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COSTING THEORY NOTES

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Posted On 29 June 2010 at 10:27 Report Abuse

 COSTING THEORY NOTES.

COSTING- THEORY

 

CHAPTER-1

Basic Concepts & Product Cost sheet

Q1. Define Cost Accounting, its advantages and limitation?

Cost Accounting:

Cost accounting is accounting for cost, aimed at providing cost data, statements and reports for the purpose of managerial decision making. Cost Accounting “is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision-making.

The term ‘costing’ and ‘cost accounting” are many times used interchangeably. However, the scope of cost accounting is broader than that of costing which merely focuses on cost ascertainment. Following functional activities are included in the scope of cost accounting:

1.             Cost Book- keeping : It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments, products and services.

2.             Cost System : Systems and procedures are devised for proper accounting for costs.

3.             Cost Analysis : It involves an investigation into the causes of actual costs varying from the planned costs and fixation of responsibility for cost increases.

4.             Cost Comparisons : Cost accounting also includes comparisons between cost from alternative technologies, cost of different products and activities, and cost of same product or service over a period of time.

5.             Cost Control : An important function of cost accounting is utilization of cost information for exercising control. This involves an examination of each cost in the light of benefit derived from incurrence of the cost.

Importance and Advantages of Cost Accounting

The primary advantages of Cost Accounting System are as under:

(a)             Profit Measurement and Analysis: Costs should be accurately ascertained and matched with revenues to measure profits of a firm. Further, Cost Accounting is useful for identifying the exact causes for decrease or increase in the profit / loss of the business.

(b)             Cost Reduction: The application of cost reduction techniques, operations research techniques and value analysis techniques , helps in achieving the objective of economy in concern’s operations. Continuous efforts are being made by the business organization for finding new and improved methods for reducing costs

(c)             Cost Comparison and Cost Control: Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same firm or of several units in an industry by employing uniform costing and inter- firm comparison methods.

(d)             Identification of losses and inefficiencies: A good Cost Accounting System helps in identifying unprofitable activities, losses or inefficiencies in any form, so that appropriate actions are taken. The use of Standard Costing and Variance Analysis techniques points out the deviations from pre- determined level and thus demands suitable action to eliminate its recurrence. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity,

 

(e)             Financial Decision Making: Managers can obtain relevant information from the Cost Accounting System, to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on various decision making issues viz. whether to purchase or manufacture a given component, whether to accept orders below cost, which machine to purchase when a number of choices are available. The use of Marginal Costing techniques helps managers in taking short-term decisions.

(f)             Price Determination: Cost Accounting is quite useful for price fixation. It serves as guide to test the adequacy of selling prices. The price determined may be useful for preparing estimates or filing tenders.

(g)             Dispute and Issue-solving: A good cost accounting system provides cost figures for the use of Government, Wage Tribunals and other bodies for dealing and solving issues like price taxation, price control tariff protection, wage level fixation.

Limitation of Cost Accounting

(1)            Cost accounting prepares cost records and reports in different depths, detail and form. Even assumptions made regarding lacks uniformity. Different organizations various costs differ.

(2)           There is arbitrariness in apportionment of overheads, allocation controllable and non- controllable, determination of joint costs, division of costs between of overhead absorption rates.

(3)           Cost accounts are prepared in addition to financial accounts. There are. number of costs, e.g. notional costs and decision making costs which do not appear in financial accounts. This necessitates reconciliation of financial profits and cost profit.

(4)           Cost accounting is only one of the means of achieving cost control, efficiency improvement and motivation. It does not by itself achieve these objectives.

(5)           Cost accounting has only a limited use in projecting future costs. It needs to be supplemented by various statistical tools.

Q2. List the objectives of Cost Accounting. (Nov 2002, 3 marks)

The primary objective of study of cost is to contribute to profitability through Cost Reduction and Cost Control. The following objectives of Cost Accounting can be identified:

(1)            Ascertainment of cost: This involves collection of cost information, by recording them under suitable heads of account and reporting such information on a periodical basis.

(2)            Determination of selling price: Selling Prices are influenced by a no of factors. However, prices cannot be fixed below cost, save in exceptional circumstances. Hence cost accounting is required for determination of proper selling price.

(3)            Cost Control and Cost Reduction: In the long run, higher profits can be achieved only through Cost Reduction and cost Control. These terms are discussed in detail ion a separate Chapter.

(4)            Ascertaining the profit of each activity: Profit of each department/ activity / product can be determined by comparing its revenue on an objective basis.

(5)            Assisting management in decision-making: Business decisions are taken after conducting Cost- Benefit Analysis. Hence cost and benefits of each option are analyzed and the Manager chooses the least cost option. Thus Cost Accounting and reporting system assists managers in their decision making process.

Q3. What are the essential features of a good cost Accounting system? ( C.A PE 11 May 2004, Nov 2005, C.A. Inter Nov 1993)

To be successful, a good Cost Accounting System should possess the following essential features.

(a)             Simple and easy to operate: The system should be tailor-made, practical, simple and capable of meeting the requirement of a business concern.

(b)            Accuracy of data: The data to be used by Cost Accounting System should be accurate. Otherwise it may distort the output of the system

(c)             Relevance of data: The system should handle and report relevant data for use of managers for decision making. It should not sacrifice its utility by introducing meticulous and unnecessary, details

(d)            Management’s Role: The top Management should have a faith in the costing system and should also provide a helping hand for its development and success.

(e)             Participative Role of executives: Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of cost Accounting.

(f)             Cost-effective: The cost of installing and operating the system should justify the results. The benefits from the system should exceed the amount to be spent on it.

(g)             Smooth implementation: The system should be effectively implemented. A carefully phased programme should be prepared by using network analysts for the Introduction of the system.

 

 

 

Q.4. List down any eight factors that you will consider before installing a costing system.

Answer.

The eight factors which must be considered before installing a Costing System are listed below:

(1)           Nature of business: The system of costing to be introduced should suit the general nature of business.

(2)          Layout aspects: The size and layout of the organization should be studied by the system designers.

(3)          Methods and procedures in vogue: The system designers should also study various methods and procedures for the purchase, receipts, storage and issue of material. They should also study the methods of wage payment.

(4)          Management’s expectations and policies: The system of costing should be designed after a careful analysis of the organizational operations, management’s expectation and the policies of the concern.

(5)          Technical aspects: The technical aspects of the business should be studied thoroughly by the designers. They should also make an attempt to seek the assistance and support of the supervisory staff and workers of the concern for the system.

(6)          Simplicity of the system: The system of costing to be installed should be easy to understand and simple to operate. The procedures laid down for operating the system should be easily understood by operating system.

(7)          Forms standardization: Various forms to be used by the costing system for various data/ information collection and dissemination should be standardized as far as possible.

(8)          Accuracy of data: The degree of accuracy of data to be supplied by the system should be determined.

Q.5.   Outline the steps involved in installing a costing system in a manufacturing unit. What are the essentials of an effective costing system?

Answer

The main steps involved in installing a costing system in a manufacturing unit may be outlined as below:

(1)           The objectives of installing a costing system in a manufacturing concern and the expectation of the management from such a system should be identified first. The system will be a simple one in the case of a single objective but will be an elaborate one in the case of multiple objectives.

(2)          It is important to ascertain the significant variables of the manufacturing unit which are amenable to control and affect the concern. For example, quite often the production C3sts control may be more important than control of its marketing cost.. Under such a situation, the costing system should devote greater attention to control production costs.

Q.6. What are the Pre- requisites for installation of Cost Accounting System.

Installation of a Costing System

A cost accounting system is a set of plans, programmes, procedures and documentation designed to accumulate costs, assign them to products, processes and jobs, and report cost information to management at all levels. It assists management in planning, control, performance appraisal, analysis of product profitability and optimum utilization of physical and financial resources for achieving organizational objectives.

The following considerations should be specifically taken into account:

1.         Design in suit specific needs The system should be designed as to serve the specific needs of the organization.

2.         In depth examination of production details: Before installing the system, management should make an, in-depth study of nature of products and processes, technologies, plant layout, nature of material used, so that cost accounting system is tuned to the requirements of the business,

3.         Cost Benefit analysis: The benefit from the proposed cost accounting system should far exceed the cost involved. The best system, if cost benefit, becomes useless.

4.         Location of cost office: Costing department obtains basic data mainly from accounts department. Most of this data is related to production activity.

5.         Codification: All costs relating to all products of all departments should preferably be coded. This will increase speed in handling and processing of costs. Codification also facilitates computerization of costing system.

6.         Continuous Monitoring: Operation of cost accounting system should be continuously monitored so that deficiencies do not creep in, methodical work is not replaced by short- cuts, and the system is always kept up-to-date.

 

Difficulties in Installing Cost accounting System

1.             Lack of enthusiasm and support from top management because they are not fully convinced about the benefits from such system.

2.             resistance from production staff and people at different levels in other departments because they fear getting subjected to additional controls.

3.             Resistance from accounting staff as they believe that their work would increase.

4.             Shortage of trained and well- qualified staff.

5.             Over enthusiasm to have an unnecessary detailed costing structure or keeping it too simple due to too much concern for cost.

6.             High cost of installing the system.

7.             Failing to keep the system up-to-date,

Q.7. How are costs classified on the basis of Time Period?

On the basis of Time Period: Costs are classified into:

(1)        Historical Costs- Costs relating to the past time period: Cost which has already been incurred.

(2)        Current Costs- Costs relating to the present period.

(3)        Pre determined Costs- Costs relating to the future period; Cost which is computed in advance, on the basis of specification of all factors affecting it.

Q8. How are costs classified on the basis of Behavior/ Nature/ Variability?

On the basis of Behavior/ Nature/ Variability: Costs are classified into:

(1)           Variable Costs- These are costs which tend to vary or change in relation to volume of production. They increase in total as production increases and vice-versa e.g. cost of raw materials, direct wages etc. However, variable costs per unit are generally constant for unit of the additional output.

(2)          Fixed Costs- these are costs which remain constant at various levels of production. They are not affected by volume of production e.g. factory rent, Insurance etc. Fixed Costs per unit decreases and vice- versa. Sometimes, these are also known as Capacity Costs or Period Costs.

(3)          Semi- Variable Costs- These are costs which are partly fixed and party variable. These are fixed upto a particular volume of production and become variable therefore for the 1 next level of production. Hence, they are also called Step Costs. Some examples are Repairs and Maintenance, Electricity, Telephone etc.

Q.9. How are costs classified on the basis of Elements?

On the basis of elements: Costs are classified into:

(1)        Materials- Cost of tangible, physical input used in relation to output/ production: e.g., costs of raw materials, consumable stores, maintenance items etc.

(2)        Labour- Cost incurred in relation to human resources of the enterprise; e.g, wages to workers, Salary to Office Staff, Training Expenses etc.

(3)        Expenses- Cost of operating and running the enterprise, other than materials and labour; this is the residual category of costs, E.g, Factory Rent, Office Maintenance, Salesman Salary etc.

Q.10. How are costs classified on the basis of Relationships?

On the basis of Relationship : Costs are classified into:

(1)           Direct costs- Costs which are directly related to / identified with / attributable to a Cost Center or a Cost unit. E.g. Cost of basic raw material used in the finished product, wages paid to site labour in a construction contract etc

(2)          In direct Costs- Costs which are not directly identified with a cost centre or a cost unit. Such costs are apportioned over different cost centers using appropriate basis e.g, Factory Rent incurred over various departments; Salary of supervisors engaged in overseeing various construction contracts etc.

Q11. How are costs classified on the basis of Controllability? What are the aspects affecting Control?

On the basis of Controllability: Costs are classified into:

(1)           Controllable Costs- Costs which can be influenced and controlled by managerial action. However, Controllability is a relative term and is subject to the following factors.

a.             Time- Certain costs are controllable in the long run and not in the short run.

b.             Location- certain costs are not influenced and decided at a particular location / cost center. If rent agreements of all factory premises are executed centrally at the head Office, factory Managers cannot control the incurrence of cost.

c.             Product Output- Certain costs are controllable by reference to one product or market segment and not by reference to the other. For example, cost of common raw material input for exports is lower than that of domestically sold goods since excise duty concession / duty drawback is available for export sales.

(2)          Non - Controllable Costs-* These are costs that cannot be influenced and controlled by a specific member of the organization. The line of difference between controllable and non- controllable costs is thin.

NOTE: No cost is uncontrollable. Controllability is subject to the factors laid down above.

Q12. How are costs classified on the basis of Normality?

On the basis of Normality: Costs are classified into:

(1)           Normal Cost: Costs which can be reasonably expected to be incurred under normal, routine and regular operating conditions.

(2)          Abnormal Cost: Costs over and above normal cost; which is not incurred under normal operating conditions e.g, fines and penalties.

Q13. Enumerate the types of costs on the basis of Functions.

On the basis of Functions: Costs are classified as under;

(1)           Production Cost: The cost of the set of operations commencing with supply of materials, labour and services and ends with the primary packing of product. Thus it is equal to the total of Direct Materials, Direct labour, Direct Expenses and Production Overheads.

(2)          Administration Cost: The cost of formulating the policy, directing the organization and controlling the operations of the undertaking, which is not directly related to production, selling, distribution, research or development activity or function. Some examples are Office rent, Accounts Department Expenses, Audit and Legal expenses, Directors Remuneration etc.

(3)          Selling Costs; The cost of seeking to create and stimulate demand and of securing orders. These are sometimes called marketing costs. Some examples are Advertisement, Salesmen remuneration, Show-room Expenses, Cost of samples etc.

(4)          Distribution Cost: The cost of the sequence of operations which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty package, if any, available for re- use. Some examples are Distribution packing (secondary packing), carriage outwards, maintenance of delivery vans, expenditure incurred in transporting articles to central or local storage, expenditure incurred in moving articles to and from prospective customers(as in sale or Return) etc.

(5)          Research Cost: The cost of the process which begins with the implementation of the decision to produce a hew or improved products, new application of materials or improved methods.

(6)          Development Cost: The cost of the process which begins with the implementation of the decision to produce a new or improved product, or to employ a new or improved method and ends with commencement of formal production of that product of by that method.

(7)          Pre production Cost; The part of development cost incurred in making a trial production run prior to formal production.

(8)          Conversion Cost: The sum of direct wages, direct expenses and overhead cost of convening raw materials to the finished stage or converting a material from one stage of production to the other.

Q14. Write short notes on Period Costs and Product Costs. Why should product costs be computed?

On the basis of atributability  to the Product: Costs are classified into:

(1)           Period Costs: These are costs which are not assigned to the products but arc charged as expenses against the revenue of the period in which they are incurred. Non - manufacturing costs e.g. Selling and Distribution Costs are generally recognized as expenses against the revenue of the period in which they are incurred. Non- manufacturing costs. These costs are not included in inventory : valuation.

(2)          Product Costs: These are costs which are assigned to the product and are included in inventory valuation. These are also called as Inventorable costs. Under absorption costing, total manufacturing costs are regarded product costs under marginal costing, total manufacturing costs are regarded product costs while under marginal costing, only variable manufacturing costs are considered. The purposes of computing product costs are as under:

a.             Preparation of Financial Statements- Focus on inventory valuation and reporting profits.

b.             Product Pricing- Focus on costs assigned and incurred on the product till it is made available to the customer/ user.

c.             Cost- plus- Contracts with Government Agencies- Focus is on reimbursement of costs specifically assigned to the particular job / contract.

Q15. List out the various items of costs on the basis of relevance to decision making. Or Explain the Significance of” Decision- Making Cost.”

On the basis of Relevance to decision making: Costs are classified into:

(a)              Relevant Costs viz. Marginal Costs, Differential Costs, Opportunity Costs etc.

(b)              Irrelevant Costs viz. Absorbed fixed Costs, Sunk Costs, Committed Costs etc.

(A)       Relevant Costs: These are costs which are relevant and useful for decision-making purpose.

(1)           Marginal Cost- Marginal cost is the total variable cost i.e. prime cost plus variable overheads. It is assumed that variable cost varies directly with production whereas fixed cost remains fixed irrespective of volume of production. Marginal cost is a relevant cost for decision- making as this cost will be incurred in future for additional units of production.

(2)          Differential Cost- It is the change in costs due to change in the level of activity or pattern or method of production. Where, the change results in increase in cost it is called incremental cost, whereas if costs are reduced due to decrease of output, the difference is called decremented costs.

(3)          Opportunity Cost- This refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action, For example, a firm may finance its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan. Opportunity cost is a relevant cost where alternatives are available. However, opportunity cost does not find any place in formal accounts and is computed only for decision making and analytical purposes,

(4)          Out- of- pocket Costs- These are costs which entail current or near future outlays of cash for the decision at hand as opposed to costs which do not require any cash outlay such as depreciation. Such costs are relevant for decision-making, as these will occur in near future. It is that portion of total cost which involves cash outflow. This cost concept is a short- run concept and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out of pocket costs can be avoided or saved if a particular proposal under consideration is not accepted,

(5)          Replacement Cost- It is the cost at which there could be purchase of an asset or material identical to that which is being replaced or revalued. It is the cost of replacement at current market price and is relevant for decision- making.

(6)          Imputed Costs- These are notional costs appearing in the cost accounts only e.g, notional rent charges, interest on capital for which no interest has been paid. Where alternative capital investment projects are being evaluated, it is necessary to consider the imputed interest on capital before a decision is arrived at, as to which is the most profitable project.

(7)          Discretionary costs- These are “escapable” or “avoidable” costs. These can be avoided if a particular course of action is not chosen. In other words, these are costs, which are essential for the accomplishment of a managerial objective.

(B)        Irrelevant Costs: These are costs which are not relevant for decision-making.

(1)           Sunk Cost- It is a cost which has already been incurred or sunk in the past. It is not relevant for decision- making and is caused by complete abandonment as against temporary shut- down. Thus, if a firm has obsolete stock of materials amounting to Rs. 10,000 which can be sold as scrap for Rs. 2,000 or can be, utilized in a special job, the value of opening stock of Rs. 10,000 is a sunk cost and is not relevant for decision- making.

(2)          Committed Cost- A cost which has been already committed by the management is not relevant for decision- making. This should be contrasted with discretionary costs, which are avoidable costs.

(3)          Absorbed Fixed Cost- Fixed costs which do not change due to increase or decrease in activity is irrelevant for decision- making. Although such fixed costs are absorbed in cost of production at a normal rate, they are irrelevant for managerial decision making. However if fixed costs are specific, they become relevant.

Q16 Write short notes on Explicit and Implicit Costs.( C.A. P.E. 11 May 2005, May 2006

(a)           Explicit Costs- These are also known as out of pocket costs they refer to costs involving / immediate payment of cash. Salaries, wages, postage and telegram, printing and stationary, interest on loan etc. are some examples of explicit cost involving immediate cash payment.

(b)          Implicit Costs- These costs do not involve any immediate cash payment. They are not recorded in the books of account. They are also known as economic costs or imputed costs.

Q17. Define the terms (a) Estimated Costs, (b) Shut Down Costs and (c) Absolute Costs.

(a)        Estimated Cost- Kohler defines estimated cost as” the expected cost of manufacture or acquisition, often in terms of a unit of product computed on the basis on information available in advance of actual production or purchase”. Estimated costs are prospective costs they refer to prediction of costs.

(b)        Shut down costs- These are costs which continue to be incurred even when a plant is temporarily shut down, e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant. In other words, all fixed costs which cannot be avoided during the temporary closure of a plant will be known as shut down costs.

(c)        Absolute cost- These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute in absolute amount may be called absolute costs and are base costs on which further analysis and decisions are based.

Q18. Write Short notes on Direct Expenses or Chargeable Expenses?

Ans.     These are the Expenses which can be charged directly to Jobs, Product, Processes, Cost Units. These are also known as Direct Expenses. Depending on the Situation, the same item of expenses may be treated as a chargeable Expenses or an indirect Cost.

For example, the rent charges of a machine specifically hired to complete a particular job will be a direct charge on the job. But if the same machine is used for various purposes, then the rent charges will be treated as indirect cost and are apportioned to concerned cost centers on an equitable basis.

Nature of Direct Expenses

(1)                   These are expenses other than Direct materials and Direct Labour

(2)                  These are either allocated or charged completely to cost centers or cost units.

(3)                  These are included in the prime Cost of a Product.

Examples

(1)                   Hire charges in respect of special machinery or plant.

(2)                  Cost of special Moulds, design and Patterns,

(3)                  Payment of royalties

(4)                  Architects, Surveyors and other consultant’s fees.

(5)                  Traveling expenses to site.

(6)                  Freight inward on special material.

·                     Direct Costs are sub-classified on the basis of elements into Materials, Labour and Expenses.

·                     Indirect Costs (Overheads) are sub-classified on the basis of functions.

Q.19. What is meant by Cost Period?

The period to which the Cost relates is called Cost Period. It is also called the control period since cost ascertainment is for the purpose of control. Generally, the cost period is shorter than the financial period used for reporting purposes.

For example, if the production process for converting raw material into finished product requires 15 days, it may be considered as a Cost Period.

Q.20. Define a Cost Unit. Give suitable illustrations.

Cost Unit: It is a unit of production, service or time or combination of these, in relation to which costs may be ascertained or expressed. It should be one with which expenditure can be most readily associated.

An appropriate cost unit should be selected keeping in view the following:

1.          Cost units should suit the business.

2.         It should be most natural to the business.

3.         Cost unit should be readily understood and accepted by all concerned.

4.         Cost unit should be uniformly maintained over a period of time and should be same         or similar products.

Cost Units differ from one business to the other. They are usually units of physical measurement like number, weight, area, volume, time, length and value. Some illustrations of cost units are as under:

Examples of cost Units and Methods of Costing in Various industries

Industry

Cost Unit

Methods of costing

Bricks

Per 1,000 bricks

Unit costing

Cement

Per ton

Process costing

Road construction

Per k.m or per mile

Job costing

Advertising

Each job

Job

Interior decoration

Each job

Job

Made to order

Number

Job costing

Readymade

Number

Batch costing

Tyres and tubes batch

Each

Batch costing

Toy

Each batch

Batch costing

Pharmaceuticals

1000 Nos., tablets, strips, capsules

Batch costing

Water supply

Per 1000 litre

Operating costing

Bus service

Passenger-kilometer

Operating costing

Education

Per student hour

Operating costing

Electricity

Per kilowatt-hour

Operating costing

Hotel

Per guest per day or per guest per meal etc.

Operating costing

Bridge construction

Each contract

Contract costing

Ship building

Each ship

Contract costing

Mining

Per ton

Process costing

Petrochemicals

Tons, gallons litres

Process costing

Steel

Per ton

Process costing

Textiles

Per meter

Process costing

Sugar

Per tonne

Process costing

Paper

Per kg/tonne

Process costing

Chemical

Per kg/litre/tonne

Process costing

Fertilizer

Per tonne

Process costing

Oil refinery

Per gallon

Process costing

Automobile

Number

Process costing

Colliery

Per tonne

Output

Bicycle manufacturing

Number

Multiple costing

Q.21. What is a Responsibility Centre? What are its types?

Meaning:

·                     It is an activity centre of a business organization entrusted with a special task.

·                     It is a unit of function of a business organization headed by an executive responsible for its performance:

Types of Responsibilities Centres

Particulars

 

Cost Centres

 

Revenue

Centres

Profit Centres

Investment

Centres

Meaning

A centre for which a standard amount of cost is pre-determined and used for control.

A centre devoted

to raising revenue

 (no responsibility

 for production)

A centre whose performance is measured in terms of income earned and cost incurred (profit earning)

A centre responsible for earning  profits and also for asset utilization.

Primary

responsibility

Cost reduction

and cost control

Generation of sale revenue

Profit earning

Earning return of

Investments.

Performance

evaluation

Standard cost less

actual cost

Budgeted revenue

less actual

revenue

Budgeted profits

 less actual profits

Budgeted ROI

less actual ROI

Other points

Control of cost is

subject to-

   1, Time

   2. Location

   3. Product

Also responsible for some expenses related with mark-eting of products.

It may mean that one division sells its output to another division within the organization – i.e.inter-divisional transfer pricing.

 

Q.22. Write short note on Cost Centre? Discuss the various types of Cost Centres.

Cost Centre:

A cost centre refers to a section, segment or subdivision of an organization of which costs are charged. A cost centre is ‘location, person or its of equipment (or group of these) for which costs may be ascertained and used for the purpose of control. For example a cost centre may be

(i)         Allocation e.g., departments sales territories etc.

(ii)        A person e.g., engineers salesmen, machine operators, etc.

(iii)       An item of equipment, e.g., machines delivery vans, etc. Classification: Cost Centres can be classified as under:

(a) Based on Type:

Personal Cost Centre

Impersonal cost Centre

It consists of a person or group of persons.

it consists of a location or an item of equipment (or group of these)

 

(b) Based on Role:

Personal Cost Centre

Service cost Centre

It is a cost centre where raw material is processed and converted into finished product

It is a cost centre which serves as an ancillary unit and renders services to a production cost centre.

Here both direct and indirect costs are incurred

Here only indirect costs are incurred. There are no direct costs as there is no measurable and saleable output.

Machine shops, welding shops and assembly shops are examples of production Cost Centres,

Power-house, gas production shop, material service centres, plant maintenance centres are examples of since cost centres.

(c) Based on Activity:

Operational Cost Centre

Process cost Centre

It consists of machines and / or persons, carrying our similar operations.

It consists of machines and / or persons, engaged on a specific process or a continuous sequence of operation.

All machines/operators performing the same operation are brought together under a Cost Centre, the purpose being ascertainment of cost of each operation irrespective of its location inside the factory.

Cost is analysed and related to. a series of operations in sequence. Generally, these constitute a single location, as in oil refineries and other process industries

 

Q.23. Write short notes on the various methods of costing. Or Discuss the different Methods of costing along with their applicability to concerned Industry?( 1999 Nov)

Business vary in their nature and in the type of products or services they produce. Hence different methods of cost ascertainment are used in different business. The output has to be costed, so that costing methods to be employed are also determined with due regard to the method of production and the unit of cost used. The various methods of costing can be summarized as under:

 

 



Total thanks : 5 times

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CA Konfused
Chartered Accountant & CFA Level 1

[ Scorecard : 268]
Posted On 08 November 2010 at 15:23

sonam where  are the other topics





Praveen Gaur
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[ Scorecard : 208]
Posted On 02 April 2011 at 21:39

fayblus notes thanks..............



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