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# UNIT II COST ACCOUNTING

It was merely considered to be a technique for ascertainment and controlling of costs of products or services.

COST ACCOUNTING
Meaning of Cost: The term cost means the amount of expenditure (actual or notional) incurred on, or attributable to, a given thing.

## Objectives of Cost Accounting:

Determining selling price of the products Determining and controlling the efficiency of the firm Facilitating preparation of financial and other Statements Providing basis for operating policy

Elements of Cost
There are three broad elements of cost n Material

n n

Direct Material Integral part of the product Indirect Material Ancillary to the business Direct labour Indirect labour

Labour
n n

Expenses

n

Elements of cost
n

n n n

## Indirect material Indirect labour and Indirect expenses

Thus, all indirect costs are overheads. n Factory O/H n Office and Administration O/H n Selling & Distribution O/H
n

## Components of Total Cost

Prime Cost = Direct Material + Direct labour + Direct Expenses (Direct Cost)

## Factory Cost = Prime Cost + Works or Factory O/H (Works cost)

Office Cost = Works cost + Office & Admn. O/H (Total cost of Production)

Cost of Sales = Office cost + Selling & Distribution O/H (Total Cost)

Classification of Cost
n

Fixed Cost The cost which does not vary but remains constant within a given period. (Ex. Rent, Insurance, Salary, etc.) Variable Cost The cost which varies directly in proportion to every increase or decrease in the volume of output or production. (Ex. Wages, Power, Cost of Direct Material, etc.) Semi-Variable Cost Partly Fixed and Partly Variable. (Ex. Depreciation, Repairs, etc.)

Standard Costing
VARIANCES

VARIANCES

Introduction: The most significant contribution of std costing to the science and art of management is the presentation of variances.

VARIANCES

Meaning: In cost accounting, variance means deviation of the actual cost from the standard cost.

VARIANCES

Variances

may

be

Favourable

(positive or credit) or Unfavourable ( or negative or adverse or debit) depending upon whether the actual resulting cost is less or more than the std cost.

VARIANCES
Favourable Variance: When the actual cost incurred is less than the std cost, the deviation is known as FV. It increase the profit.

Unfavourable Variance: When the actual cost incurred is more than the std cost, the deviation is known as UFV. It refers to the loss of the firm.

Uses of variances
n n n n n

Comparison of actual with std cost which reveals the efficiency or inefficiency of performance. It is a tool of cost control and cost reduction. It helps the management to apply the principle of mgt by exception. It help the mgt to maximize the profits Future planning and programmes are based on the variance analysis

Computation of Variances
n

1.Material Variances 2.Labour or wage Variances 3.Overhead variances (a) Variable (b) Fixed 4.Sales Variances

1.Material Variances
The following are the variance in the case of materials: (a) Direct Material Cost Variance (or) MCV = (SQ x SP) (AQ x AP) (b) Material Price Variance (MPV) = AQ - (SR x AR) (c) Direct Material Usage (Quantity) Variance (or) MUV = SR (SQ AQ)

contd..

1.Material Variances
(d) Direct Material Mix Variance (DMMV) (i) When actual weight of mix and std weight of mix are the same DMMV = SR (SQ - AQ) or SR (RSQ - AQ)

Std is revised due to the shortage of a particular type of material. The formula is: MMV = SR (RSQ AQ) Total weight of actual mix RSQ = x Std quantity Total weight of standard mix

1.Material Variances
(d) Direct Material Mix Variance (DMMV) (ii) When actual weight of mix and std weight of mix are differ from each other, the formula to find new std mix is, Total weight of actual mix = Total weight of standard mix Revised MUV = SR (SQ RSQ)

1.Material Variances
(e) Material Yield Variance (MYV) 1 When actual mix and std mix are the same, the formula is, MYV = SYR ( SY AY ) Std cost of std mix Here SYR = Net Std Output Net Std Output = Gross output Std loss

1.Material Variances
(e) Material Yield Variance (MYV) (ii) When the actual mix and std mix differ from each other, the formula is, Std cost of revised std mix Std rate = Net Std Output MYV = Std Rate ( Actual Std Yield RSY)

RELATIONSHIP
n n n n

MCV = MPV + MUV MUV = MMV+ MYV MCV = MPV + MMV + M Sub Usage V Material sub usage Variance = MUV - MMV

## 2. Labour or wage Variances

n

It arises because of (i) difference in actual rates and std rates of labour and (ii) the variation in actual time taken by workers and the std time allotted to them for performing a job.

## The various types of labour variances

n n n n n n

Labour Cost Variance Labour Rate Variance Labour Time or Efficiency Variance Labour Idle Time Variance Labour Mix Variance or Gang Composition Variance

## 2. Labour or wage Variances

( the word time in place of quantity)
The following are the variance in the case of labour : (a) Labour Cost or Labour Wage Variance (or) LCV = (ST x SR) (AT x AR) (b) Labour or Wage Rate Variance (MPV) = AT - (SR x AR) (c) Labour Time or Labour Efficiency Variance = SR (ST AT)

## 2. Labour or wage Variances

(d) Labour Idle Time Variance = Abnormal Idle Time x Std Hourly Rate (e) Labour Mix Variance or Gang Composition Variance (i) When the total hours i.e. time of the std composition and actual composition of workers are same, the formula is LMV = (Std Cost of Std Mix) (Std Cost of Actual Mix)

## 2. Labour or wage Variances

(e) Labour Mix Variance or Gang Composition Variance (LMV) (ii) When the total hours i.e. time of the std composition and actual composition of workers differ, the formula is:

LMV =

Total Time of Actual Mix x Std cost of std mix - Std cost of Total Time of Std Mix Actual Mix

## 2. Labour or wage Variances

(f) Labour Yield Variance (LYV)
Actual Production)

## = Std Cost per unit ( Std production of Actual Mix

RELATIONSHIP
n n n n

LCV = L Rate V + L Efficiency V L Efficiency V = L Mix V+ Idle Time V L Efficiency V = L Yield V + Idle Time V Efficiency V = L Mix V + Yield V + Idle Time Variance

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## BREAK EVEN ANALYSIS

Cost Volume Profit Analysis is often referred to as Break Even Analysis. BEP is known as no profit, no loss. The technique of BEA can be made easy with the help of graph or mathematical formula. Graphical representation of BEP is known as break even chart.

BEA
n

The term BEA is used in two senses narrow sense and broad sense. In its broad sense, BEA refers to the study of relationship between costs, volume and profit at different levels of sales (or) production.

BEA

In narrow sense, it refers to a technique of determining that level of operations where total revenues equal total expenses, i.e., the point of no profit, no loss.

## Significance of Break Even Chart at various levels of activity:

1. It will show the VC,FC and Total Costs. 2. Sales Unit or Sales Value can be known. 3. Profit or Loss can be known. 4. MOS can be known. 5. Angle of incidence or the intersection of

sales line with costs line can also be known. Thus, it is very useful for managerial decision.

Assumptions of BEA
All elements of cost can be segregated into fixed and

variable components. VC remains constant per unit and thus fluctuates directly in proportion to change in the volume of output. FC remains constant at all volumes of output. Selling price per unit remains constant at all levels of output. Volume of production is only factor that influences cost. There will be no change in the general price-level.

## Construction of BREAK EVEN CHART

y Total Revenue Total Cost Total FC Loss

BEP

Profit

Cost / Revenue

Total VC x

## Advantages of BEA and Chart

TC,VC and FC can be determined. Break Even unit or sales value can be

determined. CVP relationship can be studied. Inter-firm comparison is possible. It is useful for forecasting plans and profits. Total profits can be selected. It is helpful for cost control.

## Limitations of BEA and Chart

BEC is constructed under some unrealistic assumptions: 1.Exact and accurate classification of cost into fixed and variable is not possible. 2.Constant selling price is not true. 3.Detailed information cannot be known from the chart. 4.No importance is given to opening and closing stocks.

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