cash flow

b) Weighted average price method = Cost maybe classified as Period Cost:charged to, debited to, or written off to the income statement Product cost: the costs of manufacturing our products Direct costs: collectively known as Prime Costs Total cost Total No. of units c) Periodic simple average price method = Total unit price of certain period Total Number of purchases of (This rate is used for all issues for that period. Period means a month (or) week (or) year) that d) Periodic weighted average price method = Total cost of certain period Total Number of units of that period Indirect Costs: collectively known as Overheads Conversion Costs: these are the costs incurred in the factory that are incurred in the conversion of materials into finished goods Market Price Method Replacement price method plywood, wooden battens, fabric for the seat and the back, nails, screws, glue sawyers, drillers, assemblers, painters, polishers, upholsterers Direct expense •Issues are valued as if it was purchased now at current market price Direct labour Direct materials Direct Costs: costs of special designs for one batch, or run, of a particular set of tables and/or chairs, the cost of buying or hiring special machinery to make a limited edition of a set of chairs indirectly associated with manufacture: management of a department or area, supervisors, cleaners, maintenance and repair technicians •Issues are valued at price if it is sold now Standard price method = Materials are priced at pre determined rate (or) Notional Price Method Standard rate Inflated price method = The issue price is inflated to cover the losses incurred due to natural(or)climatic losses factory cost not included in any of the other sections InDirect expense tools and supplies InDirect labour InDirect materials Indirect Costs Realizable price method Depreciation of equipment, machinery, vehicles, buildings, electricity, water, telephone, rent, Council Tax, insurance ABC Analysis (or) Pareto Analysis Particulars “A” – Important material “B” – Neither important nor unimportant “C” – UN Important Quantity 10% 20% 70% Value 70% 20% 10% Note Period Costs 1. Administration Costs: include salaries, rent, Council Tax, electricity, water, telephone, depreciation, a potentially infinitely long list 2. Selling Costs: incurred to create and stimulate the demand and to secure the demand 3. Distribution Costs: incurred on dispatch of the finished goods to customer including transportation 4. Research Costs 5. Finance Costs: associated with providing the permanent, long term and short term finance Material 1) Reorder level = Maximum usage * Maximum lead time (Or) Minimum level + (Average usage * Average Lead time) •Material received as replacement from supplier is treated as fresh supply •If any material is returned from Department after issue, it has to be first disposed in the next issue of material •loss in the book balance of stock and actual is to be transferred to Inventory adjustment a/c and from there if the loss is normal it is transferred to Over Head control a/c. If it is abnormal it is transferred to costing profit and loss a/c. •CIF = Cost Insurance and Freight (This consignment is inclusive of prepaid insurance and freight) •FOB = Free on Board (Materials moving by sea – insurance premium is not paid) •FOR = Free on Rail (Insurance and freight is not borne by the supplier but paid by the company or purchase) •For each receipt of goods = Goods Receipt note •For each issue of goods = Materials Requisition note (or) Material Issue note Accounting Treatment 2) Minimum level = Reorder level – (Average usage * Average lead time) Normal Wastage = It should be distributed over goods output increasing per unit cost 3) Maximum level = ROL + ROQ – (Minimum usage * Minimum lead time) 4) Average level = Minimum level +Maximum level 2 Minimum level + ½ Reorder quantity Abnormal Wastage= It will be charged to costing profit and loss a/c (or) Sale value of scrap is credited to costing profit and loss a/c as an abnormal gain Sale proceeds of the scrap can be deducted from material cost or factory overheads 5) Danger level (or) safety stock level =Minimum usage * Minimum lead time (preferred) (or) Average usage * Average lead time (or) Average usage * Lead time for emergency purposes Sale proceeds of scrap may be credited to particular job Normal Defectives = cost of rectification of defectives should be charged to specific 6) EOQ (Economic Order Quantity - Wilson’s Formula) = √2AO/C Where A = Annual usage units O = Ordering cost per unit C = Annual carrying cost of one unit i.e. Carrying cast % * Carrying cost of unit 7) Associated cost = Buying cost pa + Carrying cost pa 8) Under EOQ Buying cost = Carrying cost Abnormal Defectives = This should be charged to costing profit and loss a/c Cost of Normal spoilage is to borne by good units Abnormal spoilage should be charged to costing profit and loss a/c Labour Time Rate system 9) Carrying Cost = Average inventory * Carrying cost per unit pa * Carrying cost % (Or) Average Inventory * Carrying cost per order pa 10) Average inventory = EOQ/2 Flat time Rate High wage system Payment by Results 11) Buying cost = Number of Orders * ordering cost 12) Number of Orders = Annual Demand / EOQ 13) Inventory Turnover (T.O) Ratio = Material consumed Average Inventory 14) Inventory T.O Period = 365 . Inventory Turn over Ratio Graduated time rate Piece rate system Group Bonus System Combination of Time and Piece rate Premium bonus plans Piece rate system Straight piece rate Differential piece rate- Taylor system & Merrick system Group Bonus System 15) Safety stock = Annual Demand *(Maximum lead time - Average lead time) 365 16) Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost Budgeted Expenses Towne gain sharing scheme Cost efficiency bonus Priest man system Combination of Time and Piece rate 17) Input Output Ratio = Quantity of input of material to production Standard material content of actual output Remarks :1) High Inventory T.O Ratio indicates that the material in the question is fast moving 2) Low Inventory T.O Ratio indicates over investment and locking up of working Capital in inventories Pricing of material Issues 1) Cost price method:a) Specific price method b) First in First Out method (FIFO) c) Last in First Out method (LIFO) d) Base stock method 2) Average price method:a) Simple average price method = Gantt task and Bonus scheme Emerson Efficiency system Point scheme-Bedaux system & Haynes manit system Premium bonus plans Halsey premium plan Rowan scheme Barth scheme 1) Time rate system = Hours worked * Rate per hour (Basic wages) 2) Piece rate system: i) Straight piece rate earnings = Number of units produced * Rate per unit ii) Differential Piece rate Total unit price Total No. of purchases a) F.W.Taylor’s differential rate system » 83% of piece rate when below standard » 125% of piece rate when above or at standard period Reconciliation Causes of difference b) Merrick differential or multiple piece rate system Efficiency level Piece rate » up to 83% »Normal piece rate » 83% to 100% » 110% of Normal rate » Above 100% » 120% of Normal rate iii) Gantt Task and Bonus system Output » Below standard » At standard » Above standard Payment » Time rate (guaranteed) » 20% Bonus of Time rate » 120% of ordinary piece rate iv) Emerson’s Efficiency system Efficiency Payment » Below 66.7% » Hourly Rate » from 66.7% »Hourly rate (+) increasing bonus according to degree to 100% of efficiency on the basis of step bonus rates » Above 100% » Hourly rate (+) 20% Bonus (+) additional bonus of 1% of hourly rate for every 1% increase in efficiency v) Halsey Premium Plan = Basic wages + 50% of time saved * Hourly Rate vi) Halsey Weir Premium Plan = Basic wages + 30% of time saved * Hourly rate * Basic Wages vii) Rowan Plan = Basic wages + Time saved Time allowed viii) Bedaus Point system = Basic wages + 75% * Bedaus point/60 * Rate/hr ix) Barth’s System = Hourly rate * √Std time *Time taken Labour Turnover:1) Separation rate method = Separation during the period Average No. of worker’s during the period 2) Net labour T.O rate (or) Replacement method = Number of replacements Average No. of worker’s during the period 3) Labour flux rate = No. of separation + No. of replacement Average No. of worker’s during the period Accounting Treatment Normal Idle time = Charged to factory overheads Normal but un-controllable = It should be charged to job by inflating wage rate Overheads Step method of secondary distribution (or) Non reciprocal method • Service department costs are divided over production department • Ignore service rended by one dept. to another • Service department which serves largest number of service department is divided first and go on Valuation of stock •Raw-material-I fi a ial a/ ’s sto k is alued at ost or arket alue Whi he er is less, hile i ost a/ ’s it is alued at LIFO, FIFO et •Work in progress -I fi a ial a/ ’s ad i istrati e e pe ses are also o sidered hile alui g sto k, ut i ost a/ ’s it a e alued at pri e or fa tor ost or cost of production •Finished Goods -I fi a ial a/ ’s it is alued at ost or arket pri e hi he er is less, i ost a/ ’s it is alued at total ost of produ tio Overheads Depreciation Abnormal Gains •In financial = Actual expenses are taken •In cost = Expenses are taken at predetermined rate •In financial = Charged in diminishing or fixed balance method •In cost = Charged in machine hour rate •In financial = Taken to profit & Loss a/c •I ost = E luded to ost a/ ’s or harged i osti g profit & Loss a/ Job & Batch Costing Organizations that carry out functions and services on a one at a time basis A job is “A customer order or task of relatively short duration” Job costing is “A form of specific order costing; the attribution of cost to jobs” A batch is group of similar articles which maintains its identity throughout one or more stages of production and is treated as a cost unit Batch costing is a form of specific order costing; the attribution of costs to batches. Economic Batch Quantity = EBQ = √2AS/C Where A = Annual Demand S = Setting up cost per batch C= Carrying cost / unit of production Process Costing Format of Abnormal loss Particulars Unit Rs. Particulars Unit Rs. To Process a/c By Sale of wasted units By costing P & L a/c Total Total Format of Abnormal gain a/c Particulars Units Rs. Particulars Units Rs. To Normal Loss a/c By Process a/c (names of different process) To costing P&la/c Total Total Abnormal = It should be charged to costing P & L a/c Direct redistribution method Purely financial items •Appropriation of profits Transferred to reserves, goodwill, preliminary expenses, dividend paid etc •Loss on sale of investment, penalties and fines •Income Interest received on Bank deposits, profit on sale of investments, fixed assets, transfer fees Reciprocal service method • ) Simultaneous equation method (or) Algebraic method • Repeated distribution method • Trial and Error method Simultaneous equation method •Equation is formed between service departments and is solved to find the amount due Repeated distribution method •Service department cost separated repeatedly till figure of service dept. is exhausted or too small Trial and Error method •Cost of service department is apportioned among them repeatedly till the amount is negligible and the total is divided among production department Treatment of Over/under Absorption absorbed and over absorbed overheads -small value •transferred to costing profit and loss a/c under and over absorption occurs due to wrong estimates •cost of product manufactured should be adjusted 1. Cost per unit for valuation of units to be trans. to next process and also for abnormal, loss or gain= Total process cost – Salvage value of normal spoilage Total units introduced – Normal loss in units 2. Abnormal loss (or) gain (all in units): = Units from previous process + fresh units introduced – Normal loss – units transferred to next process (If the result is positive then abnormal loss. If negative then abnormal gain) 3. Statements to be prepared while WIP is given: i) Statement of equivalent production ii) Statement of cost iii) Statement of apportionment of cost iv) Process cost a/c 4. In case of opening WIP and closing WIP are given then there are different methods of valuation of closing WIP FIFO Method LIFO Method •units transferred to next process includes full opening stock units -First to complete the units already in process •closing stock includes the RM introduced during the process •Cost incurred in process first to complete newly introduced units •Then to complete units already in process in this method •closing stock is divided into two-Units which represent opening stock but lie at the end of the period & Newly introduced units in closing stock Average Method •No distinction is made between opening stock and newly introduced material. •cost incurred for opening stock is also to be added with current cost accrued due to same abnormal reasons •transferred to costing profit & loss a/c Apportionment of OH Exp. Stores service expenses Factory rent Municipal rent, rates and taxes Insurance on Building and machinery Welfare department expenses Supervision Amenities to employee’s Employees liability for insurance Lighting power Stores over heads General over heads Apportionment of Departmental cost Maintenance dept Pay roll and time keeping Value of materials consumed Floor area floor area Insurable value Number of employees Plug point Direct Material Direct Wages Hours worked for each dept Total labour (or) machine hours (or) Number of employees in each department Employment (or) Personnel department Rate of labour T.O (or) No. of employees of each department Stores Keeping department No. of requisitions (or) value of materials of each department Purchase department No. of purchase orders value of materials of each department Welfare, ambulance, canteen, service, No. of employees in each department recreation room expenses Building service department Relative area each dept Internal transport service (or) overhead weight, value graded product handled, weight and distance crane service traveled Transport department Crane hours, truck hours, truck mileage, Number of packages Power house (electric power cost) Housing power, horse power machine hours, No. of electric points etc. Points of vital importance in case of Abnormal Gain / Loss: a) Calculate cost per unit by assuming there is no abnormal loss / gain b) Cost per unit arrived above should be applied for valuation of both abnormal Loss/gain units and output of the process. c) Separate a/c for both abnormal loss/gain is to be prepared JOINT PRODUCT AND BY PRODUCT COSTING Methods of apportioning joint cost over joint products Physical unit method •Separated on the basis of ratio of output quantity Standard cost method •Separated on the basis of standard cost set for respective joint products Contribution margin method •divided into two categories (i.e.) variable and fixed. Variable costs are separated on unit produced. Fixed on the basis of contribution ratios made by different products Market value at the point of separation •Joint cost *100/ Sales Revenue •Joint cost for each product is apportioned by applying this % on sales revenue of each product •Sales revenue = Sales Revenue at the point of separation Market value after processing Net Realizable value method •apportioned on the basis of total sales Value of each product after further processing •From sales value following items are deducted •i) Estimated profit margin •ii) Selling and distribution expenses if any included. •iii) Post split off cost Operating Costing Indifference Point The Differences Between Product Costing and Service Costing Shut down point  There may be very few, if any, materials to worry about  Overheads will comprise the most significant portion of any costs of which, labour costs may well •Point at which two Product sales result in same amount of profit • Point at which each of division or •= Change in fixed cost (in units) comprise as much as 70% product can be closed •Change in variable cost per unit No. Enterprise Cost per unit 1. Railways or bus companies Per passenger-kilometer •= Change in fixed cost (in units) • = Maximum (or) Specific (or) 2. Hospital Per patient/day, per bed/day •Change in contribution per unit Available fixed cost 3. Canteen Meals served , cups of tea • P/V Ratio (or) Contribution per •= Change in Fixed cost (in Rs.) 4. Water supply service Per 1000 gallons •Change in P/Ratio unit 5. Boiler House 1000 kg of steam 6. Goods Transport Per tonne km, quintal km • If sales are less than shut down •= Change in Fixed cost (in Rs.) 7. Electricity Boards Per kilowatt – hours point then that product is to shut •Change in Variable cost ratio 8. Road maintenance department Per mile or road maintenance down 9. Bricks One thousand 10. Hotel Per room/day Note :1) When comparison of profitability of two products if P/V Ratio of one product is greater than P/V Ratio of Passenger km, quintal km, tonne km, known as composite units computed in 2 ways: other Product then it is more profitable. a) Absolute (weighted average): (e.g.) tones km - Multiplying total distance by respective load 2) In case of Indifference point if Sales > Indifference point --- Select option with higher fixed cost (or) quantity. select option with lower fixed cost. b) Commercial (simple average): (e.g.) tonne Km–Multiplying total distance by average load quantity Standard Costing Method one of reading:All accumulated cost is classified into 3 categories: Running charges (or) variable cost= Fuel, Driver Wages, Depreciation, oil etc Standing charges (or) fixed cost Maintenance charges (or) semi variable cost = Supervision salary, Repairs and Maintenance Material 1 2 3 4 SP * SQ SP * AQ SP * RSQ AP * AQ = (1) – (4) Material cost variance Material price variance = (2)–(4) Material usage variance = (1) – (2) Material mix variance = (3) – (2) usually applies to major long term contracts rather than short term jobs such as civil engineering contracts for building houses, roads, bridges and so on Material yield variance = (1) –(3) also include contracts for building ships, and for providing goods and services under a long term contractual agreement 1 2 3 4 SR*ST SR*AT SR * RST AR * AT Contract Costing A form of specific order costing; attribution of costs to individual contracts every contract and each development will be accounted for separately contain the features of job costing Labour Labour cost variance = (1) – (4) Labour Rate variance = (2)–(4) Labour Efficiency variance = (1) – (2) Profit of Incomplete contract :Labour mix variance = (3) – (2) 1) When % of completion is less than or equal to 25% then full Notional profit is transferred to Labour Yield variance = (2) –(3) reserve. 2) When % of completion is above 25% but less than 50% following amount should be credited to profit & loss a/c = 1/3 * Notional Profit * {Cash received / Work certified} 1 Variable OH SR*ST 3) When % of completion is more than or equal to 50% then the amount transferred to profit is = 2/3 * Notional Profit * {Cash received / Work certified} [Balance is transferred to reserve a/c] Variable OH cost variance 4) When the contract is almost complete the amount credited to profit & loss a/c is a) Estimated total profit * {Work certified / Contract price} b) Estimated total profit * {Cash received / Contract price} c) Estimated total profit * {Cost of work done / Estimated total profit} d) Estimated total profit*{Cost of work done*Cash received Estimated total cost * Work certified} Variable OH Exp. variance = (2)–(4) Fixed OH 1 2 3 4 5 SR*ST SR*AT SR * RBT SR * BT AR * AT Margin of safety [MOP] Actual sales – Break even sales Sales – Variable cost = Fixed cost + Profit Profit Volume Ratio [P/V Ratio]:•{Contribution / Sales} * 100 •{Contribution per unit / Sales per unit} * 100 •{Change in profit / Change in sales} * 100 •{Change in contribution / Change in sales} * 100 Net profit / P/V Ratio = (4) – (5) Fixed Overheads Efficiency Variance = (1) – (2) Fixed Overheads Volume Variance = (1) – (4) Fixed Overheads Capacity Variance = (2) – (3) Fixed Overheads Capacity Variance = (2) – (3) Fixed Overheads Calendar Variance = (3) – (4) Sales Value Variance 1 2 3 5 Budgeted Price*BQ BP*AQ BP*Budgeted mix AP * AQ Sales value variance = (4)–(1) (4) – (2) (2) – (3) = Sales quantity variance = (3) – (1) Note :i) Actual margin per unit (AMPU) = Actual sale price – selling cost per unit ii) Budgeted margin per unit (BMPU) = Budgeted sale price – selling price per unit Sales Margin Variance 1 2 3 5 BMPU*BQ BMPU*AQ BMPU*Budgeted mix AMPU * AQ Sales margin variance = (4)–(1) = (4) – (2) Sales margin volume variance = (2) – (1) Sales margin mix variance (2) – (3) Sales value for Desired Profit = {Fixed cost + Desired profit} / P/V Ratio Sales margin price variance Contribution = Sales * P/V Ratio = Sales margin quantity variance = At BEP Contribution = Fixed cost Break Even Point [BEP]:•Fixed cost / Contribution per unit [in units] •Fixed cost / P/V Ratio [in value] (or) Fixed Cost * Sales value per unit/(Sales – Variable cost per unit) (2) – (1) Profit / Contribution per unit [In units] Sales unit at Desired profit = {Fixed cost + Desired profit} / Cont. per unit Variable cost Ratio = Change in total cost * 100/Change in total sales (1) – (5) = Fixed Overheads Budgeted Variance Sales mix variance Marginal Costing Variable cost Ratio = {Variable cost / Sales} * 100 AR * AT [Where: SR =Standard rate/hour = Budgeted variable OH Budgeted Hours ] Sales price variance = 6) Escalation Clause = This is to safeguard against likely change in price of cost elements rise by and Sales volume variance = certain % over the prices prevailing at the time tendering the contractee has to bear the cost. Variable cost = It changes directly in proportion with volume SR*AT = (1) – (3) Fixed Overheads Cost Variance 5) Work-In-Progress is shown in Balance Sheet as follows:Skeleton Balance sheet Liabilities (RS) Asset (Rs) Profit & loss a/c (will include) Work-in-progress Profit on contract (Specify Value or work certified the contract number) Cost of work uncertified Less : Loss on contract Less :- Reserve for unrealized profit (Specify the contract number) Less :- Amount received from Sundry creditors (will include) contractee Wages accrued Direct expenses accrued Any other expenses (Specify) Total Cost = Variable cost + Fixed cost 3 Variable OH Efficiency variance = (1) – (2) % of completion = {Work certified/Contract price} * 100 Sales = Total cost + Profit = Variable cost + Fixed cost + Profit 2 (3) – (1) Control Ratio :1) Efficiency Ratio = Standard hours for actual output * 100 Actual hours worked 2) Capacity Ratio = Actual Hours Worked * 100 Budgeted Hours 3) Activity Ratio = Actual hours worked * 100 Budgeted Hours Verification: Activity Ratio = Efficiency * Capacity Ratio NON-INTEGRATED ACCOUNTS Scheme of journal entries:Material: For material purchases (cash or Material control a/c Dr credit) To Cost ledger control a/c Purchases for a special job Work-in-progress ledger control a/c Dr To Cost ledger control a/c Material returned to vender Cost ledger control a/c Dr To Stores ledger control a/c Material (direct) issued to Work-in-progress control a/c Dr production To Stores ledger control a/c Material (indirect) issued to Manufacturing overheads a/c Dr production To Stores ledger control a/c Material returned from shop to Stores ledger control a/c Dr stores To Work-in-progress control a/c Material transferred from Job 1 to No entry Job 2 Material issued from stores for Manufacturing overhead a/c Dr repairs To Stores ledger control a/c Labour: Direct wages paid Wage control a/c Dr To Cost ledger control a/c Work-in-progress a/c Dr To Wage control a/c Indirect wages paid to workers in Wage control a/c Dr Production, Administration, To Cost ledger control a/c Selling & Distribution departments Production Overhead a/c Dr Administrative Overhead a/c Dr Selling & Distribution Overhead a/c Dr To Wage control a/c Direct Expenses on a particular Job a/c Dr job To Cost ledger control a/c Overheads Overhead expenses incurred Production overhead a/c Dr Administrative Overhead a/c Dr Selling & Distribution Overhead a/c Dr To cost ledger control a/c Carriage inward Manufacturing Overhead a/c Dr To Cost ledger control a/c Production Overheads recovered Work-in-progress control a/c Dr To Production Overhead a/c Administrative Overhead Finished goods ledger control a/c Dr recovered from finished goods To Administrative Overhead a/c Selling and Distribution Overhead Cost of sales a/c Dr recovered from sales To Selling & Distribution a/c Special cases If over/under absorbed amounts are carried For over recovery : forward to subsequent year, the balance of Production Overhead a/c Dr each Overhead account will have to be To Production overhead suspense a/c transferred to respective Overhead suspense (or reserve) Accounts as follows: For under recovery : Administrative Overhead Suspense a/c Dr To Administrative Overhead a/c Selling & Distribution Overhead Suspense a/c Dr To Selling & Distribution Overhead a/c In case the Under/Over absorbed overheads are For Over recovery: transferred to costing profit & loss a/c then the Production Overhead a/c Dr relevant entries are: To Costing Profit & Loss a/c For Under recovery: Costing Profit & Loss a/c Dr To Administration Overhead a/c Sales: For sales effected Cost ledger control a/c Dr To Costing Profit & Loss a/c Profit / Loss: In case of profit the entry is as Costing Profit & Loss a/c Dr follows To Cost ledger control a/c Reverse the entry in case of loss Relevant Costing Relevant costs future costs that will be changed by a particular decision Irrelevant costs Those costs that will not be affected by a decision 1. If the relevant revenues exceed the relevant costs then it will be worthwhile accepting the decision. 2. A particular cost can be relevant in one situation but irrelevant in another. 3. The important point to note is that relevant costs represent those future costs that will be changed by a particular decision, while irrelevant costs are those costs that will not be affected by that decision. Other Important Terminologies : To affect a decision a cost must be: Future: Past costs are irrelevant as they are not affected them by future decisions & decisions should be made as to what is best now. Incremental: This refers to additional revenue or expenditure, which may appear as a result of our decision-making. (A cash flow - Such charges as depreciation may be future but do not represent cash flows and, as such, are not relevant.) Sunk costs: Past costs, not relevant for decision making Committed costs: This is future in nature but which arise from past decisions, perhaps as the result of a contract. Relevant Costs: Problem areas: 1 Problems in determining the relevant costs of materials: When considering various decisions, if the any materials required is not taken from existing stocks but would be purchased on a later date, then the estimated purchase price would be the relevant material cost. A more difficult problem arises when materials are taken from existing stock. In this situation the relevant cost of materials for a particular job (say job X) depends on Material is in regular use of the company Use Replacement Cost Material is not in regular use of the Opportunity cost or Realisable value company The net sales revenue if the materials were sold (or) The expense that would be avoided if the materials were used on some other job Whichever is greater Material is in short supply If the material is in short supply the only way material for the job under consideration can be obtained is by reducing production of some other product / job. This would release material for the order. but the reduced production will result in loss of contribution which should be taken in to account when ascertaining the relevant costs for the specific order. Therefore the relevant cost will be Contribution lost (before the material cost since the material cost will be incurred in any case) will be the relevant cost. 2 Determining the direct labour that are relevant to short - term decision depends on the circumstances. Where a company has temporary sparse capacity and the labour force is to be maintained in the short term, the direct labour cost incurred will remain same for all alternative decisions. The direct labour cost will therefore be irrelevant for short - term decision - making purposes. However where casual labour is used and where workers can be hired on a daily basis; a company may then adjust the employment of labour to exactly the amount required to meet the production requirements. The labour cost will increase if the company accepts additional work, and will decrease if production is reduced. In this situation the labour cost be a relevant cost for decision - making purposes. In a situation where full capacity exists and additional labour supplies are unavailable in the short - term, and where no further overtime working is possible, the only way that labour resources could then be obtained for a specific order would be to reduce existing production. This would release labour for the order. but the reduced production will result in loss of contribution, which should be taken in to account when ascertaining the relevant costs for the specific' order. Therefore the relevant cost will be Contribution lost (before the labour cost) will be the relevant cost. Budgetary Control Zero Base Budgeting budgets are developed from a zero base at the beginning of the budget development process, all budget headings have a value of ZERO incremental budgeting system in general tends to start a new budget with a balance at least equal to last year's total balance, or an estimate of it. Definition of Zero Base Budgeting (ZBB) “A method of budgeting whereby all activities are reevaluated each time a budget is set. Discrete levels of each activity are valued and a combination chosen to match funds available”. -CA. Rajgopal Sanghi & CA. Sumit L. Sarda Objectives and Benefits of ZBB • zero base budgeting tries to achieve is an optimal allocation of resources • starts by asking managers to identify and justify their area(s) of work in terms of decision packages benefits of ZBB • Focus the budget process on a comprehensive analysis of objectives and needs • Combine planning and budgeting into a single process • Cause managers to evaluate in detail the cost effectiveness of their operations • Expand management participation in planning and budgeting at all levels of the organisation Activity Based costing Traditional Method we split the Over Head incurred in production, based on machine hours In ABC method Over Head are splited according to the related activity, for each type of Over Head. Overhead are apportioned among various Production cost centers on the basis of Activity cost drivers Plot no.8, Canal Road, Ramdaspeth, Nagpur-440010, Contact:8600364185