Cost Accounting - (Al Jamia Arts and Science College, Poopalam)
Cost Accounting - (Al Jamia Arts and Science College, Poopalam)
Cost Accounting - (Al Jamia Arts and Science College, Poopalam)
Overheads may be sub-divided into (i) 3. The time lag between indenting and
Manufacturing Overheads; (ii) receiving materials can be reduced.
Administration Overheads; (iii) Selling 4. Technical requirements of each plant can
Overheads; (iv) Distribution Overheads; (v) be ascertained.
Research and Development Overheads. Purchase Procedure:
Cost sheet or Statement of Cost: When 1. Indenting for materials : The stores
costing information is set out in the form of department prepares indents for the
a statement, it is called “Cost Sheet”. purchase of materials for replenishment of
Module II (Materials) stocks (regular indents) or for a special
Materials: - job(special indents) and sends it to the
The materials are a major part of the total purchase department.
cost of producing a product and are one of 2. Issue of tenders to suppliers: The
the most important assets in majority of the purchase department issue tenders to
business enterprises. Hence the total cost of suppliers or publish them in papers. The
a product can be controlled and reduced by suppliers quote their terms of price and
efficiently using materials. The materials delivery/payment. After the last date for
are of two types, namely: (i) Direct receipt of quotations is over, the tenders
materials and Indirect materials are opened and a comparative statement is
Purchasing Control and Procedure: prepared.
Purchasing is an art. Wrong purchases 3. Placing of purchase orders: Normally
increase the cost of materials, store six copies of purchase order are made. The
equipment and the finished goods. Hence it supplier, stores, inspection department,
is imperative that purchases should be store accounting section, purchase
effectively, efficiently and economically department and progress department are
performed. So scientific purchasing should sent one copy each.
be done. 4. Inspection: The supplier delivers goods
According to Alford and Beatty, “Purchasing at the place specified. Two delivery challans
is the procuring of materials, supplies, are prepared by the supplier one of which
machines tools and services required for is returned. It is a proof of delivery. After
the equipment, maintenance and operation receiving the goods, the inspection
of a manufacturing plant”. department checks that the materials are in
Methods of PurchasingPurchasing can be accordance with the quality required,
broadly classified as centralized and standard expected, tolerances allowed etc.
localized purchasing. 5. Receiving Stores: The stores
(a) Centralized Purchasing: In a large department prepares a Stores Receipt Note
organization, manufacturing units are for the quantity of stock accepted in
many. In such cases centralized purchasing inspection. After issuing of the Stores
is beneficial. It is the process of purchasing Receipt, the Storekeeper is responsible for
from few dealers. the stocks. The stores receipt is the
document for the posting of receipts in Bin
(b) Decentralization of Purchases: The
Card and the Stores Ledger.
advantages of decentralization of purchases
6. Checking and passing of bills for
1. Each plant may have its own particular
payment: Bills received by the purchase
need. This can be given special attention.
department are forwarded to the stores
2. Direct contact can be established with accounting section to check the authenticity
suppliers. regarding quantity and price and the
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
Purchase price of material is fixed balance after every receipt and issue, to
Carrying or storage cost per unit is facilitate regular checking to avoid closing
fixed down of factory for stock taking.
Ordering cost per unit is fixed. ABC analysis
The quantity of material ordered is In the case of large concerns large number
received immediately. The lead time of items are kept in the stores. Therefore, it
is zero is practically impossible to concentrate on
Costs of inventory each and every item. In such situations,
Ordering cost – ABC analysis is used with view to exercise
these are cost of placing an orders. This better control over materials. Under ABC
cost depends on number of orders. It analysis all materials are classified into
includes preparation of purchase order, three categories. A, B and C according to
cost of receiving order, transport costs, etc. value. Category A include high value of
materials, category B includes medium
Carrying cost – value of materials and category C consist
these are the cost incurred in keeping lower value materials. According to this
inventory. These includes storage technique a greater or strict control is
costs(rent, lighting), handling costs, exercised over category A, moderate
insurance, security cost, damage etc. control is exercised over category and
Stock out cost – relatively lesser degree of control over
a stock out is a situation when the firm is category C materials
not having items in store but there is a Issue of materials
demand for the same. Materials issued from stores are debited to
Stores (or Materials) records the jobs or work orders which received
In the stores the most important two them and credited to the materials account.
records kept are bin cards and stores There are many methods of pricing
ledger. (a) Bin Card. A bin card is a record material issues. The most important being:
of the receipt and issue of material and is FIFO, LIFO, simple and weighed average
prepared by the store keeper for each item methods.
of stores. In a bin card not only the receipt 1) First in First Out (FIFO) :Under this
and issue of material is recorded, minimum method material is first issued from the
quantity, maximum quantity and ordering earliest consignment on hand and priced at
quantity are stated on the card. the cost at which that consignment was
(b) Stores Ledger: This ledger is kept in the placed in the stores. In other words,
costing department and is identical with materials received first are issued first. This
the bin card except that receipts, issues and method is most suitable in times of falling
balances are shown along with their money prices because the issue price of materials
values. to jobs or work order will be high while the
Perpetual inventory system cost of replacement of materials will be low.
The system of material control on 2) Last in Last Out (LILO):Under this
continuous basis while the material is in method, issues are priced in the reverse
storage is called perpetual inventory order of purchase i.e., the prices of the
system. Under this system the actual stock latest available consignment is taken. This
is taken continuously and is compared method is suitable in times of rising prices
with the stock as shown by the material because material will be issued from the
records. It is a method of recording stores latest consignment at a price which is
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
closely related to the current price levels. used it should make a correct record of the
3) Simple Average Method: In this time and the method should be cost
method, price is calculated by dividing the effective and minimize the risk of fraud.
total of the prices of the materials in the The manual methods of time keeping are
stock from which the material to be priced as follows:
could be drawn by the number of the prices a) Attendance Register Method, and
used in that total. b) Metal Disc Method
4) Weighted Average Methods: In this Attendance Register Method: This is the
method, price is calculated by dividing the traditional method where an attendance
total cost of materials in the stock from register or muster roll is kept at the time
which the materials to be priced could be office near the factory gate or in each
drawn by the total quantity of materials in department. The timekeeper records the
that stock. In the periods of heavy name of the worker, the worker’s number,
fluctuations in the prices of materials, the the department in which he is working, the
average cost method gives better results rate of wages, the time of arrival and
because it tends to smooth out the departure, normal time and overtime.
fluctuations in prices by taking the average
Metal Disc Method: Under this method,
of prices of various lots in stock.
each worker is allotted a metal disc or a
Module III( Labour) token with a hole bearing his
Labour cost is a second major element of identificationnumber. A board is kept at the
cost. The control of labour cost and its gate with pegs on it and all tokens are hung
accounting is very difficult as it deals with on this board. These boards can be
human element. Labour is the most maintained separately for each department
perishable commodity and as such should so that the workers can remove the token
be effectively utilized immediately. Labour without delay and put it in a tray or box kept
is of two types (a) direct labour, (b) near the board. Immediately after the
indirect labour. scheduled time for entering the factory, the
Time keeping box is removed and the latecomers will have
Time-keeping will serve the following to give their tokens to the timekeeper and
purposes: their exact time of arrival is recorded. The
1. Preparation of Pay Rolls in case of time- tokens or disc left on the board will
paid workers. represent the absentee workers.
2. Meeting the statutory requirements. Mechanical Methods: The mechanical
methods that are generally used for the
3. Ensuring discipline in attendance.
recording of time of workers may be as
4. Recording of each worker’s time ‘in’ and
follows:
‘out’ of the factory making distinction
between normal time, overtime, late (a) Time Recording Clocks
attendance, early leaving. (b) Dial Time Records
5. For overhead distribution when Time Recording Clocks: The time
overheads are absorbed on the basis of recording clock is a mechanical device
labour hours. which automatically records the time of the
Methods of Time-keeping: There are two workers. Under this method, each worker is
methods of time-keeping. They are the given a Time Card which is kept in a tray
manual methods and the mechanical near the factory gate and as the worker
methods. Whichever method is enters the gate, he picks up his card from
the tray, puts it in the time recording clock
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
which prints the exact time of arrival in the System of Wage Payment
proper space against the particular day Time wage system and
Dial Time Records: Under this method, a piece rate wage system
dial time recorder machine us used. It has a Time Wage System: Under this method of
dial with number of holes (usually about wage payment, the worker is paid at an
150) and each hole bears a number hourly, daily, weekly or monthly rate. This
corresponding to the identification number payment is made according to the time
of the worker concerned. There is one worked irrespective of the work done
radial arm at the centre of the dial. As a Merits
worker enters the factory gate, he is to
press the radial arm after placing it at the Simple to understand
hole of his number and his time will Helps to maintain quality of product
automatically be recorded on roll of a paper Job safety
inside the dial time recorder against the Trade union accept this
number. good relation with management
Time Booking Save machines from overload
Guarantee fixed wages
Time booking is the recording of time spent
by the worker on different jobs or work Demerits
orders carried out by him during his period No distinction between efficient &
of attendance in the factory. inefficient workers
Idle Time Continuous supervision is required
There is always a difference between the Difficult to measure labour cost
time booked to different jobs or work Piece Rate System (payment by result):
orders and the time recorded at the factory Under this system of wage payment, a fixed
gate. This difference is known as idle time. rate is paid for each unit produced, job
Idle time is of two types. completed or an operation performed.
(a) Normal Idle Time (b) Abnormal Idle Thus, payment is made according to the
Time
quantity of work done no consideration is
Normal Idle Time: This represents the
given to the time taken by the workers to
time, the wastage of which cannot be
avoided and, therefore, the employer must perform the work.
bear the labour cost of this time. But every Merits
effort should be made to reduce it to the Simple to understand
lowest possible level. More quantity
Abnormal Idle Time: It is that time the Strict supervision is not required
wastage of which can be avoided if proper Cost per unit can easily be calculated
precautions are taken. Example: time Reduce cost of production
wasted due:- to breakdown of machinery Management can distinguish between
Over Time: - efficient & inefficient workers
It is the work done beyond the normal Demerits
working period in a day or week. For Reduce quality
overtime done, the workers are given Minimum wage are not guaranteed
double the wages for the overtime done. Chance for machine breakdown
The additional amount paid on account of Promotes jealousy or suspicion
overtime is known as overtime premium.
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
Methods of piece rate wage system. (i) Halsey Premium Plan: Under this
a) Straight piece rate system method, the worker is given wages for the
b) Taylor’s differential piece rate system actual time taken and a bonus equal to half
of wages for time saved. The standard time
c) Merrick’s multiple piece rate system
for doing each job or operation is fixed. In
d) Gant’s task and bonus plan practice the bonus may vary from 33⅓ %
(a) Straight piece rate system: Payment is to 66⅔ % of the wages of the time saved.
made as per the number of units produced Thus if S is the standard time, T the time
at a fixed rate per unit. Another method is taken, R the labour rate per hour, and % the
piece rate with guaranteed time rate in percentage of the wages of time saved to be
which the worker is given time rate wages given as bonus, total earnings of the worker
if his piece rate wages is less than the time will be: T x R + % (S-T) R. Under Halsey-
rate. Weir plan, the premium is set at 30% of the
(b) Taylor’s Differential Piece Rate time saved.
system: This system was introduced by The advantages of Halsey Premium Plan
Taylor, the father of scientific management 1. It is simple to understand and relatively
to encourage the workers to complete the simple to calculate.
work within or less than the standard time.
2. It guarantees time wages to workers.
Taylor advocated two piece rates, so that if
a worker performs the work within or less 3. it is helpful in reducing labour cost per
than the standard time, he is paid a higher unit.
piece rate and if he does not complete the 4. It motivates efficient workers
work within the standard time, he is given a 5. Fixed overhead cost per unit is reduced
lower piece rate. with increase in production.
c) Merrick’s Multiple Piece Rate System: 6. The employer is able to reduce cost of
This method seeks to make an production
improvement in the Taylor’s differential Disadvantages
piece rate system. Under this method, three 1. Quality of work suffers
piece rates are applied for workers with
2. Workers criticize this method on the
different levels of performance. Wages are
ground that the employer gets a share of
paid at ordinary piece rate to those workers
wages of the time saved.
whose performance is less than 83% of the
standard output, 110% of the ordinary (ii) Rowan Plan: The difference between
piece rate is given to workers whose level Halsey plan and Rowan Plan is the
of performance is between 83% and 100% calculation of the bonus. Under this method
of the standard and 120% of the ordinary also the workers are guaranteed the time
piece rate is given to workers who produce wages but the bonus is that proportion of
more than 100% of the standard output. the wages of the time taken which the time
saved bears to the standard time allowed
Premium and Bonus Plan
Total Earnings = T x R + S-T x T x R
Under a premium plan, a standard time is
fixed for the completion of a specific job or Advantages
operation at an hourly rate plus wages for a 1. It guarantees time wages to workers
certain fraction of the time saved by way of 2. The quality of work does not suffer
a bonus. The plan is also known as 3. Labour cost per unit is reduced
incentive plans. 4. Fixed overhead cost is reduced with
The following are some of the important increase in production.
premium plans.
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
allocation, overheads are directly allocated department receives service from another
to the department for which it is incurred. department, the department receiving such
(i) Direct Labour/Machine Hours. Under service should be charged. If two
this basis, overhead expenses are departments provide service to each other,
distributed to various departments in the each department should be charged for the
ratio of total number of labour or machine cost of services rendered by the other.
hours worked in each department. There are three methods available for
(ii) Value of materials passing through dealing with inter-service departmental
cost centres. This basis is adopted for transfer:
expenses associated with material such as a. Simultaneous Equation Method
material handling expenses. b. Repeated Distribution Method
(iii) Direct wages. Expenses which are c. Trial and Error Method
booked with the amounts of wages (a) Simultaneous Equation method:
2) Re-apportionment of Service Under this method, the true cost of the
Department Costs to Production service departments are ascertained first
Departments with the help of simultaneous equations;
Service department costs are to be these are then redistributed to production
reapportioned to the production departments on the basis of given
departments or the cost centres where percentage.
production is going on. This process of re- (b) Repeated Distribution Method: Under
apportionment of overhead expenses is this method, the totals are shown in the
known as ‘Service Distribution’. The departmental distribution summary, are
following is a list of the bases of put out in a line, and then the service
apportionment which may be accepted for department totals are exhausted in turn
the service departments. repeatedly according to the agreed
The following are the various methods of percentages until the figures become too
re-distribution of service department costs small to matter.
to production departments. (c) Trial and Error Method: Under this
1. Direct re-distribution method method, the cost of one service department
2. Step distribution method is apportioned to another centre. The cost
of another centre plus the share received
3. Reciprocal Services method
from the first centre is again apportioned to
1).Direct re-distribution method: Under the first cost centre and this process is
this method, the costs of service repeated till the balancing figure becomes
departments are directly apportioned to negligible.
production departments without taking
ABSORPTION OF OVERHEAD
into consideration any service from one
service department to another service Absorption means the distribution of the
department. overhead expenses allotted to a particular
department over the units produced in that
2) Step Distribution Method: Under this
department. Overhead absorption is
method, the cost of most serviceable
accomplished by overhead rates.
department is first apportioned to other
service departments and production Methods of Absorption of Manufacturing
departments. Overhead
3) Reciprocal Services Method: This The following are the main methods of
method recognizes the fact that if a given absorption of manufacturing or factory
overheads.
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
(a) Direct Material Cost Method. Under convenient physical units like number,
this method percentage of factory expenses weight, volume etc. the rate is calculated as
to value of direct materials consumed in under:
production is calculated to absorb Overhead Rate= Overhead expenses
manufacturing overheads. (budgeted)/Budgeted production
The formula is Overhead Rate = Production (g) Sale Price Method: Under this method,
Overhead Expenses (Budgeted) / budgeted overhead expenses are divided by
Anticipated Direct Material Cost the sale price of units of production in
(b) Direct Labour Cost (or Direct Wages) order to calculate the overhead recovery
Method. This is a simple and easy method rate., the formula is
and widely used in most of the concerns. Overhead Recovery Rate= Budgeted
The overhead rate is calculated as under: overhead expenses / Sale value of units of
Overhead Rate= Production Overhead production
Expenses / Direct Labour Cost Module IV(Methods of Costing)
(c) Prime Cost Method. Under this UNIT COSTING
method the recovery rate is calculated
It is an important method of costing. It is
dividing the budgeted overhead expenses
also known as output costing or single
by the aggregate of direct materials and
costing. It is used to ascertain the cost of
direct labour cost of all the products of a
producing a unit of output.. This method is
cost centre. The formula is
called ‘unit’ costing since every unit of
Overhead Recovery Rate = Production production is identical in all respects and
Budgeted Overhead Expenses / Anticipated the cost unit is a standard product.
Direct Materials and Direct Labour Cost
Cost sheet:
(d) Direct Labour (or Production) Hour
Cost sheet is a device used to determine
Method. This rate is obtained by dividing
and present the cost under unit costing. It is
the overhead expenses by the aggregate of
a statement of costs incurred at each level
the productive hours of direct workers. The
of manufacturing a product or service. In a
formula is Overhead rate = Production
Cost sheet all the elements of cost is taken
Overhead Expenses / direct labour hours.
into consideration. It includes Prime cost,
(e) Machine Hour Rate. Machine hour rate Factory/manufacturing cost, cost of
is the cost of running a machine per hour. It production, cost of sale Profit/loss etc.
is one of the methods of absorbing factory
Items excluded from Cost Sheet:
expenses to production. What is needed for
computing the machine hour rate is to 1. Pure financial expenses like interest on
divide overhead expenses for a specific capital, interest on loan, discount on
machine or group of machines for a period debentures, loss on sale of fixed asset
by the operating hours of the machine or provision for bad debts and doubtful debts,
the group of machines for the period. It is writing off goodwill, copyright, preliminary
calculated as follows: Machine hour rate = expenses etc.
Amount of overheads / Machine hours 2. Pure financial incomes like interest
during a given period received, profit on sale of investment,
(f) Rate Per Unit of Production. This dividend received, rent received,
method is simple, direct and easy. It is commission received, discount received etc.
suitable for mining and other extractive In addition to the above, no appropriation
industries, foundries and brick laying items will include in cost sheet
industries, where the output is measured in
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
known as Notional profit or notional loss. 3. Process Costing is simple and less
Special terms in contract account expensive in relation o job costing.
1. Work in Progress: It is the unfinished 4. By evaluating the performance of each
contract at the end of the accounting period process effective managerial control is
and it includes amount of work certified possible.
and amount of work uncertified. Disadvantages of Process Costing
2. Work certified: The sales value of work 1. Valuation of work in progress is difficult.
completed as certified by the architect is 2. It is not easy to value losses, wastes,
known as ‘work certified’. scraps etc.
3. Work Uncertified: It means work which 3. The apportionment of total cost among
has been carried out by the contractor but joint products and by-products is difficult.
has not been certified by the architect. 4. Process cost are not accurate, they are
4. Retention money: - Regardless of the only average costs
amount of work certified, the contractor is 5. Process costs are only historical.
paid a specified percentage of the same and
Difference between Process Costing and
the balance is held or retained by the
Job Costing
contractee. The unpaid balance of work
certified or the amount held back or Process Costing Job Costing
retained by the contractee is known as Production is Production is
‘retention money’. continuous according to
5. Sub contract: Sometimes the contractor customers’ orders
enters into contracts with another Production is for Production is not
contractor to give a portion of work stock for stock
undertaken by him. All units produced Each job is
6. Escalation clause: This is clause which is are identical or different from the
provided in the contract to cover up any Homogeneous other
increase in the price of the contract due to
increase in the prices of raw material or
There is regular There is no
labour or in the utilization of any other transfer of cost of regular transfer of
factors of production. one process to cost
PROCESS COSTING subsequent from one job to
Process costing is the method of costing processes another
applied in the industries engaged in
Work in progress Work in progress
continuous or mass production. Process
always exists may or may not
costing is a method of costing used to
exist
ascertain the cost of a product at each
process or stage of manufacturing. Hence, Accounts
this costing is also called as “Average The preparation of Process Account
Costing” or “Continuous Costing”. depends upon the following situations
Advantages of Process Costing 1. Simple Process Account
1. It is easy to compute average cot because 2. Process costing with normal process loss
the products are homogeneous in Process 3. Process costing with abnormal process
Costing. loss
2. It is possible to ascertain the process 4. Process costing with abnormal process
costs at short intervals. gains
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
Simple Process Account: Under this case it rather than production of commodities. The
is very easy to prepare process account. A services may be in the form of transport,
separate account is opened for each supply service, welfare service, etc.
process. All costs are debited to the process Module V (Cost Control Techniques)
account. The total cost of the process is BUDGET AND BUDGETORY CONTROL
transferred to the next process. At the end
Meaning and definition of budget:
of each process the cost per unit is obtained
by dividing the total cost by the number of It simply means a financial plan expressed
units. in terms of money. The budget pertaining to
any of the activities of business is always
Process losses: The process loss is
forward looking. The term ‘budget’ has
classified into two- normal process loss and
been derived from the French word,
abnormal process loss.
”bougette”, which means a leather bag into
Normal process loss: This is the loss
which funds are appropriated to meet the
which is unavoidable on account of
anticipated expenses.
inherent nature of production process. It
arises under normal conditions. It is usually Budgeting and Budgetary control:
calculated as a certain percentage of input. Budgeting simply means preparing budgets.
Normal process los includes either waste or It is a process of preparation,
scrap or both. implementation and the operation of
abnormal Process Loss: Any loss caused budget. Being a plan of action, a budget
by unexpected or abnormal conditions such guides every manager in the decision
as plant break don, substandard materials, making process.
carelessness, accident etc. or loss in exceeds In the words of Rowland Harr, “Budgeting
of the margin anticipated for normal is the process of building budgets”..
process loss can be called as abnormal Objectives of Budget and Budgetary
process loss. control:
Abnormal Gain (or Abnormal Effective): The following points reveal the objectives
Sometimes actual loss or wastage in a of Budget and budgetary control:-
process is less than expected normal loss. In 1. To aid the planning of annual operations
this case the difference between actual loss 2. To co ordinate the activities of the
and expected loss is known as abnormal various parts of the organization
gain or abnormal effective. It is the excess
3. To communicate plans to the various
of actual production over normal output..
responsibility centre managers
Equivalent Production
Equivalent production represents the 4. To motivate managers to strive to
achieve the organizational goals.
production of a process in terms of
completed units. In other words, it means 5. To control activities
converting the incomplete units into its 6. To eliminates the wastes of all kinds
equivalent of completed units. It is also 7. To provide a yard stick against which
known as effective production. actual results can be compared
OPERATING COSTING (SERVICE 8. To evaluate the performance of
COSTING) managers.
It is the costing procedure used for 9. To reduce the uncertainties
determining the cost of per unit of service Meaning of Estimate, forecast and
rendered. It is a method of costing applied Budget:
to undertaking which provides service
An estimate is predetermination of future
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
events either on the basis of simple guess purposes, the entire organization will be
work or following scientific principles. split into a number of departments, area or
Forecast is an assessment of probable future functions, known as ‘centres’, and budgets
events. Budget is based on the implication of will be prepared for each such centers
a forecast and related to planned events. 4. Clear cut objectives and reasonably
Steps involved in Budgetary Control: attainable goals
The following steps may be considered 5. Participative budgeting: Every
necessary for a comprehensive budgetary executive responsible for the
control programme:- implementation of budgets should be given
1. Laying down organizational goals or an opportunity to take part in the
objectives preparation of budgets.
2. Formulating the necessary plans to 6. Budget committee: The work of
ensure that the desired objectives are preparing a budget manual should be
achieved. entrusted to a Budget committee.
3. Translating plans into budget 7. Comprehensive budgeting: Budgeting
4. Relating the responsibilities of executives should not be partial, it should cover all the
to the requirements of a policy. functions .
5. Recording and reporting actual 8. Adequate accounting system:
performance 9. Periodic reporting: - There should be a
6. Continuous comparison of actual with prompt and timely communication and
budgeted results reporting system for the effective
7. Ascertainment of deviations, if any implementation of a budgetary control
8. Focusing attention on significant system.
deviations Budget manual:
9. Investigation into deviations to establish It is a written document which guides the
causes executives in preparing various budgets.
10. Presentation of information to Budget period:
management, relating the variations to This may be defined as the period for which
individual a budget is prepared and employed. The
responsibility. budget period will depend on the type of
11. Taking corrective action to prevent business and the control aspects.
recurrence of variations. Classification of Budget
12. Provide a basis for revision of budgets.
1. Classification according to time factor
Essentials of a Budgetary Control
2. Classification according to flexibility
system:
factor
1. Support by top management: The
3. Classification according to function.
wholehearted support of all managerial
persons is very necessary for the success of I. Classification according to time factor:
a budgetary control system. On this basis, budgets can be of three types:
2. Formal organization: The existence of a 1. Long term budget – for a period of 5 to 10
formal and sound organizational structure years
is of an absolute necessity for an effective 2. Short term budgets – Usually for a period
system of budgetary control. of one to two years
3. Budget centers: For budgetary control 3. Current budgets - Usually covers a period
of one month or so,
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
MPV = Actual qty x (std price – Actual price) allowed for actual output achieved and the
c. Material Usage Variance or Material actual cost of labour.
Quantity Variance(MQV): It is that portion LCV = Std cost of labour – Actual cost labour
of material cost variance which is due to the 2. Labour rate variance: It is that part of
difference between the standard quantity of labour cost variance, which arises due to
materials specified for the actual output the difference between standard rate
and the actual quantity of materials used. specified and the actual rate paid.
MUV = Std price per unit (Std qty – Actual LRV = Actual time x (Std rate – Actual rate)
qty) 3. Labour Efficiency Variance: It is that
d. Material Mix Variance (MMV): It is that portion of labour cost variance which arises
portion of the material usage variance due to the difference between standard
which is due to the difference between labour hours specified for the activity
standard and actual composition of a achieved and the actual labour hours
mixture. In case of material mix variance, expended.
two situations may arise: Actual weight of LEV = Standard rate x (Standard time for
mix and the A. Standard weight of mix do actual output – Actual time)
not differ: - In this case material mix
Overhead Variances:
variance is calculated by applying the
following formula The term overhead, which comprises
indirect materials, indirect labour and
MMV= Std price (Std qty x Actual qty)
indirect expenses, may relate to factory,
If the standard is revised due to shortage of office or selling and distribution. It is the
a particular type of material, the material sum of variable overhead variance and
mix variance is calculated as follows: fixed overhead variance.
MMV= Std price (Revised std qty – Actual Variable overhead Cost variance: This
qty) represents the difference between the
B. Actual weight of mix differ from standard standard cost of variable overhead allowed
weight weight of mix:- In such a case, for actual output and the actual variable
material mix variance is calculated as overhead incurred during the period.
follows: Variable Over head Expenditure
x Std of std mix - Std of actual Variance:
It is the difference between the standard
e. Material Yield Variance :- It is that
variable OH rate per hour and the actual
portion of the material usage variance
variable OH rate per hour, multiplied by the
which is due to the difference between the
actual hours worked.
standard yield specified and the actual yield
obtained. This variance measures the Variable OH efficiency Variance: It is the
abnormal loss or saving of material. difference between the variable overhead
allowed for production and the variable
Labour Variance:
overhead absorbed through production.
When standard cost of labour differs from
Fixed Over head variance:
actual wage cost, the labour variance arises.
The following are the important types of It is the difference between standard fixed
labour variances overhead allowed for actual output and the
actual fixed overhead incurred
1. Labour cost variance: It is the
difference between standard cost of labour Fixed OH Expenditure variance: It is the
difference between budgeted fixed
overhead and actual fixed overhead.
Cost Accounting– (Al Jamia Arts and Science College, Poopalam)
MUHAMMED RIYAS N
ASST.PROF.
AL JAMIA ARTS AND SCIENCE COLLEGE
STUDY
WELL…
POOPALAM
PERINTHALMANNA
PH: 9747799772
E-mail: riyasmuhammed89@gmail.com