING
1
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1 Meaning
Book- keeping includes recording of journal, posting in ledgers and balancing
of accounts
...
Thus, book- keeping many be defined as the science and art
of recording transactions in money or money’s worth so accurately and systematically,
in a certain set of books, regularly that the true state of businessman’s affairs can be
correctly ascertained
...
1
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2 Definition
“Book- keeping is the art of recording business transactions in a systematic
manner”
...
H
...
“Book- keeping is the science and art of correctly recording in books of
account all those business transactions that result in the transfer of money or money’s
worth”
...
N
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2
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ii)
Soundness of a firm can be assessed from the records of assets and abilities
on a particular date
...
iv)
It enables to prepare a list of customers and suppliers to ascertain the amount
to be received or paid
...
vi)
Amendment of business laws, provision of licenses, assessment of taxes etc
...
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1
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3
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It identifies transactions and events of a specific
entity
...
g
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An event (whether internal or external) is a
happening of consequence to an entity (e
...
use of raw material for production)
...
1
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2 Definition of Accounting
American Institute of Certified Public Accountants (AICPA) which defines
accounting as “the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events, which are, in part at least, of a
financial character and interpreting the results thereof”
...
3
...
However, the following are the general objectives of
accounting
...
Accounting serves this purpose of record
keeping by promptly recording all the business transactions in the books of account
...
e
...
For this purpose, a business entity prepares either a Trading and Profit and
Loss account or an Income and Expenditure account which shows the profit or loss of
the business by matching the items of revenue and expenditure of the some period
...
e
...
This helps the businessman to know his financial strength
...
iv) To portray the liquidity position: Financial reporting should provide
information about how an enterprise obtains and spends cash, about its borrowing and
repayment of borrowing, about its capital transactions, cash dividends and other
distributions of resources by the enterprise to owners and about other factors that may
affect an enterprise’s liquidity and solvency
...
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vi) To facilitate rational decision – making: Accounting
records
and
financial statements provide financial information which help the business in making
rational decisions about the steps to be taken in respect of various aspects of business
...
Maintenance of accounts is also compulsory under the Sales Tax Act and Income Tax
Act
...
3
...
They
possess curiosity in knowing whether the business is being conducted on sound lines
or not and whether the capital is being employed properly or not
...
Comparing the
accounts of various years helps in getting good pieces of information
...
The accounts are the basis, the management can
study the merits and demerits of the business activity
...
The financial accounting is the “eyes and ears of management and facilitates
in drawing future course of action, further expansion etc
...
It is usual that these groups are interested to know the
financial soundness before granting credit
...
Profit and Loss Account and Balance Sheet are
nerve centres to know the soundness of the firm
...
The more important point is that the workers expect regular income for the
bread
...
depend upon
the profitability of the firm and in turn depends upon financial position
...
v) Investors: The prospective investors, who want to invest their money in a
firm, of course wish to see the progress and prosperity of the firm, before investing
their amount, by going through the financial statements of the firm
...
For this, this group is eager to go through the accounting
which enables them to know the safety of investment
...
The state and central Governments are interested in the
financial statements to know the earnings for the purpose of taxation
...
vii) Consumers: These groups are interested in getting the goods at reduced
price
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Researchers are also interested in accounting for interpretation
...
To make a study into the financial operations of a particular firm, the research scholar
needs detailed accounting information relating to purchases, sales, expenses, cost of
materials used, current assets, current liabilities, fixed assets, long-term liabilities and
share-holders funds which is available in the accounting record maintained by the
firm
...
Notes: (a)
(b)
Write your answer in the space given below
...
13)
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3
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These facilitate to know operating results and
financial positions
...
Thus accounting performs historical
function i
...
, attention on the past performance of a business; and this facilitates
decision making programme for future activities
...
The managerial function and decision making programmes, without
accounting, may mislead
...
The variations of actual operations with pre-determined
standards and their analysis is possible only with the help of accounting
...
Auditing is not possible without accounting
...
Accounting is a base and
with its help various returns, documents, statements etc
...
iv) Language of Business: Accounting is the language of business
...
There are many parties-owners,
creditors, government, employees etc
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The accounting shows a
real and true position of the firm or the business
...
3
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ii)
It gives information about the profit or loss made by the business at the
close of a year and its financial conditions
...
iii)
It provides useful information form making economic decisions,
iv)
It facilitates comparative study of current year’s profit, sales, expenses
etc
...
v)
It supplies information useful in judging the management’s ability to
utilise enterprise resources effectively in achieving primary enterprise
goals
...
vii)
It helps in complying with certain legal formalities like filing of incometax and sales-tax returns
...
1
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7 Limitations of Accounting
i)
Accounting is historical in nature: It does not reflect the current financial
position or worth of a business
...
Accounting is limited to monetary transactions only
...
iii)
Facts recorded in financial statements are greatly influenced by
accounting conventions and personal judgements of the Accountant or
Management
...
iv)
Accounting principles are not static or unchanging-alternative
accounting procedures are often equally acceptable
...
Price changes are not considered
...
This is a
strong limitation of accounting
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vii)
The accounting statements do not reflect those increase in net asset
values that are not considered realized
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4 Methods of Accounting
Business transactions are recorded in two different ways
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4
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4
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4
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Single Entry: It is incomplete system of recording business transactions
...
So the complete recording of transactions cannot be made and trail balance
cannot be prepared
...
4
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The recording is made on the
basis of both these aspects
...
1
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3 Steps involved in Double entry system
(a) Preparation of Journal: Journal is called the book of original entry
...
Here the job of recording takes
place
...
Here the grouping of accounts is performed
...
(c) Trial Balance preparation: Summarizing
...
(d) Preparation of Final Account: At the end of the accounting period to
know the achievements of the organization and its financial state of affairs, the final
accounts are prepared
...
4
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It helps to attain the objectives of
accounting
...
iii) A check on the accuracy of accounts: By use of this system the accuracy
of accounting book can be established through the device called a Trail balance
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v) Knowledge of the financial position of the business: The financial
position of the firm can be ascertained at the end of each period, through the
preparation of balance sheet
...
vii) Comparative study is possible: Results of one year may be compared
with those of the precious year and reasons for the change may be ascertained
...
ix) No scope for fraud: The firm is saved from frauds and misappropriations
since full information about all assets and liabilities will be available
...
5 Meaning of Debit and Credit
The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from
‘creditable’
...
Recording of transactions require a thorough understanding of the rules of debit and
credit relating to accounts
...
1
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To achieve this object, business transactions have been
classified into three categories:
(i)
Transactions relating to persons
...
The accounts falling under the first heading are known as ‘personal Accounts’
...
The accounts
can also be classified as personal and impersonal
...
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6
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These accounts are necessary, in particular,
to record credit transactions
...
eg
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Both males and females are included in it
(b) Artificial or legal persons: An account recording financial transactions
with an artificial person created by law or otherwise is termed as an artificial person,
personal account, e
...
Firms’ accounts, limited companies’ accounts, educational
institutions’ accounts, Co-operative society account
...
When
accounts are of a similar nature and their number is large, it is better tot group them
under one head and open a representative personal accounts
...
g
...
When a person starts a business, he is known as proprietor
...
So, capital accounts and
drawings account are also personal accounts
...
6
...
g
...
,
Real accounts can be further classified into tangible and intangible
...
e
...
Machinery
account Cash account, Furniture account, stock account etc
...
e
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, Goodwill accounts, patents account, Trademarks account, Copyrights account,
etc
...
6
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These accounts are also known as fictitious accounts as they do not
represent any tangible asset
...
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Wages account, Rent account Commission
account, Interest received account are some examples of nominal account
The rule for Nominal accounts is:
Debit all expenses and losses
Credit all incomes and gains
1
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recorded transactions in
order to find out their
accuracy
...
Total and Balance
To make total of the
amount in journal and
accounts of ledger
...
To prepare trial balance
with the help of
balances of ledger
accounts
...
Rectification of
errors
These are not included in These are included in
book-keeping
accounting
...
as in advanced countries
this work is done by
machines
...
for the work of bookkeeper
...
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8 BRANCHES OF ACCOUNTING
The changing business scenario over the centuries gave rise to specialized
branches of accounting which could cater to the changing requirements
...
Now, let us understand these terms
...
8
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It is the original
from of accounting
...
The financial statements i
...
, the profit and loss account and the
balance sheet, show them the manner in which operations of the business have been
conducted during a specified period
...
8
...
It is that
branch of accounting which is concerned with the accumulation and assignment of
historical costs to units of product and department, primarily for the purpose of
valuation of stock and measurement of profits
...
It generally relates to the future and involves an estimation of future costs
to be incurred
...
1
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3 Management Accounting
It is an accounting for the management i
...
, accounting which provides
necessary information to the management for discharging its functions
...
” It covers all
arrangements and combinations or adjustments of the orthodox information to provide
the Chief Executive with the information from which he can control the business e
...
Information about funds, costs, profits etc
...
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1
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One
should know the basic purpose of accounting, its merits, kinds of accounting and rules
of accounting
...
The next lesion will deal with principles of accounting
...
10 Lesson-End Activities
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2
3
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5
...
7
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9
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Explain the primary objectives of accounting?
What is Double entry system?
What is meaning of Debit and Credit?
Explain the different methods of accounting
...
Discuss the limitations of accounting
...
Explain the accounting rules
...
11 Check your Progress
1
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1
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To ascertain the results of the operation
3
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To portray the liquidity position
5
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12 Points for Discussion
1
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2
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1
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Grewal, T
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2
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3
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L
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LESSON – 2 PRINCIPLES OF ACCOUNTING
Contents:
2
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1 Introduction
2
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2
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2
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Accounting Conventions
2
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3
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3
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3
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4 Accounting Terminology
2
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1 Transaction
2
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2 Debtor
2
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3 Creditor
2
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4 Capital
2
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5 Liability
2
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6 Asset
2
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7 Goods
2
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8 Revenue
2
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9 Expense
2
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10 Expenditure
2
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11 Purchases
2
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12 Sales
2
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13 Stock
2
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14 Drawings
2
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15 Losses
2
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16 Account
2
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17 Invoice
2
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18 Voucher
2
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19 Proprietor
2
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20 Discount
2
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21 Solvent
2
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22 Insolvent
2
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5
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6 Let us Sum Up
2
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8 Check your Progress
2
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10 References
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2
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To understand the meaning and definition of Accounting
...
To study the basic accounting principles
...
To know the bases of accounting
...
To understand the accounting terminology and equation
...
1 INTRODUCTION
The word ‘Principle’ has been differently viewed by different schools of
thought
...
Canadian Institute of Chartered Accountants defined accounting principle
as “the body of doctrines commonly associated with the theory and procedure of
accounting, serving as an explanation of current practices as a guide for the selection
of conventions or procedures where alternatives exist
...
To be more reliable, accounting
statements are prepared in conformity with these principles
...
But in reality as all the businesses are not alike, each one has its own
method of accounting
...
, relevance, objectivity and
feasibility
...
It is said to be objective
to the extent that it is supported by the facts and free from personal bias
...
Though accounting principles are denoted by various terms such as concepts,
conventions, doctrines, tenets, assumptions, axioms, postulates, etc
...
, accounting concepts and accounting conventions
...
2 ACCOUNTING CONCEPTS AND CONVENTIONS
2
...
1 Accounting concepts:
T h e term ‘concept’ is used to denote accounting postulates, i
...
, basic
assumptions or conditions upon the edifice of which the accounting super-structure is
based
...
1
...
Going Concern Concept
5
...
Matching Concept
9
...
Money Measurement Concept
4
...
Historical Cost Concept
8
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Objective Evidence Concept
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i) Business Entity Concept: A business unit is an organization of persons
established to accomplish an economic goal
...
This concept can be expressed through an accounting equation, viz
...
The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants
...
The expenses, income, assets and liabilities not related to the
sole proprietorship business are excluded from accounting
...
Thus, in the case of sole
proprietorship, business and non-business assets and liabilities are treated alike in the
eyes of law
...
Similarly, the private assets are first
used to pay off the private liabilities of partners and if any surplus remains, it is
treated as part of the firm’s property and is used for paying the firm’s liabilities
...
ii) Money Measurement Concept: In accounting all events and transactions
are recode in terms of money
...
In other words, facts, events and transactions which
cannot be expressed in monetary terms are not recorded in accounting
...
This concept does not also take care of the effects of inflation because it assumes a
stable value for measuring
...
e
...
Keeping
this in view, the suppliers and other companies enter into business transactions with
the business unit
...
This concept also supports the treatment of
prepaid expenses as assets, although they may be practically unsaleable
...
, 1
...
Receiving certain benefits
...
This is the underlying
assumption of this concept
...
, Assets = Capital +
Liabilities or Capital = Assets – Liabilities, will further clarify this concept, i
...
, at any
point of time the total assets of the business unit are equal to its total liabilities
...
Liabilities to the owners
are considered as capital
...
Though the business is assumed to be continuing in future (as per going
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concern concept), the measurement of income and studying the financial position of
the business for a shorter and definite period will help in taking corrective steps at the
appropriate time
...
The businessman has to analyse and evaluate the results
ascertained periodically
...
During the course of preparation of these statements
capital revenue items are to be necessarily distinguished
...
For example,
if an asset is purchases, it is entered in the accounting record at the price paid to
acquire the same and that cost is considered to be the base for all future accounting
...
However, in the
light of inflationary conditions, the application of this concept is considered highly
irrelevant for judging the financial position of the business
...
Under this concept, the accounting period concept is relevant and it is this concept
(matching concept) which necessitated the provisions of different adjustments for
recording outstanding expenses, prepaid expenses, outstanding incomes, incomes
received in advance, etc
...
viii) Realisation Concept: This concept assumes or recognizes revenue when
a sale is made
...
However, there are two exceptions to this concept, viz
...
Hire purchase system
where the ownership is transferred to the buyer when the last instalment is paid and 2
...
ix) Accrual Concept: According to this concept the revenue is recognized on
its realization and not on its actual receipt
...
This assumption makes it necessary
to give certain adjustments in the preparation of income statement regarding revenues
and costs
...
Hence, the combination of both cash
and accrual system is preferable to get rid of the limitations of each system
...
e
...
Only then, the
transactions can be verified by the auditors and declared as true or otherwise
...
e
...
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...
However, in reality the subjectivity
cannot be avoided in the aspects like provision for bad and doubtful debts, provision
for depreciation, valuation of inventory, etc
...
2
...
2 Accounting Conventions
The following conventions are to be followed to have a clear and meaningful
information and data in accounting:
i) Consistency: The convention of consistency refers to the state of accounting
rules, concepts, principles, practices and conventions being observed and applied
constantly, i
...
, from one year to another there should not be any change
...
It also prevents personal bias as the persons involved
have to follow the consistent rules, principles, concepts and conventions
...
It admits changes wherever
indispensable and adds to the improved and modern techniques of accounting
...
This
convention is given due legal emphasis by the Companies Act, 1956 by prescribing
formats for the preparation of financial statements
...
It is enough if sufficient information, which is of material interest to the
users, is included
...
This convention follows the policy of caution
or playing safe
...
A view opposed to this convention is that there is the possibility of creation of
secret reserves when conservatism is excessively applied, which is directly opposed to
the convention of full disclosure
...
2
...
following bases may be used to finalise accounts
...
Cash basis
2
...
Mixed or Hybrid basis
...
3
...
No entry is passed when a payment or receipt becomes due
...
Government system of accounting is mostly on cash basis
...
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In such a case, the
financial statements prepared by them for determination of their income is termed as
Receipts and Expenditure Account
...
3
...
Incomes are credited to the period
in which they are earned whether cash is received or not
...
The profit or loss of any accounting period is the difference between incomes
earned and expenses incurred, irrespective of cash payment or receipt
...
Under the Companies Act 1956, all
companies are required to maintain the books of accounts according to accrual basis
of accounting
...
3
...
For example, a company may follow
mercantile system of accounting in respect of its export business
...
e
...
Such a method
could be adopted because of uncertainty with respect of quantum, amount and time of
receipt of such incentives and drawbacks
...
In practice, the profit or loss
shown under this basis will not be realistic
...
It is not widely practised due to the inconsistency
...
4 ACCOUNTING TERMINOLOGY
It is necessary to understand some basic accounting terms which are daily in
business world
...
2
...
1 Transaction
“An event the recognition of which gives rise to an entry in accounting
records
...
That is,
which changes the value of assets and equity
...
, are the transactions”
...
Credit transaction, on the other hand, will not have ‘cash’ either received or
paid, for something given or received respectively, but gives rise to debtor and
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creditor relationship
...
g
...
,
2
...
2 Debtor
A person who owes money to the firm mostly on account of credit sales of
goods is called a debtor
...
2
...
3 Creditor
A person to whom money is owing by the firm is called creditor
...
4
...
It is also known as
owner’s equity or net worth
...
It will always be equal to assets less liabilities, say:
Capital = Assets - Liabilities
...
4
...
In the words of Finny and Miller, “Liabilities are debts; they are amounts
owed to creditors; thus the claims of those who ate not owners are called liabilities”
...
2
...
6 Asset
Any physical thing or right owned that has a money value is an asset
...
2
...
7 Goods
It is a general term used for the articles in which the business deals; that is,
only those articles which are bought for resale for profit are known as Goods
...
4
...
It
is defined as the inflow of assets which result in an increase in the owner’s equity
...
,
However, receipts of capital nature like additional capital, sale of assets etc
...
2
...
9 Expense
The terms ‘expense’ refers to the amount incurred in the process of earning
revenue
...
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19
2
...
10 Expenditure
Expenditure takes place when an asset or service is acquired
...
Similarly, if an asset
is acquired during the year, it is expenditure, if it is consumed during the same year, it
is also an expense of the year
...
4
...
As the trade is buying and selling of commodities purchase is the main
function of a trade
...
Purchases can be of two types
...
If cash is paid immediately for the purchase, it is cash purchases, If the
payment is postponed, it is credit purchases
...
4
...
Here, the
possession and the ownership right over the goods are transferred to the buyer
...
'Business Turnover’ or sales proceeds
...
,, cash
sales and credit sales
...
If
payment for sales is postponed, it is credit sales
...
4
...
If there is stock at the end of the accounting year, it is said to be a closing stock
...
2
...
14 Drawings
It is the amount of money or the value of goods which the proprietor takes for
his domestic or personal use
...
2
...
15 Losses
Loss really means something against which the firm receives no benefit
...
It may be noted that expense leads to
revenue but losses do not
...
g
...
4
...
It can also be expressed as a clear and concise record of the transaction
relating to a person or a firm or a property (or assets) or a liability or an expense or an
income
...
4
...
Such a statement is called an invoice
...
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...
4
...
It is a proof that a
particular transaction has taken place for the value stated in the voucher
...
2
...
19 Proprietor
The person who makes the investment and bears all the risks connected with
the business is known as proprietor
...
4
...
When some discount is allowed in prices of
goods on the basis of sales of the items, that is termed as trade discount, but when
debtors are allowed some discount in prices of the goods for quick payment, that is
termed as cash discount
...
4
...
2
...
22 Insolvent
A person whose liabilities are more than the realizable values of his assets is
called an insolvent
...
5 ACCOUNTING EQUATION
As indicated earlier, every business transaction has two aspects
...
Both the aspects have to be recorded in accounts
appropriately
...
e
...
The equation is as follows:
Assets = Equities
The equation is based on the principle that accounting deals with property and
rights to property and the sum of the properties owned is equal to the sum of the rights
to the properties
...
Equities can be
subdivided into equity of the owners which is known as capital and equity of creditors
who represent the debts of the business know as liabilities
...
Internal equity represents the owner’s
equity in the assets and external represents he outsider’s interest in the asset
...
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The equation is fundamental in the sense that it gives a foundation to the
double entry book-keeping system
...
Check your progress 2
What you understand about the following terminology
(i) Liabilities (ii) Assets (iii) Stock (iv) Losses
List out five objectives of Accounting
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
2
...
1 Rules for accounting equation:
Following rules help in making the accounting equation:
(i) Assets: If there is increase in assets, this increase is debited in assets
account
...
(ii) Liabilities: When liabilities are increase, outsider’s equities are credited
and when liabilities are decreased, outsider’s equities are debited
...
(iv) Expenses: Owner’s equity is decreased by the amount of revenue
expenses
...
2
...
This chapter elaborately explains the principles
which are needed for consistency in accounting throughout the lifetime of the concern
...
Next lesion will cover the basic journal and ledger preparation
...
7 LESSON END ACTIVITIES
1
...
2
...
What do your understand by convention of materiality?
4
...
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...
8 CHECK YOUR PROGRESS
(i) Liability: It means the amount which the firm owes to outsiders that is,
excepting the proprietors
...
In simple terms, debts repayable to outsiders by the business are known as
liabilities
...
In other words, an asset is that expenditure which results in acquiring of some
property or benefits of a lasting nature
...
If there is stock at the end of the accounting year, it is said to be a
closing stock
...
(iv) Losses: Loss really means something against which the firm receives no
benefit
...
It may be noted that expense
leads to revenue but losses do not
...
g
...
2
...
Explain the following terms
a) Assets b) Liabilities c) Capital d) Revenue e) Expenses
2
...
2
...
Gneval, T
...
Double Entry Book Keeping
...
Jain & Navang – Advanced Accountancy
...
clicktoconvert
...
0 Aims and objectives
3
...
2 Advantages of Journal
3
...
4 Ledger
3
...
1 Ruling of ledger account
3
...
2 Sub-division of ledger
3
...
3 Distinction between journal and ledger
3
...
6 Let us Sum Up
3
...
8 Check Your Progress
3
...
10 References
3
...
To study the advantages and important point of journal
...
To study the distinguish between journal and ledger
...
1 INTRODUCTIONS
When the business transactions take place, the first step is to record the same
in the books of original entry or subsidiary books or books of prime or journal
...
Journalsing refers to the act of recording each
transaction in the journal and the form in which it is recorded, is known as a journal
entry
...
2 ADVANTAGES OF JOURNAL
The following are the inherent advantages of using journal, though the
transactions can also be directly recorded in the respective ledger accounts;
1
...
All the necessary information and the required explanations regarding all
transactions can be obtained from the journal; and
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24
3
...
The specimen journal is as follows:
Date
Particulars
L
...
1
2
3
Debit
Rs
...
5
-
The journal has five columns, viz
...
(1) Date: In each page of the journal at the top of the date column, the year is
written and in the next line, month and date of the first entry are written
...
Thus, in this column, the date on which the transaction takes place is alone
written
...
The name of the account to be debited is entered first at the
extreme left of the particulars column next to the date and the abbreviation ‘Dr
...
The name of the
account to be credited is entered in the next line preceded by the word “To” leaving a
few spaces away from the extreme left of the particulars column
...
“Narration” may include particulars required to identify and
understand the transaction and should be adequate enough to explain the transaction
...
The use of the word “Being” is completely dispense with, in modern
parlance
...
(3) Ledger Folio: This column is meant to record the reference of the main
book, i
...
, ledger and is not filled in when the transactions are recorded in the journal
...
(4) Amount (Debit): The amount to be debited along with its unit of
measurement at the top of this column on each page is written against the account
debited
...
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25
3
...
Thus, the number and the number and
type of journals required are determined by the nature of operations and the volume of
transactions in a particular business
...
Sales Day Book- to record all credit sales
...
Purchases Day Book- to record all credit purchases
...
Cash Book- to record all cash transactions of receipts as well as payments
...
Sales Returns Day Book- to record the return of goods sold to customers
on credit
...
Purchases Returns Day Book- to record the return of goods purchased from
suppliers on credit
...
Bills Receivable Book- to record the details of all the bills received
...
Bills Payable Book- to record the details of all the bills accepted
...
Journal Proper-to record all residual transactions which do not find place in
any of the aforementioned books of original entry
...
4 LEDGER
Ledger is a main book of account in which various accounts of personal, real
and nominal nature, are opened and maintained
...
But, the
preparation of different ledger accounts helps to get a consolidated picture of the
transactions pertaining to one ledger account at a time
...
From the above definition, it is clear that when
transactions take place, they are first entered in the journal and subsequently posted to
the concerned accounts in the ledger
...
In the past, the ledgers were kept in bound
books
...
3
...
1 Ruling of ledger account
The ruling of a ledger account is as follows:
Type- 1
Dr
...
F
...
Date
Particulars
By name of the
account to be debited
J
...
Cr
...
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26
Date
Particulars
J
...
Dr
...
Cr
...
Dr
...
Balance
Rs
...
3
...
2 Sub-division of ledger
In a big business, the number of accounts is numerous and it is found
necessary to maintain a separate ledger for customers, suppliers and for others
...
(i) Debtors’ Ledger: It contains accounts of all customers to whom goods
have been sold on credit
...
This ledger is also known as sales ledger
...
From the Purchases Day Book, Purchases Returns Book
and Cash Book, the entries are made in this ledger
...
(iii) General Ledger: It contains all the residual accounts of real and nominal
nature
...
3
...
3 Distinction between journal and ledger
(i) Journal is a book of prime entry, whereas ledger is a book of final entry
...
(iii) In the journal, information about a particular account is not found at one
place, whereas in the ledger information about a particular account is found
at one place only
...
(v) A journal entry shows both the aspects debit as well as credit but each
entry in the ledger shows only one aspect
...
(vii) Vouchers, receipts, debit notes, credit notes etc
...
3
...
ILLUSTRATIONS
1
...
1998
June 1
June 2
Started business with a capital of
Paid into bank
Rs
...
clicktoconvert
...
Date
1998
June
June
June
June
June
June
June
June
June
June
1
2
4
6
6
8
12
15
18
20
Particulars
Cash A/c
To Capital A/c
(Capital brought into the business)
Bank A/c
To Capital A/c
(Cash paid into bank)
Purchases A/c
To Kamal’s A/c
(Purchased goods from Kamal on credit)
Shriram’s A/c
To Cash A/c
(Cash paid to Shriram)
Shriram’s A/c
To Cash A/c
(Cash allowed by Shriram)
Cash A/c
To Sales A/c
(Cash sales effected)
Hameed’s A/c
To Sales A/c
(Goods sold to Hameed)
Purchases A/c
To Bharat’s A/c
(Purchased goods from Bharat)
Salaries A/c
To Cash A/c
(salaries paid)
Cash A/c
L
...
Dr
...
Rs
...
Rs
...
4,920
4,920
Dr
...
20,000
20,000
Dr
...
7,500
7,500
Dr
...
2,480
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28
June
June
June
June
To Prem’s A/c
(Cash received from Prem)
Discount A/c
To Prem’s A/c
(Discount allowed to Prem)
Cash A/c
To Bank A/c
(Cash withdrawn from bank)
Drawings A/c
To Cash A/c
(Cash withdrawn from bank for personal use
Hanif’s A/c
To Bank A/c
(Paid to Hanif by cheques)
20
25
28
30
2,480
Dr
...
5,000
5,000
Dr
...
3,000
3,000
Illusration-2
Journalise the following transactions:
1998
June
June
June
June
June
1
3
5
7
9
Purchased goods worth Rs
...
500 from Kamal on credit
...
1,000 to Balram and Rs
...
Cash of Rs
...
800 from Krishnasmy
...
800 to Pradeep and Rs
...
Withdrawn from bank Rs
...
300 for personal use
...
F
...
Dr
...
Cr
...
800
300
500
Dr
...
1,000
700
1,700
Dr
...
Dr
...
Dr
...
clicktoconvert
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
Illustration - 3
Journalise the following transactions, post the same in relevant ledger account
and balance the same
...
20,000
...
5,000
...
10,000 from Modi & Co
...
5,000 form Anwar
...
4,000 sold to Anbu
June 8 Sold goods worth Rs
...
June 10 Goods returned by Anbu Rs
...
June 15 Paid rent Rs
...
June 18 Withdrawn from bank for office use Rs
...
June 20 Paid Salaries Rs
...
June 25 Withdrawn for personal use Rs
...
June 26 Goods returned to Anwar Rs
...
June 27 Paid for office furniture Rs
...
June 28 Received Rs
...
50
...
4,800 and discount allowed
by him Rs
...
Date
1998
June 1
June 2
Particular
Cash A/c
To Karthik’s Capital A/c
(Capital brought into the business by Karthik)
Bank A/c
To Cash A/c
(Cash Paid in to bank)
L
...
Dr
Dr
...
20,000
Cr
...
20,000
Dr
5,000
5,000
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30
June 3
June 4
June 6
June 8
June 10
June 15
June 18
June 20
June 25
June 26
June 27
June 28
June 29
Plant A/c
To Modi & Co’s
...
)
Dr
Purchase A/c
To Answar’s A/c
(Goods purchased from Anwar)
Anbu’s A/c
To Sales A/c
(Goods sold to Anbu)
Cash A/c
To Sales A/c
(Goods sold for cash)
Sales Returns A/c
To Anbu’s A/c
(Goods returned by Anbu)
Rent A/c
To Cash A/c
(Rent paid)
Cash A/c
To Bank A/c
(Withdrawn from bank for office use)
Salaries A/c
To Cash A/c
(Salaries paid)
Drawing A/c
To Cash A/c
(Withdrawn for personal use)
Anwar’s A/c
To Purchases Returns A/c
(Goods returned to Anwar)
Furniture A/c
To Bank A/c
(Payment by cheque for office furniture)
Cash A/c
Discount A/c
To Anbu’s A/c
(Cash received from Anbu and discount allowed Rs
...
Date
1998
Particulars
J
...
Rs
...
F
...
Rs
...
clicktoconvert
...
2,500
June
June
15
20
By Rent A/c
By Salaries A/c
250
1,800
28
To Anbu’s A/c
3,900
June
June
June
25
29
30
By Drawings A/c
By Anwar’s A/c
By Balance c/d
To Balance b/d
28,400
16,300
1
250
4,800
16,300
28,400
Bank
Dr
...
F
...
June
2
To Cash A/c
5,000
July
1
To Balance b/d
Date
1998
June
June
June
Particulars
18
27
30
J
...
By Cash A/c
By Furniture A/c
By Balance c/d
5,000
1,000
Cr
...
2,500
1,500
1,000
5,000
Karthik’s Capital A/c
Dr
...
F
...
20,000
20,000
Date
1998
June
1
July
June
Particulars
Particulars
1
J
...
By Cash A/c
Cr
...
20,000
20,000
20,000
By Balance b/d
Plant A/c
Dr
...
F
...
A/c
Rs
...
F
...
Rs
...
A/c
Dr
...
F
...
10,000
10,000
Date
1998
June
3
July
June
Particulars
Particulars
1
J
...
By Plant A/c
Cr
...
10,000
10,000
10,000
By Balance b/d
Purchase A/c
Dr
...
F
...
Date
1998
Particulars
J
...
Cr
...
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32
June
July
4
1
To Anwar’s
A/c
5,000
June
30
By Balance C/d
5,000
5,000
5,000
To Balance b/d
5,000
Anwar’s A/c
Dr
...
F
...
100
Date
1998
June
Particulars
4
J
...
By Purchases A/c
Cr
...
5,000
4,800
100
5,000
5,000
Sales A/c
Dr
...
F
...
6,000
Date
1998
June
June
6
8
By Anbu’s A/c
By Cash A/c
July
June
Particulars
Particulars
1
J
...
To Balance b/d
Cr
...
4,000
2,000
6,000
6,000
6,000
Anbu’s A/c
Dr
...
F
...
4,000
Date
1998
June
10
June
June
June
Particulars
Particulars
28
28
J
...
By Sales Returns
A/c
By Cash A/c
By Discount A/c
Cr
...
50
3,900
50
4,000
4,000
Purchases Returns A/c
Dr
...
F
...
100
100
Date
1998
June
26
By Anwar’s A/c
July
June
Particulars
Particulars
1
J
...
By Balance b/d
Cr
...
100
100
100
Sales Returns A/c
Dr
...
F
...
50
50
50
Date
1998
June
Particulars
30
J
...
By Balance c/d
Cr
...
50
50
Furniture A/c
Dr
...
F
...
Date
1998
Particulars
J
...
Cr
...
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33
June
27
To Bank A/c
July
1
1,500
1,500
1,500
To Balance b/d
June
30
By Balance c/d
1,500
1,500
Discount A/c
Dr
...
F
...
50
50
100
Date
1998
June
Particulars
29
By Anwar’s A/c
July
1
J
...
By Balance b/d
Cr
...
100
10,000
100
50
Drawings A/c
Dr
...
F
...
250
250
250
Date
1998
June
Particulars
30
J
...
By Balance c/d
Cr
...
250
250
Rent A/c
Dr
...
F
...
250
250
250
Date
1998
June
Particulars
30
J
...
By Balance c/d
Cr
...
250
250
Salaries A/c
Dr
...
F
...
1,800
1,800
1,800
Date
1998
June
Particulars
30
By Balance c/d
J
...
Cr
...
1,800
1,800
1,800
3
...
LET US SUM UP
Business transactions are first entered in the records in the form of journal
...
Then in order to summaries the accounts,
posting should be done through ledger
...
7 Lesson-End Activities
1
...
What is ledger?
3
...
What are the advantages of journal?
5
...
clicktoconvert
...
1
...
3
...
5
...
7
...
Mohan started business with Rs
...
20,000
Paid into bank Rs
...
1000
Sold goods to R Rs
...
20
Received dividend on investment Rs
...
250
3
...
Transactions are recorded daily in the journal, whereas posting in the ledger is
made periodically
...
Recording of transactions in the journal is called journalising and recording of
transactions in the ledger is called posting
...
3
...
Journalize the following transactions in the books of Mr
...
1
5
8
10
15
16
18
19
20
22
23
25
26
27
28
Started business with cash Rs
...
10,000
...
1,000
Paid household expenses Rs
...
Sold personal car for Rs
...
Withdrew goods for personal use Rs
...
Sold goods to Navin on credit Rs
...
Sold old typewriter Rs
...
Purchase goods on credit from Ramesh Rs
...
6,000
...
2,000
...
5,000
...
12,000
Received cash from Anand on account Rs
...
1,000
...
1,000
...
clicktoconvert
...
500
...
1,000
...
12,000
...
Journalise the following transactions in the books of Sabitha and post them in
the Ledger:
2000
Apr
...
15,000
3 Sold goods for cash
Rs
...
12,000
6 Sold goods on credit to Ravindar
Rs
...
12,000
10 Paid to Perara
Rs
...
4,500
3
...
Mar
...
4,650 and allowed him discount
150
20 Cash sales
7,200
28 Paid to Kathar in full settlement
1,300
30 Paid rent
300
Paid salary
1,600
st
Accounts are closed on 31 March 2001
...
Journalise the following transactions and Post them in relevant ledger accounts:
1991
Rs
...
1
...
2
...
3
...
4
...
5
...
10
...
12
...
15
...
16
...
17
...
19
...
21
...
22
...
25
...
clicktoconvert
...
Jan
...
Jan
...
29
...
31
...
10 References
1) Grewal, T
...
, Double Entry Book Keeping
...
260
100
60
150
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37
LESSON 4 SUBSIDIARY BOOKS
Contents:
4
...
1 Introduction
4
...
2
...
2
...
2
...
2
...
2
...
2
...
2
...
2
...
3 Basic Document for subsidiary Books
4
...
1 Inward Invoice
4
...
2 Outward Invoice
4
...
3 Debit Note
4
...
4 Credit Note
4
...
5 Cash Receipts and Vouchers
4
...
4
...
4
...
4
...
4
...
4
...
4
...
4
...
5 Imprest system
4
...
6
...
6
...
6
...
7 Illustrations
4
...
9 Lesson-End Activities
4
...
11 Points for Discussion
4
...
0 AIMS AND OBJECTIVES
i
...
To know the Meaning of subsidiary books,
To understand the kinds of subsidiary books
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38
iii
...
4
...
Each one of the subsidiary books is a special journal and a book
of original or prime entry
...
Recording the transactions in a special journal and then in the ledger
accounts is the practical system of accounting which is also referred to as English
System
...
4
...
They are:
4
...
1 Purchases Book
4
...
3 Purchases Returns Books
4
...
5 Bills Receivable Books
4
...
7 Journal Proper
books which are commonly used in any
4
...
2
4
...
4
4
...
6
4
...
8
Sales Book
Sales Returns Books
Bills Payable Books
Cash Book
4
...
1 Purchases Book
This book is used to record all credit purchases made by the business concern
from its suppliers
...
It contains five columns, viz
...
Whenever any credit purchase is made, the date
on which the transaction has taken place is entered in the ‘Date Column’, the name of
the party from whom the purchase has been made the particulars column, the inward
invoice number with which the purchase has been made in the ‘inward Invoice
Number Column’ and the money value of the purchase in the ‘Amount Column’
...
F
...
Posting: The total of purchases book for a specified period is debited to the
purchases account in the Ledger
...
Purchases Book
Date
Particulars
L
...
Inward
Invoice
Number
Amount
Rs
...
2
...
This book is also called as ‘Sales Book’, ‘sales Journal’ or ‘Sold Book’
...
, Date, Particulars, L
...
, Outward Invoice Number and
Amount
...
clicktoconvert
...
Posting: The total of the Sales Book for a specified period is credited to the
Sales Account in the Ledger
...
The specimen ruling of a Sales Book is as follows:
Sales Book
Date
Particulars
L
...
Outward
Invoice
Number
Amount
Rs
...
2
...
This book is also known as ‘Purchases Returns journal’ or ‘Returns
Outward Book’, the specimen ruling of a Purchases Returns Book is given below:
Purchases Returns Book
Date
Name of supplier
L
...
Debit
Note
Amount
Rs
...
A debit note
represents a note sent to the supplier for the value of goods retuned by the business
...
4
...
4 Sales Returns Books
This book is used to record all transactions relating to goods returned by
customers
...
F
...
The columns in this book are similar to those of Sales Book except the Credit
Note Column in which the credit note number is recorded
...
While posting,
all the personal accounts are credited in the Ledger and the total of sales returns book
is debited to Sales Returns Account
4
...
5 Bills Receivable Book:
This book is used to record all the bills received by the business from its
customers
...
clicktoconvert
...
The specimen
ruing of a Bills Receivable Book is given below:
Bills Receivable Book
Sl
...
Receipt
L
...
Drawer Acceptor
Term
Due
Date
Rs
...
4
...
6 Bills Payable Book:
This book is used to record all the bills accepted by the business drawn by its
creditors
...
The specimen ruling of Bills payable Book is given below:
Bills Payable Book
Sl
...
Date of
Acceptance
Drawer
Payee
L
...
Where
Payable
Date of
bill
Term
Due
Date
Rs
...
4
...
7
...
While recording, the entries are made in the
journal covering both the aspects of the transaction
...
1
...
2
...
Transfer entries from one account to another account
...
Rectification entries
...
Bills of Exchange Entries
6
...
4
...
8 Cash Book
Cash Book is a sub-division of Journal recording transactions pertaining to
cash receipts and payments
...
The
Cash Book is maintained in the form of a ledger with the required explanation called
as narration and hence, it plays a dual role of a journal as well as ledger
...
All cash transactions are recorded chronologically in the Cash Book
...
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41
Kinds of Cash Book: From the above it can be observed that the Cash Book
serves as a subsidiary books as well as ledger
...
They are:
a) Single Column Cash Book
b) Two Column Cash Book or Cash Book with cash and discount columns
...
d) ‘Bank’ Cash Book or Cash Book with bank and discount columns
...
a) Single or Simple Column Cash Book :This is the simplest form of Cash
Book and is used when payments and receipts are mostly in the form of cash and
where usually no cash discount is allowed or received
...
The ruling
of Single Column Cash Book is as follows:
Single Column Cash Book
Dr
...
No
...
F
...
Date
Particulars V
...
L
...
Cr
...
From the above it can be observed that the Single Column Cash Book is just
like a ledger account
...
e
...
No
...
The L
...
(Ledger Folio) column is for entering the reference ledger folio number when posting
to the ledger is made
...
e
...
No
...
The voucher represents the supporting document for
all cash payments effected
...
For posting,
from the debit side of the Cash Book, the concerned accounts are credited and from
the credit side, the concerned accounts are debited
...
Usually, discount is allowed when payments are
promptly made by the customers and discount is enjoyed when payments are promptly
made by the business
...
clicktoconvert
...
,
‘Discount Column’
...
The
discount columns as such cannot be balanced since they are purely memorandum
columns and will not serve the purpose of a ledger account as cash columns do
...
, Discount
Allowed Account and Discount Received Account can be opened
...
Two Column Cash Book (with Cash and Discount Columns)
Dr
...
No
...
F
...
allowed
Cr
...
No
...
F
...
received
Posting: The following points should be kept in mind while posting from the
Cash Book is effected
...
The opening and closing balances should not be posted
...
From the debit side of the Cash Book, all the concerned accounts are given
credit
...
From the credit side of the Cash Book, all the concerned accounts are given
debit
...
While posting cash received from a debtor or cash paid to a creditor, due
care should be taken to credit the personal account with the amount of both
cash and discount allowed or debit the personal account with the amount of
both cash and discount received
...
Separate accounts should be opened for discount allowed and discount
received
...
The
total of the discount received column represent as gain made by the business
and it should be credited to the discount account by writing ‘By Sundries’ in
the particulars column
...
Thus, when a business is maintaining a bank account, the transactions can be made
through cheques
...
Thus, the three
column Cash Book is the resultant effect where in addition to cash and discount
columns, bank column is also included
...
Date
Cr
...
No
...
F
...
Cash
Rs
...
Date
Particulars
V
...
L
...
Discount
received
Rs
...
Bank
Rs
...
clicktoconvert
...
Amounts paid into
the bank or deposited are recorded on the debit side in the bank column and all
payments made by cheques are recorded on the credit side in the bank column
...
e
...
Hence, the Cash Book
with bank and discount columns alone is maintained
...
Date
Particulars
R
...
L
...
Discount
allowed
Bank
Rs
...
No
...
F
...
Bank
Rs
...
The petty cash book is used to record items like carriage,
cartage, entertainment expenses, office expenses, postage and telegrams, stationery,
etc
...
The petty cash
book is used by many business concerns to save the much valuable time of the senior
official, who usually writes up the main cash book, to prevent over burdening of the
main cash book with so many petty items and to find out readily and easily
information about the more important transactions
...
When the petty cashier finds shortage of money, he has to submit the petty cash book,
after making all the entries, to the chief cashier for necessary verifications
...
Columnar Petty Cash Book or analytical Petty Cash Book
In this cash book various items of petty cash payments are analysed and
separate analytical columns are provided for recording each and every item
...
The analytical column is provided for each usual head of expense like
postage & telegrams, printing & stationery, carriage & cartage, traveling expenses,
entertainment expenses, office expenses, sundry expenses, etc
...
The
balancing of petty cash book is done in the total payments column
...
clicktoconvert
...
4
...
3
...
It is the basis for entries in purchases book
...
3
...
, it is the basis for writing sales
book
...
3
...
The debit notes are
issued by a trader relating to purchase returns in order to put up his claim for
abatement of his dues to the other party
...
4
...
4 Credit Note:
It is nothing but a statement sent by one person to another person showing the
amount credited to the account of the latter along with a brief explanation
...
4
...
5Cash Receipts and Vouchers:
These are the vouchers and receipts for cash received and paid
...
They are also useful for
auditing purpose
...
But since cash and bank accounts are maintained in the cash book, the debit and credit
may be found in the two different accounts in the Cash Book
...
For instance, when cash is deposited
into the bank, bank account should be debited and cash account should be credited
...
‘To Cash’ is written in the particulars
column and the amount is entered in the bank column
...
When cash is withdrawn from the bank, on the debit side of the Cash Book,
‘To Bank’ is written in the particulars column and the amount is written in the cash
column
...
Therefore, those entries which appear on both the sides of the Cash Book are called
Contra Entries and they are identified and denoted in the Cash Book itself by writing
the letter ‘C’ in the Ledger Folio Columns on either side
...
clicktoconvert
...
In a three columnar Cash Book, cash and bank columns are balanced as any
other ledger account and discount columns are imply totaled
...
, discount account is opened in the
ledger
...
The credit balance in the bank column represents
nothing but bank overdraft
...
4 ADVANTAGE OF SUBSIDIARY BOOKS
The advantages of maintaining special journals can be summarized as under:
4
...
1 Division of work
The division of journal resulting in division of work ensures more clerks
working independently in recording original entries in day books
...
4
...
4
...
3 Time Saving
Due to division of work, it is possible to perform various accounting processes
simultaneously
...
4
...
4 Minimum frauds and errors
Systematic recording of business transactions in special journals reduces the
possibility of frauds and errors
...
4
...
5 Better information
A lot of useful data like credit sales, credit purchases, returns etc
...
4
...
6 Management decisions facilitated
Since transactions of a similar nature are recorded at one place, the
management can have the benefit of the trend and distributional pattern in planning
and making decisions
...
4
...
Thus, the
accounting work will be done efficiently
4
...
, a week or a month
...
The chief cashier, in turn, will verify all the entries with the supporting
vouchers and gives the actual amount spent on various petty items
...
This system of
maintaining the original amount of cash as such is known as ‘Imprest System of
maintaining Petty Cash Book’
...
clicktoconvert
...
6
...
6
...
He will
calculate the total price according to the list of catalogue
...
This
deduction is known as Trade discount
...
6
...
e
...
4
...
3 Difference Between Trade Discount and Cash Discount
Trade discount
Cash discount
It
is
given
by
the It may be allowed by seller to any
manufacturer
or
the debtor
...
It is allowed on a certain It is allowed on payment being
quantity being purchased
...
It is a reduction in the It is a reduction in the amount due
catalogue price of an article
...
It is not usually accounted for
in the books since the net
amount (i
...
after deducting
discount) is shown
...
It is allowed only when there It is allowed only when there is
is a sale either cash or credit
...
It is usually given at the same It varies from customer to customer
rate which is applicable to all depending on the time and period
customers
...
It is allowed or not allowed
according to sales policy
followed by a business
concern
...
The
dues should be paid within the
stipulated time
...
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47
4
...
2001
Aug
...
Aug
...
1,500
1,000
500
Bought goods from Sivika
Bought goods from Nithi
Bought goods from Abi
Solution:
Purchases Books
Date
2001
Aug
...
4
Aug
...
F
...
Sivika
Nithi
Abi
1,500
1,000
500
3,000
Ledger
Purchases A/c
Dr
...
12
Cr
...
Date
Particulars
Rs
...
Date
Cr
...
Date
2001
Aug
...
1,500
Nithi’s A/c
Dr
...
Particulars
Rs
...
4
Particulars
By Purchase A/c
Rs
...
clicktoconvert
...
Cr
...
2001
Date
Particulars
By Purchase A/c
2001
Aug
...
500
Illustration 2
Enter the following transactions in sales Book and post the same in the
relevant ledger accounts
...
Aug
...
18
Sold goods to Bala
1,500
Aug
...
15
Aug
...
22
L
...
Inward
Invoice
Number
Prabu
Bala
Mano
Amount
Rs
...
Date
Cr
...
2002
Date
2002
Aug
...
4,500
Prabu’s A/c
Dr
...
15
Particulars
To Sales A/c
Rs
...
Rs
...
clicktoconvert
...
Date
2002
Aug
...
To Sales A/c
Particulars
Cr
...
Particulars
Date
2002
Cr
...
1,500
Mano’s A/c
Dr
...
22
Particulars
Rs
...
2003
Aug
...
Aug
...
Aug
...
Aug
...
Aug
...
2,500
1,500
1,500
1,200
150
100
800
900
150
Bought goods from Ganga
Sold goods to Kaveri
Yamuna sold goods to us
Krishna purchased goods from us
Received goods returned by Kaveri
Returned goods to Ganga
Sold goods to Ponni
Purchased goods from Sindhu
Returned goods to Yamuna
Solution:
Purchases Book
Date
2003
Aug
...
5
Aug
...
F
...
2,500
1,500
900
4,900
Sales Book
Date
2003
Aug
...
8
Aug
...
F
...
1,500
1,200
800
3,500
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Purchases Returns Books
Date
2003
Aug
...
27
Name of Supplier
L
...
Debit
Note
Ganga
Yamuna
Rs
...
11
Name of Customer
L
...
Credit
Note
Kaveri
Rs
...
Date
2003
Aug
...
Particulars
Particulars
Date
2003
Cr
...
Cr
...
4,900
Sales A/c
Dr
...
Date
Aug
...
Date
2003
Particulars
Rs
...
31
Particulars
By Sundries
Cr
...
250
Sales Returns A/c
Dr
...
31
Particulars
To Sundries
Rs
...
Rs
...
Date
2003
Aug
...
1
Particulars
Rs
...
11
To Balance b/d
1,500
1,350
Particulars
By Sales Returns A/c
By Balance c/d
Cr
...
150
1350
1,500
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Krishna’s A/c
Dr
...
8
To Sales A/c
Sept
...
Date
2003
1,200 Aug
...
Rs
...
Date
2003
Aug
...
1
To Balance b/d
Particulars
Rs
...
31
800
800
Particulars
By Balance c/d
Cr
...
800
800
Ganaga’s A/c
Dr
...
13
Aug
...
Date
2003
100 Aug
...
1
Particulars
Cr
...
By Purchases A/c
2,500
By Balance b/d
2,500
2,400
Yamuna’s A/c
Dr
...
27
Aug
...
Date
2003
1,500 Aug
...
1
Particulars
Cr
...
By Purchases A/c
1,500
To Balance b/d
1,500
1,350
Sindhu’s A/c
Dr
...
31
Particulars
To Balance c/d
Rs
...
22
900
1,350 Sept
...
Rs
...
1998
Aug
...
1,500 Payable 3
month after date
...
9 Drew a 2 months bills on Velan for Rs
...
Aug
...
1,100
payable at Canara Bank, Salem
...
clicktoconvert
...
No
...
2
...
Date of
Receipt
Aug
...
9,1998
Aug
...
F
...
Remarks
Self
Self
Self
3 mths
...
3 mths
...
4,’98
Oct
...
22,’98
1,500
1,200
1,100
Discounted
-
Kandan
Velan
Kumaran
3,800
Ledger
Bills Receivable A/c
Dr
...
31
To Sundries
3,800 Aug
...
1
To Balance b/d
3,800
3,800
Particulars
Rs
...
Rs
...
Date
1998
Particulars
Rs
...
1
Cr
Rs
...
Date
1998
Particulars
Rs
...
9
Cr
Rs
...
Date
1998
Particulars
Rs
...
19
Cr
Rs
...
1998
Sept
...
bill for Rs
...
Sept
...
drew on us a 3 months bill for Rs
...
Sept
...
1,200 accepted by us, the bill being due
after 3 months
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Bill Payable Book
Sl
...
1
...
1, 1998
2
...
21, 1998
3
...
28, 1998
Drawer
Payee
Sundar
& Co
...
Swami
L
...
Sundar
& Co
...
Remarks
Sept
...
Nov
...
21, 1998
3 mth
...
24, 1998
2,050
Returned
Sept
...
Dec
...
Particulars
30
To Balance c/d
Rs
...
Particulars
30
Oct
...
Particulars
Rs
...
Rs
...
Rs
...
Rs
...
Rs
...
21 To Bills Payable A/c
Dr
Date
Particulars
1998
Sept
...
Date
1998
2,050
Swami’s A/c
Rs
...
1998
Rs
...
clicktoconvert
...
on credit
Goods sold to Sathyan on credit
Stationery purchased
Lent to Vignesh
Received from Dinesh
Withdrawn from business for private use
Cash Sales
Paid fro repairs
Paid Rent
Vignesh repaid his loan
600
500
400
120
150
140
150
60
150
120
Solution
Single Column Cash Book
Dr
...
Date
1998
July
1
July
4
July
6
July
10
July
Particulars
To Balance b/d
To Sales A/c
(Cash sales
effected)
To Shankar’s A/c
(Received from
Shankar)
R
...
L
...
Rs
...
No
...
F
...
By Purchases
A/c(Cash sales
effected)
700
70
600
July
1,100
July
3
By Carriage
Inwards A/c
(Carriage
Inwards paid)
To Machinery
A/c (Sale of old
machinery)
800
July
5
By Salaries A/c
(Salaries padi)
1,100
12
To Sales A/c
(Cash sales
effected)
700
July
18
By Stationery
A/c (Stationery
bought)
400
July
20
To Dinesh’s A/c
(Received from
Dinesh)
150
July
19
By Vignesh’s
A/c (Lent to
Vignesh)
120
July
23
To Sales A/C
(Cash sales
effected)
150
July
22
By Drawings
A/c (Withdrawn
from business
for private use)
140
July
31
To Vignesh;s A/c
(Vignesh repaid
his loan)
120
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55
July
24
By Repairs A/c
(Paid for
repairs)
60
July
25
150
July
31
By Rent A/c
(Rent Paid)
By Balance c/d
2,880
5,602
Aug
...
Ledger
Sales A/c
Dr
...
Date
1998
July
Particulars
31
To Balance c/d
Rs
...
1,450
Cr
...
Date
700
1998
July
Particulars
31
By Balance c/d
700
Aug
...
1
Purchases A/c
1998
July
Rs
...
700
700
700
Carriage A/c
Dr
...
Date
1998
July
Particulars
3
To Cash A/c
Rs
...
1
To Balance b/d
Rs
...
Cr
...
Date
1,100
1998
July
1,100
Aug
...
1,100
1,100
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56
Stationery A/c
Dr
...
Date
1998
July
Particulars
18
To Cash A/c
Rs
...
1
To Balance b/d
Rs
...
Cr
...
Date
60
1998
July
Particulars
31
By Balance c/d
60
Aug
...
60
60
60
Rent A/c
Dr
...
Date
1998
July
Particulars
25
To Cash A/c
Rs
...
1
To Balance b/d
Rs
...
Cr
...
Date
140
1998
July
Particulars
31
By Balance c/d
140
Aug
...
140
140
140
Machinery A/c
Dr
...
Date
1998
July
Particulars
31
To balance c/d
Rs
...
800
800
Aug
...
clicktoconvert
...
Cr
...
Date
To Balance c/d
1998
July
1,100
Particulars
6
By Cash A/c
1,100
Rs
...
1
By Balance b/d
1,100
Vignesh’s A/c
Dr
...
Date
1998
July
Particulars
19
To Cash A/c
Rs
...
120
120
Dinesh’s A/c
Dr
...
Particulars
31
Rs
...
150
150
Aug
...
(b)
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
Illustration 7
Enter the following transactions in a two column Cash Book and prepare
discount account in the ledger
1998
Rs
...
clicktoconvert
...
Cr
...
No
...
F
...
1998
Date
Particulars
V
...
L
...
Discount
allowed
Rs
...
1
To Balance
b/d
19,950
8,250
4,100
800
250
19,950
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Ledger
Discount A/c
Dr
...
Date
1998
July
July
Particulars
30
31
To Sundries
To Balance c/d
Rs
...
250
250
Aug
...
1998
July
1
Cash on hand
Cash at bank
July
2
Received cash from Arul
Allowed him discount
July
4
Paid Azar by cheque
Discount received
July
6
Purchased Goods and paid by cheque
July
8
Deposited with bank
July
10 Sold goods to Anil on credit
July
12 Sold goods & received payment by cheque
July
15 Received a cheque from Anil in full settlement
of his account
July
17 Withdrawn from bank for office use
July
19 Purchased goods from K& Co
...
by cheque
Discount received
July
20 Paid telephone charges
July
23 Paid
...
Antony’s cheque has been
dishonored
31 Deposited with bank
July
31 Bank charges as shown in the pass book
100
prepare three
Rs
...
clicktoconvert
...
Date
Cr
...
No
...
F
...
Arul’s A/c
July
8
To Cash A/c
July
12
15
To
...
Antony’s
A/c
July
31
To Cash A/c
Date
Rs
...
Rs
...
F
...
Ahmad’s A/c
480
July
27
600
July
28
By
...
By Telephone
Charges A/c
1,900
C
C
Rs
...
July
Discount
received
Rs
...
No
...
1998
Rs
...
400)
July
12 Paid ‘H’
375
Discount allowed by him
25
July
13 Received Commission from ‘G ‘
231
July
15 Paid Traveling Expenses to ‘J’
45
July
18 Received for Cash Sales
245
July
19 Paid to ‘S’ for office furniture
185
July
20 Paid Electricity Charges
35
July
21 Paid Office Rent
100
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July
July
July
July
July
July
24
25
29
30
31
Drew self cheque for personal use
Received from ‘N’
Discount allowed
Drew cheque for petty cash
Drew cheque for salaries
Paid to ‘M’ (in full settlement of Rs
...
Cr
...
No
...
F
...
Bank
Rs
...
No
...
F
...
Bank
Rs
...
20
July
7,399
July
July
July
47
245
1,600
31
35
450
3,759
35
To Balance
b/d
Illustration 10
Enter the following transactions in a petty cash book maintained on Imprest
System with analytical columns:
1998
Rs
...
clicktoconvert
...
Cr
...
Particulars
250
Total
Payme
nts
Carriage &
Cartage
Stationery
Travelling
Expenses
Office
Expenses
Rs
...
No
...
Rs
...
Rs
...
A/c
35
July
19
By Telegram
5
July
20
By Taxi Hire
8
July
Postage
&
Tele-
To Cash A/c
16
Enter
tainm
ent
Exps
...
10
25
35
5
8
21
By Envelopes
6
July
22
By Typewriter
Repairs
21
July
23
By Bottle of
ink
10
10
July
25
By clips
10
10
July
27
By Railways
Fare
30
July
31
By Coolie hire
5
5
165
30
July
31
By Balance
c/d
250
6
21
30
26
38
21
35
85
250
85
Aug
...
1
To Cahs A/c
4
...
Credit purchases, credit
sales and cash details are frequently needed items which can be known at any time
with the help of Subsidiary books
...
clicktoconvert
...
11 Lesson-End Activities:
1
What do you understand by Subsidiary books?
2
What are the advantages of Subsidiary books?
3
Define purchases book and sales book
...
10 Distinguish between trade discount and cash discount
11 Write short notes on
a) Inward invoice b) Outward invoice c) Debit and Credit note
d) Contra Entries e) Imprest system
...
12 Check your Progress
Your answer may include any five the following:
1
...
Cash discount may be allowed by seller to any debtor
...
Trade discount is allowed on a certain quantity being purchased
...
3
...
Cash discount
is a reduction in the amount due by a debtor
...
Trade discount is not usually accounted for in the books since the net amount
(i
...
after deducting discount) is shown
...
5
...
Cash
discount is allowed only when there is cash receipt or cash payment including
cheques
...
13 Points for Discussion
1
...
2002
March
March
March
March
March
March
1
2
4
5
6
8
Purchased goods from Senthil
Sold goods to Selvi
Return goods to Senthil
Sold goods to Sivika
Goods return by Selvi
Sold goods from Aruna
Rs
...
clicktoconvert
...
From the following transaction you are require to prepare Three
Cash book
...
1
Cash balance
Bank balance
Jan
...
8
Cash purchases
Jan
...
20 Paid into bank
Jan
...
30 Salary paid
4
...
Gupta R
...
– Advanced Accountancy
2
...
B
...
2500
2800
500
Column
Rs
...
clicktoconvert
...
0 Aims and objectives
5
...
2 Meaning and Definition of Trial balance
5
...
1 Meaning
5
...
2 Definition
5
...
4 Features of Trial balance
5
...
6 Methods of preparing trial balance
5
...
1 Total method
5
...
2 Balance method
5
...
13 Let us Sum Up
5
...
15 Check Your Progress
5
...
17 References
5
...
ii) To know the objectives, features and limitations of Trail balance
...
5
...
It is a must that the correctness of posting to the ledger accounts
and their balances be verified
...
5
...
2
...
As the name indicates it is prepared to check the ledger balances
...
The
agreement of a trail balance ensure arithmetical accuracy only, A concern can prepare
trail balance at any time, but its preparation as on the closing date of an accounting
year is compulsory
...
clicktoconvert
...
2
...
S
...
5
...
The balance of any
account can be found from a glance from the trail balance without going
through the pages of the ledger
...
If the trail balance agrees, it proves:
(a) That both the aspects of each transaction are recorded and
(b) That the books are arithmetically accurate
...
Important conclusions can be derived by comparing the balances of two or
more than two years with the help of trail balances of those years
...
4 FEATURES OF TRAIL BALANCES
The following are the important features of a trail balances:
(i)
A trail balance is prepared as on a specified date
...
(iii) It may be prepared with the balances or totals of Ledger accounts
...
(v) It the debit and credit amounts are equal, we assume that ledger accounts are
arithmetically accurate
...
(vii) Tallying of trail balance is not a conclusive profit of accuracy of accounts
...
5 LIMITATIONS OF TRAIL BALANCE
(i)
(ii)
(iii)
The following are the important limitations of trail balances:
The trail balance can be prepared only in those concerns where double entry
system of book- keeping is adopted
...
A trail balance is not a conclusive proof of the arithmetical accuracy of the
books of account
...
On the other hand, some errors are not
disclosed by the trail balance
...
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67
5
...
It
can be prepared in the following manner:
5
...
1
...
5
...
2
...
Some accounts may have debit balance and the other may have credit
balance
...
This method is widely
used
...
Debit Total
Credit Total
S
...
Name of Account
L
...
Rs
...
No
...
Debit
Name of Account
L
...
Credit
balance
Rs
...
Accounts of incomes, gains, liabilities and capital are credit balances
...
This is given below
...
clicktoconvert
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
5
...
Rs
...
Anil started business with
8,000
2
...
Purchased goods
6,000
4
...
Purchased from Raja
4,000
6
...
Paid to Raja
2,500
8
...
Paid rent
200
10
...
F
Dr
...
Cash A/c
Dr
...
1,000
1,000
To Cash A/c
[Purchased furniture]
Purchases A/c
Dr
...
7,000
7,000
To Sales A/c
[Sold goods for cash]
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69
Purchases A/c
Dr
...
To Sales A/c
[Sold goods on credit]
Raja A/c
Dr
...
To Somu A/c
[Received from Somu]
Rent A/c
Dr
...
To Commission received A/c
[Received commission]
Cash Account
Rs
...
To Balance c/d
8,000 By Cash
8,000
By Balance b/d
Furniture Account
Rs
...
To Cash
6,000 By Balance c/d
To Raja
4,000
10,000
To Balance b/d
10,000
4,000
5,000
2,500
3,000
200
100
Rs
...
8,000
8,000
8,000
Rs
...
10,000
10,000
4,000
5,000
2,500
3,000
200
100
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70
To Balance c/d
To Cash
To Balance c/d
To Sales
By Balance b/d
To Cash
To Balance b/d
Sales Account
Rs
...
2,500 By Purchase
1,500
4,000
By Balance b/d
Somu Account
Rs
...
200
By Balance c/d
200
200
Commission received Account
Rs
...
Balance Method
Trail balance as on…
...
Cash
8,400
Capital
Furniture
1,000
Purchases
10,000
Sales
Raja
Somu
2,000
Rent
200
Commission received
21,600
Rs
...
4,000
4,000
1,500
Rs
...
200
200
Rs
...
8,000
12,000
1,500
100
21600
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71
II
...
Dr
...
)
Cr
...
)
Cash
18,100
9,700
Capital
8,000
Furniture
1,000
Purchases
10,000
Sales
12,000
Raja
2,500
4,000
Somu
5,000
3,000
Rent
200
Commission received
100
36,800
36,800
Illustration 2
The following Trail balance has been prepared wrongly
...
Dr
...
Rs
...
Capital
22,000
Stock
10,000
Debtors
8,000
Creditors
12,000
Machinery
20,000
Cash in hand
2,000
Bank overdraft
14,000
Sales returns
8,000
Purchases returns
4,000
Misc
...
Dr
...
Capital
Stock
Debtors
Creditors
Machinery
Cr
...
22,000
10,000
8,000
12,000
20,000
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72
Cash in hand
Bank overdraft
Sales returns
Purchases returns
Misc
...
Rewrite the Trial Balance, correcting the mistakes committed
by him
...
Cr
...
Rs
...
clicktoconvert
...
Rs
...
Rs
...
5
...
In double entry system, we find two aspects (Debit and Credit) in each and
every business transaction
...
Ledger accounts balances will be
transferred and finally it should be totaled
...
If it is equal our accounting is correct
...
With the help of trial balance we can find the arithmetical accuracy of accounts
preparation
...
clicktoconvert
...
9 Lesson-End Activities
1
...
Explain the meaning and objectives of Trail Balance
3
...
What are the errors disclosed by Trail Balance?
5
...
6
...
5
...
A trail balance is prepared as on a specified date
...
It contains a list of all ledger account including cash account
...
It may be prepared with the balances or totals of Ledger accounts
...
Total of the debit and credit amount columns of the trail balance must tally
...
It the debit and credit amounts are equal, we assume that ledger accounts are
arithmetically accurate
...
11 Points for Discussion
1
...
Rs
...
House Property
45,000 Repairs
1,200
Furniture
5,000 Rent Received
4,800
Utensils
6,000 Medical Expenses
1,200
Ornaments
Cash
25,000 School Free
1,800
630 Conveyance
1,350
Bank Balance:
Fixed Deposits
Savings Bank
Shares & Govt
...
12,000 Interest paid
1,500 Municipal Taxes
24,000 Income-tax
Servants wages
1,200 Accumulated Fund
Food and Drink
3,750
Dress and Clothing’s
2,450
1,150
3,000
20,000
1,870
3,000
2,500
88,300
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75
2
...
You are required to
correct and redraft it
...
Cr
...
Mr
...
574
...
Cr
...
Rs
...
465
Sales Return
98
5,454
5,454
If you do not approve this statement, amend it
...
The under mentioned balances were extracted from the books of Mahesh as on
31st March 2005
...
Rs
...
4
...
clicktoconvert
...
12 References
1
...
B
...
Jain & Navamy – Advanced Accountancy
...
clicktoconvert
...
0 Aims and objectives
6
...
2 Meaning of Manufacturing Account
6
...
4 Various items shown in manufacturing account
6
...
1 Debit side items
6
...
2 Credit side items
6
...
6 Illustrations
6
...
8 Lesson-End Activities
6
...
10 Points for Discussion
6
...
0 AIMS AND OBJECTIVES
i) To know the purpose of preparing Manufacturing account
...
iii) To understand the method of preparing Manufacturing account
...
1 INTRODUCTION
‘Final Statements’ generally refer to two statement prepared by a business
concern at the end of every accounting year
...
In case of trading concerns these statements are prepared under the
headings ‘Trading and profit and loss account’ and ‘Balance sheet
...
’ In case of Limited companies they are
called ‘Profit and Loss Account’, ‘Profit and Loss appropriation account’ and ‘Balance
sheet’
...
2 MEANING OF MANUFACTURING ACCOUNT
Manufacturing concerns which convert raw material into finished product is
required to prepare manufacturing account and then prepare trading and profit and loss
account
...
6
...
clicktoconvert
...
6
...
4
...
e
...
(b) Direct wages and expenses
Direct wages and direct expenses are debited to manufacturing account
...
(c) Indirect factory expenses
Expenses like factory rent, salaries, lighting, power, heat and fuel, machinery
repairs, depreciation and other factory expenses are debited to manufacturing account
...
(d) Opening work in progress
Work-in-progress is the semi finished output
...
The assumption is that it is
completed into finished output during the current accounting period
...
It may be reduced
from material cost on debit side
...
6
...
2 Credit side
(a) Closing work-in-progress
It represents the semi-finished output at the end of the accounting period and
is credited to manufacturing account
...
However in the absence of specific details, the amount from sale of scrap can be
credited to manufacturing account
...
(c) Cost of Finished goods manufactured
This is the balancing figure in the manufacturing account
...
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79
Note: The closing work-in-progress and sale of scrap may also be reduced on debit
side and then credit side shows the cost of goods manufactured alone
...
6
...
SPECIMEN OF MANUFACTURING ACCOUNT IS PRESENTED BELOW
Manufacturing A/c for the year ended……
...
To work-in-progress (opening )
To Material used
xxx By Sale of scrap
xxx
Opening stock
Rs
...
fig)
Add: Purchases
xxx
xxx
Less: Closing stock
xxx
xxx
To Wages
xxx
To Factory expenses
xxx
To Purchase expenses
xxx
To Import duty
xxx
To Carriage inward
xxx
To Depreciation on machinery
xxx
To Repairs to Machinery
xxx
xxx
Check your progress 6
List out any three items debited in the manufacturing account
Notes: (a)
Write your answer in the space given below
...
89)
...
clicktoconvert
...
6 ILLUSTRATIONS
Illustration 1
From the following balances in the ledger of Mr
...
Opening work-in-progress
Opening stock of raw materials
Purchases of raw materials
Closing stock of raw materials
Carriage on purchases
Factory wages
Fuel and coal
Factory power
Depreciation on plant and machinery
Factory supervisor’s salary
Closing work-in-progress
Rs
...
Kannusamy for the year ended 31-3-2002
Particulars
To opening work- in- progress
To Raw materials used:
Opening stock
Add: Purchases
Less: Closing stock
To Carriage on purchase
To Factory wages
To Fuel and coal
To Factory power
To Depreciation on plant and
machinery
To Supervisor’s salary
Rs
...
1,00,000
55,000
10,00,000
10,55,000
40,000
Particulars Rs
...
fig)
Rs
...
clicktoconvert
...
Senthil prepares
manufacturing account for the year ended 31-3-2001
...
Opening stock:
Raw Materials
20,000
Work-in-progress
15,000
Finished goods
40,000
Purchase of raw materials
4,00,000
Factory expenses :
Cleaning
500
Power
500
Fuel & coal
1,000
Wages
2,000
Closing stock:
Raw materials
5,000
Work-in-progress
8,000
Finished stock
12,000
Sales
10,00,000
Solution :
Manufacturing account for the year ended 31-3-2001
Particulars
To opening work- inprogress
To Raw materials used:
Opening stock
Add: Purchases
Less: Closing stock
To Wages
To Factory cleaning
To Factory power
To Fuel & coal
Rs
...
15,000
20,000
4,00,000
4,20,000
5,000
4,15,000
2,000
500
500
1,000
4,34,000
Particulars Rs
...
By Closing work-in- 8,000
progress
By Cost of goods
Manufactured,
4,26,000
transferred to trading
A/c (Bal
...
7 LET US SUM UP
Manufacturing concerns converting raw materials into finished products
...
In order to know the cost of production, they prepare manufacturing account
...
clicktoconvert
...
8 LESSON – END ACTIVITIES
1
...
2
...
3
...
4
...
9 Check your progress
Your answer may include five of the following
1
...
Direct wages and expenses
3
...
Opening work in progress
5
...
10 Points for Discussion
1
...
Seetha on 31-12-1999
...
Rs
...
Following are the ledger balances of Mr
...
Prepare
manufacturing account for the year ending on that date
...
Stock of Materials on 1-4-1999
Purchase of raw materials
Stock of raw materials on 31-3-2000
Carriage inwards
Factory wages
20,000
3,00,000
10,000
1,500
20,000
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83
Fuel and coal
Factory cleaning
5,000
4,000
Factory lighting
Depreciation: Factory machinery
Factory building
Factory watchman’s salary
2,000
4,000
2,000
2,000
Stores consumed
Opening work-in-progress
Closing work-in-progress
200
5,000
2,000
6
...
Grewal T
...
– Double Entry Book Keeping
2
...
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84
LESSON 7 TRADING ACCOUNT
Contents:
7
...
1 Introduction
7
...
2
...
2
...
3 Closing entries relating to trading account
7
...
5 Illustrations
7
...
7 Lesson-End Activities
7
...
9 Points for Discussion
7
...
0 AIMS AND OBJECTIVES
(i) To understand the meaning of trading account
(ii) To know the items shown in trading account Debit side and Credit side
(iii) To study the Closing entries relating to trading account
...
1 INTRODUCTION
Trading account is prepared for an accounting period to find the trading
results or gross margin of the business i
...
, the amount of gross profit the concern has
made from buying and selling during the accounting period
...
For the purpose of computing cost of sales,
value of opening stock of finished goods, purchases, direct expenses on purchasing
and manufacturing are added up and closing stock of finished goods is reduced
...
7
...
It has to be prepared in conformity with
double entry principles of debit and credit
...
2
...
This is the closing stock as per the last balance sheet
...
Trading account starts with opening stock on
the debit side
...
clicktoconvert
...
Purchases comprise of cash purchases am credit
purchases
...
They include wages, carriage and freight on purchases, import duty, customs
duty, clearing and forwarding charges manufacturing expenses or factor
...
All direct expenses are
extracted from trial balance
...
2
...
Sales returns are reduced from
sales and net sales are shown on the credit side of trading account
...
ii) Closing stock: Closing stock is the value of goods remaining at the end of
the accounting period
...
The
opening stock is ascertained from trial balance but closing stock is not a part of ledger
...
If it is given in trial balance, it is
after adjustment of opening and closing stocks in purchases
...
If closing stock is
given outside trial balance, it is shown on credit side of trading account and also as
current asset in the balance sheet
7
...
(i) For opening stock, purchases and direct expenses
...
clicktoconvert
...
7
...
Rs
...
Xxx
xxx
-----
By closing stock
By Gross loss c/d *
(transferred to profit
and loss A/c)
Royalty on production
xxx
Power
xxx
Coal water, Gas
xxx
Import duty
xxx
Consumable stores
xxx
Factory expenses
xxx
To Gross profit c/d
xxx
(transferred to profit and
-----loss A/c)
* Balancing figure will be either gross profit or loss in Trading A/c
Rs
...
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87
Notes:
(a)
Write your answer in the space given below
...
98)
...
5 ILLUSTRATIONS
Illustration 1
Prepare trading account of Sivika for the year ending 31-3-2001
...
Opening stock
Purchases
Carriage inward
Wages
4,00,000
43,00,000
2,60,000
1,20,000
Credit sales
Cash sales
Sales returns
Purchase returns
72,00,000
18,00,000
15,80,000
50,000
Closing stock
5,00,000
Solution:
Trading account of Sivika for the year ending 31-3-2001
Particulars
To Opening Stock
To purchase
Less: Purchase returns
To wages
To carriage inward
To gross profit
Illustration-2
Rs
...
Particulars
4,00,000 By Sales;
Cash sales
Credit sales
42,50,000
1,20,000
2,60,000
28,90,000
79,20,000
Less: Sales returns
By Closing stock
Rs
...
18,00,000
72,00,000
90,00,000
15,80,000 74,20,000
5,00,000
79,20,000
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88
Prepare Trading Account of Lakshmi for the year ending 31-12-96 from the following
information:
Rs
...
To Opening Stock
To purchase
8,60,000
Less: Purchase returns
To Freight Inward
To Wages
To Import duty
To Gross Profit c/d
10,000
Rs
...
80,000 By Sales;
Less: Sales returns
8,50,000
52,000
24,000
30,000
1,88,000
Rs
...
Suresh for the year ended 31st
March 1996
...
20,000
3,000
10,800
50,000
2,40,000
1,000
32,000
40,000
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89
Office expenses
Depreciation on Plant & Machinery
30,000
3,00
Closing stock:
Raw materials
Work-in-progress
Finished goods
20,000
4,000
8,000
Prepare manufacturing and Trading Account for the year ended 31 March 1996
...
Suresh for the year ending 31
...
96
Particulars
Rs
...
3,000
To Cost of Materials consumed:
Opening
By Closing work- inprogress
By cost of goods
Manufactured
transferred to
Trading A/c
Rs
...
clicktoconvert
...
6 LET US SUM UP
At the end of the year, trading account is prepared to know the trading results
...
Cost of goods sold is
compared with sales in order to know gross profit / gross loss
...
7 LESSON – END ACTIVITIES
1
...
Distinguish between trading and manufacturing account?
7
...
Trading A/c
Dr
xxx
To Opening Stock A/c
To Purchases (Net) A/c
To Direct expenses A/c
xxx
xxx
xxx
[Being transfer of trading a/c debit
side items]
(ii) For transfer of sales (after reducing sales returns)
Sales (net) A/c
To Trading A/c
[Being transfer of sales to Trading A/c]
Dr
xxx
xxx
(iii) For transferring gross profit
Trading A/c
To Profit & Loss A/c
[Being transfer of gross profit to P&L A/c]
Dr
xxx
xxx
(iv) For Gross Loss
Profit & Loss A/c
To Trading A/c
[Being transfer of gross loss to P&L A/c]
Dr
xxx
xxx
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91
7
...
From the under mentioned balances obtained at the end of 31-March 1999,
prepare Trading account
...
Stock of goods on 1-4-98
12,50,000
Stock of goods on 31-3-99
23,75,000
Purchases – Cash
18,50,000
- Credit
Sales – Cash
-Credit
41,25,000
25,50,000
57,50,000
Returns to suppliers
25,000
Returns by customers
30,000
Duty and clearing charges
50,000
2
...
Stock as on 1-4-99
...
10 References
1
...
2
...
L
...
RS
...
clicktoconvert
...
0 Aims and objectives
8
...
2 Definition
8
...
3
...
3
...
4 Closing entries for profit and loss account
8
...
6 Principles of preparing profit of loss Account
8
...
7 Let us Sum Up
8
...
9 Check your Progress
8
...
11 References
8
...
ii) To learn how to prepare the profit and loss account
...
1 INTRODUCTIONS
Profit and loss account is prepared to ascertain the net profit of the business
concern for an accounting period
8
...
Carter “Profit and loss account is an account into which
all gains and losses are collected in order to ascertain the excess of gains over the
losses or vice versa
...
3 PREPARATION OF PROFIT AND LOSS ACCOUNT
Profit and loss account starts with gross profit brought down from trading
account on the credit side
...
All the indirect expenses
are debited and all the revenue incomes are credited to the profit and loss account and
then net profit or loss is calculated
...
On the other hand if the expenses or debit side is
more, the difference is net loss
...
3
...
Operating expenses and 2
...
clicktoconvert
...
They are incurred in running the organisation
...
(2) Non operating expenses: These expenses are not directly associate with day today
operations of the business concern
...
8
...
2 Credit side
Gross profit is the first item appearing on the credit side of profit and loss
account
...
The other incomes are classified as operating incomes and non operating incomes
...
Examples: discount received,
commission earned, interest received etc
...
Examples are profit on sale of fixed assets, refund of tax etc
...
4 CLOSING ENTRIES FOR PROFIT AND LOSS ACCOUNT
1
...
For transfer of incomes to profit and loss account
Incomes A/c
To Profit and Loss A/c
[Being transfer of Incomes to P&L A/c]
Dr
xxx
xxx
3
...
For transfer of Net Loss
Capital A/c
To P&L A/c
[Being net loss transferred to capital]
Dr
xxx
xxx
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94
Note: In case of partnership, the profit or loss is divided between partners in their
profit sharing ratio and credited or debited to the individual partners
...
8
...
Particulars
Rs
...
Fig)*
xxx
Audit fees
xxx
Directors fees
xxx
General expenses
xxx
To Selling & Distribution Expenses
Showroom expenses
xxx
Advertising
xxx
Commission paid to salesmen
xxx
Bad debts
xxx
Provision for doubtful debts
xxx
Godown rent
xxx
Carriage outward
xxx
Upkeep of delivery vans
xxx
To Depreciation and maintenance
Depreciation
xxx
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95
Repairs
xxx
To Financial expenses
Interest ob borrowings
xxx
Discount allowed
xxx
To abnormal losses
Loss on sale of assets
xxx
To Net profit transferred to capital
xxx
A/c (bal
...
To determine the future line of action
To know the net profit or loss of business
To calculate different ratios
To compare the actual performance of the business with the desired one
...
6 PRINCIPLES OF PREPARING PROFIT OF LOSS ACCOUNT
1
...
Only revenue expenses together with losses should be taken into account
...
Expenses and incomes relating only to the period for which the accounts are
being prepared should be considered
...
All expenses and income relating to the period concerned should be considered
even if the expense has not yet been paid in cash or the income has not yet been
received in cash
...
All personal expenses of the proprietor and pertners must be debited to the
capital or drawings accounts and must not be debited to the profit and loss
account
...
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96
8
...
Gandhi prepare profit and loss account
for the year ended 31-3-2001
...
Gross Profit
Rs
...
Gandhi for the year ended 31-3-2001
Particulars
Rs
...
9,50,000
5,000
To Discount
8,000 By Interest received
4,000
To Bank charges
4,000 By Sundry income
7,000
To Audit fees
2,000 By Discount
To Stationery
To Net profit c/d
12,000
400
9,38,600
9,78,000
9,78,000
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97
Check your progress 8
When you prepare profit and loss account what are the principles to be
followed
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
Illustration – 2
From the following balance given below, prepare P&L A/c of M/s
...
for the year ending 31
...
2003
...
Rs
...
For doubtful debts
Medical fees
3,000 G
...
for the year
10,000
1,200
15,000
2,000
1,25,000
Solution:
Profit & Loss of M/s Diviya Ltd
...
12
...
To Salary & wages
8,000 By Gross profit b/d
To Interest paid
5,000 By Commission
To Commission
6,000 By Interest
Rs
...
clicktoconvert
...
for doubtful
2,000
debts
To Traveling expenses
5,000
To Bad debts
1,500
To Depreciation
10,000
To Printing & Stationery
11,500
To Postage & rates
7,500
To Rent & rates
1,500
To Medical fees
3,000
To Other office expenses
1,200
To Net profit
84,800
1,57,000
1,57,000
Illustration 3
From the following balance extracted at the close of the year ended 31 Dec
...
Prepare Profit and Loss account of Mr
...
Gross profit
Carriage on sales
Office Rent
General expenses
55,000
500
500
900
Discount to customers
Interest from Bank
Traveling expenses
Salaries
360
200
700
900
Commission
300
Rs
...
)
Fire insurance premium
Bad debts
Apprentice Premium (Cr
...
clicktoconvert
...
Santha Kumar for the year ending 31-12-1996
Rs
...
900
300
500
To Telephone expenses
To Interest paid
To Fire Insurance Premium
To Bad debts
520
480
900
2,100
To Printing & Stationery
To Trade expenses
To Net Profit transferred to
Capital A/c
55,000
200
1,500
2,500
300
45,240
56,700
56,700
8
...
All the revenue expenses related to the year whatever it is paid or not and all
revenue income related to the current year, whatever it is received are not must be take
into consideration in order to know the exact net result
...
8 POINTS FOR DISCUSSION
1
...
Distinguish between balance sheet and trial balance?
3
...
The following are the balance extracted from the Books of Mr
...
Prepare Profit and Loss Account for the year ending 31-3-2007
...
Rs
...
clicktoconvert
...
From the following balance, ascertained from the books of M/r
...
Prepare profit and Loss account
...
Gross Profit
Carriage outwards
Rs
...
9 Check your progress answer
Your answer may include the following
1
...
Only revenue expenses together with losses should be taken into account
...
Expenses and incomes relating only to the period for which the accounts are
being prepared should be considered
...
All expenses and income relating to the period concerned should be considered
even if the expense has not yet been paid in cash or the income has not yet
been received in cash
...
10 Points for Discussion
1
...
2
...
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8
...
Gupta R
...
– Advanced Accountancy
2
...
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LESSON 9 BALANCE SHEET
Contents:
9
...
2
9
...
4
9
...
6
9
...
8
9
...
10
9
...
12
9
...
14
Aims and objectives
Introduction
Title
Definitions of Balance sheet
Classification of assets and liabilities
9
...
1 Assets
9
...
2 Liabilities
Performa of Balance Sheet
Illustrations
Adjustments
Preparation of Final Accounts
Let us Sum Up
Lesson-End Activities
Check your Progress
Points for Discussion
References
9
...
2 INTRODUCTION
The Balance sheet comprises of lists of assets, liabilities and capital fund on a
given date
...
It reflects the assets owned by the concern and the sources of
funds used in the acquisition of those assets
...
Balance sheet may be called a ‘statement of equality’ in which equality is
established by representing values of assets on one side and values of liabilities and
owners' funds on the other side
...
clicktoconvert
...
3 TITLE
A Balance sheet is called by different names probably due to lack of
uniformity in accounting systems
...
Of the above, the title 'Balance sheet" is mostly used
...
4 DEFINITIONS OF BALANCE SHEET:
“Balance sheet is a ‘Classified summary’ of the ledger balances remaining
after closing all revenue items into the profit and loss account
...
“Balance sheet is a screen picture of the financial position of a going business
concern at a certain moment” - Francis
...
5 CLASSIFICATION OF ASSETS AND LIABILITIES
A clear and correct understanding of the basic divisions of the assets and
liabilities and the meanings which they signify and the amounts which they represent
is very essential for a proper perspective of financial position of a business concern
...
9
...
1 Assets:
Assets are properties of business
...
Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held
permanently and used in the business with the objective of making profits
...
(ii) Current assets: The assets of the business in the form of cash, debtors
bank balances, bill receivable and stock are called current assets as they can be
realised within an operating cycle of one year to discharge liabilities
...
Thus tangible assets can be both fixed assets and current assets
...
Goodwill, patents,
trade marks and licences are examples of intangible assets
...
(v) Fictitious assets: Fictitious assets are not real assets
...
clicktoconvert
...
are the examples of fictitious assets
...
Assets such
as mines, Timber forests, quarries etc
...
are known as wasting assets
...
(vii) Contingent assets: Contingent assets are assets, the existence, value
possession of which is based on happening or otherwise of specific events
...
Till
the suit is decided, it is a contingent asset
...
5
...
All
the amounts which are claims by outsiders on the assets of the business are known as
liabilities
...
Liabilities are classified into bur
categories as given below
...
In addition to initial capital introduced, proprietors may introduce additional
capital and withdraw some amounts from business over a period of time
...
Net worth is the total fund of proprietors on a
particulars date
...
In case of limited companies, capital refers to capital subscribed by
shareholders
...
(2) Long term Liabilities: Liabilities repayable after specific duration of
long period of time are called long term liabilities
...
Examples are long term loans and debentures
...
(3) Current liabilities: Liabilities which are repayable during the operating
cycle of business, usually within a year, are called short term liabilities or current
liabilities
...
Examples of current liabilities are trade creditors, bills payable, outstanding
expenses, bank overdraft, taxes payable and dividends payable
...
Examples are:
Bills discounted and endorsed which may be dishonoured, unpaid calls on
investments
...
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...
6 PRFORMA OF BALANCE SHEET
Balance Sheet as on ………
Liabilities
Rs
...
on drawings
Less: Loss if any
xxx
xxx
xxx
-------
Assets
Fixed assets
Rs
...
Income received in advance
xxx
xxx
xxx
xxx
Prepaid expenses
Accrued incomes
Cash at bank
Cash in hand
xxx
xxx
xxx
xxx
Fictitious assets
Preliminary expenses
Advertisement expenses
Underwriting commission
xxx
xxx
xxx
Discount on issue of
shares
xxx
Discount on issue of
debentures
xxx
xxx
xxx
Check your progress 9
List out any five classification of assets
Notes:
(a)
Write your answer in the space given below
...
142)
...
clicktoconvert
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7 ILLUSTRATIONS
Illustration 1
From the following adjustment Trial Balance, Prepare Balance Sheet of
Saravanan Traders as at 31st December 2004
...
(Rs
...
(Rs
...
20,000)
Bills payable
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Solution
Saravanan Traders
Balance Sheet as on 31st December 2004
Liabilities
Capital
Add : Net profit
Less: Drawings
Rs
...
Rs
...
1,500
on 1
...
90
...
1,100
...
12
...
40,000
...
During 1991, bad debts
came to Rs
...
On 31
...
91 the debtors owed Rs
...
The bad debts in 1992
amounted to Rs
...
On 31
...
92, the debtors owed Rs
...
The same 5% reserve
for doubtful debts is maintained in all the years
...
Solution
Journal Entries
Particulars
Date
1990
Dec
...
For doubtful debts A/c
To Bad debts A/c
[Being bad debts transferred]
Profit & Loss A/c
To Provision for doubtful debts A/c
[Being amount transferred to P&L A/c
Bad debts A/c
Rs
...
Rs
...
1,100
1,100
Dr
...
800
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Dec
...
31
”
”
To Sundry debtors A/c
800
[Being bad debts written off]
Prov
...
800
800
Profit & Loss A/c
To Provision for doubtful debts A/c
[Being amount transferred to P & L A/c
Bad debts A/c
To Sundry debtors A/c
[Being bad debts written off]
Prov
...
for doubtful debts A/c
To Profit & Loss A/c
Dr
...
400
400
Dr
...
300
300
[Being excess reserve credited to P&L A/c]
Bad debts A/c
Rs
...
31 To Sundry Debtors
1991
Dec
...
31 To Sundry Debtors
Rs
...
31 By Prov
...
31 By Prov
...
clicktoconvert
...
1990 To Bad debts
Dec
...
1990 By Balance b/d
Dec
...
31 To Bad debts
To Balance c/d
800
2,200
3,100
1991
Jan
...
31 To Bad debts
To P&L A/c
To Balance c/d
400
300
1,500
3,000
1992
Jan 1 Balance b/d
2,200
2,200
2,200
Illustration -3
The sundry debtors of a firm on 1st December 1987 were Rs
...
On that
date it was decided to create a provision for discount at 2% on debtors
...
400
...
Show the journal entries, discount A/c and provision for discount A/c
for both the year
...
31
Profit & loss
To Res
...
31
[Being 2% reserve created on Rs
...
For discount on debtors A/c
[Being the provision created]
Rs
...
Rs
...
400
400
Dr
...
200
200
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Reserve for discount on debtors A/c
Rs
...
1987
Dec
...
31
By P&L A/c
800
800
800
1998
Dec
...
31
By P&L A/c
200
1,000
1,000
Discount A/c
Rs
...
31
Rs
...
31 By Res
...
The balance of
reserve for discount on creditors stood at Rs
...
Total creditors
at the end of 1987 and 1988 were Rs
...
Discount
received during each of the years amounted to Rs
...
100 respectively
...
Solution
Reserve for discount on creditors A/c
Rs
...
1 To Balance b/d
300
Dec
...
Dec
...
31 By Balance c/d
250
200
450
1988
Jan
...
31 To P&L A/c
450
1988
200 Jan 1 By Discount received
80 Dec
...
clicktoconvert
...
Under
...
Dr
...
-
Cr
...
1,00,000
Closing Stock
40,000
-
Fixed Assets less depreciation Rs
...
Add: Net Profit
Rs
...
88,00
16,000
Stock
1,36,00 Debtors
80,000 Less: Provision for
1,00,000
5,000
95,000
Bad debts
Liabilities for expenses
11,000 Cash & Bank
2,27,000
20,000
2,27,000
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(b) Liquidity Order:
Balance Sheet of Ramagopalan as on 31-12-96
Liabilities
Rs
...
Liabilities for expenses
11,000 Cash & Bank
Sundry Creditors
80,000 Debtors
Capital A/c
Opening Balance:
42,000
6,000
5,000
Fixed Assets
16,000
95,000
40,000
88,000
Less: Depreciation
1,42,000
Less: Drawings
1,00,000
Less: Provision for
Bad debts
Stock
1,00,000
Add: Net Profit
20,000
72,000
1,36,000
2,27,000
2,27,000
9
...
The following are the items for which
adjustments are usually required
...
Closing Stock
This is the stock which remained unsold in the preceding accounting period
...
To Trading A/c
Trading A/c
By Closing stock
Balance Sheet
Closing stock
2
...
Expenses A/c Dr
To Outstanding expenses A/c
Trading A/c
To Wages
(+) O/s wages
Balance Sheet
O/S wages
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P & L A/c
Balance Sheet
O/S wages
To Salary
(+) O/s wages
3
...
They are expenses paid in advance or
unexpired expenses
...
4
...
are earned during the current accounting year, but have
not been actually received by the end of the same year
...
Accrued Income A/c Dr
To Income A/c
P&L A/c
Balance Sheet
Accrued interest
By interest
(+) Accrued int
...
Income received in advance
Sometimes a portion of income received during the current year relate to the
future period
...
Income A/c Dr
To Income received in advance A/c
P & L A/c
By Rent received
(-) Received in
advance
Balance Sheet
Rent received
in advance
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6
...
It is a business expenses, though it is not paid in
cash every year
...
If depreciation is given in the Trial Balance, it is taken only on the debit side
of Profit and Loss Account as its adjustment is over
...
To Concerned Assets A/c
P&L A/c
To Dep
...
Bad Debts
Any irrecoverable portion of sundry debtors is termed as bad debt
...
If is given in the Trial Balance, it should be shown on the debit
side of Profit and Loss Account
...
Bad debts A/c Dr
...
Provision for doubtful debts
It is a provision created to meet any loss, if the debtors fail to pay the whole or
part of the debt owed by them
...
Profit and Loss A/c Dr
To Provision for doubtful debts A/c
P&L A/c
To Provision for
doubtful debts
Balance Sheet
Debtors
(-) Bad debts
(-) Provision for
double debts
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9
...
Profit and Loss A/c Dr
...
Reserve for discount on creditors
Prompt payment, if made, enables a business man to receive discount
...
Reserve for discount on creditors A/c Dr
...
Interest on capital
Sometimes interest is paid on the proprietor’s capital
...
Interest on capital A/c Dr
To Capital A/c
P&L A/c
To Interest on
capital
Balance Sheet
Capital
(+) Interest
on Capital
12
...
It is a gain to
the business
...
clicktoconvert
...
Transfer to Reserve
Balance sheet
Capital
(+) Interest on
Capital
(-) Interest on
drawings
Reserves save a business from future losses and meet the losses without
reduction in capital
...
Profit and A/c Dr
To Reserve A/c
P&L A/c
Balance Sheet
Reserve
(+) New
reserve
To New reserve
14
...
In the absence of any special instruction, it is assumed
that commission is allowed as a percentage of the net profit before charging such
commission
...
Profit before x
Rate of commission
100
For example, if profit is Rs
...
2,000
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Manager’s Commission A/c
Dr
...
Loss of goods by fire or accidents
a) Such losses are abnormal losses
...
Loss of stock A/c Dr
To Trading A/c
Trading A/c
Balance Sheet
By Loss by fire
Insurance claims
The loss of stock is closed by transferring the amount to Profit and Loss
Account
...
The amount due by Insurance Company is shown as an
asset in the Balance Sheet
...
Insurance Company A/c Dr
Profit and Loss A/c
Dr
To Loss of stock A/c
16
...
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Drawing A/c
Dr
To Purchase A/c
Trading A/c
Balance Sheet
Capital
(-) Drawings
To Purchases
(-) Drawings
The amount of such drawings can not be treated as sales, as the goods are not
drawn at selling price
...
Goods used in office from purchases
In certain trading concern, good bought for trading purpose are used in the
office
...
Printing and Stationery A/c Dr
or
Office expenses A/c
Dr
To Purchases A/c
18
...
The entry for the same is:
Sale Return A/c Dr
or
Sale A/c Dr
To Debtors
19
...
Goods sent as free sample A/c Dr
To Purchases A/c
9
...
clicktoconvert
...
Account
Amount
Account
Amount
Rs
Rs
...
30,000
(b) Provide for depreciation @ 10 % on buildings
...
1,000
(d) Salaries yet to be paid- Rs
...
Solution:
Trading and Profit and Loss account of M/s
...
Dr
...
Particulars
Rs
...
clicktoconvert
...
Arvind Mills as on 31-12-1997
...
Rs
...
Outstanding salaries
3,000 Less: Bad debts written
Rs
5,000
50,000
1,000
49,000
off
...
clicktoconvert
...
Shanthi
Particulars
Credit
Rs
...
35,000
Mortgage Loan
Plant and Machinery
Loose tools 1
...
92
20,000
45,500
5,600
Bills payable
Book debts
3,400
18,200
Sales
1,21,500
Cash at bank
11,000
Stock 1
...
1992
10,500
Insurance
300
Bad debts
560
Sundry creditors
Bills Receivable
Purchases
Cash on hand
Rent, Rates, etc
...
clicktoconvert
...
90; Rent outstanding on 31-12-92 Rs
...
4,500, Closing stock Rs
...
Solution
Trading and Profit and Loss A/c of Mr
...
Cr
...
Particulars
10,500 By Sales
50,000 By Closing stock
10,700
350
79,950
1,51,500
By Gross profit b/d
210 By Discount
Rs
...
They are the
low value tools and implements like spanners, screw drivers etc
...
(Revaluation method of depreciation)
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Balance sheet of Mr
...
Bills payable
Sundry creditors
Outstanding rent
Mortgage loan
Capital
Add: Net profit
Add: Interest on capital
Less: Drawings
3,400
15,600
300
20,000
40,000
70,620
2,000
Assets
Cash at Bank
Cash on hand
Book debts
Less: Provision for
doubtful debts
11,000
640
18,200
910
Bills receivable
Closing stock
Prepaid insurance
17,290
5,400
30,000
90
1,12,620
Loose tools
2,500 1,10,120 Less: Depreciation
5,600
1,100
Plant and machinery
Freehold land
4,500
45,500
35,000
1,49,420
Note : Prepaid Insurance and unexpired insurance are both one and the same
...
Debit
Credit
Particulars
Rs
...
Furniture and fittings
640
Motor vehicles
6,250
Buildings
7,500
Capital
Bad debts
12,500
125
Provision for bad debts
200
Sundry debtors and creditors
3,800
Stock on January 1, 1989
3,460
Purchases and sales
5,475
Bank overdraft
2,500
15,450
2,850
Sales and purchase returns
200
Advertising
450
125
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Interest
118
Commission
Cash
Taxes and insurance
General expenses
Salaries
375
650
1,250
782
3,300
34,000
34,000
The following adjustment are to be made:
(a) Stock in hand on 31st December 1989 was Rs
...
(b) Depreciate buildings @ 5%, furniture and fittings @ 10% and motor
vehicles @ 20%
...
85 is due for interest on bank overdraft
...
300 and taxes Rs
...
(e) Insurance amounting to Rs
...
(f) One-third of the commission received is in respect of work to be done
next year
...
100 as bad debts and provision for bad debts is to
be made at 5% on sundry debtors
...
200, on January 1, 1989
...
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Solution:
Trading and profit and Loss A/c for the year ended 31st December1989
...
5,475
125
5,350
200
To Gross profit c/d
To Advertising
To Interest
Add: Outstanding
To Bad debts
Add: New Bad debts
Add: Provision required
(3,800 – 100) x 5%
118
85
Particulars
3,460 By Sales
Less: Sales returns
Rs
...
clicktoconvert
...
Creditors
Bank overdraft
Outstanding expenses :
Rs
...
650
3,800
100
3,700
185
505 Closing stock
125 Insurance prepaid
12,500
1,916
Rs
...
250
5,000
Building
Less: Depreciation
7,500
375
7,125
20,396
20,396
Illustration 9
From the following data, prepare a profit and loss a/c and a balance sheet as on 313-1996
...
Particulars
Drawings
10,000 Capital
Purchases
30,000 Purchase returns
Rs
...
clicktoconvert
...
4
...
40,000
...
5,000
...
(b) Provide for bad debts @ 10% and provide for discount on debtors @ 5% and
on creditors @ 10%
(c) Depreciate buildings at the rate of 15% p
...
(d) Rent outstanding amounted to Rs
...
2,000
...
Solution:
Trading and profit and loss account for the year ending 31st March 1996
Particulars
To Opening stock
To purchases
Less: purchase returns
Less: Sample
Rs
...
25,000 By Sales
Less: Returns
1,000
29,000
2,000
To Carriage inwards
To Gross Profit C/d
Particulars
By Closing stock
By Stock destroyed by fire
Rs
...
2,000
3,000 By Gross profit b/d
1,000 By Rent received
3,000 By Interest
By Provision of discount
creditors 6,000 x 10%
98,000
44,000
1,000
5,000
600
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Add: New provision for
bad debts (15,000 x
10%)
By Interest on drawings
(10,000 x 10%)
1,000
1,500
3,500
Less: Existing provision
for bad bets
1,000
2,500
To Provision for
discount on debtors
(15,000-1,500) x 5%
Interest
To Depreciation:
Plant
Building (20,000x15%)
675
5,000
4,000
3,000
7,000
To Interest on capital
To Net profit,
transferred to capital
account
...
(2) Stock destroyed by fire is credited to trading a/c and claim is shown as an
asset
...
(4) Samples included in closing stock should be separated from stock by reducing
from stock
...
38,000
...
Since they are not yet distributed, they appear on assets side of balance sheet
...
clicktoconvert
...
3
...
6,000
Assets
Debtors
Less: Provision for bad
debts
600
5,400
38,000
2,000
1,000
30,000
26,425
3,000
59,425
1,000
58,425
10,000
Rs
...
Gopal on 30th June 1981:
Debit
Rs
...
540
2,630
40,675
98,780
680
500
Wages account
Fuel and Power A/c
Carriage on Sales A/c
Carriage on Purchases A/c
10,480
4,730
3,200
2,040
Stock Account (1st July, 1980)
Buildings Account
Freehold Land A/c
Machinery A/c
5,760
30,000
10,000
20,000
Patents A/c
17,000
94,825
Illustration - 10
Cash in hand
Cash at bank
Purchases account
12,825
38,000
2,000
5,000
7,500
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Salaries Account
15,000
General expenses A/c
Insurance Account
Drawings Account
Capital account
3,000
600
5,245
Sundry debtors A/c
Sundry creditors A/c
14,500
71,000
6,300
1,76,580
1,76,580
Taking into account the following adjustments prepare Trading and Profit &
Loss account and the balance sheet:
(a) Stock on hand 30th June, 1981 is Rs
...
Machinery is to be depreciated at the
rate of 10% and patents at the rate of 20%
...
1,500 were unpaid
...
170 on a policy expiring on 31st
December, 1981
...
2,000 spent on the creation of a cycle shed for
employees and customers
...
Solution:
Trading and profit and Loss Account of Gopal
for the year ended 30th June 1981
...
Particulars
To Opening stock
To Purchase
Less: Purchase returns
To Carriage on purchases
To Wage
Less: Wages for erection
of cycle shed
To Fuel and power
To Gross profit b/d
To Carriage on sales
Rs
...
Rs
...
clicktoconvert
...
500 x 20%
600
85
3,500
725
To Provision for doubtful
debts (14,500 x 5%)
To Net profit transferred
to capital A/c
16,275
43,715
43,715
Note:
1
...
2
...
It should be reduced
from wages and added to the asset i
...
, cycleshed (or) Buildings
...
Out of insurance Rs
...
Rs
...
81
...
85 it’s the insurance prepaid
...
Gopal as on 30th June 1981
Liabilities
Sundry creditors
Salaries unpaid
Capital
Add: Net profit
Rs
...
Assets
6,300 Cash in hand
1,500 Cash at bank
Sundry debtors
Less: Provision for
doubtful dents
Closing stock
82,030 Prepaid insurance
Machinery
Less: Depreciation
Patents
Less: Written off
Freehold land
Building
Add: Wages incurred
for cycleshed erection
89,830
Rs
...
540
2,630
14,500
725
13,775
6,800
85
20,000
2,000
7,500
1,500
18,000
6,000
10,000
30,000
2,000
32,000
89,830
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9
...
It helps to know the financial
position of an organisation
...
By seeing the balance sheet we can say the concern solvent are not
...
11 LESSON END ACTIVITIES
1
...
Explain the classification of assets Liabilities?
3
...
Annadurai, prepare Trading and
Profit & Loss account for the year ended 30-6-2001 and a Balance Sheet as on
that date:
Debit
Credit
Rs
...
Drawings
5,000
-
Insurance
600
-
3,000
-
14,500
6,300
7,500
-
Plant & machinery
20,000
-
Building
40,000
-
Stock (1-7-2000)
5,800
-
Carriage inwards
2,000
-
Carriage outwards
3,200
-
15,000
-
4,000
-
10,500
-
600
500
41,000
98,800
3,900
-
-
71,000
General expenses
Debtors and Creditors
Furniture
Salary & wages
Power & fuel
Productive wages
Returns
Purchases and Sales
Cash in hand & at bank
Ganesh’s capital
1,76,600 1,76,600
Adjustment:
(i)
(ii)
Stock on 30-6-2001 was valued at Rs
...
Charge 5% interest on drawings
...
clicktoconvert
...
Goods purchased worth Rs
...
Prepaid insurance amounted to Rs
...
Salaries and advertisement bill are outstanding to the extent of Rs
...
1,000 respectively
...
2,000,
Rs
...
1,500 respectively
...
Palani as on 31-3-95, prepare final
accounts as on that date
...
Rs
...
32,000;
Outstanding wages Rs
...
300;
Commission received in advance Rs
...
500
...
clicktoconvert
...
The following balance were taken from the books of Shri
...
Rs
...
1,00,000 Rent (Cr)
17,600 Railway freight and other
expenses on good sold
80,000 Carriage inwards
1,40,370 Office expenses
2,100
16,940
2,310
1,340
2,820 Printing & stationery
660
11,460 Postage & telegrams
820
1,400 Sundry debtors
Sundry creditors
62,070
18,920
3,240
1,300 Cash at bank
12,400
190 Cash in hand
2,210
Bills receivable
1,240 Office furniture
3,500
Sales returns
4,240 Salaries & commission
9,870
Wages
6,280 Additions to buildings
7,000
Discount (Cr)
Buildings
25,000
Prepare Trading and Profit and Loss Account and Balance Sheet as on 31st
March 1996, after keeping in view the following adjustment:
(i)
Depreciate old buildings at 2
...
(ii)
Write off further bad debts at Rs
...
(iii) Increase the bad debts provision at 6% of debtors
...
570 are outstanding salary
...
200
...
(vii) Stock on 31-3-96 is valued at Rs
...
(viii) Unexpired insurance Rs
...
9
...
Assets 2
...
Current assets 4
...
Intangible assets 6
...
13 POINTS FOR DISCUSSION
1
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2
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9
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Gupta & Radhaswamy – Advanced Accountancy
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Jain & Naway – Advanced Accountancy
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Shukla & Grewal – Advanced Accountancy
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0
10
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2
10
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4
10
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6
10
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8
Objectives
Introduction
Definition of Cost, Costing, Cost Accounting and Cost Accountancy
Scope of Cost Accounting
Objectives of Cost Accounting
10
...
1 Ascertainment of Cost
10
...
2 Fixation of Selling Price
10
...
3 Cost Control
10
...
4 Matching Cost with Revenue
10
...
5 Special Cost Studies and Investigations
10
...
6 Preparation of Financial Statements, Profit and Loss Account,
Balance Sheet
Functions of Cost Accounting
Advantages of Cost Accounting
10
...
1 Helps in decision making
10
...
2 Helps in fixing prices
10
...
3 Formulation of future plans
10
...
4 Avoidance of wastage
10
...
5 Highlights causes
10
...
6 Reward to efficiency
10
...
7 Prevention of frauds
10
...
8 Improvement in profitability
10
...
9 Preparation of final accounts
10
...
10 Facilitates control
Objections of Cost Accounting
10
...
1 Cost Accounting is costly to operate
10
...
2 Cost Accounting is unnecessary
10
...
3 Cost Accounting involves many forms and statements
10
...
4 Costing may not be applicable in all types of Industries
10
...
5 It is based on Estimations
Characteristics of a good costing system
10
...
1 Simplicity
10
...
2 Flexibility and Adaptability:
10
...
3 Economy
10
...
4 Comparability
10
...
5 Suitability to the Firms
10
...
6 Minimum Changes to the Existing one
10
...
7 Uniformity of Forms
10
...
8 Less Clerical Work
10
...
9 Efficient Material Control and Wage System
10
...
10 A Sound Plan
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10
...
11 Reconciliation
10
...
12 Overall Efficiency of Cost Accountant
10
...
10
10
...
12
10
...
14
10
...
16
10
...
18
10
...
1 Determination of objectives
10
...
2 Study of the nature of business
10
...
3 Study of the nature of the organization
10
...
4 Deciding the structure of cost accounts
10
...
5 Determination of cost rates
10
...
6 Organization of the cost office
10
...
7 Introducing the system
Cost concepts
10
...
1 Cost Unit
10
...
2 Cost Centre
10
...
3 Profit Centre
10
...
4 Distinguish between cost centre and profit centre
Cost control
Cost reduction
Difference between cost control and cost reduction
Let us Sum Up
Lesson-End Activities
Check your Progress
Points for Discussion]
References
10
...
AIMS AND OBJECTIVES
i)
To know the Meaning and Definition of cost, costing and cost Accounting
ii)
To study the objectives and functions of cost Accounting
iii)
To study the importance of cost Accounting
iv)
To know the Characteristics of a good costing system
v)
To study the cost control and cost reduction
vi)
To understand the meaning of cost unit, cost centre and profit centre
...
1 INTRODUCTION
Industrialization and advent of factory system during the second half of 19th
Century necessitating accurate cost information have led to the development of cost
accounting
...
To quote Eldons Handristen
“Not until the last 20 years of the 19th Century was there much literature on the subject
of cost accounting in England and even very little was found in the United States
...
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Rapid development in cost accounting has taken place after 1914 with the
growth of heavy industry and large scale production as a consequence of First World
War when cost other than material and labour (overhead) constituted a significant
portion of total cost
...
233 B of
Companies Act was made
...
It was felt that the financial audit falls short of
expectations to reveal the malpractices
...
This has given impetus to the
development of cost accounting in India
...
2 DEFINITION OF COST, COSTING, COST ACCOUNTING AND COST
ACCOUNTANCY
Cost: The term ‘cost’ has to be studied in relation to its purpose and
conditions
...
C
...
A
...
I
...
A
...
Costing: The I
...
M
...
, London has defined costing as the ascertainment of
costs
...
Cost Accounting: It is the method of accounting for cost
...
I
...
M
...
has defined cost accounting as follows: “The process of accounting for cost
from the point at which expenditure is incurred or committed to the establishment of
its ultimate relationship with cost centers and cost units
...
Cost Accountancy: It is an aid to management for decision making
...
C
...
A
...
It includes the presentation of
information derived there from for the purpose of managerial decision making”
...
3 SCOPE OF COST ACCOUNTING
The term scope here refers to filed of activity
...
The information provided to the management
is helpful for cost control and cost reduction through functions of planning, decision
making and control
...
With the development of business activity and introduction of large scale
production, the scope of cost accounting was broadened and providing information for
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cost control and cost reduction has assumed equal significance along with finding out
cost of production
...
Initially cost accounting was applied in manufacturing activities
only
...
10
...
4
...
Costs may be ascertained,
under different circumstances, using one or more types of costing principles-standard
costing, marginal costing, uniform costing etc
...
4
...
Apart from cost ascertainment, the cost accountant analyses the total cost into fixed
and variable costs
...
This will increase the volume of salesmore sales than previously, thus leading to maximum profit
...
4
...
Comparison of actual cost
with standards reveals the discrepancies- variances
...
10
...
4 Matching Cost with Revenue
The determination of profitability of each product, process, department etc
...
10
...
5 Special Cost Studies and Investigations
It undertakes special cost studies and investigations and these are the basis for
the management in decision-making or policies
...
10
...
6 Preparation of Financial Statements, Profit and Loss Account, Balance
Sheet
To prepare these statements, the value of stock, work-in-progress, finished
goods etc
...
But a good system of costing
facilitates the preparation of the statements, as the figures are easily available; they
can be prepared monthly or even weekly
...
5
...
clicktoconvert
...
The main functions of cost accounting are:
i)
To serve as a guide to price fixing of products
...
iii) To reveal sources of economy in production process
...
v)
To exercise effective control on factors of production
...
vii) To suggest management of future expansion policies
...
ix) To organize cost reduction programmes
...
xi) To supply timely information for various decisions
...
10
...
ADVANTAGES OF COST ACCOUNTING
10
...
1 Helps in Decision Making
Cost accounting helps in decision making
...
For instance, cost accounting helps in deciding:
a
...
Whether to accept or reject an export order?
c
...
6
...
It provides detailed cost data of each
product (both on the aggregate and unit basis) which enables fixation of selling price
...
10
...
3 Formulation of future plans
Cost accounting is not a post-mortem examination
...
On the basis of past experience, it helps in the formulation of definite future plans in
quantitive terms
...
10
...
4 Avoidance of wastage
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Cost accounting reveals the sources of losses or inefficiencies such as spoilage,
leakage, pilferage, inadequate utilization of plant etc
...
10
...
5 Highlights causes
The exact cause of an increase or decrease in profit or loss can be found with
the aid of cost accounting
...
10
...
6 Reward to efficiency
Cost accounting introduces bonus plans and incentive wage systems to suit the
needs of the organization
...
10
...
7 Prevention of frauds
Cost accounting envisages sound systems of inventory control, budgetary
control and standard costing
...
10
...
8 Improvement in profitability
Cost accounting reveals unprofitable products and activities
...
The resources released from
unprofitable products can be used to improve the profitability of the business
...
6
...
It helps in the
preparation of interim profit and loss account and balance sheet without physical stock
verification
...
6
...
By adopting them, the management can notice the
deviation from the plans
...
10
...
However, the following are the usual objections raised against
cost accounting:
10
...
1 Cost Accounting is costly to operate
One of the objections against cost accounting is that it involves heavy
expenditure to operate
...
This is the case with any accounting system; the benefits
derived by operating the system are more than the cost
...
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10
...
2 Cost Accounting is unnecessary
It is felt by a few that cost accounting is of recent origin and an enterprise can
survive without cost accounting
...
10
...
3 Cost Accounting involves many forms and statements
It is pointed against cost accounting that it involves usage of many forms and
statements which leads to monotony in filling up of forms and increase of paper work
...
This will become routine and as time passes the utility of forms is
realized and the forms can be reviewed, revised, simplified and minimized
...
7
...
Cost accounting methods can be devised for all types of industries, and
services
...
7
...
Costing system estimates costs scientifically based on past
and present situations and with suitable modifications for the future
...
But for the
predetermined costs, cost accounting also becomes another ‘Historical Accounting’
...
8
...
The main characteristics are:
10
...
1 Simplicity
It must be simple, flexible and adaptable to the changing conditions
...
The information provided must be in
the proper order, in right time and to the right persons so as to be utilized fully
...
8
...
The expansion, contraction of changes must be adopted in the
existing system with minimum changes
...
8
...
The expenditure must be
less than the benefits derived from the system adopted
...
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...
8
...
10
...
5 Suitability to the Firms
Before accepting a costing system, the nature, requirements, size, conditions of
the business etc
...
The system must be capable of prompt
and accurate reporting to different levels of management according to their
requirements
...
8
...
10
...
7 Uniformity of Forms
Forms of different colours can be used to distinguish them
...
Form should contain instructions to fill, to use and for
disposal
...
8
...
They may not like to spend much time in filling the forms
...
8
...
A systematic method of wage system will
help in the control of labour cost
...
10
...
10 A Sound Plan
There must be proper and sound plans to collect, to allocate and to apportion
overhead expenses on each job or each product in order to find out the cost accurately
...
8
...
10
...
12 Overall Efficiency of Cost Accountant
The work of the cost accountant under a good system of costing must be
clearly defined as to his duties and responsibilities to the firm are very essential
...
clicktoconvert
...
9 INSTALLATION OF A COSTING SYSTEM
The costing system of an organization should be carefully planned in order to
achieve its objectives
...
9
...
If the objective is only to ascertain the cost, a simple system will be sufficient
...
10
...
2 Study of the nature of business
The nature of the business and other technical aspects like nature of the
products, methods and stages of production cycle should be carefully analyzed
...
For example,
contract costing is suitable for large construction projects
...
10
...
3 Study of the nature of the organization
The costing system should be designed to meet the requirements of the
organization
...
The factors to be considered are:
a
...
b
...
c
...
d
...
e
...
10
...
4 Deciding the structure of cost accounts
A suitable costing system can be developed on the basis of the study of the
nature of business and organization
...
10
...
5 Determination of cost rates
This step involves a thorough study of the following points for developing an
integrated costing system
...
Classification of costs into direct and indirect cots
...
Grouping of indirect costs (overheads) into production, administration,
selling and distribution etc
...
Methods of pricing issues
...
Treatment of wastes of all types
...
Absorption of overheads
...
clicktoconvert
...
Calculation of overhead rates
...
9
...
The cost office, with adequate staff must be located a close as possible to the factory
...
a
...
c
...
Stores accounts
...
Further, the role and duties and responsibilities of the cost accountant must be
clearly defined
...
10
...
7 Introducing the system
After completion of the above steps, the costing system may be formally
introduced
...
Before introduction, the feature of the systems, its working and advantages
must be explained to the concerned employees to secure their co-operation
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
10
...
10
...
10
...
10
...
10
...
In other words, cost unit is the unit of output
for which cost is ascertained
...
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The selection of cost unit is important in cost accounting
...
The selected unit should be
neither too small nor too big, but ideal for cost ascertainment
...
The following are the
cost units in various industries
...
)
Per passenger k
...
Per tonne k
...
Ceramic tiles
Bricks
Road contract
Per square foot or per unit
Per 1,000 Nos
...
k
...
Thus, cost units may vary from industry to industry
...
10
...
2 Cost Centre
A large business is divided into a number of functional departments (such as
production, marketing and finance) for administrative convenience
...
These smaller divisions are called cost centers
...
In simple words, it is a subdivision of the organization to which cost can be charged
...
e
...
g
...
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The determination of suitable cost centre is very important for the purpose of
cost ascertainment and control
...
The number and size of cost centers vary from
organization to organization
...
Nature and size of the business
...
Layout and organization of the factory
...
Availability of various cost data and information
...
Management policy regarding cost ascertainment and control
...
Production cost centre: A cost centre is which production is carried on is
known as production cost centre
...
g
...
Service cost centre: A cost centre which renders service to production cost
centre is known as service centre e
...
power house, stores department, maintenance
department etc
...
g
...
Impersonal cost centre: It consists of a location or a machine or a group of
machines
...
g
...
Operation cost centre: It consists of machines and / or persons carrying out
similar operations
...
g
...
10
...
3 Profit Centre
A profit centre is a responsibility centre which accumulates revenues as well as
costs
...
For instance, if there are two divisions
in a textile company, say readymade and clothing, each one may be regarded as a
profit centre
...
10
...
On the other hand, a profit
centre is created by the top management
...
But
the profit centre is created for the purpose of evaluation of performance
...
iv) Cost centres do not enjoy autonomy
...
v) Cost centre does not have a target of costs
...
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10
...
It aims at accomplishing conformity between actual result and
standards or budgets
...
Cost control has the following features:
i) Creation of responsibility centres with defined authority and
responsibility for cost incurrence
...
iii) Timely cost control reports (responsibility reporting) describing the
variances between budgets and standards and actual performance
...
v) A systematic and fair plan or motivation to encourage workers to
accomplish budgetary goals
...
Cost control does not necessarily mean reducing the cost but its aim is to have
the maximum utility of the cost incurred
...
10
...
Cost
reduction implies real and permanent reduction in the unit cost of goods manufactured
or services rendered without impairing their (product or goods) suitability for the use
intended
...
The steps for cost reduction include
elimination of waste, improving operations, increasing productivity, search for
cheaper materials, improved standards of quality, finding other means to reduce unit
costs
...
Reduction of costs due to external factors such as reduction in taxes,
government subsidies, grants etc
...
10
...
As stated earlier,
cost control aims at controlling costs within prescribed limits with the help of budgets
and standards
...
Cost control process involves (a) setting 1
...
Cost
investigating the variances and (e)
reduction is the final result in the
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taking corrective action
...
2
...
Cost reduction aims at improving
i
...
cost targets
...
It challenges
standards
...
3
...
It is continuous, dynamic and
lacks dynamic approach
...
4
...
4
...
5
...
In cost reduction, there is always
before they are incurred
...
6
...
This is applicable to every activity
have standards
...
7
...
It adds thinking and analysis to
management as to how to do a thing
...
10
...
Costing is the
method/techniques of ascertaining cost
...
Cost accounting is helpful to reduce cost and for cost control
...
10
...
2 Briefly explain the objectives and scope of cost accounting
...
16 CHECK YOUR PROGRESS
Your answer may include any six of the following:
1
...
2
...
3
...
4
...
5
...
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6
...
10
...
What are the requisites of a good costing system?
2
...
10
...
Jain & Narang – Cost Accountancy
...
S
...
Maheswari – Management Accounting
...
clicktoconvert
...
0 Aims and objectives
11
...
2 Definitions
11
...
4 Scope of Management According
11
...
1 Financial Accounting
11
...
2 Cost Accounting
11
...
3 Budgeting and Forecasting
11
...
4 Inventory Control
11
...
5 Statistical Analysis
11
...
6 Analysis of Data
11
...
7 Internal Audit
11
...
8 Tax Accounting
11
...
9 Methods and Procedures
11
...
5
...
5
...
5
...
5
...
5
...
5
...
5
...
6 Advantages of Management Accounting
11
...
1 Helps in Decision Making
11
...
2 Helps in Planning
11
...
3 Helps in Organizing
11
...
4 Facilitates Communication
11
...
5 Helps in Coordinating
11
...
6 Evaluation and Control of Performance
11
...
7 Interpretation of Financial Information
11
...
8 Economic Appraisal
11
...
7
...
7
...
7
...
7
...
7
...
7
...
7
...
clicktoconvert
...
8 Distinguish between Management Accounting and cost accounting
11
...
1 Purpose
11
...
2 Emphasis
11
...
3 Principles and Procedures
11
...
4 Data Used
11
...
5 Scope
11
...
9
...
9
...
9
...
9
...
9
...
9
...
9
...
9
...
10 Distinguish between cost accounting and financial accounting
...
10
...
10
...
10
...
10
...
10
...
10
...
10
...
10
...
11 Let us Sum Up
11
...
13 Check your Progress
11
...
15 References
11
...
(ii)
To understand the functions, advantages and limitations of management
accounting
...
11
...
Management accounting provides necessary information to assist the management in
the creation of policy and in the day-to-day operations
...
e
...
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11
...
– R
...
Anthony
...
- Anglo American Council of Productivity
...
3 OBJECTIVES OF MANAGEMENT ACCOUNTING
The objectives of management accounting are:
(1) to assist the management in promoting efficiency
...
(2) to prepare budget covering all functions of a business (i
...
production,
sales, research and finance)
...
(4) to compare the actual performance with plan for identifying deviations
and their causes
...
(6) to submit to the management at frequent intervals operating statements
and short-term financial statements
...
(8) to provide a suitable organization for discharging the responsibilities
...
11
...
The field of management
accounting is very wide
...
Management accounting includes various areas of specialization to render
effective service to the management
...
4
...
Management accounting rearranges and uses the
financial statements
...
It is closely related and connected with financial accounting
...
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11
...
2 Cost Accounting
Cost accounting is an essential part of management accounting
...
It also provides information regarding cost of products
process and jobs through different methods of costing
...
11
...
3 Budgeting and Forecasting
Budgeting is setting targets by estimating expenditure and revenue for a given
period
...
Targets are fixed for various departments and responsibility is
pinpointed for achieving the targets
...
11
...
4 Inventory Control
This includes, planning, coordinating and control of inventory from the time of
acquisition to the stage of disposal
...
11
...
5 Statistical Analysis
In order to make the information more useful statistical tools are applied
...
For the purpose of
forecasting, other tools such as time series regression analysis and sampling
techniques are used
...
4
...
The analysis and
interpretation results in drawing reports and presentation to the management
...
4
...
11
...
8 Tax Accounting:
Tax liability is ascertained from income statements
...
Knowledge of tax provisions helps the management in meeting the tax liabilities and
complying with other legislations like Sales tax, Companies Act and MRTP Act
...
4
...
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11
...
The major functions of management are planning,
organizing, directing and controlling
...
11
...
1 Presentation of Data
Traditional Profit and Loss Account and the Balance Sheet are not analytical
for decision making
...
11
...
2 Aid to Planning and Forecasting
Management accounting is helpful to the management in the process of
planning through the techniques of budgetary control and standard costing
...
11
...
3 Decision Making
Management accounting provides comparative data for analysis and
interpretation for effective decision making and policy formulation
...
5
...
11
...
5 Effective Control
Standard costing and budgetary control are integral part of management
accounting
...
11
...
6 Incorporation of non-financial information
Management accounting considers both financial and non-financial
information for developing alternative courses of action which leads to effective and
accurate decisions
...
5
...
This continual
reporting helps the management in coordinating various activities to improve the
overall performance
...
clicktoconvert
...
6 ADVANTAGES OF MANAGEMENT ACCOUNTING
The advantages of management accounting are summarized below:
11
...
1 Helps in Decision Making
Management accounting helps in decision making such as pricing, make or
buy, acceptance of additional orders, selection of suitable product mix etc
...
11
...
2 Helps in Planning
Planning includes profit planning, preparation of budgets, programmes of
capital investment and financing
...
11
...
3 Helps in Organizing
Management accounting uses various tools and techniques like budgeting,
responsibility accounting and standard costing
...
11
...
4 Facilitates Communication
Management is provided with up-to-date information through periodical
reports
...
11
...
5 Helps in Co-ordinating
The functional budgets (purchase budget, sales budget, and overhead budget
etc
...
This facilitates clear definition
of department goals and coordination of their activities
...
6
...
With the help of ratios and variance analysis, the efficiency of departments can be
measured
...
11
...
7 Interpretation of Financial Information
Management accounting presents information in a simple and purposeful
manner
...
11
...
8 Economic Appraisal
Management accounting includes appraisal of social and economic forces and
government polices
...
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11
...
7
...
If the past records are not reliable, it will affect the
effectiveness of management accounting
...
7
...
This results in inaccuracy and other practical difficulties
...
7
...
Hence, it is very costly and only big concerns can afford to adopt it
...
7
...
Tools and techniques are
not fully developed
...
11
...
5 Opposition to Change
Introduction of management accounting system requires a number of changes
in the organization structure, rules and regulations
...
11
...
6 Intuitive Decisions
Management accounting helps in scientific decision making
...
11
...
7 Not an Alternative to Management
Management accounting will not replace the management and administration
...
Decisions are of the management and not of the
management accountant
...
8 DISTINGUISH BETWEEN
COST ACCOUNTING
MANAGEMENT
ACCOUNTING AND
Cost accounting and Management accounting are tow modern branches of
accounting
...
Cost accounting is concerned
not only with cost ascertainment, but also cost control and managerial decision
making
...
The functions of cost accounting and management accounting are
complimentary
...
Though it appears that
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there is overlapping of areas between cost and management accounting, the following
are the differences between the two systems
...
8
...
The function of management accounting is to provide
information to management for efficiently performing the functions of planning,
directing, and controlling
...
8
...
11
...
3 Principles and Procedures
Established procedures and practices are followed in cost accounting
...
The analysis is made
and the resulting conclusions are presented in reports as per the requirements of the
management
...
8
...
11
...
5 Scope
Management accounting includes, financial accounting, cost accounting,
budgeting, tax planning and reporting to management, whereas Cost accounting is
concerned mainly with cost ascertainment and control
...
9 DISTINGUISH BETWEEN MANAGEMENT ACCOUNTING AND
FINANCIAL ACCOUNTING
The following are the main differences between financial accounting and
management accounting
...
9
...
But the objective of management accounting is to provide
information for the internal use of management
...
9
...
On the other hand management accounting is concerned with the
departments or divisions
...
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11
...
3 Data Used
Financial accounting is mainly concerned with the recording of past events
whereas management accounting is concerned with future plans and policies
...
9
...
Because of this, financial accounting is more objective and
management accounting is more subjective
...
9
...
But approximations
are widely used in management accounting
...
11
...
6 Legal Compulsion
Financial accounting is compulsory for all joint stock companies but
management accounting is only optional
...
9
...
On the other hand, management accounting records not only
monetary transactions but also non- monetary events, namely technical changes,
government polices etc
...
9
...
Management accounting will reveal the deviations of actual performance from plans
...
Check your progress 11
What are the advantages of the management accounting
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
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11
...
10
...
The main objective of financial accounting is to
prepare Profit and Loss A/c and Balance Sheet to report to owners and outsiders
...
10
...
Financial records are maintained as per
the requirement of Companies Act and Income Tax Act
...
10
...
,
according to purpose for which costs are incurred
...
e
...
11
...
4 Stock Valuation
In cost accounts stocks are valued at cost
...
11
...
5 Analysis of Profit and Cost
Cost accounts reveal Profit of Loss of different products, departments
separately
...
11
...
6 Accounting period
Cost report are continuous process and are prepared as per the requirements of
managements, may be daily, weekly, monthly, quarterly, or annually
...
11
...
7 Emphasis
Cost accounting lays emphasis on ascertainment of cost and cost control
...
11
...
8 Nature
Cost accounts lay emphasis on both historical and predetermined costs
...
11
...
Management has to take decision on day-to–day basis or long-term basis based on
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some information
...
Cost accounts provide information relating to cost but management accounting
includes both cost and revenue
...
11
...
2
...
4
...
Define ‘Management accounting’
...
Explain the scope and advantages of Management accounting
...
What are the functions of Management accounting?
11
...
Helps in Decision Making
2
...
Helps in Organizing
4
...
Helps in Coordinating
6
...
Interpretation of Financial Information
11
...
Distinguish between Management accounting and cost accounting
...
Distinguish between cost accounting and financial accounting
...
15 REFERENCES
1
...
N
...
2
...
K
...
Gupta – Management Accounting
...
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0
Aims and Objectives
12
...
2
Elements of cost
12
...
3
...
3
...
3
...
3
...
3
...
3
...
3
...
3
...
3
...
3
...
4
Methods of Costing
12
...
1 Job costing
12
...
2 Contract costing
12
...
3 Batch costing
12
...
4 Process costing
12
...
5 Unit costing
12
...
6 Operating costing
12
...
7 Operation costing
12
...
8 Multiple Costing
12
...
5
...
5
...
5
...
5
...
5
...
5
...
6
Let us Sum Up
12
...
8
Check your Progress
12
...
10 References
12
...
AIMS AND OBJECTIVES
i)
To understand the elements of cost
...
iii) To study the methods and techniques of costing
...
clicktoconvert
...
1
...
The total cost of production can be found
with out such analysis, and in many instances an average unit cost could be obtained
but none of the advantages of an analysed cost would be available
...
2
...
For effective control and managerial decision making, data is to be
provided on the basis of analysed and classified costs
...
e
...
The
elements of cost are:
1
...
Labour and
3
...
They can be direct or indirect
...
These materials cost can be conveniently identified with and
allocated to a particular product, process or job
...
g
...
Indirect materials: Indirect materials are those materials which do not form a
part of a financial product
...
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...
Labour: For conversion of raw materials into finished product human effort is
needed
...
Labour can be direct as well as indirect
...
The wages of such labour are known as direct wages
...
It is a part of the prime cost, e
...
Indirect labour: Indirect labour is that labour which is not directly engaged in
production of goods or services
...
The wages paid for indirect labour is known as indirect wages
...
g
...
Expenses: Expenses may be direct expenses or indirect expenses
...
It is parts of the
prime cost e
...
excise duty, royalty on production, cost of special drawings and
designs, architect’s fees or equipment for a particular job etc
...
It can be classified as
follows
...
Factory overheads cover all indirect expenses incurred from
the stage of raw materials to finished goods
...
g
...
b) Administrative overheads: These are expenses incurred for running
administrative office e
...
office rent and salaries, printing and stationary, legal
expenses, telephone expenses etc
...
g
...
d) Distribution overheads: These are expenses concerned with the packing
and delivery of goods to the customers e
...
packing charges, warehouse expenses,
depreciation of delivery van, loading charges etc
...
3
...
It is the placement of like items together according to their common
characteristics
...
Costs may be classified according to
their nature, i
...
material, labour and expenses and a number of other characteristics
...
clicktoconvert
...
The
important ways of classification are:
12
...
1 By Nature or Elements
12
...
2 By Functions
12
...
3 As Direct and Indirect
12
...
4 By Variability
12
...
5 By Controllability
12
...
6 By Normality
12
...
7 By Capital or Revenue
12
...
8 By Time
12
...
9 According to Planning and Control
12
...
10 For Managerial Decisions
...
12
...
1 By Nature or Element or Analytical Classification
According to this classification, the costs are divided into three categories i
...
Materials, Labour and Expenses
...
This classification is important as it helps to
find out the total cost, how such total cost is constituted and valuation of work in
progress
...
3
...
It leads to grouping of cost according to the broad divisions or functions
of a business undertaking i
...
, production, administration selling and distribution
...
Commercial Cost: This is the total of costs incurred in the operation of a
business undertaking other than the cost of manufacturing and production
...
These terms will be explained in a subsequent chapter
...
3
...
Direct costs are those which are incurred for and may be conveniently
identified with a particular cost centre or cost unit
...
Indirect costs are those cost which are incurred for
the benefit of number of cost centres or cost units and cannot be conveniently
identified with a particular cost centre or cost unit
...
The nature of the
business and the cost unit chosen will determine which costs are direct and which are
indirect
...
The importance of the distinction of costs into
direct and indirect lies in the fact that direct costs of a product or activity can be
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166
accurately determined while indirect costs have to be apportioned on certain
assumptions as regards their incidence
...
3
...
On
this basis, costs are classified into three groups viz
...
(i) Fixed or period costs are commonly described as those which remain fixed
in total amount with increase or decrease in the volume of output or productive
activity for a given period of time
...
Examples of fixed costs are rent,
insurance of factory building, factory manager’s salary etc
...
These costs are
known as period costs because these are dependent on time rather than on output
...
10,000 per
month remaining same for every month irrespective of output of every month
...
These costs per unit remain relatively constant with changes
in production
...
Examples are direct material costs,
direct labour costs, power, repairs etc
...
(iii) Semi-variable costs are those which are partly fixed and partly variable
...
Other examples of such costs are depreciation, repairs and maintenance of building
and plant etc
...
3
...
On this basis it is
classified into two categories:
(i) Controllable costs are those which can be influenced by the action of a
specified member of an undertaking, that is to say, costs which are at least partly
within the control of management
...
Generally
speaking, all direct costs including direct material, direct labour and some of the
overhead expenses are controllable by lower level of management
...
Most of the fixed costs are uncontrollable
...
Overhead cost, which is
incurred by one service section and is apportioned to another which receives the
service, is also not controllable by the latter
...
clicktoconvert
...
It is only in relation to a particular
level of management or an individual manager that we may say whether a cost is
controllable or uncontrollable
...
Moreover, there may be an item of cost which is controllable
from long term point of view and uncontrollable from short term point of view
...
12
...
6 By Normality
Under this, costs are classified according to whether these are cost which are
normally incurred as a given level of output in the conditions in which that level of
activity is normally attained
...
It is a part
of cost of production
...
It is not a
part of cost of production and charged to Costing Profit and Loss Account
...
3
...
For example, the
cost of a rolling machine in case of steel plan
...
It
any expenditure is done in order to maintain the earning capacity of the concern such
as cost of maintaining an asset or running a business it is revenue expenditure e
...
cost
of materials used in production, labour charges paid to convert the material into
production, salaries, depreciation, repairs and maintenance charges, selling and
distribution charges etc
...
12
...
8 By Time
Cost can be classified as (i) Historical costs and (ii) Predetermined costs
...
Such costs are available only when the production of a
particular thing has already been done
...
Basic characteristics of such costs are:
(a) They are based on recorded facts
...
(c) They are mostly objective because they relate to happenings which have
already taken place
...
e
...
Predetermined cost determined on scientific basis
becomes standard cost
...
clicktoconvert
...
Historical costs and predetermined costs are not mutually exclusive but they
work together in the accounting system of an organization
...
Therefore, even in a system when historical costs are used, predetermined costs have a
very important role to play because a figure of historical cost by itself has no meaning
unless it is related to some other standard figure to give meaningful information to the
management
...
3
...
Cost
accounting furnishes information to the management which is helpful is the due
discharge of theses two functions
...
i) Budgeted costs: Budgeted costs represent an estimate of expenditure for
different phases of business operations such as manufacturing, administration, sales,
research and development etc
...
Various budgets are prepared for various phases, such as raw
material cost budget, labour cost budget, cost of production budget, manufacturing
overhead budget, office and administration overhead budget etc, Continuous
comparison of actual performance (i
...
actual cost) with that of the budgeted cost is
made so as to report the variations from the budgeted cost to the management for
corrective action
...
The Institute of Cost and Management
Accountants, London defines standard cost as follows: “Standard cost is the
predetermined cost based on a technical estimate for materials, labour and overhead
for a selected period of time and for a prescribed set of working conditions”
...
Budgeted costs and standard costs are similar to each other to the extend that
both of them represent estimates for cost for a period of time in future
...
Standard costs are scientifically predetermined costs of every aspect of
business activity whereas budgeted costs are mere estimates made on the basis of past
actual financial accounting data adjusted to future trends
...
2
...
3
...
Budgeted costs represent a macro approach of business operations
because they are estimated in respect of the operations of a department
...
clicktoconvert
...
Thus, budgeted costs deal with aggregates whereas standard
costs deal with individual parts which make the aggregate
...
e
...
whereas standard costs are compiled for various elements of costs i
...
materials, labour and overhead
...
3
...
e
...
It is based on the distinction between fixed and variable
costs
...
ii) Out of pocket costs: This is that portion of the cost which involves
payment to outsiders i
...
, gives rise to cash expenditure as opposed to such costs as
depreciation, which do not involve any cash expenditure
...
iii) Differential costs: The change in costs due to change in the level of
activity or pattern or method of production is known as differential costs
...
If there is decrease in cost
resulting from decrease of output, the difference is known as decremental cost
...
It is the written down value of the abandoned plant
less its salvage value
...
v) Imputed costs: These costs are those costs which appear in cost accounts
only e
...
national rent charged on business premises owned by the proprietor, interest
on capital for which no interest has been paid
...
When alternative capital investment projects are being evaluated it is necessary
to consider the imputed interest on capital before a decision is arrived as to which is
the most profitable project
...
In simple words, it is the advantage, in measurable terms, which has
been foregone due to not using the facility in the manner originally planned
...
vii) Replacement cost: It is the cost at which there could be purchased an
asset or material identical to that which is being replaced or revalued
...
viii) Avoidable and unavoidable cost: Avoidable costs are those which can
be eliminated if a particular product or department, with which they are directly
related, is discontinued
...
Unavoidable cost is
that cost which will not be eliminated with the discontinuation of a product or
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department
...
12
...
METHODS OF COSTING
The method of costing refers to a system of cost ascertainment and cost
accounting
...
Hence, different methods of costing are used by different
industries
...
Job costing and process costing are the two basic methods of costing
...
Process costing is suitable to industries where
production is continuous and the units produced are identical
...
The methods of
costing are explained in detail
...
4
...
It is adopted by industries where there is
no standard product and each job or work order is different from the others
...
The purpose of job costing is to ascertain the
cost of each job separately
...
12
...
2 Contract costing
It is also known as terminal costing
...
However, it is used where the job is big and spread over a long period of time
...
The purpose of
contract costing is to ascertain the cost incurred on each contract separately
...
This method is used by firms engaged
in ship building, construction of buildings, bridges, dams and roads
...
4
...
A batch is a group of identical products
...
Hence each batch is
treated as a cost unit and costed separately
...
Batch
costing is adopted by manufacturers of biscuits, ready made garments, spare parts
medicines etc
...
4
...
In certain industries, the raw material passes
through different processes before it takes the shape of a final product
...
Process costing is used in such industries
...
Process costing is applied to continuous
process industries such as chemicals, textiles, paper, soap, lather etc
...
clicktoconvert
...
4
...
It is suitable to
industries where production is continuous and units are identical
...
A cost sheet is
prepared taking into account the cost of material, labour and overheads, Unit costing
is applicable in the case of mines, oil drilling units, cement works, brick works and
units manufacturing cycles, radios, washing machines etc
...
4
...
To ascertain the
cost of such services, composite units like passenger kilometers and tone kilometers
are used for ascertaining costs
...
Operating costing is
adopted by airways railways, road transport companies (goods as well as passengers)
hotels, cinema halls, power houses etc
...
4
...
It involves costing by
every operation
...
The main purpose of this method is to
ascertain the cost of each operation
...
The cost of these operations may be found
out separately
...
12
...
8 Multiple Costing
It is also known as composite costing
...
It is adopted in industries where several parts
are produced separately and assembled to a single product
...
5 TECHNIQUES OF COSTING
In addition to different methods of costing, the following techniques are used
for the purpose of ascertaining costs
...
5
...
This is a
conventional method of cost ascertainment
...
5
...
This is the aggregate of marginal cost and a portion of fixed cost that are identifiable
with the product or process
...
12
...
3 Absorption costing
It is also known as total cost approach
...
It is useful in
submitting tenders, preparing job estimates etc
...
clicktoconvert
...
5
...
12
...
5 Marginal costing
It classifies cost into fixed and variable and only variable costs are charged to
product
...
12
...
6 Standard costing
Standard cot is predetermined cost
...
Standard performance is set in terms of costs
...
Then, reasons for variations are
investigated and remedial actions are taken
...
Check your progress 12
Explain the three methods of costing
Notes:
(a)
Write your answer in the space given below
...
183-184)
...
6 LET US SUM UP
Cost on element can be found at different levels
...
Direct cost can be calculated in order
to know the cost at different levels for cost control purpose
...
Each and every
classification has its own purpose
...
12
...
2 What do you understand by ‘overhead’?
3 Write short notes on:
a) Cost centre b) profit centre c) material d) labour
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12
...
It is adopted by
industries where there is no standard product and each job or work order is different
from the others
...
Basically, this
method is similar to job costing
...
3 Batch costing: It is an extension of job costing
...
All the units in a particular batch are uniform in nature and size
...
4 Process costing: It is called continuous costing
...
In other words, the finished product of one process becomes the raw material
for the subsequent process
...
5 Unit costing: This method is also known as single or output costing
...
The
objective of this method is to ascertain the total cost as well as the cost per unit
...
9 POINTS FOR DISCUSSION
1 Explain the methods of Costing
...
12
...
Jain & Narang – Cost Accounting
...
Nigma & Sharma – Cost Accounting
...
clicktoconvert
...
0
13
...
2
13
...
4
13
...
6
13
...
8
13
...
10
13
...
12
13
...
14
Aims and objectives
Introduction
Meaning and definition of cost sheet
Purpose of cost sheet
Specimen of cost sheet
Cost sheet and production Account
Cost sheet and production statement
Treatment of stocks
13
...
1 Stocks of raw materials
13
...
2 Stocks of work-in-progress
13
...
3 Stocks of finished goods
Tenders and Quotations
Important points to be remembered
13
...
1 Alternative terms are used for many items in cost sheet
13
...
2 Valuation of Stocks of Finished Goods
13
...
3 Sale of Material Scrap
13
...
4 Items excluded from cost accounts
13
...
5 Profit given as percentage of selling price
13
...
6 Standard Assumptions
Let us Sum Up
Lesson-End Activities
Points for Discussion
Check your Progress
References
13
...
ii) To understand the treatment of stocks
...
iv) To know the tenders and quotations
13
...
Preparation of cost sheet is one of the functions of cost accounting
...
2
...
This statement is called cost sheet
...
clicktoconvert
...
If this statement is confined to the disclosure
of the cost of the units produced during the period, it is a termed as a cost sheet”
...
13
...
PURPOSE OF COST SHEET
1
...
2
...
3
...
4
...
5
...
13
...
SPECIMEN OF COST SHEET
Cost Sheet for the period ____________
Production _____________ Units
Total Cost Cost per unit
Rs
...
Direct Material Consumed:
Opening stock
Add:
Purchases
Less:
Closing Stock
__
Cost of drawing
__
Direct Expenses
__
Primary Packing materials
__
PRIME COST
Add:
Works / Factory overheads:
__
__
Indirect Materials
__
Indirect Wages
__
Factory Rent and Rates
__
Factory Lighting and Heading
__
Power and Fuel
__
Repairs and Maintenance
__
Drawing Office Expenses
__
Research and Experiment cost
__
Depreciation of Factory Plant
__
Works Stationery
__
Insurance of factory
__
Works Manager’s salary
__
WORKS COST/FACTORY COST/
MANUFACTURING COST
Add:
Office and Administrative Overheads:
__
Office salaries
__
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176
Add:
Office Rent and Rates
Lighting and Heating
Cleaning
Telephone and Postages
Printing and Stationery
Depreciation of office Furniture
Depreciation of office Equipment
Insurance
Legal Expenses
COST OF PRODUCTION
Selling and Distribution Overhead:
Advertising
Salesmen Salaries
Samples and Free gifts
Sales Office Rent
Sales Promotion Expenses
Packing and Demonstration
Showroom Rent and Rates
Commission
Traveling Rent and Rates
Warehouse Rent and Rates
Repair of Delivery vans
Carriage freight Outwards etc
...
It is the aggregate of direct
materials direct labour and direct expenses, which are easily identifiable with the
product
...
, prime cost plus factory expenses
...
Cost of Production: This includes work cost and administration expenses
...
Cost of Sales: It represents cost of production plus selling and distribution
cost incurred
...
When profit is added to the cost of sales, sales can be found
...
It ensures that all the costs are
recovered and any desired profit is also obtained
...
5
...
The classification of cost is done on the basis of elements of cost, functions and
behaviour of cost
...
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177
On the other hand, the cost, sales, and profits presented in the form of a ledger
account is known as production account or manufacturing account
...
The balancing figure is either profit or loss
...
6 COST SHEET AND PRODUCTION STATEMENT
The cost of output can be ascertained from the statement known as cost sheet
...
Thus, total cost of a cost centre or cost unit is shown in the cost sheet
...
Bigg has defined it as “The expenditure which has been
incurred upon production for a period is extracted from the financial books and stores
records and set out in a memorandum statement
...
However the modern practice is to extend
the cost sheet to show profit and sales also and call it “statement of cost and profit”
...
7 TREATMENT OF STOCKS
13
...
1 Stocks of Raw materials
When opening stock of raw materials, purchase of raw materials and closing
stock of raw materials are given, raw materials consumed can be calculated as
follows:
Rs
...
7
...
Work-in-progress is valued on prime cost or
works cost basis but the latter is preferred
...
clicktoconvert
...
clicktoconvert
...
7
...
Add:
Cost of production
Opening stock of finished goods
Less: Closing stock of finished goods
Cost of production of goods sold
Specimen of Cost sheet, with inventories
Statement of Cost and Profit (with stocks)
Particulars
Opening stock of direct materials
Add: Purchase of direct materials
Expenses, taxes and duties on materials purchased
Less: Closing stock of direct materials
Direct material scrap sold
Cost of direct material consumed
Direct wages
Direct or chargeable expenses
Prime cost
Add: Factory overhead
Add: Opening work-in-progress
Less: Closing work-in-progress
Works cost (or) Factory cost
Add: Administration overheads
Cost of production
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Cost of goods sold
Add: Selling and distribution overheads
cost of sales
Add: Profit / Less: loss
Sales
Rs
...
xxx
xxx
xxx
xxx
Rs
...
8 TENDERS AND QUOTATIONS
Frequently the manufacturers of consumer durables and capital goods are
asked to quote the price at which they can supply their ouput
...
The
tender has to be prepared carefully since it may be accepted and goods have to be
supplied in future at the quoted rate
...
clicktoconvert
...
1
...
Direct labour
...
Chargeable expenses
4
...
Office overhead
6
...
Estimated profits
Estimation of different elements of cost has to be made
...
Percentage of factory overheads to direct wages =
X 100
Direct Wages
Office overheads
2
...
Percentage of selling and distribution overheads to works cost
=
Selling and Distribution overheads
Works cost
(Or)
X 100
The percentage may be calculated on cost of production
= Selling and Distribution overheads X 100
Cost of production
The overhead percentages obtained on the basis of preceding period’s cost
sheet are used for the tender by giving due regard to likely changes anticipated
...
In that case profit for the
tender is ascertained as given below:
Percentage of profit
100
If profit is to ascertain as a percentage of selling price of the tender, the profit is to be
calculated as given below:
Profit = Cost of Sales x
Profit =
Cost of Sales x Rate of profit sales
100- Rate percentage on sales
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181
13
...
9
...
Direct Labour
- Direct wages, Production wages,
Productive wages, Productive labour
b
...
Overhead
- ‘On-cost’, ‘Burden’
d
...
Factory cost
- Works cost, Manufacturing cost
f
...
9
...
Value of closing stock units =
Cost of production
Units produced
x Closing stock units
If value of opening stock units is not given, they can also be valued on the current cost
basis, assuming that costs in the pervious period were similar to the current period
...
9
...
It may also be indirect material scrap in which case it has to be reduced
from the factory overhead cost
...
13
...
4 Items excluded from cost accounts
(a) Purely financial expenses and losses like interest on loans and debentures,
loss on sale of investments and fixed assets, cash discount
...
(c) Capital expenses and losses
written off like goodwill, preliminary expenses, discount on issue of shares, etc
...
13
...
5 Profit given as percentage of selling price
Usually profit is added to the cost of sales to ascertain the sale price
...
For example if profit is 20% on sale
...
9
...
(a) Factory overhead to direct wages ratio of the previous period holds good
for current period also
...
clicktoconvert
...
Check your progress 13
Explain the following terms:
(i) Prime cost
Notes:
(ii) Work cost
(iii) Cost of production (iv) Cost of sales
(a)
Write your answer in the space given below
...
200)
...
10 ILLUSTRATIONS
Illustration 1
Calculate Prime Cost, Factory Cost, Cost of Production, Cost of Sales and Profit
from the following details:
Direct Materials
Rs
...
4,000
Direct Expenses
Rs
...
1,500
Administrative Expenses
Rs
...
300
Sales
Rs
...
14,500)
= Rs
...
4,000 + Rs
...
16,000)
= Prime Cost + Factory Expenses
= Rs
...
1,500
Cost of Production
(Rs
...
16,000 + Rs
...
17,300)
= Cost of Production + Selling Expenses
= Rs
...
300
Profit
(Rs
...
20,000 – Rs
...
clicktoconvert
...
Materials
2
...
Finished goods
Closing Stock:
1
...
Work-in-progress
3
...
2,00,000
60,000
5,000
1,80,000
50,000
15,000
5,00,000
1,50,000
1,00,000
8,00,000
20,000
Rs
...
5,20,000
1,50,000
6,70,000
1,00,000
7,70,000
60,000
8,30,000
50,000
7,80,000
Rs
...
80,000
Direct Wages Rs
...
clicktoconvert
...
4
Office overhead 10% of works cost
Selling overhead Rs
...
50 Per unit
Unit produced 4,000
Units sold 3,600 at Rs
...
Prepare cost sheet and show (a) cost per unit and (b) profit for the period
...
Rs
...
4)
32,000
8,00
Works Cost
1,60,000
40
...
00
Cost of production
1,76,000
44
...
Rs
...
00
(3,600 x Rs
...
50
(3,600 x Rs
...
50)
Cost of Goods Sold
1,63,800
45,50
Profit
16,200
4
...
50)
1,80,000
50
...
44 (b) Total Profit = Rs
...
Illustration 4
From the following particulars prepare a statement showing the components of
the total sales and the profit for the year ended 31st December
...
Stock of finished goods (1st Jan
...
)
40,000
st
Work-in-progress (1 Jan
...
)
15,000
Wages
1,75,000
Work manager’s salary
30,000
Factory employees’ salary
60,000
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Power expenses
General expenses
Sales for the year
Stock for the year
Work-in-progress (31st Dec
...
Rs
...
40,000
Purchase during the year
4,75,000
5,15,000
st
Stock of materials on 31 Dec
...
Works-in-progress 31st Dec
...
Less:
Less: Stock of Finished goods 31st Dec
...
4,65,000
1,75,000
12,500
6,52,500
1,49,750
15,000
1,64,750
10,000
1,54,750
8,07,250
32,500
8,39,750
6,000
8,45,750
15,000
8,30,750
29,250
8,60,000
Illustration 5: On August 15, 2003 a manufacturer Sethu desired to quote for a
contract for the supply of 500 radio sets
...
Stock of materials as on 1st Jan
...
clicktoconvert
...
The radios to be
quoted are of uniform quality and size as were manufactured during the six months to
30th June 2003
...
Solution:
Statement of cost and profit of Radio sets for six month
ending 30th June 2003
Particulars
Rs
Per unit
Rs
Opening stock of raw material
(+) Purchases of material
(-) Closing stock of material
20,000
150,000
170,000
25,000
Material consumed
Factory wages
1,45,000
1,20,000
100
82
...
76
17
...
00
Cost of production
(+) Opening stock of finished goods
(-) Closing stock of finished goods
(100 x 200)
2,90,000
20,000
200
...
clicktoconvert
...
Working Note
: Pr ofit
x 100
Sales
: Pr ofit
Profit on sales
Profit on costs
Cost
2
...
76 x
÷
100 ø
è
Wages per unit for quotation
Statement showing quotation for 500 radio sales
Particulars
54000
x 100
324000
54000
x 100
270000
82
...
28
16
...
04
Total
Per unit
Materials
50,000
100
...
04
95,520
191
...
24
1,04,140
208
...
66
1,24,968
249
...
10 LET US SUM UP
Cost sheet shows the elements of cost at different levels
...
We can take cost as the base for
preparing quotation foe a job
...
Expenses and losses are purely financial nature, capital, expenses
and less written off and appropriations are not taken into consideration while
preparing cost sheet
...
11 LESSON END ACTIVITIES
1
...
What are the purposes of cost sheet?
3
...
Write short notes on:
(i) Prime cost
(ii) Work cost
(iii) Work-in-progress
(iv) Cost of production
(v) Cost of sales
...
How are ‘Tenders’ prepared?
6
...
clicktoconvert
...
25,000
26,200
Purchase of raw materials
Carriage on purchases
Sale of finished goods
21,900
1,100
72,300
Direct wages
Non-productive wages
Direct expenses
Factory overheads
17,200
800
1,200
8,300
st
Administrative overheads
Selling overheads
3,200
4,200
7
...
The cost of production is:
Rs
...
8
...
Ltd
...
The costs are estimated as under:
Raw Materials
- 1,00,000 Kgs
...
1 per Kg
...
4 per hour
...
2
...
16,000
...
6,000
Selling and Distribution Rs
...
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9
...
Cost of raw materials in stock as on 1st June 1992
Raw materials purchased during the month
Wages paid
Wages Outstanding
Factory overheads
Work in progress as on 1
...
1992
Raw materials in stock as on 30
...
1992
Work in progress as on 30
...
1992
Opening stock of finished goods
Closing stock of finished goods
Selling and distribution overheads
Sales
Administration overheads
30,000
4,50,000
2,00,000
30,000
92,000
12,000
25,000
15,000
60,000
55,000
20,000
9,00,000
30,000
You are required to prepare a statement showing the cost of goods
manufactured and cost of goods sold
...
12 CHECK YOUR PROGRESS
Your answer is given below :
Prime cost: This is also called direct cost
...
Work cost: It consists of the total of all items of expenses incurred in the
manufacturing of a product, viz
...
It is also known as
factory cost or manufacturing cost
...
Production is not deemed to be complete without the managerial and facilitating costs
...
Thus, the cost of sales is the aggregate of all the direct and indirect costs
connected to the goods sold
...
13 POINTS FOR DISCUSSION
1
...
2
...
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13
...
Nigam and Sharma – Cost Accounting
...
Jain & Narang – Cost Accountancy
...
clicktoconvert
...
0
Aims and objectives
14
...
2
Meaning and Types of Store
14
...
1 Centralised stores
14
...
2 Decentralised stores
14
...
3 Central stores with sub stores
14
...
3
...
4
Classification and Codification
14
...
1 Types of Coding
14
...
5
...
5
...
5
...
6
Inventory turnover
14
...
1 Input-output Ratio
14
...
8
Inventory system
14
...
1 Periodical Inventory system
14
...
2 Perpetual Inventory system
14
...
9
...
9
...
9
...
9
...
10 Economic Order Quantity
14
...
12 Let us Sum Up
14
...
14 Check your Progress
14
...
16 References
14
...
ii) To know the store keeper, classification and codification
...
iv) To study inventory turnover, ABC analysis and VED analysis
...
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14
...
Every manufacturing concern maintains a store under the
control of a person called storekeeper
...
The materials required for the
production will be issued from the store as an when it is needed
...
2 Meaning and Types of Store
Store is a place where the various items of materials are kept safely till they
are issued for production is called store
...
ii) Decentralized stores
...
14
...
1 Centralised Stores
The usual practice in most of the concerns is to have a central store
...
All
materials are kept at one central store
...
2
...
Handling of stores is undertaken by the storekeeper in each department
...
The disadvantages of centralized stores can be eliminated if there are
decentralized stores
...
14
...
3 Central Stores with Sub-stores
In large factories, departments are situated at a distance from the central store;
so in order to keep the transportation costs and handling charges to minimum, substores (in addition to the central stores near the Receiving Department) should be
situated near production departments
...
At the end of a period the storekeeper of each sub-store will requisition from
the central stores the quantity of the material consumed to bring the stock upto the
predetermined quantity
...
To conclude, the ideal course for a large factory to overcome the
disadvantages of centralized and decentralized stores is to have central stores with
sub-stores
...
3 STORE KEEPER
All manufacturing concerns appoint a person known as the Storekeeper, Chief
Storekeeper or the Stores Superintendent who is in charge of the stores department
and is responsible for stores control
...
He should be a man of undoubted integrity
...
3
...
clicktoconvert
...
Therefore it is
imperative that utmost importance should be given to storekeeping
...
ii) Materials are classified according to the nature, size, shape, price, etc
...
iii) He must initiate the purchase requisition when the material reaches the
ordering level
...
v) He must maintain stock registers, entering therein all receipts, issues and
balances
...
vii) All items must be entered in the bin cards and this must be tallied with ledger
balances
...
4 CLASSIFICATION AND CODIFICATION
For an efficient store keeping, proper classification and codification of materials is
essential
...
Once the materials are
classified they are to be allotted codes which will be helpful for easy identification
...
14
...
1 Types of coding
The following are the important types of coding
i) Alphabetical method: An alphabet is allotted to each item of stores
...
This system is not flexible
...
ii) Mnemonic: It is an improvement over the alphabetical method
...
For example
Petrol can be ‘PT’, Diesel as ‘DS’, Kerosine as ‘KS’, etc
...
iii) Numerical Method: A number is allotted to each material for example
01, 02, 03, 04 and so on
...
There are two types of numbering – Straight numbering and Block
numbering
...
For example, Steelwire-1 “SW1, Copper wire2”CW2, brasswire 1”- BW1 etc
...
For each item in store, specifications are allotted
...
The specifications ensure that material of correct quality is used in production to
maintain the required quality of finished output
...
clicktoconvert
...
Simplifications is a corollary of standardization and aims at minimizing the
number of items carried in the stores so that carrying cost and investments in materials
may be reduced
...
5 STORE OR MATERIAL CONTROL
Store control aims at achieving savings in material cost, improvement in
material handling, increased production and avoidance of over investment or under
investment in inventories
...
5
...
to make available the right type of raw material at the right time in order to
have smooth and continuous flow of production;
b
...
to prevent over stocking of materials and consequent locking up of working
capital;
d
...
to prevent losses during storage of materials;
f
...
5
...
Essential of store control:
The following at the essentials of good system of material control
...
There should be proper co-operation and co-ordination among the departments
dealing with materials
...
All purchases must be centralized and must be made through an expert
purchase manager
...
All items in the stores should be classified with codes
...
Receiving and inspection procedure should be chalked out
...
Ideal storage and preservation facilities will have to be provide
...
Stores control measures like ABC analysis, perpetual inventory system, stock
verification should be introduced
...
There should be an efficient system of internal audit and internal check
...
Maximum level, minimum level and re-order level of stock should be fixed to
avoid over-stocking or shortage of materials
...
Appropriate records should be maintained to control issues and utilization of
stores in production
...
There should be a system of regular reporting to management regarding
materials purchases, storage and utilization
...
5
...
Advantages of store control:
The following are the main advantages of store control:
a
...
b
...
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c
...
Thus, it prevents production delays
...
It ensures up-to-date maintenance of stock records
...
It avoids over investment in inventories
...
It facilitates preparation of accurate monthly financial statements required for
various management information reports
...
It furnishes quickly and accurately the value of materials and supplies used in
various departments
...
6 INVENTORY TURNOVER
Kohler defines inventory turnover ratio as “a ratio which measures the number
of times a firm’s average inventory is sold during a year”, In his view the ratio is an
indicator of a firm’s inventory management efficiency
...
A low ratio on the other hand indicates over
investment and blocking up of working capital
...
It is measured
in terms of value of materials consumed to the average inventory during a period
...
If the number of
days in a year is divided by turn over ration, the number of days for which the average
inventory is held can be ascertained
...
On the basis of the ratio, a
decision is made to reduce investment on slow moving materials and stop over
stocking of undesirables material
...
6
...
Input-output-Ratio
This is yet another method of inventory control
...
This is possible in industries where the product and raw material are being
expressed in same quantitative measurement such as kilograms, Metric tonnes, etc
...
The raw material cost
of the finished product can be arrived at by multiplying material cost per unit by the
input-output ratio
...
clicktoconvert
...
7
...
In this Always
Better Control (ABC) technique of inventory control, the materials are classified and
controlled according to value of the materials involved
...
Thus, high value items are paid more attention than low value
items
...
‘A’ category consists of a few items of high value
...
The general classification of items under ABC categories are as given below:
Category
Percentage of
Percentage of
total items
total material cost
A
5 to 10
70-80
B
10 to 20
10-20
C
70 to 80
5-10
From the above classification, it is clear that ‘A’ items are of minimum
quantity and of maximum value out of total quantity and value of materials
...
‘B’ and ‘C’ items are
of major portion of total quantity of raw materials but having minimum capital
investment
...
Advantages
1
...
This results in reduction in value of material losses
...
Optimum investment in materials as minimum required quantity of ‘A’ items
with high value are purchased
...
Storage cost is kept at minimum amount as high value materials representing
minimum quantity are kept in stores
...
On the basis of the relative
importance, spare parts may be classified into 3 category viz
...
‘Vital’ spare parts are those whose non availability may
lead to stoppage of production
...
Production may not be interrupted due to
the non-availability of ‘Essential’ spares for one hour or one day, beyond which
production will be stopped and thus these items are very essential
...
14
...
clicktoconvert
...
Every manufacturing concern has to maintain proper
and accurate records regarding the quantity and value of inventory in hand
...
14
...
1
...
Periodic inventory system has the following disadvantages
...
Business or production has to be stopped during the period of stock-taking
...
b
...
c
...
So, verification cannot be
perfect
...
The element of surprise check which is essential for effective control is
completely absent
...
Stock discrepancies are not detected till the end of the accounting period
...
14
...
2 Perpetual inventory system:
This system is also known as “Automatic Inventory System”
...
Its main object is to make available detail about the
quantity and value of stock of each item, at all times
...
It also covers continuous stock-taking
...
14
...
The different stock levels are: (1) Minimum stock level (2) Maximum stock level (3)
Reorder stock level (4) Average stock level
...
9
...
Reorder stock level: It is the point at which the storekeeper should initiate
purchase requisition for fresh supply
...
The re-ordering point is fixed slightly higher than the minimum
stocks in such a way that the difference between minimum level and re-ordering level
is sufficient to meet the demand for production up to the time of fresh supply
...
Formula:
Re-order level of ordering level = Minimum level + consumption during the time
required to get fresh supply
Or
Maximum consumption x Maximum re-order period
14
...
2
...
clicktoconvert
...
This is
the maximum quantity of stock of raw materials which can be had in the stock
...
The demerits are:
1
...
More space is needed
3
...
There will be loss due to obsolescence
5
...
Availability of capital
2
...
Rate of consumption
4
...
Delivery time to obtain fresh stock
6
...
Cost of maintaining the stock
8
...
Seasonal nature of supply
10
...
Economic order quantity (EOQ)
Formula:
Maximum stock level = Re-order level + Re-ordering quantity (Minimum consumption x Minimum re-order period)
14
...
3
...
Material should not be allowed to fall below this level
...
This stock is
also known as safety stock level or buffer stock
...
1
...
Time required for getting fresh delivery of material
...
Rate of consumption of material during the lead time
...
Availability of substitute and re-order level
Formula:
Minimum stock level = Reorder level - (Normal consumption x Normal reorder
period
14
...
4
...
This is regarded as the average of maximum and minimum stock levels
...
Average stock level = Minimum level + ½ Reorder quantity
Average stock level =
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14
...
Economic ordering quantity is the
reorder quantity, which is the quantity to be purchased each time an order is placed
...
B = Buying cost per order
...
S
= Storage and carrying cost per annum
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
14
...
The value of material is Re
...
Opening Stock
800 Kg
...
Closing Stock
400 Kg
...
clicktoconvert
...
Solution:
Cost of Material Consumed
Inventory turnover ratio or Material Turnover Ratio =
Average value of Material in sock
Cost of Material Consumed = Opening Stock of Material + Purchase of Material –
Closing stock of Material
= 800 + 12,000-400
= Rs
...
600
2
Material or Inventory turnover ratio =
12,400
600
= 20
...
67
= 17
...
54
Ordering cost Rs
...
Inventory carrying cost 20 % of the average inventory
...
clicktoconvert
...
Number of orders per day =
36,000
= 36
1,000
Illustration 3
Two components X and Y are used as follows:
Minimum usage
:
50 units per week each
...
Y – 2 to weeks
...
, are
used interchangeably
...
(a) Re-order level = Maximum consumption x Maximum reorder period
Component X = 150 units x 6 weeks = 900 units
Component Y = 150 units x 4 weeks = 600 units
(b) Maximum level
= Reorder level + Reorder Quantity – (Minimum
Consumption x Minimum reorder period)
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Component X = 900 Units + 600 units – (50 units x 4 weeks)
= 1,500 – 200 = 1,300 units
...
Minimum usage
-
150 units per week each
Maximum usage
-
450 units per week each
You are required to calculate the following for each of the components
...
Solution:
Component A:
(a) Reordering level = Maximum consumption x Maximum reorder period
=
450 x 4 = 1,800 units
(b) Maximum stock level =Reorder level + Reordering quantity –
(Minimum consumption x minimum reorder period)
=
1,800 + 1,200 – (150 x 2)
=
2,700 units
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(c) Minimum stock level
=
Reorder level – (Normal consumption x
Normal reorder period)
=
1,800 – (300 x 3)
=
900 units
(d) Average stock level = Minimum stock level +
1
2
of reorder quantity
1 x 1,200
2
=
900 +
=
900 + 600 = 1,500 units
...
700 units
Reorder level + Reorder quantity – (Minimum
Consumption x minimum reorder period)
=
2,700 + 1,000 – (150 x 3)
=
3,400 units
Minimum stock level = Reorder level – (Normal consumption x Normal
Reorder period)
=
=
Average stock level
2700 – (300 x 4
...
clicktoconvert
...
14
...
Under this control of store keeper, materials are kept safely up to utilisation
...
Excessive investment in inventory
and shortage of raw materials must be avoided
...
In order to reduce carrying and ordering cost,
economic ordering level is calculated and orders made accordingly
...
So re-order level is fixed that minimum and maximum
level
...
13 LESSON END ACTIVITIES
1
...
What do you understand by ‘Classification’ and ‘Codification’ of
materials?
3
...
What is ‘ABC Analysis’?
5
...
6
...
Write short notes on: i) Maximum level ii) Minimum level
iii) Re order level iv) Average stock level
...
14 CHECK YOUR PROGRESS
Your answer the following:
ABC analysis is ‘Management by exception’ system of Inventory control
...
It is also called
proportional parts value analysis
...
The materials are classified under ‘A’, ‘B’ or ‘C’ designation on the
basis of their value and importance
...
Category ‘B’ includes more
items of medium value and category ‘C’ includes all other materials of small value
...
clicktoconvert
...
15 POINTS FOR DISCUSSION
1
...
Stock as on 1st Jan
...
2001
Purchases during 2001
25,000
35,000
2,50,000
2
...
Annual usage
Buying cost per order
Cost per unit
Cost of carrying inventory 10% of cost
3
...
Two components X and Y are used as follows;
20,000 units
Rs
...
100
and Re-ordering level from
Units per day
Units per day
Units per day
days
Units
...
16 REFERENCES
1
...
2
...
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LESSON 15 STORES LEDGER
Contents:
15
...
1
Introduction
15
...
3
BIN card
15
...
1 Difference between store ledger and Bin card
15
...
4
...
4
...
5
Treatment of surplus material
15
...
1 Return of surplus Material
15
...
2 Transfer of surplus Material
15
...
6
...
6
...
6
...
6
...
7
Material losses and Types
15
...
1 Waste
15
...
2 Scrap
15
...
3 Spoilage
15
...
4 Defectives
15
...
5 Obsolete, Slow moving and Dormant Stocks
15
...
9
Lesson-End Activities
15
...
11 Points for Discussion
15
...
0 AIMS AND OBJECTIVES
i) To know the store ledger and Bin card
ii) To understand the issue of material and treatment of surplus material
...
15
...
It is a
document showing the quantity and value of materials received, issued and in balance
at the end
...
Entries are
made in this ledger by the costing clerk with reference to goods received note,
material requisition note, material returned note etc
...
It gives the value of closing stock at any time
...
clicktoconvert
...
15
...
:
Reorder level
:
Sl
...
)
Rate
Quantity
Balance
Amount (Rs
...
R
...
Amount (Rs
...
R
...
No
...
3 BIN CARD
Bin is a place where materials are kept in
...
Bin card is a document showing the particulars of
materials kept in the bin
...
A bin card is
used for each item of material
...
Bin card is maintained by the store keeper
...
No, name of material, material code number, stores ledger folio
number, quantity of materials received, issued and the balance in hand
...
:
Reorder level
:
Sl
...
R
...
Qty
...
R
...
Qty
...
Remarks
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15
...
1 Difference between Store Ledger and Bin Card
1
...
3
...
5
...
7
...
9
...
It is maintained by the cost clerk
...
Entries are made by the cost clerk
...
It is maintained by the storekeeper
...
Entries are made by the stroe
keeper
...
material requisition note etc
...
transactions
...
recorded
...
shown
...
closing stock
...
4 ISSUE OF MATERIAL
Materials are kept in stores so that the storekeeper may issue them whenever
these are required by the production departments
...
15
...
1 Material Requisition
The storekeeper should always issue the material on proper authority to avoid
the misappropriation of material
...
15
...
2 Bill of Material
A bill of materials gives a complete list of all materials required with
quantities for a particular job, order or process
...
This bill serves the purpose of material requisition and all materials listed
on the bill are sent to the production department
...
15
...
5
...
When
these materials are returned to stores a Material Return Note is to be prepared by the
department which has the excess materials
...
One
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209
copy is retained by the department which is returning the material
...
The store keeper keeps one copy for making entries in the Bin
card and the second copy is sent to the cost office for making entries in the stores
ledger and for giving credit to the job where the material is in excess
...
5
...
This is because record for transfer may not be made and actual material
cost of jobs may be inaccurate
...
The transfer is to be allowed only
with preparation of material transfer note so that the cost of material transferred is
debited to the job receiving the material and credited to the job transferring the
material
...
6 METHODS OF PRICING OF MATERIAL
A number of methods are used for pricing material issues
...
As such, it is impossible to say which method
is the best
...
While choosing a method, it is necessary to see that the method chosen is simple,
effective and realistic
...
The following are the different methods of pricing the material issues:
15
...
1
...
It means that the material received first will be issued first
...
This method is simple to understand and easy to operate
...
The closing stock is valued at the current market price
...
Since issues are priced at cost, no profit or loss arises from pricing
...
This method is more suitable in times of falling prices
...
Deterioration and obsolescence can be avoided
...
When prices fluctuate, calculation becomes complicated
...
b
...
Therefore, comparison between jobs is difficult
...
During the period of rising prices, product costs are under stated and profits are
overstated
...
Check your progress 15
List out any three difference between store ledger and Bin card
Notes: (a)
(b)
Write your answer in the space given below
...
233)
...
clicktoconvert
...
6
...
Here materials received last are issued first
...
Advantages:
a
...
b
...
c
...
d
...
e
...
f
...
Disadvantages:
a
...
b
...
c
...
d
...
e
...
15
...
3 Simple Average Method
The simple average is determined by adding different prices of materials in
stock and dividing the total by number of prices
...
For Example: 20 units are purchased at Rs
...
11
40 units are purchased at Rs
...
11
...
This method is simple to understand and easy to operate
...
It reduces clerical work
...
It is suitable when price are stable
...
It does not take into account the quantities purchased
...
The value of closing stock becomes unrealistic
...
Material cost does not represent actual cost price
...
When prices fluctuate, this method will give incorrect result
...
clicktoconvert
...
6
...
This method takes
into account both quantity and price for arriving at the average price
...
For Example :
20 units are purchased at Rs
...
u Rs
...
20 p
...
600
50
Rs
...
800 / 50 = Rs
...
It gives more accurate results than simple average price because it considers
both quantity as well as price
...
It evens out the effect of price fluctuations
...
So, comparison between jobs is more easy and realistic
...
It is suitable in the case of materials subject to wide price fluctuations
...
It is acceptable to income tax authorities
...
Stock on hand does not represent current market price
...
When large number of purchases are made at different rates, the calculation is
tedious
...
c
...
15
...
The output is obtained along with wastage, scrap, spoilages and
defectives
...
Losses in the form of waste, scraps, spoilage and defectives are inherent and
inevitable with any manufacturing activity
...
Standard for each type of loss is
fixed
...
Types of Material Losses
15
...
1 Waste:
Waste is inherent in any manufacturing activity
...
Waste occurs
invisibly in the form of evaporation or shrinkage
...
Examples of visible wastes are gases, dust, valueless residue, etc
...
Example: atomic waste
...
Control of Waste: A waste report is prepared periodically
...
Accounting Treatment
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Waste has no value
...
i) Normal Waste: This is the inherent waste while manufacturing
...
The total cost of normal waste is distributed
among the good units of output
...
15
...
2 Scrap:
Scrap is the residue from certain manufacturing activities usually having
disposable value
...
Examples of scrap are outlined material from stamping operations, filings, Saw dust,
short lengths from wood working operations, sprues and ’flash’ from foundry and
moulding processes
...
Control of Scrap
Scrap is controlled by fixation of standards for scrap, fixation of department
wise responsibilities for scrap, etc
...
Actual scrap is compared with standard scrap
...
Accounting Treatment
i) Sale value of scrap credited to profit and loss A/c: The sale value is
credited to profit and loss account as other income
...
This method of accounting treatment is adopted when the value is
negligible
...
This method is adopted when several jobs are done
simultaneously and it is not possible to segregate the scraps job wise
...
This method is followed when identification of scrap with specific jobs of
processes is easy
...
7
...
Spoilage is
disposed off without further processing
...
The method of sale of spoilage depends on the extent of spoilage
...
Control of Spoilage: Spoilage is controlled through proper reporting about the
extent of spoilage
...
Actual spoilage
is compared with standard and variance is recorded
...
Accounting Treatment of Spoilage
Accounting treatment depends on whether the spoilage is normal or
abnormal
...
Abnormal spoilage is
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avoidable under efficient conditions
...
15
...
4 Defectives
It is a part of production which can be rectified and made into good units with
additional cost
...
Defective units are rectified with additional cost of
material, labour and overheads and sold as ‘first quality’ or ‘seconds’
...
Standards are fixed for defectives
...
If actuals are more than the
standards remedial action is taken to control it
...
If it is normal being inherent with production, it
is identified with specific jobs
...
If
the cost is not treated with a job, the cost of rectification is treated as factory overhead
...
15
...
5 Obsolete, Slow moving and Dormant Stocks: These items are part of
inventory
...
i) Obsolete Stocks: They are those stocks in the inventory which have been
lying unused due to change in product process and design or method of
manufacturing
...
ii) Slow moving Materials: They are items in stock used at long intervals
and thus lying idle for long periods
...
The store keeper should highlight such items in his periodical reports so that
the management may try (a) to dispose them off at any price or (b) clear them out to
save space in the stores (c) exercise caution in future purchase of such items of
materials
...
8 ILLUSTRATIONS
Illustrations-1
Draw a stores ledger card recording the following transactions under FIFO method
...
10 each
...
11 each
6
Issued 500 units
...
12 each
...
14
Issued 600 units
...
19
Received back 100 units out of the issue made on 14th July
...
25
Received 500 units at Rs
...
28
Issued 300 units
...
clicktoconvert
...
Solution:
Stores Ledger Account
(FIFO Method)
Name: __________
Maximum level: __________
Folio No
...
No
...
Rate Amount Qty
...
P
...
Units
Balance
Rate Amount
Rs
...
Rs
...
Units
Rate Amount
Rs
...
Rs
...
1
Balance
2,000
10
20,000
2,000
10
20,000
1,000
11
11,000
1,500
10
15,000
1,000
11
11,000
1,500
10
15,000
1,000
11
11,000
5,000
12
60,000
1,500
10
15,000
1,000
11
11,000
5,000
12
60,000
50
10
500
900
10
9,000
1,000
11
11,000
5,000
12
60,000
50
10
500
b/d
5
6
10
12
14
18
G
...
N
...
1,000
11
11,000
M
...
No
...
R
...
No
...
Retd
...
M
...
No
...
No
...
clicktoconvert
...
R
...
60,000
500
28
12
100
150
9,900
50
10
11
5,000
15
7,400
900
Shortage
10
500
26
740
740
7,000
1,000
100
14
10
50
500
500
5,000
G
...
N
...
10
900
25
1,500
60,000
100
10
12
50
150
9,900
5,000
M
...
No
...
Retd
...
500
900
19
10
14
7,000
Closing Stock = 6,975 units, valued at Rs
...
G
...
N
...
– Goods Received Note Number
...
M
...
No
...
Mat
...
Note = Material
Returned Note
...
clicktoconvert
...
Debit Note is sent to suppliers when materials are returned
...
Shortage is treated like an issue and priced as per the method of pricing in
operation
...
Returns from departments are treated just like fresh receipts at the price at
which the original issue was made
...
An alternative treatment is to issue the returned material as the
‘first out’ (or) irrespective of the method of pricing, issuing it as ‘next issue’
whenever an issue is made
...
Returns to supplier are like an issue, at the rate at which the original
purchase was made
...
2 each
...
Prepare Sores Ledger
Account showing how the value of the issues would be recorded under (a) FIFO and
(b) LIFO methods
...
2
...
150 units at Rs
...
40 each
180 units at Rs
...
50 each
150 units
100 units
100 units
200 units
Solution:
STORES LEDGER ACCOUNT
First In First Out (FIFO)
Date
April
1998
Receipts
Qty
...
Issues
Amt
...
Qty
...
Balance
Amt
...
1
Qty
...
Amt
...
200
5
100
2
...
00
300
220
7
150
2
...
00
2
...
00
100
2
...
20
220
50
2
...
20
110
100
50
10
50
50
50
150
400
100
2
2
...
clicktoconvert
...
20
110
50
2
...
40
180
2
...
40
2
...
40
240
2
...
50
200
240
100
240
100
450
2
...
Rate
Rs
...
Rs
...
Rate
Rs
...
Rs
...
Rate
Rs
...
Rs
...
40
28
100
180
2
...
40
240
450
180
2
...
40
48
50
2
...
00
100
2
...
00
100
2
...
00
100
2
...
50
450
50
2
...
40
72
450
20
220
50
360
12
20
220
2
...
00
100
50
100
2
...
20
300
2
...
00
50
150
5
150
400
100
2
2
...
172
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Illustration 3
From the following particulars, prepare stores ledger by adopting simple
average method of pricing of material issues
...
1
300 units at Rs
...
12 per unit
12 400 units at Rs
...
14 per unit
20
300 units
22 300 units at Rs
...
16 per unit
27
200 units
31
100 units
Solution:
Stores Ledger Account
(Simple Average Method)
Name: __________
Maximum level: __________
Folio No
...
No
...
Rate Amount Qty
...
P
...
Units
Balance
Amount Qty
...
Units Rs
...
Rs
...
P
...
1
G
...
N
...
10
3,000
300
10
3,000
200
12
2,400
500
-
5,400
400
11
4,400
900
-
9,800
G
...
N
...
15
10
G
...
N
...
12
300
M
...
No
...
R
...
150
æ 10 + 12 + 11 ö
ç
÷
3
è
ø
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18
G
...
N
...
20
200
14
2,800
M
...
No
...
33
3,699
-
8
...
R
...
No
...
R
...
No
...
R
...
200
14
æ 11 + 14 + 15 + 16 ö
ç
÷
4
è
ø
31
G
...
N
...
6,301
...
So,
whenever the older stocks are exhausted physically, their prices are also omitted
while calculating simple average of prices
...
1 is
physically exhausted
...
10 is omitted when issue price is
computed next time on Jan
...
Illustration-4
Prepare as stores ledger account using weighted average method of pricing
issue of materials
...
70 per unit
...
80 per unit
...
Issued 1,000 units
...
80 per unit
...
Received back 25 units out of the issue made on 5th March
...
Returned to supplier 30 units out of the purchases made on
15th March
...
75 per unit
...
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Physical verification on 21st March revealed a shortage of 15 units and 20 units
shortage on 30th March
...
__________
Code No: __________
Minimum level: __________
Bin
...
__________
Description: __________
Reorder level: __________
Location code: __________
Reorder quantity: __________
Particulars
Date
or
Reference
Receipts
Qty
...
P
...
Qty
...
P
...
Qty
...
P
...
1999
3
Balance
B/d
G
...
N
...
5
M
...
No
...
R
...
No
...
R
...
No
...
R
...
20
Mar
...
Retd
...
21
1,60,000
3,000
76
...
667
38,333 2,500
76
...
667
76,667 1,500
76
...
571
2,75,000
31,428 3,100
78
...
556
2,45,489
78
...
556
2,44,311
1,500 78
...
5297
1,24,077
2,580
77
...
667
78
...
R
...
24
80
Shortage
22
2,000
70,000
15
Debit
Note No
...
R
...
No
...
R
...
1,000
77
...
16
77,160 1,560
77
...
9
...
In
addition to that bin card is maintained in which details of materials in a particular bin
is recorded
...
Some times Production Company may
send bill of materials, in that materials required completing a particular job is
specified
...
clicktoconvert
...
Wastage may be classified as normal, abnormal,
scrap, and spoilage and suitable controlling measures must be taken in order to control
wastage and properly recorded into accounts
...
10 LESSON END ACTIVITIES
1 Write short notes on:
a) Bin card b) Store ledger c) Bill of material
2 What are the different types of material losses?
3 What is FIFO and LIFO method?
4 Distinguish between store ledger and bin card
...
1998 March 1
Opening Balance
500 tonnes at Rs
...
190
14 Returned from department ‘A’ 15 tonnes
16 Issue
180 tonnes
20 Received from supplier
240 tonnes at Rs
...
200
26 Issue
115 tonnes
27 Returned from department ‘B’ 35 tonnes
28 Received from supplier
100 tonnes at Rs
...
11 CHECK YOUR PROGRESS
Your answer may include any five of the following
(i)
(ii)
(iii)
(iv)
(v)
Store ledger is a record of both quantity and value
...
Store ledger is maintained by the cost clerk
...
Store ledger is kept in the cost office
...
Store ledger entries are made by the cost clerk
...
Store ledger entries are made on the basis of documents like goods received
note, material requisition note etc
...
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15
...
Prepare the stores ledger from the following information using LIFO
method of material valuation
...
2-1-94
Purchase
210
2
...
50
14-1-94
Issue of materials
260
-
17-1-94
Purchase
220
3
...
10
2
...
Receipt
Quantity
kg
...
2-3-82
200
2
...
40
-
15-3-82
-
-
250
18-3-82
250
2
...
3
...
Date
Receipt
Quantity
Rate
Issue
Quantity
2-3-1980
300
Rs
...
00
-
10-3-1980
400
Rs
...
40
-
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223
15-3-1980
-
-
350
18-3-1980
350
Rs
...
60
-
20-3-1980
-
-
300
Prepare a price ledger sheet, pricing the issues at weighted average rate
...
13 REFERENCES
1
...
2
...
3
...
N
...
LESSON 16 LABOUR COST
Contents:
16
...
1
Introduction
16
...
3
Labour cost
16
...
4
...
4
...
5
Job Analysis
16
...
7
Merit Rating
16
...
1 Importance of Merit rating:
16
...
8
...
8
...
9
Labour Turnover
16
...
1 Meaning
16
...
2 Methods of Measurement of labour turnover
16
...
3 Causes of Labour turnover
16
...
10
...
10
...
11 Over Time
16
...
12
...
12
...
12
...
13 Pay roll
16
...
15 Let us Sum Up
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16
...
17
16
...
19
Lesson-End Activities
Check your Progress
Points for Discussion
References
16
...
iii) To understand about job analysis and job evaluation
...
v) To understand about labour Turnover
...
1 INTRODUCTION
Labour cost is an important element of cost
...
Labour costs are associated with human beings
...
The human element makes the control of
labour cost difficult
...
Once unused it cannot
be recovered and the labour cost is bound to increase cost of production
...
In many
instances labour can achieve wonders in regard to the amount and quality of work
performed by them
...
16
...
(a) Direct labour cost is cost of labour expended in altering the construction,
composition or condition of the product
...
(b) Indirect labour cost is the amount of wages paid to workmen who are not
directly involved in altering the composition of the product
...
16
...
g
...
clicktoconvert
...
(b) Fringe Benefits, e
...
: (i) subsidized Food; (ii) Subsidized Housing; (iii)
Subsidized Education to the children of the workers; (iv) Medical facilities; (v)
Holidays Pay; (vi) Recreational facilities
...
4 RATE OR TIME AND MOTION STUDY
This department works in close harmony with the personnel, engineering and
cost departments
...
(2) Making job analysis
(3) Setting piece rates
...
4
...
The main
object of time study is to determine the proper time required to complete the job
...
Such study is conducted after the motion study because time is to be
noted down for the necessary movements, which are decided by motion study
...
It is also fair to
allow some time for fatigue and personal requirements of workers like smoking, going
to urinals, drinking water and the like
...
4
...
Motion study
There can be several methods of performing an operation; but the
determination of the best way of performing an operation is made possible by motion
study
...
Motion study was developed by F
...
Gilbrith, an
American management expert
...
Mr
...
For conducting motion study, workers are studied at their jobs and all their
movements and motions are noted
...
Time spent
on each therblig involved in an operation is collected by the use of a stop- watch
...
The purpose of such study is to determine the best way of
performing an operation involved in a job which every worker is supposed to follow
...
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226
16
...
JOB ANALYSIS
Job analysis is defined as the process of determining, by observation and
study and reporting pertinent information relating to the nature of a specific job
...
Job analysis with its two immediate products can be represented briefly as
follows:
JOB ANALYSIS
A procedure which discovers and
Identifies the pertinent
to each job
JOB SPECIFICATION
JOB DESCRIPTION
A
A statement of the job contents
such as:
__Job title
statement of the human
qualities required to do the job
such as :
__Education
__Location
__Skill
__Summary of duties
__Training
__Qualifications
__Experience
__Detailed statement of
__Responsibility
work to be done
__Initiative
__Working conditions
__Judgement ability
__Tools, equipment,
__Quality of leadership
machines, materials used
__Relation to other jobs
__Special aptitude
__Emotional characteristics
16
...
In addition to indicating
relative wages value, job evaluation serves the following varied purposes:
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227
a) It helps to know whether workers are placed in jobs best suited to them and to
the advantage of employers
...
c) Job evaluation forms the basis for training schemes
...
7 MERIT RATING
Merit rating aims at evaluating the performance of workers
...
Merit rating
brings out the comparative worth of workers
...
The employees may be rated individually as per the
pints they score and they may be put in groups based on their common scores of
points
...
7
...
Importance of Merit rating:
Merit is a valuable tool considered to be important for human resource
measurement
...
(2) It points out traits in which the workers are not proficient
...
(3) It helps in increasing wages and promotion opportunities
...
16
...
Attendance time is recorded for wage calculation and job time or
time booking is considered for computing time spent for each department, job,
Operation and Process for calculating labour cost department wise, job wise and of
each process and operation
...
8
...
Good time keeping system prevents ‘proxy’ for one another among workers
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2
...
3
...
4
...
5
...
6
...
7
...
16
...
2 Time Booking
Time spent by the worker on different jobs and works is called time booking
...
The following are the objectives of time
booking:
1
...
2
...
3
...
4
...
5
...
6
...
16
...
9
...
e
...
High labour turnover indicates that
labour is not stabilised and there are frequent changes by way of workers leaving the
organization
...
At the same time very low labour
turnover indicates inefficient workers are being retained in the organization
...
9
...
It does not consider surplus labour being
discharged by the firm (retrenchment)
...
clicktoconvert
...
This does not consider expansion programmes
...
Number of employees left + Number of employees recruited
during a period
Labour Turnover =
Average number of employees during a period
16
...
3 Causes of Labour turnover:
The causes for labour turnover can be broadly classified under three heads
...
(b) Retirement on reaching the prescribed age
...
(d) Dislike for the job or place;
(e) Death of the employee
...
(g) Permanent disability due to accidents
...
ii) Unavoidable Causes: In certain instances the organization may discharge
the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency
(b) Discharge of workers on account of irregularity or long absence
...
iii) Avoidable Causes: Some of the employees may leave the organization
account of the following reasons:
(a) Non availability of promotion opportunities
(b) Dissatisfaction with incentive schemes
(c) Unhappy with remuneration
(d) Unsuitable to job due to wrong placement
(e) Unhappy with working conditions
(f) Non availability of accommodation, health and recreational facilities
(g) Lack of stability of Tenure
...
clicktoconvert
...
10 IDLE TIME
When workers spent their whole time at different jobs, then the time booked
for jobs must with the gate time
...
It so happens, because of reasons like, waiting for materials,
machine breakdown, waiting for instruction, power failure etc
...
16
...
1 Causes of Idle Time
Idle time arises because of:
i)
Power failure
ii) Waiting for work
iii) Waiting for instruction
iv) Waiting for tools
v) Machine breakdown
vi) Bad Planning of work
vii) Accidents, strikes etc
...
10
...
ii) The instructions to the workers should be given in advance so that
workers need not wait
...
v) Regular and timely supply of raw materials must be made available
through a good system of storing materials
...
11 OVER TIME
When a worker works above his normal working hours, he is said to be
working overtime
...
If a worker works more than 9 hours on any day or 48 hours
is a week, the worker is entitled for overtime payment
...
The extra
amount payable to a worker over and above the normal rate is an overtime premium
...
If the
Factory Act does not apply, Establishment Act will apply
...
However, overtime work may be avoided, because:
1
...
2
...
3
...
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4
...
At the same time, overtime may be allowed:
1
...
2
...
3
...
4
...
16
...
Time wages
or piece wages earned plus other financial incentives constitute the earning of
employees
...
More over attractive ‘pay package’ will reduce labour
turnover
...
Non monetary incentives include,
promotional opportunities training schemes, etc
...
16
...
1 Essential of a good wage system:
The features of good wage system are listed below:
i) The wage system has to be fair to employees and the employer
...
iii) Workers are to be compensated on the basis of their relative efficiency
...
v) The wage system should encourage higher productivity and reduce labour
turnover
...
vii) The wage system should equate with industry wage levels
...
16
...
2
...
There are two
basic methods of wage payment:
i) Payment made on the basis of time spent by the workers in the factory
irrespective of output produced
...
The methods of wage payment are respectively called time wages and piece
wages
...
clicktoconvert
...
There are five variations of time wages which
are as follows:
(1) Flat time rate
(2) High day rate
(3) Measured day rate
(4) Graduated time rate
(5) Differential time rate
(1) Flat time rate: Under this method workers are paid at a single rate on the
basis of the time they are employed
...
The earnings of employees depend on total time they spend
in the factory
...
This flat rate is suitable for highly skilled workers, unskilled workers and
apprentices
...
(1) Where high quality goods are being produced
(2) Where production is mechanized and involves high speed
...
(4) Where effective and close supervision is possible
...
To conclude the flat time rate does not recognize effort and it is not helpful in
increasing output
...
This method also intends to remove the
draw backs of flat time rate which does not provide incentive fro efficiency
...
The target or standard output
fixed is at high level which only a skilled worker can achieve
...
High day rate reduces the labour cost
and over head cost per unit with the help of high output
...
(3) Measured day rate: Under this method of time wages the workers are
given a particular work to be performed and the rate is fixed on the basis of the level
of performance of specified work
...
The main drawback of measured day rate is that the
workers are not paid any additional remuneration for any improvement in the level of
performance originally specified
...
The rate of wages goes on changing with change in cost of
living index
...
(5) Differential time rate: This method recognizes individual efficiency and
skill
...
High rates are paid
for efficient workers and lower rates are paid for inefficient workers
...
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(B) Piece Rate System: This is also called ‘payment by results’
...
The earnings of the workers depend
on the number of units of output produced and the wage rate per unit received by the
worker
...
The effect of piece rate is that the remuneration is at constant rate and labour
cost per unit remains stable throughout the range of output
...
Variation of piece wages
There are four variations of piece wages
...
Check your progress 16
Pointed out the essentials of good wages system
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
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…………………………………………………………………………
…………………………………………………………………………
II
...
Two or more rates are offered to workers
...
In other words the increase in wages is in proportion to increase in
production
...
(1) Taylor’s differential piece rate
(2) Merrick’s differential piece rate system (Multiple piece rate system)
(3) Gantt’s Task and Bonus plan
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(1) Taylor’s differential piece rate system
The ‘Father of Scientific Management’ F
...
Taylor has introduced this
method
...
(a) Lower piece rate for the workers with below standard performance
...
(b) Higher piece rate for the work with performance above the standard or at the
standard
...
(2) Merrick’s Multiple or Differential piece rate system
This method is an improvement over Taylors method
...
Wages are paid at ordinary piece rate to those
workers whose performance is les than 83% of standard output; 110% of the ordinary
piece rate is given to workers whose level of performance is between 83% and 100%
of the standard and 120% of the ordinary piece rate is given to workers who produce
more than 100% of the standard output
...
Actual time taken is compared with the standard time and efficiency is
ascertained (1) Time wage are paid to the workers whose performance is below 100%,
i
...
, those who take more than the standard time
...
Some authors have provided for 20% bonus over and above high piece rate
for above standard workers
...
16
...
3
...
The workers are induced to show efficiency by performance of job in less
than the standard time
...
“A premium and bonus plan” is called
“incentive plan” because the worker is provided incentive to earn more wages by
completing the work in less time
...
Premium bonus systems
i) Monetary bonus:
The following are some of the popular monetary premium bonus systems
(1) Halsey premium plan
(2) Halsey- Weir premium plan
(3) Rowan system
(4) Barth variable sharing plan
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(5) Emerson’s efficiency plan
(6) Bedaux point premium system
(7) Accelerating premium plan, etc
...
It was
introduced by F
...
Halsey, an American engineer
...
Except for this change, Halsey and Halseyweir plans are similar
...
The wages are calculated on the basis of hours worked
where as the ‘bonus is that proportion of the wages of time taken which the time saved
bears to the standard time allowed’
...
The earnings in calculated by multiplying the rate per hour by the geometric mean of
stander hour and actual hours worked
...
Worker’s output is measured as a percentage of the standard fixed
...
The rate of bonus increases gradually when efficiency percentage goes
up form 67% to 100% of the basic time rate
...
Schedule of bonus
Efficiency %
Bonus
(A) Below 662/3 %
No bonus
...
(B) 662/3 % to 100%
Bonus starting from 0
...
(C) Above 100%
Bonus of 20% of time rate + 1% additional
bonus for each additional 1% efficiency
beyond the 100%
...
clicktoconvert
...
Even average workers can earn bonus since it
starts at 662/3 % of the standard
...
(6) Bedeaux’s point premium system: It is a combination of time and bonus
schemes
...
Standard production per
hour is fixed and the unit of measurement is ‘minute’
...
Each minute at standard time is called a point-Bedaux point or ‘B’
...
If actual time is more
than the standard time the worker is paid on hourly basis
...
Earnings = Hours worked x Rate per hour +
BS x RH
75
x
100
60
Where
B
...
= Number of points saved, i
...
, number of points actually earned less the
standard number of points for the job
...
H
...
Accelerating Premium Plan: Under this premium plan bonus increases at a faster
rate as output increases
...
The
efficiency is determined on the basis of time saved or increased output
...
It goads and forces the workers to increase production
...
Group Bonus Systems
Premium bonus schemes are meant for individual incentive where their
output can be measured
...
Under
such circumstances group bonus schemes take the place of individual bonus plans
...
The main group bonus schemes are as
under:
(1) Budgeted expenses bonus, (2) Cost efficiency bonus, (3) Priest may
system (4) Towne’s Gain sharing system and (5) Waste reduction scheme
...
The employees are
given a share in the profits based on the prosperity of the concern
...
(a) Profit sharing: In this scheme there is an agreement between the
management and employees, whereby the employer pays them a predetermined share
of the profits of the undertaking in addition to wages
...
In
certain cases employees are given loan to buy the shares of the company and
minimum period of service to be rendered is prescribed to get the shares allotted
...
clicktoconvert
...
This scheme increases morale of the employees to a great
extent if the company is profitable
...
ii) Non-monetary incentives: The employees are provided better facilities,
instead of additional monetary payments
...
Non financial incentives include the following:
(1) Favourable working conditions
(2) Free health care
(3) Providing rent free accommodation
...
Advantages of non-monetary incentives
(1) Attracting efficient and skilled labour force
...
16
...
The accuracy of the pay roll should be verified with the relevant records,
in order to avoid errors of omission
...
From the gross income of each employees, certain deductions are made to
arrive at the net wages payable
...
16
...
clicktoconvert
...
600
workers are recruited during the year; of these 150 workers are recruited to fill up
vacancies and the rest are engaged on account of an expansion scheme
...
75%
4,000
(b) Labour turnover by applying separation method:
=
=
Number of wor ker s separated
x 100
Average number of wor ker s
40 + 160
200
=
x 100 = 5%
4000
4000
(c) Labour turnover by applying flux method
=
Number of wor ker s replaced + No
...
60
Differentials to be used 80% and 120%
In a particular day of 8 hours, worker ‘X’ produced 30 units and worker ‘Y’
produced 50 units
...
clicktoconvert
...
60
Rs
...
12 per unit
Straight piece rate
=
5 units per hour
Low piece rate for below standard production
= Standard piece rate x Lower differential
= Rs
...
9
...
12 x 120% = Rs
...
40 per unit
...
12 per unit = Rs
...
12 per unit = Rs
...
9
...
288
Worker Y = 50 units x Rs
...
40 per unit
= Rs
...
5 per hour
High task 40 units per week
Piece rate above the high task Rs
...
5 per unit
In a 40 hour week, the production of the workers was as follows:
A 35 units B 40 units
C 41 units D 52 units
Calculate the wages of the workers under Gantt’s task bonus plan
...
(2) Level of performance of workers
Actual output
x 100
Level of performance =
High task output
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240
35
x 100 = 87
...
5%
40
52
Dx 100 = 130%
40
(3) Earnings of workers
A - Below standard performance – Only time wages
40 hours x Rs
...
200
B - Performance at standard – Time wages + 20% bonus
40 x 5 + 20% (40 x 5) = 200 + 40 = Rs
...
5 = Rs
...
5
D
- Performance above standard – High piece rate on whole
output
52 x 6
...
338
Note: Some experts provide for 20% bonus in addition to high piece rate for above
standard performance
...
Illustration 4
A worker is paid at 25 paise per hour for completing a work within 8 hours
...
Also ascertain the effective hourly rate of earning by the
worker
...
0
...
25
Earnings (or) wages = 6 x 0
...
75
= Re
...
292 per hour (approx
...
clicktoconvert
...
Number of units to be completed 5
...
0
...
Time taken 8 hours
...
Also
determine the effective rate of earnings per hour
...
0
...
25
= 8 x 0
...
40 = Rs
...
40
Effective rate of earnings per hour
Total Earnings
=
Actual time taken
=
2
...
0
...
5
...
5 = Rs
...
5
Note (1) Each ‘B’ represents one minutes standard work
...
Illustration 7
From the following details, calculate the earnings of a worker under Barth’s
variable sharing plan:
Standard time 25 hours
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242
Actual time
20 hours
Standard rate per hour: Rs
...
36 = Rs
...
33
Illustration 8
X Ltd
...
Standard output per
day of 8 hours is fixed at 50 units
...
5 per hour
...
‘M’ 30 units
...
‘O’ 50 units
...
You may
assume
...
Solution:
(1) Schedule of Bonus under Emerson’s plan
1
...
No bonus
2
...
3
...
Actual output
x 100
(2) Efficiency level of workers =
S tan dard output
30
x 100 = 60%
Efficiency level of ‘M’ =
50
45
x 100 = 90%
Efficiency level of ‘N’ =
50
50
x 100 = 100%
Efficiency level of ‘O’ =
50
58
x 100 = 116%
Efficiency level of ‘P’ =
50
(3) Earnings of workers
= Time wages + Bonus
M – 8 hours at Rs
...
40
96 - 66
...
60 = 45
...
4 = Rs
...
4
100
Note: As per instruction given in the problem, bonus for ‘N’ is at
...
67 and 90= 23
...
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16
...
Capacity
...
Labour turnover means the percentage change in the labour
force during a specific period
...
If the labour
turnover is high company will find the cause of labour turnover
...
If the idle time is more immediately
the company should analyse the causes of idle time and it should take effort to control
the idle time
...
16 LESSON END ACTIVITIES
1
...
What is Merit rating? What are its merits & demerits?
3
...
Explain the different variations of Time Rate system
...
Describe various Piece Rate systems and their pros and cons
...
From the following particulars supplied by the personnel department of a firm
Calculate labour turnover:
Total number of employees at the beginning of the month
Number of employees who are recruited during the month
Number of employees who left during the month
Total number of employees at the end of the month
2,010
30
50
1,990
7
...
follows Taylor’s differential piece rate system- 80 and 120 being the
differentials for below standard and above standard work
...
Standard time 15 minutes per unit
Time worked 8 hours
Unit produced X: 28 Y: 35
Normal piece rate per unit Rs
...
Calculate earnings of 3 workers A, B and C under the Merrick’s plan of piece rate
system given the following:
Standard production 120 units
Production of A 90 units
Production of B 100 units
Production of C 130 units
Ordinary piece rate Re
...
10
...
From the information given below, calculate the earnings of the three workers, X, Y
and Z under gantt’s task bonus plan:
a) time rare Rs
...
2 per unit
d) Day’s output: X 70 units Y 80 units Z 90 units
10
...
clicktoconvert
...
Hourly rate Rs
...
b) Hourly rate of wages Rs
...
Actual time taken by the worker to produce 25 dozens 40 hours
...
‘S’ a worker in a factory 300
Standard time allowed 10 minutes per unit
...
5 per hour
...
17 CHECK YOUR PROGRESS
Your answer may include the following
· The wage system has to be fair to employees and the employer
...
· Workers are to be compensated on the basis of their relative efficiency
...
· The wage system should encourage higher productivity and reduce labour
turnover
...
18 POINTS FOR DISCUSSION
1
...
2 as bonus on a job which requires 20 standard hours at Re
...
50
per hour, under Halsey incentive system based on 50:50
...
From the following information, calculate the bonus and earnings under Emerson’s
Efficiency Bonus plan:
Standard output in 12 hours
Actual output in 12 hours
Time rate
192 units
168 units
Re
...
75 per hour
...
19 REFERENCES
1
...
2
...
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LESSON 17 STANDARD COSTING
Contents:
17
...
1
Introduction
17
...
3
Advantages of standard costing
17
...
1 Cost control
17
...
2 Elimination of wastage and inefficiency
17
...
3 Norms
17
...
4 Locates sources of inefficiency
17
...
5 Fixing responsibility
17
...
6 Management by exception
17
...
7 Improvement in methods and operations
17
...
8 Guidance for production and pricing policies
17
...
9 Planning and Budgeting
17
...
10 Inventory valuation
17
...
5
Applicability of standard costing
17
...
7
Introduction of Standard Costing System
17
...
1 Establishment of cost centres
17
...
2 Classification and codification of accounts
17
...
3 Determining the types of standards and their basis
17
...
4 Determining the expected level of activity
17
...
5 Setting standards
17
...
9
Historical Cost and Standard Cost
17
...
11 Standard Costing and Marginal Costing
17
...
13 Standard Cost card
17
...
15 Lesson-End Activities
17
...
17 Points for Discussion
17
...
0 AIMS AND OBJECTIVES
(i) To know the meaning of standard, standard cost and standard costing
...
(iii) To study the advantages and limitation of standard costing
...
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17
...
Standard costing is the
most powerful system ever invented for cost control
...
It does not provide any ‘Norms’ or ‘Yardsticks’ for cost control
...
But, it is
necessary to plan the costs, to determine what should be the cost of a product or
service
...
Standard costing fulfills the need to compensate the short comings of
Historical costing from the point of view of cost control
...
(c) The
variances are further analysed for contributory reasons
...
(d) Corrective measures are under taken to
eliminate the unfavourable variances wherever possible
...
17
...
DEFINITION: STANDARD, STANDARD COST, STANDARD COSTING
Standard
...
Eric L
...
Standard may be used to a predetermined
rate or a predetermined amount or a predetermined cost
...
I
...
M
...
Terminology defines Standard Cost as, “a predetermined cost, which is
calculated from management standards of efficient operations and the relevant
necessary expenditure
...
The other names for standard costs are predetermined
costs, budgeted costs, projected costs, model costs, measured costs, specifications
costs etc
...
Actual costs are
compared with these standard costs
...
C
...
A
...
“Standard costing is a method of ascertaining the costs whereby statistics are
prepared to show (a) the standard cost (b) the actual cost (c) the difference between
these costs, which is termed the variance” says Wheldon
...
Pre-determination of standard costs;
2
...
clicktoconvert
...
Comparison of actual cost with the standard costs;
4
...
Reporting to management for proper action to maximize efficiency
...
3
...
3
...
Controlling and reducing costs becomes a systematic practice under standard costing
...
3
...
17
...
3 Norms:
Standard costing provides the norms and yard sticks with which the actual
performance can be measured and assessed
...
3
...
It also measures
the extent of the inefficiency
...
3
...
Shifting or evading responsibility is not easy under this system
...
3
...
17
...
7 Improvement in methods and operations:
Standards are set on the basis of systematic study of the methods and
operations
...
17
...
8 Guidance for production and pricing policies:
Standards are valuable guides to the management in the formulation of pricing
policies and production decisions
...
3
...
Being predetermined costs on scientific basis, standard costs are also useful in
planning the operations
...
3
...
17
...
LIMITATION OF STANDARD COSTING
1
...
2
...
Periodic revision of standard is a
costly thing
...
Inefficient staff is incapable of operating this system
...
Since it is difficult to set correct standards, it is difficult to ascertain correct
variance
...
clicktoconvert
...
Industries, which are subject to frequent changes in technological process or
the quality of material or the character of labour, need a constant revision of
standard
...
6
...
17
...
It is not a separate method of product
costing
...
The
standard-cost process is mostly used to control the operating tasks
...
Industries where standardized and uniform work of repetitive nature is done
are suitable for introduction of standard costing
...
17
...
The Cost Accountant coordinates the functions of the Standard
Committee
...
If necessary,
review the existing system
...
iv) Determine the type of standard to be used
...
vi) Determine standard costs for each product
...
viii) Classify the accounts properly so that variances may be accounted for in the
manner desired
...
x) Action to be taken by management to ensure that adverse variances are not
repeated
...
7 INTRODUCTION OF STANDARD COSTING SYSTEM
Introducing standard costing in any establishment requires the fulfillment of
following preliminaries
...
Establishment of cost centres;
2
...
Determining the types of standards and their basis;
4
...
Setting standards
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249
17
...
1 Establishment of cost centres
A cost centre is a location, person or item of equipment for which costs may
be ascertained and used for the purpose of cost control
...
The nature of production
and operations, the organisational structure, etc
...
No hard and fast rule can be laid down in this regard
...
17
...
2 Classification and codification of accounts
The need for quick collection and analysis of cost information necessitates
classification and codification
...
Each of the headings is to be given a
separate code number
...
17
...
3 Determining the types of standards and their basis
Standards can be classified into two broad categories on the basis of the
length of use
...
They are for short-term use and
are more suitable for control purpose
...
(b) Basic standards: These are long-term standards, some of them intended to be
in use for even decades
...
Basic standards are established for some base year and are not
changed for a long period of time
...
Generally, the number of basic standards may
be very few and current standards are predominant in number
...
The following are the different bases for setting standard, whether they
are current standards for short-term or basic standards for long-term use
...
They are like 100 marks in a paper for students taking up examinations
...
They are impractical and unattainable in practice
...
(b) Past performance based standards: The actual performance attained in the
past may be taken as basis and the same may be retained as standard
...
They are
too easy to attain
...
(c) Normal standard: It is defined as “the average standard which, it is
anticipated can be attained over a future period of time, preferably long enough
to cover one trade cycle”
...
For a specific period, say a budget period, their relevance is negligible
...
clicktoconvert
...
They are based on the current
conditions and capability of the workers
...
Any variances from such standard are really
significant because the standard which is attainable with effort is not attained
...
7
...
When the activity level is decided on the
basis of sales or production, whichever is the limiting factor, all standard can be
developed with the activity level as the focal point
...
are solely governed by the planned level of
activity
...
7
...
Setting standards is like laying a building foundation
...
It is preferable, particularly in large firms, to establish ‘Standard committee’
which is responsible for determining standards in all aspects of the business and also
making suitable revisions in due course
...
It is the Cost
Accountant’s role which is crucial because he has to assign the monetary values for
the different standards set by the other experts in each area or function
...
There may be several materials
used in the production of a product
...
Material usage or Quantity standards
These standards deal with the quantity of material needed for each unit of
finished product, the quality specifications and tolerances like length, breadth,
strength, volume, etc
...
Based on the expected or permitted loss, the quantity standard per
unit is fixed
...
The production manager and technical expert play the most important role in
setting quantity standards
...
The
following are the usual quantity standards set
...
(b) Standard loss permitted in the production process
...
clicktoconvert
...
(d) The yield expected from material
...
Usually, current market price
for each material, the trends observed and the forecasts of the purchasing department
are the determining factors
...
, are also considered
...
It is customary to prepare a standard ‘Bill of Materials’ which is a list of all
the direct materials to be used and incorporate therein all the standards set for each
material sot that it acts like a ready reckoner
...
(A) Labour Time Standards: These standards represent the time to be taken by the
direct labour in the production of one unit of product or performing a specific
operation
...
Since, human factor is involved, the cooperation of workers should be
obtained by suitable briefing about the purpose and significance of the exercise
...
The most ticklish problem in setting the labour time standards is the provision
for idle time
...
the
care with which the idle time standards are fixed determines the level of arguments
and quarrels on the production lines
...
(a) Standard time to be taken for one unit of output
...
(B) Labour rate standards: Labour rates are generally governed by agreements with
trade unions, the firm’s wage policy and incentive systems in use
...
Wage rate standards differ for different grades or kinds of labour
...
(3) Standards for overhead cost
Overheads are usually segregated into fixed and variable
...
Separate rates have to be determined for factory, office, selling and distribution
overheads- both fixed and variable
...
clicktoconvert
...
Standard overhead costs – both fixed and variable should be determined
...
Standard output and its standard cost
Once all the cost standards are finalised, it is possible to consolidate them in
the shape of ‘standard cost for standard output’
...
The total of all of these represents standard cost
per unit
...
Standard hour
If a single product is produced in a firm, the output can be expressed in terms
of the units of that product
...
Though all of these can not be expressed in terms of a single measure, it possible to
express all of theme in terms of ‘Time’
...
Production, expressed in terms of hours needed to produce them is
called ‘Standard hours’
...
C
...
A
...
The ‘Standard hour’ is very useful is ascertaining overhead variances
...
Revision of standards
Current or short-term standards have to be periodically revised
...
They may also need revision when the
factors affecting the standard change
...
(e) Errors in setting of the original
standards
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
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…………………………………………………………………………
…………………………………………………………………………
17
...
But the
object of standard costing differs
...
It is used as statistical data, and It is scientifically used, and it is a
leads to a lot of guess work
...
2
...
costs should be”
3
...
efficiency
...
It is used for a specific use; i
...
, It is a continuous process of costing,
fixing sale price
...
5
...
is in operation
...
It is not accurate
...
cost
...
9 HISTORICAL COST AND STANDARD COST
Historical Cost
1
...
2
...
3
...
4
...
Standard Cost
It is a predetermined cost
...
It is a future cost
...
It is used for the measurement of
operational
efficiency
of
the
enterprises
...
10 BUDGETARY CONTROL AND STANDARD COSTING
Budgetary Cost
Standard Cost
1
...
whole
...
clicktoconvert
...
Budgets are prepared for sales, It is determined by classifying
production, cash etc
...
3
...
accounts
...
Control is exercised by taking Variances are revealed
into account budgets and difference accounts
...
Variances are not
revealed through accounts
...
Budgeting can be applied in It cannot be applied in parts
...
6
...
production, sales, finance etc
...
Budgets can be operated with This system cannot
standards
...
be
operated
17
...
STANDARD COSTING AND MARGINAL COSTING
Standard costing is a system of accounting in which all expense: (fixed and
variable) are considered for the determination of standard cost for a prescribed set of
working conditions
...
Both standard costing and
marginal costing are completely independent of each other and may be installed
jointly
...
Variances are calculated in the same way as in
standard costing system with the only difference that volume variances are absent
because fixed expenses are charged in totals in each period
...
12 STANDARD COSTING AND STANDARDISED COSTING
The term ‘standardised costing’ is synonymous to inform costing
...
With the help of uniform costing, several common processes
of various industrial units can be standardised which will be helpful in improving the
performance of inefficient units
...
e
...
17
...
The process of setting standards for materials,
labour and overheads results in the establishment of the standard cost for the product
...
clicktoconvert
...
The build-up of the standard cost of each item is recorded
in standard cost card
...
The type of standard cost card varies
with the requirements of individual firm hence no uniform format can be prescribed
...
14 LET US SUM UPS
Standard costing is a yardstick to measure the performance of a concern
...
Standard yard for materials, both in quality and price, labour both rate and hours,
overheads, sales and profit are fixed
...
Budgetary control extensive and deals with the operation
of department as a whole
...
15 LESSON END ACTIVITIES
1 Define ‘standard cost’ and ‘standard costing’
...
4 What are the difference between ‘standard cost’ and estimated cost’?
5 Distinguish between budgetary control and standard costing
...
16 CHECK YOUR PROGRESS
Your answer may include the following
Advantages of standard costing
1 Cost control: Standard costing is universally recognised as a powerful cost
control system
...
2 Elimination of wastage and inefficiency: Wastage and inefficiency in all
aspects of the manufacturing process are curtailed, reduced and eliminated over a
period of time if standard costing is in continuous operation
...
Limitations of standard costing
1
...
2
...
Periodic revision of standard is a
costly thing
...
Inefficient staff is incapable of operating this system
...
17 CHECK YOUR PROGRESS
1
...
2
...
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17
...
Jain & Narang – Cost Accounting
...
S
...
Maheswary – Management Accounting
...
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...
0
18
...
2
18
...
4
18
...
6
18
...
8
18
...
10
18
...
3
...
3
...
0 AIMS AND OBJECTIVE
i) To understand the meaning and definition of variance analysis
ii) To know to different kinds of material variance
iii) To study the different type of labour variance
iv) To learn to methods of calculation of material and labour variances
18
...
It, thus, involves the measurement of the deviation of actual
performance from the intended performance
...
In
variance analysis, the attention of management is drawn not only to the monetary
value of unfavourable and favourable managerial performance but also to the
responsibility and causes for the same
...
Computation and analysis of variances is the main objective
of standard costing
...
18
...
C
...
A, Variance Analysis is “the resolution into constituent parts and
explanation of variances”
...
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...
Explanation of variance includes the probing and inquiry for causes and
responsible persons
...
3 FAVOURABLE AND UNFAVOURABLE VARIANCE
Variances may be favourable or unfavourable depending upon whether the
actual resulting cost is less or more than the standard cost
...
3
...
The effect of the favourable variance increases the
profit
...
It is also known as positive or credit variance and viewed only as
savings
...
3
...
unfavourable variance refers to
deviation to the loss of the business
...
When the profit is greater than the standard profit, it is known as favourable
variance
...
This favourable variance is a sign or efficiency of the organisation and the
unfacourable variance is a sign of inefficiency of the organisation
...
4 UTILITY OF VARIANCES ANALYSIS
i)
Variance analysis sub divides the total variance based on difference
contributory causes
...
ii)
The sub division of variance establishes and highlights the interrelationship
between different variances
...
It paves way for
fixing responsibility for all variances
...
v)
It is a powerful tool leading to cost control
...
vii) It segregates variance into controllable and uncontrollable, thereby
indicating where action is warranted
...
18
...
(1) Direct material cost variances (2) Direct labour cost variance (3)
Overheads cost variances (4) Sales variances
...
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...
If the actual cost is less than the
standard cost, the variance is favourable and vice versa
...
MPV = (SP – AP) AQ
MPV arises due to the following reasons:
(a) Changes in the market prices of materials
(b) Uneconomical size of purchase orders
(c) Uneconomical transport cost
(d) Failure to obtain cash discount
(e) Failure to purchase materials at proper time
...
However, a general
increase in prices would be uncontrollable
...
MUV = (SQ – AQ) SP
MUV may arise due to (a) carelessness in use of materials (b) loss due to pilferage
(c) faulty workmanship (d) defect in plant and machinery causing excessive
consumption of materials
...
(4) Material Mix Variance (MMV): It is that part of material usage variance
which arises due to change in standard and actual composition of mix
...
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...
where definite
proportions of different raw materials are mixed to get a product
...
(5) Material Yield Variance (MYV): It is a part of material usage variance
...
MYV = (Standard yield – Actual yield) Average standard price p
...
Or
(Standard loss on actual input - Actual loss) Average standard price p
...
Labour
(1) Labour Cost Variance (LCV): This is the difference between the
standard wages specified and the actual wages paid
...
This is further divided into the following
variances
...
LRV = (SR – AR) AH
Labour rate variance arises due to (a) changes in the basic wage rates (b) use of
different methods of wage payment (c) unscheduled overtime
...
It
is the difference between standard labour hours specified and actual labour hours
spent
...
LMV = (RSH – AH) SR
RSH =
S tan dard Hours
x Total Actual Hours
Total S tan dard Hours
SH = Standard Hour SR = Standard Rate
AH = Actual Hours
AR = Actual Rate
RSH = Revised Standard Hour
...
It
arises due to the difference between standard yield and actual yield
...
u
...
u
...
Overhead Cost Variance = Standard
overhead – Actual overhead
...
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Variable overheads variance is the difference between the standard and actual
variable overheads
...
Overheads variance is further divided into the following categories
...
Budget Variance =
Budgeted overhead – Actual overhead
...
(ii) Volume Variance: It is caused due to the difference between the budgeted output
...
Volume variance = (Actual production – Budgeted production) SR
(iii) Efficiency Variance: It is that portion of volume variance which is due to
the difference between the budgeted efficiency (in standard units) and the actual
efficiency attained
...
It may be caused by idle
time, strike and lock out, failure of power, machine break-down etc
...
This variance arises
due to the difference actual working days and the budgeted working days
...
Note: SR refers to standard overhead rate per unit
...
Sales value variance = Actual sales – Standard sales
(ii) Sales Price Variance: It is the difference between the actual price and
standard price, for actual quantity sold
...
(iii) Sales Volume Variance: It is the difference between the actual quantity of
sales and the budgeted quantity of sales at standard price
...
– Standard Qty
...
This variance may arise only when more than one commodity is sold
...
– Revised standard Qty
...
clicktoconvert
...
Check your answer with the ones given at the end of this Lesson
(pp
...
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
18
...
Material Cost Variance
= (SQ x SP) – (AQ x AP)
2
...
Material Usage Variance = (SQ – AQ) SP
4
...
Material Sub-Usage Variance = (SQ – RSQ) SP
Material Yield Variance = (Standard loss on actual input- Actual loss)
Average SP
Average Standard Price per Unit =
Total S tan dard Cost
S tan dard Output
Abbreviations used:
SQ = Standard Quantity
AQ = Actual Quantity
SP = Standard Price
AP = Actual Price
RSQ = Revised Standard Quantity
Illustration 1
The standard quantity and standard price of raw material required for one unit
of product A are given below:
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263
Quantity
Standard Price
Material X
2 kgs
...
3 per kg
...
Rs
...
The actual production and relevant data are as follows:
Output 500 units of product A
Material
Total Quantity
Total Cost
for 500 units
Rs
...
3,900
Y
1,800 kg
...
Solution:
1
...
For 500 units of product A, Material X = 500 x 2 = 1000 kgs
...
For 500 units of product A, Material Y = 500 x 4 = 2000 kgs
...
900 Adverse
Material Y: (2,00 x 2) – 4,500 = Rs
...
Material Price Variance
= (SP –AP) AQ
Material X : (3-3
...
300 Adverse
Material Y : (2-2
...
900 Adverse
3
...
600 Adverse
Material Y : (2,000 – 1,800) 2 = Rs
...
25; Y = 4500 ¸ 1800 = 2
...
Standard
Actual
Quantity
Unit
Quantity
Unit
(Kilos)
Price
Total
(Kilos)
Price
Rs
...
Rs
...
Material Cost Variance
=
(SQ x SP) – (AQ x AP)
Total
Rs
...
clicktoconvert
...
3
...
70 (F)
Material Mix Variance
=
Revises Standard Quantity
=
(RSQ – AQ) SP
SQ of each material
x Total AQ
Total SQ
A
:
10
x 30 = 6
50
B
:
20
x 30 = 12
50
C
:
20
x 30 = 12
50
Material Mix Variance
Rs
...
clicktoconvert
...
of chemical D is made up of:
Chemical A-30 kg
...
4 per kg
...
@Rs
...
Chemical C-80 kg
...
6 per kg
...
of chemical D were produced from a mix of
Chemical A - 140 kg
...
588
Chemical B- 220 kg
...
1,056
Chemical C - 440 kg
...
2,860
How do the yield, mix and the price factors contribute to the variance in the
actual cost per 100 kg
...
of chemical D
...
for production of 100kg
...
Chemical A
Chemical B
Chemical C
140kg
...
x 100
500
440kg
...
44kg
...
Actual price per kg
...
588
= 4
...
80
220
= (SQ x SP) -(AQ x AP)
2860
= 6
...
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...
20)
120 – 117
...
00 (A)
(80 x 6) – (88 x 6
...
11
...
80)
200 – 211
...
40 (F)
100
...
20) 28
=
5
...
80) 44
=
8
...
50) 88
=
44
...
80 (A)
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3
...
Total actual quantity
= 28 + 44 + 88 = 160 kg
...
150
Chemical B
=
40
x 160 = 42
...
150
Chemical C
=
80
x 160 = 32kg
...
65 (A)
=
16
...
Chemical B
=
6
...
67 – 44) 5
= -1
...
33-88) 6
= -2
...
Material Sub-Usage Variance
Chemical A
=
:
(SQ – RSQ) SP
(30-32) 4
-2x4
Chemical B
:
:
=
13
...
98 (A)
(80- 85
...
33 x 6
Total Material Sub-Usage Variance
8
...
67) 5
- 2
...
33 (A)
Note: Material sub-usage variance is also called mater yield variance
...
clicktoconvert
...
Kg
...
Total
Rs
...
Kg
...
Total
Rs
...
00
3
...
00
3
...
00
900
400
2
...
Material Cost Variance
Material B
(SQ x SP) – (AQ x AP)
:
(500 x 6 ) – (400 x 6)
:
Material A
=
3,000 – 2,400
:
(400 x 3
...
60)
= 600 (F)
1,500 – 1,800
Material C
:
= 300 (A)
(300 x 3) – (400 x 2
...
Material Price Variance
= 80 (F)
=
(SP-AP) AQ
Material A
:
(6 – 6) 400
=
0
Material B
:
(3
...
60) 500
=
75 (F)
Material C
:
(3-2
...
Material Usage Variance
=
(SQ – AQ) SP
Material A
:
(500 – 400) 6
=
600 (F)
Material B
:
(400 – 500) 3
...
clicktoconvert
...
Material Mix Variance
=
=
75 (A)
(RSQ – AQ) SP
Revises Standard Quantity
=
S tan dard Quantity
x Total Acutal Quantity
Total S tan dard Quantity
Material A
:
500
x 1,300 = 541
...
33kg
1200
Material C
:
300
x 1,300 = 325
...
1200
Material A
:
(541
...
33 – 500) 3
...
Material Yield Variance
= 375 (F)
=
(Standard loss on actual input – Actual loss) Average standard price p
...
= 120
Standard loss on the actual input of 1,300 kg
...
u
...
1200
Total s tan dard cos t
S tan dard output
= Rs
...
5
Material Yield Variance = (130 – 220) 5 = Rs
...
40 per ton
12 tons of material B at Rs
...
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...
30 per ton
20 tons of material B at Rs
...
Solution:
Material Cost Variance = (SQ x SP) – (AQ x AP)
SQ for actual production:
Standard production = 90% of input = 90% of (8+12) = 18
For a standard production of 18, SQ of A = 8 tons
For the actual production of 27, SQ of A = A =
27
x 8 = 12 tons
18
For the standard production of 18, SQ of B = 12 tons
For the actual production of 27, SQ of B =
1
...
=
= (SP – AP) AQ
A
= (40 – 30) 12
=
120 (F)
B
= (60 – 68) 20
=
160 (A)
=
40 (A)
Total Material Price Variance
3
...
clicktoconvert
...
Material Mix Variance
= (RSQ – AQ) SP
Revised Standard Quantity (RSQ)
=
S tan dard Quantity
x Total Actual Quantity
Total S tan dard Quantity
Total Std Qty = 12 + 18 = 30; Total Actual Qty = 12 + 20 = 32
12
x 32 = 12
...
2
30
RSQ for A =
Material Mix Variance A
=
(12
...
2 – 20) 60
=
48 (A)
=
16 (A)
Total Material Mix Variance
5
...
u
...
That is, standard loss = 10% (100-90)
Standard loss on actual input = 10% on 32 = 3
...
u
...
78
Material Yield Variance = (3
...
78 = 104 (A)
*Working
Standard cost
= SQ x SP
=
A
B
Less Std
...
Labour Cost Variance
2
...
4
...
clicktoconvert
...
Labour Sub Efficiency Variance
=
(SH – RSH) SR
6
...
Labour cost variance 2
...
Efficiency variance 4
...
Labour sub-efficiency variance
...
00
9,000
4
...
50
8,400
1
...
00
20,000
0
...
Solution:
1
...
clicktoconvert
...
50) – (8,400 x 1
...
00) – (20,000 x 0
...
8,600 (A)
Labour Rate Variance
=
(SR – AR) AH
Skilled
= (3 – 4) 9,000
=
9,000 (A)
Semi-skilled
= (1
...
50) 8,400
=
0
Unskilled
= (1-0
...
7,000 (A)
Labour Efficiency Variance
= (SH – AH) SR
Skilled
= (10,000 – 9,000) 3
Semi-skilled
= (8,000 – 8,400) 1
...
Labour Mix Variance
=
=
3,000 (F)
1,600 (A)
= (RSH – AH) SR
Revised Standard Hours (RSH)
=
S tan dard Hours
xTotal Actual Hours
Total S tan dard Hours
Total standard hours = 10,000 + 8000 + 16,000 = 34,000
Total actual hours
= 9000 + 8,400 + 20, 000 = 37,400
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RSH: Skilled
= 10,000
34,000
Semi-Skilled
=
Unskilled
= 16,000
= 11,000 hrs
x 37,400
= 8,800 hrs
8,000
x 37,400
34,000
34,000
= 17,600 hrs
x 37,400
Labour Mix Variance
Skilled
=
(11,000 – 9,000) 3
=
6000 (F)
Semi-skilled
=
(8,800 – 8,400) 1
...
4,200 (F)
Labour Sub-Efficiency Variance = (SH – RSH) SR
Skilled
=
(10,000 – 11,000) 3
=
Semi-skilled
=
(8,000 – 8,800) 1
...
of
workers
Skilled
75
Semi-skilled
Un-skilled
Actual
Hourly
wage rate
per worker
Rs
...
7
45
4
30
5
60
3
80
2
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The work was completed in 32 hours
...
Solution:
Labour Cost Variance = (SH x SR) – (AH x AR)
SH here refers to standard man hours
...
3
...
Labour Mix Variance
= (RSH – AH) SR
660 (A)
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RSH
=
S tan dard Hours
xTotal Actual Hours
Total S tan dard Hours
Revised Standard Hours (RSH)
Skilled
= 2,250
5,400
Semi-Skilled
= 1,350
5,400
Unskilled
= 1,800
5,400
= 2,400
x 5,760
= 1,440
x 5,760
= 1,920
x 5,760
Labour Mix Variance =
Skilled
=
(2,400 – 2,240) 6
=
960 (F)
Semi-skilled
=
(1,440 – 960) 4
=
1,920 (F)
Unskilled
=
(1,920-2,560) 3
=
1,920 (A)
Total Labour Mix Variance
5
...
7 LET US SUM UP
1,620 (A)
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Variance is the difference between standard and actual performance
...
Material cost variance is the difference between
standard material cost and actual material cost
...
Labour variance is the
difference between standard wage fixed and actual wage paid
...
8 LESSON END ACTIVITIES
1
...
Describe to managerial use of variance analysis
...
Describe variance analysis significance to the management
...
The standard material cost for 100 kg of chemical D is made up of:
Chemical A: 30kgs
...
4
...
Chemical B: 40kgs
...
5
...
Chemical C: 80kgs
...
6
...
In a batch of 500 kgs
...
at a cost of Rs
...
at a cost of Rs
...
at a cost of Rs
...
From the following information calculate the Materials Mixture Variance
Materials
Standard
Actual
Standard
Actual
Quantity
Quantity
Price per unit
Price per unit
A
100
150
Rs
...
5
...
6
Rs
...
00
C
300
400
Rs
...
3
...
Calculate the material (a) cost variance (b) price variance and (c) quantity variance
Standard
Actual
Qty
Rate
4
2
2
8
A
B
C
Amount
Rs
...
Rate
2
1
3
6
350
200
300
Amount
Rs
...
A company manufactures particular product the standard material cost of which is
Rs
...
The following information is obtained from the cost records
...
Rs
...
clicktoconvert
...
Rs
...
Calculate material price variance in each of the following:
(a) Standard
Actual
(b) Standard
Actual
: 2,740 units at Rs
...
17 each
: 5,000 units at Rs
...
4
...
5 each
1,300 units, purchased at Rs
...
5
...
15 per ton
Closing stock
: 1,600 tons
Standard price
: Rs
...
g
...
400
chemical ‘Y’
Stock at the beginning of the : 200kgs
...
clicktoconvert
...
425 per kg
...
the period
9
...
Kg
...
X
500
460
10
Y
300
480
12
Z
200
260
8
10
...
9,000
Standard quantity of material required per ton of output
30 units
Standard rate of materials
Rs
...
50 per unit
Opening stock of materials
Nil
Closing stock of materials
500 units
Output during the period
80 tons
11
...
10 each
Material B
:
2,000 units ate Rs
...
9 each
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280
Material B
:
2,100 units at Rs
...
Calculate material mix and yield variances
...
10 per kg
B
:
6,000kgs at Rs
...
Standard loss
:
10% of input
Compute material yield variance
(c) Standard mix
:
X
:
300 units at Rs
...
3 each
Z
:
500 units at Rs
...
5 each
Y
:
400 units at Rs
...
3 each
Calculate material mix variance
...
9 CHECK YOUR PROGRESS
Your answer is given below
1
...
The effect of the favourable variance
increases the profit
...
It is also known as positive or credit variance and
viewed only as savings
...
Unfavourable variance: When the actual cost incurred is mote than the standard
cost, there is a variance, known as unfavourable or adverse variance
...
It is also known as negative or
debit variance and viewed as additional costs or losses
...
10 POINTS FOR DISCUSSION
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281
1
...
(a) Standard
: 400 units at Rs
...
7 each
:
3-kg at Rs
...
Production during March 1999
:
6,000 units of output
...
11 per kg
...
8 per kg
...
9 per kg
...
5 and Rs
...
Standard loss 10%
Actual:
5,000 units at Rs
...
B 5,000 unit at Rs
...
Output 8, 100 units
...
From the following data compute (a) Labour cost variance (b) Labour rate variance
(c) Labour efficiency variance (d) Labour mix variance
...
20 men at Rs
...
25 per hour for 25 hour
30 women at Rs
...
10 per hour for 25 hours
Actual labour composition for producing 100 units
25 men at Rs
...
50 per hour for 24 hours
...
1
...
3
...
3
2
Amount
Rs
...
clicktoconvert
...
2
...
00
Amount
Rs
...
11 REFERENCES
1
...
2
...
K
...
Gupta – Management Accounting
...
clicktoconvert
...
0
Aims and objectives
19
...
2
Definition of Marginal cost
19
...
4
Application of marginal costing
19
...
6
Difference between Absorption Costing and Marginal Costing
19
...
8
Some important concepts of cost-volume-profit analysis
19
...
1 Fixed cost
19
...
2 Variable costs
19
...
3 Contribution
19
...
4 Contribution to Sales æ C ö (or) P/V (Profit Volume) Ratio
ç ÷
èS ø
19
...
10
19
...
12
19
...
14
19
...
8
...
8
...
8
...
9
...
9
...
E
...
19
...
3 Types of Break Even Charts
Illustrations
Let us Sum Up
Lesson-End Activities
Check your Progress
Points for Discussion
References
19
...
ii) To know the cost volume profit analysis and some impotents points
...
iv) To study the difference between Absorption costing and Marginal costing
...
1 INTRODUCTION
Marginal costing is not a method of cost ascertainment like job costing or
contract costing
...
, job process
...
The other names for marginal costing are direct costing, differential
costing, incremental costing and comparative costing
...
These
variable costs will change in direct relation to the change in the volume of production
or change in the production by one unit
...
clicktoconvert
...
Fixed costs are not allocated to cost unit; and
these are charged directly to profit and loss account during the period and are called as
period costs or capacity costs
...
2 DEFINITION OF MARGINAL COST
Marginal cost is the additional cost of producing an additional unit of a
product
...
C
...
A, London as ‘the amount at any given
volume of output by which aggregate costs are changed if the volume of output is
increased or decreased by one unit
...
19
...
C
...
A
...
19
...
As already seen, it reveals the cost, volume profit
relationship in all its ramifications which is useful in profit planning, selling price
determination, selection of optimum volume of production, etc
...
The following are some of the more popular areas of application of marginal
costing:
(1) Key factor (or) Limiting factor
(2) Make or buy decision
(3) Fixation of selling prices
(4) Export decision
(5) Sales mix decision
(6) Product elimination decision
(7) Plant merger decision
(8) Plant purchase decision
(9) Further processing decision
(10) Shut down decision
The above list is not exhaustive
...
19
...
In marginal costing, only variable costs are charged
to productions
...
K
...
clicktoconvert
...
This explains why this technique is also called full costing
...
19
...
2
...
4
...
Absorption Costing
Marginal Costing
Charging of Fixed costs form part of Variable costs alone form part of
costs
total costs of production cost of production, and sales
and distribution
...
Valuation of Stocks
and
work-in- Stocks are valued at variable cost
stocks
progress are valued at both only
...
e
...
Variation in When there is no sale the If there is no sale, the fixed
profits
entire stock is carried overhead will be treated as loss in
forward and there is no the absence of contribution
...
not carried forward as part of stock
value
...
pricing policy over longterm
...
selling and pricing aspects
...
7 COSTS-VOLUME PROFIT ANALYSIS
As the term itself suggests, the cost-volume-profit (CVP) analysis is the
analysis of three variables, viz
...
In CVP analysis, an attempt
is made to measure variations of costs and profit with volume
...
The cost volume profit analysis helps or assists the management in profit
planning
...
When the
output is at maximum, within the installed capacity, it adds to the contribution
...
”
Thereby, cost volume profit analysis is the relationship among cost, volume and
profit
...
When the output increases, the fixed
cost per unit decreases
...
clicktoconvert
...
Generally, costs may not change in direct proportion to the volume
...
The management is always interested in knowing that which product or
product mix is most profitable, what effect a change in the volume of output will have
on the cost of production and profit etc
...
To know the cost volume profit relationship, a study of the following is
essential:
1
...
Break-even analysis;
3
...
Profit graph;
5
...
Sales mix
...
19
...
8
...
They do not depend on the volume of production and sales
...
Examples: Office rent,
Factory rent, Manager’s salary, etc
...
e
...
The fixed costs do not normally change upto the full capacity of a firm
...
Fixed cost are fixed in total but variable per unit
...
8
...
Variable costs are called ‘Product costs’ or ‘Marginal costs
...
They include all the direct costs, i
...
, direct material,
direct wages, direct expenses and variable overheads
...
19
...
3 Contribution
Contribution is the difference between sales and marginal cost
...
In marginal costing technique contribution
is a very important concept as it is used to find the profitability of products, processes,
departments and divisions
...
Contribution is different from the profit which is the net margin remaining
after reducing fixed expenses from the total contribution
...
clicktoconvert
...
8
...
It is an important ratio analyzing the
relationship between sales and contribution
...
This ratio helps in
comparison of profitability of various products
...
P/V Ratio can be improved by:
(1) Decreasing the variable cost by efficiently utilizing material, machines and
men
...
(3) Increasing the selling price per unit
...
19
...
5 Break even Analysis and Break even Point
Break even analysis is a method of studying relationship between revenue and
costs in relation to sales volume of a business enterprise and determination of volume
of sales at which total costs are equal to revenue
...
Thus, break even analysis refers to a system of determination of that level of activity
where total sales are just equal to total costs
...
E
...
At the break even point a business man neither earns any
profit nor incurs any loss
...
Formula for calculating break even point
Break even point (in units)
Fixed exp enses
=
Selling price per unit - M arg inal cos t per unit
(or)
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288
Fixed cos t
Contribution per unit
(or)
Break even sales value
Selling price per unit
Break even point (in rupees)
(or)
Break even sales value
Break even sales value = Break even point in units x Selling price per unit
...
Break even ratio is ascertained by the following formula:
Break even sales
x 100
Break even ratio = =
Actual sales
Composite Break even point
This is the combined break even point or overall break even point of a
concern calculated only when a business concern makes two or more products
...
Composite P/V ratio = Individual P/V Ratio x % of each product to total sales
Beak even capacity or Capacity Break even point: This is expression of break even
point as percentage of capacity
...
E
...
in units
x 100
Capacity B
...
P
...
8
...
Margin of safety
is the difference between actual sales and break even sales
...
Margin of safety indicates the
value/volume of sales which directly contribute to profit, as fixed costs have already
been recovered at break even point
...
It is
the ratio of margin of safety to actual sales
...
clicktoconvert
...
8
...
e
...
The point of their crossing is termed ‘Breakeven point’
...
‘The bigger is the angle, the more will be the contribution and profit with every
additional sale
...
Such firm can magnify their profits in high demand
conditions
...
19
...
Graphical representation of break-even point is
known as the break-even chart
...
Vance is of the opinion that “it is a graph showing
the amount of fixed variable costs and the sales revenue at different volumes of
operation
...
B
...
C
...
Break-even point is known as “no profit, no loss point”
...
At this point, the total costs are recovered and profit begins
...
9
...
ii) B
...
output or sales value can be determined
...
iv) Inter-firm comparison is possible
...
vi) The best products mix can be selected
...
viii) Profitability of different levels of activity, various products or profit, i
...
,
plant can be known
...
19
...
2 Limitations of B
...
C
...
E
...
is constructed under some unrealistic assumptions
...
ii) Detailed information cannot be known from the chart
...
iii) No importance is given to opening and closing stocks
...
clicktoconvert
...
v) If the business conditions change during a period, the B
...
C
...
19
...
3 Types of Break Even Charts
From the point of view of methods of preparation and purpose for which the
chart is prepared, break even chart may be various types
...
(1)
(2)
(3)
(4)
(5)
(6)
Simple break-even chart
Contribution break even chart
Profit break even chart
Profit chart for product-wise analysis
Cash break even chart
Control break even chart
Check your progress 19
Explain the Break even analysis and Break even point
Notes: (a)
(b)
Write your answer in the space given below
...
312)
...
10 ILLUSTRATIONS
Illustration 1: Calculate Break-Even Point from the following particulars
...
Fixed expenses
1,50,000
Variable cost per unit
10
Selling price per unit
15
Solution:
Calculation of Break-even point:
Fixed exp enses
B
...
P
...
u
...
u
...
15 – Rs
...
5
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291
Rs
...
E
...
(in rupees) = B
...
P
...
15
= Rs
...
E
...
(in units)
=
Illustration 2: Calculate Break-even point:
Sales
Fixed expenses
Variable costs:
Direct Material
Direct Labour
Other Variable expenses
Rs
...
6, 00,000 – Rs
...
2, 00,000
1,50,000
=
x 6,00,000 = Rs
...
E
...
can be calculated
only in terms of Rupees
...
E
...
(in Rs
...
E
...
What will be the
selling price per unit if B
...
P
...
Variable cost per unit
75
Fixed expenses
2,70,000
Selling price per unit
100
Solution:
Fixed exp enses
=
B
...
P
...
u
...
u
...
100 – Rs
...
25
2,70,000
= 10,800 units
B
...
P
...
Fixed exp enses
Fixed expenses per unit =
No
...
2,70,000
= Rs
...
clicktoconvert
...
E
...
is 9,000 units, Selling price p
...
is calculated as follows:
Selling price = Fixed expenses + Variable expenses per unit
...
30 + Rs
...
105
Illustration 4: From the following information relating to Quick Standard Ltd
...
V
...
4,500
Total Variable cost
7,500
Total sales
15,000
(e) Also Calculate the Volume of sales to earn profit of Rs
...
Solution:
(a) Profit volume ratio
=
Contribution
x 100
Sales
=
7,500
x 100 = 50%
15,000
(b) Break even point (in Rs
...
V
...
9,000
50
(c) Profit
= Sales – Total cost
= Rs
...
12,000 = Rs
...
7,500 – Rs
...
3,000
(d) Margin of safety
= Present sales – Break even sales
= Rs
...
9,000 = Rs
...
V
...
6,000
= Fixed exp enses + Desired profit
P
...
Ratio
= 4,500 + 6,000
x 100 = Rs
...
10,000 which represents 40% of sales
...
V
...
Calculate (a) Sales (b) Break even sales (c) Fixed cost (d) Profit
Solution:
(a) Sales:
Margin of safety 40% of sales
If margin of safety is Rs
...
100
If margin of safety is Rs
...
25,000
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293
(b) Break Even Sales:
Break Even Sales
= Sales – Margin of Safety
= Rs
...
10,000 = Rs
...
V
...
50 when Sales are Rs
...
V
...
15,000 x 50%
Contribution
= Rs
...
7,500
Profit at B
...
P
...
0
(d) Profit
Contribution = Sales x P
...
ratio
= 25,000 x 50%
Contribution
= Rs
...
7,500
Profit
= Rs
...
Ltd
...
8
Direct Labour
28
...
6
1,89,900
Distribution Overheads
4
...
1
66,700
Budgeted sales are Rs
...
You are required to determine
the break-even sales volume
the profit at the budgeted sales volume
the profit, if actual sales
(a) drop by 10% (b) increase by 5% from budgeted sales
...
8% of sales
Direct Labour
28
...
6% of sales
Distribution overheads
4
...
1% of sales
Total Variable Cost
79
...
clicktoconvert
...
V
...
V
...
1,89,9000 + Rs
...
66,700
=
21%
100
= 3,15,000 x
= Rs
...
18,50,000:
Percentage of Contribution to Sales = 21
21
Contribution at the budgetd sales = 18,50,000 x
100
= Rs
...
3,88,500 - Rs
...
73,500
(iii) (a) Profit is actual sales drop by 10%
Rs
...
3,49,650
= 3,15,000
Rs
...
18,50,000
92,500
19,42,500
=
4,07,925
= 3,15,000
Rs
...
clicktoconvert
...
Ltd
...
Sales (units)
15,000
Fixed Expenses
Rs
...
1,50,000
Variable costs
Rs
...
(ii) Calculate the revised P/V ration, break-even point and margin of safety in each
of the following cases:
(a) Decrease of 10% in selling price:
(b) Increase of 10% in variable costs:
(c) Increase of sales volume by 2,000 units:
(d) Increase of Rs
...
Solution:
(1) At the existing level:
Contribution
x 100
P
...
ratio =
Sales
Sales Value = Rs
...
10
\ Selling price per unit =
15,000
Contribution
= Rs
...
6 = Rs
...
V
...
E
...
(in units)
=
Contribution per unit
34,000
= 8,500 units
4
B
...
P
...
)
= B
...
P
...
10 = Rs
...
E
...
Sales
= Rs
...
85,000 = Rs
...
(a) Decrease of 10% in selling price:
Selling price per unit
Less : 10% Reduction
Revised selling price per unit
Contribution
P
...
ratio
B
...
P
...
= Rs
...
6 = Rs
...
clicktoconvert
...
E
...
(in Rs
...
1,01,997
= (15,000 x 9) – 1,01,997
= Rs
...
1,01,997 = Rs
...
6
...
0
...
6
...
V
...
10 – Rs
...
60 = Rs
...
40
= 3
...
E
...
(in units)
= 34,000
= 10,000 units
3
...
E
...
(in Rs
...
1,00,000
Margin of safety
= Rs
...
1,00,000 = Rs
...
V
...
E
...
(in units)
=
4
x 100 = 40%
10
B
...
P
...
E
...
(in Rs
...
85,000
Margin of safety
= (17,000 x 10) – Rs
...
1,70,000 – Rs
...
6,000 in fixed costs:
4
x 100 = 40%
P
...
ratio =
10
Fixed costs
=
Rs
...
6,000
Revised Fixed costs
=
Rs
...
E
...
(in Rs
...
1,00,000
= Rs
...
1,00,000 = Rs
...
11 LET US SUM UP
Marginal costing techniques is helpful to management to take decision, is in
which we are considering only variable cost
...
Break even point is a
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297
point at which sales equal to total cost
...
With the help of BEP we can find profit at desired levels
...
11 Lesson-End Activities
1
...
Distinguish between absorption costing and marginal costing by showing their
major points of difference
...
What do you understand by ‘Cost volume profit’ Analysis? What is its
significance?
4
...
Explain the meaning and significance of ‘Margin of Safety’
...
What are the limitations of break even chart? Mention the assumptions
underlying a break even chart
...
for 1993:
Sales
Rs
...
10,000
Fixed costs
Rs
...
8 From the following details find out
(a) Profit volume ratio
(b) Break-even sales and
(c) Margin of safety
Sales
Total cost
Fixed cost
Net profit
Rs
...
80,000
Rs
...
20,000
9 From the following information relating to Honest Ltd
...
V
...
Total fixed costs
4,500
Total variable costs
7,500
Total sales
15,000
10 From the following data calculate
(a) Break even point (in units)
(b) If sales are 10% and 15% above he break even volume
...
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298
Selling price per unit
- Rs
...
3
Fixed overheads
- Rs
...
2
Direct labour cost per unit
- Rs
...
1, 00,000; Profit Rs
...
Find out
(e) P/V Ratio
(f) Fixed cost
(g) Sales to earn a profit of Rs
...
, you are required to find
out
Sales price
- Rs
...
11 per unit
Variable selling cost
- Rs
...
5,40,000 per year
Fixed selling costs
- Rs
...
60,000
(c) Sales required to earn a profit of 10% of sales
13 From the following particulars you are required to determine:
(a) Break even sales volume
(b) the profit at the budgeted sales volume
(c) The profit if actual sales drop by 10% over the budgeted sales
...
18,50,000
...
8
Direct labour
18
...
6
2,89,900
Distribution overhead
6
...
1
56,000
14 The sales and profit for 1996 and 1997 are as follows:
Sales
Profit
Rs
...
1996
1,50,000
20,000
1997
1,70,000
25,000
Find out:
(a) P/V Ratio
(b) BEP
(c) Sales for a profit of Rs
...
2,50,000 and
(e) Margin of safety at a profit of Rs
...
clicktoconvert
...
12 CHECK YOUR PROGRESS
Your answer may the following:
Break even analysis is a method of studying relationship between revenue
and costs in relation to sales volume of a business enterprise and determination of
volume of sales at which total costs are equal to revenue
...
Thus, break even analysis refers to a system of determination of that
level of activity where total sales are just equal to total costs
...
E
...
At the
break even point a business man neither earns any profit nor incurs any loss
...
19
...
Differentiate managerial costing & Absorption costing
...
Explain the managerial costing techniques
...
14 REFERENCES
1
...
K
...
Gupta – Management Accounting
...
S
...
M a h e s w a r i –
Management
Accounting
...
clicktoconvert
...
0
20
...
2
20
...
4
20
...
6
20
...
8
20
...
10
20
...
12
20
...
14
20
...
2
...
3
...
5
...
7
...
7
...
7
...
8
...
8
...
8
...
B
...
)
20
...
1 Process of Zero Base Budgeting:
Illustrations
Let us Sum Up
Lesson-End Activities
Check Your Progress
Points for Discussion
References
20
...
1 INTRODUCTION
Modern business world is full of competition, uncertainty and exposed to
different types of risks
...
Budgeting is the most common,
useful and widely used standard device of planning and control
...
Costs can be reduced, wastage can be prevented and proper
relationship between costs and incomes can be established only when the various
factors of production are combined in profitable way
...
clicktoconvert
...
This requires careful
working out of proper plans in advance, co-ordination and control of activities on the
part of management
...
A
good number of tools and devices are available
...
Cost accounting aims not only at cost ascertainment, but also
greatly at cost control and cost reduction
...
It is possible when there is a Preplanning
...
The more
important point is that the actual programme is compared with the pre-planned
programme and the variances are analysed and investigated
...
,
20
...
Budgeting is preparing budgets
and other procedures for planning, coordination and control or business enterprises
...
C
...
A
...
20
...
1Objectives of Budget
1
...
2
...
The budgets are
compared with actual performance; and variances, if any, are investigated
...
It aims at careful control over the performance and cost of every function
...
It contributes to co-ordinate efforts of all departments in order to achieve an
integrated goal
...
20
...
It involves a detailed
study of business environment clearly grasping the management objectives, the
available resources of the enterprise and capacity of the enterprise
...
Batty as under: “The entire process of preparing the
budgets is known as budgeting”
...
Thus budgeting is a process of making the budget plans
...
‘Budgetary control’ starts with budgeting and ends with control
...
3
...
To obtain more economical use of capital
...
To prevent waste and reduce expenses
...
To facilitate various departments to operate efficiently and economically
...
clicktoconvert
...
To plan and control the income and expenditure of the firm,
5
...
6
...
7
...
8
...
9
...
10
...
20
...
Control is a mechanism
according to which something or some one is guided to follow the predetermined
course
...
Secondly, that it is possible to measure the
results of operations with a view to detecting deviations
...
20
...
Thus budget is a means and budgetary control is the end result
...
It
also provides a method of control
...
Wheldon characterises budgetary control as planning in advance of the various
functions of a business so that the business as a whole is controlled
...
C
...
A
...
20
...
1 Objectives of Budgetary Control
Budgetary control is inevitable for policy formulation, planning, control and
coordination
...
Following are the main
objectives of budgetary control
...
ii) Coordination: Budgets are helpful in coordination of business activities
...
iv) Increase in Profitability: Cost are controlled with help of budgets and profits
targeted are achieved
...
clicktoconvert
...
vi) Control: Controlling function is made to be effective as the control is
centralised while budgets are prepared and implemented
...
20
...
(ii) Forecast may be done for longer time; but budget is prepared for shorter
periods
...
(iv) Forecast results in planning and the planning results in budgeting
...
(vi) Forecast is not used for evaluating the efficiency of performance while a
budget is always used for this purpose
...
7 ORGANISATION
The following are the essentials for a sound system of budgetary control
20
...
1 Budget centre
For the purpose of effective budgetary control, budget centres are defined
...
Separate budgets
are prepared for each department and the departmental head is responsible for carrying
out budgets
...
20
...
2 Budget manual
It is a document which sets out the responsibilities of persons engaged in the
routine work
...
Duties, authorities, powers of each official of the different departments are
clearly defined, so as to avoid conflicts among the personnel
...
20
...
3 Budget Period
This is the period or time for which the budget is prepared and remains in
operation
...
There is no definite rule as regards the duration of a
budget period
...
For example manufacturers of consumer goods may prepare budgets for a
year, whereas in industries like ship-building the period of the budget may be 5 to 10
years
...
clicktoconvert
...
8 CLASSIFICATION OF BUDGETS
Budgets are classified according to their nature
...
20
...
1
...
Long-term budgets
2
...
Current budgets
20
...
2
...
Functional or subsidiary budgets
2
...
8
...
Classification on the basis of flexibility
1
...
Flexible budget
20
...
1 Classification on the basis of Time
(1) Long-term Budgets: Long-term budgets are prepared to reflect long-term
planning of the business
...
They are prepared by the top level management
...
(2) Short-term Budgets: These budgets are generally for a duration of one
year and are expressed in monetary terms
...
These budgets are prepared for the current operations of the business
...
C
...
A
...
20
...
2 Classification on the basis of functions
(1) Functional Budgets: These budgets relate to various functions of the
concern
...
It
encompasses the activities of the whole organisation
...
C
...
A
...
Master budget is prepared to coordinate the activities of various functional
departments
...
8
...
Fixed Budget: it is prepared for a given level of activity and remains same
irrespective of change of activity
...
20
...
4 Some Important Budgets
(1) Sales Budget:
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305
In the budgeting process, sales is a starting point, as sales is the key factor in
many cases
...
W
...
(2) Production Budget:
This budget is based on sales budget, unless production itself is the key-factor
...
It has
two parts, one showing the output for the period and the other showing production
costs
...
(3) Materials Budget:
This budget is prepared in coordination with production budget
...
Material budget consists of two parts, one is the consumption budget and
another is materials purchase budget
...
Labour budget is prepared by the
personnel department
...
(4) Labour cost for the period, etc
...
It is prepared with the help of production, and labour budgets
...
(b) Administration overhead budget: This budget is prepared to estimate the
expenditure to be incurred for planning, organising, direction and control functions of
the management
...
(c) Selling and distribution overhead budget: This budget is prepared to
estimate expenditure to be incurred to sell the product and is distribution
...
It is generally prepared in consultation with sales managers of each
territory
...
The budget is prepared in two parts, one is for
revenue expenditure and another is to estimate the capital expenditure to be incurred
...
It is generally a long-term budget
...
(8) Cash Budget:
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Cash budget is an important budget
...
The cash
budget is based on forecasts of cash or estimates of cash showing what funds would
be available at what times and whether the funds available would meet requirements
...
Methods of preparing cash budget
(1) Receipts and payments method
(2) Balance Sheet method
(3) Adjusted Profit and Loss Account method
...
The master budget is an overall plan
for the guidance of the management
...
C
...
A
...
Flexible Master Budget
I
...
M
...
, London defines a flexible budget as “a budget which, by recognising the
difference between fixed, semi-variable and variable costs is designed to change in
relation to the level of activity attained”
...
It is also
termed as ‘variable budget’ or ‘sliding scale budget’
...
1
...
2
...
Usually, all the direct costs and
variable portions of the indirect costs are combinedly called ‘variable cost’
...
Estimation of Fixed Costs: All those expenses which remain constant
irrespective of the level of activity are fixed costs
...
The total of such expenses has to be estimated
...
Estimation of Semi-variable Cost: It remains fixed upto a particular level of
capacity and there after it increases if the activity level goes up further
...
Presentation of Flexible Budget
The flexible budget can be presented in the following forms:
1
...
Under this
method costs are classified under fixed variable and semi variable
...
2
...
3
...
The expenses are expressed in terms
of ratios or percentages of production
...
clicktoconvert
...
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308
20
...
B
...
)
The purpose of management control is to ensure better performance and better
utilisation of scarce resources
...
‘Zero base budgeting’ provides a solution towards this end
...
Pyhrr at Texas
Instruments
...
Pyhrr has defined ZBB as “an operating, planning and budgeting
process which requires each manager to justify his entire budget request in detail from
scratch (hence zero base) and shifts the burden of proof to each manager to justify
why we should spend any money at all”
...
9
...
1
...
2
...
3
...
4
...
Check your progress
What are the steps involved in preparing the flexible budgets?
Notes: (a)
(b)
Write your answer in the space given below
...
333)
...
10 ILLUSTRATIONS
Illustration - 1
Larsen Ltd
...
At the beginning of the first quarter of the current year, there are
14,000 units of product in stock
...
How many units must be manufactured in each quarter of the current year?
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309
Solution:
PRODUCTION BUDGET
Sales
Add: Desired closing
stock
closing stock
Less: Opening stock
Estimated production
Illustartion -2
First
Quarter
Units
1,10,000
Second
Third
Fourth
Quarter Quarter Quarter
Units
Units
Units
1,20,000 1,30,000 1,50,000
24,000
1,34,000
14,000
1,20,000
26,000
30,000
28,000
1,46,000 1,60,000 1,78,000
24,000
26,000
30,000
1,22,000 1,34,000 1,48,000
The Sales Director of a manufacturing company reports that next year he expects to
sell 50,000 units of a particular product
...
Each unit of the product requires 2 units of A and 3 units of B
...
Solution:
Production Budget (Units)
Estimated sales
50,000
Add: Desired closing stock
14,000
64,000
Less: Opening stock
10,000
Estimated Production
54,000
Production Budget (Units)
Material A
Estimated consumption 2 x 54,000
1,08,000
(3 x 54,000)
Add: Desired closing stock
13,000
1,21,000
Less: Opening stock
12,000
Estimated purchases
1,09,000
Material B
1,62,000
16,000
1,78,000
15,000
1,63,000
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Illustartion - 3
Rajeswari Ltd
...
For the purpose of submission of sales budget to the
budget committed the following information has been made available:
Budgeted sales for the current year were:
Product
East
West
X
400 at Rs
...
9
Y
300 at Rs
...
21
Actual sales for the current year were:
Product
East
West
X
500at Rs
...
9
Y
200 at Rs
...
21
Adequate market studies reveal that product X is popular but under priced
...
1 it will find a ready market
...
1
...
From the information based on these price changes and reports from
salesman, the following estimates have been prepared by divisional managers:
Percentage increase in sales over current budget is:
Product
East
West
X
+10%
+5%
Y
+20%
+10%
With the help of an intensive advertisement campaign, the following
additional sales above the estimated sales of divisional managers are possible:
Product
East
West
X
60
70
Y
40
50
You are required to prepare Budget for Sales incorporating the above
estimates and also show the budgeted and actual sales for the current year
...
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Sales Budget for the year
...
East
Price
Budget for current period
Actual sales for current period
Quantity
Quantity Price
Rs
...
Value
Rs
...
X
500
10
5,000
400
9
3,600
500
9
4,500
Y
400
20
8,000
300
21
6,300
200
21
4,200
13,000
700
9,900
700
900
Total (A)
West
8,700
X
700
10
7,000
600
9
5,400
700
9
6,300
Y
600
20
12,000
500
21
10,500
400
21
8,400
19,000
1,100
15,900
1,100
1,300
Total (B)
14,700
Total
X
1,200
10
12,000
1,000
9
9,000
1,200
9
10,800
Total
Y
1,000
20
20,000
800
21
16,800
600
21
12,600
32,000
1,800
25,800
1,800
2,200
Total (A+B)
23,400
Working
Budget for future period
...
for
the months of March to August, 2000:
Month
Sales Purchases Wages Manufacturing
Office
Selling
(all
(all
Expenses
Expenses Expenses
credit)
credit)
Rs
...
Rs
...
Rs
...
March
60,000
36,000
9,000
4,000
2,000
4,000
April
62,000
38,000
8,000
3,000
1,500
5,000
May
64,000
33,000 10,000
4,500
2,500
4,500
June
58,000
35,000
8,500
3,500
2,000
3,500
July
56,000
39,000
9,500
4,000
1,000
4,500
August
60,000
34,000
8,000
3,000
1,500
4,500
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312
You are given the following further information
...
16,000 is due for delivery in July payable 10% on delivery
and the balance after three months
...
8,000 is payable in March and June each
...
(d) Lag in payment of manufacturing expenses ½ month
...
You are required to prepare a cash budget for three months starting on 1st May,
2000 when there was a cash balance of Rs
...
Solution:
Jothi Limited
Cash Budget for the quarter ended 31 July, 2000
May
Rs
...
July
Rs
...
clicktoconvert
...
Material
70
Labour
25
Variable Overheads
20
Fixed Overheads (Rs
...
Assume that administration expenses are fixed for all levels of production
...
Rs
...
1,00,000)
8,000 Units
Per
Total
Unit
Amount
Rs
...
6,000 Units
Per
Total
Unit
Amount
Rs
...
70
...
00
20
...
00
7,00,000
2,50,000
2,00,000
50,000
70
...
00
20
...
00
5,60,00
2,00,000
1,60,000
40,000
70
...
00
20
...
00
4,20,000
1,50,000
1,20,000
30,000
10
...
50
1,00,000
16
...
clicktoconvert
...
30
11
...
625
11
...
167
11
...
40
5
...
00
14,000
56,000
50,000
1
...
600
6
...
334
5
...
333
14,000
33,600
50,000
155
...
425 12,75,400 166
...
Selling expenses Rs
...
Fixed 10% (i
...
13 x
10
) = Rs
...
100
For 10,000 units = 10,000 x 1
...
13,000
Variable 90% (i
...
13 x
90
) = Rs
...
70
100
Illustartion-6
Draw up a flexible budget for overhead expenses on the basis of the following data
and determine the overhead rates at 70%, 80% and 90% plant capacity
...
Variable Overheads:
Indirect labour
Store including spares
Semi-Variable Overheads:
Power
(30% fixed, 70% variable)
Repairs and maintenance (60%
fixed, 40% variable)
Fixed Overheads:
Depreciation
Insurance
Salaries
Total Overheads
Estimated direct labour hours:
At 80%
Capacity
Rs
...
-
12,000
4,000
-
-
20,000
2,000
-
-
11,000
3,000
10,000
62,000
1,24,00 hrs
...
clicktoconvert
...
At 80% At 90%
Capacity Capacity
Rs
...
Variable Overheads:
Indirect labour
10,500
12,000
13,500
3,500
4,000
4,500
6,000
6,000
6,000
12,250
14,000
15,750
1,200
1,200
1,200
700
800
900
11,000
11,000
11,000
3,000
3,000
3,000
10,000
10,000
10,000
58,150
62,000
65,850
Estimated direct labour hours
1,08,500
1,24,000
1,39,500
Direct labour hour rate
Rs
...
536
Rs
...
500
Rs
...
472
Stores including spares
Semi-Variable Overheads:
Power- Fixed (30%)
Variable (70%)
Repairs and Maintenance
Fixed (60%)
Variable (40%)
Fixed Overheads:
Depreciation
Insurance
Salaries
Total Overheads
Working:
Direct labour rates have been computed as follows:
At 70% capacity
=
Rs
...
0
...
At 80% capacity
=
Rs
...
= Re
...
65,850
1,39,500 hrs
...
0
...
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11 LET US SUM UP
Budget is a technique in the hands of management to control costs
...
Every department heads are asked
to prepare budget of there own departments
...
It a concern unable to attain the
budgeted performance, then they analyse the causes of non-attainment of budgeted
performance
...
12 Lesson-End Activities
1
...
3
...
Define ‘Budget’, ‘Budgeting’ and ‘Budgetary control’
...
Distinguish between forecasts and budgets
...
Briefly explain the different classifications of budgets
...
What is Z
...
B? Describe the process of preparing Z
...
B
...
3
...
31
...
2001 – 80,000 units
31
...
2001 – 40% of February’s budgeted sales
28-2-2001 – 60% of March’s budgeted sales
...
3
...
7
...
Co
...
Manufactures 2 product X and Y
...
Feb
...
Apr
...
clicktoconvert
...
2001)
...
9
...
Each unit of the product
requires 3 units of material A and 5 units of material B
...
Finished product
5,000 units
Material A
12,000 units
Material B
20,000 units
Materials on order
Material A
7,000 units
Material B
11,000 units
The desirable closing balances at the end of the next year
...
The sales director of Future Problem & Co
...
The Production Manager
consults the store keeper and casts his figures as follows:
Two kind of raw materials ‘P’ and ‘Q’ are required for manufacturing the
product
...
The estimated
opening balances at the commencement of next year are
Finished product – 20,000 units
Raw material ‘P’ – 24,000 units
Raw material ‘Q’ – 30,000 units
The desirable closing balances at the end of next year are:
Finished product – 28,000 units
Raw material ‘P’ – 26,000 units
Raw material ‘Q’ – 32,000 units
Prepare production budget and materials purchase budget for the next year
...
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Retail Traders Ltd
...
100 per unit; T Rs
...
A special incentive system is proposed by the director of marketing for the
salesman in east zone which is expected to push up the estimated sales of ‘S’ and ‘T’
by 20% in that zone
...
12
...
sells two products R and P which are manufactured in one
plant
...
Sales Budget units
First quarter
Second quarter
Third quarter
Fourth quarter
Product R
90,000
2,50,000
3,00,000
80,000
Product P
80,000
75,000
60,000
90,000
Each of these two products is sold on a seasonal basis
...
plans to sell
product ‘R’ throughout the year at a price of Rs
...
20 per unit
...
has lost 3% of its billed
revenue each year because of returns, (constituting 2% of loss of revenue) allowances
and bad debts (1% loss)
...
13
...
30
...
The
following information is supplied to you
...
Rs
...
Rs
...
Rs
...
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(ii) Suppliers supply goods on two months credit
...
10,000 is due to be paid in July
...
1,00,000 is to be paid in May
...
Prepare a cash budget for the months of May, June and July 2003 on the basis of
the following information:
(a) Income and Expenditure forecasts:
Month
2003
March
April
May
June
July
August
Credit
Sales
Rs
...
36,000
38,000
33,000
35,000
39,000
34,000
Wages
Rs
...
4,000
3,000
4,500
3,500
4,000
3,000
Office
Selling
expenses expenses
Rs
...
2,000
4,000
1,500
5,000
2,500
4,500
2,000
3,500
1,000
4,500
1,500
4,000
(b) Cash balance on 1st May 2003 Rs
...
(c) Plant costing Rs
...
(d) Advance tax of Rs
...
(e) Period of credit allowed (i) by supplier-two months and
(ii) to customers- one month
...
(g) Lag in payment of office and selling expenses – 1 month
...
The expenses budgeted for production of 10,000 units in a factory are furnished
below:
Per unit
Rs
...
1,00,000)
10
Variable expenses (Direct)
5
Selling expenses (10% fixed)
13
Distribution expenses (20% fixed)
7
Administration expenses (50,000)
5
Total cost per unit (to make or sell)
155
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320
Prepare a flexible budget for the production of (a) 8,000 units and (b) 6,000
units
...
On the basis of the following particulars, draw up a flexible budget for overhead
expenses and determine the overhead rates at 70%, 80% and 90% plant capacity
...
80%
Rs
...
Variable overheads:
Indirect labour
-
12,000
-
Indirect materials
-
4,000
-
Power (30% fixed)
-
20,000
-
Repairs (40% fixed)
-
2,000
-
Depreciation
-
11,000
-
Insurance
-
3,000
-
Salaries
-
10,000
-
Semi-variable overheads:
Fixed overheads:
Total overhead expenses
Estimated direct labour hours
62,000
1,24,000
20
...
Classification of cost: The cost is classified according to variability as
variable, cost, fixed and semi variable cost
...
Estimation of Variable Cost: Variable cost comprises of all those costs
which vary in direct proportion to the level of activity
...
3
...
They usually include all the fixed
portion of the overheads
...
4
...
The semi
variable cost should be estimated for the chosen activity levels
...
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14 POINTS FOR DISCUSSION
1
...
2
...
20
...
B
...
Sharma & K
...
2
...
N
...
Title: Accounting
Description: It contains almost all syllables in accounting and book keeping.
Description: It contains almost all syllables in accounting and book keeping.