Accounting XI

7/17/2019 Accounting XI

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and lossIncome and Gain

Definition of Accounting

American Institute of Certified Public Accountants (AICPA) which defines

accounting as “the art of recording, classifying and summarizing in a significant manner

and in terms of money, transactions and events, which are, in part at least, of a financial

character and interpreting the results thereof!

Meaning of Debit and Credit

"he term #debit$ is supposed to have derived from #debit$ and the term #credit$ from

#creditable$! %or convenience #&r$ is used for debit and #Cr$ is used for credit! 'ecording

of transactions reuire a thorough understanding of the rules of debit and credit relating

to accounts! oth debit and credit may represent either increase or decrease, depending

upon the nature of account!

ACCOUNTING TERMINOLOGY

It is necessary to understand some basic accounting terms which are daily in

business world! "hese terms are called accounting terminology!

2.4. Tran!action

“An event the recognition of which gives rise to an entry in accounting records!

It is an event which results in change in the balance sheet euation! "hat is, which

changes the value of assets and euity! In a simple statement, transaction means the

e*change of money or moneys worth from one account to another account +vents lie

purchase and sale of goods, receipt and payment of cash for services or on personal

accounts, loss or profit in dealings etc!, are the transactions!Cash transaction is one

where cash receipt or payment is involved in the e*change!

Credit transaction, on the other hand, will not have #cash$ either received or paid,

for something given or received respectively, but gives rise to debtor and creditor

relationship! -on.cash transaction is one where the uestion of receipt or payment of cashdoes not at all arise, e!g! &epreciation, return of goods etc!,

2.4.2 Debtor

A person who owes money to the firm mostly on account of credit sales of

goods is called a debtor! %or e*ample, when goods are sold to a person on credit that

person pays the price in future, he is called a debtor because he owes the amount to the

firm!

2.4." Creditor

A person to whom money is owing by the firm is called creditor! %or e*ample,

/adan is a creditor of the firm when goods are purchased on credit from him

2.4.4 Ca#ita$

It means the amount (in terms of money or assets having money value) which

the proprietor has invested in the firm or can claim from the firm! It is also nown as

owner$s euity or net worth! 0wner$s euity means owner$s claim against the assets! It

will always be eual to assets less liabilities, say1

Capital 2 Assets % 3iabilities!



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2.4.& Liabi$it'

It means the amount which the firm owes to outsiders that is, e*cepting the

proprietors! In the words of %inny and /iller, “3iabilities are debts5 they are amounts

owed to creditors5 thus the claims of those who ate not owners are called liabilities! In

simple terms, debts repayable to outsiders by the business are nown as liabilities!

2.4.( A!!et

Any physical thing or right owned that has a money value is an asset! In other

words, an asset is that e*penditure which results in acuiring of some property or

benefits of a lasting nature!

2.4.) Good!

It is a general term used for the articles in which the business deals5 that is, only

those articles which are bought for resale for profit are nown as 6oods!

2.4.* Re+enue

It means the amount which, as a result of operations, is added to the capital! It is

defined as the inflow of assets which result in an increase in the owner$s euity! It

includes all incomes lie sales receipts, interest, commission, broerage etc!, 7owever,

receipts of capital nature lie additional capital, sale of assets etc!, are not a pant of

revenue!

2.4., E-#en!e

"he terms #e*pense$ refers to the amount incurred in the process of earning

revenue! If the benefit of an e*penditure is limited to one year, it is treated as an e*pense

(also now is as revenue e*penditure) such as payment of salaries and rent!

2.4. E-#enditure

+*penditure taes place when an asset or service is acuired! "he purchase of goods is e*penditure, where as cost of goods sold is an e*pense! 8imilarly, if an asset is

acuired during the year, it is e*penditure, if it is consumed during the same year, it is

also an e*pense of the year!

2.4. /urc0a!e!

uying of goods by the trader for selling them to his customers is nown as

purchases! As the trade is buying and selling of commodities purchase is the main

function of a trade! 7ere, the trader gets possession of the goods which are not for own

use but for resale! Purchases can be of two types! viz, cash purchases and credit

purchases! If cash is paid immediately for the purchase, it is cash purchases, If the

payment is postponed, it is credit purchases!

2.4.2 1a$e!

9hen the goods purchased are sold out, it is nown as sales! 7ere, the

possession and the ownership right over the goods are transferred to the buyer! It is

nown as! :usiness "urnover$ or sales proceeds! It can be of two types, viz!, , cash sales

and credit sales! If the sale is for immediate cash payment, it is cash sales! If payment

for sales is postponed, it is credit sales!

2.4." 1toc




2

"he goods purchased are for selling, if the goods are not sold out fully, a part of

the total goods purchased is ept with the trader unlit it is sold out, it is said to be a

stoc! If there is stoc at the end of the accounting year, it is said to be a closing stoc!

"his closing stoc at the year end will be the opening stoc for the subseuent year!

2.4.4 Dra3ing!

It is the amount of money or the value of goods which the proprietor taes for hisdomestic or personal use! It is usually subtracted from capital!

2.4.& Lo!!e!

3oss really means something against which the firm receives no benefit! It

represents money given up without any return! It may be noted that e*pense leads to

revenue but losses do not! (e!g!) loss due to fire, theft and damages payable to others,

2.4.( Account

It is a statement of the various dealings which occur between a customer and the

firm! It can also be e*pressed as a clear and concise record of the transaction relating to

a person or a firm or a property (or assets) or a liability or an e*pense or an income!

2.4.) In+oice

9hile maing a sale, the seller prepares a statement giving the particulars such

as the uantity, price per unit, the total amount payable, any deductions made and shows

the net amount payable by the buyer! 8uch a statement is called an invoice!

2.4.* ouc0er

A voucher is a written document in support of a transaction! It is a proof that a

particular transaction has taen place for the value stated in the voucher! ;oucher is

necessary to audit the accounts!

2.&., /ro#rietor"he person who maes the investment and bears all the riss connected with the

business is nown as proprietor!

2.4.2 Di!count

9hen customers are allowed any type of deduction in the prices of goods by the

businessman that is called discount! 9hen some discount is allowed in prices of goods

on the basis of sales of the items, that is termed as trade discount, but when debtors are

allowed some discount in prices of the goods for uic payment, that is termed as cash

discount!

2.4.2 1o$+entA person who has assets with realizable values which e*ceeds his liabilities is

insolvent!

2.4.22 In!o$+ent

A person whose liabilities are more than the realizable values of his assets is called

an insolvent!

2.& ACCOUNTING E5UATION




3

As indicated earlier, every business transaction has two aspects! 0ne aspect is

debited other aspect is credited! oth the aspects have to be recorded in accounts

appropriately! American Accountants have derived the rules of debit and credit through

a #novel$ medium, i!e!, accounting euation! "he euation is as follows1 Assets 2

+uities

"he euation is based on the principle that accounting deals with property andrights to property and the sum of the properties owned is eual to the sum of the rights

to the properties! "he properties owned by a business are called assets and the rights to

properties are nown as liabilities or euities of the business! +uities can be

subdivided into euity of the owners which is nown as capital and euity of creditors

who represent the debts of the business now as liabilities! "hese euities may also be

called internal euity and e*ternal euity! Internal euity represents the owner$s euity

in the assets and e*ternal represents he outsider$s interest in the asset! ased on the

bifurcation of euity, the accounting euation can be restated as follows1

Assets 2 3iabilities < Capital (0r)

Capital 2 Assets = 3iabilities

(0r)

3iabilities 2 Assets = Capital!

"he euation is fundamental in the sense that it gives a foundation to the double

entry boo.eeping system! "his euation holds good for all transaction and events and

at all periods of time since every transaction and events has two aspects!

Ru$e! for accounting e6uation7

%ollowing rules help in maing the accounting euation1

(i) A!!et!7 If there is increase in assets, this increase is debited in assets account!

If there is decrease in assets, this decrease credited in assets account!

(ii) Liabi$itie!7 9hen liabilities are increase, outsider$s euities are credited and

when liabilities are decreased, outsider$s euities are debited!(iii) Ca#ita$7 9hen capital is increased, it is credited and when capital is

withdrawn, it is debited!

(iv)E-#en!e!7 0wner$s euity is decreased by the amount of revenue e*penses!

(v) Inco8e or #rofit!7 0wner$s euity is increased by the amount of revenue

income!

2.( LET U1 1UM U/

9hile recording business transaction, one should now the principals of

accounting, concepts and conventions! "his chapter elaborately e*plains the principles

which are needed for consistency in accounting throughout the lifetime of the concern!

Accounting terminologies needed for preparing accounts that also e*plained clearly! -e*t lesion will cover the basic >ournal and ledger preparation!

9i: Liabi$it'7 It means the amount which the firm owes to outsiders that is, e*cepting the

proprietors! In the words of %inny and /iller, “3iabilities are debts5 they are amounts

owed to creditors5 thus the claims of those who ate not owners are called liabilities! In

simple terms, debts repayable to outsiders by the business are nown as liabilities!

9ii: A!!et7 Any physical thing or right owned that has a money value is an asset! In other

words, an asset is that e*penditure which results in acuiring of some property or

benefits of a lasting nature!




4

9iii: 1toc7 "he goods purchased are for selling, if the goods are not sold out fully, a part

of the total goods purchased is ept with the trader unlit it is sold out, it is said to be a

stoc! If there is stoc at the end of the accounting year, it is said to be a closing stoc!

"his closing stoc at the year end will be the opening stoc for the subseuent year!

9i+:Lo!!e!7 3oss really means something against which the firm receives no benefit! It

represents money given up without any return! It may be noted that e*pense leads torevenue but losses do not! (e!g!) loss due to fire, theft and damages payable to others!

9: Date7 In each page of the >ournal at the top of the date column, the year is written and in

the ne*t line, month and date of the first entry are written! "he year and month need not

be repeated until a new page is begun or the month or the year changes! "hus, in this

column, the date on which the transaction taes place is alone written!

92: /articu$ar!7 In this column, the details regarding account titles and description are

recorded! "he name of the account to be debited is entered first at the e*treme left of the

particulars column ne*t to the date and the abbreviation #&r!$ is written at the right

e*treme of the same column in the same line! "he name of the account to be credited is

entered in the ne*t line preceded by the word “"o leaving a few spaces away from thee*treme left of the particulars column! In the ne*t line immediately to the account

credited, a short about the transaction is given which is nown as “-arration!

“-arration may include particulars reuired to identify and understand the transaction

and should be adeuate enough to e*plain the transaction! It usually starts with the word

“eing which means what it is and is written within parentheses! "he use of the word

“eing is completely dispense with, in modern parlance! "o indicate the completion of

the entry for a transaction, a line is usually drawn all through the particulars column!

9": Ledger ;o$io7 "his column is meant to record the reference of the main boo, i!e!,

ledger and is not filled in when the transactions are recorded in the >ournal! "he page

number of the ledger in which the accounts are appearing is indicated in this column,while the debits and credits are posted to the ledger accounts!

94: A8ount 9Debit:7 "he amount to be debited along with its unit of measurement at the

top of this column on each page is written against the account debited!

9&: A8ount 9Credit:7 "he amount to be credited along with its unit of measurement at the

top of this column on each page is written against the account credited!

"." 1U<%DII1ION O; =OURNAL

9hen innumerable number of transactions taes place, the >ournal, as the sole

boo of the original entry becomes inadeuate! "hus, the number and the number and

type of >ournals reuired are determined by the nature of operations and the volume of

transactions in a particular business! "here are many types of >ournals and the followingare the important ones1

4! 8ales &ay oo. to record all credit sales!

?! Purchases &ay oo. to record all credit purchases!

@! Cash oo. to record all cash transactions of receipts as well as payments!

! 8ales 'eturns &ay oo. to record the return of goods sold to customers on

credit!

B! Purchases 'eturns &ay oo. to record the return of goods purchased from

suppliers on credit!




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! ills 'eceivable oo. to record the details of all the bills received!

D! ills Payable oo. to record the details of all the bills accepted!

E! Fournal Proper.to record all residual transactions which do not find place in any

of the aforementioned boos of original entry!

".4 LEDGER3edger is a main boo of account in which various accounts of personal, real and

nominal nature, are opened and maintained! In >ournal, as all the business transactions

are recorded chronologically, it is very difficult to obtain all the transactions pertaining

to one head of account together at one place! ut, the preparation of different ledger

accounts helps to get a consolidated picture of the transactions pertaining to one ledger

account at a time! "hus, a ledger account may be defined as a summary statement of all

the transactions relating to a person, asset, e*pense, or income or gain or loss which

have taen place during a specified period and shows their net effect ultimately! %rom

the above definition, it is clear that when transactions tae place, they are first entered in

the >ournal and subseuently posted to the concerned accounts in the ledger! Posting

refers to the process of entering in the ledger the information given in the >ournal! In the

past, the ledgers were ept in bound boos! ut with the passage of time, they became

loose.leaf ones and the advantages of the same lie in the removal of completed accounts,

insertion of new accounts and arrangement of accounts in any reuired manner!

".4. Ru$ing of $edger account

"he ruling of a ledger account is as follows1 T'#e%

&r! Cr!

&ate Particulars F!%! 's! &ate Particulars F!%! 's! "o name of

the y name of the account to be credited account to bedebited

T'#e% 2

&ate Particulars F!%! &r! Cr! &r! G Cr!

alance 's! 's! 's!

"o name of the y name of the

account to be credited account to be debited

3edger Account "ype 4 is followed in almost all the business concerns, whereas

"ype ? is followed only in baning institutions to save space, time and clerical wor

involved!

".4.2 1ub%di+i!ion of $edger

In a big business, the number of accounts is numerous and it is found necessary

to maintain a separate ledger for customers, suppliers and for others! Hsually, the

following three types of ledgers are maintained in such big business concerns!

9i: Debtor!> Ledger7 It contains accounts of all customers to whom goods have been sold

on credit! %rom the 8ales &ay oo, 8ales 'eturns oo and Cash oo, the entries are

made in this ledger! "his ledger is also nown as sales ledger!




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9ii: Creditor!> Ledger7 It contains accounts of all suppliers from whom goods have been

bought on credit! %rom the Purchases &ay oo, Purchases 'eturns oo and Cash

oo, the entries are made in this ledger! "his ledger is also nown as Purchase 3edger!

9iii: Genera$ Ledger7 It contains all the residual accounts of real and nominal nature! It

is also nown as -ominal 3edger!

".4." Di!tinction bet3een ?ourna$ and $edger

(i) Fournal is a boo of prime entry, whereas ledger is a boo of final entry!

(ii) "ransactions are recorded daily in the >ournal, whereas posting in the ledger is

made periodically!

(iii)In the >ournal, information about a particular account is not found at one place,

whereas in the ledger information about a particular account is found at one

place only!

(iv)'ecording of transactions in the >ournal is called >ournalising and recording of

transactions in the ledger is called posting!

(v) A >ournal entry shows both the aspects debit as well as credit but each entry in

the ledger shows only one aspect!

(vi)-arration is written after each entry in the >ournal but no narration is given in

the ledger!

(vii) ;ouchers, receipts, debit notes, credit notes etc!, from the basic

documents form >ournal entry, whereas >ournal constitutes basic record for

ledger entries!

".&. ILLU1TRATION1

4! Fournalise the following transactions in the boos of 8hanar Co!

4JJE 's!

Fune 4 8tarted business with a capital of K,KKK

Fune ? Paid into ban @K,KKK

Fune Purchased goods from Lamal on credit 4K,KKK

Fune Paid to 8hiram ,J?K

Fune &iscount allowed by him EK

Fune E Cash 8ales ?K,KKK

Fune 4? 8old to 7ameed B,KKK

Fune 4B Purchased goods from harat on credit D,BKK

Fune 4E Paid 8alaries ,KKK

Fune ?K 'eceived from Prem ?,EK

Fune ?K Allowed him discount ?K

Fune ?B 9ithdrew from ban for office use B,KKKFune ?E 9ithdraw for personal use 4,KKK

Fune

1o$ution7

@K Paid 7anif by cheue

In t0e boo! of 10anar @ Co.

@,KKK

&ateParticulars 3!%! &r! Cr!




7

's! 's!4JJE

Fune 4 Cash AGc &r! K,KKK

"o Capital AGc

(Capital brought into the business)

K,KKK

Fune ? an AGc @K,KKK

"o Capital AGc(Cash paid into ban)

@K,KKK

Fune Purchases AGc 4K,KKK

"o Lamal$s AGc

(Purchased goods from Lamal on credit)

4K,KKK

Fune 8hriram$s AGc &r! ,J?K

"o Cash AGc

(Cash paid to 8hriram)

,J?K

Fune 8hriram$s AGc &r! EK

"o Cash AGc

(Cash allowed by 8hriram)

EK

Fune E Cash AGc &r! ?K,KKK "o 8ales AGc

(Cash sales effected)

?K,KKK

Fune 4? 7ameed$s AGc &r! B,KKK

"o 8ales AGc

(6oods sold to 7ameed)

B,KKK

Fune 4B Purchases AGc &r! D,BKK

"o harat$s AGc

(Purchased goods from harat)

D,BKK

Fune 4E 8alaries AGc &r! ,KKK

"o Cash AGc

(salaries paid)

,KKK

Fune ?K Cash AGc &r! ?,EK

"o Prem$s AGc

(Cash received from Prem) ?,EK

Fune ?K &iscount AGc &r! ?K

"o Prem$s AGc

(&iscount allowed to Prem)

?K

Fune ?B Cash AGc &r! B,KKK

"o an AGc

(Cash withdrawn from ban)

B,KKK

Fune ?E &rawings AGc &r! 4,KKK

"o Cash AGc(Cash withdrawn from ban for personal use

4,KKK

Fune @K 7anif$s AGc &r! @,KKK

"o an AGc

(Paid to 7anif by cheues)

@,KKK

I$$u!ration%2

Fournalise the following transactions1

4JJE

Fune 4 Purchased goods worth 's!@KK from ;imal and 's!BKK from Lamal on



( Withdrawn from bank for oce use andpersonal use)


8

credit!Fune @ 8ale of goods worth 's!4,KKK to alram and 's!DKK to &hanram!

Fune B Cash of 's!JKK received from 'amasamy and 's!EKK from Lrishnasmy!

Fune D Paid 's!EKK to Pradeep and 's!BKK to uldeep!

Fune J

1o$ution7

9ithdrawn from ban 's!KK for office use and 's!@KK for personal use!

=ourna$&ate

4JJE

Particulars 3!%! &r!

's!

Cr!

's!

Fune 4 Purchases AGc &r! EKK

"o ;imal$s AG c @KK

"o Lamal$s AGc

(Purchased goods from ;imal and

Lamal on credit

BKK

Fune @ alram$s AGc &r! 4,KKK

&hanram AGc &r! DKK

"o 8ales AGc(8ales of goods to alram and &hanram)

4,DKK

Fune B Cash AGc &r! 4,DKK

"o 'amasamy$s AGc JKK

"o Lrishnasamy$s AGc

(Cash received from 'amasamy and

Lrishnasamy)

EKK

Fune D Pradeep$s AGc &r! EKK

Luldeep$s AGc &r! BKK

"o Cash AGc

(Paid Pradeep and Luldeep )

4,@KK

Fune J Cash AGc &r! KK&rawings AGc &r! @KK

"o an AGc JKK

C0ec 'our #rogre!! % "

3ist out any three different between Fournal and 3edger

-otes1 (a) 9rite your answer in the space given below!

(b) Chec your answer with the ones given at the end of this 3esson (pp!

@J)!

MMMMMMMMMMMMMMMMMMMMMMMMMMMM





I$$u!tration % "




Fournalise the following transactions, post the same in relevant ledger account

and balance the same! 4JJE

Fune 4 Larthi commenced business with 's!?K,KKK!

Fune ? Paid into ban 's!B,KKK!

Fune @ Purchased Plant worth 's!4K,KKK from /odi Co!

Fune Purchased goods worth 's! B,KKK form Anwar!Fune 6oods worth 's!,KKK sold to Anbu

Fune E 8old goods worth 's!?,KKK for cash!

Fune 4K 6oods returned by Anbu 's!BK!

Fune 4B Paid rent 's!?BK!

Fune 4E 9ithdrawn from ban for office use 's! ?,BKK!

Fune ?K Paid 8alaries 's!4,EKK!

Fune ?B 9ithdrawn for personal use 's!?BK!

Fune ? 6oods returned to Anwar 's!4KK!

Fune ?D Paid for office furniture 's!4,BKK by cheue!

Fune ?E 'eceived 's!@,JKK cash from Anbu and discount allowed

's!BK!Fune ?J Paid Anwar on account 's!,EKK and discount allowed by

him 's!4KK!

&ate Particular 3!%! &r!

's!

Cr!

's!

4JJE Cash AGc &r ?K,KKK

Fune 4 "o Larthi$s Capital AGc ?K,KKK

(Capital brought into the business by Larthi)

Fune ? an AGc &r B,KKK

"o Cash AGc B,KKK(Cash Paid in to ban)

Fune @ Plant AGc

"o /odi Co$s! AGc

(Plant purchased from /odi Co!)

&r 4K,KKK 4K,KKK

Fune Purchase AGc

"o Answar$s AGc

(6oods purchased from Anwar)

&r B,KKK

B,KKK

Fune Anbu$s AGc

"o 8ales AGc

(6oods sold to Anbu)

&r ,KKK

,KKK

Fune E Cash AGc

"o 8ales AGc

(6oods sold for cash)

&r ?,KKK

?,KKK




!"

Fune 4K 8ales 'eturns AGc

"o Anbu$s AGc

(6oods returned by Anbu)

&r BK

BK

Fune 4B 'ent AGc

"o Cash AGc

('ent paid)

&r ?BK

?BK

Fune 4E Cash AGc

"o an AGc

(9ithdrawn from ban for office use)

&r ?,BKK

?,BKK

Fune ?K 8alaries AGc

"o Cash AGc

(8alaries paid)

&r 4,EKK

4,EKK

Fune ?B &rawing AGc

"o Cash AGc

(9ithdrawn for personal use)

&r ?BK

?BK

Fune ? Anwar$s AGc

"o Purchases 'eturns AGc

(6oods returned to Anwar)

&r 4KK

4KK

Fune ?D %urniture AGc

"o an AGc

(Payment by cheue for office furniture)

&r 4,BKK

4,BKK

Fune ?E Cash AGc

&iscount AGc

"o Anbu$s AGc

(Cash received from Anbu and discount allowed 's!BK)

&r

&r

@,JKK

BK

@,JBK

Fune ?J Anwar$s AGc

"o Cash AGc

"o &iscount AGc

(Cash paid to Anwar and discount allowed by him)

Ledger

Ca!0 Ac

&r ,JKK ,EKK

4KK

&ate &ate

4JJE 4JJE

Fune 4 "o Larthi$s

Capital AGc

?K,KKK ? y an AGc B,KKK

Fune E "o 8ales AGc ?,KKK! Fune 4B y 'ent AGc ?BKFune 4E "o an AG c ?,BKK Fune ?K y 8alaries AGc 4,EKK

Fune ?E "o Anbu$s AGc @,JKK Fune ?B y &rawings AGc ?BK

Fune ?J y Anwar$s AGc ,EKK

Fune @K y alance cGd 4,@KK

?E,KK ?E,KK

Fuly 4 "o alance bGd 4,@KK

<an




!!

&r! Cr!

&ate Particulars F!%! 's! &ate Particulars F!%! 's!

4JJE 4JJE

Fune ? "o Cash AGc B,KKK Fune 4E y Cash AGc ?,BKK

Fune ?D y %urniture AGc 4,BKK

Fune @K y alance cGd 4,KKK

B,KKK B,KKK

Fuly 4 "o alance bGd 4,KKK

Bart0i>! Ca#ita$ Ac&r! Cr!


4JJE 4JJE

Fune @K "o alance cGd ?K,KKK Fune 4 y Cash AGc ?K,KKK

?K,KKK ?K,KKK

Fuly 4

/$ant Ac

y alance bGd ?K,KKK

&r! Cr!


4JJE 4JJE

Fune @ "o /odi

Co$s! AGc

4K,KKK Fune @K y alance cGd 4K,KKK

4K,KKK 4K,KKK

Fuly 4 "o alance cGd 4K,KKK

Modi @ Co>!. Ac&r! Cr!


4JJE 4JJE

Fune @K "o alance cGd 4K,KKK Fune @ y Plant AGc 4K,KKK

4K,KKK 4K,KKK

Fuly 4

/urc0a!e Ac

y alance bGd 4K,KKK

&ate &ate

4JJE 4JJE

Fune "o Anwar$s B,KKK @K y alance CGd B,KKK

AGc

B,KKK B,KKK

Fuly 4 "o alance bGd B,KKK

An3ar>! Ac

&r! Cr!




!2


4JJE 4JJE

Fune ? "o Purchases 4KK Fune y Purchases AGc B,KKK

'eturns AGc

Fune ?J "o Cash AGc ,EKK

Fune ?J "o &iscount AGc 4KK

B,KKK B,KKK

1a$e! Ac

&r! Cr!


4JJE 4JJE

Fune @K "o alance cGd ,KKK Fune y Anbu$s AGc ,KKK

Fune E y Cash AGc ?,KKK

,KKK ,KKK

Fuly 4 "o alance bGd ,KKK

Anbu>! Ac

&r! Cr!


4JJE 4JJE

Fune "o 8ales AGc ,KKK Fune 4K y 8ales 'eturns BK

AGc

Fune ?E y Cash AGc @,JKK

Fune ?E y &iscount AGc BK

,KKK ,KKK

/urc0a!e! Return! Ac

&r! Cr!


4JJE 4JJE

Fune @K "o alance cGd 4KK Fune ? y Anwar$s AGc 4KK

4KK 4KK

Fuly 4 y alance bGd 4KK




!3

1a$e! Return! Ac

&r! Cr!


4JJE 4JJE

Fune 4K "o Anbu$s AGc BK Fune @K y alance cGd BK

BK BK

Fuly 4 "o alance bGd BK

;urniture Ac

&ate &ate

4JJE 4JJE

Fune ?D "o an AGc 4,BKK @K y alance cGd 4,BKK

4,BKK 4,BKK

Fuly 4 "o alance bGd 4,BKK

Di!count Ac

&r! Cr!


4JJE 4JJE

Fune ?E "o Anbu$s AGc BK Fune ?J y Anwar$s AGc 4KK

Fune @K "o alance cGd BK 4K,KKK

4KK Fuly 4 y alance bGd 4KK

BK

Dra3ing! Ac

&r! Cr!


4JJE 4JJE

Fune ?B "o Cash AGc ?BK Fune @K y alance cGd ?BK

?BK ?BK




!4

Fuly 4 "o alance bGd ?BK

Rent Ac

&r! Cr!


4JJE 4JJE

Fune 4B "o Cash AGc ?BK Fune @K y alance cGd ?BK

?BK ?BK

Fuly 4 "o alance bGd ?BK

1a$arie! Ac

&r! Cr!


4JJE 4JJE

Fune ?K "o Cash AGc 4,EKK Fune @K y alance cGd 4,EKK

4,EKK 4,EKK

Fuly 4 "o alance bGd 4,EKK 4,EKK

".(. LET U1 1UM U/

usiness transactions are first entered in the records in the form of >ournal! As per the

double entry system of accounting we have to classify the accounts and apply the double

accounting rule accordingly! "hen in order to summaries the accounts, posting should be done

through ledger!

".) Le!!on%End Acti+itie!

4! 9hat is >ournalN

?! 9hat is ledgerN

@! &istinguish between >ournal and ledgerN

! 9hat are the advantages of >ournalN

B! Fournalize the following transactions

?KKK

Fan! 4! /ohan started business with 's!?B,KKK

?! ought goods from 's!?K,KKK@! Paid into ban 's!4K,KKK

! 'eturned goods to 's!4KKK

B! 8old goods to ' 's!?BKK

! Paid cartage 's!?K

D! 'eceived dividend on investment 's!4KK

E! Paid salary 's!?BK

".* C0ec 'our #rogre!! an!3er




!5

Oour answer may include any five following

(i) Fournal is a boo of prime entry, whereas ledger is a boo of final entry!

(ii) "ransactions are recorded daily in the >ournal, whereas posting in the ledger is made

periodically!

(iii) In the >ournal, information about a particular account is not found at one place,

whereas in the ledger information about a particular account is found at one place only!

(iv)'ecording of transactions in the >ournal is called >ournalising and recording of

transactions in the ledger is called posting!

(v) A >ournal entry shows both the aspects debit as well as credit but each entry in the

ledger shows only one aspect!

"., /oint! for Di!cu!!ion

. Fournalize the following transactions in the boos of /r!Chandran7

?KK4Apr! 4 8tarted business with cash 's!K,KKK and furniture 's!4K,KKK! B Paid tuition

fee of the son 's!4,KKK E Paid household e*penses 's!4,KK!

4K 8old personal car for 's!4E,KKK and the amount is brought into the business!

4B 9ithdrew goods for personal use 's!?,KKK!

4 8old goods to -avin on credit 's!E,KKK!

4E 8old old typewriter 's!4,KKK!

4J Purchase goods on credit from 'amesh 's!?K,KKK ?K 'eceived

interest on investment 's!,KKK!

?? 'eceived commission from /anohar 's!?,KKK! ?@ 'eceive

a cheue from -avin 's!B,KKK!?B Issued a cheue to 'amesh 's!4?,KKK ? 'eceived cash

from Anand on account 's!,KKK ?D Paid cash to hagwan

on account 's!4,KKK!

?E 'eturned goods to 'amesh 's!4,KKK!

?J -avin returned goods 's!BKK!

@K Paid rent 's!4,KKK!

Paid salaries 's!4?,KKK!

2. Fournalise the following transactions in the boos of 8abitha and post them in the

3edger1

?KKK

Apr! 4 ought goods for cash 's! 4B,KKK@ 8old goods for cash 's! 4J,KKK

B ought goods on credit from Perara 's! 4?,KKK

8old goods on credit to 'avindar 's! 4,KKK

E 'eceived from 'avindar 's! 4?,KKK

4K Paid to Perara 's! D,BKK

?B ought furniture for cash 's! ,BKK




!6

". +nter the following transactions in the >ournal and ledger of /urali of -ew &elhi1 ?KK4

's! /ar! 4 /urali commenced business with cash JK,KKK

Purchased goods for cash ,KKK B &eposited into ban K,KKK

9ithdrew from ban for office use ,BKK E 8old goods to 'a>a ,EKK

4? Purchased goods on credit from Lathar 4,@EK 4B 'eceived from 'a>

's!,BK and allowed him discount 4BK ?K Cash sales D,?KK ?E Paid toLathar in full settlement 4,@KK @K Paid rent @KK Paid salary 4,KK

Accounts are closed on @4st /arch ?KK4!

4. Fournalise the following transactions and Post them in relevant ledger accounts1

4JJ4 's!

Fan! 4! ought from &as 4,KKK

Fan! ?! 8old to 8en KK

Fan! @! 8old to 'amesh ?BK

Fan! ! Purchased from 8uresh ?KK

Fan! B! 8ales returns by 8en BK

Fan! 4K! ought from 8hyam KK

Fan! 4?! 'eturned to 8uresh 4KK

Fan! 4B! 8old to 'oy EKK

Fan! 4! 'oy returned goods ?KK

Fan! 4D! 8old goods to 'am @KK

Fan! 4J! ough from -aresh BK

Fan! ?4! 8old to hatanger DBK

Fan! ??! 'eturned to -aresh BK

Fan! ?B! ought from Lhat>u EBK

@

Fan! ?D! 8old to &heeran ?K

Fan! ?J! 'eturns from hatanger 4KK

Fan! @K! &heeran 'eturned K

Fan! @4! 'eturns to Lhat>u 4BK

". Reference!

4) 6rewal, "!!, &ouble +ntry oo Leeping!

?) 6upta 'adhasway = Advanced Accountancy!




!7

LE11ON 4 1U<1IDIARY <OOB1

Content!7

4. Ai8! and Ob?ecti+e!

4.2 Introduction

4." Bind! of !ub!idiar' boo!!?!4 Purchases oos

!?!? 8ales oos

!?!@ Purchases 'eturns oos

!?! 8ales 'eturns oos

!?!B ills 'eceivable oos

!?! ills payable oo

!?!D Fournal proper

!?!E Cash boo

4." <a!ic Docu8ent for !ub!idiar' <oo!

!@!4 Inward Invoice!@!? 0utward Invoice

!@!@ &ebit -ote

!@! Credit -ote

!@!B Cash 'eceipts and ;ouchers

4.4 Ad+antage of !ub!idiar'

!!4 &ivision of wor

!!? %acilitate posting

!!@ "ime 8aving

!! /inimum frauds and errors

!!B etter information!! /anagement decisions facilitated

!!D 8pecialisation and efficiency

4.& I8#re!t !'!te8

4.( Di!count!

!!4 "rade discount

!!? Cash discount

!!@ &ifference between "rade discount and Cash discount

4.) I$$u!tration!

4.* Let u! 1u8 U#

4., Le!!on%End Acti+itie!4. C0ec 'our /rogre!!

4. /oint! for Di!cu!!ion

4.2 Reference!

4. AIM1 AND O<=ECTIE1

i. "o now the /eaning of subsidiary boos, ii!

"o understand the inds of subsidiary boos




!8

iii! "o now the meaning of "rade and Cash

discount and also to understand the difference

between these two discounts!

4. INTRODUCTION

Fournal is subdivided into various parts nown as subsidiary boos or subdivisions of >ournal! +ach one of the subsidiary boos is a special >ournal and a

boo of original or prime entry! "here are no >ournal entries when records are made

in these boos! 'ecording the transactions in a special >ournal and then in the ledger

accounts is the practical system of accounting which is also referred to as +nglish

8ystem! "hough the usual type of >ournal entries are not passed in these sub.divided

>ournals, the double entry principles of accounting are strictly followed!

4.2 BIND1 O; 1U<1IDIARY <OOB1

"here are different types of subsidiary boos which are commonly used in any big

business concern! "hey are1

!?!4 Purchases oo !?!? 8ales oo

!?!@ Purchases 'eturns oos !?! 8ales 'eturns oos

!?!B ills 'eceivable oos !?! ills Payable oos

!?!D Fournal Proper !?!E Cash oo

4.2. /urc0a!e! <oo

"his boo is used to record all credit purchases made by the business concern

from its suppliers! "his boo is also nown as #Purchases oos$, #Purchases

Fournal$ or #Invoice oo$! It contains five columns, viz!, &ate, Particulars, 3edger

%olio, Inward Invoice -umber and Amount! 9henever any credit purchase is made,the date on which the transaction has taen place is entered in the #&ate Column$, the

name of the party from whom the purchase has been made the particulars column, the

inward invoice number with which the purchase has been made in the #inward

Invoice

-umber Column$ and the money value of the purchase in the #Amount Column$! "he

#3!%! Column$ is to record the ledger folio number while posting is made!

/o!ting7 "he total of purchases boo for a specified period is debited to the

purchases account in the 3edger! "he personal accounts are posted by crediting the

individual accounts!

/urc0a!e! <oo

&ate Particulars 3!%! Inward Amount

Invoice 's!

-umber

4.2.2 1a$e! boo!

"his boo is used to record all credit sales effected by the business to its

customers! "his boo is also called as #8ales oo$, #sales Fournal$ or #8old oo$! It

contains five columns, viz!, &ate, Particulars, 3!%!, 0utward Invoice -umber and




!

Amount! 9hen any credit sales is effected, the date is entered in the #&ate Column$,

the name of the party to whom the sale is made in the #Particulars Column$, the

invoice number with which the sales have been effected in the #0ut.ward Invoice

-umber Column$ and the money value of the sales in the #Amount Column$, "he 3%

column is entered while posting is effected!

/o!ting7 "he total of the 8ales oo for a specified period is credited to the8ales Account in the 3edger! "he personal account is posted by debiting the

individual accounts!

"he specimen ruling of a 8ales oo is as follows1

1a$e! <oo

&ate Particulars 3!%! 0utward Amount

Invoice 's!

-umber

4.2." /urc0a!e! Return! <oo!

"his boo is used to record all transactions relating to the goods returned tosuppliers! "his boo is also nown as #Purchases 'eturns >ournal$ or #'eturns

0utward oo$, the specimen ruling of a Purchases 'eturns oo is given below1

/urc0a!e! Return! <oo

&ate -ame of supplier 3!%! &ebit Amount -ote 's!

"he columns in this boo are similar to those of Purchases oo e*cept the

&ebit -ote Column in which the debit note number is recorded! A debit note

represents a note sent to the supplier for the value of goods retuned by the business!9hile posting, all the personal accounts are debited in the 3edger and the total of

Purchases 'eturns oo is credited to Purchases 'eturns Account!

4.2.4 1a$e! Return! <oo!

"his boo is used to record all transactions relating to goods returned by

customers! "his boo is also nown as #8ales 'eturn Fournal$ or #'eturns Inwards

oo$, the specimen ruling of sales returns boo is given below1

1a$e! Return! <oo

&ate -ame of Customer 3!%! Credit Amount -ote 's!

"he columns in this boo are similar to those of 8ales oo e*cept the Credit

-ote Column in which the credit note number is recorded! A credit note represents a

note sent to the customer for the value of the goods returned by him! 9hile posting,

all the personal accounts are credited in the 3edger and the total of sales returns boo

is debited to 8ales 'eturns Account

4.2.& <i$$! Recei+ab$e <oo7

"his boo is used to record all the bills received by the business from its

customers! It contains details regarding the name of the acceptor, date of the bill, place of




2"

payment, term of the bill, due date and the amount of the bill! "he specimen ruing of a

ills 'eceivable oo is given below1

<i$$! Recei+ab$e <oo

8l! &ate of 3!%! &rawer Acceptor "erm &ue 's! 'emars

-o! 'eceipt &ate

9hile posting, the individual customers$ accounts will be credited and the

total of the ills 'eceivable oo for a specified period will be debited to the ills

'eceivable Account in the 3edger!

4.2.( <i$$! /a'ab$e <oo7

"his boo is used to record all the bills accepted by the business drawn by its

creditors! It contains details regarding the name of the drawer, payee and date of

acceptance, due date, place of payment, term and amount of the bill!

"he specimen ruling of ills payable oo is given below1

<i$$! /a'ab$e <oo 8l! &ate of &rawer Payee 3!% 9here &ate of "erm &ue 's! 'emar

-o! Acceptance ! Payable bill &ate s

9hile posting the individual drawer or payee account is debited and the ills

payable Account is credited with the total in the ills Payable oo!

4.2.). =ourna$ /ro#er

"his boo is used to record all the residual transactions which cannot find

place in any of the subsidiary boos! 9hile recording, the entries are made in the

>ournal covering both the aspects of the transaction! "he following are some of thee*amples of transactions which are entered in this boo!

4! 0pening entries and closing entries!

?! Ad>usting entries

@! "ransfer entries from one account to another account!

! 'ectification entries!

B! ills of +*change +ntries

! Credit PurchaseGsale of an asset other than goods!

4.2.* Ca!0 <oo

Cash oo is a sub.division of Fournal recording transactions pertaining to

cash receipts and payments! %irstly, all cash transactions are recorded in the Cashoo wherefrom they are posted subseuently to the respective ledger accounts! "he

Cash oo is maintained in the form of a ledger with the reuired e*planation called

as narration and hence, it plays a dual role of a >ournal as well as ledger! All cash

receipts are recorded on the debit side and all cash payments are recorded on the

credit side! All cash transactions are recorded chronologically in the Cash oo! "he

Cash oo will always show a debit balance since payments cannot e*ceed the

receipts at any time!




2!

Bind! of Ca!0 <oo7 %rom the above it can be observed that the Cash oo

serves as a subsidiary boos as well as ledger! &epending upon the nature of business

and the type of cash transactions, various types of Cash boos are used! "hey are1

a) 8ingle Column Cash oo

b) "wo Column Cash oo or Cash oo with cash and discount columns!c) "hree Columnar Cash oo or Cash oo with cash, ban and discount columns!

d) #an$ Cash oo or Cash oo with ban and discount columns!

e) Petty Cash oo!

a: 1ing$e or 1i8#$e Co$u8n Ca!0 <oo 7"his is the simplest form of Cash

oo and is used when payments and receipts are mostly in the form of cash and

where usually no cash discount is allowed or received! ut, when transactions

involving discounts are effected, it is recorded in a separate ledger account! "he

ruling of 8ingle Column Cash oo is as follows1

1ing$e Co$u8n Ca!0 <oo

&r! Cr!&ate Particulars '!-o! 3!%! 's! &ate Particulars ;!-o! 3!%! 's!

%rom the above it can be observed that the 8ingle Column Cash oo is >ust

lie a ledger account! 9hen cash is received, it is recorded on the debit side, i!e!,

#'eceipts 8ide$ of the Cash oo, with the date on which the transaction is effected,

in the #&ate Column$, the name of the party or the head of a nominal account, from

whom or for which the cash has been received, in the #Particulars Column$, the

receipt number, with which the cash has been received by the cashier, in the #'! -o!

Column and the money value of the transaction in the #Amount Column$ respectively!"he 3!%! (3edger %olio) column is for entering the reference ledger folio number

when posting to the ledger is made!

8imilarly when payment of cash is made, it is recorded on the credit side, i!e!,

“Payments 8ide of the Cash oo, with the date in the #&ate Column$, the name of

the party or head of a nominal account in the #Particulars Column$, the voucher

number in the #;! -o! Column$, and the money value of the transaction in the

#Amount Column$ respectively! "he voucher represents the supporting document for

all cash payments effected!

/o!iting7 0nce the Cash oo is entered with all the cash transactions,

posting of the entries is made to the respective ledger accounts subseuently! %or

posting, from the debit side of the Cash oo, the concerned accounts are credited

and from the credit side, the concerned accounts are debited!

b: To3 Co$u8n Ca!0 <oo or Ca!0 <oo 3it0 Ca!0 and Di!count

Co$u8n!7 "his type of Cash oo is used when cash transactions involving discount

allowed or received are effected! Hsually, discount is allowed when payments are

promptly made by the customers and discount is en>oyed when payments are

promptly made by the business! In this two column Cash oo, instead of only one

column for cash as in a 8ingle Column Cash oo, one additional column is

introduced, viz!, #&iscount Column$! "he discounts allowed by the business are




22

entered on the debit side and discounts received are entered on the credit side of the

Cash oo! "he discount columns as such cannot be balanced since they are purely

memorandum columns and will not serve the purpose of a ledger account as cash

columns do! "o now the balance of discount columns, separate ledger accounts, viz!,

&iscount Allowed Account and &iscount 'eceived Account can be opened! "he

ruling of a two column Cash oo is as follows!

T3o Co$u8n Ca!0 <oo 93it0 Ca!0 and Di!count Co$u8n!:

&r! Cr!

&ate Particulars '!-o! 3!%! &iscount 's! &ate Particulars ;!-o! 3!%! &iscount 's!

allowed received

/o!ting7 "he following points should be ept in mind while posting from the Cash

oo is effected!

4! "he opening and closing balances should not be posted!

?! %rom the debit side of the Cash oo, all the concerned accounts are givencredit!

@! %rom the credit side of the Cash oo, all the concerned accounts are given

debit!

! 9hile posting cash received from a debtor or cash paid to a creditor, due care

should be taen to credit the personal account with the amount of both cash and

discount allowed or debit the personal account with the amount of both cash

and discount received!

B! 8eparate accounts should be opened for discount allowed and discount

received! "he total of the discount allowed column represents a loss sustained

by the business and the same should be debited to discount allowed account bywriting #"o sundries$ in the particulars column! "he total of the discount

received column represent as gain made by the business and it should be

credited to the discount account by writing #y 8undries$ in the particulars

column!

c: T0ree Co$u8nar Ca!0 <oo or Ca!0 <oo 3it0 Ca!0 <an and Di!count

Co$u8n!7 -owadays, every businessman invariably has a ban account to reap the

advantages of safety, convenience, credit facilities and less clerical wor! "hus, when

a business is maintaining a ban account, the transactions can be made through

cheues! Instead of maintaining the ban account in the ledger, it is found more

convenient if it is included in the Cash oo as Cash Column! "hus, the three column

Cash oo is the resultant effect where in addition to cash and discount columns, ban column is also included! "he ruling of a three columnar cash boo is as follows1

T0ree Co$u8nar Ca!0 <oo 93it0 Ca!0 <an and Di!count Co$u8n!:&r!

&ate Particulars '!-o! 3!%! &iscount Cash an &ate Particulars ;!-o! 3!%! &iscount Cash

an

allowed 's! 's! received 's!

's! 's!

All cash receipts are entered on the debit side in the cash column and all

cash payments on the credit side in the cash column of the Cash oo! Amounts paid




23

into the ban or deposited are recorded on the debit side in the ban column and all

payments made by cheues are recorded on the credit side in the ban column!

d: <an> Ca!0 <oo or Ca!0 <oo 3it0 <an and Di!count Co$u8n!7 In case of a

business where all transactions are effected through ban, i!e!, all receipts are baned

(deposited into the ban) on the same day and all payments are made by cheues

only, the cash column in the cash boo is of no use! 7ence, the Cash oo with ban

and discount columns alone is maintained! "he ruling of a Cash oo with ban and

discount column is as follows1

T3o Co$u8n Ca!0 <oo 93it0 <an and Di!count Co$u8n!:

&r!

&ate Particulars '!-o! 3!%! &iscount an &ate Particulars ;!-o! 3!%! &iscount an

allowed 's! received 's!

e: /ett' Ca!0 <oo7 "he word #petty$ has its origin from the %rench word #petit$ which

means small! "he petty cash boo is used to record items lie carriage, cartage,

entertainment e*penses, office e*penses, postage and telegrams, stationery, etc! "he person who maintains this boo is called the #petty cahsier$! "he petty cash boo is

used by many business concerns to save the much valuable time of the senior official,

who usually writes up the main cash boo, to prevent over burdening of the main

cash boo with so many petty items and to find out readily and easily information

about the more important transactions!

"he amount reuired to meet out various petty items is estimated and given

to the petty cashier at the beginning of the stipulated period say a fortnight or a

month! 9hen the petty cashier finds shortage of money, he has to submit the petty

cash boo, after maing all the entries, to the chief cashier for necessary verifications!

"he chief cashier in turn, verifies all the entries with supporting vouchers and

disburses cash or issues cheue for the e*act amount spent!Co$u8nar /ett' Ca!0 <oo or ana$'tica$ /ett' Ca!0 <oo

In this cash boo various items of petty cash payments are analysed and

separate analytical columns are provided for recording each and every item! "he

amount of cash received from the chief cashier for meeting out the petty e*penses is

recorded on the debit side and the actual cash payments towards various petty items

are recorded on the credit side in the total as well as analytical columns!

"he analytical column is provided for each usual head of e*pense lie

postage telegrams, printing stationery, carriage cartage, traveling e*penses,

entertainment e*penses, office e*penses, sundry e*penses, etc! 8ubseuently, the

totals of these analytical columns are posted to the respective ledger accounts whichsave labour used in posting each item of payment separately in the ledger! "he

balancing of petty cash boo is done in the total payments column!

9here the debit side ('eceipts) e*ceeds that of the credit side (in the totals

column.Payments), it represents the unspent balance of cash remaining with the petty

cashier!

4." <A1IC DOCUMENT ;OR 1U<1IDIARY <OOB1




24

4.". In3ard In+oice7

"his is the document sent by the suppliers of goods giving details of goods sent,

price, value, discount etc! It is the basis for entries in purchases boo!

4.".2 Out3ard In+oice7

"his is a document sent by the firm to the customers, showing the details of

goods supplied, their price and value, discounts etc!, it is the basis for writing sales boo!

4."." Debit Note7

It is a simple statement sent by a person to another person showing the

amount debited to the account of the latter along with a brief e*planation! "he debit

notes are issued by a trader relating to purchase returns in order to put up his claim

for abatement of his dues to the other party! &ebit notes are serially numbered and

are similar to invoices although they are usually printed in red in!

4.".4 Credit Note7

It is nothing but a statement sent by one person to another person showing the

amount credited to the account of the latter along with a brief e*planation! "he credit

notes are used for sales return in order to intimate related abatement and are similar to invoice although they are usually printed in red in!

4.".&Ca!0 Recei#t! and ouc0er!7

"hese are the vouchers and receipts for cash received and paid! +ntries in

cash boo are made on the strength of the vouchers and receipts! "hey are also

useful for auditing purpose!

Contra Entrie!

%or any single transaction the same account cannot be debited and credited!

ut since cash and ban accounts are maintained in the cash boo, the debit and

credit may be found in the two different accounts in the Cash oo! "hey are

transactions which affect both the sides of the Cash oo! %or instance, when cash is

deposited into the ban, ban account should be debited and cash account should be

credited! 7ence, on the debit side of the Cash oo! #"o Cash$ is written in the

particulars column and the amount is entered in the ban column! 8imilarly, on the

credit side of the Cash oo, #y an$ is written in the particulars column and the

amount is entered in the cash column!

9hen cash is withdrawn from the ban, on the debit side of the Cash oo, #"o

an$ is written in the particulars column and the amount is written in the cash

column! 3iewise, on the credit side of the Cash oo, #y

Cash$ is written in the particulars column and amount is entered in the ban column!

"herefore, those entries which appear on both the sides of the Cash oo are called

Contra +ntries and they are identified and denoted in the Cash oo itself by writingthe letter #C$ in the 3edger %olio Columns on either side! %or these transactions, as

double entry procedure is completed in the cash boo itself, no further positing is

made in the ledger!

In a three columnar Cash oo, cash and ban columns are balanced as any

other ledger account and discount columns are imply totaled! "o now the balance of

the discount columns, a separate account, viz!, discount account is opened in the

ledger! 9hile the cash column will always show a debit balance, the ban column




25

may show a credit balance at times! "he credit balance in the ban column represents

nothing but ban overdraft!

4.4 ADANTAGE O; 1U<1IDIARY <OOB1

"he advantages of maintaining special >ournals can be summarized as under1

4.4. Di+i!ion of 3or

"he division of >ournal resulting in division of wor ensures more clers woring

independently in recording original entries in day boos!

4.4.2 ;aci$itate #o!ting

ecause the transactions of one nature are recorded at one place, the posting of

real account is highly facilitated!

4.4." Ti8e 1a+ing

&ue to division of wor, it is possible to perform various accounting processes

simultaneously! "hus, lesser time is reuired to complete accounting records!

4.4.4 Mini8u8 fraud! and error!

8ystematic recording of business transactions in special >ournals reduces the possibility of frauds and errors! It also helps in location of errors, if any!

4.4.& <etter infor8ation

A lot of useful data lie credit sales, credit purchases, returns etc!, is made

available which is not possible in >ournal system!

4.4.( Manage8ent deci!ion! faci$itated

8ince transactions of a similar nature are recorded at one place, the

management can have the benefit of the trend and distributional pattern in planning

and maing decisions!

4.4.) 1#ecia$i!ation and efficienc'

9hen the same wor is allotted to a particular person over a period of time,

he acuires full nowledge of it and becomes efficient in handling it! "hus, theaccounting wor will be done efficiently

4.& IM/RE1T 1Y1TEM

In this system, the petty cashier is provided with a sum of cash which is

termed as #float$ after taing into consideration the possible inds of e*penses which

would be incurred for a specific period, viz!, a wee or a month! "he petty cashier, at

the end of such period, submits the petty cash boo, with all entries passed, to the

chief cashier! "he chief cashier, in turn, will verify all the entries with the supporting

vouchers and gives the actual amount spent on various petty items! "his would bring

the petty cash balance to the original amount with which he has begun! "his systemof maintaining the original amount of cash as such is nown as #Imprest 8ystem of

maintaining Petty Cash oo$!

4.(. DI1COUNT1

4.(. Trade di!count

9hen a customer buys goods regularly or buys large uantity or buys for a

large amount, the seller is usually inclined to allow a concession in price! 7e will

calculate the total price according to the list of catalogue! ut after the total is arrived



Trade discount Cash discount


26

at, he will mae a deduction B or 4K depending upon his business policy! "his

deduction is nown as "rade discount!

4.(.2 Ca!0 Di!count

An amount which is allowed for the prompt settlement of debt arising out of a

sale within a specified time and calculated on a percentage basis is nown as cash

discount, i!e!, it is always associated with actual payment!

4.(." Difference <et3een Trade Di!count and Ca!0 Di!count

It is given by the It may be allowed by seller to any

manufacturer or the debtor!

wholesaler to a retailer and not

to others!

It is allowed on a certain It is allowed on payment being uantity being

purchased! made before a certain date!

It is a reduction in the It is a reduction in the amount due catalogue price of

an article! by a debtor!

It is not usually accounted for "his discount must have to be in the

boos since the net accounted for in the boos since it amount (i!e!

after deducting is deducted from the gross selling discount) is

shown! price!

It is allowed only when there It is allowed only when there is is a

sale either cash or credit! cash receipt or cash payment includingcheues!

It is usually given at the same It varies from customer to customer

rate which is applicable to all depending on the time and period customers! of

payment!

It is allowed or not allowed according to

sales policy followed by a businessconcern!

It is allowed only on condition! "he dues should

be paid within the stipulated time! If not, thedebtor is not eligible for cash discount!

4.) ILLU1TRATION1

I$$u!tration

+nter the following transactions in the Purchases oo and post the

same in the relevant ledger accounts!

?KK4 's!

Aug! 4 ought goods from 8ivia 4,BKK

Aug! ought goods from -ithi 4,KKK




27

Aug!

1o$ution7

E ought goods from Abi

/urc0a!e! <oo!

BKK

&ate

?KK4

Particulars 3!%! Inward

Invoice

-umber

Amount

's!

Aug! 4

Aug!

Aug! E

8ivia

-ithi

Abi

Ledger

/urc0a!e! Ac

4,BKK

4,KKKBKK

@,KKK

&r! Cr!

&ate Particulars 's! &ate Particulars 's!

?KK4

Aug! 4?

1i+ia>! Ac

"o 8undries ?KK4

@,KKK

&r! Cr!


?KK4 ?KK4

Nit0i>! Ac

Aug! 4 y Purchase AGc 4,BKK

&r! Cr!


?KK4 ?KK4

Aug! y Purchase AGc 4,KKK

Abi>! Ac

&r! Cr!


?KK4 ?KK4

Aug! E y Purchase AGc BKK

I$$u!tration 2

+nter the following transactions in sales oo and post the same in the

relevant ledger accounts!

?KK? 's!

Aug! 4B 8old goods to Prabu ?,KKK




28

Aug! 4E 8old goods to ala 4,BKK

Aug! ??

1o$ution7

8old goods to /ano 4,KKK

1a$e! <oo &ate

?KK?


Invoice

-umber

Amount

's!

Aug! 4B

Aug! 4E

Aug! ??

Ledger

Prabu

ala

/ano

1a$e! Ac

?,KKK

4,BKK

4,KKK

,BKK

&r! Cr!


?KK? ?KK?

Aug! @4

/rabu>! Ac

y 8undries ,BKK

&r! Cr!

&ate Particulars 's! &ate Particulars 's!?KK? ?KK?

?,KKKAug!4B "o 8ales AGc

<a$a>! Ac&r! Cr!


?KK?

Aug! 4E

"o 8ales AGc ?KK?

4,BKK

Mano>! Ac

&r! Cr!

&ate Particulars 's! &ate Particulars 's!?KK?

Aug! ?? "o 8ales AGc

?KK?

4,KKK

I$$u!tration "

+nter the following transactions in proper 8ubsidiary oos and post

the same in the relevant ledger accounts!

?KK@ 's!

Aug! 4 ought goods from 6anga ?,BKK

Aug! ? 8old goods to Laveri 4,BKK




2

Aug! B Oamuna sold goods to us 4,BKK

Aug! E Lrishna purchased goods from us 4,?KK

Aug! 44 'eceived goods returned by Laveri 4BK

Aug! 4@ 'eturned goods to 6anga 4KK

Aug! 4D 8old goods to Ponni EKK

Aug! ?? Purchased goods from 8indhu JKK

Aug! ?D

1o$ution7

'eturned goods to Oamuna 4BK

/urc0a!e! <oo &ate

?KK@


Invoice

-umber

's!

Aug! 4

Aug! BAug! ??

6anga

Oamuna8indhu

1a$e! <oo

?,BKK

4,BKKJKK

,JKK

&ate

?KK@

Particulars 3!%! 0utward

Invoice

-umber

's!

Aug! ?

Aug! E

Aug! 4D

Lavari

Lrishna

Ponni

4,BKK

4,?KK

EKK

@,BKK

/urc0a!e! Return! <oo!&ate

?KK@

-ame of 8upplier 3!%! &ebit

-ote

's!

Aug! 4@

Aug! ?D

6anga

Oamuna

1a$e! Return! <oo

4KK

4BK

?BK

&ate

?KK@

-ame of Customer 3!%! Credit -ote

's!

Aug! 44 Laveri

Ledger

/urc0a!e! Ac

4BK

4BK

&r! Cr!





3"

?KK@

Aug! @4

?KK@

"o 8undries AGc ,JKK

1a$e! Ac&r! Cr!

&ate

?KK@

Particulars 's! &ate Particulars 's!

Aug!@4 y 8undries @,BKK

/urc0a!e! Return! Ac

&r! Cr!

&ate

?KK@


Aug! @4 y 8undries 1a$e!

Return! Ac

?BK

&r! Cr!

&ate

?KK@


Aug! @4 "o 8undries 4BK

Ba+eri>! Ac&r! Cr!


?KK@

Aug! ?

?KK@

"o 8ales AGc 4,BKK Aug! 44 y 8ales 'eturns AGc

y alance cGd

4BK

4@BK4,BKK 4,BKK

8ept! 4 "o alance bGd 4,@BK

Bri!0na>! Ac&r! Cr!


?KK@

Aug! E "o 8ales AGc

?KK@

4,?KK Aug! @4 y alance cGd 4,?KK

4,?KK 4,?KK

8ept! 4 "o alance bGd 4,?KK

/onni>! Ac&r! Cr!


?KK@

Aug! 4D "o 8ales AGc

?KK@

EKK Aug! @4 y alance cGd EKK

EKK EKK

8ept! 4 "o alance bGd EKK

Ganaga>! Ac&r! Cr!


?KK@

Aug! 4@

Aug! @4


"o alance cGd

?KK@

4KK Aug! 4

?,KK

y Purchases AGc ?,BKK

?,BKK ?,BKK

8ept! 4

Ya8una>! Ac

y alance bGd ?,KK



1.2.3.


3!

&r! Cr!


?KK@

Aug! ?D

Aug! @4


"o alance cGd

?KK@

4,BKK Aug! B

4,@BK

y Purchases AGc 4,BKK

4,BKK 4,BKK

4,@BK8ept! 4

1ind0u>! Ac

"o alance bGd 4,@BK

&r! Cr!


?KK@

Aug! @4 "o alance cGd

?KK@

JKK Aug! ?? y Purchases AGc JKKJKK JKK

4,@BK 8ept! 4 "o alance bGd JKK

I$$u!tration 4

+nter the following transactions in the ills 'eceivable oo and post the

same in the relevant ledger accounts!

4JJE

Aug! 4 'eceived from Landan a bill duly accepted for 's!4,BKK Payable @

month after date!

Aug! J &rew a ? months bills on ;elan for 's!4,?KK which was duly

accepted and has been discounted!

Aug! 4J Lumaran accepted a @ month bill drawn by us for 's!4,4KK

payable at Canara an, 8alem!

1o$ution7

<i$$! Recei+ab$e <oo 8l!

-o!

&ate of

'eceipt

3!%! &rawer Acceptor "erm &ue &ate 's! 'emars

Aug! 4, 4JJE8elfLandan@

mths!-ov! ,$JE

4,BKK Aug!

J,4JJE8elf;elan?

mths!0ct!4?,$JE 4,?KK &iscounted

Aug! 4J,4JJE8elfLumaran@ mths!-ov! 4,4KK .

??,$JE

@,EKK

Ledger<i$$! Recei+ab$e Ac

&r! Cr!

&ate

4JJE


Aug! @4 "o 8undries @,EKK Aug! @4 y alance cGd @,EKK

@,EKK @,EKK

8ept! 4 "o alance bGd @,EKK

Bandan>! Ac




32

&r! Cr


4JJE 4JJE

Aug! 4 y ills 'eceivable AGc

e$an>! Ac

4,BKK

&r! Cr


4JJE 4JJE

Aug! J y ills 'eceivable AGc

Bu8aran>! Ac

4,?KK

&r! Cr


4JJE 4JJE

Aug! 4J y ills 'eceivable AGc 4,4KK

I$$u!tration &

+nter the following in the ills Payable oo and post them in the ledger!

4JJE

8ept! 4 9e accept 8undar Co$s! bill for 's!4,KKK,? months duration

payable at an of India!8ept! ?4 /aduri Co! drew on us a @ months bill for 's!?,KBK which we

accepted and returned!

8ept! ?E 8wami$s bill for 's!4,?KK accepted by us, the bill being due

after @ months

<i$$ /a'ab$e <oo8l!

-o!

&ate of

Acceptance

&rawer Payee 3!%! 9here &ate of bill "erm &ue &ate 's! 'emar

Payable

4! 8ept! 4, 4JJE 8undar

8undar Co!

Co!

an of 8ept! 4, 4JJE

India

? mth! -ov! , 4JJE 4,KKK .

?! 8ept! ?4, 4JJE /aduri /aduri

Co! Co

an of 8ept! ?4, 4JJE

India

@ mth! &ec! ?, 4JJE ?,KBK 'eturne

@! 8ept! ?E, 4JJE 8wami 8wami an of 8ept! ?E, 4JJE

India

Ledger

<i$$! /a'ab$e Ac

@ mth! &ec! @4, 4JJE 4,?KK

,?BK

.

&r Cr!

&ate

4JJE


8ept! @K "o alance cGd ,?BK 8ept! @K y 8undries ,?BK

,?BK ,?BK

0ct! 4

1undar @ Co>! Ac

y alance bGd ,?BK

&r Cr!


4JJE 4JJE

8ept! 4 "o ills Payable AGc 4,KKK Maduri @

Co>! Ac

&r Cr!




33


4JJE 4JJE

8ept! ?4 "o ills Payable AGc ?,KBK 13a8i>! Ac

&r Cr!

&ate Particulars 's! &ate Particulars 's!4JJE 4JJE

8ept! ?E "o ills Payable AGc 4,?KK

I$$u!tration (

+nter the following transactions in a 8ingle Column Cash oo and

post the same in the relevant ledger accounts!

4JJE 's!

Fuly 4 Cash on hand ?,KKK

Fuly ? 6oods purchased for cash DKK

Fuly @ Paid Carriage Inwards DK

Fuly Cash 8ales KK

Fuly B Paid 8alaries 4,4KK

Fuly Cash received from 8hanar 4,4KK

Fuly 4K 8ale of old machinery EKK

Fuly 4? Cash 8ales DKK

Fuly 4 6oods purchased from Lamal Co! on credit KK

Fuly 4 6oods sold to 8athyan on credit BKK

Fuly 4E 8tationery purchased KK

Fuly 4J 3ent to ;ignesh 4?K

Fuly ?K 'eceived from &inesh 4BK

Fuly ?? 9ithdrawn from business for private use 4K

Fuly ?@ Cash 8ales 4BK

Fuly ? Paid fro repairs K

Fuly ?B Paid 'ent 4BK

Fuly @4 ;ignesh repaid his loan 4?K

1o$ution

1ing$e Co$u8n Ca!0 <oo

&r! Cr!




34

&ate Particulars '!-o! 3!%! 's! &ate Particulars ;!-o! 3!%!

's!

4JJE 4JJE

Fuly 4 "o alance bGd ?,KKK Fuly ? y Purchases DKK

AGc(Cash sales

effected)

Fuly "o 8ales AGc KK Fuly

(Cash sales

effected)

Fuly "o 8hanar$s AGc 4,4KK Fuly @ y Carriage DK

('eceived from Inwards AGc

8hanar) (Carriage

Inwards paid)

Fuly 4K "o /achinery EKK Fuly B y 8alaries AGc 4,4KK

AGc (8ale of old (8alaries padi)

machinery)

Fuly 4? "o 8ales AGc DKK Fuly 4E y 8tationery KK

(Cash sales AGc (8tationery

effected) bought)

Fuly ?K "o &inesh$s AGc 4BK Fuly 4J y ;ignesh$s 4?K

('eceived from AGc (3ent to

&inesh) ;ignesh)

Fuly ?@ "o 8ales AGC 4BK Fuly ?? y &rawings 4K

(Cash sales AGc (9ithdrawn

effected) from business

for private use)

Fuly @4 "o ;ignesh5s AGc 4?K

(;ignesh repaid

his loan)

Fuly ? y 'epairs

AGc (Paid for

repairs)

K

Fuly ?B y 'ent AGc

('ent Paid)

4BK




35

Fuly @4 y alance cGd ?,EEK

B,K? B,?K

Aug! 4 "o alance bGd ?,EEK

Note7 "he transactions effected on Fuly 4 4 represent credit transactions and hence

not entered in the Cash oo!

Ledger

1a$e! Ac

&r! Cr!


4JJE 4JJE

Fuly @4 "o alance cGd 4,BK Fuly y Cash AGc KK

Fuly 4? y Cash AGc DKK

Fuly ?@ y Cash AGc 4BK

4,BK 4,BK

Aug! 4 y alance bGd 4,BK

/urc0a!e! Ac

&r! Cr!


4JJE 4JJE

Fuly ? "o Cash AGc DKK Fuly @4 y alance cGd DKK

DKK DKK

Aug! 4 "o alance bGd DKK

Carriage Ac

&r! Cr!


4JJE 4JJE

Fuly @ "o Cash AGc DK Fuly @4 y alance cGd DK

DK DK

Aug! 4 "o alance bGd DK

1a$arie! Ac

&r! Cr!


4JJE 4JJE




36

Fuly B "o Cash AGc 4,4KK Fuly @4 y alance cGd 4,4KK

4,4KK 4,4KK

Aug! 4 "o alance bGd 4,4KK

1tationer' Ac

&r! Cr!


4JJE 4JJE

Fuly 4E "o Cash AGc KK Fuly @4 y alance cGd KK

KK KK

Aug! 4 "o alance bGd KK

Re#air! Ac&r! Cr!


4JJE 4JJE

Fuly ? "o Cash AGc K Fuly @4 y alance cGd K

K K

Aug! 4 "o alance bGd K

Rent Ac

&r! Cr!


4JJE 4JJE

Fuly ?B "o Cash AGc 4BK Fuly @4 y alance cGd 4BK

4BK 4BK

Aug! 4 "o alance bGd 4BK

Dra3ing! Ac

&r! Cr!


4JJE 4JJE

Fuly ?? "o Cash AGc 4K Fuly @4 y alance cGd 4K

4K 4K

Aug! 4 "o alance bGd 4K




37

Mac0iner' Ac

&r! Cr!


4JJE 4JJE

Fuly @4 "o balance cGd EKK Fuly 4K y Cash AGc EKK

EKK EKK

Aug! 4 "o alance bGd EKK

10anar>! Ac

&r! Cr!


4JJE 4JJE

Fuly @4 "o alance cGd 4,4KK Fuly y Cash AGc 4,4KK

4,4KK 4,4KKK

Aug! 4 y alance bGd 4,4KK

igne!0>! Ac

&r! Cr!


4JJE 4JJE

Fuly 4J "o Cash AGc 4?K Fuly @4 y Cash AGc 4?K

4?K 4?K

Dine!0>! Ac

&r! Cr!


4JJE 4JJE

Fuly @4 "o alance cGd 4BK Fuly ?K y Cash AGc 4BK

4BK 4BK

Aug! 4 y alance bGd 4BK

C0ec 'our #rogre!! 4

3ist out any three different between "rade discount and Cash

discount -otes1 (a) 9rite your answer in the space given below!

(b) Chec your answer with the ones given at the end of this

3esson (pp! E)!




38






I$$u!tration )

+nter the following transactions in a two column Cash oo and prepare

discount account in the ledger

4JJE 's!Fuly 4 Cash on 7and 4,?KK

Fuly ? 'eceived from Q @,JKK

Allowed him discount 4KK

Fuly B Purchased goods for cash ,4KK

Fuly D Paid to / EBK

&iscount allowed by him BK

Fuly J Cash 8ales ,JKK

Fuly 44 9ithdrew from ban B,BKK

Fuly 4B Credit purchase from O @,KKK

Fuly ?4 Paid to O in full settlement ?,EKK

Fuly ?? 'eceived from L 4,?BK

Allowed him discount BK

Fuly ?@ &rew Cheue for office use ?KK

Fuly ?B Paid office rent EKK

Fuly ?E 'eceived interest on

investments

@,KKK

Fuly

1o$ution

@4 Paid into ban @,4BK

T3o Co$u8n Ca!0 <oo 93it0 Ca!0 and

Di!count Co$u8n!:&r! Cr!

&ate Particulars '!-o! 3!%! &iscount 's!

&ate Particulars ;!-o! 3!%!

&iscount allowed allowed

's

!

4JJE 4JJE

Fuly 4 "o alance 4,?KK Fuly B y Purchases AGc

bGd (Cash Purchases

/ade)

Fuly ? "oQ$s AGc 4KK @,JKK Fuly D y /$s AGc BK

EBK

(Amount (Amount paid to

received from / and discount




3

Q and received)

discount

allowed)

Fuly J "o 8ales AGc ,JKK Fuly ?4 y O$s AGc ?KK

?,EKK

(Cash 8ales (Amount paid to

effected) O and discount

received)

Fuly 44 "o an AGc B,BKK Fuly ?B y 0ffice 'ent

(9ithdrawn AGc (0ffice rent

from ban) paid)

Fuly ?? "o L AGc BK 4,?BK Fuly @4 y an AGc

(Amount (Amount paid into

received from the ban)

L and

discount

allowed)

Fuly ?@ "o an AGc ?KK Fuly @4 y alance cGd

(9ithdrawn

from ban for

office use)

Fuly ?E "o Interest on @,KKK

investment

AGc (Interest

received on

investments)

4BK 4J,JBK ?BK

4J,JBK

Aug! 4 "o alance E,?BK

bGd

LedgerDi!count Ac

&r! Cr!


4JJE 4JJE

Fuly @K "o 8undries 4BK Fuly @4 y 8undries ?BK

Fuly @4 "o alance cGd 4KK




4"

?BK ?BK

Aug! 4 y alance bGd 4KK

I$$u!tration *

%rom the following transactions given below you are reuire to prepare

three columnar Cash oo!

4JJE 's!

Fuly 4 Cash on hand KK

Cash at ban J,DK

Fuly ? 'eceived cash from Arul 4,JKK

Allowed him discount 4KK

Fuly Paid Azar by cheue EKK

&iscount received @K

Fuly Purchased 6oods and paid by cheue ?,4KK

Fuly E &eposited with ban ?,4KK

Fuly 4K 8old goods to Anil on credit 4,4KK

Fuly 4? 8old goods received payment by cheue JKK

Fuly 4B 'eceived a cheue from Anil in full settlement 4,KBK

of his account

Fuly 4D 9ithdrawn from ban for office use JKKFuly 4J Purchased goods from L Co! @,KKK

Fuly 4J Paid L Co! by cheue ?,JKK

&iscount received 4KK

Fuly ?K Paid telephone charges 4KK

Fuly ?@ Paid!Ahmad by cheue E

&iscount received 4

Fuly ? Cash 8ales 4,JKK

Fuly ? 'eceived cheue from Antony and sent to the EK

ban

&iscount allowed ?K

Fuly ?D Purchased a new machinery for office use by ,KKK

cehue




4!

Fuly ?E an intimated that!Antony$s cheue has been

dishonored

@4 &eposited with ban KK

Fuly @4 an charges as shown in the pass boo ?

1o$ution7T0ree Co$u8nar Ca!0 <oo

&r! Cr

&ate Particulars

'!-o!

3!%! &iscount

allowed

Cash an &ate Particulars '!-o! 3!%! &iscount

received

Cash

4JJE 's! 's! 's! 4JJE 's! 's!

Fuly 4 "o alance

bGd

KK J,DK Fuly y Azar$s AGc @K EK

Fuly ? "o!Arul$s AGc 4KK 4,JKK Fuly y Purchases AGc ?,4

Fuly E "o Cash AGc C ?,4KK Fuly E y an AGc C ?,4KK

Fuly 4? "o 8ales AGc JKK Fuly 4D y Cash AGc C JK

Fuly 4B "o!Anil$s AGc BK 4,KBK Fuly 4J y Purchase AGc 4KK ?,J

Fuly 4D "o an AGc C JKK Fuly ?K y "elephone

Charges AGc

4KK

Fuly ? "o 8ales AGc 4,JKK Fuly ?@ y!Ahmad$s AGc 4 E

Fuly ? "o!Antony$s

AGc

?K EK Fuly ?D y -ew

/achinery AGc

,K

Fuly @4 "o Cash AGc C KK Fuly ?E y!Antony$s AGc ?K E

Fuly @4 y an AGc C KK

Fuly @4 y an Charges

AGc

?

Fuly @4 y alance cGd ?,BKK ?,B

4DK B,@KK 4,EKK 4 B,@KK 4

Aug! 4 "o alance

bGd

?,BKK ?,B4K

I$$u!tration ,




42

+nter the following transactions is Cash oo with ban and discount

columns only, assuming all receipts are baned on the same day and that all payments are

made by means of cheues only!

4JJE 's!

Fuly 4 an alance B,KKK

Fuly Purchased goods for each 4,KK

Fuly B 8old goods to #A$ for cash 4,@KK

Fuly 4K 'eceived cheue from #9$ (in full settlement @DE of 's!KK)

Fuly 4? Paid #7$ @DB

&iscount allowed by him ?B Fuly4@ 'eceived

Commission from #6 # ?@4 Fuly 4B Paid "raveling +*penses to

#F$ B Fuly4E 'eceived for Cash 8ales ?B

Fuly 4J Paid to #8$ for office furniture 4EB Fuly ?K Paid +lectricity

Charges @B Fuly ?4 Paid 0ffice 'ent 4KK

Fuly ? &rew self cheue for personal use @KK

Fuly ?B 'eceived from #-$ ?B

Fuly &iscount allowed ?B

Fuly ?J &rew cheue for petty cash 4JK

Fuly @K &rew cheue for salaries @K

Fuly

1o$ution7

@4 Paid to #/$ (in full settlement of 's!EB)

Ca!0 <oo 3it0 <an and Di!count Co$u8n!

BK

&r!

&ate Particulars '!-o! 3!%! &iscounts an &ate Particulars

's! 's!

;!-o! 3!%! &iscount

's!

4JJE 4JJE

Fuly 4 "o alance bGd B,KKK Fuly y Purchases AGc

Fuly B "o 8ales AGc 4,@KK Fuly 4? y #7$ AGc ?B

Fuly 4K "o #9$ AGc ?? @DE Fuly 4B y "ravelling

+*penses AGc

Fuly 4@ "ocommission

AGc

?@4 Fuly 4J y 0ffice%urniture AGc

Fuly 4E "o 8ales AGc ?B y +lectricity

Charges AGc

Fuly ?B "o #-$ AGc ?B ?B Fuly ?K y 0ffice rent

AGc

Fuly ?4 y &rawings AGc

Fuly ? y Petty Cash AGc

Fuly ?J y 8alaries AGc




43

Fuly @K y #/$ AGc @B

Fuly @4 y alance cGd

Fuly @4

D D,@JJ @B

Aug! 4 "o alance bGd

I$$u!tration

+nter the following transactions in a petty cash boo maintained on Imprest 8ystem

with analytical columns1

4JJE 's! Fuly 4B 'eceived from the chief cashier ?BK Fuly 4 ought

stamps 4K

Fuly 4D Paid cartage ?B Fuly 4E "ea and 3unch e*penses to customers @B

Fuly 4J "elegram sent B

Fuly ?K Paid "a*i 7ire E Fuly ?4 Purchased envelopes

Fuly ?? Paid for repairs of typewriter ?4

Fuly ?@ Purchased one bottle of in 4K Fuly ?B Purchased

Clips 4K Fuly ?D Paid 'ailway far to manager @K Fuly

@4 Paid to Coolie B

1o$ution7

Ana$'tica$ /ett' Ca!0 <oo&r!

Cash Cash &ate Cr! Particulars ;!-o! "otal Carriage 8tationery "ravelling 0ffice

+nter Postage

'eceived oo Payme Cartage +*penses +*penses

tainm

%olio nts ent

"ele.

+*ps!

4JJE 's! 's! 's! 's! 's! 's!

?BK Fuly 4B "o Cash AGc

Fuly4 y 8tamps 4K 4K

AGc

Fuly4D y Cartage ?B ?B

AGg

Fuly4E y @B @B

+ntertainment

+*ps! AGc

Fuly4J y "elegram B B

Fuly?Ky "a*i 7ire EE

Fuly?4y +nvelopes




44

Fuly??y "ypewriter?4?4

'epairs

Fuly?@y ottle of 4K4K in

Fuly?By clips 4K4K

Fuly ?Dy 'ailways @K@K

%are

Fuly@4 y Coolie hire B B

4B @K ? @E ?4 @B

4B

Fuly@4 y alance EB

cGd

?BK ?BK

EB Aug! 4 "o alance

bGd

4B Agu! 4 "o Cahs AGc

4. LET U1 1UM U/1

8ubsidiary boos reduce clerical wor considerably! Credit

purchases, credit sales and cash details are freuently needed items which

can be nown at any time with the help of 8ubsidiary boos! Cash

discount, importance of cash discount, cash ban details can be nown at

any time with the help of 8ubsidiary boos

4. Le!!on%End Acti+itie!7

4 9hat do you understand by 8ubsidiary boosN

? 9hat are the advantages of 8ubsidiary boosN

@ &efine purchases boo and sales boo!

9hat is >ournal properN

B 9hat is petty cash booN

9hat are the different inds of 8ubsidiary boosN

D 9hat do you mean by Cash booN

E 9hat are the inds of Cash boosN

J &efine trade discount and cash discounts!

4K &istinguish between trade discount and cash discount

44 9rite short notes on

a) Inward invoice b) 0utward invoice c) &ebit and Credit note

d) Contra +ntries e) Imprest system!

4.2 C0ec 'our /rogre!!

Oour answer may include any five the following1




45

4! "rade discount is given by the manufacturer or the wholesaler to a

retailer and not to others! Cash discount may be allowed by seller to

any debtor!

?! "rade discount is allowed on a certain uantity being purchased! Cash

discount is allowed on payment being made before a certain date!

@! "rade discount is a reduction in the catalogue price of an article! Cash

discount is a reduction in the amount due by a debtor!

! "rade discount is not usually accounted for in the boos since the net

amount (i!e! after deducting discount) is shown! Cash discount must

have to be accounted for in the boos since it is deducted from the

gross selling price!

B! "rade discount is allowed only when there is a sale either cash or

credit! Cash discount is allowed only when there is cash receipt or

cash payment including cheues!

4." /oint! for Di!cu!!ion

4! %rom the following transaction you are reuire to prepare suitable

subsidiary boos and post them in the relevant ledger account!

?KK? 's!

/arch 4 Purchased goods from 8enthil KKK

/arch ? 8old goods to 8elvi 4BKK

/arch 'eturn goods to 8enthil 4KKK

/arch B 8old goods to 8ivia BKK

/arch 6oods return by 8elvi BKK

/arch E 8old goods from Aruna KK

/arch 4K ought goods from /ano ?BKK/arch 4? ought goods from 8ethu ?EKK

/arch 4B 6oods return to /ano BKK

?! %rom the following transaction you are reuire to prepare "hree

Column Cash boo!

?KKK 's!

Fan! 4 Cash balance KKK

an balance ?BKKK

Fan! ? Cash sales @4KKKFan! E Cash purchases ??KKK

Fan! 4B Purchases of machinery by issue of cheue 4KKKK

Fan! ?K Paid into ban 4BKKK

Fan! ?B 'ent paid by the cheue 4BKK

Fan! @K 8alary paid ?BKK

4.4 Reference!

4! 6upta '!3! = Advanced Accountancy

?! 6rwal "!! = &ouble +ntry oo Leeping!




46

LE11ON & TRIAL <ALANCE

Content!7

&. Ai8! and ob?ecti+e!

&.2 Introduction

&." Meaning and Definition of Tria$ ba$ance

B!?!4 /eaning

B!?!? &efinition

&." Ob?ecti+e! of #re#aring Tria$ ba$ance

&.4 ;eature! of Tria$ ba$ance

&.& Li8itation! of Tria$ ba$ance

&.( Met0od! of #re#aring tria$ ba$ance

B!!4 "otal method

B!!? alance method

&.2 I$$u!tration!

&." Let u! 1u8 U#

&.4 Le!!on%End Acti+itie!

&.& C0ec Your /rogre!!

&.( /oint! for Di!cu!!ion

&.) Reference!

&. AIM1 AND O<=ECTIE1

i) "o study the meaning and definition of "rial balance!

ii) "o now the ob>ectives, features and limitations of "rail balance! iii) "o

understand the methods of preparing "rial balance!

&. INTRODUCTION

According to the dual aspect concept, the total of debit balance must be eual to the

credit balance! It is a must that the correctness of posting to the ledger accounts and their

balances be verified! "his is done by preparing a trail balance!

&.2 MEANING AND DE;INITION

&.2. Meaning

"rial balance is a statement prepared with the balances or total of debits and credits of all the accounts in the ledger to test the arithmetical accuracy of the ledger accounts! As the

name indicates it is prepared to chec the ledger balances! If the total of the debit and credit

amount columns of the trail balance are eual, it is assumed that the posting to the ledger in

terms of debit and credit amounts is accurate! "he agreement of a trail balance ensure

arithmetical accuracy only, A concern can prepare trail balance at any time, but its preparation

as on the closing date of an accounting year is compulsory!

&.2.2 Definition




47

According to /!8! 6osav “"rail balance is a statement containing the balances of all

ledger accounts, as at any given date, arranged in the form of debit and credit columns placed

side by side and prepared with the ob>ect of checing the arithmetical accuracy of ledger

postings!

&." O<=ECTIE1 O; /RE/ARING A TRAIL <ALANCE(i) It gives the balances of all the accounts of the ledger! "he balance of any account

can be found from a glance from the trail balance without going through the pages

of the ledger!

(ii) It is a chec on the accuracy of posting! If the trail balance agrees, it proves1 (a)

"hat both the aspects of each transaction are recorded and (b) "hat the boos are

arithmetically accurate!

(iii) It facilitates the preparation of profit and loss account and the balance sheet!

(iv)Important conclusions can be derived by comparing the balances of two or more

than two years with the help of trail balances of those years!

&.4 ;EATURE1 O; TRAIL <ALANCE1

"he following are the important features of a trail balances1

(i) A trail balance is prepared as on a specified date!

(ii) It contains a list of all ledger account including cash account!

(iii) It may be prepared with the balances or totals of 3edger accounts!

(iv)"otal of the debit and credit amount columns of the trail balance must tally!

(v) It the debit and credit amounts are eual, we assume that ledger accounts are


(vi)&ifference in the debit and credit columns points out that some mistaes have beencommitted!

(vii) "allying of trail balance is not a conclusive profit of accuracy of accounts!

&.& LIMITATION1 O; TRAIL <ALANCE

"he following are the important limitations of trail balances1

(i) "he trail balance can be prepared only in those concerns where double entry system

of boo. eeping is adopted! "his system is too costly!

(ii) A trail balance is not a conclusive proof of the arithmetical accuracy of the boos of

account! It the trail balance agrees, it does not mean that now there are absolutely no

errors in boos! 0n the other hand, some errors are not disclosed by the trail

balance!

(iii) It the trail balance is wrong, the subseuent preparation of "rading, P3

Account and alance 8heet will not reflect the true picture of the concern!

&.( METOD1 O; /RE/ARING TRAIL <ALANCE

A trail balance refers to a list of the ledger balances as on a particular date! It can be

prepared in the following manner1

&.(.. Tota$ Met0od



S!s "ooks

Trail Balance as on……..

S.#o. #ame of $ccount %.&'ebit otal

$mount

s.

redit otal

$ccount

s.

Method II* "alance +ethod* +!s "ooks

Trail Balance as on……..

S.#o. #ame of $ccount %.&'ebit

balance

s.

redit

balance

s.


48

According to this method, debit total and credit total of each account of ledger are

recorded in the trail balance!

&.(.2. <a$ance Met0od

According to this method, only balance of each account of ledger is recorded in trail

balance! 8ome accounts may have debit balance and the other may have credit balance! All

these debit and credit balances are recorded in it! "his method is widely used!Ru$ing of a trai$ ba$ance7

"he following is the form of a trail balance

Met0od I7 "otal /ethod

Note7 Accounts of all assets, e*penses, losses and drawings are debit balances!

Accounts of incomes, gains, liabilities and capital are credit balances!

"rial balance disclosed some of the errors and does not disclosed some other errors!

"his is given below!A: Tria$ <a$ance di!c$o!ed b' t0e Error!

i) 9rong totaling of subsidiary boos ii) Posting

of an amount on the wrong side iii) 0mission to

post an amount into ledger iv) &ouble posting or

omission of posting v) Posting wrong amount vi)

+rror in balancing

<: Trai$ <a$ance not di!c$o!ed b' t0e Error!

i) +rror of principle ii) +rror of

omission iii) +rrors of

Commission

iv) 'ecording wrong amount in the boos of original entry v)

Compensating errors

C0ec 'our #rogre!! &

3ist out any three features of trial balance


(b) Chec your answer with the ones given at the end of this 3esson (pp! RRR )!




4






&.) ILLU1TRATION1

I$$u!tration

%rom the following transactions, pass >ournal entries, prepare ledger accounts and

also prepare "rial alance under (i) alance method (ii) "otal method! 's! 4! Anil started

business with E,KKK

?! Purchased furniture 4,KKK

@! Purchased goods ,KKK

! 8old goods D,KKK B! Purchased from 'a>a ,KKK

! 8old to 8omu B,KKKD! Paid to 'a>a ?,BKK E! 'eceived from 8omu @,KKK

J! Paid rent ?KK 4K! 'eceived commission 4KK

1o$ution

=ourna$ Entrie!

/articu$ar! L.; &r! Cr!Cash AGc

"o Capital AGc

S8tarted businessT

&r! E,KKK E,KKK

%urniture AGc

"o Cash AGc

SPurchased furnitureT

&r! 4,KKK 4,KKK

Purchases AGc

"o Cash AGc

SPurchased goodsT

&r! ,KKK ,KKK

Cash AGc &r! D,KKKD,KKK

"o 8ales AGc

S8old goods for cashT

Purchases AGc &r! ,KKK

,KKK

"o 'a>a AGc

SPurchased goodsT

8omu AGc &r! B,KKK

B,KKK

"o 8ales AGc




5"

S8old goods on creditT

'a>a AGc &r! ?,BKK

"o Cash AGc ?,BKK

SPaid cashT

Cash AGc &r! @,KKK

"o 8omu AGc @,KKK

S'eceived from 8omuT

'ent AGc &r! ?KK

"o Cash AGc ?KK

SPaid rentT

Cash AGc &r! 4KK

"o Commission received AGc 4KK

S'eceived commissionT

Ca!0 Account

's! 's!

"o Capital E,KKK y %urniture 4,KKK

"o 8ales D,KKK y Purchases ,KKK

"o 8omu @,KKK y 'a>a ?,BKK

"o Commission 4KK y 'ent ?KK

y alance cGd E,KK

4E,4KK 4E,4KK

"o alance bGd E,KK

Ca#ita$ Account

's! 's!

"o alance cGd E,KKK y Cash E,KKK

E,KKK E,KKK

y alance bGd E,KKK

;urniture Account

's! 's!

"o Cash 4,KKK y alance cGd 4,KKK




5!

4,KKK 4,KKK

y alance bGd 4,KKK

/urc0a!e Account

's! 's!

"o Cash ,KKK y alance cGd 4K,KKK

"o 'a>a ,KKK

4K,KKK 4K,KKK

"o alance bGd 4K,KKK

1a$e! Account

's! 's!

"o alance cGd 4?,KKK "o Cash D,KKK

"o 8omu B,KKK

4?,KKK 4?,KKK

y alance bGd 4?,KKK

Ra?a Account

's! 's!

"o Cash ?,BKK y Purchase ,KKK"o alance cGd 4,BKK

,KKK ,KKK

y alance bGd 4,BKK

1o8u Account

's! 's!

"o 8ales B,KKK y Cash @,KKK

y alance cGd ?,KKK

B,KKK B,KKK

y alance bGd ?,KKK

Rent Account

's! 's!

"o Cash ?KK y alance cGd ?KK




52

?KK ?KK

"o alance bGd ?KK

Co88i!!ion recei+ed Account

's! 's!

"o alance cGd 4KK y Cash 4KK

4KK 4KK

y alance bGd 4KK

I. <a$ance Met0od

Trai$ ba$ance a! onF..

&r! Cr!

Cash E,KK

Capital . E,KKK

%urniture 4,KKK .

Purchases 4K,KKK .

8ales . 4?,KKK

'a>a . 4,BKK

8omu ?,KKK .

'ent ?KK .

Commission received 4KK

?4,KK ?4KK

II. Tota$ Met0od

Tria$ ba$ance a! onF..

&r! ('s!) Cr! ('s!)Cash 4E,4KK J,DKK

Capital . E,KKK

%urniture 4,KKK .

Purchases 4K,KKK .

8ales . 4?,KKK

'a>a ?,BKK ,KKK

8omu B,KKK @,KKK

'ent ?KK .

Commission received . 4KK

@,EKK @,EKK

I$$u!tration 2




53

"he following "rail balance has been prepared wrongly! Oou are ased to prepare the

"rail balance correctly!

&r! Cr!

's! 's!

Capital ??,KKK

8toc 4K,KKK&ebtors E,KKK

Creditors 4?,KKK/achinery ?K,KKK

Cash in hand ?,KKK

an overdraft 4,KKK

8ales returns E,KKK

Purchases returns ,KKK

/isc! e*penses 4?,KKK

8ales ,KKK

Purchases ?,KKK

9ages 4K,KKK8alaries 4?,KKK

Prepaid insurances ?KK

ills payable 4K,EKK

0utstanding salaries 4,KK

"otal 4,KE,?KK 4,KE,?KK

1o$ution

Corrected Tria$ <a$ance a! atF.

&r! Cr! 's! 's!

Capital ??,KKK

8toc 4K,KKK

&ebtors E,KKK

Creditors 4?,KKK

/achinery ?K,KKKCash in hand ?,KKK

an overdraft 4,KKK

8ales returns E,KKK

Purchases returns ,KKK

/isc! e*penses 4?,KKK

8ales ,KKK

Purchases ?,KKK

9ages 4K,KKK

8alaries 4?,KKK

Prepaid insurances ?KK

ills payable 4K,EKK

0utstanding salaries 4,KK

"otal 4,KE,?KK 4,KE,?KK

I$$u!tration "

A boo.eeper submitted to you the following "rail alance, which he has not been

able to agree! 'ewrite the "rial alance, correcting the mistaes committed by him!

&r! Cr!




54

's! 's!

Capital 4B,KKK

&rawings @,?BK

8toc (4.4.EK) 4D,B

'eturn inwards BB

Carriage inwards 4,?K

&eposit with Anand 6upta 4,@DB

'eturn outwards EK

Carriage outwards D?B

3oan to Asho U B given on 4,KKK

4.4.EK

Interest on the above ?B

'ent E?K

'ent outstanding 4@K

8toc (@4.4?.4JEK) 4E,DJ?

Purchases 4?,JDK

&ebtors ,KKK

6oodwill 4,D@K

Creditors @,KKK

Advertisement e*penses JB

Provision for doubtful debts 4,?KK

ad debts KK

Patents and patterns BKK

Cash ?

8ales ?D,J4

&iscount allowed @@K

9ages DB

"otal B,KJB J,J4B

1o$ution

Corrected Trai$ <a$ance a! at "!t Dece8ber ,*




55

&r! Cr! 's! 's!

Capital 4B,KKK

&rawings @,?BK

8toc (4.4.4JEK) 4D,B

'eturn inwards BB

Carriage inwards 4,?K

&eposit with Anand 6upta 4,@DB

'eturn outwards EK

Carriage outwards D?B

3oan to Asho U B given on 4,KKK

4.4.EK

Interest on the above ?B

'ent E?K

'ent outstanding 4@K

Purchases 4?,JDK

&ebtors ,KKK

6oodwill 4,D@K

Creditors @,KKK

Advertisement e*penses JB

Provision for doubtful debts 4,?KK

ad debts KK

Patents and patterns BKK

Cash ?

8ales ?D,J4

&iscount allowed @@K

9ages DB

"otal E,4KJ E,4KJ

Note7 Closing stoc is an ad>ustment, so it has not been taen in the "rial balance!

&.* LET U1 1UM U/




56

In business, monetary transaction is prepared on the basis of double entry system! In

double entry system, we find two aspects (&ebit and Credit) in each and every business

transaction! After preparing the ledger account, in order to now the arithmetical accuracy trial

balance will be prepared! 3edger accounts balances will be transferred and finally it should be

totaled! "he debit and credit balances should be eual! If it is eual our accounting is correct!

If not, some mistae has been made! 9ith the help of trial balance we can find the arithmetical

accuracy of accounts preparation!

&., Le!!on%End Acti+itie! 4! 9hat is

"rail alanceN

?! +*plain the meaning and ob>ectives of "rail alance @! 9hat are

the different methods of preparing "rail alanceN

! 9hat are the errors disclosed by "rail alanceN

B! -ame the errors which do not affect the "ail alance!

! &raw up a "rail alance with imaginary figures!

&. C0ec 'our #rogre!!

Oour answer may include any five of the following1

4! A trail balance is prepared as on a specified date!

?! It contains a list of all ledger account including cash account!

@! It may be prepared with the balances or totals of 3edger accounts!

! "otal of the debit and credit amount columns of the trail balance must tally!

B! It the debit and credit amounts are eual, we assume that ledger accounts are


&. /oint! for Di!cu!!ion

4! %rom the following ledger accounts of 8athiya, draw "rail alance as on @4 st

&ecember ?KK!

's! 's!

7ouse Property B,KKK 'epairs 4,?KK

%urniture B,KKK 'ent 'eceived ,EKK

Htensils ,KKK /edical +*penses 4,?KK

0rnaments ?B,KKK 8chool %ree 4,EKK

Cash @K Conveyance 4,@BK

an alance1 Cosmetics 4,4BK

%i*ed &eposits ?K,KKK Interest 'eceived @,KKK

8avings an @,BKK 7ouse uilding 3oan from

6ovt!

?K,KKK

8hares 6ovt! 8ecurities 4?,KKK Interest paid 4,EDK

Claims against persons 4,BKK /unicipal "a*es @,KKK




57

8alary (Income) ?,KKK Income.ta* ?,BKK

8ervants wages 4,?KK Accumulated %und EE,@KK

%ood and &rin @,DBK

&ress and Clothing$s ?,BK

?! "he following "rail alance was e*tracted from the boos of a /erchant, although

the columns are agreed, yet they are incorrect! Oou are reuired to correct and

redraft it!

&r! Cr!

Premises @K,KKK Capital @,EKK/achinery E,BKK %i*tures ?,EKK

ad &ebts 4,KK 8ales B?,KKK

'eturns 0utwards 4,@KK &ebtors @K,KKK

Cash ?KK Interest 'eceived 4,@KK

&iscount 'eceived 4,BKK

an 0verdraft B,KKK

Creditors ?B,KKKPurchases BK,KKK

4,??,JKK 4,??,JKK@! /r! lan, a client of your with whom boo.eeping is not a strong point, as you

to audit his accounts for the year ended @4 st &ecember ?KK, upon which data his

Closing 8toc was values at 's!BD!

As a basis for your audit lan

furnishes you with the

following statements1

If you do not approve this

statement, amendit!

! "he under mentioned

balances were

e*tracted from the

boos of /ahesh as on

@4st /arch ?KKB! Oou

are ased to prepare a

"rail alance as on that

date!

's!

Capital DE,KKK

8toc 4!!?KK B,KKK

3easehold Premises ,KKK

&r! Cr!

's! 's!

lan Capital . 4,BB

lan &rawings B .

3easehold Premises D4 .

8ales . ?,DB

&ue from Customers . B@K

Purchases 4,?E .

Purchases 'eturn ? .

3oan form an . ?BK

Creditors B?E .

"rade +*penses DE .

Cash at an 4? .

ills Payable 4KK .8alaries 9ages BJE .

8toc (4st Fanuary) . ?

'ent, 'ates, etc! B .

8ales 'eturn . JE

B,B B,B




58

%urniture %ittings 4@,BKK

Plant /achinery @B,KKK

Purchases DE,JKK

8ales 4,@K,?K

&iscount 'eceived DK

&iscount Allowed BK

Carriage Inwards 4?K

Carriage 0utwards ?@K

'eturns Inward 4,BKK

'eturns 0utward @EK

9ages and 8alaries 4D,EK

'ates and "a*es 4,@DK

'ent 'eceived B@K8undry +*penses 4,K

"rade Creditors ??,DK

oo &ebts @,KKK

&rawings @,KKK

ills Payable 4,4K

Cash in hand 4,?KK

an 3oan B,EKK

Closing 8toc @,JKK

&.2 Reference!

4! 6rewal "!! = &ouble +ntry oo Leeping

?! Fain -avamy = Advanced Accountancy!

LE11ON ( MANU;ACTURING ACCOUNT

Content!7

(. Ai8! and ob?ecti+e!

(.2 Introduction

(." Meaning of Manufacturing Account

(.4 /ur#o!e of Manufacturing Account

(.& ariou! ite8! !0o3n in 8anufacturing account!!4 &ebit side items

!!? Credit side items

(.& 1#eci8en of 8anufacturing account

(.( I$$u!tration!

(.) Let u! 1u8 U#

(.* Le!!on%End Acti+itie!

(., C0ec 'our /rogre!!

(. /oint! for Di!cu!!ion




5

(. Reference!

(. AIM1 AND O<=ECTIE1

i) "o now the purpose of preparing /anufacturing account!

ii) "o identify the items debited and credited in /anufacturing account! iii) "o

understand the method of preparing /anufacturing account!

(. INTRODUCTION

#%inal 8tatements$ generally refer to two statement prepared by a business concern at

the end of every accounting year! "hey are (I) Income statement and (?) alance sheet! In case

of trading concerns these statements are prepared under the headings #"rading and profit and

loss account$ and #alance sheet!$ In case of manufacturing concerns these statements are

titled #/anufacturing, "rading, and Profit and 3oss Account$ and #alance 8heet!$ In case of 3imited companies they are called #Profit and 3oss Account$, #Profit and 3oss appropriation

account$ and #alance sheet$!

(.2 MEANING O; MANU;ACTURING ACCOUNT

/anufacturing concerns which convert raw material into finished product is reuired

to prepare manufacturing account and then prepare trading and profit and loss account! "his is

necessary because they have to ascertain cost of goods manufactured, gross profit and net

profit!

(." /UR/O1E O; MANU;ACTURING ACCOUNT

"he main purpose of manufacturing account is to show1

(i) Cost of goods manufactured5 and

(ii) /a>or items of costs such as raw material consumed, productive wages, direct

and indirect e*penses of production!

(.4 ARIOU1 ITEM1 1ON IN MANU;ACTURING ACCOUNT

(.4. Debit !ide ite8!

9a: Ra3 8ateria$ con!u8ed

/anufacturing account starts with value of raw materials consumed, i!e!, openingstoc of raw materials plus Purchases and incidental e*penses of purchase less closing stoc of

raw materials!

9b: Direct 3age! and e-#en!e!

&irect wages and direct e*penses are debited to manufacturing account!

"hese are the wages and e*penses directly identifiable with the output produced!

9c: Indirect factor' e-#en!e!




6"

+*penses lie factory rent, salaries, lighting, power, heat and fuel, machinery repairs,

depreciation and other factory e*penses are debited to manufacturing account! "otal of 'aw

materials consumed, direct wages, direct e*penses and factory e*penses is the total

manufacturing cost!

9d: O#ening 3or in #rogre!!

9or.in.progress is the semi finished output! 0pening wor.in.progress is shown onthe debit side of manufacturing account! "he assumption is that it is completed into finished

output during the current accounting period!

9e: 1a$e of 1cra#

8crap can be raw material scrap or indirect material scrap! It may be reduced from

material cost on debit side! Alternatively it can be shown on credit side of manufacturing

account, lie an income!

(.4.2 Credit !ide

9a: C$o!ing 3or%in%#rogre!!

It represents the semi.finished output at the end of the accounting period and is

credited to manufacturing account!

9b: 1a$e of !cra#

If it is direct material scrap, it can be reduced from raw material on debit side!

7owever in the absence of specific details, the amount from sale of scrap can be credited to

manufacturing account! In that case, whether it is direct material scrap or indirect factory

material scrap maes no difference!

9c: Co!t of ;ini!0ed good! 8anufactured

"his is the balancing figure in the manufacturing account! It is transferred to trading

account! Note: "he closing wor.in.progress and sale of scrap may also be reduced on debit side and

then credit side shows the cost of goods manufactured alone! "hat approach maes the

above account loo lie a cost sheet prepared in cost AGc!

(. &.1/ECIMEN O; MANU;ACTURING ACCOUNT I1 /RE1ENTED

<ELO

Manufacturing Ac for t0e 'ear endedFF..

'8! 's!

"o wor.in.progress (opening ) *** y 8ale of scrap ***

"o /aterial used *** y 9or.in.progress (closing) ***

0pening stoc *** y Cost of goods produced

transferred to trading AGc (bal!

fig)

***




6!

Add1 Purchases ***

***

3ess1 Closing stoc *** ***

"o 9ages ***

"o %actory e*penses ***

"o Purchase e*penses ***

"o Import duty ***

"o Carriage inward ***

"o &epreciation on machinery ***

"o 'epairs to /achinery ***

*** ***

C0ec 'our #rogre!! (3ist out any three items debited in the manufacturing account -otes1 (a)

9rite your answer in the space given below!

(b) Chec your answer with the ones given at the end of this 3esson (pp! EJ)!





MMMMMMMMMMMMMMMMMMMMMMMMMMMM(.( ILLU1TRATION1

I$$u!tration

%rom the following balances in the ledger of /r! Lannusamy for the year ended @4.

@.?KK?, prepare manufacturing account!




62

's!

0pening wor.in.progress 4,KK,KKK 0pening stoc of raw

materials BB,KKK Purchases of raw materials 4K,KK,KKK

Closing stoc of raw materials K,KKK

Carriage on purchases 4K,KKK

%actory wages BK,KKK

%uel and coal B,KKK

%actory power ?K,KKK

&epreciation on plant and machinery 4B,KKK

%actory supervisor$s salary DB,KKK

Closing wor.in.progress ?K,KKK

1o$ution

Manufacturing Account of Mr. Bannu!a8' for t0e 'ear ended "%"%22

/articu$ar! R!. R!. /articu$ar! R!. R!.

"o opening wor.in. progress 4,KK,KKK y Closing worin.

progress

?K,KKK

"o 'aw materials used1 y Cost of goods

0pening stoc

Add1 Purchases

BB,KKK

4K,KK,KKK

4K,BB,KKK

/anufactured,

transferred to

trading AGc

(al!fig)

4@,4K,KKK

3ess1 Closing stoc K,KKK 4K,4B,KKK"o Carriage on purchase 4K,KKK

"o %actory wages BK,KKK

"o %uel and coal B,KKK

"o %actory power ?K,KKK

"o &epreciation on plant and

machinery

4B,KKK

"o 8upervisor$s salary DB,KKK

4@,@K,KKK 4@,@K,KKK

I$$u!tration 2 %rom the following ledger balance of /r! 8enthil prepares manufacturing

account for the year ended @4.@.?KK4!

's!

O#ening !toc7

'aw /aterials ?K,KKK

9or.in.progress 4B,KKK

%inished goods K,KKK

Purchase of raw materials ;actor'

e-#en!e! 7

,KK,KKK

Cleaning BKK




63

Power BKK

%uel coal 4,KKK

9ages

Closing stoc1

?,KKK

'aw materials B,KKK

9or.in.progress E,KKK %inished stoc 4?,KKK

8ales 4K,KK,KKK

1o$ution 7

/anufacturing account for the year ended @4.@.?KK4

/articu$ar! R!. R!. /articu$ar! R!. R!.

"o opening wor.

inprogress

4B,KKK y Closing wor.

inprogress

E,KKK

"o 'aw materials used1 y Cost of goods

0pening stoc ?K,KKK /anufactured,

transferred totrading AGc

(al!%ig)

,?,KKK

Add1 Purchases ,KK,KKK

,?K,KKK

3ess1 Closing stoc B,KKK ,4B,KKK

"o 9ages ?,KKK

"o %actory cleaning BKK

"o %actory power BKK

"o %uel coal 4,KKK

,@,KKK ,@,KKK(.) LET U1 1UM U/

/anufacturing concerns converting raw materials into finished products! "hey must

now the cost of production for the units produced during a particular period! In order to now

the cost of production, they prepare manufacturing account!

(.* LE11ON H END ACTIITIE1

4! &escribe to steps involved in to preparation of financial statement of accounts of a firm!

?! &escribe the contents of manufacturing account!

@! +*plain to various financial statements!

! 9hat is material consumedN

(., C0ec 'our #rogre!!

Oour answer may include five of the following

4! 'aw material consumed

?! &irect wages and e*penses

@! Indirect factory e*penses

! 0pening wor in progress

B! 8ale of 8crap




64

(. /oint! for Di!cu!!ion

4! %ollowing are the ledger balances of /Gs!8eetha on @4.4?.4JJJ! Prepare her

manufacturing account for the year 4JJJ!

's!

0pening stoc of raw materials 4K,KKK

Closing stoc of raw materials 4B,KKK

Purchase of raw materials 4,BK,KKK

%reight on purchases BKK

9ages (Productive) DB,KKK

%actory cleaning ?,KKK

%actory rent ,KKK

%actory lighting B,KKK

Power ?K,KKK

&epreciation1 0n plant and machinery 4B,KKK

0n %actory vehicles B,KKK

%actory managers salary ?,KKK

?! %ollowing are the ledger balances of /r! Larthi as on @4.@.?KKK! Prepare

manufacturing account for the year ending on that date!

's!

8toc of /aterials on 4..4JJJ ?K,KKK

Purchase of raw materials @,KK,KKK

8toc of raw materials on @4.@.?KKK 4K,KKK

Carriage inwards 4,BKK

%actory wages ?K,KKK

E@

%uel and coal B,KKK

%actory cleaning ,KKK

%actory lighting ?,KKK

&epreciation1 %actory machinery ,KKK

%actory building ?,KKK

%actory watchman$s salary ?,KKK

8tores consumed ?KK

0pening wor.in.progress B,KKK

Closing wor.in.progress ?,KKK

(. Reference!

4! 6rewal "!! = &ouble +ntry oo Leeping

?! Fain -avamy = Advanced Accountancy!




65

LE11ON ) TRADING ACCOUNT

Content!7

). Ai8! and ob?ecti+e!

).2 Introduction

)." /re#aration of Trading Account

D!?!4 Items shown in trading account1 (A) &ebit side

D!?!4 Items shown in trading account1 () Credit side

)." C$o!ing entrie! re$ating to trading account

).4 1#eci8en of Trading account

).& I$$u!tration!

).( Let u! 1u8 U#

).) Le!!on%End Acti+itie!

).* C0ec 'our /rogre!!

)., /oint! for Di!cu!!ion

). Reference!

). AIM1 AND O<=ECTIE1

(i) "o understand the meaning of trading account

(ii) "o now the items shown in trading account &ebit side and Credit side (iii) "o study

the Closing entries relating to trading account.

). INTRODUCTION

"rading account is prepared for an accounting period to find the trading results or

gross margin of the business i!e!, the amount of gross profit the concern has made from buying

and selling during the accounting period! "he difference between the sales and cost of sales is

gross profit! %or the purpose of computing cost of sales, value of opening stoc of finished

goods, purchases, direct e*penses on purchasing and manufacturing are added up and closing

stoc of finished goods is reduced! "he balance of this account shows gross profit or loss

which is transferred to the profit and loss account!

).2 /RE/ARATION O; TRADING ACCOUNT

"rading account is a ledger account! It has to be prepared in conformity with double

entry principles of debit and credit!

).2. Ite8! !0o3n in trading account7 9A: Debit !idei: O#ening !toc : "he stoc at the beginning of an accounting period is called

opening stoc! "his is the closing stoc as per the last balance sheet! It includes

stoc of raw materials, wor in progress, (where manufacturing account is not

separately prepared) and finished goods! "rading account starts with opening

stoc on the debit side!

ii: /urc0a!e!7 "he total value of goods purchased after deducting purchase

returns is debited to trading aGc! Purchases comprise of cash purchases am credit purchases!




66

iii: Direct e-#en!e!7 &irect e*penses are incurred to mae the goods sale able!

"hey include wages, carriage and freight on purchases, import duty, customs

duty, clearing and forwarding charges manufacturing e*penses or factor!

+*penses (where manufacturing account is not separately prepared)! All direct

e*penses are e*tracted from trial balance!

).2.2 Ite8! !0o3n in trading account 79<: Credit !ide7

i: 1a$e!7 It includes both credit and cash sales! 8ales returns are reduced from

sales and net sales are shown on the credit side of trading account! "he sales and returns are

e*tracted from the trial balance!

ii: C$o!ing !toc7 Closing stoc is the value of goods remaining at the end of

the accounting period! It includes closing stoc of raw materials, wor progress (where

manufacturing account is not separately prepared) and finished stoc! "he opening stoc is

ascertained from trial balance but closing stoc is not a part of ledger! It is separately valued

and given as an ad>ustment! If it is given in trial balance, it is after ad>ustment of opening and

closing stocs in purchases! If closing stoc is given in trial balance it is shown only as current

asset in balance sheet! If closing stoc is given outside trial balance, it is shown on credit sideof trading account and also as current asset in the balance sheet

)." CLO1ING ENTRIE1 RELATING TO TRADING ACCOUNT

"he Fournal entries given below are passed to transfer the relevant ledger account

balances to trading account!

(i) %or opening stoc, purchases and direct e*penses!

"rading AGc &r ***

"o 0pening 8toc AGc *** "o Purchases (-et) AGc ***

"o &irect e*penses AGc ***

Seing transfer of trading aGc debit side itemsT

(ii) %or transfer of sales (after reducing sales returns)

8ales (net) AGc &r ***

"o "rading AGc ***

Seing transfer of sales to "rading AGcT

(iii) %or transferring gross profit

"rading AGc &r ***

"o Profit & 3oss AGc

Seing transfer of gross profit to P3 AGcT

(iv) %or 6ross 3oss

***




67

Profit 3oss AGc &r ***

"o "rading AGc ***

Seing transfer of gross loss to P3 AGcT

Note: Closing stoc is taen into account by an ad>ustment >ournal entry along with

other ad>ustments!

).4 A 1/ECIMEN O; TRADING ACCOUNT I1 1ON <ELO

Trading account for t0e 'ear ended FFFFF

/articu$ar! R!. R!./articu$ar!

R!. R!.

"o 0pening stoc *** y 8ales Q**

"o purchases *** 3ess1 'eturns inwards(or)

8ales 'eturns***

3ess1 purchase returnsTo Direct e-#en!e!7

*** *** ..... ***

9ages *** y closing stoc

%uel Power *** y 6ross loss cGd V ***

Carriage inwards *** (transferred to profit and

loss AGc)

***

'oyalty on production ***

Power ***

Coal water, 6as ***

Import duty ***

Consumable stores ***

%actory e*penses ***"o 6ross profit cGd ***

(transferred to profit and ...... ......

loss AGc)

V alancing figure will be either gross profit or loss in "rading AGc

C0ec 'our #rogre!! )

3ist out closing entries to be passed to transfer relevant ledger balances to trading account!


(b) Chec your answer with the ones given at the end of this 3esson (pp! JE)!

MMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM




).& ILLU1TRATION1




68

I$$u!tration

Prepare trading account of 8ivia for the year ending @4.@.?KK4!

's!

0pening stoc ,KK,KKK Purchases @,KK,KKK

Carriage inward ?,K,KKK9ages 4,?K,KKK

Credit sales D?,KK,KKK

Cash sales 4E,KK,KKK

8ales returns 4B,EK,KKK Purchase returns BK,KKK

Closing stoc B,KK,KKK

1o$ution7

Trading account of 1i+ia for t0e 'ear ending "%"%2

Particulars 's! 's! Particulars 's!

"o 0pening 8toc ,KK,KKK y 8ales5

"o purchase @,KK,KKK Cash sales 4E,KK,KKK

3ess1 Purchase returns BK,KKK Credit sales D?,KK,KKK

?,BK,KKK

"o wages 4,?K,KKK 3ess1 8ales returns JK,KK,KKK

's!

"o carriage inward ?,K,KKK 4B,EK,KKKD,?K,KKK

"o gross profit ?E,JK,KKK y Closing stoc B,KK,KKK

DJ,?K,KKK DJ,?K,KKK

I$$u!tration%2

Prepare "rading Account of 3ashmi for the year ending @4.4?.J from the following

information1

's!

0pening 8toc EK,KKK Purchases E,K,KKK

%reight Inward B?,KKK

9ages ?,KKK

8ales 4,K,KKKPurchase 'eturns 4K,KKK 8ales 'eturns @,4,KKK

Closing 8toc 4,KK,KKK

Import duty @K,KKK

1o$ution 7

Trading Account of La!08i for t0e 'ear ending "%2%,,(




6


"o 0pening 8toc EK,KKK y 8ales5 4,K,KKK

's!

"o purchase E,K,KKK 3ess1 8ales returns @,4,KKK44,?,KKK

3ess1 Purchase returns 4K,KKK E,BK,KKK y Closing 8toc

"o %reight Inward B?,KKK"o 9ages ?,KKK

"o Import duty @K,KKK

"o 6ross Profit cGd 4,EE,KKK

4,KK,KKK

4?,?,KKK

I$$u!tration %"

4?,?,KKK

"he following are the balances in the 3edger of /r! 8uresh for the year ended @4st

/arch 4JJ!

0pening 8toc1 's!

'aw materials ?K,KKK 9or.in.progress @,KKK

%inished goods 4K,EKK

Purchase of raw materials BK,KKK

8ales ?,K,KKK

%uel and coal 4,KKK

9ages @?,KKK

%actory K,KKK

0ffice e*penses @K,KKK

&epreciation on Plant /achineryClosing stoc1

@,KK

'aw materials ?K,KKK

9or.in.progress ,KKK

%inished goods E,KKK

Prepare manufacturing and "rading Account for the year ended @4 /arch 4JJ!

1o$ution7

Manufacturing Trading Account of Mr. 1ure!0 for t0e 'ear ending ".".,(


"o 0pening wor.in.progress @,KKK y Closing wor.in. progress

,KKK

"o Cost of /aterials consumed1 y cost of

goods

/anufactured

transferred to

"rading AGc 4,?B,KKK

0pening ?K,KKK




7"

Add1 Purchases BK,KKK

DK,KKK

3ess1 Closing 8toc ?K,KKK

BK,KKK

"o 9ages @?,KKK

"o %uel Coal 4,KKK

"o %actory e*penses K,KKK

"o &epreciation on plant

/achinery

@,KKK

4,?J,KKK 4,?J,KKK

"o 0pening 8toc of finished

goods

4K,EKK O 8ales ?,K,KKK

"o Cost of goods manufacture 4,?B,KKK y Closing 8toc of

finished goods

E,KKK

"o 6ross Profit cGd 4,4?,?KK

?,E,KKK ?,E,KKK

).( LET U1 1UM U/

At the end of the year, trading account is prepared to now the trading results! "rade

e*penses lie wages, carriage inward are considered! Cost of goods sold is compared with

sales in order to now gross profit G gross loss!

).) LE11ON H END ACTIITIE14! 9hat is trading accountN 9hy it is preparedN

?! &istinguish between trading and manufacturing accountN

).* C0ec 'our #rogre!! an!3er

Oour answer may include the following 1

(i) %or opening stoc, purchases and direct e*penses!

"rading AGc &r ***

"o 0pening 8toc AGc ***

"o Purchases (-et) AGc *** "o &irect e*penses AGc

Seing transfer of trading aGc debit sideitemsT

(ii) %or transfer of sales (after reducing sales returns)

***

8ales (net) AGc &r ***




7!

"o "rading AGc

Seing transfer of sales to "rading AGcT

(iii) %or transferring gross profit

***

"rading AGc &r ***

"o Profit & 3oss AGc

Seing transfer of gross profit to P3 AGcT

(iv) %or 6ross 3oss

***

Profit 3oss AGc &r ***

"o "rading AGc ***

Seing transfer of gross loss to P3 AGcT

)., /oint! for Di!cu!!ion

4! %rom the under mentioned balances obtained at the end of @4./arch 4JJJ, prepare "rading

account!'8!

8toc of goods on 4..JE 4?,BK,KKK

8toc of goods on @[email protected] ?@,DB,KKK

Purchases = Cash 4E,BK,KKK

. Credit 4,?B,KKK

8ales = Cash ?B,BK,KKK

.Credit BD,BK,KKK

'eturns to suppliers ?B,KKK

'eturns by customers @K,KKK

&uty and clearing charges BK,KKK

?! Prepare trading and manufacturing account of /Gs 8enthil ros from their ledger

balances as on @4.@.?KKK!

8toc as on 4..JJ! '8!'aw materials 4K,KKK

9or.in.progress B,KKK

%inished goods @K,KKK

Purchase of 'aw materials ?,KK,KKK

Purchase returns 4K,KKK8ales of finished goods B,KK,KKK

%actory lighting B,KKK

Power ,KKK

Coal %uel ,KKK9ages BK,KKK

&epreciation of plant /achinery

8toc as on @4.@.?KKK

4,KKK

'aw materials B,KKK




72

9or.in.progress 4K,KKK

%inished goods BK,KKK

D!4K 'eferences

4! Fain -arang = Advanced Accountancy!

?! 6upta '!3! = Advanced Accountancy!

LE11ON * /RO;IT AND LO11 ACCOUNT

Content!7

*. Ai8! and ob?ecti+e!

*.2 Introduction

*." Definition

*.4 /re#aration of #rofit and $o!! account

E!@!4 &ebit side

E!@!? Credit side

*.4 C$o!ing entrie! for #rofit and $o!! account*.& 1#eci8en of #rofit and $o!! account

*.( /rinci#$e! of #re#aring #rofit of $o!! Account

*.( I$$u!tration!

*.) Let u! 1u8 U#

*.* Le!!on%End Acti+itie!

*., C0ec 'our /rogre!!

*. /oint! for Di!cu!!ion

*. Reference!

*. AIM1 AND O<=ECTIE1

i) "o study the definition of profit and loss account! ii) "o learn how to

prepare the profit and loss account! iii) "o understand the Principles of

preparing profit of loss Account

*. INTRODUCTION1

Profit and loss account is prepared to ascertain the net profit of the business concern

for an accounting period

*.2 DE;INITION

In the words of Prof! Carter “Profit and loss account is an account into which all gains

and losses are collected in order to ascertain the e*cess of gains over the losses or vice versa!

*." /RE/ARATION O; /RO;IT AND LO11 ACCOUNT

Profit and loss account starts with gross profit brought down from trading account on

the credit side! (If gross loss, on the debit side)! All the indirect e*penses are debited and all

the revenue incomes are credited to the profit and loss account and then net profit or loss is

calculated! If incomes or credit is more, than the e*penses or debit, the difference is net profit!

0n the other hand if the e*penses or debit side is more, the difference is net loss!




73

*.".Debit !ide7

+*penses shown on the debit side of profit and loss account are classified into two

categories

4! 0perating e*penses and ?! -on operating e*penses

9: O#erating e-#en!e!7 "hese e*penses are incurred to operate the business efficiently! "hey are

incurred in running the organisation! 0perating e*penses include administration, selling,distribution, finance, depreciation and maintenance e*penses!

92: Non o#erating e-#en!e!7 "hese e*penses are not directly associate with day today operations

of the business concern! "hey include loss on sale of assets, e*traordinary losses, etc!

*.".2 Credit !ide

6ross profit is the first item appearing on the credit side of profit and loss account!

0ther revenue incomes also appear on the credit side of profit and to account!

"he other incomes are classified as operating incomes and non operating incomes!

9: O#erating inco8e!7 "hese incomes are incidental to business and earned from

usual business carried on by the concern! +*amples1 discount received, commission

earned, interest received etc!

92: Non o#erating inco8e!7 "hese incomes are not related to the business carried on

by the firm! +*amples are profit on sale of fi*ed assets, refund of ta* etc!

*.4 CLO1ING ENTRIE1 ;OR /RO;IT AND LO11 ACCOUNT

4! %or transferring e*penses to profit and loss account1

Profit and 3oss AGc &r ***

"o e*penses AGc ***

Seing transfer of all P3 AGc debit side itemsT

?! %or transfer of incomes to profit and loss account

Incomes AGc &r ***

"o Profit and 3oss AGc ***

Seing transfer of Incomes to P3 AGcT

@! %or net profit1

P3 AGc &r ***

"o Capital AG ***Seing net profit credited to capitalT

! %or transfer of -et 3oss

Capital AGc &r ***

"o P3 AGc ***

Seing net loss transferred to capitalT




74

Note: In case of partnership, the profit or loss is divided between partners in their profit

sharing ratio and credited or debited to the individual partners! In case of limited companies,

-et profit or loss is transferred to the P3 Appropriation AGc for disposal!

*.& TE 1/ECIMEN O; /RO;IT AND LO11 ACCOUNT I1 1ON <ELO

/rofit and Lo!! Account

;or t0e 'ear ended "!t Marc0 2

Particulars 's! Particulars 's!

"o 6ross loss bGd *** y 6ross profit bGd ***

To Ad8ini!tration e-#en!e! y &ividends received ***

8alaries *** y Interest received ***

'ent rates ta*es *** y &iscount received ***

Printing 8tationery *** y commission received ***

Postage and "elegrams *** y 'ent received ***

"elephone e*penses *** y Profit on sale of assets ***

3egal charges *** y 8undry revenue receipts ***

Insurance *** y -et loss transferred to

capital AGc (al! %ig)V

***

Audit fees ***

&irectors fees ***

6eneral e*penses ***

To 1e$$ing @ Di!tribution E-#en!e!

8howroom e*penses ***

Advertising ***

Commission paid to salesmen ***

ad debts ***

Provision for doubtful debts ***

6odown rent ***

Carriage outward ***

Hpeep of delivery vans ***

To De#reciation and 8aintenance

&epreciation ***

'epairs ***

To ;inancia$ e-#en!e!




75

Interest ob borrowings ***

&iscount allowed ***

To abnor8a$ $o!!e!

3oss on sale of assets ***

"o -et profit transferred to capital ***

AGc (bal!fig)

*** ***

Note7 V+ither net profit or net loss is the balancing figure in P 3 AGc

"he purpose and importance of preparing profit and loss account!

"o determine the future line of action

"o now the net profit or loss of business

"o calculate different ratios

"o compare the actual performance of the business with the desired one!

*.( /RINCI/LE1 O; /RE/ARING /RO;IT O; LO11 ACCOUNT

4! 0nly revenue receipts should be entered

?! 0nly revenue e*penses together with losses should be taen into account!

@! +*penses and incomes relating only to the period for which the accounts are being

prepared should be considered!

! All e*penses and income relating to the period concerned should be considered even if the e*pense has not yet been paid in cash or the income has not yet been received in

cash!

B! All personal e*penses of the proprietor and pertners must be debited to the capital or

drawings accounts and must not be debited to the profit and loss account! 8imilarly any

income has been earned from the private assets of the proprietor which is received by

firm, it must be credited to the capital or drawings account!

*.( ILLU1TRATION1

I$$u!tration %

%rom the following "rial balance of /r!6andhi prepare profit and loss account for the

year ended @4.@.?KK4!

&ebit Credit

's! 's!

6ross Profit J,BK,KKK

Commission received B,KKK

Interest received ,KKK




76

8undry income D,KKK

&epreciation 4K,KKK

8alaries 4B,KKK

&iscount (&r) E,KKK

&iscount (Cr) 4?,KKK

an charges ,KKK

Audit fees ?,KKK

8tationery KK

1o$ution

/rofit and Lo!! Account of Mr.Gand0i for t0e 'ear ended "%"%2


"o &epreciation 4K,KKK y 6ross profit bGd J,BK,KKK

"o 8alaries 4B,KKK y Commission received B,KKK

"o &iscount E,KKK y Interest received ,KKK

"o an charges ,KKK y 8undry income D,KKK

"o Audit fees ?,KKK y &iscount 4?,KKK

"o 8tationery KK

"o -et profit cGd J,@E,KK

J,DE,KKK J,DE,KKKC0ec 'our #rogre!! *

9hen you prepare profit and loss account what are the principles to be followed!


(b) Chec your answer with the ones given at the end of this 3esson (pp! 4KE)!






I$$u!tration H 2

%rom the following balance given below, prepare P3 AGc of /Gs! &iviya 3td! for the

year ending @4!4?!?KK@!

's! 's!




77

8alary wages E,KKK &iscount allowed D,KKK

Interest paid B,KKK Interest received ,KKK

Commission received 44,KKK "raveling B,KKK

Commission paid ,KKK ad debts 4,BKK

Advertisement B,KKK &epreciation 4K,KKK

Printing 8tationery 44,BKK 0ther office e*penses 4,?KK

Postage telegram D,BKK 8undry income 4B,KKK

'ent rates 4,BKK Prov! %or doubtful debts ?,KKK

/edical fees @,KKK 6!P! for the year 4,?B,KKK

1o$ution7

/rofit @ Lo!! of M! Di+i'a Ltd. for t0e 'ear ending ".2.2"

's! 's!

"o 8alary wages E,KKK y 6ross profit bGd 4,?B,KKK

"o Interest paid B,KKK y Commission 44,KKK

"o Commission ,KKK y Interest ,KKK

"o Advertisement B,KKK y 8undry income 4B,KKK

"o &iscount D,KKK y Prov! for doubtful

debts

?,KKK

"o "raveling e*penses B,KKK

"o ad debts 4,BKK"o &epreciation 4K,KKK

"o Printing 8tationery 44,BKK

"o Postage rates D,BKK

"o 'ent rates 4,BKK

"o /edical fees @,KKK

"o 0ther office e*penses 4,?KK

"o -et profit E,EKK

4,BD,KKK 4,BD,KKK

I$$u!tration "

%rom the following balance e*tracted at the close of the year ended @4 &ec!

4JJ! Prepare Profit and 3oss account of /r!8antha Lumar as at that date1

's! 's!

6ross profit BB,KKK 'epairs BKK




78

Carriage on sales BKK "elephone e*penses B?K

0ffice 'ent BKK Interest (&r!) EK

6eneral e*penses JKK %ire insurance premium JKK

&iscount to customers @K ad debts ?,4KK

Interest from an ?KK Apprentice Premium (Cr!) 4,BKK

"raveling e*penses DKK Printing 8tationary ?,BKK

8alaries JKK "rade e*penses @KK

Commission @KK

1o$ution

/rofit @ Lo!! Account of Mr. 1ant0a Bu8ar for t0e 'ear ending "%2%,,(

's! 's!

"o Carriage on 8ales BKK y 6ross profit bGd BB,KKK

"o 0ffice 'ent BKK y an Interest ?KK

"o 6eneral JKK y Apprentice Premium 4,BKK

"o &iscount to customers @K

"o "raveling e*penses DKK

"o 8alaries JKK

"o Commission @KK

"o 'epairs BKK

"o "elephone e*penses B?K

"o Interest paid EK

"o %ire Insurance Premium JKK

"o ad debts ?,4KK

"o Printing 8tationery ?,BKK

"o "rade e*penses @KK

"o -et Profit transferred to

Capital AGc

B,?K

B,DKK B,DKK

*.) LET U1 1UM U/

-et results of an organisation can be now by preparing profit and loss account! Allthe revenue e*penses related to the year whatever it is paid or not and all revenue income

related to the current year, whatever it is received are not must be tae into consideration in

order to now the e*act net result!

*.* /OINT1 ;OR DI1CU11ION

4! 9hat is profit and loss accountN 9hat purpose does if serveN

?! &istinguish between balance sheet and trial balanceN

@! 9hat is Profit and 3oss accountN 9hat purpose does it serveN






8"

4K4

*. Reference!4! 6upta '!3! = Advanced Accountancy

?! 6upta 'hasamy = Advanced Accountancy!




8!

LE11ON , <ALANCE 1EET

Content!7

,. Ai8! and ob?ecti+e!,.2 Introduction

,." Tit$e

,.4 Definition! of <a$ance !0eet

,.& C$a!!ification of a!!et! and $iabi$itie!

J!B!4 Assets

J!B!? 3iabilities

,.( /erfor8a of <a$ance 10eet

,.) I$$u!tration!

,.* Ad?u!t8ent!

,., /re#aration of ;ina$ Account!,. Let u! 1u8 U#

,. Le!!on%End Acti+itie!

,.2 C0ec 'our /rogre!!

,." /oint! for Di!cu!!ion

,.4 Reference!

,. AIM1 AND O<=ECTIE1

i) "o study the meaning and definition of alance

sheet ii) "o study the Classification of assets and

liabilities iii) "o now the ad>ustment of alance sheetiv) "o learn how to prepare the alance sheet

,.2 INTRODUCTION

"he alance sheet comprises of lists of assets, liabilities and capital fund on a

given date! It presents the financial position of a concern as revealed by the

accounting records! It reflects the assets owned by the concern and the sources of

funds used in the acuisition of those assets! In simple language it is prepared in such

a way that true financial position is revealed in a form easily readable and more

rapidly understood than would be possible from a view of the detailed information

contained in the accounting records prepared during the currency of the accounting period! alance sheet may be called a #statement of euality$ in which euality is

established by representing values of assets on one side and values of liabilities and

owners: funds on the other side!

,." TITLE

A alance sheet is called by different names probably due to lac of

uniformity in accounting systems! 6enerally, the following titles are used in respect

of balance sheet1

(i) alance sheet or 6eneral alance sheet5




82

(ii) 8tatement of %inancial position or condition5

(iii) 8tatement of assets and liabilities5

(iv)8tatement of assets and liabilities and owners$ fund etc!

0f the above, the title :alance sheetW is mostly used! "he use of this title implies

that data presented in it have been taen from the balances of accounts,

,.4 DE;INITION1 O; <ALANCE 1EET7

“alance sheet is a #Classified summary$ of the ledger balances remaining after

closing all revenue items into the profit and loss account! . Cropper!

“alance sheet is a screen picture of the financial position of a going business

concern at a certain moment . %rancis!

,.& CLA11I;ICATION O; A11ET1 AND LIA<ILITIE1

A clear and correct understanding of the basic divisions of the assets and

liabilities and the meanings which they signify and the amounts which they represent

is very essential for a proper perspective of financial position of a business concern!

Assets and liabilities are classified under the following ma>or headings!

,.&. A!!et!7

Assets are properties of business! "hey are classified on the basis of their nature!

&ifferent types of assets are as under1

9i: ;i-ed a!!et!7 %i*ed assets are the assets which are acuired and held

permanently and used in the business with the ob>ective of maing profits!

3and and building, Plant and machinery, %urniture and %i*tures are

e*amples of fi*ed assets!

9ii: Current a!!et!7 "he assets of the business in the form of cash, debtors

ban balances, bill receivable and stoc are called current assets as they

can be realised within an operating cycle of one year to discharge

liabilities!

9iii: Tangib$e a!!et!7 "angible assets have definite physical shape or identity

and e*istence5 they can be seen, felt and have volume such as land, cash,

stoc etc! "hus tangible assets can be both fi*ed assets and current assets!

9i+:Intangib$e a!!et!7 "he assets which have no physical shape which cannot

be seen or felt but have value are called intangible assets! 6oodwill,

patents, trade mars and licences are e*amples of intangible assets! "heyare usually classified under fi*ed assets!

9+: ;ictitiou! a!!et!1 %ictitious assets are not real assets! Past accumulated

losses or e*penses which are capitalised for the time being, e*penses for

promotion of organisations (preliminary e*penses), discount on issue of

shares, debit balance of profit and loss account etc! are the e*amples of

fictitious assets!

9+i:a!ting a!!et!7 "hese assets are also called depleting assets! Assets such

as mines, "imber forests, uarries etc! which become e*hausted in value




83

by way of e*cavation of the minerals, cutting of wood etc! are nown as

wasting assets! 8uch assets are usually natural resources with physical

limitations!

9+ii: Contingent a!!et!7 Contingent assets are assets, the e*istence,

value possession of which is based on happening or otherwise of specific

events! %or e*ample, if a business firm has filed a suit for a particular property now in possession of other persons, the firm will get the property

if the suit is decided in its favour! "ill the suit is decided, it is a contingent

asset!

,.&.2 Liabi$itie!

A liability is an amount which a business firm is #liable to pay$ legally! All

the amounts which are claims by outsiders on the assets of the business are nown as

liabilities! "hey are credit balances in the ledger! 3iabilities are classified into bur

categories as given below!

9: O3ner! ca#ita$7 Capital is the amount contributed by the owners of the

business! In addition to initial capital introduced, proprietors may

introduce additional capital and withdraw some amounts from business

over a period of time! 0wner$s capital is also called #net worth$! -et worth

is the total fund of proprietors on a particulars date! It consists of capital,

profits and interest on capital sub>ect to reduction of drawings and interest

on drawings!

In case of limited companies, capital refers to capital subscribed by

shareholders! -et worth refers to paid up euity capital plus reserves and profits,

minus losses!

92: Long ter8 Liabi$itie!1 3iabilities repayable after specific duration of long

period of time are called long term liabilities! "hey do not become due for

payment in the ordinary #operating cycle$ of business or within a short

period of lime! +*amples are long term loans and debentures! 3ong term

liabilities may be secured or unsecured, though usually they are secured!

9": Current $iabi$itie!7 3iabilities which are repayable during the operating

cycle of business, usually within a year, are called short term liabilities or

current liabilities! "hey are paid out of current assets or by the creation of

other current liabilities! +*amples of current liabilities are trade creditors,

bills payable, outstanding e*penses, ban overdraft, ta*es payable and

dividends payable!

94: Contingent $iabi$itie!7 Contingent liabilities will result into liabilities only

if certain events happen! +*amples are1

ills discounted and endorsed which may be dishonoured, unpaid calls on

investments!

,.( /R;ORMA O; <ALANCE 1EET

<a$ance 10eet a! on FFF

Liabi$itie! R!. A!!et! R!.




84

Ca#ita$ *** ;i-ed a!!et! ***

Add1 -et profit *** 6oodwill ***

Add1 Interest on capital *** 3and uildings ***

...... 3oose tools ***

3ess1 &rawing *** %urniture fi*tures ***3ess1 Int! on drawings *** ;ehicles ***

3ess1 3oss if any *** Patents ***

....... *** "rade mars ***

Long ter8 $iabi$itie! 3ong term loans (advances

)

***

3oan on mortgage *** In+e!t8ent!

Current a!!et!

an loan *** Closing stoc ***

Current $iabi$itie! 8undry debtors ***8undry creditors *** ills receivable ***

ills payable *** Prepaid e*penses ***

an overdraft *** Accrued incomes ***

Creditors for outstanding e*p! *** Cash at ban ***

Income received in advance *** Cash in hand

;ictitiou! a!!et!

***

Preliminary e*penses ***

Advertisement e*penses ***

Hnderwriting commission ***

&iscount on issue of shares ***

&iscount on issue of

debentures

***

*** ***

C0ec 'our #rogre!! ,

3ist out any five classification of assets



4?)!

MMMMMMMMMMMMMMMMMMMMMMMMMMM

M


M


M





85


,.) ILLU1TRATION1

I$$u!tration

%rom the following ad>ustment "rial alance, Prepare alance 8heet of

8aravanan "raders as at @4st &ecember ?KK! Tria$ ba$ance

&r! ('s!) Cr! ('s!)

Capital . ?,BK,KKK

Cash in hand K,KKK .

Cash at ban @K,KKK .

Closing stoc ?K,KKK .

%i*ed assets less depreciation ('s!?K,KKK) 4,EK,KKK .

ills payable ?4,KKK .

8undry debtors . ?,KKK

8undry creditors B?,KKK .

3iabilities for e*penses . ?B,KKK

&rawings . 4K,KKK

Investments 4?,KKK .

P3 AGc 4B,KKK .

an overdraft . DK,KKK

. 4@,KKK@,DK,KKK @,DK,KKK

1o$ution

1ara+anan Trader!

<a$ance 10eet a! on "!t Dece8ber 24

Liabi$itie! R!. A!!et! R!.

Capital ?,BK,KKK %i*ed assets ?,KK,KKK

Add 1 -et profit DK,KKK 3ess1 &epn! ?K,KKK

4,EK,KKK

3ess1 &rawings @,?K,KKK Investments 4B,KKK

4?,KKK Closing stoc ?K,KKK@,KE,KKK 8undry

debtors

B?,KKK

ills payable ?,KKK ills

receivable

?4,KKK

8undry creditors ?B,KKK Cash at ban @K,KKK

3iabilities for

e*penses

4K,KKK Cash in hand K,KKK

an overdraft 4@,KKK

@,BE,KKK @,BE,KKK




86

I$$u!tration! 2

"he reserve for doubtful debts account showed a credit balance of 's!4,BKK

on 4!4!JK! &uring 4JJK, bad debts amounted to 's!4,4KK! "he debtors on @4!4?!JK

owed 's!K,KKK! /aintain a B reserve for doubtful debts! &uring 4JJ4, bad debts

came to 's!EKK! 0n @4!4?!J4 the debtors owed 's!,KKK! "he bad debts in 4JJ?

amounted to 's!KK! 0n @4!4?!J?, the debtors owed 's!@?,KKK! "he same Breserve for doubtful debts is maintained in all the years! Pass necessary >ournals and

ledger accounts!

1o$ution

=ourna$ Entrie!

&ate Particulars 's! 's!

4JJK ad debts AGc &r! 4,4KK

&ec!@4 "o 8undry debtors AGc

Seing bad debts written offT

4,4KK

Prov! %or doubtful debts AGc &r! 4,4KK

"o ad debts AGc

Seing bad debts transferredT

4,4KK

Profit 3oss AGc &r! 4,KK

"o Provision for doubtful debts AGc

Seing amount transferred to P3 AGc

4,KK

4JJ4 ad debts AGc &r! EKK

&ec!@4 "o 8undry debtors AGc

Seing bad debts written offT

EKK

Prov! for doubtful debts AGc &r! EKK

"o ad debts AGc

Seing bad debts transferredT

EKK

Profit 3oss AGc &r! 4,KKK

"o Provision for doubtful debts AGc

Seing amount transferred to P 3 AGc

4,KKK

4JJ? ad debts AGc &r! KK

&ec!@4 "o 8undry debtors AGcSeing bad debts written offT

KK

Prov! for doubtful debts AGc &r! KK

"o ad debts AGc

Seing bad debts AGcT

KK

Prov! for doubtful debts AGc &r! @KK




87

"o Profit 3oss AGc

Seing e*cess reserve credited to P3 AGcT

<ad debt! Ac

@KK

's! 's!

4JJK 4JJK

&ec!@4 "o 8undry &ebtors 4,4KK &ec!@4 y Prov! for

doubtful debts

4JJ4 4JJ4

4,4KK

&ec!@4 "o 8undry &ebtors EKK &ec!@4 y Prov! for

doubtful debts

4JJ? 4JJ?

EKK

&ec!@4 "o 8undry &ebtors KK Fan 4 alance bGd KK

/ro+i!ion for doubtfu$ debt! Ac

's! 's!

4JJK "o ad debts 4,4KK 4JJK y alance bGd 4,BKK

&ec!@4 "o alance cGd ?,KKK &ec!@4 y P3 AGc 4,KK

@,4KK @,4KK

4JJ4 4JJ4

&ec!@4 "o ad debts"o alance cGd

EKK?,?KK Fan!@4 y alance bGd y P3 AGc

?,KKK4,KKK

@,KKK @,KKK

4JJ? 4JJ?

&ec!@4 "o ad debts

"o P3 AGc

"o alance cGd

KK

@KK

4,BKK

Fan 4 alance bGd ?,?KK

I$$u!tration %"

?,?KK ?,?KK

"he sundry debtors of a firm on 4st &ecember 4JED were 's!K,KKK! 0n that

date it was decided to create a provision for discount at ? on debtors ! &uring 4JEE

the actual amount of discount allowed was 's!KK! "he debtors on @4st &ecember

4JEE were 's@K,KKK and it is again decided to create a provision for discount on

debtors at ?! 8how the >ournal entries, discount AGc and provision for discount AGc

for both the year!

1o$ution

=ourna$ Entrie!




88

&ate Particulars 's! 's!

4JED Profit loss &r! EKK

&ec!@4 "o 'es! %or discount on debtors AGc

Seing ? reserve created on 's!K,KKKT

EKK

4JEE &iscount AGc &r! KK&ec!@4 "o 8undry debtors AGc

Seing the discount allowed to debtorsT

KK

'eserve for discount on debtors AGc &r! KK

"o &iscount AGc

Seing the transfer madeT

KK

Profit 3oss AGc &r! ?KK

"o 'es! %or discount on debtors AGc

Seing the provision createdT

?KK

Re!er+e for di!count on debtor! AcR!. R!.

4JED 4JED

&ec! @4 "o alance cGd EKK &ec!@4 y P3 AGc EKK

EKK EKK

4JJE 4JEE

&ec!@4 "o &iscount KK Fan 4 y alance bGd EKK

"o alance cGd KK &ec!@4 y P3 AGc ?KK

4,KKK

Di!count Ac

4,KKK

's! 's!

4JJE 4JEE

&ec!@4 "o 8undry &ebtors KK &ec!@4 y 'es! %or doubtful KK

debts

KK KK

I$$u!tration H 4

A from maintains a reserve for discount on creditors at ?! "he balance of

reserve for discount on creditors stood at 's!@KK on 4 st Fanuary 4JED! "otal creditors

at the end of 4JED and 4JEE were 's!4K,KKK and 's J,KKK respectively! &iscount

received during each of the years amounted to 's!?BK and 's!4KK respectively! 9rite

up the reserve aGc for the two years!

1o$ution

Re!er+e for di!count on creditor! Ac



'r.

s.

r.

s.


8

's! 's!

4JED

Fan!4 "o alance bGd @KK &ec!@4 y &iscount ?BK

received

&ec!@4 "o P3 AGc 4BK &ec!@4 y alance cGd ?KK

BK BK

4JEE 4JEE

Fan!4 "o alance bGd ?KK Fan 4 y &iscount received 4KK

&ec!@4 "o P3 AGc EK &ec!@4 y alance cGd 4EK

?EK ?EK

I$$u!tration %&%rom the following ad>usted "rial alance, prepared after "rading and Profit

3oss Accounts are drafted, prepare alance 8heet of 'amagopalan as at @4st

&ecember 4JJ! Hnder!

(a) Permanency order and (b) 3iuidity order!

Capital . 4,KK,KKK

Closing 8toc K,KKK .

%i*ed Assets less depreciation 's!4,KKK D?,KKK .

8undry &ebtors 4,KK,KKK .

Provision for ad debts . B,KKK

Profit 3oss Account . ?,KKK

8undry Creditors . EK,KKK

3iabilities for e*penses . 44,KKK

&rawings ,KKK

Cash an ?K,KKK

?,@E,KKK ?,@E,KKK

1o$ution

(a) Permanency 0rder1.

<a$ance 10eet of Ra8ago#a$an a! on "%2%,(

3iabilities 's! Assets 's!

Capital opening bal! 4,KK,KKK %i*ed Assets EE,KK

Add1 -et Profit ?,KKK 3ess1 &epreciation 4,KKK




"

4,?,KKK 8toc

3ess1 &rawing ,KKK 4,@,KK &ebtors 4,KK,KKK

8undry Creditors EK,KKK 3ess1 Provision for

ad debts

B,KKK JB,KKK

3iabilities for e*penses 44,KKK Cash an ?K,KKK

?,?D,KKK ?,?D,KKK

(b) Li6uidit' Order7

<a$ance 10eet of Ra8ago#a$an a! on "%2%,(


3iabilities for e*penses 44,KKK Cash an ?K,KKK

8undry Creditors EK,KKK &ebtors 4,KK,KKK

Capital AGc 3ess1 Provision for

ad debts B,KKK JB,KKK

0pening alance1 4,KK,KKK 8toc K,KKK

Add1 -et Profit ?,KKK %i*ed Assets EE,KKK

4,?,KKK 3ess1 &epreciation 4,KKK D?,KKK

3ess1 &rawings ,KKK 4,@,KKK

?,?D,KKK ?,?D,KKK

,.* AD=U1TMENT1

0n preparing "rading and profit and 3oss Account, ad>ustments re necessary

when accrual basis of accounting is followed! "he following are the items for which

ad>ustments are usually reuired!

. C$o!ing 1toc

"his is the stoc which remained unsold in the preceding accounting period!

C$o!ing !toc Ac Dr.

To Trading Ac

Trading Ac <a$ance 10eet

<' C$o!ing !toc C$o!ing !toc

2. Out!tanding E-#en!e!

0utstanding e*penses refer to those e*penses which have become due during

the accounting period for which the final accounts have been preared, but have not

yet been paid!

E-#en!e! Ac Dr




!

To Out!tanding e-#en!e! Ac


"o 9ages 0G8 wages

(<) 0Gs wages

/ @ L Ac <a$ance 10eet

"o 8alary 0G8 wages

(<) 0Gs wages

". /re#aid E-#en!e!

Prepaid e*penses are the e*penses the benefit of which has not been fully

en>oyed before the end of the accounting year! "hey are e*penses paid in advance or

une*pired e*penses!

/re#aid e-#en!e Ac Dr

To E-#en!e! Ac


"o Insurance Prepaid insurance

(.) Prepaid Ins!

4. Inco8e Earned but not recei+ed 9Out!tanding or accrued inco8e:

It may often happen that certain items of income such s interest on

investments, commission etc! are earned during the current accounting year, but

have not been actually received by the end of the same year! 8uch incomes are

nown as outstanding or accrued incomes! Accrued Inco8e Ac Dr

To Inco8e Ac

/@L Ac <a$ance 10eet

y interest Accrued interest

(<) Accrued int!

&. Inco8e recei+ed in ad+ance

8ometimes a portion of income received during the current year relate to thefuture period! 8uch portion of the income which belong to the ne*t accounting period

is income received in advance and is nown as une*pired income!

Inco8e Ac Dr

To Inco8e recei+ed in ad+ance Ac




", ent recei-ed

() ecei-ed in

ad-ance

'ebtors

() "ad debts


2

'ent

received in advance

(. De#reciation

&epreciation is the decreased in the value of an asset due to wear and tear, passage of time, obsolescence etc! It is a business e*penses, though it is not paid in

cash every year! It is to be debited to profit and loss account and the amount be

deducted from the relevant asset in the alance 8heet!

If depreciation is given in the "rial alance, it is taen only on the debit side

of Profit and 3oss Account as its ad>ustment is over! De#reciation Ac Dr.

To Concerned A!!et! Ac


"o &ep! 0n /achinery

machinery (.) &epreciation

). <ad Debt!

Any irrecoverable portion of sundry debtors is termed as bad debt! ad debt

is a loss to the business! If is given in the "rial alance, it should be shown on the

debit side of Profit and 3oss Account! ad debts given in the ad>ustment is to be

deducted from sundry debtors in the alance 8heet and the same is debited to the

Profit and 3oss Account!

<ad debt! Ac Dr.

To 1undr' Debtor! Ac


"o ad debts

*. /ro+i!ion for doubtfu$ debt!

It is a provision created to meet any loss, if the debtors fail to pay the whole

or part of the debt owed by them! "he amount reuired for doubtful debt is ept bychanging the amount to the profit and loss account!

/rofit and Lo!! Ac Dr

To /ro+i!ion for doubtfu$ debt! Ac


"o Provision for doubtful

debts

&ebtors

(.) ad debts(.) Provision for

double debts



o Interest on

capital


3

,. /ro+i!ion for di!count on debtor!

8ometimes the goods are sold on credit to customers in one accounting period

whereas the payment of the same is received in the ne*t accounting period and

discount is to be allowed!

/rofit and Lo!! Ac Dr.

To /ro+i!ion for di!count on debtor! Ac


"o Provision for

discount on

debtors

&ebtors

(.) ad debts

(.) Provision for

double

debts (.)

&iscount on

debtors

. Re!er+e for di!count on creditor!

Prompt payment, if made, enables a business man to receive discount! 8o on

last day of accounting period if some amount is still payable to creditors, a provision

should be created for such probable income and the amount should be credited to the

profit and loss account of that year in which purchases are made! Re!er+e for

di!count on creditor! Ac Dr.

To /rofit and Lo!! Ac


y Provision

for discountcreditors

Creditors (.)

Provisionfor discount

on creditors

. Intere!t on ca#ita$

8ometimes interest is paid on the proprietor$s capital! 8uch interest is an e*pense

to the business and is debited to profit and 3oss Account!

Interest on capital A/c

Dr To Ca#ita$ Ac

/@L Ac <a$ance 10eetCapital

(<)

Interest

on

Capital

2. Intere!t on Dra3ing!




4

0ften, interest is charged on drawings made by the proprietor! It is a gain to the

business!

Dra3ing! Ac Dr

To Intere!t on dra3ing! Ac

/@L Ac <a$ance !0eet

"o InterestCa#ita$

on drawings (<) Interest on

Capital

(.) Interest on

". Tran!fer to Re!er+e drawings

'eserves save a business from future losses and meet the losses without

reduction in capital! "he reserves are appropriation of profits and are created only in

the year when there are profits! /rofit and Ac Dr

To Re!er+e Ac


"o -ew reserve 'eserve

(<) -ew

reserve

4. Co88i!!ion on /rofit

"he Commission as a percentage of the net profit may be #before$ or #after$

charging such commission! In the absence of any special instruction, it is assumed

that commission is allowed as a percentage of the net profit before charging suchcommission!

a) If the commission is on the net profit before charging such commission, the

formula is!

Profit before * 'ate of commission

4KK

%or e*ample, if profit is 's!??,KKK and rate of commission is 4K on the profit

before charging such commission, the calculation is as follow1

4K

Commission 2 ??,KKK * 2 ?,?KK

4KK

b) If the commission is on the net profit after charging such commission, the

amount is calculated as follows1

'ate

Commission 2 Profit *




5

(4KK<rate)

Commission as per above e*ample 2 ??,KKK *4K

44K

2 's!?,KKK

Manager>! Co88i!!ion Ac Dr.

To Out!tanding co88i!!ion Ac


"o 0utstanding 0utstanding commission Commission

&. Lo!! of good! b' fire or accident!

a) 8uch losses are abnormal losses! 8toc destroyed by fire or accidents is

credited to the "rading Account!Lo!! of !toc Ac Dr

To Trading Ac


y 3oss by fire Insurance claims

"he loss of stoc is closed by transferring the amount to Profit and 3ossAccount!

b) If the loss is fully covered by insurance, no portion of the loss is debiting to

the Profit and 3oss Account! "he amount due by Insurance Company is

shown as an asset in the alance 8heet!

In!urance Co8#an' Ac Dr

To Lo!! of 1toc Ac

c) If the Insurance Company agree to pay only a part of the loss, the position

of loss not covered by insurance is debited to Profit and 3oss Account and

the amount due by the Insurance Company is shown as an assets in the

alance 8heet! In!urance Co8#an' Ac Dr

/rofit and Lo!! Ac Dr

To Lo!! of !toc Ac

(. Good! dra3n for #er!ona$ u!e

If goods are drawn by the proprietor for the personal use or domestic

purpose, the cost of such goods drawn is deducted from purchase account and the

same is added to his drawings!



o /urchases

() 'rawin0s


6

Dra3ing Ac Dr

To /urc0a!e Ac


Capital

(.) &rawings

"he amount of such drawings can not be treated as sales, as the goods are not

drawn at selling price!

). Good! u!ed in office fro8 #urc0a!e!

In certain trading concern, good bought for trading purpose are used in the

office! "he cost of such goods used is to be deducted form purchases and added to

printing and stationery or office e*pense!/rinting and 1tationer' Ac Dr

or

Office e-#en!e! Ac Dr

To /urc0a!e! Ac

*. Good! !ent on !a$e or return ba!i!

"he sales value of such goods if included in the total sales should be

deducted from sales and debtors! "he entry for the same is1 1a$e

Return Ac Dr

or 1a$e Ac Dr

To Debtor!

,. Good! di!tributed a! free !a8#$e!

It may be debited in the goods sent as free samples or Advertisement account

and credited to Purchases Account!

Good! !ent a! free !a8#$e Ac Dr

To /urc0a!e! Ac

,., /re#aration of ;ina$ Account!

9Trading and /rofit @ $o!! ac and <a$ance !0eet:

I$$u!tration (

"he following balances are drawn from the boos of /Gs Arvind /ills as on @4.

4?.4JJD!

Account Amount Account Amount

's 's!



/articulars s. /articulars s


7

3and 4,KK,KKK 8ales @,KK,KKK

uilding ?,KK,KKK Purchases 4,DB,KKK

8ales returns 4K,KKK 8toc (4.4.JD) ?B,KKK

Purchase returns B,KKK &ebtors BK,KKK

an overdraft 4B,KKK Cash in hand B,KKK

Creditors ?K,KKK 8alaries 4K,KKK

9ages 4?,KKK 6oodwill 4B,KKK

6eneral e*penses B,KKK 8elling e*penses 4?,KKK

ad debts 4,KKK Insurance 4,KKK

Capital ?,E4,KKK

Ad?u!t8ent!7

(a) Closing stoc is 's!@K,KKK

(b) Provide for depreciation U 4K on buildings!

(c) 9rite off further bad debts = 's! 4,KKK

(d) 8alaries yet to be paid. 's! @,KKK

Oou are reuired to prepare a trading and profit loss aGc and balance sheet of

/Gs Arvind /ills!

1o$ution7

Trading and /rofit and Lo!! account of M!. Ar+ind Mi$$! for t0e 'ear ended "%

2%,).

&r!

"o 0pening stoc ?B,KKK y 8ales @,KK,KKK

"o Purchases 4,DB,KKK 3ess1 'eturns 4K,KKK ?,JK,KKK

3ess1 'eturns B,KKK 4,DK,KKK y Closing stoc @K,KKK

"o 9ages 4?,KKK

"o 6ross profit cGd 4,4@,KKK

@,?K,KKK @,?K,KKK

"o 6eneral e*penses B,KKK y 6ross Profit bGd 4,4@,KKK

"o ad debts1 0ld 4,KKK

-ew 4,KKK ?,KKK

"o 8alaries 4K,KKK

Add1 0utstanding @,KKK 4@,KKK



/articulars 'ebit

s.

redit

s.


8

"o Insurance 4,KKK

"o &epreciation on uilding

(?,KK,KKK * 4K )

?K,KKK

"o 8elling e*penses 4?,KKK

"o -et profit, transferred tocapital AGc

K,KKK

4,4@,KKK 4,4@,KKK

<a$ance !0eet of M!. Ar+ind Mi$$! a! on "%2%,,).

3iabilities 's! 's! Assets 's! 's

an overdraft 4B,KKK Cash on hand

Creditors ?K,KKK &ebtors BK,KKK

B,KKK

0utstanding salaries @,KKK 3ess1 ad debts written 4,KKK

off!

J,KKK

Capital ?,E4,KKK Closing stoc

Add1 -et profit K,KKK @,4,KKK uilding ?,KK,KKK

@K,KKK

3ess1 &epreciation at 4K ?K,KKK 4,EK,KKK

3and 4,KK,KKK

6oodwill 4B,KKK

@,DJ,KKK @,DJ,KKK

I$$u!tration %)

"he following is the "rial balance as on @4st &ecember 4JJ? e*tracted from the

boos of /r! 8hanthi

%reehold 3and @B,KKK

/ortgage 3oan ?K,KKK

Plant and /achinery B,BKK

3oose tools 4!4!J? B,KK

ills payable @,KK

oo debts 4E,?KK

8ales 4,?4,BKK

Cash at ban 44,KKK




8toc 4!4!4JJ? 4K,BKK

Insurance @KK

ad debts BK

8undry creditors 4B,KK

ills 'eceivable B,KK

Purchases BK,KKK

Cash on hand K

'ent, 'ates, etc! 4,@KK

Interest ?BK

9ages 4K,DKK

"rade e*penses 4BK

8alary 4,BK

'epairs to plant EDB

Carriage Inwards @BK

&iscount ?JK 4DB

8atish$s capital K,KKK

&rawings ?,BKK

?,KK,DB ?,KK,DBPrepare trading and profit and loss account and balance sheet after maing

the following ad>ustment1 Provision for doubtful debts at B on boo debts5 Interest

on capital at B une*pired insurance premium 's!JK5 'ent outstanding on @4.4?.J?

's!

@KK5 3oose tools revalued at 's!,BKK, Closing stoc 's!@K,KKK!

1o$ution

Trading and /rofit and Lo!! Ac of Mr.1ati!0

;or t0e 'ear ended "!t Dece8ber ,,2

&r! Cr!

Particulars 's! Particulars 's!"o 0pening stoc 4K,BKK y 8ales 4,?4,BKK

"o Purchases BK,KKK y Closing stoc @K,KKK

"o 9ages 4K,DKK

"o Carriage inwards @BK

"o 6ross profit cGd DJ,JBK

4,B4,BKK 4,B4,BKK

"o Insurance @KK y 6ross profit bGd DJ,JBK

3ess1 Hne*pired JK ?4K y &iscount 4DB

"o ad debts BK



%iabilities s. $ssets


!""

Add1 Provision for doubtful debts J4K 4DK

"o 'ent 'ates 4,@KK

Add1 0utstanding @KK 4,KK

"o Interest ?BK

"o "rade e*penses 4BK

"o 8alary 4,BK

"o 'epairs to plant EDB

"o &iscount ?JK

"o Interest on capital

(K,KK * B)

?,KKK

"o &epreciation on 3oose tools 4,4KK

"o -et profit, transferred to

capital AGc

DK,?K

EK,4?B EK,4?B

Note 7 3oose tools are generally revalued at the end of accounting year! "hey are the

low value tools and implements lie spanners, screw drivers etc! "he difference

between closing value of loose tools and their opening value is to be treated asdepreciation! ('evaluation method of depreciation)

<a$ance !0eet of Mr. 1ati!0 a! on "%2%,,2

ills payable @,KK Cash at an 44,KKK

8undry creditors 4B,KK Cash on hand K

0utstanding rent @KK oo debts 4E,?KK

/ortgage loan ?K,KKK 3ess1 Provision for

doubtful debts J4K 4D,?JK

Capital K,KKK ills receivable B,KK

Add1 -et profit DK,?K Closing stoc @K,KKK

Add1 Interest on capital ?,KKK Prepaid insurance JK

4,4?,?K 3oose tools B,KK

3ess1 &rawings ?,BKK 4,4K,4?K 3ess1 &epreciation 4,4KK ,BKK

Plant and machinery B,BKK

%reehold land @B,KKK

4,J,?K 4,J,?K

-ote 1 Prepaid Insurance and une*pired insurance are both one and the same!

I$$u!tration *

"he following "rial alance is e*tracted from the boos of a merchant on @4 st

&ecember 4JEJ!



/articulars'ebit

s.

redit

s.


!"!

%urniture and fittings K

/otor vehicles ,?BK

uildings D,BKK

Capital 4?,BKK

ad debts 4?B

Provision for bad debts ?KK

8undry debtors and creditors @,EKK ?,BKK

8toc on Fanuary 4, 4JEJ @,K

Purchases and sales B,DB 4B,BK

an overdraft ?,EBK

8ales and purchase returns ?KK 4?B

Advertising BK

Interest 44E

Commission @DB

Cash BK

"a*es and insurance 4,?BK 6eneral e*penses

DE?

8alaries @,@KK

@,KKK @,KKK

"he following ad>ustment are to be made1

(a) 8toc in hand on @4st &ecember 4JEJ was 's!@,?BK!

(b) &epreciate buildings U B, furniture and fittings U 4K and motor

vehicles U ?K!

(c) 's!EB is due for interest on ban overdraft!(d) 8alaries 's!@KK and ta*es 's!4?K are outstanding!

(e) Insurance amounting to 's!4KK is prepaid!

(f) 0ne.third of the commission received is in respect of wor to be done ne*t

year!

(g) 9rite off a further 's!4KK as bad debts and provision for bad debts is to be

made at B on sundry debtors!

(h) Purchases included purchase of furniture 's!?KK, on Fanuary 4, 4JEJ!




!"2

Prepare a trading and profit and loss AGc for the year ending @4 st &ecember 4JEJ

and a balance sheet as on that date!

1o$ution7

Trading and #rofit and Lo!! Ac for t0e 'ear ended "!t Dece8ber,*,.


"o 0pening stoc @,K y 8ales 4B,BK

"o Purchases B,DB 3ess1 8ales returns ?KK 4B,?BK

3ess1 Purchase returns 4?B y Closing stoc @,?BK

B,@BK

3ess1 Purchase of furniture ?KK B,4BK

"o 6ross profit cGd J,EJK

4E,BKK 4E,BKK

"o Advertising BK y 6ross profit bGd J,EJK

"o Interest 44E y Commission @DB

Add1 0utstanding EB ?K@ 3ess1 'eceived in advance 4?B ?BK

"o ad debts 4?B

Add1 -ew ad debts 4KK

Add1 Provision reuired 4EB

(@,EKK = 4KK) * B

4K

3ess1 +*isting provision ?KK ?4K

"o "a*es and insurance 4,?BK

3ess1 Insurance prepaid 4KK

4,4BK

Add1 "a*es outstanding 4?K 4,?DK

"o &epreciation1

uildings (D,BKK * B) @DB

%urniture * (K<?KK)4K E

/otor vehicles (,?BK*?K) 4,?BK 4,DKJ

"o 6eneral e*penses DE?

"o 8alaries @,@KK






!"4

Carriage in ?,KKK 9ages outstanding ?,KKK

Carriage out @,KKK 'ent received 4,KKK

&epreciation on Plant ,KKK 'eserve for doubtful

debts

4,KKK

Plant account ?K,KKK Interest (Cr) B,KKK

8alaries wages @,KKK 8undry creditors ,KKK

ad debts ?,KKK 3oans @E,KKK

Premises ?K,KKK

Interest B,KKK

8toc 4!!JB ?B,KKK

8undry debtors 4B,KKK

4,,KKK 4,,KKK

Ad>ustment1

(a) 8toc on @[email protected] was 's!K,KKK! A fire broe.out in the godown and destroyed

stoc worth 's!B,KKK! Insurance company had accepted the claim in full!

(b) Provide for bad debts U 4K and provide for discount on debtors U B and

on creditors U 4K

(c) &epreciate buildings at the rate of 4B p!a!

(d) 'ent outstanding amounted to 's!4,KKK

(e) Closing stoc includes samples worth of 's!?,KKK!

(f) Provide interest on drawings U 4K and on capital U 4K!

1o$ution7

Trading and #rofit and $o!! account for t0e 'ear ending "!t Marc0 ,,(

Particulars 's! 's! Particulars 's! 's!

"o 0pening stoc ?B,KKK y 8ales K,KKK

"o purchases @K,KKK 3ess1 'eturns B,KKK BB,KKK

3ess1 purchase returns 4,KKK y Closing stoc @E,KKK

?J,KKK y 8toc destroyed by fire B,KKK

3ess1 8ample ?,KKK ?D,KKK

"o Carriage inwards ?,KKK

"o 6ross Profit CGd ,KKK

JE,KKK JE,KKK

"o 8alaries 9ages @,KKK y 6ross profit bGd ,KKK

"o 'ent outstanding 4,KKK y 'ent received 4,KKK




!"5

"o Carriage outwards @,KKK y Interest B,KKK

"o ad debts ?,KKK y Provision of discount

creditors ,KKK * 4K KK

Add1 -ew provision for bad

debts (4B,KKK *

4K)

3ess1 +*isting provision

4,BKK

@,BKK

y Interest on drawings

(4K,KKK * 4K)

4,KKK

for bad bets

"o Provision for discount

on debtors

4,KKK ?,BKK

(4B,KKK.4,BKK) * B DB

Interest

"o &epreciation1

B,KKK

Plant ,KKK

uilding (?K,KKK*4B) @,KKK D,KKK

"o Interest on capital

"o -et profit, transferred

to capital

@,KKK

account! ?,?B

B4,KK B4,KK

Note7

(4) Premises include 3and and uildings, 8o, depreciation on uildings applies to

premises!(?) 8toc destroyed by fire is credited to trading aGc and claim is shown as an asset!

(@) &epreciation on plant given in "rial balance is assumed to be current year$s

depreciation!

() 8amples included in closing stoc should be separated from stoc by reducing

from stoc! 8o, effective closing stoc is only 's!@E,KKK!

"he samples should be reduced from purchases because they are not meant

for sale! 8ince they are not yet distributed, they appear on assets side of balance

sheet! Ad>ustment entry is1

8amples AGc &r?,?KK

"o purchases AGc ?KKK

<a$ance !0eet a! on ".".,,(


8undry creditors ,KKK &ebtors 4B,KKK

3ess1 Provision for

discount KK

3ess1 Provision for bad

debts 4,BKK

B,KK 4@,BKK



'ebit

s.

redit

s.


!"6

3oans @E,KKK

9ages outstanding

'ent outstanding

?,KKK

4,KKK

3ess1 Provision for

discount on debtorsDB

4?,E?B

Capital @K,KKK Closing stoc @E,KKK

Add1 -et profit ?,?B 8amples in stoc ?,KKK

Add1 Interest on capital @,KKK Insurance claim'eceivable

B,KKK

BJ,?B Plant ?K,KKK

3ess1 Interest on drawings 4,KKK Premises ?K,KKK

BE,?B 3ess1 &epreciation @,KKK 4D,KKK

3ess1 &rawings 4K,KKK

E,?B

I$$u!tration %

J,E?B J,E?B

"he following is the "rial balance of !6opal on @Kth

Fune 4JE41

Cash in hand BK

Cash at ban ?,@K

Purchases account K,DB

8ales account JE,DEK

'eturns inward account EK

'eturns outward account BKK

9ages account 4K,EK

%uel and Power AGc ,D@K

Carriage on 8ales AGc @,?KK

Carriage on Purchases AGc ?,KK

8toc Account (4st Fuly, 4JEK) B,DK

uildings Account @K,KKK

%reehold 3and AGc 4K,KKK

/achinery AGc ?K,KKK

Patents AGc D,BKK8alaries Account 4B,KKK

6eneral e*penses AGc @,KKK

Insurance Account KK

&rawings Account B,?B

Capital account D4,KKK

8undry debtors AGc 4,BKK

8undry creditors AGc ,@KK




!"7

4,D,BEK 4,D,BEK

"aing into account the following ad>ustments prepare "rading and Profit 3oss

account and the balance sheet1

(a) 8toc on hand @Kth Fune, 4JE4 is 's!,EKK!/achinery is to be depreciated at the rate

of 4K and patents at the rate of ?K!(b) 8alaries for the month of Fune 4JE4 amount to 's!4,BKK were unpaid!

(c) Insurance includes a premium of 's! 4DK on a policy e*piring on @4st &ecember,

4JE4!

(d) 9ages include a sum of 's!?,KKK spent on the creation of a cycle shed for

employees and customers!

(e) A provision for bad and doubtful debts is to be created to the e*tent of B on

sundry debtors!

1o$ution7

Trading and #rofit and Lo!! Account of Go#a$

for t0e 'ear ended "t0 =une ,*.

&r! Cr!


"o 0pening stoc B,DK y 8ales JE,DEK

"o Purchase K,DB 3ess1 8ales returns EK

3ess1 Purchase returns BKK K,4DB y Closing stoc JE,4KK

"o Carriage on purchases ?,KK ,EKK

"o 9age

3ess1 9ages for erection

4K,EK

of cycle shed ?,KKK E,EK

"o %uel and power ,D@K

"o 6ross profit bGd @,D4B

4,K,JKK 4,K,JKK

"o Carriage on sales @,?KK y 6ross profit bGd @,D4B

"o 8alaries 4B,KKK

Add1 0utstanding 4,BKK 4,BKK

"o 6eneral e*penses @,KKK

"o Insurance KK

3ess1 Prepaid 4DK * G4?

"o &epreciation1

/achinery

EB B4B

?K,KKK * 4K ?,KKK

Patents D!BKK * ?K 4,BKK @,BKK

"o Provision for doubtful

debts (4,BKK * B)

D?B






!"

6eneral e*penses @,KKK .

&ebtors and Creditors 4,BKK ,@KK

%urniture D,BKK .

Plant machinery ?K,KKK .

uilding K,KKK .

8toc (4.D.?KKK) B,EKK .

Carriage inwards ?,KKK .

Carriage outwards @,?KK .

8alary wages 4B,KKK .

Power fuel ,KKK .

Productive wages 4K,BKK .

'eturns KK BKK

Purchases and 8ales 4,KKK JE,EKK

Cash in hand at ban @,JKK .

6anesh$s capital . D4,KKK

4,D,KK 4,D,KK

Ad>ustment1

(i) 8toc on @K..?KK4 was valued at 's!D,KKK!

(ii) Charge B interest on drawings!

(iii) 6oods purchased worth 's!B,KKK were received and included in closing stoc but were not entered in purchases boo!

(iv)Prepaid insurance amounted to 's!4DK!

(v) 8alaries and advertisement bill are outstanding to the e*tent of 's!BKK and

's!4,KKK respectively!

(vi)uilding, /achinery and %urniture are to be depreciated by 's!?,KKK, 's!@,KKK

and 's!4,BKK respectively!

! "he following is the trial balance of /r!Palani as on @[email protected], prepare final accounts

as on that date!

Tria$ <a$ance a! on "%2%2&r Cr

's! 's!

Capital . 4,KK,KKK uilding 4B,KKK .

&rawing 4E,KKK .

%urniture D,BKK .

/otor car ?B,KKK .

3oan from O U 4? interest . 4B,KKK Interest paid on above JKK .




!!"

8ales . 4,KK,KKK

Purchase DB,KKK

0pening stoc ?B,KKK

8undry e*penses 4B,KKK

9ages ?,KKK

Insurance 4,KKK

Commission received . D,BKK

&ebtors ?E,4KK .

an balance ?K,KKK .

Creditors . 4K,KKK

?,@?,BKK ?,@?,BKK

Ad>ustment1

(i) Closing stoc 's!@?,KKK5(ii) 0utstanding wages 's!BKK5

(iii) Prepaid insurance 's!@KK5

(iv)Commission received in advance 's!EKK5

(v) Interest on capital 4K5

(vi)&epreciate5 buildings ?4G?5 furniture and fittings 4K5 motor van 4K5 (vii) Interest on

drawings 's!BKK!

B! "he following balance were taen from the boos of 8hri! 'am Prasas on @4.@.

4JJ!

's! 's!

Capital 4,KK,KKK 'ent (Cr) ?,4KK

&rawings 4D,KK 'ailway freight and other

e*penses on good sold 4,JK

Purchases EK,KKK Carriage inwards ?,@4K

8ales 4,K,@DK 0ffice e*penses 4,@K

Purchase returns ?,E?K Printing stationery K

0pening stoc 44,K Postage telegrams E?K

ad debts 4,KK 8undry debtors ?,KDK

ad debts provision(4..JB) @,?K

8undry creditors 4E,J?K

'ates insurance 4,@KK Cash at ban 4?,KK

&iscount (Cr) 4JK Cash in hand ?,?4K

ills receivable 4,?K 0ffice furniture @,BKK

8ales returns ,?K 8alaries commission J,EDK

9ages ,?EK Additions to buildings D,KKK




!!!

uildings ?B,KKK

Prepare "rading and Profit and 3oss Account and alance 8heet as on @4st /arch

4JJ, after eeping in view the following ad>ustment1

(i) &epreciate old buildings at ?!B and new additions to buildings at ? and

office furniture at B!

(ii) 9rite off further bad debts at 's!BDK!(iii) Increase the bad debts provision at of debtors!

(iv)'s!BDK are outstanding salary!

(v) 'ent receivable 's!?KK!

(vi)Interest on capital at B!

(vii) 8toc on @[email protected] is valued at 's!4,?JK! (viii) Hne*pired insurance

's!?K!

,.2 CECB YOUR /ROGRE11 AN1ER

Oour answer may include any si* of the following

4! Assets ?! %i*ed assets @!Current assets !"angible assetsB! Intangible assets ! %ictitious assets

,." /OINT1 ;OR DI1CU11ION

4! 9hat are the classification of assets liabilities!

4@B

?! 6ive the Proforma of alance 8heet!

,.4 RE;ERENCE1

4! 6upta 'adhaswamy = Advanced Accountancy!

?! Fain -away = Advanced Accountancy!

@! 8hula 6rewal = Advanced Accountancy!




!!2

LE11ON CO1T ACCOUNTING

Content!7

. Ob?ecti+e!

.2 Introduction

." Definition of Co!t Co!ting Co!t Accounting and Co!t Accountanc'.4 1co#e of Co!t Accounting

.& Ob?ecti+e! of Co!t Accounting

4K!!4 Ascertainment of Cost

4K!!? %i*ation of 8elling Price

4K!!@ Cost Control

4K!! /atching Cost with 'evenue

4K!!B 8pecial Cost 8tudies and Investigations

4K!! Preparation of %inancial 8tatements, Profit and 3oss Account, alance

8heet

.& ;unction! of Co!t Accounting.( Ad+antage! of Co!t Accounting

4K!!4 7elps in decision maing

4K!!? 7elps in fi*ing prices

4K!!@ %ormulation of future plans

4K!! Avoidance of wastage

4K!!B 7ighlights causes

4K!! 'eward to efficiency

4K!!D Prevention of frauds

4K!!E Improvement in profitability

4K!!J Preparation of final accounts4K!!4K %acilitates control

.) Ob?ection! of Co!t Accounting

4K!D!4 Cost Accounting is costly to operate

4K!D!? Cost Accounting is unnecessary

4K!D!@ Cost Accounting involves many forms and statements

4K!D! Costing may not be applicable in all types of Industries

4K!D!B It is based on +stimations

.* C0aracteri!tic! of a good co!ting !'!te8

4K!E!4 8implicity

4K!E!? %le*ibility and Adaptability1

4K!E!@ +conomy

4K!E! Comparability

4K!E!B 8uitability to the %irms

4K!E! /inimum Changes to the +*isting one

4K!E!D Hniformity of %orms

4K!E!E 3ess Clerical 9or

4K!E!J +fficient /aterial Control and 9age 8ystem




!!3

4K!E!4K A 8ound Plan

4K!E!44 'econciliation

4K!E!4? 0verall +fficiency of Cost Accountant

., In!ta$$ation of a co!ting !'!te8

4K!J!4 &etermination of ob>ectives4K!J!? 8tudy of the nature of business

4K!J!@ 8tudy of the nature of the organization

4K!J! &eciding the structure of cost accounts

4K!J!B &etermination of cost rates

4K!J! 0rganization of the cost office

4K!J!D Introducing the system

. Co!t conce#t!

4K!4K!4 Cost Hnit

4K!4K!? Cost Centre

4K!4K!@ Profit Centre4K!4K! &istinguish between cost centre and profit centre

. Co!t contro$

.2 Co!t reduction

." Difference bet3een co!t contro$ and co!t reduction

.4 Let u! 1u8 U#

.& Le!!on%End Acti+itie!

.( C0ec 'our /rogre!!

.) /oint! for Di!cu!!ionJ

.* Reference!

.. AIM1 AND O<=ECTIE1

i)"o now the /eaning and &efinition of cost, costing and cost Accounting ii) "o

study the ob>ectives and functions of cost Accounting iii) "o study the importance

of cost Accounting iv) "o now the Characteristics of a good costing system v) "o

study the cost control and cost reduction vi) "o understand the meaning of cost unit,

cost centre and profit centre!

. INTRODUCTION

Industrialization and advent of factory system during the second half of 4J th Century

necessitating accurate cost information have led to the development of cost accounting! "he

growth of cost accounting was slow! "o uote +ldons 7andristen “-ot until the last ?K years

of the 4Jth Century was there much literature on the sub>ect of cost accounting in +ngland and

even very little was found in the Hnited 8tates! /ost of the literature until this time

emphasized the procedure for the calculation of prime costs only!




!!4

'apid development in cost accounting has taen place after 4J4 with the growth of

heavy industry and large scale production as a conseuence of %irst 9orld 9ar when cost

other than material and labour (overhead) constituted a significant portion of total cost!

"he development of cost accounting in India is of recent origin and it is given

importance after independence, when provision for Cost Audit under 8ec!?@@ of Companies

Act was made! ;ivian ose +nuiry Committee revealed the malpractices of manufacturingcompanies! It was felt that the financial audit falls short of e*pectations to reveal the

malpractices! "herefore, under the Companies Act, the government was given the power to

order for cost audit! "his has given impetus to the development of cost accounting in India!

.2 DE;INITION O; CO1T CO1TING CO1T ACCOUNTING AND CO1T

ACCOUNTANCY

Co!t7 "he term #cost$ has to be studied in relation to its purpose and conditions! As

per the definition by Institute of Cost and /anagement Accountants (I!C!/!A!), now nown as

Chartered Institute of /anagement Accountants (C!I!/!A!), 3ondon #cost$ is the amount of1

actual e*penditure incurred on a given thing!

Co!ting7 "he I!C!/!A!, 3ondon has defined costing as the ascertainment of costs! “It

refers to the techniues and processes of ascertaining costs and studies the principles and rules

concerning the determination of cost of products and services!

Co!t Accounting7 It is the method of accounting for cost! "he process of recording

and accounting for all the elements of cost is called cost accounting! I!C!/!A! has defined cost

accounting as follows1 “"he process of accounting for cost from the point at which

e*penditure is incurred or committed to the establishment of its ultimate relationship with cost

centers and cost units! In its widest usage it embraces the preparation of statistical data, the

application of cost control methods and the ascertainment of the profitability of activities

carried out or planned!

Co!t Accountanc'7 It is an aid to management for decision maing! I!C!/!A!, has

defined cost accountancy as follows1 “"he application of costing and cost accounting

principles, methods and techniues to the science, art and practice of cost control and the

ascertainment of profitability! It includes the presentation of information derived there from

for the purpose of managerial decision maing!

." 1CO/E O; CO1T ACCOUNTING

"he term scope here refers to filed of activity! Cost accounting is concerned with

ascertainment and control of costs! "he information provided to the management is helpful for

cost control and cost reduction through functions of planning, decision maing and control!

In the initial stages of evolution, cost accounting confined itself to cost ascertainment

and presentation of the same with the main ob>ective of finding the product cost! 9ith the

development of business activity and introduction of large scale production, the scope of cost

accounting was broadened and providing information for cost control and cost reduction has

assumed eual significance along with finding out cost of production!

In addition to enlargement of scope, the area of application of cost accounting has also

widened! Initially cost accounting was applied in manufacturing activities only! -ow, it is




!!5

applied in service organizations, government organizations, local authorities, farms, e*tractive

industries, etc!

.4 O<=ECTIE1 O; CO1T ACCOUNTING

.4. A!certain8ent of Co!t

It enables the management to ascertain the cost of product, >ob, contract, service or unitof production so as to develop cost standard! Costs may be ascertained, under different

circumstances, using one or more types of costing principles.standard costing, marginal

costing, uniform costing etc!

.4.2 ;i-ation of 1e$$ing /rice

Cost data are useful in the determination of selling price or uotations! Apart from

cost ascertainment, the cost accountant analyses the total cost into fi*ed and variable costs!

"his will help the management to fi* the selling price5 sometimes, below the total cost but

above the variable cost! "his will increase the volume of salesmore sales than previously, thus

leading to ma*imum profit!

.4." Co!t Contro$

"he ob>ect is to minimize the cost of manufacturing! Comparison of actual cost with

standards reveals the discrepancies. variances! It the variances are adverse, the management

enters into investigation so as to adopt corrective action immediately!

.4.4 Matc0ing Co!t 3it0 Re+enue

"he determination of profitability of each product, process, department etc! is the

important ob>ect of costing!

.4.& 1#ecia$ Co!t 1tudie! and In+e!tigation!

It undertaes special cost studies and investigations and these are the basis for the

management in decision.maing or policies! "his will also include pricing of new products,

contraction or e*pansion programmes, closing down or continuing a department, product mi*,

price reduction in depression etc!

.4.( /re#aration of ;inancia$ 1tate8ent! /rofit and Lo!! Account <a$ance

10eet

"o prepare these statements, the value of stoc, wor.in.progress, finished goods etc!,

are essential5 in the absence of the costing department, when we have to close the accounts it

rather taes too much time! ut a good system of costing facilitates the preparation of the

statements, as the figures are easily available5 they can be prepared monthly or even weely!

.&. ;UNCTION1 O; CO1T ACCOUNTINGAccording to locer and 9eltemer, “Cost Accounting is to serve management in the

e*ecution of polices and in comparison of actual and estimated results in order that the value

of each policy may be appraised and changed to meet the future conditions! "he main

functions of cost accounting are1

i) "o serve as a guide to price fi*ing of products!




!!6

ii) "o disclose sources of wastage in process of production! iii) "o reveal

sources of economy in production process!

iv) "o provide for an effective system of stores, materials etc!

v) "o e*ercise effective control on factors of production!

vi) "o ascertain the profitability of each product! vii) "o suggest management of future

e*pansion policies! viii) "o present and interpret data for management decisions!

i*) "o organize cost reduction programmes!

*) "o facilitate planning and control of business activity! *i) "o

supply timely information for various decisions! *ii) "o organize

the internal audit systems etc!

.(. ADANTAGE1 O; CO1T ACCOUNTING

.(. e$#! in Deci!ion Maing

Cost accounting helps in decision maing! It provides vital information necessary for

decision maing! %or instance, cost accounting helps in deciding1

a! 9hether to mae a product buy a productN

b! 9hether to accept or re>ect an e*port orderN

c! 7ow to utilize the scarce materials profitablyN

.(.2 e$#! in fi-ing #rice!

Cost accounting helps in fi*ing prices! It provides detailed cost data of each product

(both on the aggregate and unit basis) which enables fi*ation of selling price! Cost accounting

provides basis information for the preparation of tenders, estimates and uotations!

.(." ;or8u$ation of future #$an!

Cost accounting is not a post.mortem e*amination! It is a system of foresight! 0n the

basis of past e*perience, it helps in the formulation of definite future plans in uantitive terms!

udgets are prepared and they give direction to the enterprise!

.(.4 A+oidance of 3a!tage

Cost accounting reveals the sources of losses or inefficiencies such as spoilage,

leaage, pilferage, inadeuate utilization of plant etc! y appropriate control measures, thesewastages can be avoided or minimized!

.(.& ig0$ig0t! cau!e!

"he e*act cause of an increase or decrease in profit or loss can be found with the aid of

cost accounting! %or instance, it is possible for the management to now whether the profits

have decreased due to an increase in labour cost or material cost or both!




!!7

.(.( Re3ard to efficienc'

Cost accounting introduces bonus plans and incentive wage systems to suit the needs

of the organization! "hese plans and systems reward efficient worers and improve

productivity as well improve the morale of the wor .force!

.(.) /re+ention of fraud!

Cost accounting envisages sound systems of inventory control, budgetary control and

standard costing! 8cope for manipulation and fraud is minimized!

.(.* I8#ro+e8ent in #rofitabi$it'

Cost accounting reveals unprofitable products and activities! /anagement can drop

those products and eliminate unprofitable activities! "he resources released from unprofitable

products can be used to improve the profitability of the business!

.(., /re#aration of fina$ account!

Cost accounting provides for perpetual inventory system! It helps in the preparation of

interim profit and loss account and balance sheet without physical stoc verification!

.(. ;aci$itate! contro$

Cost accounting includes effective tools such as inventory control, budgetary control

and variance analysis! y adopting them, the management can notice the deviation from the

plans! 'emedial action can be taen uicly!

.) O<=ECTION1 O; CO1T ACCOUNTING

Cost accounting has become indispensable tool to management for e*ercising

effective decisions! 7owever, the following are the usual ob>ections raised against cost

accounting1

.). Co!t Accounting i! co!t$' to o#erate0ne of the ob>ections against cost accounting is that it involves heavy e*penditure to

operate!-o doubt, e*penses are involved in introduction and operation of cost accounting

system! "his is the case with any accounting system5 the benefits derived by operating the

system are more than the cost! "herefore an organization need not hesitate to install and

operate the system!

.).2 Co!t Accounting i! unnece!!ar'

It is felt by a few that cost accounting is of recent origin and an enterprise can survive

without cost accounting!-o doubt financial accounting may be helpful to draw P 3 Account

and alance 8heet but an enterprise can wor efficiently with the help of cost accounting and

it is necessary to increase efficiency and profitability in the long run!.)." Co!t Accounting in+o$+e! 8an' for8! and !tate8ent!

It is pointed against cost accounting that it involves usage of many forms and

statements which leads to monotony in filling up of forms and increase of paper wor! It is

true that cost accounting is operated by introducing many forms and preparation of statements!

"his will become routine and as time passes the utility of forms is realized and the forms can

be reviewed, revised, simplified and minimized!

.).4 Co!ting 8a' not be a##$icab$e in a$$ t'#e! of Indu!trie!




!!8

+*isting methods of cost accounting may not be applicable in all types of industries!

Cost accounting methods can be devised for all types of industries, and services!

.).& It i! ba!ed on E!ti8ation!

8ome people claim that costing system relies on predetermined data and therefore it is

not reliable! Costing system estimates costs scientifically based on past and present situations

and with suitable modifications for the future! "his leads to accurate cost figures based onwhich management can initiate decisions! ut for the predetermined costs, cost accounting

also becomes another #7istorical Accounting$!

.*. CARACTERI1TIC1 O; A GOOD CO1TING 1Y1TEM

An ideal system of cost accounting must possess some characteristics which bring all

the advantages, discussed above5 to the business, in order to be ideal and ob>ective! "he main

characteristics are1

.*. 1i8#$icit'

It must be simple, fle*ible and adaptable to the changing conditions! And it must be

easily understandable to the personnel! "he information provided must be in the proper order,in right time and to the right persons so as to be utilized fully!

.*.2 ;$e-ibi$it' and Ada#tabi$it'

"he costing system must be fle*ible to accommodate the changing conditions and

circumstances! "he e*pansion, contraction of changes must be adopted in the e*isting system

with minimum changes!

.*." Econo8'

"he costing system must suit the finance available! "he e*penditure must be less than

the benefits derived from the system adopted!

.*.4 Co8#arabi$it'

"he management must be able to mae comparison of the facts and figures with the

past figures, figures of other concerns, or other departments of the same concern!

.*.& 1uitabi$it' to t0e ;ir8!

efore accepting a costing system, the nature, reuirements, size, conditions of the

business etc!, must be carefully considered! "he system must be capable of prompt and

accurate reporting to different levels of management according to their reuirements!

.*.( Mini8u8 C0ange! to t0e E-i!ting one

9hen introducing a costing system, it may cause minimum disturbance to the e*isting

set up of the business!

.*.) Unifor8it' of ;or8!

%orms of different colours can be used to distinguish them! %orms must be uniform in

size and uality! %orm should contain instructions to fill, to use and for disposal!

.*.* Le!! C$erica$ or




!!

Printed forms will involve less labour to fill in, as the worers may be a little educated!

"hey may not lie to spend much time in filling the forms!

.*., Efficient Materia$ Contro$ and age 1'!te8

"here must be a proper procedure for recording the time spent on different >obs, by

worers for the payment of wages! A systematic method of wage system will help in the

control of labour cost! 8ince the cost of material forms a great proportion to the total cost,

there must be an efficient system of stores control!

.*. A 1ound /$an

"here must be proper and sound plans to collect, to allocate and to apportion overhead

e*penses on each >ob or each product in order to find out the cost accurately!

.*. Reconci$iation

"he systems of costing and financial accounting must be facilitated to reconcile in the

easiest manner!

.*.2 O+era$$ Efficienc' of Co!t Accountant

"he wor of the cost accountant under a good system of costing must be clearly

defined as to his duties and responsibilities to the firm are very essential!

., IN1TALLATION O; A CO1TING 1Y1TEM

"he costing system of an organization should be carefully planned in order to achieve

its ob>ectives! "he important steps for the installation of a costing system are discussed below1

.,. Deter8ination of ob?ecti+e!

"he first and foremost stop is to clearly lay down the ob>ectives of the costing system!

If the ob>ective is only to ascertain the cost, a simple system will be sufficient! 7owever, if the

ob>ective is to get information for decision maing, planning and control, a more elaborate

system of costing is necessary!

.,.2 1tud' of t0e nature of bu!ine!!

"he nature of the business and other technical aspects lie nature of the products,

methods and stages of production cycle should be carefully analyzed! 8uch an analysis is

necessary to decide the method of costing to be adopted! %or e*ample, contract costing is

suitable for large construction pro>ects! 0perating costing is adopted by service industries lie

transport!

.,." 1tud' of t0e nature of t0e organiKation

"he costing system should be designed to meet the reuirements of the organization!

7ence, it is necessary to study the nature, size and layout of the organization! "he factors to beconsidered are1

a! 8ize of the organization and the size of the departments!

b! "he physical layout of the organization!

c! "he different levels of management!

d! "he e*tent of decentralization of authority!

e! "he nature of authority relationships!




!2"

.,.4 Deciding t0e !tructure of co!t account!

A suitable costing system can be developed on the basis of the study of the nature of

business and organization! "he structure of cost accounts should be simple and in accordance

with the natural production process!

.,.& Deter8ination of co!t rate!

"his step involves a thorough study of the following points for developing an

integrated costing system!

a! Classification of costs into direct and indirect cots!

b! 6rouping of indirect costs (overheads) into production, administration, selling

and distribution etc!

c! /ethods of pricing issues!

d! "reatment of wastes of all types!

e! Absorption of overheads!

f! Calculation of overhead rates!

.,.( OrganiKation of t0e co!t office

"he cost office is responsible for the efficient operation of the costing system! "he cost

office, with adeuate staff must be located a close as possible to the factory! "he following are

the ma>or functions of the cots office!

a! 8tores accounts!

b! 3abour accounting

c! 'ecording of cost data and

d! Cost control!

%urther, the role and duties and responsibilities of the cost accountant must be clearly

defined! 7e must have the necessary authority to discharge his duties effectively!

.,.) Introducing t0e !'!te8

After completion of the above steps, the costing system may be formally introduced!

Introduction of the system in an e*isting organization should be done gradually! efore

introduction, the feature of the systems, its woring and advantages must be e*plained to the

concerned employees to secure their co.operation!

C0ec Your /rogre!!

3ist out any three functions of cost accounting


(b) Chec your answer with the ones given at the end of this 3esson (pp! 4BE)!






Industry Cost Unit


!2!



. CO1T CONCE/T1

4K!4K!4 Cost Hnit

4K!4K!? Cost Centre 4K!4K!@

Profit Centre

.. Co!t Unit7

A cost unit refers to a unit of product, service or time in relation to which costs may

be ascertained or e*pressed! In other words, cost unit is the unit of output for which cost is

ascertained! %or e*amples, the cost of air.conditioner is ascertained per unit!

"he selection of cost unit is important in cost accounting! It should be carefully

selected to suit the nature of business operation! "he selected unit should be neither too small

nor too big, but ideal for cost ascertainment! Cost unit may be e*pressed in terms of number

(units), weight, area, length etc! "he following are the cost units in various industries!

'efrigerators, Cars, 8cooters Per unit

"elevision sets, /otor Cycles Per unit

9atches, 'adios Per unit

8ugar Per uintal

Cement, 8teel, Coal Per tonne

Paper Per tonne

"e*tiles Per metre

Chemicals Per gGtonneGlitre

+lectricity Per ilowatt hour (wh!)

Passenger transport Per passenger !m!

6oods transport Per tonne !m!

Ceramic tiles Per suare foot or per unitrics Per 4,KKK -os!

'oad contract Per! !m!

"hus, cost units may vary from industry to industry! An enterprise which produces more than

one type of product may have more than one cost unit!

..2 Co!t Centre

A large business is divided into a number of functional departments (such as

production, mareting and finance) for administrative convenience! "hese departments are




!22

further divided into smaller divisions for cost ascertainment and control! "hese smaller

divisions are called cost centers!

A cost centre is a location, person or item of euipment (or group of these) in relation

to which cost can be ascertained and controlled! In simple words, it is a subdivision of the

organization to which cost can be charged!

A cost centre can be1 (a) a location i!e! an area such as wors department, store yard(b) a person such as supervisor, sales man (c) an item of euipment e!g! delivery van, or a

particular machine!

"he determination of suitable cost centre is very important for the purpose of cost

ascertainment and control! "he manager of a cost centre is held responsible for control of cost

of his cost centre! "he number and size of cost centers vary from organization to organization!

"he selection of a suitable cost centre depends on the following factors1

a! -ature and size of the business!

b!3ayout and organization of the factory!

c! Availability of various cost data and information!

d!/anagement policy regarding cost ascertainment and control!

T'#e! of co!t centre!7 Cost centres may be of the following types!

/roduction co!t centre7 A cost centre is which production is carried on is nown as

production cost centre! e!g!, machine shop, welding shop, assembly shop, etc!

1er+ice co!t centre7 A cost centre which renders service to production cost centre is

nown as service centre e!g! power house, stores department, maintenance department etc .

/er!ona$ co!t centre7 It consists of a person or a group of persons e!g! 8ales manager,

9ors manager etc!

I8#er!ona$ co!t centre7 It consists of a location or a machine or a group of machines!

e!g! canteen!

O#eration co!t centre7 It consists of machines and G or persons carrying out similar

operations! e!g! machines and operators engaged in welding or turning!

.." /rofit Centre

A profit centre is a responsibility centre which accumulates revenues as well as costs!

In other words, it is a department or segment of the organization which has been assigned

control over both revenues and cost! %or instance, if there are two divisions in a te*tile

company, say readymade and clothing, each one may be regarded as a profit centre!

..4 Di!tingui!0 bet3een co!t centre and #rofit centre

Important differences between cost centre and profit centre are1

i) Cost centre is created by the cost accountant! 0n the other hand, a profit centre is

created by the top management!

ii) Cost centre is created for the purpose of cot ascertainment and control! ut the

profit centre is created for the purpose of evaluation of performance! iii) Cost



ost eduction


!23

centre is a small segment, whereas profit centre is a large segment! iv) Cost centres

do not en>oy autonomy! ut, profit centres en>oy autonomy!

v) Cost centre does not have a target of costs! ut a profit centre has a target of profit

for performance evaluation!

. CO1T CONTROL

Cost control can be defined as the comparative analysis of actual costs with

appropriate standards of budgets to facilitate performance evaluation and formulation of

corrective measures! It aims at accomplishing conformity between actual result and standards

or budgets! Cost control is eeping e*penditures within prescribed limits!

Cost control has the following features1

i) Creation of responsibility centres with defined authority and responsibility for

cost incurrence!

ii) %ormulation of standards and budgets that incorporate ob>ectives and goals to be

achieved!

iii) "imely cost control reports (responsibility reporting) describing the variances

between budgets and standards and actual performance!iv) %ormulation of corrective measures to eliminate and reduce unfavourable

variances!

v) A systematic and fair plan or motivation to encourage worers to accomplish

budgetary goals!

vi) %ollow.up to ensure that corrective measures are being effectively applied!

Cost control does not necessarily mean reducing the cost but its aim is to have the

ma*imum utility of the cost incurred! In other words, the ob>ective of cost control is the

performance of the same >ob at a lower cost or a better performance for the same cost!

.2 CO1T REDUCTION

Cost reduction may be defined as an attempt to bring costs down! Cost reduction

implies real and permanent reduction in the unit cost of goods manufactured or services

rendered without impairing their (product or goods) suitability for the use intended! "he goal

of cost reduction is achieved in two says1 (i) by reducing the cost per unit and (ii) by

increasing productivity! "he steps for cost reduction include elimination of waste, improving

operations, increasing productivity, search for cheaper materials, improved standards of

uality, finding other means to reduce unit costs!

Cost reduction has to be achieved using internal factors within the organisation!

'eduction of costs due to e*ternal factors such as reduction in ta*es, government subsidies,

grants etc! do not come under the concept of cost reduction!

." DI;;ERENCE <ETEEN CO1T CONTROL AND CO1T REDUCTION

Cost reduction is a much wider concept than cost control! As stated earlier, cost control

aims at controlling costs within prescribed limits with the help of budgets and standards! "he

following are the differences between the two1

Cos

t Control




!24

4! Cost control process involves (a) setting

targets and standards (b) ascertaining actual

performance (c) comparing actual

performance with targets (d) investigating the

variances and (e)

4! Cost reduction is not concerned with

setting targets and standards and

maintaining performance according to

standards! Cost reduction is the final

result in the

taing corrective action! cost control process!?! Cost control aims at achieving standards, ?! Cost reduction aims at improving

i!e! cost targets! It assumes e*istence of the standards! It challenges standards! standards

and assumes e*istence

of concealed potential savings in the

standards!

@! It follows a conservative procedure and @! It is continuous, dynamic and lacs dynamic

approach! innovative in nature, looing

always for measures and alternative to

reduce costs!

! It is a preventive function! ! It is a corrective function!

B! In cost control, costs are optimised B! In cost reduction, there is always before they are

incurred! assumed a scope for reducing the incurred costs under controlled conditions!

! It is generally applicable to items which ! "his is applicable to every activity have

standards! of the business!

D! It contains guidelines and directive of D! It adds thining and analysis to management as

to how to do a thing! action at all levels of management!

.4 LET U1 1UM U/

Cost is the e*penditure incurred on productGservices! Costing is the

methodGtechniues of ascertaining cost! "he process of accounting for cost is called cost

accounting! Cost accounting is helpful to reduce cost and for cost control! Cost accounting is

helpful in decision maing, production, mareting and administrative areas reuire cost

reduction programmes!

.& LE11ON END ACTIITIE1

4 &efine #Cost$,$Costing$$Cost Accounting$ and “Cost Accountancy$!

? riefly e*plain the ob>ectives and scope of cost accounting!

@ 9hat are the advantages of cost accountingN

9hat is cost controlN

B 9hat is cost reductionN 9hat are the differences between cost control and cost reductionN

.( CECB YOUR /ROGRE11

Oour answer may include any si* of the following1

4! "o serve as a guide to price fi*ing of products!

?! "o disclose sources of wastage in process of production!




!25

@! "o reveal sources of economy in production process!

! "o provide for an effective system of stores, materials etc!

B! "o e*ercise effective control on factors of production!

4BK

! "o ascertain the profitability of each product!

.) /OINT1 ;OR DI1CU11ION

4! 9hat are the reuisites of a good costing systemN

?! 9hat are the methods and techniues of costingN &escribe each of them briefly!

.* RE;ERENCE1

4! Fain -arang = Cost Accountancy!

?! 8!-! /aheswari = /anagement Accounting!




!26

LE11ON% MANAGEMENT ACCOUNTINGContent!7

. Ai8! and ob?ecti+e!

.2 Introduction

." Definition!

.4 Ob?ecti+e! of Manage8ent According

.& 1co#e of Manage8ent According

44!!4 %inancial Accounting

44!!? Cost Accounting

44!!@ udgeting and %orecasting

44!! Inventory Control

44!!B 8tatistical Analysis

44!! Analysis of &ata

44!!D Internal Audit

44!!E "a* Accounting

44!!J /ethods and Procedures

.& ;unction! of Manage8ent Accounting

44!B!4 Presentation of &ata

44!B!? Aid to Planning and %orecasting

44!B!@ &ecision /aing

44!B! Communication of /anagement Policies

44!B!B +ffective Control

44!B! Incorporation of non.financial information

44!B!D Co.ordination

.( Ad+antage! of Manage8ent Accounting

44!!4 7elps in &ecision /aing

44!!? 7elps in Planning

44!!@ 7elps in 0rganizing

44!! %acilitates Communication

44!!B 7elps in Coordinating

44!! +valuation and Control of Performance

44!!D Interpretation of %inancial Information

44!!E +conomic Appraisal

.) Li8itation! of Manage8ent Accounting

44!D!4 ased on Accounting Information

44!D!? 9ide scope

44!D!@ Costly

44!D! +volutionary 8tage

44!D!B 0pposition to Change

44!D! Intuitive &ecisions

44!D!D -ot an Alternative to /anagement

.* Di!tingui!0 bet3een Manage8ent Accounting and co!t accounting

44!E!4 Purpose




!27

44!E!? +mphasis

44!E!@ Principles and Procedures

44!E! &ata Hsed

44!E!B 8cope

., Di!tingui!0 bet3een 8anage8ent accounting and financia$ accounting

44!J!4 0b>ectives44!J!? Performance Analysis

44!J!@ &ata Hsed

44!J! -ature

44!J!B Accuracy

44!J! 3egal Compulsion

44!J!D /onetary "ransactions

44!J!E Control

. Di!tingui!0 bet3een co!t accounting and financia$ accounting.

44!4K!4 0b>ective

44!4K!? 3egal reuirement44!4K!@ Classification of transactions

44!4K! 8toc valuation

44!4K!B Analysis of Profit and cost

44!4K! Accounting period

44!4K!D +mphasis

44!4K!E -ature

. Let u! 1u8 U#

.2 Le!!on%End Acti+itie!

." C0ec 'our /rogre!!

.4 /oint! for Di!cu!!ion.& Reference!

. AIM1 AND O<=ECTIE1

(i) "o study the definition, ob>ectives and scope of management accounting!

(ii) "o understand the functions, advantages and limitations of management

accounting!

(iii) "o study the distinction between management, cost and financial accounting!

. INTRODUCTION

"he term management accounting refers to accounting for the management!

/anagement accounting provides necessary information to assist the management in the

creation of policy and in the day.to.day operations! It enables the management to discharge all

its functions i!e! planning, organization, staffing, direction and control efficiently with the help

of accounting information!

.2 DE;INITION1




!28

“/anagement accounting is concerned with accounting information that is useful to

management! = '!-! Anthony!

“/anagement accounting is the presentation of accounting information is such a way

as to assist management in the creation of policy and in the day.to.day operations of an

undertaing!. Anglo American Council of Productivity!

." O<=ECTIE1 O; MANAGEMENT ACCOUNTING

"he ob>ectives of management accounting are1

(4) to assist the management in promoting efficiency! +fficiency includes best

possible services to the customers, investors and employees!

(?) to prepare budget covering all functions of a business (i!e! production, sales,

research and finance)!

(@) to analysis monetary and non.monetary transactions!

() to compare the actual performance with plan for identifying deviations and their

causes!

(B) to interpret financial statements to enable the management to formulate future

policies!

() to submit to the management at freuent intervals operating statements and short.

term financial statements!

(D) to arrange for the systematic allocation of responsibilities!

(E) to provide a suitable organization for discharging the responsibilities!

In short, the ob>ective of management accounting is to help the management in maing

decisions and implementing them efficiently!.4 1CO/E O; MANAGEMENT ACCORDING

/anagement accounting has various facets! "he field of management accounting is

very wide! "he main purpose of management accounting is to provide information to the

management to perform its functions of planning directing and controlling! /anagement

accounting includes various areas of specialization to render effective service to the

management!

.4. ;inancia$ Accounting

%inancial Accounting deals with financial aspects by preparation of Profit and 3oss

Account and alance 8heet! /anagement accounting rearranges and uses the financialstatements! "herefore management accounting does not e*clusively maintain factual data for

itself! It is closely related and connected with financial accounting! thus, management

accounting is dependent on financial accounting which limits its scope!

.4.2 Co!t Accounting

Cost accounting is an essential part of management accounting! Cost accounting,

through its various techniues, reveals efficiency of various divisions, departments and

products! It also provides information regarding cost of products process and >obs through




!2

different methods of costing! /anagement accounting maes use of all this data by focusing it

towards managerial decisions!

.4." <udgeting and ;oreca!ting

udgeting is setting targets by estimating e*penditure and revenue for a given period!

%orecasting is prediction of what will happen as a result of a given set of circumstances!

"argets are fi*ed for various departments and responsibility is pinpointed for achieving thetargets! Actual results are compared with preset targets and performance is evaluated!

.4.4 In+entor' Contro$

"his includes, planning, coordinating and control of inventory from the time of

acuisition to the stage of disposal! "his is done through various techniues of inventory

control lie stoc levels, AC and ;+& analysis physical stoc verification, etc!

.4.& 1tati!tica$ Ana$'!i!

In order to mae the information more useful statistical tools are applied! "hese tools

include charts, graphs, diagrams inde* numbers, etc! %or the purpose of forecasting, other

tools such as time series regression analysis and sampling techniues are used!

.4.( Ana$'!i! of Data

%inancial statements are analysed and compared with past statements, compared with

those of other firms and with standards set! "he analysis and interpretation results in drawing

reports and presentation to the management!

.4.) Interna$ Audit

Internal audit helps the management in fi*ing individual responsibility for internal

control!

.4.* Ta- Accounting7

"a* liability is ascertained from income statements! "a* planning in done by following

the various ta* incentives offered by the Central and 8tate 6overnments! Lnowledge of ta*

provisions helps the management in meeting the ta* liabilities and complying with other

legislations lie 8ales ta*, Companies Act and /'"P Act!

.4., Met0od! and /rocedure!7

In includes eeping of efficient system for data processing and effective reporting of

reuired data in time!

.& ;UNCTION1 O; MANAGEMENT ACCOUNTING

/ain ob>ective of management accounting is to help the management in performing its

functions efficiently! "he ma>or functions of management are planning, organizing, directingand controlling! /anagement accounting helps the management in performing these functions

effectively!

.&. /re!entation of Data

"raditional Profit and 3oss Account and the alance 8heet are not analytical for

decision maing! /anagement accounting modifies and rearranges data as per the

reuirements for decision maing through various techniues!

.&.2 Aid to /$anning and ;oreca!ting




!3"

/anagement accounting is helpful to the management in the process of planning

through the techniues of budgetary control and standard costing! %orecasting is e*tensively

used in preparing budgets and setting standards!

.&." Deci!ion Maing

/anagement accounting provides comparative data for analysis and interpretation for

effective decision maing and policy formulation!

.&.4 Co88unication of Manage8ent /o$icie!

/anagement accounting conveys the polices of the management downward to the

personnel effectively for proper implementation!

.&.& Effecti+e Contro$

8tandard costing and budgetary control are integral part of management accounting!

"hese techniues lay down targets, compare actual with standards and budgets to evaluate the

performance and control the deviations!

.&.( Incor#oration of non%financia$ infor8ation

/anagement accounting considers both financial and non.financial

information for developing alternative courses of action which leads to effective and accurate

decisions!

.&.) Co ordination

"he targets of different departments are communicated to them and their performance

is reported to the management from time to time! "his continual reporting helps the

management in coordinating various activities to improve the overall performance!

.( ADANTAGE1 O; MANAGEMENT ACCOUNTING

"he advantages of management accounting are summarized below1

.(. e$#! in Deci!ion Maing

/anagement accounting helps in decision maing such as pricing, mae or buy,

acceptance of additional orders, selection of suitable product mi* etc! "hese important

decision are taen with the help of marginal costing techniue!

.(.2 e$#! in /$anning

Planning includes profit planning, preparation of budgets, programmes of capital

investment and financing! /anagement accounting assists in planning through budgetary

control, capital budgeting and cost.volume.profit analysis!

.(." e$#! in OrganiKing/anagement accounting uses various tools and techniues lie budgeting,

responsibility accounting and standard costing! A sound organizational structure is developed

to facilitate the use of these techniues!

.(.4 ;aci$itate! Co88unication

/anagement is provided with up.to.date information through periodical reports! "hese

reports assist the management in the evaluation of performance and control!

.(.& e$#! in Co%ordinating




!3!

"he functional budgets (purchase budget, sales budget, and overhead budget etc!) are

integrated into one nown as master budget! "his facilitates clear definition of department

goals and coordination of their activities!

.(.( E+a$uation and Contro$ of /erfor8ance

/anagement accounting is a convenient tool for evaluation of performance! 9ith the

help of ratios and variance analysis, the efficiency of departments can be measured!/anagement accounting assists the management in the location of wea spots and in taing

corrective actions!

.(.) Inter#retation of ;inancia$ Infor8ation

/anagement accounting presents information in a simple and purposeful manner! "his

facilitates uic decision maing!

.(.* Econo8ic A##rai!a$

/anagement accounting includes appraisal of social and economic forces and

government polices! "his appraisal helps the management in assessing their impact on the

business!.) LIMITATION1 O; MANAGEMENT ACCOUNTING

/anagement accounting suffers from the following limitations1

.). <a!ed on Accounting Infor8ation

/anagement accounting derives information from past financial accounting and cost

accounting records! If the past records are not reliable, it will affect the effectiveness of

management accounting!

.).2 ide !co#e

/anagement accounting has a very wide scope incorporating many disciplines! "his

results in inaccuracy and other practical difficulties!

.)." Co!t$'

"he installation of management accounting system reuires a large organization!

7ence, it is very costly and only big concerns can afford to adopt it!

.).4 E+o$utionar' 1tage

/anagement accounting is still in its initial stages! "ools and techniues are not fully

developed! "his creates doubts about the utility of management accounting!

.).& O##o!ition to C0ange

Introduction of management accounting system reuires a number of changes in theorganization structure, rules and regulations! "his rearrangement is not generally lied by the

people involved!

.).( Intuiti+e Deci!ion!

/anagement accounting helps in scientific decision maing! Oet, because of simplicity

and personal factors the management has a tendency to arrive at decisions by intuition!

.).) Not an A$ternati+e to Manage8ent




!32

/anagement accounting will not replace the management and administration! It is a

tool of the management! &ecisions are of the management and not of the management

accountant!

.* DI1TINGUI1 <ETEEN MANAGEMENT ACCOUNTING AND

CO1T ACCOUNTING

Cost accounting and /anagement accounting are tow modern branches of accounting!

oth the systems involve presentation of accounting data for the purpose of decision maing

and control of day.to.day activities! Cost accounting is concerned not only with cost

ascertainment, but also cost control and managerial decision maing! /anagement accounting

maes use of the cost accounting concepts, techniues and data! "he functions of cost

accounting and management accounting are complimentary! In cost accounting the emphasis is

on cost determination while management accounting considers both the cost and revenue!

"hough it appears that there is overlapping of areas between cost and management accounting,

the following are the differences between the two systems!

.*. /ur#o!e

"he main ob>ective of cost accounting is to ascertain and control the cost of products

or services! "he function of management accounting is to provide information to management

for efficiently performing the functions of planning, directing, and controlling!

.*.2 E8#0a!i!

Cost accounting is based on both historical and present data, whereas management

according deals with future pro>ections on the basis of historical and present cost data!

.*." /rinci#$e! and /rocedure!

+stablished procedures and practices are followed in cost accounting! -o such

prescribed practices are followed in /anagement accounting! "he analysis is made and the

resulting conclusions are presented in reports as per the reuirements of the management!

.*.4 Data U!ed

Cost accounting uses only uantitative information whereas management accounting

uses both ualitative and uantitative information!

.*.& 1co#e

/anagement accounting includes, financial accounting, cost accounting, budgeting,

ta* planning and reporting to management, whereas Cost accounting is concerned mainly with

cost ascertainment and control!

., DI1TINGUI1 <ETEEN MANAGEMENT ACCOUNTING AND ;INANCIALACCOUNTING

"he following are the main differences between financial accounting and management

accounting!

.,. Ob?ecti+e!

"he main ob>ective of financial accounting is to supply information in the form of

profit and loss account and balance sheet to outside parties lie shareholders, creditors,




!33

government etc! ut the ob>ective of management accounting is to provide information for the

internal use of management!

.,.2 /erfor8ance Ana$'!i!

%inancial accounting is concerned with the overall performance of the business! 0n the

other hand management accounting is concerned with the departments or divisions! It report

about the performance and profitability of each of them!

.,." Data U!ed

%inancial accounting is mainly concerned with the recording of past events whereas

management accounting is concerned with future plans and policies!

.,.4 Nature

%inancial accounting is based on measurement while management accounting is based

on >udgement! ecause of this, financial accounting is more ob>ective and management

accounting is more sub>ective!

.,.& Accurac'

Accuracy is an important factor in financial accounting! ut appro*imations are widely

used in management accounting! "his is because most of the information is related to the

future and intended for internal use!

.,.( Lega$ Co8#u$!ion

%inancial accounting is compulsory for all >oint stoc companies but management

accounting is only optional !

.,.) Monetar' Tran!action!

%inancial accounting records only those transactions which can be e*pressed in terms

of money! 0n the other hand, management accounting records not only monetary transactions

but also non. monetary events, namely technical changes, government polices etc!

.,.* Contro$

%inancial accounting will not reveal whether plans are properly implemented!

/anagement accounting will reveal the deviations of actual performance from plans! It will

also indicate the causes for such deviations!

C0ec 'our #rogre!!

9hat are the advantages of the management accounting!


(b) Chec your answer with the ones given at the end of this 3esson (pp!4D4)!









!34

. DI1TINGUI1 <ETEEN CO1T ACCOUNTING AND ;INANCIAL

ACCOUNTING

&ifferences between Cost Accounts and %inancial Accounts are listed below1

.. Ob?ecti+e

"he main ob>ective of cost accounting is to provide cost information to managementfor decision maing! "he main ob>ective of financial accounting is to prepare Profit and 3oss

AGc and alance 8heet to report to owners and outsiders!

..2 Lega$ Re6uire8ent

Cost accounts are maintained to fulfil the internal reuirements of the management as

per conventional guideline! %inancial records are maintained as per the reuirement of

Companies Act and Income "a* Act!

.." C$a!!ification of Tran!action!

Cost accounting records and analyses e*penditure in an ob>ective manner viz!,

according to purpose for which costs are incurred! %inancial accounting classifies records andanalyses transactions in a sub>ective manner i!e!, according to nature of e*penses!

..4 1toc a$uation

In cost accounts stocs are valued at cost! In financial accounts, stocs are valued at

cost or realisable value, whichever is lesser!

..& Ana$'!i! of /rofit and Co!t

Cost accounts reveal Profit of 3oss of different products, departments separately! In

financial accounts, the Profit or 3oss of the entire enterprise is disclosed into!

..( Accounting #eriod

Cost report are continuous process and are prepared as per the reuirements of managements, may be daily, weely, monthly, uarterly, or annually! %inancial reports are

prepared annually!

..) E8#0a!i!

Cost accounting lays emphasis on ascertainment of cost and cost control! %inancial

accounts emphasis is laid on the recording of transactions and control aspect is not given

importance!

..* Nature

Cost accounts lay emphasis on both historical and predetermined costs!

%inancial accounts are maintained on the basis of historical records!

. LET U1 1UM U/1

Accounting relating to management called as management accounting!

/anagement has to tae decision on day.to=day basis or long.term basis based on some

information! /anagement accounting provides this information to management! Cost accounts

provide information relating to cost but management accounting includes both cost and

revenue! %inancial accounting provides accounting information to the outsiders where as

management accounting provides accounting information to the internal management!




!35

.2 /OINT1 ;OR DI1CU11ION

4! &efine #/anagement accounting$!

?! riefly e*plain the ob>ectives of /anagement accounting!

@! +*plain the scope and advantages of /anagement accounting!

! &escribe the limitations of /anagement accounting!

B! 9hat are the functions of /anagement accountingN

." CECB YOUR /ROGRE11 AN1ER

Oour answer may include the following1

4! 7elps in &ecision /aing

?! 7elps in Planning

@! 7elps in 0rganizing

! %acilitates Communication

B! 7elps in Coordinating

! +valuation and Control of PerformanceD! Interpretation of %inancial Information

.4 /OINT1 ;OR DI1CU11ION

4! &istinguish between /anagement accounting and cost accounting!

?! &istinguish between cost accounting and financial accounting!

.& RE;ERENCE1

4! 8!-! /aheswari = /anagement Accounting!

?! '!L! 8harma and L! 6upta = /anagement Accounting!

LE11ON % 2 ELEMENT1 O; CO1T

Content!7

2. Ai8! and Ob?ecti+e!

2.2 Introduction

2." E$e8ent! of co!t

2.4 C$a!!ification of co!t

4?!@!4 y -ature or +lements

4?!@!? y %unctions

4?!@!@ As &irect and Indirect

4?!@! y ;ariability

4?!@!B y Controllability4?!@! y -ormality

4?!@!D y Capital or 'evenue

4?!@!E y "ime

4?!@!J According to Planning and Control

4?!@!4K %or /anagerial &ecisions

2.4 Met0od! of Co!ting

4?!!4 Fob costing




!36

4?!!? Contract costing

4?!!@ atch costing

4?!! Process costing

4?!!B Hnit costing

4?!! 0perating costing

4?!!D 0peration costing4?!!E /ultiple Costing

2.& Tec0ni6ue! of co!ting

4?!B!4 7istorical costing

4?!B!? &irect costing

4?!B!@ Absorption costing

4?!B! Hniform costing

4?!B!B /arginal costing

4?!B! 8tandard costing

2.( Let u! 1u8 U#

2.) Le!!on%End Acti+itie!2.* C0ec 'our /rogre!!

2., /oint! for Di!cu!!ion

2. Reference!

2.. AIM1 AND O<=ECTIE1

i) "o understand the elements of cost! ii) "o study the

classification of cost! iii) "o study the methods and

techniues of costing!

2.. Introduction

A classification has to be made to arrive at the detailed costs of departments, production orders, >obs or other cost units! "he total cost of production can be found with out

such analysis, and in many instances an average unit cost could be obtained but none of the

advantages of an analysed cost would be available!

2.2. E$e8ent! of Co!t

8imple ascertainment of total cost cannot satisfy the various reuirements of decision

maing! %or effective control and managerial decision maing, data is to be provided on the

basis of analysed and classified costs! In order to satisfy this ob>ective, the cost is analysed by

elements of cost i!e!, by nature of e*penditure! "he elements of cost are1

4! /aterials

?! 3abour and

@! +*penses

"he above elements of cost are analysed in the chart given below1 +lements of

Cost



+aterials penses

'irect

materialsIndirect

materials

%abour

'irectlabour

Indirectlabour

'irect

epensesIndirect

epenses

/rime

/roduction

o-erheads

$dministration

o-erheads

Sellin0 and

'istribution

-erheads


!37

overheads

Materia$!7 "he substances from which the products are made are nown as materials!

"hey can be direct or indirect!

Direct 8ateria$!1 &irect materials are those materials which form a part of finished

product! "hese materials cost can be conveniently identified with and allocated to a particular

product, process or >ob! It is a part of a prime cost, e!g! "imber in furniture maing, cloth the

dress maing, leather in shoe maing, brics in building a house etc!

Indirect 8ateria$!1 Indirect materials are those materials which do not form a part of a

financial product! Cost of indirect materials cannot be identified with and allocated but can be

apportioned to a particular product, process or >ob,e,g Cotton waste, lubricant, grease, etc!Labour7 %or conversion of raw materials into finished product human effort is needed!

8uch human effort is called labour! 3abour can be direct as well as indirect!

Direct Labour7 &irect labour is that labour which is directly engaged in the

production of goods or services! "he wages of such labour are nown as direct wages! "hese

labour cost or direct wages can be identified with and allocated to a particular product, process

or >ob! It is a part of the prime cost, e!g 9ages of spinners and weavers in a te*tiles factory!

Indirect $abour1 Indirect labour is that labour which is not directly engaged in

production of goods or services! In indirectly helps the direct labour engaged in production!

"he wages paid for indirect labour is nown as indirect wages! Indirect wages cannot be

identified with and allocated but can be apportioned to a particular product, process or >ob e!g!

wages of machines, supervisors, watchman, sweepers, time.eeper etc!

E-#en!e!7 +*penses may be direct e*penses or indirect e*penses!

Direct E-#en!e!1 All e*penses (other than direct material cost or direct wages) that are

directly charged to production are direct e*penses! It is parts of the prime cost e!g! e*cise duty,

royalty on production, cost of special drawings and designs, architect$s fees or euipment for a

particular >ob etc!

Indirect E-#en!e!1 +*pense (other than indirect material and indirect labour) that are

not directly charged to production are indirect e*penses! It can be classified as follows!




!38

a: ;actor' o+er0ead!1 "hese are also called manufacturing overhead or wors

overhead or wor on cost! %actory overheads cover all indirect e*penses incurred

from the stage of raw materials to finished goods! It includes indirect material,

indirect wages and indirect e*penses e!g! factory rent, supervisors salary, power and

fuel, heating and lighting, depreciation of factory building etc!

b: Ad8ini!trati+e o+er0ead!1 "hese are e*penses incurred for running

administrative office e!g! office rent and salaries, printing and stationary, legal e*penses,

telephone e*penses etc!

c: 1e$$ing o+er0ead!1 "hese are e*penses incurred for actual sales and

promotion of sales e!g! salaries of sales manager, commission, traveling e*penses of salesman

and promotion e*penses lie advertising and publicity, after sales service etc!

d: Di!tribution o+er0ead!7 "hese are e*penses concerned with the pacing and

delivery of goods to the customers e!g! pacing charges, warehouse e*penses,

depreciation of delivery van, loading charges etc!

2.". CLA11I;ICATION O; CO1T

Cost classification is the process of grouping costs according to their commoncharacteristics! It is the placement of lie items together according to their common

characteristics! A suitable classification of costs is of vital importance in order to identify the

cost with cost centres or cost units! Costs may be classified according to their nature, i!e!

material, labour and e*penses and a number of other characteristics! "he same cost figures are

classified according to different ways of costing depending upon the purpose to be achieved

and reuirements of a particular concern! "he important ways of classification are1

4?!@!4 y -ature or +lements 4?!@!? y %unctions4?!@!@ As &irect and Indirect 4?!@! y ;ariability

4?!@!B y Controllability 4?!@! y -ormality

4?!@!D y Capital or 'evenue 4?!@!E y "ime

4?!@!J According to Planning and Control

4?!@!4K %or /anagerial &ecisions!

-ow each classification will be discussed in detail!

2.". <' Nature or E$e8ent or Ana$'tica$ C$a!!ification

According to this classification, the costs are divided into three categories i!e!

/aterials, 3abour and +*penses! "here can be further sub classification of each element5 for

e*ample, material into raw material components, and spare parts, consumable stores, pacing

material etc! "his classification is important as it helps to find out the total cost, how such total

cost is constituted and valuation of wor in progress!2.".2 <' ;unction!

According to this classification costs are divided in the light of the different aspects of

basics managerial activities involved in the operation of a business undertaing! It leads to

grouping of cost according to the broad divisions or functions of a business undertaing i!e!,

production, administration selling and distribution! According to this classification costs are

divided as follows1

/anufacturing and Production Cost1 "his is the total of costs involved in

manufacture, construction and fabrication of units of production!




!3

Commercial Cost1 "his is the total of costs incurred in the operation of a business

undertaing other than the cost of manufacturing and production! Commercial cost may

further be sub.divided into (a) administrative cost and (b) selling and distribution cost! "hese

terms will be e*plained in a subseuent chapter!

2."." A! Direct and Indirect

According to this classification, total cost is divided into direct costs and indirect costs!&irect costs are those which are incurred for and may be conveniently identified with a

particular cost centre or cost unit! /aterials used and labour employed in manufacturing an

article or in a particular process of production are common e*amples of direct costs! Indirect

costs are those cost which are incurred for the benefit of number of cost centres or cost units

and cannot be conveniently identified with a particular cost centre or cost unit! +*amples of

indirect cost include rent of building, management salaries, machinery depreciation etc! "he

nature of the business and the cost unit chosen will determine which costs are direct and which

are indirect! %or e*ample, the hire of a mobile crane for use by a contractor at site would be

regarded as a direct cost but if the crane is used as a part of the services of a factory, the hire

charges would be regarded as indirect cost because it will probably benefit more than one cost

centre! "he importance of the distinction of costs into direct and indirect lies in the fact thatdirect costs of a product or activity can be accurately determined while indirect costs have to

be apportioned on certain assumptions as regards their incidence!

2.".4 <' ariabi$it'

According to this classification, costs are classified according to their behaviour in

relation to changes in the level of activity or volume of production! 0n this basis, costs are

classified into three groups viz! fi*ed, variable and semi.variable!

(i) %i*ed or period costs are commonly described as those which remain fi*ed in total

amount with increase or decrease in the volume of output or productive activity for a

given period of time! %i*ed cost per unit decreases as production increases andincreases as production declines! +*amples of fi*ed costs are rent, insurance of

factory building, factory manager$s salary etc! "hese fi*ed costs are constant in total

amount but fluctuate per unit as production changes! "hese costs are nown as period

costs because these are dependent on time rather than on output! 8uch costs remain

constant per unit of time such as factory rent of 's!4K,KKK per month remaining same

for every month irrespective of output of every month!

(ii) ;ariable or product costs are those which vary in total in direct proportion to the

volume of output! "hese costs per unit remain relatively constant with changes in

production! "hus, variable costs fluctuate in total amount but tend to remain constant

per unit as production activity changes! +*amples are direct material costs, direct

labour costs, power, repairs etc! 8uch costs are nown as product costs because they

depend on the uantum of output rather than on time!

(iii) 8emi.variable costs are those which are partly fi*ed and partly variable! %or

e*ample, telephone e*penses included a fi*ed portion of annual charge plus variable

charge according to calls5 thus total telephone e*penses are semi.variable! 0ther

e*amples of such costs are depreciation, repairs and maintenance of building and

plant etc!

2.".& <' Contro$$abi$it'




!4"

Hnder this, costs are classified according to whether or not they are influenced by the

actions of a given member of the undertaing! 0n this basis it is classified into two categories1

(i) Controllable costs are those which can be influenced by the action of a specified

member of an undertaing, that is to say, costs which are at least partly within the

control of management! An organization is divided into a number of responsibility

centres and controllable costs incurred in a particular cost centre can be influenced by

the action of the manager responsible for the centre! 6enerally speaing, all direct

costs including direct material, direct labour and some of the overhead e*penses are

controllable by lower level of management!

(ii) Hncontrollable costs are those which cannot be influenced by the action of a

specified member of an undertaing that it is to say, which are within the control of

management! /ost of the fi*ed costs are uncontrollable! %or e*ample, rent of the

building is not controllable and so are managerial salaries! 0verhead cost, which is

incurred by one service section and is apportioned to another which receives the

service, is also not controllable by the latter!

"he distinction between controllable and uncontrollable is sometimes left to individual

>udgment and is not sharply maintained! It is only in relation to a particular level of management or an individual manager that we may say whether a cost is controllable or

uncontrollable! A particular item of cost which may be controllable from the point of view of

one level of management may be uncontrollable from another point of view! /oreover, there

may be an item of cost which is controllable from long term point of view and uncontrollable

from short term point of view! "his is partly so in the case of fi*ed costs!

2.".( <' Nor8a$it'

Hnder this, costs are classified according to whether these are cost which are normally

incurred as a given level of output in the conditions in which that level of activity is normally

attained! 0n this basis, it is classified into two categories1

(a) -ormal cost1 It is the cost which is normally incurred at a given level of output in the

conditions in which that level of output is normally attained! It is a part of cost of production!

(b) Abnormal cost1 It is the cost which is not normally incurred at a given level of output

in the conditions in which that level of output is normally attained! It is not a part of

cost of production and charged to Costing Profit and 3oss Account!

2.".) <' Ca#ita$ and Re+enue or ;inancia$ Accounting C$a!!ification

"he cost which is incurred in purchasing assets either to earn income or increasing the

earning capacity of the business is called capital cost! %or e*ample, the cost of a rolling

machine in case of steel plan! 8uch cost is incurred at one point of time but the benefits

accruing from it are spread over a number of accounting years! It any e*penditure is done in

order to maintain the earning capacity of the concern such as cost of maintaining an asset or running a business it is revenue e*penditure e!g! cost of materials used in production, labour

charges paid to convert the material into production, salaries, depreciation, repairs and

maintenance charges, selling and distribution charges etc! "he distinction between capital and

revenue items is important in costing as all items of revenue e*penditure are taen into

consideration while calculating cost whereas capital items are completely ignored!

2.".* <' Ti8e

Cost can be classified as (i) 7istorical costs and (ii) Predetermined costs!

i: i!torica$ co!t!7 "he cost which is ascertained after their incurrence is




!4!

called historical costs! 8uch costs are available only when the production of a particular thing

has already been done! 8uch costs are only of historical value and not at all helpful for cost

control purposes! asic characteristics of such costs are1

(a) "hey are based on recorded facts!

(b) "hey can be verified because they are always supported by the evidence of their

occurrence!(c) "hey are mostly ob>ective because they relate to happenings which have already

taen place!

ii: /redeter8ined co!t!7 8uch costs are estimated costs i!e! computed in advance of

production taing into consideration the previous period$s costs and the factors affecting such

costs! Predetermined cost determined on scientific basis becomes standard cost! 8uch costs

when compared with actual costs will give the reasons of variance and will help the

management to fi* the responsibility and to tae remedial action to avoid its recurrence in

future!

7istorical costs and predetermined costs are not mutually e*clusive but they wor

together in the accounting system of an organization! In competitive age, it is better to lay

down standards, so that after comparison with the actual, the management may be able to taestoc of the situation to find out as to how far the standards fi*ed by it have been achieved and

tae suitable action in the light of such information! "herefore, even in a system when

historical costs are used, predetermined costs have a very important role to play because a

figure of historical cost by itself has no meaning unless it is related to some other standard

figure to give meaningful information to the management!

2."., According to /$anning and Contro$

Planning and control are two important functions of management! Cost accounting

furnishes information to the management which is helpful is the due discharge of theses two

functions! According to this, costs can be classified as budgeted costs and standard costs!

i: <udgeted co!t!7 udgeted costs represent an estimate of e*penditure for

different phases of business operations such as manufacturing, administration, sales, research

and development etc! coordinated in a well conceived framewor for a period of time in future

which subseuently becomes the written e*pression of managerial targets to be achieved!

;arious budgets are prepared for various phases, such as raw material cost budget, labour cost

budget, cost of production budget, manufacturing overhead budget, office and administration

overhead budget etc, Continuous comparison of actual performance (i!e! actual cost) with that

of the budgeted cost is made so as to report the variations from the budgeted cost to the

management for corrective action!

ii: 1tandard Co!t7 udgeted costs are translated into actual operation

through the instrument of standard costs! "he Institute of Cost and /anagement Accountants,

3ondon defines standard cost as follows1 “8tandard cost is the predetermined cost based on atechnical estimate for materials, labour and overhead for a selected period of time and for a

prescribed set of woring conditions! "hus, standard cost is a determination, in advance of

production of what should be the cost!

udgeted costs and standard costs are similar to each other to the e*tend that both of

them represent estimates for cost for a period of time in future! In spite of this, they differ in

the following aspects1

4! 8tandard costs are scientifically predetermined costs of every aspect of business

activity whereas budgeted costs are mere estimates made on the basis of past actual




!42

financial accounting data ad>usted to future trends! "hus, budgeted costs are

pro>ection of financial accounts whereas standard costs are pro>ection of cost

accounts!

?! "he primary emphasis of budgeted costs is on the planning function of management

whereas the main thrust of standard costs is on control because standard costs lay

emphasis on what should be the costs!

@! udgeted costs are e*tensive whereas standard costs are intensive in their

application! udgeted costs represent a macro approach of business operations

because they are estimated in respect of the operations of a department! Contrary to

this, standard costs are concerned with each and every aspect of business operation

carried in a department! "hus, budgeted costs deal with aggregates whereas standard

costs deal with individual parts which mae the aggregate! %or e*ample, budgeted

costs are calculated for different functions of the business i!e! production, sales,

purchases etc! whereas standard costs are compiled for various elements of costs i!e!

materials, labour and overhead!

2.". ;or Manageria$ Deci!ion!

0n this basis, costs may be classified into the following costs1i: Margina$ co!t7 /arginal cost is the total of variable costs i!e! prime cost

plus variable overheads! It is based on the distinction between fi*ed and variable costs! %i*ed

costs are ignored and only variable costs are taen into consideration for determining the cost

of products and value of wor in progress and finished goods! ii: Out of #ocet co!t!7 "his is

that portion of the cost which involves payment to outsiders i!e!, gives rise to cash e*penditure

as opposed to such costs as depreciation, which do not involve any cash e*penditure! 8uch

costs are relevant for price fi*ation during recession or when mae or buy decision is to be

made!

iii: Differentia$ co!t!7 "he change in costs due to change in the level of activity or

pattern or method of production is nown as differential costs! It the change increases the cost,

it will be called incremental cost! If there is decrease in cost resulting from decrease of output,

the difference is nown as decremental cost! i+: 1un co!t!7 A sun cost is an irrecoverable

cost and is caused by

complete abandonment of a plant! It is the written down value of the abandoned plant less its

salvage value! 8uch costs are not relevant for decision maing and are not affected by increase

or decrease in volume!

+: I8#uted co!t!7 "hese costs are those costs which appear in cost accounts

only e!g! national rent charged on business premises owned by the proprietor, interest on

capital for which no interest has been paid! "hese costs are also nown as notional costs!

9hen alternative capital investment pro>ects are being evaluated it is necessary to consider the

imputed interest on capital before a decision is arrived as to which is the most profitable pro>ect!

+i: O##ortunit' co!t7 It is the ma*imum possible alternative earning that might have

been earned if the productive capacity or services had been put to some alternative

use! In simple words, it is the advantage, in measurable terms, which has been

foregone due to not using the facility in the manner originally planned! %or e*ample,

if an owned building is proposed to be used for a pro>ect, the liely rent of the

building is the opportunity cost which should be taen into consideration while

evaluating the profitability of the pro>ect!

+ii:Re#$ace8ent co!t7 It is the cost at which there could be purchased an




!43

asset or material identical to that which is being replaced or revalued! It is the cost of

replacement at current maret price!

+iii: A+oidab$e and una+oidab$e co!t7 Avoidable costs are those which can be

eliminated if a particular product or department, with which they are directly related,

is discontinued! %or e*ample, salary of the clers employed in a particular

department can be eliminated, if the department is discontinued! Hnavoidable cost is

that cost which will not be eliminated with the discontinuation of a product or

department! %or e*ample, salary of factory manager or factory rent cannot be

eliminated even if a product is eliminated!

2.4. METOD1 O; CO1TING

"he method of costing refers to a system of cost ascertainment and cost accounting!

Industries differ in their nature, in the products they produce and the services they offer!

7ence, different methods of costing are used by different industries! %or e*ample, the method

of costing employed by a building contractor is different from that of a transport company!

Fob costing and process costing are the two basic methods of costing! Fob costing is

suitable to industries which manufacture or e*ecute the wor according to the specifications of the customers! Process costing is suitable to industries where production is continuous and the

units produced are identical! All other methods are combinations, e*tensions or improvements

of these basic methods! "he methods of costing are e*plained in detail!

2.4. =ob co!ting

It is also called specific order costing! It is adopted by industries where there is no

standard product and each >ob or wor order is different from the others! "he >ob is done

strictly according to the specifications given by the customer and usually the >ob taes only a

short time for completion! "he purpose of >ob costing is to ascertain the cost of each >ob

separately! Fob costing is used by printing presses, motor repair shops, automobile garages,

film studios, engineering industries etc!

2.4.2 Contract co!ting

It is also nown as terminal costing! asically, this method is similar to >ob costing!

7owever, it is used where the >ob is big and spread over a long period of time! "he wor is

done according to the specifications of the customer! "he purpose of contract costing is to

ascertain the cost incurred on each contract separately! 7ence a separate account is prepared

for each contract! "his method is used by firms engaged in ship building, construction of

buildings, bridges, dams and roads!

2.4." <atc0 co!ting

It is an e*tension of >ob costing! A batch is a group of identical products! All the units

in a particular batch are uniform in nature and size! 7ence each batch is treated as a cost unit

and costed separately! "he total cost of a batch is ascertained and it is divided by the number of units in the batch to determine the cost per unit! atch costing is adopted by manufacturers

of biscuits, ready made garments, spare parts medicines etc!

2.4.4 /roce!! co!ting

It is called continuous costing! In certain industries, the raw material passes through

different processes before it taes the shape of a final product! In other words, the finished

product of one process becomes the raw material for the subseuent process! Process costing is

used in such industries!




!44

A separate account is opened for each process to find out the total cost as well as cost

per unit at the end of each process! Process costing is applied to continuous process industries

such as chemicals, te*tiles, paper, soap, lather etc!

2.4.& Unit co!ting

"his method is also nown as single or output costing! It is suitable to industries where

production is continuous and units are identical! "he ob>ective of this method is to ascertainthe total cost as well as the cost per unit! A cost sheet is prepared taing into account the cost

of material, labour and overheads, Hnit costing is applicable in the case of mines, oil drilling

units, cement wors, bric wors and units manufacturing cycles, radios, washing machines

etc!

2.4.( O#erating co!ting

"his method is followed by industries which render services! "o ascertain the cost of

such services, composite units lie passenger ilometers and tone ilometers are used for

ascertaining costs! %or e*ample, in the case of a bus company, operating costing indicates the

cost of carrying a passenger per ilometer! 0perating costing is adopted by airways railways,road transport companies (goods as well as passengers) hotels, cinema halls, power houses etc!

2.4.) O#eration co!ting

"his is a more detailed application of process costing! It involves costing by every

operation! "his method is used where there is mass production of repetitive nature involving a

number of operations! "he main purpose of this method is to ascertain the cost of each

operation! %or instance, the manufacture of handles for bicycles involves a number of

operations such as cutting steel sheets into proper strips, moulding, machining and finally

polishing! "he cost of these operations may be found out separately! 0peration costing

provides a minute analysis of costs to achieve accuracy and it is applied in industries such as

spare parts, toy maing and engineering!

2.4.* Mu$ti#$e Co!ting

It is also nown as composite costing! It refers to a combination of two or more of the

above methods of costing! It is adopted in industries where several parts are produced

separately and assembled to a single product!

2.& TECNI5UE1 O; CO1TING

In addition to different methods of costing, the following techniues are used for the

purpose of ascertaining costs!

2.&. i!torica$ co!ting

In this, actual costs are ascertained after they have been incurred! "his is aconventional method of cost ascertainment!

2.&.2 Direct co!ting

"he ascertainment of direct costs in respect of department, product or process! "his is

the aggregate of marginal cost and a portion of fi*ed cost that are identifiable with the product

or process! &irect costs are, therefore, traceable costs!

2.&." Ab!or#tion co!ting




!45

It is also nown as total cost approach! Hnder this techniue, all costs, both fi*ed and

variable are charged to product, process or operations! It is useful in submitting tenders,

preparing >ob estimates etc!

2.&.4 Unifor8 co!ting

It is the use of some costing principles and methods by several concerns for common

control or comparison of costs!2.&.& Margina$ co!ting

It classifies cost into fi*ed and variable and only variable costs are charged to product!

"his type of costing is useful in taing important decisions such as price decisions in time of

competition mae or buy decisions, selecting profitable product mi* etc!

2.&.( 1tandard co!ting

8tandard cot is predetermined cost! "he costs are determined in advance of production!

8tandard performance is set in terms of costs! Actual costs are compared with the standards

and variations are found! "hen, reasons for variations are investigated and remedial actions are

taen! "his system enables control of costs and also measurement of efficiency of operations!


+*plain the three methods of costing


(b) Chec your answer with the ones given at the end of this 3esson (pp! 4E@.

4E)!






2.( LET U1 1UM U/

Cost on element can be found at different levels! Cost at factory,

administrative cost, selling and distribution cost! &irect cost can be calculated in order to

now the cost at different levels for cost control purpose! -ot only that cost can be classified

into various ways namely cost by time, cost by function, cost by planning and control, cost by

variability, cost by capital and revenue! +ach and every classification has its own purpose!

Costing method differ from industry to industry according to the nature of productive process!

2.) LE11ON END ACTIITIE1

4 &escribe the different elements of cost!

? 9hat do you understand by #overhead$N

@ 9rite short notes on1

a) Cost centre b) profit centre c) material d) labour

2.* CECB YOUR /ROGRE11




!46

Oour answer may include in the following1

=ob co!ting7 It is also called specific order costing! It is adopted by industries where

there is no standard product and each >ob or wor order is different from the others!

2 Contract co!ting7 It is also nown as terminal costing! asically, this method is

similar to >ob costing! 7owever, it is used where the >ob is big and spread over a long

period of time!" <atc0 co!ting7 It is an e*tension of >ob costing! A batch is a group of identical

products! All the units in a particular batch are uniform in nature and size! 7ence

each batch is treated as a cost unit and costed separately!

4 /roce!! co!ting7 It is called continuous costing! In certain industries, the raw

material passes through different processes before it taes the shape of a final

product! In other words, the finished product of one process becomes the raw

material for the subseuent process! Process costing is used in such industries!

& Unit co!ting7 "his method is also nown as single or output costing! It is suitable to

industries where production is continuous and units are identical! "he ob>ective of

this method is to ascertain the total cost as well as the cost per unit!

2., /OINT1 ;OR DI1CU11ION

4 +*plain the methods of Costing!

? +*plain the different techniues of costing!

2. RE;ERENCE1

4! Fain -arang = Cost Accounting!

?! -igma 8harma = Cost Accounting!

LE11ON " CO1T 1EET

Content!7

". Ai8! and ob?ecti+e!

".2 Introduction

"." Meaning and definition of co!t !0eet

".4 /ur#o!e of co!t !0eet

".& 1#eci8en of co!t !0eet

".( Co!t !0eet and #roduction Account

".) Co!t !0eet and #roduction !tate8ent".* Treat8ent of !toc!

4@!D!4 8tocs of raw materials

4@!D!? 8tocs of wor.in.progress

4@!D!@ 8tocs of finished goods

".* Tender! and 5uotation!

"., I8#ortant #oint! to be re8e8bered

4@!J!4 Alternative terms are used for many items in cost sheet

4@!J!? ;aluation of 8tocs of %inished 6oods



otal ost

s.

ost per unit

s.


!47

4@!J!@ 8ale of /aterial 8crap

4@!J! Items e*cluded from cost accounts

4@!J!B Profit given as percentage of selling price

4@!J! 8tandard Assumptions

". Let u! 1u8 U#

". Le!!on%End Acti+itie!".2 /oint! for Di!cu!!ion

"." C0ec 'our /rogre!!

".4 Reference!

". AIM1 AND O<=ECTIE1

i) "o study the meaning and definition of cost sheet!

ii) "o understand the treatment of stocs! iii) "o learn

how to prepare cost sheet! iv) "o now the tenders

and uotations

". INTRODUCTION

A cost sheet is a statement prepared to show the different elements of cost!

Preparation of cost sheet is one of the functions of cost accounting!

".2. MEANING AND DE;INITION O; CO1T 1EET

"he e*penses of a product are analysed under different heads in the form of

statement! "his statement is called cost sheet!

9alter igg define, “"he e*penditure which has been incurred upon production for

a period is e*tracted from the financial boos and the store records, and set out in a

memorandum or a statement! If this statement is confined to the disclosure of the cost of theunits produced during the period, it is a termed as a cost sheet! In other words cost sheet is a

statement showing the total cost under proper classification in a logical order!

".". /UR/O1E O; CO1T 1EET

4! It provides details of total cost under logical classification!

?! It provides cost per unit in difference stages!

@! It helps in comparison and control of cost!

! Cost sheet is helpful in estimation of cost for preparation of tender and uotations!

B! It acts as basis for fi*ation of selling price!

".4. 1/ECIMEN O; CO1T 1EET

Cost 8heet for the period RRRRRRRRRRRR

Production RRRRRRRRRRRRR Hnits




!48




!4

/ri8e co!t7 "his is also called direct cost! It is the aggregate of direct materials direct

labour and direct e*penses, which are easily identifiable with the product!

or co!t7 It consists of the total of all items of e*penses incurred in themanufacturing of a product, viz!, prime cost plus factory e*penses! It is also nown as factory

cost or manufacturing cost!

Co!t of /roduction7 "his includes wor cost and administration e*penses!

Production is not deemed to be complete without the managerial and facilitating costs!

Co!t of 1a$e!7 It represents cost of production plus selling and distribution cost

incurred! "hus, the cost of sales is the aggregate of all the direct and indirect costs connected

to the goods sold!

9hen profit is added to the cost of sales, sales can be found! Hsually, selling prices

are fi*ed on the basis of the cost of sales! It ensures that all the costs are recovered and any

desired profit is also obtained!

".&. CO1T 1EET AND /RODUCTION ACCOUNT

Cost sheet is a statement of total cost under different classifications of costs! "he

classification of cost is done on the basis of elements of cost, functions and behaviour of cost!

"he total cost in the form of cost of sales and cost per unit is revealed!

0n the other hand, the cost, sales, and profits presented in the form of a ledger account

is nown as production account or manufacturing account! "he debit side of the account is

shown with opening stoc, e*penses and the credit side is shown with closing stoc and sales!

"he balancing figure is either profit or loss!




!5"

".( CO1T 1EET AND /RODUCTION 1TATEMENT

"he cost of output can be ascertained from the statement nown as cost sheet! "he

items of various costs are e*tracted from financial boos and presented in logical order! "hus,

total cost of a cost centre or cost unit is shown in the cost sheet!

9hen sales, stocs and profits are included in the cost sheet it is called production

statement! igg has defined it as “"he e*penditure which has been incurred upon productionfor a period is e*tracted from the financial boos and stores records and set out in a

memorandum statement! If the statement is confined in the disclosure of the cost of the units

produced during the period it is termed as cost sheet, but where the statement records, cost,

sales and profit it is usually nown as production or output statement or account! 7owever

the modern practice is to e*tend the cost sheet to show profit and sales also and call it

“statement of cost and profit!

".) TREATMENT O; 1TOCB1

".). 1toc! of Ra3 8ateria$!

9hen opening stoc of raw materials, purchase of raw materials and closing stoc of

raw materials are given, raw materials consumed can be calculated as follows1

's!

0pening stoc of raw materials ***

Add1 Purchase of raw materials ***

Add1 Carriage inwards ***Add1 0ther direct materials used ***

Add1 "a*es and duties on the material purchased ***

***

3ess 1 Closing stoc of raw materials ***

3ess 1 8ale of unsuitable raw materials ***

3ess 1 8ale of scrap of raw materials *** ***Cost of raw materials consumed ***

".).2 1toc of or H in H /rogre!!

#9or.in.progress$ means units of production on which wor has been done but are

not yet completely finished! 9or.in.progress is valued on prime cost or wors cost basis but

the latter is preferred! "he opening and closing wor in.progress are ad>usted as given below1

Prime cost Q**Add1 %actory overhead Q**

Add1 0pening wor.in.progress Q**

4DE

3ess1 Closing wor.in.progress Q**

9ors cost Q**




!5!

".)." 1toc of ;ini!0ed Good!

If opening and closing stocs of finished goods are given they are to be ad>usted to

find out cost of production of goods sold!

's!

Cost of production ***

Add1 0pening stoc of finished goods *** ***3ess1 Closing stoc of finished goods *** Cost of

production of goods sold ***

1#eci8en of Co!t !0eet 3it0 in+entorie!

1tate8ent of Co!t and /rofit 93it0 !toc!:

Particulars 's! 's!

0pening stoc of direct materials ***

Add1 Purchase of direct materials ***

+*penses, ta*es and duties on materials purchased ***

***

3ess1 Closing stoc of direct materials ***&irect material scrap sold *** ***

Cost of direct material consumed ***

&irect wages ***

&irect or chargeable e*penses ***

/ri8e co!t ***

Add1 %actory overhead ***

***Add1 0pening wor.in.progress ***

***3ess1 Closing wor.in.progress ***

or! co!t 9or: ;actor' co!t ***Add1 Administration overheads ***

Co!t of #roduction ***

Add1 0pening stoc of finished goods ***

***

3ess1 Closing stoc of finished goods ***

Co!t of good! !o$d ***

Add1 8elling and distribution overheads ***

co!t of !a$e! ***

Add1 Profit G 3ess1 loss ***

1a$e! ***".* TENDER1 AND 5UOTATION1

%reuently the manufacturers of consumer durables and capital goods are ased to

uote the price at which they can supply their ouput! "he price at which the items of output

are offered for sale is nown as #tender$ or #uotation$ price! "he tender has to be prepared

carefully since it may be accepted and goods have to be supplied in future at the uoted rate!

In order to prepare the tender the following items are to be analysed!

4! 'aw materials ?! &irect labour!

@! Chargeable e*penses ! 9ors overhead




!52

B! 0ffice overhead ! 8elling overhead

D! +stimated profits

+stimation of different elements of cost has to be made! "he following are the

accepted norms1

(A)&irect material and direct labour cost is generally estimated on the basis of #cost per unit$ of preceding period, sub>ect to fluctuations in the mared price of materials and

labour rates1

() 0verhead is estimated on the basis of past e*perience as a percentage as given below1

%actory 0verheads

. /ercentage of factor' o+er0ead! to direct 3age! Q

4KK

&irect 9ages

0ffice overheads

2. /ercentage of office o+er0ead! to 3or! co!t Q 4KK

9ors cost

". /ercentage of !e$$ing and di!tribution o+er0ead! to 3or! co!t

2 8elling and &istribution overheads

Q 4KK

9ors cost

(0r)

"he percentage may be calculated on cost of production

2 8elling and &istribution overheads

Q 4KK

Cost of production

"he overhead percentages obtained on the basis of preceding period$s cost sheet are

used for the tender by giving due regard to liely changes anticipated!

(C) +stimation of Profit for a "ender or Xuotation

8ometimes profit is given as percentage of cost! In that case profit for the tender is

ascertained as given below1

/rofit Co!t of 1a$e! -Percentage of profit

4KK

If profit is to ascertain as a percentage of selling price of the tender, the profit is to be

calculated as given below1

Cost of 8ales * 'ate of profit sales




!53

Profit 2

4KK. 'ate percentage on sales

"., IM/ORTANT /OINT1 TO <E REMEM<ERED

".,. A$ternati+e ter8! are u!ed for 8an' ite8! in co!t !0eet "he

following are some of them1a! &irect 3abour . &irect wages, Production wages, Productive wages, Productive

labour

b! &irect e*penses . Chargeable e*penses

c! 0verhead . #0n.cost$, #urden$

d! %actory overhead . 9ors.overhead, production

overhead, manufacturing overhead

e! %actory cost . 9ors cost, /anufacturing cost

f! Administrative overhead . 0ffice overhead

".,.2 a$uation of 1toc! of ;ini!0ed Good!9hen details of units produced and sold are available, the closing stoc of finished

units can be valued at #current cost of production$!

Cost of production

a$ue of c$o!ing !toc unit! 2 * Closing stoc units Hnits produced

If value of opening stoc units is not given, they can also be valued on the current cost basis,

assuming that costs in the pervious period were similar to the current period!

".,." 1a$e of Materia$ 1cra#

It can direct material scrap and can be shown as a deduction from direct material cost!

It may also be indirect material scrap in which case it has to be reduced from the factory

overhead cost!9hen there is no indication, either method can be followed by stating the assumption!

".,.4 Ite8! e-c$uded fro8 co!t account!

(a) Purely financial e*penses and losses lie interest on loans and debentures, loss on

sale of investments and fi*ed assets, cash discount!(b) Provisions lie provision for income

ta*, provision for doubtful debts!(c) Capital e*penses and losses written off lie goodwill,

preliminary e*penses, discount on issue of shares, etc!(d) Appropriations lie dividends paid

transfer to reserves!

".,.& /rofit gi+en a! #ercentage of !e$$ing #rice

Hsually profit is added to the cost of sales to ascertain the sale price! If profit

percentage is given on sales, it must be converted to percentage on cost!

%or e*ample if profit is ?K on sale!

8ales is 4KK5 profit ?K 4Cost 2 4KK.?K 2 EK

Profit to cost 2 (or) ?B

".,.( 1tandard A!!u8#tion!

In the conte*t of tenders or uotations, the following assumptions can be made if

nothing contrary is given in the problem!




!54

(a) %actory overhead to direct wages ratio of the previous period holds good for

current period also!

(b) Administrative overhead to wors cost ratio of the previous period is applicable

in current period also!

C0ec 'our #rogre!! "

+*plain the following terms1

(i) Prime cost (ii) 9or cost (iii) Cost of production (iv) Cost of sales


(b) Chec your answer with the ones given at the end of this 3esson (pp!?KK)!





". ILLU1TRATION1

I$$u!tration

Calculate Prime Cost, %actory Cost, Cost of Production, Cost of 8ales and Profit from the

following details1

&irect /aterials 's! 4K,KKK &irect 3abour 's!,KKK &irect +*penses 's! BKK %actory +*penses

's! 4,BKK Administrative +*penses 's! 4,KKK

8elling +*penses 's! @KK

8ales

1o$ution7

's! ?K,KKK

/ri8e Co!t

('s!4,BKK)

2

2

&irect /aterials < &irect 3abour < &irect +*pens

's! 4K,KKK < 's! ,KKK < 's!BKK

or! Co!t

('s!4,KKK)

2

2

Prime Cost < %actory +*penses

's! 4,BKK < 's!4,BKK

Co!t of /roduction

('s!4D,KKK)

2

2

9ors Cost < Administrative +*penses

's! 4,KKK < 's!4,KKK

Tota$ Co!t

('s!4D,@KK)

2

2

Cost of Production < 8elling +*penses

's!4D,KKK < 's!@KK

/rofit

('s!?,DKK)

2

2

8ales = "otal Cost

's! ?K,KKK = 's!4D,@KK

I$$u!tration 2




!55

&raw a statement of cost form the following particulars1

0pening 8toc1 R!.

4! /aterials ?,KK,KKK ?! 9or.in.

progress K,KKK

@! %inished goods B,KKK

Closing 8toc1 4! /aterials 4,EK,KKK?!9or.in.progress BK,KKK@! %inished goods 4B,KKK

/aterials purchased B,KK,KKK

&irect 9ages 4,BK,KKK

/anufacturing e*penses 4,KK,KKK

8ales E,KK,KKK

8elling and distribution e*penses ?K,KKK

1o$ution1tate8ent of Co!t

's! 's!

0pening stoc of materials ?,KK,KKK

Add1 Purchase of materials B,KK,KKK

D,KK,KKK3ess Closing stoc of materials 4,EK,KKK

/aterials consumed1 B,?K,KKK

&irect 9ages 4,BK,KKK

/ri8e Co!t ,DK,KKK

Add1 /anufacturing e*penses 4,KK,KKK

D,DK,KKK

Add1 0pening stoc of wor.in.progress K,KKK

E,@K,KKK3ess1 Closing stoc of wor.in.progress BK,KKK

C08" 0% P'0&HC"I0- (wor cost)

1tate8ent of /rofit

D,EK,KKK

's!

6ood manufacture D,EK,KKK

Add1 0pening stoc of finished goods B,KKK

D,EB,KKK

3ess1 Closing stoc of finished goods 4B,KKK

D,DK,KKKAdd1 8elling and distribution e*penses ?K,KKK

Tota$ Co!t D,JK,KKKNet /rofit 4K,KKK

1a$e! E,KK,KKK

I$$u!tration "

"he following data relate to the manufacture of a product during the month of

Fanuary

'aw materials consumed 's!EK,KKK

&irect 9ages 's!E, KKK

/achine hour wored E,KKK



otal ost

s.

ost per 5nit

s.


!56

/achine hour rate 's!

0ffice overhead 4K of wors cost

8elling overhead 's!4!BK Per unit

Hnit produced ,KKK

Hnits sold @,KK at 's!BK each!

Prepare cost sheet and show (a) cost per unit and (b) profit for the period!

1o$ution7

Co!t !0eet for =anuar' (output1 ,KKK Hnits)

'aw /aterials EK,KKK ?K,KK

&irect 9ages E,KKK 4?,KK

Prime Cost 4,?E,KKK @?,KK

%actory 0verhead (E,KKK * 's!) @?,KKK E,KK

9ors Cost 4,K,KKK K!KK0ffice overhead (4K of wor cost) 4,KKK !KK

Cost of production 4,D,KKK

1tate8ent of /rofit 9"( unit! !o$d:

!KK

's! 's!

Cost of Production 4,BE,KK

(@,KK * 's!)

!KK

8elling 0verhead B,KK

(@,KK * 's!4!BK)

4!BK

Cost of 6oods 8old 4,@,EKK

Profit 4,?KK

B,BK

!BK

8ales (@,KK * 's!BK) 4,EK,KKK BK!KK(a) Cost per unit 2 's! (b) "otal Profit 2 's!4,?KK

-ote1 Cost 8heet discloses the total cost and the cost per unit during the given period!

I$$u!tration 4

%rom the following particulars prepare a statement showing the components of the

total sales and the profit for the year ended @4st &ecember!

's!

8toc of finished goods (4st Fan!) ,KKK

8toc of raw materials (4st Fan!) K,KKK

9or.in.progress (4st Fan!) 4B,KKKPurchase of raw materials ,DB,KKK

Carriage inwards 4?,BKK

%actory rent, ta*es D,?BK

0ther production e*penses @,KKK

8toc of goods (@4st &ec!) 4B,KKK

9ages 4,DB,KKK

9or manager$s salary @K,KKK

%actory employees$ salary K,KKK




!57

Power e*penses J,BKK 6eneral e*penses @?,BKK 8ales

for the year E,K,KKK 8toc for the year BK,KKK

9or.in.progress (@4st &ec!) 4K,KKK

1o$ution7

Co!t 10eet for t0e 'ear ending "!t Dec.

's! 's!8toc of raw materials on 4st Fan! K,KKK

Add1 Purchase during the year ,DB,KKK

B,4B,KKK

3ess1 8toc of materials on @4st &ec! BK,KKK

Cost of materials consumed ,B,KKK

Add1 9ages 4,DB,KKK

Carriage inwards 4?,BKK

/ri8e Co!t ,B?,BKK

Add1 %actory on cost1

9ors manager$s salary @K,KKK%actory employees$ salary K,KKK

%actory rent, ta*es and insurance D,?BK

Power e*penses J,BKK

0ther production e*penses @,KKK

Add1 9ors.in.progress 4st Fan! 4,J,DBK

4B,KKK

4,,DBK

3ess1 9ors.in.progress @4st &ec! 4K,KKK

;actor' Co!t 4,B,DBK

Add1 0ffice on cost1 E,KD,?BK6eneral e*penses @?,BKK

Tota$ Co!t E,@J,DBK

Add1 8toc of finished goods 4st Fan! ,KKK

E,B,DBK

3ess1 8toc of %inished goods @4st &ec! 4B,KKK

Co!t of !a$e! E,@K,DBK

/rofit ?J,?BK

Tota$ !a$e! E,K,KKK

I$$u!tration &7 0n August 4B, ?KK@ a manufacturer 8ethu desired to uote for a contract for

the supply of BKK radio sets! %rom the following details prepare a statement showing the price

to be uoted to give the same percentage of net profit on turnover as was realized during

months ending on @Kth Fune ?KK@1

's!

8toc of materials as on 4st Fan! ?KK@ ?K,KKK

8toc of materials as on @Kth Fune ?KK@ ?B,KKK

Purchases of materials during months 4,BK,KKK

%actory wages during months 4,?K,KKK

Indirect charges during months ?B,KKK




!58

0pening stoc of completed sets -il

Closing stoc of completed sets 4KK

8ales during months @,?,KKK

"he number of radio sets manufactured during these si* months was 4BK sets

including those sold and those stoced at the end of the period! "he radios to be uoted are of

uniform uality and size as were manufactured during the si* months to @K th Fune ?KK@! Asfrom August 4, the cost of factory labour has gone up by 4K!

1o$ution7

1tate8ent of co!t and #rofit of Radio !et! for !i- 8ont0 ending " t0

=une 2"

Particulars 's Per unit

's

0pening stoc of raw material ?K,KKK

(<) Purchases of material 4BK,KKK

4DK,KKK

(.) Closing stoc of material ?B,KKK

Materia$ con!u8ed 4,B,KKK 4KK

%actory wages 4,?K,KKK E?!D

/ri8e co!t ?,B,KKK 4E?!D

(<) Indirect wages ?B,KKK 4D!?

(<) 0pening wor.in.progress .

(.) Closing wor.in.progress .

or co!t ?,JK,KKK ?KK!KK(<) Administration overhead .

Co!t of #roduction ?,JK,KKK ?KK!KK

(<) 0pening stoc of finished goods .

(.) Closing stoc of finished goods

(4KK * ?KK)

?K,KKK

Co!t of good! !o$d ?,DK,KKK ?KK

(<) 8elling &istribution overhead .

Co!t of !a$e! ?,DK,KKK ?KK

/rofit B,KKK K

1a$e! 94&%: @?,KKK ?K

oring Note Per unit /r /r Salesosto6t o6t 4KK

4K4KK

E?.D



71.89


!5

increase 4KK

BKKK 4!

4KK

@?KKK 4KK

BKKK ?K

?DKKKK

E?!D

E!?E

9ages per unit for

uotation

1tate8ent !0o3ing 6uotation for & radio !a$e!

Particulars "otal Per unit

/aterials BK,KKK 4KK!KK

%actory wages B,B?K J4!K

/ri8e co!t JB,B?K 4J4!K

(<) Indirect changes E,?K 4D!?

Co!t of !a$e! 4,K,4K ?KE!?E

?K,E?E 4!

/rofit ?K on cost 4K4K *

!a$e! 4,?,JE ?J!J

". LET U1 1UM U/

Cost sheet shows the elements of cost at different levels! 9or.in.progress at the

beginning and at the end ad>usted in factory cost! 9e can tae cost as the base for preparing

uotation foe a >ob! 0verheads are absorbed on the basis of the information given in cost

sheet! +*penses and losses are purely financial nature, capital, e*penses and less written off

and appropriations are not taen into consideration while preparing cost sheet!

". LE11ON END ACTIITIE1

4! 9hat is cost sheetN

?! 9hat are the purposes of cost sheetN

@! 9hat do you understand overheadN

! 9rite short notes on1

(i) Prime cost (ii) 9or cost (iii) 9or.in.

progress (iv) Cost of production (v) Cost of sales!

B! 7ow are #"enders$ preparedN

! %rom the following information prepare a cost sheet for the month of Fanuary

's!

8toc of raw materials on 4st Fanuary ?B,KKK

4! Profit on sales 1

Profit on costs 1

?! %actory wages 1

(<) 4K 1




!6"

8toc of raw materials on @4st Fanuary ?,?KK

Purchase of raw materials ?4,JKK

Carriage on purchases 4,4KK

8ale of finished goods D?,@KK

&irect wages 4D,?KK -on.productive wages EKK

&irect e*penses 4,?KK

%actory overheads E,@KK

Administrative overheads @,?KK

8elling overheads ,?KK

D! A factory produces 4KK units of a commodity! "he cost of production is1

's!

&irect materials 4K,KKK

&irect wages B,KKK&irect e*penses 4,KKK

%actory overheads ,BKK

Administrative overheads @,EK

If profit of ?B on sales is to be realized what would be the selling price of each unit of the

commodityN Prepare the cost sheet!

E! "he 8ivia Co! 3td! has received an enuiry for supply of 4K,KKK steel folding chairs!

"he costs are estimated as under1

'aw /aterials . 4,KK,KKK Lgs! at 's!4 per Lg!

&irect 9ages . 4K,KKK hours at 's! per hour!;ariable 0verheads 1 %actory 's!?!K per labour hour

8elling and &istribution 's!4,KKK!

%i*ed 0verheads 1 %actory 's!,KKK

8elling and &istribution 's!4,KKK

Prepare statement showing the price to be fi*ed which will result in a profit of ?K per cent on

selling price!

J! "he following information has been obtained form the records of 8elvi /anufacturing

3imited for the period from Fune 4, 4JD? to Fune @K, 4JJ?5 's!

Cost of raw materials in stoc as on 4st Fune 4JJ? @K,KKK

'aw materials purchased during the month ,BK,KKK

9ages paid ?,KK,KKK

9ages 0utstanding @K,KKK

%actory overheads J?,KKK

9or in progress as on 4!!4JJ? 4?,KKK

'aw materials in stoc as on @K!!4JJ? ?B,KKK

9or in progress as on @K!!4JJ? 4B,KKK




!6!

0pening stoc of finished goods K,KKK

Closing stoc of finished goods BB,KKK

8elling and distribution overheads ?K,KKK

8ales J,KK,KKK

Administration overheads @K,KKKOou are reuired to prepare a statement showing the cost of goods manufactured and

cost of goods sold!

".2 CECB YOUR /ROGRE11

Oour answer is given below 1

/ri8e co!t7 "his is also called direct cost! It is the aggregate of direct materials direct

labour and direct e*penses, which are easily identifiable with the product!

or co!t7 It consists of the total of all items of e*penses incurred in the

manufacturing of a product, viz!, prime cost plus factory e*penses! It is also nown as factory

cost or manufacturing cost!Co!t of /roduction7 "his includes wor cost and administration e*penses!

Production is not deemed to be complete without the managerial and facilitating costs!

Co!t of 1a$e!7 It represents cost of production plus selling and distribution cost

incurred! "hus, the cost of sales is the aggregate of all the direct and indirect costs connected

to the goods sold!

"." /OINT1 ;OR DI1CU11ION

4! +*plain the treatment of stoc!

?! 7ow to prepare a cost sheet!

4JK

".4 RE;ERENCE1

4! -igam and 8harma = Cost Accounting!

?! Fain -arang = Cost Accountancy!




!62

LE11ON 4 1TORE CONTROLContent!7

4. Ai8! and ob?ecti+e!

4.2 Introduction

4." Meaning and T'#e! of 1tore

4!?!4 Centralised stores

4!?!? &ecentralised stores

4!?!@ Central stores with sub stores

4." 1tore Bee#er

4!@!4 %unctions of stores eeper

4.4 C$a!!ification and Codification

4!!4 "ypes of Coding

4.& 1tore or Materia$ contro$

4!B!4 0b>ectives of 8tore control

4!B!? +ssential of 8tore control

4!B!@ Advantages of 8tore control

4.( In+entor' turno+er

4!!4 Input.output 'atio

4.) A<C Ana$'!i! and ED Ana$'!i!

4.* In+entor' !'!te8

4!E!4 Periodical Inventory system

4!E!? Perpetual Inventory system

4., ;i-ation of !tore $e+e$

4!J!4 'e order level

4!J!? /a*imum level

4!J!@ /inimum level

4!J! Average stoc level

4. Econo8ic Order 5uantit'

4. I$$u!tration!

4.2 Let u! 1u8 U#

4." Le!!on%End Acti+itie!

4.4 C0ec 'our /rogre!!

4.& /oint! for Di!cu!!ion

4.( Reference!

4. AIM1 AND O<=ECTIE1

i) "o study the meaning of stores and types of stores!

ii) "o now the store eeper, classification and codification!

iii) "o understand the store control and inventory

control! iv) "o study inventory turnover, AC

analysis and ;+& analysis!

v) "o study the fi*ation of stoc levels and +conomic order Xuantity!

4. Introduction




!63

8tore is a place where the various items of materials are ept safely till

they are issued for production! +very manufacturing concern maintains a store

under the control of a person called storeeeper! "he store department acts as a lin

between the purchasing department and production department! "he materials

reuired for the production will be issued from the store as an when it is needed!

4.2 Meaning and T'#e! of 1tore

8tore is a place where the various items of materials are ept safely till they

are issued for production is called store!

T'#e! of !tore!7 "he following are the three types of stores1

i) Centralized

stores! ii)

&ecentralized

stores!

iii) Central stores with sub.stores!

4.2. Centra$i!ed 1tore!

"he usual practice in most of the concerns is to have a central store! In case

of such a store, materials are received by and issued from one stores department! Allmaterials are ept at one central store!

4.2.2 Decentra$i!ed 1tore!

Hnder this type of stores, independent stores are situated in various

departments! 7andling of stores is undertaen by the storeeeper in each

department! "he departments reuiring stores can draw from their respective stores

situated in their department! "he disadvantages of centralized stores can be

eliminated if there are decentralized stores! 8uch type of stores set up to meet the

reuirements of materials of each production department are not very popular

because of the heavy e*penditure involved!

4.2." Centra$ 1tore! 3it0 1ub%!tore!

In large factories, departments are situated at a distance from the central

store5 so in order to eep the transportation costs and handling charges to minimum,

substores (in addition to the central stores near the 'eceiving &epartment) should

be situated near production departments! %or each item of materials, a uantity is

determined and this should be ept in stoc in sub.store at the beginning of any

period! At the end of a period the storeeeper of each sub.store will reuisition

from the central stores the uantity of the material consumed to bring the stoc upto

the predetermined uantity! In short, this types of stores operates in a similar way to

a petty cash system5 so this system of stores is also nown as the Imprest system of

stores control!

"o conclude, the ideal course for a large factory to overcome thedisadvantages of centralized and decentralized stores is to have central stores with

sub.stores!

4." 1TORE BEE/ER

All manufacturing concerns appoint a person nown as the 8toreeeper,

Chief 8toreeeper or the 8tores 8uperintendent who is in charge of the stores

department and is responsible for stores control! "he storeeeper should have

technical nowledge and wide e*perience in stores routine and ability of organizing

the operations of the stores! 7e should be a man of undoubted integrity!




!64

4.". ;unction! of 1tore Bee#er

"he cost of raw materials is the largest elements of cost! "herefore it is

imperative that utmost importance should be given to storeeeping! "he main

functions of the storeeeper are as follows1

i) 7e must receive the materials, store them properly according to the goods

inspection report or the invoice!ii) /aterials are classified according to the nature, size, shape, price, etc! 7e

mush places them in definite places (racs or bins) and number them for

easy identification! iii) 7e must initiate the purchase reuisition when the

material reaches the ordering level!

iv) 7e should not allow unauthorized persons to enter the store room!

v) 7e must maintain stoc registers, entering therein all receipts, issues and balances!

vi) 7e should issue materials only upon written material reuisition duly signed by an

authorized person!

vii)All items must be entered in the bin cards and this must be tallied with ledger

balances!

4.4 CLA11I;ICATION AND CODI;ICATION

%or an efficient store eeping, proper classification and codification of materials

is essential! /aterials are to be classified on the basis of their nature and they may

be further classified on the basis of type, shape, colour, etc! 0nce the materials are

classified they are to be allotted codes which will be helpful for easy identification!

Codes are usually short symbols which replace the longer names of the materials!

4.4. T'#e! of coding

"he following are the important types of coding

i: A$#0abetica$ 8et0od7 An alphabet is allotted to each item of stores! %or

e*ample #A$ for nut, #$ for bolt, etc! "his system is not fle*ible! If theorganization is large, where there are number of items of stores, this

method is not suitable!

ii: Mne8onic7 It is an improvement over the alphabetical method! In this

method, the first sound of the name is considered for each material! %or

e*ample Petrol can be #P"$, &iesel as #&8$, Lerosine as #L8$, etc! "he

material can be easily traced without referring to inde*!

iii: Nu8erica$ Met0od7 A number is allotted to each material for e*ample K4,

K?, K@, K and so on! 9hen large numbers of items are there, this method

is suitable! "here are two types of numbering = 8traight numbering and

loc numbering!

i+: A$#0abetica$%cu8%Nu8erica$ 8et0od7 In this method, alphabet and

numerals are used in combination! %or e*ample, 8teelwire.4 “894, Copper wire?C9?,

brasswire 4. 94 etc!

+: 1tandardiKation and 1i8#$ification7 8tandardization and simplification

aim

at inventory control by reducing the number of varieties of materials stoced in

stores! %or each item in store, specifications are allotted! "his will facilitate buying

of correct materials as it maes it clear to the buyer and seller the correct material




!65

are reuired! "he specifications ensure that material of correct uality is used in

production to maintain the reuired uality of finished output!

8tandardization is made easier, since the help of Indian 8tandard Institute

(I8I), International 0rganization for 8tandardization (I80) and other specialized

agencies may be taen for standardization of stores!

8implifications is a corollary of standardization and aims at minimizing thenumber of items carried in the stores so that carrying cost and investments in

materials may be reduced!

4.& 1TORE OR MATERIAL CONTROL

8tore control aims at achieving savings in material cost, improvement in

material handling, increased production and avoidance of over investment or under

investment in inventories! "he important ob>ectives of material control are1

4.&. Ob?ecti+e! of !tore contro$1

"he following are the important ob>ectives of store control

a! to mae available the right type of raw material at the right time in order to have

smooth and continuous flow of production5

b! to ensure effective utilization of material5

c! to prevent over stocing of materials and conseuent locing up of woring capital5

d! to procure appropriate uality of raw materials at reasonable price5

e! to prevent losses during storage of materials5

f! to supply information to the management regarding the cost of materials and the

availability of stoc5

4.&.2. E!!entia$ of !tore contro$7

"he following at the essentials of good system of material control!

a! "here should be proper co.operation and co.ordination among the departments

dealing with materials! b! All purchases must be centralized and must be made through an e*pert purchase

manager!

c! All items in the stores should be classified with codes!

d! 'eceiving and inspection procedure should be chaled out!

e! Ideal storage and preservation facilities will have to be provide!

f! 8tores control measures lie AC analysis, perpetual inventory system, stoc

verification should be introduced!

g! "here should be an efficient system of internal audit and internal chec!

h! /a*imum level, minimum level and re.order level of stoc should be fi*ed to

avoid over.stocing or shortage of materials!i! Appropriate records should be maintained to control issues and utilization of stores

in production!

>! "here should be a system of regular reporting to management regarding materials

purchases, storage and utilization!

4.&.". Ad+antage! of !tore contro$7

"he following are the main advantages of store control1

a! It helps to eliminate or minimize waste through control of purchases, storage and

issue of materials!




!66

b! It facilitates detection and elimination of fraud and pilferage by implementing stoc

control measures!

c! It facilitates maintenance of stocs at appropriate levels so that production is not

stopped for want of materials! "hus, it prevents production delays!

d! It ensures up.to.date maintenance of stoc records!

e! It avoids over investment in inventories!f! It facilitates preparation of accurate monthly financial statements reuired for

various management information reports!

g! It furnishes uicly and accurately the value of materials and supplies used in

various departments!

4.( INENTORY TURNOER

Lohler defines inventory turnover ratio as “a ratio which measures the

number of times a firm$s average inventory is sold during a year, In his view the

ratio is an indicator of a firm$s inventory management efficiency! A high inventory

turn over ratio indicates fast movement of material! A low ratio on the other hand

indicates over investment and blocing up of woring capital!

"he Inventory turnover is calculated on the sales or cost of sales! It is

measured in terms of value of materials consumed to the average inventory during a

period! It indicates number of times the inventory is consumed and replenished! If the

number of days in a year is divided by turn over ration, the number of days for which

the average inventory is held can be ascertained!

"he turnover ratio differs from industry to industry! 0n the basis of the

ratio, a decision is made to reduce investment on slow moving materials and stop

over stocing of undesirables material!

(i) Inventory "urnover 'atio 2 Cost of Materials Consum

Cost of Average Stock

(ii) Average 8toc 2 Opening Stock of Material : Closin g stockof Material

(iii) Inventory "urnover in days 2 In-entor,'a,s? inurno-ertheperiodatio

4.(.. In#ut%out#ut%Ratio

"his is yet another method of inventory control! Input output ratio is the

ratio of the uantity of material to production and standard material content of the

actual output! "his is possible in industries where the product and raw material are

being e*pressed in same uantitative measurement such as ilograms, /etric

tonnes, etc!



$ ;8<8

" 18 to 28 1828

<8;8 to =18


!67

"he Input.output ratio analysis indicates whether the consumption of actual

material when compared with standards is favorable or adverse! "he raw material

cost of the finished product can be arrived at by multiplying material cost per unit

by the input.output ratio!

"he ratio is obtained as given below1

S tanS tandarddardcoscost oft ofStan$ctualdard>uantit,>uantit,

4.). A<C ANALY1I1 AND ED ANALY1I1

A<C ana$'!i!

It is #/anagement by e*ception$ system of Inventory control! In this

Always etter Control (AC) techniue of inventory control, the materials are

classified and controlled according to value of the materials involved! It is also

called proportional parts value analysis! "hus, high value items are paid more

attention than low value items! "he materials are classified under #A$, #$ or #C$

designation on the basis of their value and importance!

#A$ category consists of a few items of high value! Category #$ includes more

items of medium value and category #C$ includes all other materials of small value!

"he general classification of items under AC categories are as given below1

Category Percentage of Percentage of

total items total material cost

B to 4K

%rom the above classification, it is clear that #A$ items are of minimum

uantity and of ma*imum value out of total uantity and value of materials! "hey

have to be controlled to the fullest possible e*tend by all methods of inventory

control from the time of purchase till they are consumed in production! #$ and #C$

items are of ma>or portion of total uantity of raw materials but having minimum

capital investment! "herefore, they are to be managed through less stringent

controls!

Ad+antage!

4! +ffective control is applied on the high value items rather than concentrating on

all items! "his results in reduction in value of material losses!?! 0ptimum investment in materials as minimum reuired uantity of #A$ items with

high value are purchased!

@! 8torage cost is ept at minimum amount as high value materials representing

minimum uantity are ept in stores!

ED ana$'!i!

It is a device intended for control of spare parts! 0n the basis of the

relative importance, spare parts may be classified into @ category viz!, ; for vital, +

for essential and & for desirable! #;ital$ spare parts are those whose non availability




!68

may lead to stoppage of production! "herefore every effort should be taen to

ensure the availability of these spare parts at any time! Production may not be

interrupted due to the non.availability of #+ssential$ spares for one hour or one day,

beyond which production will be stopped and thus these items are very essential!

#&esirable$ spare parts are those spares which are needed but their absence for a

wee or so may not lead to stoppage of production!

4.* INENTORY 1Y1TEM

Inventory means stoc! +very manufacturing concern has to maintain

proper and accurate records regarding the uantity and value of inventory in hand!

"he records may be maintained according to any one of the following two systems!

4.*.. /eriodica$ in+entor' !'!te8

Hnder this system, stocs are verified only at the end of the accounting period,

usually a year! Periodic inventory system has the following disadvantages!

a! usiness or production has to be stopped during the period of stoc.taing!

"his will result in loss of revenue to the firm!

b! Physical verification of stoc is time consuming and tedious!

c! 8toc verifiers are not e*perts in stoc.taing! 8o, verification cannot be perfect!

d! "he element of surprise chec which is essential for effective control is completely

absent!

e! 8toc discrepancies are not detected till the end of the accounting period!

"he system of continuous stoc.taing overcomes the disadvantages of periodic

stoc.taing!

4.*.2 /er#etua$ in+entor' !'!te87

"his system is also nown as “Automatic Inventory 8ystem! It is an

important aid to material control! Its main ob>ect is to mae available detail aboutthe uantity and value of stoc of each item, at all times! It consists of maintaining

records for each type of material, showing the uantities and value of material

received, issued and is stoc! It also covers continuous stoc.taing!

Definition7 "he Institute of Cost and /anagement Accounts (IC/A)

3ondon defines the perpetual inventory as, “a system of records maintained by the

controlling departments, which reflects the physical movements of stocs and their

current balance!

4., ;IATION O; 1TOCB LEEL1

"he ob>ect of fi*ing stoc levels for each item of material is to maintain

reuired uantity of materials in the store and thereby the e*penses may be

reduced! "he different stoc levels are1 (4) /inimum stoc level (?) /a*imum

stoc level (@) 'eorder stoc level () Average stoc level!

4.,.. Reorder !toc $e+e$7 It is the point at which the storeeeper should initiate

purchase reuisition for fresh supply! "his level lies between the ma*imum level

and the minimum level! "he re.ordering point is fi*ed slightly higher than the

minimum stocs in such a way that the difference between minimum level and re.

ordering level is sufficient to meet the demand for production up to the time of

fresh supply! "he level depends upon the lead time, rate of consumption and

+conomic order uantity (+0X)!




!6

;or8u$a7

Re%order $e+e$ of ordering $e+e$ 2 Mini8u8 $e+e$ con!u8#tion during t0e ti8e

re6uired to get fre!0 !u##$'

Or

Ma-i8u8 con!u8#tion - Ma-i8u8 re%order #eriod

4.,.2. Ma-i8u8 !toc $e+e$

It is the stoc level above which stoc should not be allowed to rise! "his

is the ma*imum uantity of stoc of raw materials which can be had in the stoc! It

is goes above, it will be overstocing!

"he demerits are1

4! Capital is bloced

?! /ore space is needed

@! &eterioration of stocs is possible

! "here will be loss due to obsolescence

B! "here is the danger of depreciation in value

"he ma*imum level is fi*ed by taing into account the following factors1

4! Availability of capital

?! 8pace available in stores

@! 'ate of consumption

! 'e.order level

B! &elivery time to obtain fresh stoc

! Changes in price

D! Cost of maintaining the stoc

E! Possibility of change in fashion

J! 8easonal nature of supply4K! 'estriction imposed by goods

44! +conomic order uantity (+0X) ;or8u$a7

Ma-i8u8 !toc $e+e$ Re%order $e+e$ Re%ordering 6uantit' %

9Mini8u8 con!u8#tion - Mini8u8 re%order #eriod:

4.,.". Mini8u8 !toc $e+e$

It represents the minimum uantity of an item of material to be ept in the

store at any time! /aterial should not be allowed to fall below this level! If the

stoc goes below this level, production may be held up for want of materials! "his

stoc is also nown as safety stoc level or buffer stoc! In determining the

minimum level the following factors are to be considered!

4! 3ead time ie! "ime reuired for getting fresh delivery of material!

?! 'ate of consumption of material during the lead time!

@! Availability of substitute and re.order level

;or8u$a7

Mini8u8 !toc $e+e$ 2 Reorder $e+e$ % 9Nor8a$ con!u8#tion - Nor8a$ reorder

#eriod

4.,.4. A+erage !toc $e+e$7




!7"

"his stoc level shows the average uantity of materials ept in the store!

"his is regarded as the average of ma*imum and minimum stoc levels!

A+erage !toc $e+e$ +aimum le-el +inimum le-el;or8u$a7

:

? If ma*imum stoc level is not

available!

Average stoc level 2 /inimum level < Y 'eorder uantity

4. ECONOMIC ORDER 5UANTITY EO5J

+conomic ordering uantity depends on many factors lie cost of purchasing

and receiving, normal consumption, interest on capital, availability of storage

accommodation, ordering and carrying costs! +conomic ordering uantity is the

reorder uantity, which is the uantity to be purchased each time an order is placed!

9hen the purchase price remains constants, the economic ordering uantity

will be determined based on the following formula1 +0X $" ?S

9here

+0X 2 +conomic 0rdering Xuantity

A 2 Annual consumption or usage of material in units!

2 uying cost per order!

C 2 Cost per unit!

8 2 8torage and carrying cost per annum!


9hat you understand about AC analysis


(b) Chec your answer with the ones given at the end of this 3esson

(pp! ?4B)!





4. ILLU1TRATION1

I$$u!tration




!7!

"he following information is relating to a material for the year ended 4JJE!

"he value of material is 'e!4 per Lg!

0pening 8toc EKK Lg!

Purchases 4?,KKK Lg!

Closing 8toc KK Lg!

Calculate the material turnover ratio and e*press in number of days the average

inventory held!

1o$ution7

Cost of /aterial Consumed

Inventory turnover ratio or /aterial "urnover 'atio 2

Average value of /aterial in soc

Cost of /aterial Consumed 2 0pening 8toc of /aterial < Purchase of /aterial =

Closing stoc of /aterial

2 EKK < 4?,KKK.KK

2 's! 4?,KK

0pening 8toc of /aterial < Closing 8toc of /aterial

Average value of /aterial 2

?

2 2 's!KK

/aterial or Inventory turnover ratio 2 2 ?K!D times

&ays during the period

Inventory of /aterial "urnover in &ays 2

/aterial of Inventory turnover ratio

@B days

2

?K!D

2 4D!B days (or) 4E days

I$$u!tration 2

%ind out the economic order uantity and the number of orders per year from

the following information1

/onthly consumption @,KKK units

Cost per unit 's!B

0rdering cost 's!4BK per order!

Inventory carrying cost ?K of the average inventory!




!72

1o$ution7

Annual consumption 2 @,KKK * 4? 2 @,KKK units

+0X S$"

?

9here

A 2 Annual usage of /aterial

2 uying cost per order

C 2 Cost per unit

8 2 8torage and carrying cost per unit

+0X ?@?KKK 4BK @4K?KK?KKK

?K

B

4KK

2 4,KKK units!

-umber of orders per day 2 @?KKK @@

4?KKK

I$$u!tration "

"wo components Q and O are used as follows1

/inimum usage 1 BK units per wee each!

/a*imum usage 1 4BK units per wee each

-ormal usage 1 4KK units per wee each

0rdering uantities 1 Q = KK units

O. 4,KKK units

&elivery period 1 Q = to wees!

O = ? to wees!




!73

/a*imum reorder period for emergency purchases Q1 ? wees O1 ? wees

Calculate for each component1

a) 'ecording level

b) /a*imum level

c) /inimum level

1o$ution

"he terms #&elivery period$, #'eorder period$, #3ead time$, #"ime lag$, etc!, are used

interchangeably! 8imilar is the case with the terms #usage$ and #Consumptions$!

(a) 'e.order level 2 /a*imum consumption * /a*imum reorder period

Component Q 2 4BK units * wees 2 JKK units

Component O 2 4BK units * wees 2 KK units

(b) /a*imum level 2 'eorder level < 'eorder Xuantity = (/inimum

Consumption * /inimum reorder period)

Component Q 2 JKK Hnits < KK units = (BK units *

wees) 2 4,BKK = ?KK 2 4,@KK units!

Component O 2 KK units < 4,KKK units = (BK units * ? wees)

2 4,KK = 4KK 2 4,BKK units

(c) /inimum stoc level 2 'eorder level = (-ormal consumption * -ormal

'eorder period )

Component Q 2 JKK units = (4KK units * < wees)

?

2 JKK = BKK 2 KK units

Component O 2 KK units = (4KK units * ?< wees)

?

2 KK = @KK 2 @KK units

I$$u!tration 4

"wo components A and are used as follows1

'eordering uantity 1 A 4,?KK units

4,KKK units

'eordering period A ? to wees

@ to wees

-ormal usage . @KK units per wee each!




!74

/inimum usage . 4BK units per wee each

/a*imum usage . BK units per wee each

Oou are reuired to calculate the following for each of the components!

(a) 'eordering level (b) /a*imum level (c) /inimum level (d) Average stood level!

1o$ution7

Co8#onent A7

(a) 'eordering level 2 /a*imum consumption * /a*imum reorder period

2 BK * 2 4,EKK units

(b) /a*imum stoc level 2'eorder level < 'eordering uantity =

(/inimum consumption * minimum reorder period)

2 4,EKK < 4,?KK = (4BK * ?)

2 ?,DKK units(c) /inimum stoc level 2 'eorder level = (-ormal consumption *

-ormal reorder period)

2 4,EKK = (@KK * @)

2 JKK units

(d) Average stoc level 2 /inimum stoc level < of reorder uantity

2 JKK <4

* 4,?KK

?

2 JKK < KK 2 4,BKK units!

/inimum level < /a*imum level

2 ?

2

2 4,EKK units

Co8#onent! <7

'eordering level 2 /a*imum consumption * /a*imum reorder Period

2 BK * 2 ?!DKK units

/a*imum stoc level 2 'eorder level < 'eorder uantity = (/inimum

Consumption * minimum reorder period)




!75

2 ?,DKK < 4,KKK = (4BK * @)

2 @,KK units

/inimum stoc level 2 'eorder level = (-ormal consumption * -ormal

'eorder period)

(0r)

2 /inimum stoc level < of reorder uantity

2 4,@BK <4

* 4,KKK

?

2 4,EBK

-ote1 Average stoc level differs when the alternative formulae are used!

4.2 LET U1 1UM U/1

8tore is a place where raw materials are presented on order to maintain its

uality! Hnder this control of store eeper, materials are ept safely up toutilisation! /aterials are classified and coded and ept in bins! +*cessive

investment in inventory and shortage of raw materials must be avoided! %or that

purpose minimum level and ma*imum level of inventory is fi*ed! In order to

reduce carrying and ordering cost, economic ordering level is calculated and orders

made accordingly! /inimum level of stoc always to be maintained! 8o re.order

level is fi*ed that minimum and ma*imum level!

4." LE11ON END ACTIITIE1

4! 9hat is #inventory control$N 9hat its importanceN

?! 9hat do you understand by #Classification$ and #Codification$ of materialsN

@! 9hat is +0XN 9hat is its significanceN

! 9hat is #AC Analysis$N

B! 9hat is perpetual inventory systemN +*plain its procedure!

! 9hat is inventory turnover ratioN

D! 9rite short notes on1 i) /a*imum level ii) /inimum level

2 ?DKK = (@KK * !B)2 4,@BK units

Average stoc level 2

2

2 ?,@DB Hnits

/inimum level < /a*imum level

?

@,KK < 4,@BK

?




!76

iii) 'e order level iv) Average stoc level!

4.4 CECB YOUR /ROGRE11

Oour answer the following1

AC analysis is #/anagement by e*ception$ system of Inventory control!

In this Always etter Control (AC) techniue of inventory control, the materials

are classified and controlled according to value of the materials involved! It is also

called proportional parts value analysis! "hus, high value items are paid more

attention than low value items! "he materials are classified under #A$, #$ or #C$

designation on the basis of their value and importance!

#A$ category consists of a few items of high value! Category #$ includes more

items of medium value and category #C$ includes all other materials of small value!

4.& /OINT1 ;OR DI1CU11ION

4! %rom the following figures calculate the inventory turnover ratio!

8toc as on 4st Fan! ?KK4 ?B,KKK

8toc as on @4st &ec! ?KK4 @B,KKK

Purchases during ?KK4 ?,BK,KKK

?! Calculate the economic order uantity from the following particulars!

Annual usage ?K,KKK units uying cost per

order 's!4K Cost per unit 's!4KK

Cost of carrying inventory 4K of cost

@! Calculate /inimum stoc level, /a*imum stoc level and 'e.ordering level from thefollowing details1

(i) /inimum

consumption

(ii) /a*imum

consumption

(iii) -ormal consumption

(iv) 'e.order period

(v) 'eorder uantity

(vi) -ormal reorder period

.

.

.

.

.

.

4KK

4BK

4?K

4K.4B

4,BKK

4?

Hnits per day

Hnits per day

Hnits per day

days

Hnits!

days

! "wo components Q and O are used as follows5 -ormal usage 1 ,BKK units per wee each

/inimum usage 1 ?,?BK units per wee each

/a*imum usage 1 ,DBK units per wee each

'ecorder uantity 1

Q 2 4J,BKK

units O2

?4,KKK units

'ecord period




!77

Q2 @ to B wee

O2? to wee

Calculate for each of the components 1

(a) 'eorder level (b) /inimum level (c) /a*imum level

(d) Average stoc level

4.( RE;ERENCE1


?! -igam 8harma = Cost Accountancy!

LE11ON & 1TORE1 LEDGER

Content!7

&. Ai8! and ob?ecti+e!

&.2 Introduction

&." 1tore $edger 1#eci8en

&.4 <IN card

4B!@!4 &ifference between store ledger and in card

&.4 I!!ue of 8ateria$

4B!!4 /aterial reuisition

4B!!? ill of material

&.& Treat8ent of !ur#$u! 8ateria$

4B!B!4 'eturn of surplus /aterial

4B!B!? "ransfer of surplus /aterial

&.( Met0od! of #ricing of 8ateria$

4B!!4 %irst in %irst out method S%I%0T

4B!!? 3ast in %irst out method S3I%0T

4B!!@ 8imple Average method

4B!! 9eighted Average method

&.) Materia$ $o!!e! and T'#e!

4B!D!4 9aste

4B!D!? 8crap

4B!D!@ 8poilage

4B!D! &efectives

4B!D!B 0bsolete, 8low moving and &ormant 8tocs

&.* Let u! 1u8 U#

&., Le!!on%End Acti+itie!

&. C0ec 'our /rogre!!

&. /oint! for Di!cu!!ion

&.2 Reference!

&. AIM1 AND O<=ECTIE1




!78

i: "o now the store ledger and in card ii) "o understand the issue of

material and treatment of surplus material! iii) "o study the different

methods of pricing of material and material losses!

&. INTRODUCTION

8tore ledger is another stores record ept in the costing department! It is adocument showing the uantity and value of materials received, issued and in

balance at the end! 0ne stores ledger is allotted to each component of material!

+ntries are made in this ledger by the costing cler with reference to goods received

note, material reuisition note, material returned note etc! It is very similar to the

bin card e*cept it contains additional columns showing the prices and value of

materials received, issued and balance in hand! It gives the value of closing stoc at

any time!

esides, a store ledger contain information lie name of the material, code number,

different stoc levels etc!

&.2 1TORE LEDGER 1/ECIMEN

1tore Ledger

/aterial 1 /a*imum level 1 &escription 1

/inimum level 1 in -o! 1 'eorder level 1




!7



eceipts Issues

Store Ledger Bin Card


!8"

&." <IN CARD

in is a place where materials are ept in! It may be a rac, container, shelf

or space where stores are ept! in card is a document showing the particulars of

materials ept in the bin! It is a document attached to the bin disclosing the

uantitative details of materials received, issued and the closing balance! A bin card

is used for each item of material! +ach receipt and issue is recorded on the bin cardin a chronological order and the latest balance is shown after each receipt and issue!

in card is maintained by the store eeper! It indicates information lie

different stoc levels! -o, name of material, material code number, stores ledger

folio number, uantity of materials received, issued and the balance in hand!

1#eci8en

<in Card

/aterial 1 /a*imum level 1&escription 1 /inimum level 1

in -o! 1 'eorder level 1

8l!%olio 1 'eordering uantity 1

alance

&ate 6!'! Xty! /!'! Xty! Xty! 'emars

-ote -o! -ote -o!

&.". Difference bet3een 1tore Ledger and <in Card

4! It is a record of both uantity and

value!

It is a record of uantity only!

?! It is maintained by the cost cler! It is maintained by the storeeeper!

@! It is ept in the cost office! It is attached to the bin!! +ntries are made by the cost cler! +ntries are made by the stroe

eeper!

B! +ntries are made on the basis of

documents lie goods received note,

material reuisition note etc!

+ntries are made on the basis of

actual uantity received and issued!

! Posting are made after the transactions!Postings are made before the

transactions!D! "ransactions are periodically recorded! Individual transactions are recorded!

E! Inter departmental transactions are

recorded for costing purpose!

Inter departmental transfers are not

shown!J! %acilitates physical verification of

closing stoc!

%acilitates physical verification of

closing stoc!

&.4 I11UE O; MATERIAL

/aterials are ept in stores so that the storeeeper may issue them

whenever these are reuired by the production departments! ut a storeeeper must

not issue materials unless a properly authorised material reuisition is presented to

him!

&.4. Materia$ Re6ui!ition




!8!

"he storeeeper should always issue the material on proper authority to

avoid the misappropriation of material! "his authority is usually given by the

foreman of the production department on a form nown as material reuisition!

&.4.2 <i$$ of Materia$

A bill of materials gives a complete list of all materials reuired with

uantities for a particular >ob, order or process! "hus, all materials reuired for a particular >ob, order or process are listed by the production department on a single

document! "his bill serves the purpose of material reuisition and all materials

listed on the bill are sent to the production department! A bill of materials should be

prepared if the >ob is of non.standardised nature so that reasonable estimate of all

materials reuired may be made by the production department before the >ob is

started!

&.& TREATMENT O; 1UR/LU1 MATERIAL1

&.&. Return of 1ur#$u! Materia$7

8ometimes, e*cess materials may be issued to production departments!

9hen these materials are returned to stores a /aterial 'eturn -ote is to be prepared by the department which has the e*cess materials! 6enerally, three copies

are prepared! 0ne copy is retained by the department which is returning the

material! "wo copies are sent to the store eeper! "he store eeper eeps one copy

for maing entries in the in card and the second copy is sent to the cost office for

maing entries in the stores ledger and for giving credit to the >ob where the

material is in e*cess!

&.&.2 Tran!fer of 1ur#$u! Materia$!

"ransfer of e*cess material from one >ob to another >ob is to be avoided as

far as possible! "his is because record for transfer may not be made and actual

material cost of >obs may be inaccurate! 7owever, sometimes the material may be

allowed to be transferred to avoid delays and handling charges! "he transfer is to beallowed only with preparation of material transfer note so that the cost of material

transferred is debited to the >ob receiving the material and credited to the >ob

transferring the material!

&.( METOD1 O; /RICING O; MATERIAL

A number of methods are used for pricing material issues! +ach method

has its own advantages and disadvantages! As such, it is impossible to say which

method is the best! +ach organisation should choose a particular method best suited

to it! 9hile choosing a method, it is necessary to see that the method chosen is

simple, effective and realistic! At the same time, it is eually necessary to consider

the effect of the method on production cost and inventory valuation!

"he following are the different methods of pricing the material issues1

&.(.. ;ir!t In ;ir!t Out Met0od 9;I;O:

Hnder this method, materials are issued in the order in which they are received in

the store! It means that the material received first will be issued first!

Ad+antage!7

a! "his method is simple to understand and easy to operate!

b! "he closing stoc is valued at the current maret price!

c! 8ince issues are priced at cost, no profit or loss arises from pricing!




!82

d! "his method is more suitable in times of falling prices!

e! &eterioration and obsolescence can be avoided!

Di!ad+antage!7

a! 9hen prices fluctuate, calculation becomes complicated! "his increases the

possibility of clerical errors!

b! &uring the period of price fluctuations, material charged to >obs vary! "herefore,comparison between >obs is difficult!

c! &uring the period of rising prices, product costs are under stated and profits are

overstated! "his may result in payment of higher dividend out of capital!

C0ec 'our #rogre!! &

3ist out any three difference between store ledger and in card



(pp! ?@@)!






&.(.2 La!t In ;ir!t Out Met0od 9LI;O:

"his method is opposite to %I%0! 7ere materials received last are issued first!Issues are made from the latest purchases!

Ad+antage!7

a! Issues are based on actual cost!

b! Issue price reflects current maret price!

c! Product cost will be based on current maret price and hence will be more realistic!

d! "here is no unrealized profit or loss!

e! 8imple to operate if purchases are not many and prices are steady or rising!

f! 9hen prices are raising this method is helpful in preparation of uotation or

estimates!

Di!ad+antage!7

a! "his method involves considerable clerical wor!

b! Hnder felling price, issues are priced at lower prices and stocs are valued at higher

rates!

c! 8toc of material shown in the balance sheet will not reflect maret price!

d! &ue to variation in prices, comparison of cost of similar >ob is difficult!

e! "his method is not accepted by the income ta* authorities!

&.(." 1i8#$e A+erage Met0od




!83

"he simple average is determined by adding different prices of materials

in stoc and dividing the total by number of prices! Xuantity purchased in each lot

is ignored!

%or +*ample1 ?K units are purchased at 's!4K

@K units are purchased at

's!44 K units are purchasedat 's!4?

8imple average price 2 4K :44:4? @@@

@ s.44.

@ @

Ad+antage!7

a! "his method is simple to understand and easy to operate!

b! It reduces clerical wor!

c! It is suitable when price are stable!

Di!ad+antage!7a! It does not tae into account the uantities purchased!

b! "he value of closing stoc becomes unrealistic!

c! /aterial cost does not represent actual cost price!

d! 9hen prices fluctuate, this method will give incorrect result!

&.(.4 eig0ted A+erage Met0od7

"his is an improvement over the simple average method! "his method

taes into account both uantity and price for arriving at the average price! "he

weighted average is obtained by dividing the total cost of material in the stoc by

total uantity of material in the stoc!

%or +*ample 1 ?K units are purchased at 's!4K p!u 's! ?KK

@K units are purchased at 's!?K p!u 's!

KK BK 's! EKK

9eight average price 2 's! EKK G BK 2 's! 4

Ad+antage!7

a! It gives more accurate results than simple average price because it considers both

uantity as well as price!

b! It evens out the effect of price fluctuations! All >obs are charged a average price!

8o, comparison between >obs is more easy and realistic!

c! It is suitable in the case of materials sub>ect to wide price fluctuations!

d! It is acceptable to income ta* authorities! Di!ad+antage!7

a! 8toc on hand does not represent current maret price!

b! 9hen large number of purchases are made at different rates, the calculation is

tedious! 8o, there are more chances of clerical error!

c! 9ith some appro*imation in average price, there will be profit or loss due to over

or under charging of material cost to >obs!

&.) MATERIAL LO11E1 AND TY/E1




!84

"he material reuirements of production are issued on the basis of material

reuisitions! "he output is obtained along with wastage, scrap, spoilages and

defectives! "he accurate cost of output can be computed after taing the losses into

account!

3osses in the form of waste, scraps, spoilage and defectives are inherent

and inevitable with any manufacturing activity! "hese losses can be controlled

through adeuate reporting and responsibility accounting! 8tandard for each type of

loss is fi*ed! Actual are compared and action is to be taen by the management to

control the abnormal losses, based on the variance!

T'#e! of Materia$ Lo!!e!

&.). a!te7

9aste is inherent in any manufacturing activity! 9aste is a part of raw

material lost in the process of production having no recoverable value! 9aste

occurs invisibly in the form of evaporation or shrinage! It can be visible and solid

also! +*amples of visible wastes are gases, dust, valueless residue, etc! 8ometimes

disposal of waste entails additional e*penditure! +*ample1 atomic waste! 3oss inthe form of waste increase with cost of production!

Control of 9aste1 A waste report is prepared periodically! "he actual waste is

compared with standard waste and remedial action is taen to control abnormal waste!

Accounting Treat8ent

9aste has no value! "he accounting treatment differs according to waste being

normal or abnormal!

i: Nor8a$ a!te7 "his is the inherent waste while manufacturing! It is in the

form of evaporation, deterioration etc! "he total cost of normal waste is distributed among

the good units of output!

ii: Abnor8a$ 3a!te7 "he abnormal waste is transferred to costing profit and

loss AGc to avoid fluctuation in production cost!

&.).2 1cra#7

8crap is the residue from certain manufacturing activities usually having

disposable value! It can also be the discarded materials which can fetch some

income! +*amples of scrap are outlined material from stamping operations, filings,

8aw dust, short lengths from wood woring operations, sprues and $flash$ from

foundry and moulding processes! 8crap may be sold or reused!

Contro$ of 1cra#

8crap is controlled by fi*ation of standards for scrap, fi*ation of

department wise responsibilities for scrap, etc! Leeping up proper records of scrap

and periodical reporting helps in control of scrap! Actual scrap is compared withstandard scrap! 8uitable action is taen for e*cessive actual scrap over standard

scrap!

Accounting Treat8ent

i) 8ale value of scrap credited to profit and loss AGc1 "he sale value is

credited to profit and loss account as other income! "he cost of output is inclusive

of scrap cost! "his method of accounting treatment is adopted when the value is

negligible!

ii) "he 8ale value credited to overhead or material cost1 "he sale value is




!85

reduced with selling cost of scrap and the net sale value is deducted from factory

overhead or from material cost! "his method is adopted when several >obs are done

simultaneously and it is not possible to segregate the scraps >ob wise!

iii) Crediting the sale value to the Fob or process in which 8crap arises1 "he sale

value of scrap is credited to the >ob or process concerned from which the scrap

has arisen! "his method is followed when identification of scrap with specific

>obs of processes is easy!

&.)." 1#oi$age7

8poilage occurs when goods are damaged beyond rectification! 8poilage is

disposed off without further processing! 8poilage cost is the cost upto the point of

re>ection less sale value!

"he method of sale of spoilage depends on the e*tent of spoilage! 8ome of

the spoilage is sold as seconds if the e*tent of damage is less5 rest may be sold as

scrap or treated as waste!

Control of 8poilage1 8poilage is controlled through proper reporting about

the e*tent of spoilage! 8tandards are fi*ed as a percentage on production! Actual

spoilage is compared with standard and variance is recorded! If the actual spoilageis more than the standard, suitable action is suggested to control it!

Accounting Treat8ent of 1#oi$age

Accounting treatment depends on whether the spoilage is normal or

abnormal! -ormal spoilage is borne by good units of output since it is inherent with

production and it happens even under efficient conditions! Abnormal spoilage is

avoidable under efficient conditions! "he cost of abnormal spoilage is charged to

profit and loss account!

&.).4 Defecti+e!

It is a part of production which can be rectified and made into good units with

additional cost! "he defective wor occurs due to raw materials of inferior uality, bad

planning and poor wormanship! &efective units are rectified with additional cost ofmaterial, labour and overheads and sold as #first uality$ or #seconds$!

i: Contro$ of Defecti+e7 As in the case of other losses, defectives are

controlled by accurate and periodical reports! 8tandards are fi*ed for defectives!

Actual defective wor is compared with standards! If actuals are more than the

standards remedial action is taen to control it!

ii: Accounting Treat8ent of Defecti+e!7 "he accounting treatment depends on the

e*tent of defective production! If it is normal being inherent with production, it is

identified with specific >obs! "he cost of rectification is charged to specific >obs! If

the cost is not treated with a >ob, the cost of rectification is treated as factory

overhead!If the defective wor is out of abnormal circumstances the cost of rectification is

transferred to profit and loss account!

&.).& Ob!o$ete 1$o3 8o+ing and Dor8ant 1toc!7"hese items are part

of inventory! "hey need suitable and timely action on the part of the management to

avoid occurrence of loss in due course and to prevent locing up of woring

capital!

i: Ob!o$ete 1toc!7 "hey are those stocs in the inventory which have been




!86

lying unused due to change in product process and design or method of manufacturing!

"hey are generally out of date!

ii: 1$o3 8o+ing Materia$!1 "hey are items in stoc used at long intervals and thus

lying idle for long periods! iii: Dor8ant 1toc!7 "hey are items in stoc not at all

in use for a significant period of time!

"he store eeper should highlight such items in his periodical reports so

that the management may try (a) to dispose them off at any price or (b) clear them

out to save space in the stores (c) e*ercise caution in future purchase of such items

of materials!

&.* ILLU1TRATION1

I$$u!tration!%

&raw a stores ledger card recording the following transactions under %I%0 method!

4JJE Fuly 4 0pening stoc ?,KKK units at 's!4K each!

B 'eceived 4,KKK units at 's!44 each

Issued BKK units!

4K 'eceived B,KKK units at 's!4? each!4? 'eceived bac BK units out of the issue made on th Fuly!

4 Issued KK units!4E 'eturned to supplier 4KK units out of goods received on Bth!

4J 'eceived bac 4KK units out of the issue made on 4th Fuly!

?K Issued 4BK units!

?B 'eceived BKK units at 's!4 each!

?E Issued @KK units!

"he stoc verification report reveals that there was a shortage of 4K units on 4Eth

Fuly and another shortage of 4B units on ?th Fuly!

1o$ution7

1tore! Ledger Account

9;I;O Met0od:

-ame1 RRRRRRRRRR /a*imum level1 RRRRRRRRRR %olio -o! RRRRRRRRRR

Code -o1 RRRRRRRRRR /inimum level1 RRRRRRRRRR in! -o! RRRRRRRRRR

&escription1 RRRRRRRRRR 'eorder level1 RRRRRRRRRR 3ocation code1 RRRRRRRRRR

'eorder uantity1 RRRRRRRRRR

Particulars 'eceipts Issues alance

&ate or

Xty! 'ate Amount Xty! 'ate Amount Xty! 'ate Amount 'eference Hnits 's!P!

's! Hnits 's!P! 's! Hnits 's!P! 's!

4JJE

Ful! 4 alance ?,KKK 4K ?K,KKK

bGd




!87

B 6!'!-!-o! 4,KKK 44 44,KKK ?,KKK 4K ?K,KKK

4,KKK 44 44,KKK

/!'!-o! BKK 4K B,KKK 4,BKK 4K 4B,KKK

4,KKK 44 44,KKK

4K 6!'!-!-o! B,KKK 4? K,KKK 4,BKK 4K 4B,KKK4,KKK 44 44,KKK

B,KKK 4? K,KKK

4? /at! 'etd! BK 4K BKK 4,BKK 4K 4B,KKK

-ote -o!

4,KKK 44 44,KKK

B,KKK 4? K,KKK

BK 4K BKK

4 /!'!-o! KK 4K ,KKK JKK 4K J,KKK

4,KKK 44 44,KKK

B,KKK 4? K,KKK

BK 4K BKK

4E &ebit

-ote! -o! 4KK 44 4,4KK EJK 4K E,JKK

8hortage 4K 4K 4KK JKK 44 J,JKK

B,KKK 4? K,KKK

BK 4K BKK

4J /at! 'etd! 4KK 4K 4,KKK EJK 4K E,JKK

-ote -o!

JKK 44 J,JKK

B,KKK 4? K,KKK

BK 4K BKK

4KK 4K 4,KKK

?K /!'!-o! 4BK 4K 4,BKK DK 4K D,KK

JKK 44 J,JKK

B,KKK 4? K,KKK

BK 4K BKK

4KK 4K 4,KKK

?B 6!'!-!-o! BKK 4 D,KKK DK 4K D,KK

JKK 44 J,JKK

B,KKK 4? K,KKK

BK 4K BKK




!88

4KK 4K

4,KKK BKK

4

D,KKK

? 8hortage 4B 4K 4BK D?B 4K D,?BKJKK 44 J,JKK

B,KKK 4? K,KKK

BK 4K BKK

4KK 4K

4,KKK BKK

4

D,KKK

?E /!'!-o! @KK 4K @,KKK ?B 4K ,?BKJKK 44 J,JKK

B,KKK 4? K,KKK

BK 4K BKK

4KK 4K 4,KKK

BKK 4 D,KKK

Closing 8toc 2 ,JDB units, valued at 's!E?,BK

(?B * 4K < JKK * 44 < B,KKK * 4? < BK * 4K < 4KK * 4K < BKK * 4)

Note7

4! 6!'!-!-o! = 6oods 'eceived -ote -umber!

?! /!'!-o! = /aterial 'euisition -umber! /at! 'etd! -ote 2 /aterial 'eturned

-ote!

@! &ebit -ote is sent to suppliers when materials are returned!

! 8hortage is treated lie an issue and priced as per the method of pricing in

operation!

B! 'eturns from departments are treated >ust lie fresh receipts at the price at which

the original issue was made! Its reissue will be as per the method followed! An

alternative treatment is to issue the returned material as the #first out$ (or)

irrespective of the method of pricing, issuing it as #ne*t issue$ whenever an issue

is made!

! 'eturns to supplier are lie an issue, at the rate at which the original purchase

was made!

I$$u!tration 2



'ate eceipts Issues "alance


!8

"he stoc of a material as on 4st April 4JJE was ?KK units at 's!? each! "he

following purchases and issues were made subseuently! Prepare 8ores 3edger

Account showing how the value of the issues would be recorded under (a) %I%0

and (b) 3I%0 methods!

4JJE April B Purchases 4KK units at 's!?!?K each!

4K Purchases 4BK units at 's!?!K each

?K Purchases 4EK units at 's!?!BK each

? Issues 4BK units

D Issues 4KK units

4? Issues 4KK units

?E Issues ?KK units

1o$ution7

1TORE1 LEDGER ACCOUNT

;ir!t In ;ir!t Out 9;I;O:

@K

4BK ?!K

April4JJE

Xty! 'ate's!

Amt!'s!

Xty! 'ate's!

Amt!'s!

Xty! 'ate's!

Amt! 's!

4 ?KK ?!KK KK

? 4BK ?!KK @KK BK ?!KK 4KK

B 4KK ?!?K ??K BK ?!KK 4KK

4KK ?!?K ??K

D BK ?!KK 4KK

BK ?!?K 44K BK ?!?K 44K

4K 4BK ?!K @K BK ?!?K 44K



'ate eceipts Issues "alance


!"

4? BK ?!?K 44K

BK ?!K 4?K 4KK ?!K ?K

?K 4EK ?!BK BK 4KK ?!K ?K

4EK ?!BK BK

?E 4KK ?!K ?K

4KK ?!BK ?BK EK ?!BK ?KK

1TORE1 LEDGER ACCOUNT

La!t In ;ir!t Out 9LI;O:

April Xty! 'ate Amt! Xty! 'ate Amt! Xty! 'ate Amt!4JJE 's! 's! 's! 's! 's! 's!

?KK ?!KK KK

4BK ?!KK @KK BK ?!KK 4KK

B 4KK ?!?K ??K BK ?!KK 4KK

4KK ?!?K ??K

D 4KK ?!KK ??K BK ?!KK 4KK

4K 4BK ?!K @K BK ?!KK 4KK

4BK ?!K @K

4? 4KK ?!K ?K BK ?!KK 4KK

BK ?!K 4?K

?K 4EK ?!BK BK BK ?!KK 4KK

BK ?!K 4?K

4EK ?!BK BK

?E 4EK ?!BK BK

?K ?!K E BK ?!KK 4KK

@K ?!K D?

8toc at the end1 EK units valued at 's!4D?






!2

-o! ?KK 4 ?,EKK DKK . E!?KK

?K /!'!-o! @KK 4?!@@ @,JJ KK . ,BK4

4?:44:4

@

?? 6!'!-!

-o! @KK 4B ,BKK DKK .

?B 6!'!-!

-o! 4KK 4 4,KK EKK . 4K,K4

?D 6!'!-! ?KK 4 ?,EKK KK . D,EK4

44:4:4B:4

@4 6!'!-! 4KK 4B 4,BKK BKK . ,@K4

4:4B:4

@

Closing stoc 2 BKK units valued at 's!,@K4!

Note7

"hough simple average of prices of the lots in stoc is taen for issue

purpose, for physical stoc purpose, “%I%0$ is inherent in simple average

method! 8o, whenever the older stocs are e*hausted physically, their prices

are also omitted while calculating simple average of prices!

%or e*ample1 9ith the issue on 4th Fan, the first lot purchased on Fan! 4 is

physically e*hausted! 8o, the price of 's!4K is omitted when issue price is

computed ne*t time on Fan!?K!

I$$u!tration%4

Prepare as stores ledger account using weighted average method of pricing issue

of materials!

4JJJ

/arch 4 alance 4,KKK units U 's!DK per unit!

@ Purchased ?,KKK units U 's!EK per unit!

B Issued BKK units!4K Issued 4,KKK units!

4B Purchased ?,KKK units at 's!EK per unit!

4E Issued KK units!

?K 'eceived bac ?B units out of the issue made on Bth /arch!

?? Issued 4,BKK units!

? 'eturned to supplier @K units out of the purchases made on

4Bth /arch!

?B Purchased 4,KKK units at 's!DB per unit!




!3

@K Issued 4,KKK units!

Physical verification on ?4st /arch revealed a shortage of 4B units and ?K units

shortage on @Kth /arch!

1o$ution7

1tore! Ledger Account9eig0ted A+erage Met0od:

-ame1 RRRRRRRRRR /a*imum level1 RRRRRRRRRR %olio -o! RRRRRRRRRR

Code -o1 RRRRRRRRRR /inimum level1 RRRRRRRRRR in! -o! RRRRRRRRRR

&escription1 RRRRRRRRRR 'eorder level1 RRRRRRRRRR 3ocation code1 RRRRRRRRRR

'eorder uantity1 RRRRRRRRRR

Particulars 'eceipts Issues alance

&ate or

Xty! 'ate Amount Xty! 'ate Amount Xty! 'ate Amount 'eference Hnits 's!P! 's!

Hnits 's!P! 's! Hnits 's!P! 's!

4JJJ

/ar! 4 alance

4,KKK DK,KKK DK,KKK

Gd

@ 6!'!-!-o! ?,KKK EK 4,K,KKK @,KKK D!D ?,@K,KKK

B /!'!-o! BKK D!D @E,@@@ ?,BKK D!D 4,J4,D

4K /!'!-!-o! 4,KKK D!D D,D 4,BKK D!D 4,4B,KKK

4B 6!'!-!-o! ?,KKK EK 4,K,KKK @,BKK DE!BD4 ?,DB,KKK

4E /!'!-o! KK DE!BD4 @4,?E @,4KK DE!BD4 ?,@,BD?

?K /at! 'etd!

-ote -o! ?B D!D 4,J4D @,4?B DE!BB ?,B,EJ

?4 8hortage 4B DE!BB 4,4DE @,44K DE!BB ?,,@44

?? /!'!-o! 4,BKK DE!BB 4,4D,E@ 4,4K DE,BB 4,?,DD

? &ebit

-ote -o! @K EK ?,KK 4,BEK DE!B?JD 4,?,KDD

?B 6!'!-!-o! 4,KKK DB DB,KKK ?,BEK DD!4 4,JJ,KDD

@K /!'!-o! 4,KKK DD!4 DD,4K 4,BK DD!4 4,?K,@D

8hortage ?K DD!4 4,B@

&.,. LET U1 1UM U/




!4

8tores ledger is a ledger where in we records the details of materials stored!

In addition to that bin card is maintained in which details of materials in a particular

bin is recorded! As and when the material reuisition received from production

department, the store eeper is need material! 8ome times Production Company

may send bill of materials, in that materials reuired completing a particular >ob is

specified! After a particular >ob is over e*cess materials may be returned to store,

that is recorded in materials return note! 9astage may be classified as normal,

abnormal, scrap, and spoilage and suitable controlling measures must be taen in

order to control wastage and properly recorded into accounts!

&. LE11ON END ACTIITIE1

4 9rite short notes on1

a) in card b) 8tore ledger c) ill of

material ? 9hat are the different types of

material lossesN

@ 9hat is %I%0 and 3I%0 methodN

&istinguish between store ledger and bin card!B Prepare a stores ledger account form the following information adopting %I%0

method of pricing of issues of materials!

4JJE /arch 4 0pening alance BKK tonnes at 's!?KK@ Issue DK tonnes

Issue 4KK tonnes

E Issue EK tonnes

4@ 'eceived from supplier ?KK tonnes at 's!4JK

4 'eturned from department #A$ 4B tonnes

4 Issue 4EK tonnes

?K 'eceived from supplier ?K tonnes at 's!4JB

? Issue @KK tonnes

?B 'eceived from supplier @?K tonnes at 's!?KK? Issue 44B tonnes

?D 'eturned from department #$ @B tonnes

?E 'eceived from supplier 4KK tonnes at 's!?KK

&. CECB YOUR /ROGRE11

Oour answer may include any five of the following

(i) 8tore ledger is a record of both uantity and value! in card is a record of

uantity only!

(ii) 8tore ledger is maintained by the cost cler! in card is maintained by the

storeeeper!

(iii) 8tore ledger is ept in the cost office! in card is attached to the bin!

(iv)8tore ledger entries are made by the cost cler! in card entries are made by the

store eeper!

(v) 8tore ledger entries are made on the basis of documents lie goods received

note, material reuisition note etc! in card entries are made on the basis of

actual uantity received and issued!



'ate 5nits 5nit

costs.

Auantit,

k0.

Auantit,

k0.

23<2 288 2.88

183<2 388 2.98

1=3<2 2=8

1<3<2 2=8 2.B8


!5

&.2 /OINT1 ;OR DI1CU11ION

4! Prepare the stores ledger from the following information using 3I%0 method of

material valuation!

?.4.J Purchase ?4K ?!BK

4K.4.J Purchase @?K ?!BK

4.4.J Issue of materials ?K .

4D.4.J Purchase ??K @!KK

??.4.J Issue of /aterials ?4B .

?B.4.J Purchase ??B @!4K

?!"he following transactions too place in respect of an item of /aterial!

'eceipt 'ate 's Issue

[email protected]? . . ?KK

'ecord the above transactions in stores 3edger, pricing issues at 8imple average rate!

@! "he following transactions too place in respect of a material item!

&ate 'eceipt

Xuantity

'ate Issue

Xuantity

[email protected] @KK 's!@!KK .

[email protected] KK 's!@!K .

[email protected] . . @BK




!6

[email protected] @BK 's!@!K .

[email protected] . . @KK

Prepare a price ledger sheet, pricing the issues at weighted average rate!

&." RE;ERENCE1


?! -igam 8hame = Cost Accountancy!

@! 8!-! /aheswari = /anagement Accountancy!

LE11ON ( LA<OUR CO1T

Content!7

(. Ai8! @ ob?ecti+e!

(.2 Introduction

(." T'#e! of Labour!

(.4 Labour co!t

(.& Rate or Ti8e and Motion !tud'

4!!4 "ime study

4!!? /otion study

(.& =ob Ana$'!i!

(.( =ob E+a$uation

(.) Merit Rating

4!D!4 Importance of /erit rating1

(.* Ti8e%Bee#ing

4!E!4 +ssentials of a good "ime.eeping 8ystem

4!E!? "ime ooing

(., Labour Turno+er

4!J!4 /eaning

4!J!? /ethods of /easurement of labour turnover

4!J!@ Causes of 3abour turnover

(. Id$e Ti8e

4!4K!4 Causes of Idle "ime

4!4K!? Control of Idle "ime

(. O+er Ti8e

(.2 Re8uneration @ Incenti+e!

4!4?!4 +ssential of a good wage system

4!4?!? /ethods of 'emuneration

4!4?!@ Premium onus schemes

(." /a' ro$$

(.4 I$$u!tration

(.& Let u! 1u8 U#

(.( Le!!on%End Acti+itie!




!7

(.) C0ec 'our /rogre!!

(.* /oint! for Di!cu!!ion

(., Reference!

(. AIM1 AND O<=ECTIE1

i) "o now the different inds of 3abour ii) "ounderstand the terms motions study and "ime study! iii) "o

understand about >ob analysis and >ob evaluation! iv) "o

now the different methods of remuneration and incentives! v)

"o understand about labour "urnover!

(. INTRODUCTION3abour cost is an important element of cost! It also forms significant part

of prime cost and total cost! 3abour costs are associated with human beings! "his

association maes it a significant item of cost not only because of huge wage bill of

modern organization but also because labour cost has certain special features which

other elements lie material do not possess! "he human element maes the control

of labour cost difficult! 3abour is the mot perishable commodity! 0nce unused it

cannot be recovered and the labour cost is bound to increase cost of production! At

the same time labour is the only factor which has the unlimited productive capacity!

In many instances labour can achieve wonders in regard to the amount and uality

of wor performed by them! 7owever, labour is comple* and therefore it reuires

systematic planning and control!

(.2 TY/E1 O; LA<OUR1

As in the case of materials, labour is also classified into (a) direct labour and

(b) indirect labour!

(a) &irect labour cost is cost of labour e*pended in altering the construction,

composition or condition of the product! &irect labour cost is easily

identified and allocated to cost units!

(b) Indirect labour cost is the amount of wages paid to wormen who are not

directly involved in altering the composition of the product! &irect labour

cost forms part of prime cost, whereas indirect labour cost forms part of overheads!

(." LA<OUR CO1T

3abour costs represent the various items of e*penditure incurred on worers by

the employer and would include the following1

9a: Monetar' <enefit! e.g.7 (i) asic 9ages5 (ii) &earness Allowance5 (iii)




!8

+mployer$s Contribution to Provident %und1 (iv) +mployer$s Contribution to +mployees$

8tate Insurance (+8I) 8cheme5 (v) Production onus5 (vi) Profit onus5 (vii) 0ld age

Pension5 (viii) 'etirement 6ratuity!

9b: ;ringe <enefit! e.g.7 (i) subsidized %ood5 (ii) 8ubsidized 7ousing5 (iii)

8ubsidized +ducation to the children of the worers5 (iv) /edical

facilities5 (v) 7olidays Pay5 (vi) 'ecreational facilities!

(.4 RATE OR TIME AND MOTION 1TUDY

"his department wors in close harmony with the personnel, engineering and

cost departments! "his department performs the following functions1

(4) /aing of time and motion studies of labour and plant operations!

(?) /aing >ob analysis

(@) 8etting piece rates!

(.4. Ti8e !tud'

"ime study may be defined primarily as the art of observing and recording

the time reuired to do each detailed element of an industrial operation! "he main

ob>ect of time study is to determine the proper time reuired to complete the >ob!

efore studying the time reuired for a >ob, the >ob is divided into a number of

operations which are to be studied separately and the time needed for their

completion is ascertained! 8uch study is conducted after the motion study because

time is to be noted down for the necessary movements, which are decided by

motion study! In computing the time reuired (or standard time) to do each

operation, it is only fair to used average worers rather than e*ceptionally fast or

slow worers! It is also fair to allow some time for fatigue and personal

reuirements of worers lie smoing, going to urinals, drining water and the lie!

(.4.2. Motion !tud'

"here can be several methods of performing an operation5 but thedetermination of the best way of performing an operation is made possible by

motion study! It is a study of the movements of a worer or a machine in

performing an operation for the purpose of eliminating useless, ill directed and

inefficient motions in order to improve productivity! /otion study was developed

by %!! 6ilbrith, an American management e*pert! "he definition given by him in

his boo “Applied /otion 8tudy is reproduced as below1

“/otion study consists in dividing wor into most fundamental elements

possible5 studying these elements separately and in relation to one another and from

these studied elements when timed, building methods of least waste! /r!6ilbrith

has proved that motion study opens up great opportunities for time saving by

eliminating wasteful motions and maing necessary motions less tiring!%or conducting motion study, worers are studied at their >obs and all their

movements and motions are noted! +ach movement is nown as therblig! "ime

spent on each therblig involved in an operation is collected by the use of a stop.

watch! All motions are carefully studied to find out the motions which are very

much needed to perform operation! "he purpose of such study is to determine the

best way of performing an operation involved in a >ob which every worer is

supposed to follow!



JOB ANALYSIS

$ procedure which disco-ers and

Identi6es the pertinentto each Cob

JOB !SC"I#TION

$ statement of the Cob contents

such as*

DDEob title

DD%ocation

DDSummar, of duties

DDAuali6cations

DD'etailed statement of

work to be done

DDWorkin0 conditions

DDools? e>uipment?

machines? materials used

DDelation to other Cobs

JOB S#!CI$ICATION

humanthe$ statement of

>ualities re>uired todo the Cob

such as *

DDducation

DDSkill

DDrainin0

DDperience

DDesponsibilit,

DDInitiati-e

DDEud0ement abilit,

DDAualit, of leadership

DDSpecial aptitude

DDmotional characteristics


!

/otion study is also nown as /ethods 8tudy because it aims at finding out

the best methods of completing the wor!

(.&. =O< ANALY1I1

Fob analysis is defined as the process of determining, by observation and

study and reporting pertinent information relating to the nature of a specific >ob! It

is the determination of the tass which comprise the >ob and the sills, nowledge,abilities and responsibilities reuired of the worer for successful performance and

which differentiates the >ob from all others!

Fob analysis with its two immediate products can be represented briefly as

follows1

(.( =O< EALUATION

Fob evaluation is the process of studying and assessing the relative values

of >obs within an industry, to ascertain their comparative worth! In addition to




2""

indicating relative wages value, >ob evaluation serves the following varied

purposes1

a) It helps to now whether worers are placed in >obs best suited to them and to

the advantage of employers!

b) It assists the personnel department in recruitment of worers by indicating the

responsibilities, reuirements and condition of wor and ualities reuired for each >ob!

c) Fob evaluation forms the basis for training schemes!

(.) MERIT RATING

/erit rating aims at evaluating the performance of worers! /ain ob>ective

of merit rating is to reward employee on the basis of efficiency and merit! /erit

rating brings out the comparative worth of worers! "he traits generally considered

for determining merit and worth of worers are as under1 4) +ducation

Xualification and nowledge

?) 8ill and e*perience

@) Attitude to the wor

) Xuality of wor done

B) +fficiency ) 'egularity D) Integrity

E) 'eliability

J) Xualities lie leadership, initiative, self confidence and sense of >udgment

4K)&iscipline

44)Cooperation

"he above traits are allotted with points and total points scored on all traits

determine the worth of worers! "he employees may be rated individually as per

the pints they score and they may be put in groups based on their common scores of

points!

(.).. I8#ortance of Merit rating7

/erit is a valuable tool considered to be important for human resource

measurement! /erit rating has the following advantages1

(4) It helps to now the individual worer$s worth and traits5 this helps the

supervisor to assign the tass in which the worer is proficient!

(?) It points out traits in which the worers are not proficient! "he worers

will have an opportunity to improve by suitable training!

(@) It helps in increasing wages and promotion opportunities!

() It helps to stimulate the self.confidence of worers as it recognizes the

merit and worth of worers!

(.* TIME%BEE/ING"his department is concerned with maintenance of attendance time and >ob

time of worers! Attendance time is recorded for wage calculation and >ob time or

time booing is considered for computing time spent for each department, >ob,

0peration and Process for calculating labour cost department wise, >ob wise and of

each process and operation!

(.*. E!!entia$! of a good Ti8e%ee#ing 1'!te8

4! 6ood time eeping system prevents #pro*y$ for one another among worers




2"!

?! "ime.eeping has to be done for even piece worers to maintain uniformity,

regularity and continuous flow of production!

@! oth the arrival and e*it of worers is to be recorded so that total time spent by

worers is available for wage calculations!

! /echanised methods of time eeping are to be used to avoid disputes!

B! 3ate arrival time and early departure time are to be recorded to maintain discipline!! "he time recording should be simple, uic and smooth!

D! "ime recording is to be supervised by a responsible officer to eliminate

irregularities!

(.*.2 Ti8e <ooing

"ime spent by the worer on different >obs and wors is called time

booing! "his is the productive time of worers! "he following are the ob>ectives

of time booing1

4! It ensures that the time paid for, as per time eeping is properly utilized on >obs and

orders!

?! It enables the cost department to ascertain the labour cost of each >ob or wor

order!

@! It helps in allocation and apportionment of wages among different departments

where labour hour rate method is used as basis!

! It helps to calculate idle time!

B! It is helpful when incentive schemes are in operation in the factory by revealing the

time spent by the worers on different >obs!

! "ime booing also helps in measuring the efficiency of worers by comparing

standard time for the >obs with actual time!

(., LA<OUR TURNOER

(.,. Meaning

3abour turnover may be defined as change in labour force i!e!, percentage

change in the labour force during a specific period! 7igh labour turnover indicates

that labour is not stabilised and there are freuent changes by way of worers

leaving the organization! 7igh labour turnover is to be avoided! At the same time

very low labour turnover indicates inefficient worers are being retained in the

organization!

(.,.2 Met0od! of Mea!ure8ent of $abour turno+er

"here are three methods of measuring labour turnover which are e*plained

below1

i: Labour turno+er under !e#aration 8et0od7"he basis of calculating labour turnover under this method is the number of

employees discharged during a period! It does not consider surplus labour being

discharged by the firm (retrenchment)!

-umber of employees left from the organization during a period

3abour "urnover 2

Average number of employees during a period




2"2

ii: Labour turno+er under Re#$ace8ent Met0od7

"he number of employees recruited during a period is taen as basis for

calculating labour turnover! "his does not consider e*pansion programmes!

-umber of employees replaced during a period

Labour Turno+er 2Average number of employees during a period

iii: Labour Turno+er Under ;$u- Met0od7 "his method taes into account the

number of employees who left the organization and those recruited by the organization

during a period!

-umber of employees left < -umber of employees recruited

during a period

Labour Turno+er 2

Average number of employees during a period

(.,." Cau!e! of Labour turno+er7

"he causes for labour turnover can be broadly classified under three heads!

(4) Personal Causes

(?) Hnavoidable Causes

(@) Avoidable Causes

i: /er!ona$ Cau!e!7 8ome of the employees may leave the organization on

account of personal reasons as given below1

(a) Circumstances of family!

(b) 'etirement on reaching the prescribed age!

(c) Change in material status in case of women employees! (d) &islie for the >ob or

place5 (e) &eath of the employee!

(f) +mployee getting recruited in a better >ob!

(g) Permanent disability due to accidents!

(h) Involvement of employee in activities of moral turpitude!

ii: Una+oidab$e Cau!e!7 In certain instances the organization may discharge

the employees due to unavoidable reasons as mentioned below1

(a) "ermination of worers on account of insubordination or inefficiency

(b) &ischarge of worers on account of irregularity or long absence!

(c) 'etrenchment of worers by the company on account of shortage of wor!

iii: A+oidab$e Cau!e!7 8ome of the employees may leave the organization

account of the following reasons1(a) -on availability of promotion opportunities

(b) &issatisfaction with incentive schemes

(c) Hnhappy with remuneration

(d) Hnsuitable to >ob due to wrong placement

(e) Hnhappy with woring conditions

(f) -on availability of accommodation, health and recreational facilities (g) 3ac of

stability of "enure!

(. IDLE TIME




2"3

9hen worers spent their whole time at different >obs, then the time

booed for >obs must with the gate time! 0rdinarily the time booed for >obs does

not agree with the gate time! It so happens, because of reasons lie, waiting for

materials, machine breadown, waiting for instruction, power failure etc!

'econciliation of gate time with time booed is facilitated by preparing an idle time

card!

(.. Cau!e! of Id$e Ti8e

Idle time arises because of1

i) Power failure ii)

9aiting for wor iii)

9aiting for

instruction

i+: 9aiting for tools

+: /achine breadown vi) ad Planning of wor vii) Accidents, stries etc! viii)

"ime wasted in changing from one >ob to another i*) 8eason nature of industry

*) "ime taen to reach the department, from gate

(..2 Contro$ of Id$e Ti8e

%ollowing steps are suggested to control idle time1

i) ;igilance must be e*ercised to control and eliminate idle time!

ii) "he instructions to the worers should be given in advance so that worers

need not wait! iii) Plant and machine should be maintained properly so that

their breadown can be avoided

iv) "he causes of the idle time should be found out and the root cause must

be removed!

v) 'egular and timely supply of raw materials must be made available

through a good system of storing materials!

(. OER TIME

9hen a worer wors above his normal woring hours, he is said to be

woring overtime! And according to %actories Act, 4JE, overtime has to be paid at

double the normal rate! If a worer wors more than J hours on any day or E

hours is a wee, the worer is entitled for overtime payment!

A wor is ased to do overtime, when he finishes his normal hours! "he

e*tra amount payable to a worer over and above the normal rate is an overtime

premium! "he factories Act says that a worer is to be paid twice his ordinary rate!

If the %actory Act does not apply, +stablishment Act will apply! "his Act follows

44G? times his ordinary rates! 7owever, overtime wor may be avoided, because1

4! 9hen a worer, after his normal hours of wor is ased to do overtime, the

uality of the output is affected!

?! &ouble rate has to be given (a loss to the firm)!

@! 9orers are tempted to earn more amounts without completing a >ob in normal

woring hours!

! 0verhead e*penses will also increase!

At the same time, overtime may be allowed1




2"4

4! &uring seasonal rush!

?! 9hen there is failure of power or breadown of machines!

@! "o finish a >ob in time!

! 9hen there is more demand for the products!

(.2 REMUNERATION AND INCENTIE1

"otal wages earned by the employees is termed as remuneration! "ime

wages or piece wages earned plus other financial incentives constitute the earning

of employees! Productivity depends mainly on labour and, other things lie better

euipment, production planning are contributory factors to higher productivity

6ood wage system along with effective incentive system will encourage the labour

force to give their best to the employer! /ore over attractive #pay pacage$ will

reduce labour turnover! In addition to monetary incentives non monetary incentives

also encourage employees to improve their productivity! -on monetary incentives

include, promotional opportunities training schemes, etc! "he remuneration system

should serve the twin ob>ectives of reducing the labour cost and at the same timethe worers are to be compensated adeuately for their wor!

(.2. E!!entia$ of a good 3age !'!te87

"he features of good wage system are listed below1

i) "he wage system has to be fair to employees and the employer!

ii) "he worers are to be assured of minimum guaranteed wages irrespective

of wor done!

iii) 9orers are to be compensated on the basis of their relative efficiency! iv)

"he wage system should be fle*ible to incorporate future changes!

v) "he wage system should encourage higher productivity and reduce labour

turnover!

vi) "he wage system should be as per the labour policy of the government and

follow the legislations applicable!

vii)"he wage system should euate with industry wage levels!

viii) "he method of computation of wages, wage rates and incentive system

should be simple and easy for worers to understand!

(.2.2. Met0od! of Re8uneration

"he remuneration paid to employees should reduce labour turnover,

increase productivity of employees and improve the uality of output! "here are two

basic methods of wage payment1

i) Payment made on the basis of time spent by the worers in the factoryirrespective of output produced! ii) Payment of wages on the basis of

production or wor done irrespective of time taen by the worer!

"he methods of wage payment are respectively called time wages and piece wages!

9A:Ti8e Rate 1'!te87 Hnder this method the worers are paid on he basis of hourly

daily, weely or monthly rate! "here are five variations of time wages which are as

follows1

(4) %lat time rate

(?) 7igh day rate




2"5

(@) /easured day rate

() 6raduated time rate

(B) &ifferential time rate

9: ;$at ti8e rate7 Hnder this method worers are paid at a single rate on the

basis of the time they are employed! "he flat rate may be per hour, per dayor per wee or on monthly basis! "he earnings of employees depend on total

time they spend in the factory! "he flat rate id decided on the basis of rates

prevailing in the locality where the industry is situated!

"his flat rate is suitable for highly silled worers, unsilled worers and

apprentices! It is suitable is the under mentioned types of wor!

(4) 9here high uality goods are being produced

(?) 9here production is mechanized and involves high speed!

(@) 8ituations where output cannot be measured!

() 9here effective and close supervision is possible!

(B) 9here incentive schemes cannot be introduced as the worers may not be

directly involved with the final output!

"o conclude the flat time rate does not recognize effort and it is not helpful in

increasing output!

92: ig0 da' rate7 "his method is introduced to attract silled worers by

offering the highest wages in the industry! "his method also intends to

remove the draw bacs of flat time rate which does not provide incentive fro

efficiency! 7igh rate is paid to employees to achieve present targets of

output! "he target or standard output fi*ed is at high level which only a

silled worer can achieve! 9hen high rate of wages are paid, overtime

wor is not permitted! 7igh day rate reduces the labour cost and over head

cost per unit with the help of high output! "his method will be successfulonly if efficient worers cooperate in achieving high standards of output!

9": Mea!ured da' rate7 Hnder this method of time wages the worers are

given a particular wor to be performed and the rate is fi*ed on the basis of

the level of performance of specified wor! "his gives incentive to worers

to get paid at high rate for high performance! "he main drawbac of

measured day rate is that the worers are not paid any additional

remuneration for any improvement in the level of performance originally

specified!

94: Graduated ti8e rate7 Hnder this method the wage rate is fi*ed by lining

it with cost of living inde*! "he rate of wages goes on changing with change

in cost of living inde*! &uring the period of rising prices the worers find ithelpful as they are compensated for increased prices!

9&: Differentia$ ti8e rate7 "his method recognizes individual efficiency and

sill! "he worers in the same group will be paid at different rates! 7igh

rates are paid for efficient worers and lower rates are paid for inefficient

worers! "here is positive incentive offered for improvement of

performance!

9<: /iece Rate 1'!te87 "his is also called #payment by results$! "he worers are paid

on the basis of output produced by them! "he earnings of the worers depend on




2"6

the number of units of output produced and the wage rate per unit received by the

worer! "he payment by results system is successful only if the wor is of

repetitive nature! "he effect of piece rate is that the remuneration is at constant rate

and labour cost per unit remains stable throughout the range of output! "he total

cost per unit decreases considerably on account of reduction in the fi*ed overhead

per unit for increased volume of production!

ariation of #iece 3age!

"here are four variations of piece wages! "hey are as under1

(I) 8traight piece rate

(II)&ifferential piece

rate1

(a) "aylor$s differential piece rate system

(b) /erric$s multiple piece rate system

(c) 6antt$s tas and bonus plan

9I: 1traig0t #iece rate !'!te8

Hnder straight piece rate system worers are paid according to the number of units produced at a fi*ed rate per unit!

C0ec 'our #rogre!! (

Pointed out the essentials of good wages system!



(pp! ?B)!





II. Differentia$ /iece Rate!

"his is an improvement over straight piece rate to increase the

performance of both efficient and inefficient worers! "wo or more rates are offered

to worers! 7igher performance is paid at a higher rate and lower performance is paid at lower piece rate! In other words the increase in wages is in proportion to

increase in production!

"here are three types of differential piece rates!

(4) "aylor$s differential piece rate

(?) /erric$s differential piece rate system (/ultiple piece rate system) (@)

6antt$s "as and onus plan

9: Ta'$or>! differentia$ #iece rate !'!te8




2"7

"he #%ather of 8cientific /anagement$ %!9! "aylor has introduced this method!

"here are tow different piece rates applicable to the worers!

(a) 3ower piece rate for the worers with below standard performance! "he lower

piece rate applicable is EK of straight piece rate!

(b) 7igher piece rate for the wor with performance above the standard or at the

standard! "he higher piece rate applicable is 4?K of straight piece rate!

92: Merric>! Mu$ti#$e or Differentia$ #iece rate !'!te8

"his method is an improvement over "aylors method! "his method has

three rates for different level of performance! 9ages are paid at ordinary piece rate

to those worers whose performance is les than E@ of standard output5 44K of

the ordinary piece rate is given to worers whose level of performance is between

E@ and 4KK of the standard and 4?K of the ordinary piece rate is given to

worers who produce more than 4KK of the standard output!

9": Gantt>! Ta! and <onu! #$an

Hnder this method a standard time is fi*ed for a tas to be performed byworers! Actual time taen is compared with the standard time and efficiency is

ascertained (4) "ime wage are paid to the worers whose performance is below

4KK, i!e!, those who tae more than the standard time! (?) "ime wages and ?K of

time wages as bonus are paid to those worers who tae standard time to complete

the >ob (whose performance is at 4KK) (@) 9ages at high piece rate on the whole

output are paid to the worers who tae less than standard time (whose efficiency is

above 4KK)!

8ome authors have provided for ?K bonus over and above high piece

rate for above standard worers! ut an overwhelming ma>ority of authorities

concur with the rates given above and are used here!

(.2.". /re8iu8 <onu! !c0e8e!

Premium plans are introduced to enhance the individual performance of

worers! "he worers are induced to show efficiency by performance of >ob in less

than the standard time!

Hnder the premium plans, a standard time is fi*ed for a specific >ob or

operation and the worer is paid for the actual time taen by him at hourly rate plus

wages for a portion of the time saved as bonus! “A premium and bonus plan is

called “incentive plan because the worer is provided incentive to earn more

wages by completing the wor in less time!

!

/re8iu8 bonu!

!'!te8! i: Monetar'

bonu!7

"he following are some of the popular monetary premium bonus systems

(4) 7alsey premium plan

(?) 7alsey. 9eir premium plan

(@) 'owan system

() arth variable sharing plan



Bonus


2"8

(B) +merson$s efficiency plan

() edau* point premium system (D) Accelerating premium plan, etc!

9: T0e a$!e' #re8iu8 #$an7 "his system is nown as fifty fifty plan! It was

introduced by %!A! 7alsey, an American engineer! Hnder this method a standard

time is fi*ed for the performance of each >ob5 worer is paid for actual time taen

at an hourly rate plus BK of time saved as bonus1 Tota$ earning! our!

3ored - Rate #er 0our:

4KKBK (

ime sa-ed ate per hour)

2 " * ' < BK (8.") '

92: a$!e'% eir 1c0e8e7 Hnder this method the worer gets a bonus at @K of time

saved unlie BK under 7alsey plan! +*cept for this change, 7alsey and

7alseyweir plans are similar!

9": Ro3an 1'!te8 or Ro3an /$an7 "he scheme was introduced in 4JK4 by &avid

'owan of 6lasgow, +ngland! "he wages are calculated on the basis of hours

wored where as the #bonus is that proportion of the wages of time taen which the

time saved bears to the standard time allowed$!

Tota$ Earning! under Ro3an #$an

our! 3ored - Rate #er 0our : ime sa-ed

S SFStandard time ours worked ate per hour

@ :

94: <art0>! ariab$e 10aring /$an1 Hnder this scheme wages are not guaranteed! "he

earnings in calculated by multiplying the rate per hour by the geometric mean of

stander hour and actual hours wored! "hus

Earning! Rate #er 0our S tan dard time $ctual time

9&: E8er!on>! Efficienc' /$an7 Hnder this plan, a standard time is fi*ed for every >ob

or wor! 9orer$s output is measured as a percentage of the standard fi*ed! 9hen a

worer$s efficiency reaches ?G@ of the standard, he becomes eligible to get

bonus at given rate! "he rate of bonus increases gradually when efficiency

percentage goes up form D to 4KK of the basic time rate! %or every additional

4 efficiency beyond 4KK, additional bonus is 4 of the time rate! 1c0edu$e of

bonu!

Eff

icienc' P

(A) elow ?G@ -o bonus! 0nly time wages are paid!

() ?G@ to 4KK onus starting from K!K4 for D

efficiency gradually "ouches ?K at 4KK

efficiency!




2"

(C) Above 4KK onus of ?K of time rate < 4 additional bonus

for each additional 4 efficiency

beyond the 4KK!

+merson$s plan is beneficial to the worers as they are guaranteed with

time wages and also are entitled to get bonus! +ven average worers can earn bonus

since it starts at

?

G@ of the standard! 9hen worers attain and cross the standard by reaching and surpassing 4KK efficiency level, bonus also accelerates!

9(: <edeau->! #oint #re8iu8 !'!te87 It is a combination of time and bonus

schemes! 8tandard tie for a >ob is determined by time study! 8tandard production

per hour is fi*ed and the unit of measurement is #minute$! An hour is taen as si*ty

minutes! +ach minute at standard time is called a point.edau* point or #$! "he

number of points has to be determined in respect of each >ob! If actual time is more

than the standard time the worer is paid on hourly basis! +*cess production is

counted in points, for which a bonus of DB is allowed to the worer and

remaining ?B goes to the foreman, which itself is a novel feature! Earning!

our! 3ored - Rate #er 0our "S DB

4KK K

9here

<.1! 2 -umber of points saved, i!e!, number of points actually earned less

the standard number of points for the >ob! R.! 2 asic 'ate per hour!

Acce$erating /re8iu8 /$an7 Hnder this premium plan bonus increases at a faster

rate as output increases! "he plan offers a higher incentive to the worers! "he

efficiency is determined on the basis of time saved or increased output! "he plan is

a comple* one! It goads and forces the worers to increase production! eyond a

limit, worers may find the strain is intolerable!

Grou# <onu! 1'!te8!

Premium bonus schemes are meant for individual incentive where their

output can be measured! In some cases individual output cannot be measured!

Hnder such circumstances group bonus schemes tae the place of individual bonus

plans! "he total bonus can be shared between worers of different sills in different

specified proportions, the latter being commonly based on the individual time rates

although agreed percentage allocations may be used! "he main group bonus

schemes are as under1

(4) udgeted e*penses bonus, (?) Cost efficiency bonus, (@) Priest may system

() "owne$s 6ain sharing system and (B) 9aste reduction scheme!

Indirect Monetar' Incenti+e!

"he prosperity of business firms depends on employees! "he employeesare given a share in the profits based on the prosperity of the concern! "hus,

copartnership and profit sharing schemes fall under the category of indirect

monetary incentives!

9a: /rofit !0aring7 In this scheme there is an agreement between the management and

employees, whereby the employer pays them a predetermined share of the profits

of the undertaing in addition to wages!

9b: Co%#artner!0i#1 In co.partnership or co.ownership employees are allotted shares

of the company and they are to receive profits in proportion to their capital! In

certain cases employees are given loan to buy the shares of the company and




2!"

minimum period of service to be rendered is prescribed to get the shares allotted!

"his reduces labour turnover! "his scheme increases morale of the employees to a

great e*tent if the company is profitable! +*ample1 the stoc option schemes in

software companies!

ii: Non%8onetar' incenti+e!1 "he employees are provided better facilities,

instead of additional monetary payments! "his is done to attract the efficient worers! -on financial incentives include the following1

(4) %avourable woring conditions

(?) %ree health care

(@) Providing rent free accommodation!

() %ree education facilities for children

(B) %ree transport facilities

() %ree holiday facility

(D) Providing subsidized food

(E) 9elfare facilities

(J) 0pportunities for advancement(4K) Protective clothing, liveries, uniforms, etc!

Ad+antage! of non%8onetar' incenti+e! (4)

Attracting efficient and silled labour

force!

(?) Increasing the morale of employees

(@) 'eduction labour turnover

() +stablishment of goodwill for the company (B) 'eduction in absenteeism!

(." /AY ROLL

"he pay roll is detailed information of the gross income and net income of each worer! "he accuracy of the pay roll should be verified with the relevant

records, in order to avoid errors of omission! After the preparation of wage sheet, is

duly verified and sent to the each section, where cash is drawn and disbursed to the

employees! %rom the gross income of each employees, certain deductions are made

to arrive at the net wages payable! %or instance, the payment of wages Act 4J@

authorises deductions and some of them are1

i) %ines and deductions for absence from duty ii) 7ouse rent and

supply of amenities iii) &eductions for recovery of advance iv)

%or damages or loss of goods or money e*pressly entrusted to the

employed person

v) Provident %und contribution,+mployees state Insurance

contribution

vi) &ues to the co operative

societiesvii) Income "a* deduction

etc!

(.4 ILLU1TRATION1



?


2!!

I$$u!tration %

%rom the following information calculate the labour turnover rate1

-umber of worers at the beginning of the period1 @,EKK

-umber of worers at the end of the period1 ,?KK

&uring the year, K worers left while 4K worers are discharged! KK

worers are recruited during the year5 of these 4BK worers are recruited to fill up

vacancies and the rest are engaged on account of an e*pansion scheme!

1o$ution7

Average number of worers during the period 2

#umber ofworkers at the be0innin0 of the /eriod:

#umber of worker s at end of

the period

?

@EKK:??KK ?

@KKK

?(a) 3abour turnover by applying replacement method1

@ -umber of worers replaced *4KK

Average number of

worers @4BK

?

4KK@@.DBH

KKK

(b) 3abour turnover by applying separation method1

@ -umber of worers separated *4KK

Average number of worers




2!2

@ K :4K @ ?KK 4KK @ BH

KKK KKK

(c) 3abour turnover by applying flu* method

@ -umber of worers replaced : -o!of worers separated *4KK

Average number of worers

@ KK?:?KK 4KK@?KH

KKK

I$$u!tration! 2

Calculate the earnings of worers Q and O under (A) straight piece rate systemand () "aylor$s differential piece rate system from the following details1 8tandard

time per unit 2 4? minutes

8tandard rate per hour 2 's!K

&ifferentials to be used EK and 4?K

In a particular day of E hours, worer #Q$ produced @K units and worer #O$ produced

BK units!

1o$ution7

(4) 3evel of performance of worers

8tandard production for 4?

minutes 24 unitK minutes

8tandard production per hour 2 @ B units

4? minutes

8tandard production per day of E hours 2E hours * B units 2 K units

9orer #Q$ who produced @K units is below standard

9orer #O$ who produced BK units is above standard

(?) Calculation of piece rates

8tandard rate per hour 2 's!K

's!K

8traight piece rate 2 @ 's!4? per unitB units per hour

3ow piece rate for below standard production

2 8tandard piece rate * 3ower differential

2 's!4? * EK 2 's!J!K per unit

7igh piece rate for at or above standard

production 2 8traight piece rate *

7igher differential 2 's!4? * 4?K 2

's!4!K per unit!




2!3

9A:Earning! of 3orer! under !traig0t #iece rate !'!te8

+arnings 2 Production of worer * 8traight piece rate

9orer Q1 @K units * 's!4? per unit 2 's!@K

9orer O 1 BK units * 's!4? per unit 2 's!KK

9<: Earning! of 3orer! under Ta'$or>! differentia$ #iece rate

!'!te87+arnings 2 Production of worer * differential piece rate

9orer Q 2 @K units * 's!J!K per unit

2 's!?EE

9orer O 2 BK units * 's!4!K per unit

2 's!D?K

I$$u!tration%"

"he following are the particulars applicable to a wor process1

"ime rate 's!B per hour

7igh tas K units per wee

Piece rate above the high tas 's!!B per unitIn a K hour wee, the production of the worers was as follows1

A @B units K units

C 4 units & B? units

Calculate the wages of the worers under 6antt$s tas bonus plan!

1o$ution7

(4) Hnder 6antt$s tas bonus plan, wages are ascertained as follows1

(a) 9hen output is below standard, guaranteed time wages are paid

(b) 9hen the output is at standard, time rate < ?K onus

(c) 9hen the output is above standard high piece rate on worer$s whole output!

(?) 3evel of performance of worers

3evel of performance @ Actual output *4KK

7igh tas output

A F *4KK @ ED!B

F *4KK @4KK

C F4

*4KK @4K?!B

& F *4KK @4@K

(@) +arnings of worers

A . elow standard performance = 0nly time wages

K hours * 's!B per hour 2 's!?KK

. Performance at standard = "ime wages < ?K bonus

K * B < ?K (K * B) 2 ?KK < K 2 's!?K




2!4

C . Performance above standard = 7igh piece rate on whole

output

4 * !B 2 's!?!B

& . Performance above standard = 7igh piece rate on whole

output

B? * !B 2 's!@@ENote7 8ome e*perts provide for ?K bonus in addition to high piece rate for above

standard performance! 7owever, an overwhelming ma>ority of authorities on

cost accounting state that above standard worers receive #7igh piece rate

on whole output$8o, the same method is adopted in the above woring and

also the answer for e*ercises!

I$$u!tration 4

A worer is paid at ?B paise per hour for completing a wor within E hours! If he

completes the wor within hours, calculate his wages under 7alsey plan when the

rate of premium is BK! Also ascertain the effective hourly rate of earning by the

worer!

1o$ution79ages or earnings under 7alsey scheme

@ " * ' : (8F")'

" 2 Actual time or time taen 2 hours

' 2 'ate per hour 2 's!K!?B

8 2 8tandard time 2 E hours

+arnings (or) wages 2 * K!?B : (EF) K!?B

"otal

earning 2

Actual time

4!DB

2 @ 'e!K!?J? per hour (appro*!)

I$$u!tration &

8tandard time 4K hours! -umber of units to be completed B! 7ourly rate is

'e!K!?B! "ime taen E hours! Calculate a worer$s total earnings under 'owan plan!

Also determine the effective rate of earnings per hour!

1o$ution7+arnings under 'owan Plan

@ " * ' :8F

'* " * '

8

" 2 "ime taen or actual time 2 E hours

' 2 'ate of wages 2 'e!K!?B per hour




2!5

8 2 8tandard time or time allowed 2 4K hours

"otal earnings of worer under 'owan plan

2 E * K!?B : * E * K!?B

2 ? < K!K 2 's!?!K

+ffective rate of earnings per hour@ "otal +arnings

Actual time taen

@?!K

@ 'e!K!@K per hour

E

I$$u!tration (

Ascertain wages of a worer under edeau*$s point premium system from thefollowing details1

8tandard output per day of E hours 2 4K units

Actual output during a day of E hours ?KK

units 'ate per hour is 's!B!KK 1o$ution7

8tandard production points 2 E * K 2 EK #$s

0ne unit of standard output 2 2 @ #$s

Actual output 2 ?KK * @ 2 KK #$s

Points saved 2 KK.EK 2 4?K #$s +arnings 2 "ime taen * 7ourly

rate < DB of time saved * 7ourly rate

@ E * B :

2 K < D!B 2 's!D!B

Note (4) +ach #$ represents one minutes standard wor!

Note (?) 4?K is divided with si*ty in earnings

Calculation because time saved is in #$s or minutes but rate given is hourly

rate!

I$$u!tration )

%rom the following details, calculate the earnings of a worer under arth$s variable

sharing plan18tandard time ?B hours

Actual time ?K hours

8tandard rate per hour1 's!4?

1o$ution7

+arnings under arth$s variable sharing plan

@ 'ate per hour * 8tandard "ime * Actual "ime

@4? * ?B * ?K 2 4? * ??!@ 2 's!?E!@@




2!6

I$$u!tration *

Q 3td!, employs +merson$s efficiency plan in its factory! 8tandard output per

day of E hours is fi*ed at BK units! -ormal time wage is 's!B per hour!

%our worers /, -, 0 and P produced goods as follows on a specific day!

#/$ @K units! #-$ B units! #0$ BK units! #P$ BE units

Ascertain the earnings of worers under +merson$s efficiency plan! Oou may assume! as bonus for every additional 4 efficiency between ?G@ and 4KK!

1o$ution7

(4) 8chedule of onus under +merson$s plan

4! elow ?G@ efficiency = 0nly time wages! -o bonus

?! ?G@ to 4KK . onus which begins at ?G@ and reaches ?K at 4KK

efficiency!

@! Above 4KK efficiency ?K of time wages < 4 bonus for every additional 4

efficiency!

Actual output

(?) +fficiency level of worers 2 *4KK

8tandard output

+fficiency level of #/$ 2*4KK @ K

+fficiency level of #-$ 2 *4KK @ JK

+fficiency level of #0$ 2 *4KK @4KK

+fficiency level of #P$ 2 *4KK @44

(@) +arnings of worers 2 "ime wages < onus

/ = E hours at 's!B per hour 2 E * B 2 's!K

J F D

- = E * B < E * B * . 2 K < B!K 2 B!K

4KK

0 = E * B < E * B * 2 K < E 2 E

P = E * B < E * B * 2 K < 4! 2 's!B!

Note7 As per instruction given in the problem, bonus for #-$ is at! for every 4 between

!D and JK2 ?@!@@ * 2 4 appro*imately!

(.& LET U1 1UM U/

3abour is the only factor which has unlimited production! Capacity! &ue

consideration is given to labourers, so e*perts innovate new methods to evaluate the




2!7

performance of labourers! 3abour turnover means the percentage change in the labour force

during a specific period! 7igh labour turnover should be avoided! If the labour turnover is high

company will find the cause of labour turnover! Idle time is the difference between time paid

and time wored! If the idle time is more immediately the company should analyse the causes

of idle time and it should tae effort to control the idle time!

(.( LE11ON END ACTIITIE14! 9hat is labour "urnoverN 7ow can it be reducedN

?! 9hat is /erit ratingN 9hat are its merits demeritsN

@! 9hat is idle timeN 7ow is it treated in cost accountsN

! +*plain the different variations of "ime 'ate system!

B! &escribe various Piece 'ate systems and their pros and cons!

! %rom the following particulars supplied by the personnel department of a firm Calculate

labour turnover1

"otal number of employees at the beginning of the month ?,K4K

-umber of employees who are recruited during the month @K

-umber of employees who left during the month BK"otal number of employees at the end of the month 4,JJK

D! 'a>an 3td! follows "aylor$s differential piece rate system. EK and 4?K being the

differentials for below standard and above standard wor!

%rom the following ascertain the earnings of worers Q and O!

8tandard time 4B minutes per unit

"ime wored E hours

Hnit produced Q1 ?E O1 @B

-ormal piece rate per unit 's!?

E! Calculate earnings of @ worers A, and C under the /erric$s plan of piece rate system

given the following18tandard production 4?K units

Production of A JK units

Production of 4KK units

Production of C 4@K units 0rdinary piece

rate 'e!K!4K!

J! %rom the information given below, calculate the earnings of the three worers, Q, O and Z

under gantt$s tas bonus plan1

a) time rare 's!4B per hour

b) 7igh tas per day of E hours = EK hours

c) 7igh piece rate 's!? per unit

d) &ay$s output1 Q DK units O EK units Z JK units

4K! Calculate the earnings of a worer from the following as per 7alsey plan1

a) 8tandard time = 4? hours5 Actual time #A$ 4K hours #$ E hours #C$ hours!

7ourly rate 's!E!

b) 7ourly rate of wages 's!4K

8tandard time for production of a dozen units of product 2 ? hours! Actual time

taen by the worer to produce ?B dozens K hours!




2!8

c) Articles manufactured by /r! #8$ a worer in a factory @KK 8tandard time allowed 4K

minutes per unit! Actual time hours

8tandard rate 's!B per hour!

(.) CECB YOUR /ROGRE11

Oour answer may include the following

# "he wage system has to be fair to employees and the employer!

# "he worers are to be assured of minimum guaranteed wages irrespective of wor

done!

# 9orers are to be compensated on the basis of their relative efficiency!

# "he wage system should be fle*ible to incorporate future changes!

# "he wage system should encourage higher productivity and reduce labour turnover!

(.* /OINT1 ;OR DI1CU11ION

4! A worer earns 's!? as bonus on a >ob which reuires ?K standard hours at 'e!K!BK per

hour, under 7alsey incentive system based on BK1BK! 9hat would be his earnings under

'owan PlanN

?! %rom the following information, calculate the bonus and earnings under +merson$s

+fficiency onus plan1

8tandard output in 4? hours 4J? units Actual output

in 4? hours 4E units

"ime rate 'e!K!DB per hour!

If the actual output is ?K units, what will be the amount of bonus and earningsN

(., RE;ERENCE1


?! -igam and 8harma = Cost Accounting!

LE11ON ) 1TANDARD CO1TING

Content!7). Ai8! and Ob?ecti+e!

).2 Introduction

)." Definition7 1tandard 1tandard co!t !tandard co!ting

).4 Ad+antage! of !tandard co!ting

4D!@!4 Cost control

4D!@!? +limination of wastage and inefficiency

4D!@!@ -orms

4D!@! 3ocates sources of inefficiency




2!

4D!@!B %i*ing responsibility

4D!@! /anagement by e*ception

4D!@!D Improvement in methods and operations

4D!@!E 6uidance for production and pricing policies

4D!@!J Planning and udgeting

4D!@!4K Inventory valuation).4 Li8itation of !tandard co!ting

).& A##$icabi$it' of !tandard co!ting

).( 1etting t0e 1tandard

).) Introduction of 1tandard Co!ting 1'!te8

4D!D!4 +stablishment of cost centres

4D!D!? Classification and codification of accounts

4D!D!@ &etermining the types of standards and their basis

4D!D! &etermining the e*pected level of activity

4D!D!B 8etting standards

).* E!ti8ated Co!ting +er!u! 1tandard Co!ting)., i!torica$ Co!t and 1tandard Co!t

). <udgetar' Contro$ and 1tandard Co!ting

). 1tandard Co!ting and Margina$ Co!ting

).2 1tandard Co!ting and 1tandardiKed Co!ting

)." 1tandard Co!t card

).4 Let u! 1u8 U#

).& Le!!on%End Acti+itie!

).( C0ec 'our /rogre!!

).) /oint! for Di!cu!!ion

).* Reference!

). AIM1 AND O<=ECTIE1

(i) "o now the meaning of standard, standard cost and standard costing!

(ii) "o understand the difference between estimated costing and standard costing and

also between budgetary control and standard costing!

(iii) "o study the advantages and limitation of standard costing!

(iv)"o learn the determination of standard costs!

).2 INTRODUCTION

Cost control is a basic ob>ective of cost accountancy! 8tandard costing is the most powerful system ever invented for cost control!

7istorical costing or actual costing is nothing but, a record of what happened in the

past! It does not provide any #-orms$ or #Oardstics$ for cost control! "he actual costs lose

their relevance after that particular accounting period! ut, it is necessary to plan the costs, to

determine what should be the cost of a product or service! It the actual costs do not conform

to what the costs should be, the reasons for the change should be assessed and appropriate

action should be initiated to eliminate the causes!




22"

8tandard costing fulfills the need to compensate the short comings of 7istorical

costing from the point of view of cost control! (a) It provides the norms or yardstics in the

form of standards. specifying what costs should be or yardstics in the form of standards.

specifying what cost should be (b) comparison of actual costs with standards is facilitated to

ascertain variances for each element of cost! (c) "he variances are further analysed for

contributory reasons! 'esponsibility is fi*ed on the basis of the reasons for each variance! (d)

Corrective measures are under taen to eliminate the unfavourable variances wherever

possible!

"hus, standard costing is a costing techniue specifically evolved to provide

complete #Infrastructure$ and #8ystematic approach$ for cost control!

).2. DE;INITION7 1TANDARD 1TANDARD CO1T 1TANDARD CO1TING

1tandard. According to Prof! +ric 3!Lohler, “8tandard is a desired attainable

ob>ective, a performance, a goal, a model! 8tandard may be used to a predetermined rate or a

predetermined amount or a predetermined cost!

1tandard Co!t1 8tandard cost is predetermined cost or forecast estimate of cost!

I!C!/!A! "erminology defines 8tandard Cost as, “a predetermined cost, which is calculated

from management standards of efficient operations and the relevant necessary e*penditure! It

may be used as a basis for price.fi*ing and for cost control through variance analysis! "he

other names for standard costs are predetermined costs, budgeted costs, pro>ected costs, model

costs, measured costs, specifications costs etc! 8tandard cost is a predetermined estimate of

cost to manufacture a single unit or a number of units of a product during a future period!

Actual costs are compared with these standard costs!

1tandard Co!ting is defined by I!C!/!A! "erminology as, “"he preparation and use of

standard costs, their comparison with actual costs and the analysis of variances to their causes

and points of incidence!

“8tandard costing is a method of ascertaining the costs whereby statistics are preparedto show (a) the standard cost (b) the actual cost (c) the difference between these costs, which is

termed the variance says 9heldon! "hus the techniue of standard cost study comprises of1

4! Pre.determination of standard costs5

?! Hse of standard costs5

@! Comparison of actual cost with the standard costs5

! %ind out and analyse reasons for variances5

B! 'eporting to management for proper action to ma*imize efficiency!

).". ADANTAGE1 O; 1TANDARD CO1TING

).". Co!t contro$7

8tandard costing is universally recognised as a powerful cost control system!

Controlling and reducing costs becomes a systematic practice under standard costing!

).".2 E$i8ination of 3a!tage and inefficienc'7

9astage and inefficiency in all aspects of the manufacturing process are curtailed,

reduced and eliminated over a period of time if standard costing is in continuous operation!

)."." Nor8!7

8tandard costing provides the norms and yard stics with which the actual

performance can be measured and assessed!

).".4 Locate! !ource! of inefficienc'7




22!

It pin points the areas where operational inefficiency e*ists! It also measures the e*tent

of the inefficiency!

).".& ;i-ing re!#on!ibi$it'7

;ariance analysis can determine the persons responsible for each variance!

8hifting or evading responsibility is not easy under this system!

).".( Manage8ent b' e-ce#tion7"he principle of #management by e*ception can be easily followed because problem

areas are highlighted by negative variances!

).".) I8#ro+e8ent in 8et0od! and o#eration!7

8tandards are set on the basis of systematic study of the methods and operations! As a

conseuence, cost reduction is possible through improved methods and operations!

).".* Guidance for #roduction and #ricing #o$icie!7

8tandards are valuable guides to the management in the formulation of pricing policies

and production decisions!

)."., /$anning and <udgeting7

udgetary control is far more effective in con>unction with standard costing! eing

predetermined costs on scientific basis, standard costs are also useful in planning theoperations!

).". In+entor' +a$uation7

;aluation of stocs becomes a simple process by valuing them at standard cost!

).4. LIMITATION O; 1TANDARD CO1TING

4! It is costly, as the setting of standards needs high technical sill!

?! Leeping of up.to.date standard is a problem! Periodic revision of standard is a costly

thing!

@! Inefficient staff is incapable of operating this system!

! 8ince it is difficult to set correct standards, it is difficult to ascertain correct variance!

B! Industries, which are sub>ect to freuent changes in technological process or the ualityof material or the character of labour, need a constant revision of standard! ut revision

of standard is more e*pensive!

! %or small concerns, standard costing is e*pensive!

).& A//LICA<ILITY O; 1TANDARD CO1TING

8tandard Costing is a control device! It is not a separate method of product costing!

Any activity of recurring nature is susceptible for setting standards! "he standard.cost process

is mostly used to control the operating tass! /anufacturing activities are routine and freuent

and therefore easy for establishing standards!

Industries where standardized and uniform wor of repetitive nature is done aresuitable for introduction of standard costing! 8tandard costing system is of little use or no use

where wors vary form >ob to >ob or contract to contract!

).( 1ETTING TE 1TANDARD1

9hile setting standard cost for operations, process or product, the following

preliminaries must be gone through1

i) "here must be 8tandard Committee, similar to udget Committee, in which Purchase

/anager, Personnel /anger, and Production /anager are represented! "he Cost

Accountant coordinates the functions of the 8tandard Committee!




222

ii) 8tudy the e*isting costing system, cost records and forms in use! If necessary, review

the e*isting system!

iii) A technical survey of the e*isting methods of production should be undertaen so that

accurate and reliable standards can be established!

iv) &etermine the type of standard to be used! v) %i* standard for each element of cost!

vi) &etermine standard costs for each product! vii) %i*the responsibility for setting standards!

viii)Classify the accounts properly so that variances may be accounted for in the manner

desired!

i*) Comparison of actual costs with pre.determined standards to ascertain the deviations!

*) Action to be taen by management to ensure that adverse variances are not repeated!

).) INTRODUCTION O; 1TANDARD CO1TING 1Y1TEM

Introducing standard costing in any establishment reuires the fulfillment of

following preliminaries!

4! +stablishment of cost centres5?! Classification and codification of accounts5

@! &etermining the types of standards and their basis5

! &etermining the e*pected level of activity5

B! 8etting standards

).). E!tab$i!08ent of co!t centre!

A cost centre is a location, person or item of euipment for which costs may be

ascertained and used for the purpose of cost control! "he cost centres divide an entire

organisation into convenient parts for costing purpose! "he nature of production and

operations, the organisational structure, etc! influence the process of establishing cost centres!

-o hard and fast rule can be laid down in this regard! +stablishment of the cost centres is

essential for pin pointing responsibility for variances!

).).2 C$a!!ification and codification of account!

"he need for uic collection and analysis of cost information necessitates

classification and codification! Accounts are to be classified according to different items of

e*penses under suitable headings! +ach of the headings is to be given a separate code number!

"he codes and symbols used in the process facilitate introduction of computerization!

).)." Deter8ining t0e t'#e! of !tandard! and t0eir ba!i!

8tandards can be classified into two broad categories on the basis of the length of use!

(a) Current !tandard!1 "hese are standards which are related to current conditions,

particularly of the budget period! "hey are for short.term use and are more suitable for

control purpose! "hey are also more amenable for combining with budgeting!(b) <a!ic !tandard!1 "hese are long.term standards, some of them intended to be in use

for even decades! "hey are helpful for planning long.term operations and growth!

asic standards are established for some base year and are not changed for a long

period of time!

It is preferable to use both inds of standards depending on the nature and type of activity

or cost for which they are fi*ed! 6enerally, the number of basic standards may be very few and

current standards are predominant in number!

<a!ic for !tandard!




223

"here can be significant difference in the standards set depending on the base used

for them! "he following are the different bases for setting standard, whether they are current

standards for short.term or basic standards for long.term use!

(a) Idea$ !tandard!1 "hese standards reflect the best performance in every aspect! "hey

are lie 4KK mars in a paper for students taing up e*aminations! 9hat is possible

under ideal circumstances in all aspects is reflected in theses standards!"hey are impractical and unattainable in practice! "here utility for control purpose is

negligible!

(b) /a!t #erfor8ance ba!ed !tandard!1 "he actual performance attained in the past may

be taen as basis and the same may be retained as standard! 8uch standards do not

provide any incentive or challenge to the employees! "hey are too easy to attain! "heir

value from cost control point of view is minimal!

(c) Nor8a$ !tandard1 It is defined as “the average standard which, it is anticipated can be

attained over a future period of time, preferably long enough to cover one trade cycle!

"hey are average standard reflecting the average performance over a complete trade

cycle which may tae three to five years!

%or a specific period, say a budget period, their relevance is negligible!(d) Attainab$e 0ig0 #erfor8ance !tandard!1 "hey are based on what can be achieved

with reasonable hard wor and efforts! "hey are based on the current conditions and

capability of the worers! "hese standards are considered to be of great practical value

because they provide sufficient incentive and challenge to the worers to attain them!

Any variances from such standard are really significant because the standard which is

attainable with effort is not attained!

).).4 Deter8ining t0e e-#ected $e+e$ of acti+it'

Capacity of operation or level of activity e*pected over a future period is vital in

fi*ing current or short.term standards! 9hen the activity level is decided on the basis of sales

or production, whichever is the limiting factor, all standard can be developed with the activity

level as the focal point! "he purchase of material, usage of material, labour hours to be

wored, etc! are solely governed by the planned level of activity!

).).& 1etting !tandard!

8etting standards may also be called developing standards or establishment of

standard cost because as a conseuence of setting standards for various aspects, standard cost

can be computed!

8etting standards is lie laying a building foundation! "he success of standard costing

system depends on the care with which the standards are developed!

It is preferable, particularly in large firms, to establish #8tandard committee$ which is

responsible for determining standards in all aspects of the business and also maing suitable

revisions in due course! "he standards committee usually consists of all the functionalmanagers lie purchase, production and sales, technical e*perts lie Production +ngineer, the

6eneral /anager and the Cost Accountant! It is the Cost Accountant$s role which is crucial

because he has to assign the monetary values for the different standards set by the other

e*perts in each area or function!

"he following is a brief discussion on the setting of standards for each element of

cost1

9: 1tandard! for Direct Materia$ Co!t




224

&irect material standards are broadly divided into standards for usage or uantity

standards and standards for material price! "here may be several materials used in the

production of a product! It is necessary to set standards for each of the important materials!

Materia$ u!age or 5uantit' !tandard!

"hese standards deal with the uantity of material needed for each unit of finished

product, the uality specifications and tolerances lie length, breadth, strength, volume, etc!ased on the past e*perience, the normal loss to be e*pected has to be determined! ased on

the e*pected or permitted loss, the uantity standard per unit is fi*ed! It two or more materials

are mi*ed in the production, the standard proportion of each material has to be fi*ed!

"he production manager and technical e*pert play the most important role in setting

uantity standards! "heir nowledge, e*perience and the shop floor situation are instrumental

in deciding upon the uality and uantity of each material! "he following are the usual

uantity standards set!

(a) Xuantity of material per unit of finished product!

(b) 8tandard loss permitted in the production process!

(c) "he proportion of different materials, if more than one material is used! (d) "he yield

e*pected from material!Materia$ #rice !tandard!7 Price standards for the material are the most difficult to set

because material prices are sub>ect to the maret forces! Hsually, current maret price for each

material, the trends observed and the forecasts of the purchasing department are the

determining factors!

9hile fi*ing price standards, the other terms lie trade discounts, freight, credit

terms, etc!, are also considered!

/aterial price should also include the cost of purchasing and storing including the

handling costs!

It is customary to prepare a standard #ill of /aterials$ which is a list of all the direct

materials to be used and incorporate therein all the standards set for each material sot that it

acts lie a ready reconer!

92: 1tandard! for direct $abour co!t

"he two ma>or aspects for which standards are developed relating to labour are (A)

3abour time and () 3abour rate!

9A:Labour Ti8e 1tandard!7 "hese standards represent the time to be taen by the

direct labour in the production of one unit of product or performing a specific

operation! It may be determined with the help of (4) "ime and /otion study5 (?)

"echnical estimates5 (@) "rial runs5 () Past e*perience5 (B) Caliber of the worers5

() 9oring conditions!

8ince, human factor is involved, the cooperation of worers should be obtained by

suitable briefing about the purpose and significance of the e*ercise!If different inds of labour have to perform group tass, standards should also be

fi*ed for labour mi* or gang!

"he most ticlish problem in setting the labour time standards is the provision for idle

time! Idle time includes rest pauses, personal needs of the worers, etc! the care with which the

idle time standards are fi*ed determines the level of arguments and uarrels on the production

lines!

"he following are the usual labour time standards etc!

(a) 8tandard time to be taen for one unit of output!




225

(b) Idle time permitted

(c) Proportion of different inds of labour where two or more inds of worers are

involved!

9<: Labour rate !tandard!7 3abour rates are generally governed by agreements with

trade unions, the firm$s wage policy and incentive systems in use! 7owever, the

following factors influence the labour rate standards1 (i) +*isting, labour rates5 (ii)'ates paid by similar firms5 (iii) "ype or ind of labour needed for production and

(iv) 3abour laws governing the industry!

9age rate standards differ for different grades or inds of labour! "he rate is also

sub>ect to revision whenever new agreements are concluded with the unions!

9": 1tandard! for o+er0ead co!t

0verheads are usually segregated into fi*ed and variable! It is necessary to fi*

standard overhead rates separately for fi*ed overheads and variable overheads! 8eparate rates

have to be determined for factory, office, selling and distribution overheads. both fi*ed and

variable!

9hile determining the overhead rates, the factors to be considered are1 (a) 8tandard

level of activity5 (b) -umber of units to be produced (c) 3abour and machine hours to bewored!

8tandard overhead costs = both fi*ed and variable should be determined!

ased upon the standard output and standard hours, the overhead rates are finalized!

1tandard out#ut and it! !tandard co!t

0nce all the cost standards are finalised, it is possible to consolidate them in the

shape of #standard cost for standard output$!

"he direct material cost per unit, direct wages per unit, fi*ed and variable overheads

per unit can be listed out! "he total of all of these represents standard cost per unit! "his can be

multiplied with the standard output for the budget period or a specified period to ascertain the

standard cost of the standard output!1tandard 0our

If a single product is produced in a firm, the output can be e*pressed in terms of the

units of that product! 7owever, several different products may be produced and they may be

measured in different units lie gs, "ons, liters, gallons, barrels, etc! "hough all of these can

not be e*pressed in terms of a single measure, it possible to e*press all of theme in terms of

#"ime$! "ime taen to produce is the common factor for all output! Production, e*pressed in

terms of hours needed to produce them is called #8tandard hours$!

According to I!C!/!A!, +ngland, “8tandard hours are a hypothetical hour which

represents the amount of wor which should be performed in one hour under standard

conditions!

"he #8tandard hour$ is very useful is ascertaining overhead variances! "he totaloutput of a firm comprising different products is e*pressed in the form of standard hours and

the fi*ed and variable overhead rates are set for standard hours!

Re+i!ion of !tandard!

Current or short.term standards have to be periodically revised! 3ong.term or basic

standards may be used for longer periods! "hey may also need revision when the factors

affecting the standard change!

'evision may be needed in all the following cases1



!sti%ated Cost Standard Cost


226

(a) Change in maret price of materials (b) permanent change in labour rates

(c) /a>or alterations in products or method of production or materials used

(d) asic change in product specifications or design! (e) +rrors in setting of

the original standards!

C0ec 'our #rogre!! )

3ist out the any two advantages and two limitations of standard costing -otes1 (a)


(b) Chec your answer with the ones given at the end of this 3esson (pp! ?E)!






).* E1TIMATED CO1TING AND 1TANDARD CO1TING

oth standards costing and estimated costing are predetermined costs! ut the ob>ect

of standard costing differs! "he differences between these two costs are1

4! It is used as statistical data, and It is scientifically used, and it is a leads to a

lot of guess wor! regular system of account based upon estimation and

time studies!?! Its ob>ects are to ascertain Its ob>ect is to ascertain “what the

“9hat the cost will be! costs should be

@! It gives importance to cost It is used for effective cost control and

ascertainment for fi*ing sale to tae proper action to ma*imise price!

efficiency!

! It is used for a specific use5 i!e!, It is a continuous process of costing, fi*ing

sale price! and taes into account all the

manufacturing processes!

B! It can be used where costing is It can be used where standard costing in

operation! is in operation!! It is not accurate! It is an As it is based on scientific analysis, it

appro*imation based on past is more accurate than the estimated e*perience!

cost!)., I1TORICAL CO1T AND 1TANDARD CO1T

i!torica$ Co!t 1tandard Co!t

4! It is an after.production. It is a predetermined cost!

recorded cost!?! It is, actually, incurred cost! It is an ideal cost!

@! As it relates to the past, it is not It is a future cost! It can be used for useful

for cost control! cost control!



Budgetary Cost Standard Cost


227

! It is used to ascertain the profit It is used for the measurement of

or the loss incurred during a operational efficiency of the period!

enterprises!

). <UDGETARY CONTROL AND 1TANDARD CO1TING

4! It is e*tensive in its application, It is intensive, as it is applied to as it deals with the

operation of manufacturing of a product or department or business as a providing

a service! whole!

?! udgets are prepared for sales, It is determined by classifying production,

cash etc! recording and allocating e*penses to

cost unit!

@! It is a part of financial account, It is a part of cost account, a pro>ection a

pro>ection of all financial of all cost accounts! accounts!

! Control is e*ercised by taing ;ariances are revealed through into account

budgets and difference accounts!

actuals! ;ariances are not

revealed through accounts!

B! udgeting can be applied in It cannot be applied in parts! parts!

! It is more e*pensive and broad It is not e*pensive because it relates to in

nature, as it relates to only elements of cost! production, sales, finance etc!

D! udgets can be operated with "his system cannot be operated

standards! without budgets!).. 1TANDARD CO1TING AND MARGINAL CO1TING

8tandard costing is a system of accounting in which all e*pense1 (fi*ed and variable)

are considered for the determination of standard cost for a prescribed set of woring

conditions! 0n the other hand, marginal costing is a techniue in which only variable e*penses

are taen to ascertain the marginal cost! oth standard costing and marginal costing are

completely independent of each other and may be installed >ointly! "his system of >oint

installation may be named as /arginal 8tandard Costing or 8tandard /arginal Costing

8ystem! ;ariances are calculated in the same way as in standard costing system with the only

difference that volume variances are absent because fi*ed e*penses are charged in totals in

each period!

).2 1TANDARD CO1TING AND 1TANDARDI1ED CO1TING

"he term #standardised costing$ is synonymous to inform costing! Hniform costing is

a system of costing under which several undertaings use the same costing principles and

practices! 9ith the help of uniform costing, several common processes of various industrial

units can be standardised which will be helpful in improving the performance of inefficient

units! oth standard costing and standardized costing (i!e! uniform costing) can be used for

better management of industrial units!




228

)." 1TANDARD CO1T CARD

9hen all the standard costs have been determined, a 8tandard Cost Card is prepared

for each product or service! "he process of setting standards for materials, labour and

overheads results in the establishment of the standard cost for the product! 8uch a cost card

shows for a specified unit of production, uantity, uality and price of each type of materials

to be used, the time and the rate of pay of each type of labour, the various operations the product would pass through, the recovery of overhead and the total cost! "he build.up of the

standard cost of each item is recorded in standard cost card! "hese details serve as a basis to

measure the efficiency against which actual uantities and costs are compared! "he type of

standard cost card varies with the reuirements of individual firm hence no uniform format

can be prescribed!

).4 LET U1 1UM U/1

8tandard costing is a yardstic to measure the performance of a concern! 8tandard

performance compared with actual performance and variance is found! 8tandard yard for

materials, both in uality and price, labour both rate and hours, overheads, sales and profit are

fi*ed! 8tandard costing gives more emphasis on cost than financial information! udgetarycontrol e*tensive and deals with the operation of department as a whole!

).& LE11ON END ACTIITIE1

4 &efine #standard cost$ and #standard costing$!

? 9hat are the merits of standard costingN

@ +*plain the limitations of standard costing!

9hat are the difference between #standard cost$ and estimated cost$N

B &istinguish between budgetary control and standard costing!

7ow do you set standards for different elements of costN

).( CECB YOUR /ROGRE11

Oour answer may include the following

Advantages of standard costing

Co!t contro$7 8tandard costing is universally recognised as a powerful cost

control system! Controlling and reducing costs becomes a systematic practice

under standard costing!

2 E$i8ination of 3a!tage and inefficienc'7 9astage and inefficiency in all aspects

of the manufacturing process are curtailed, reduced and eliminated over a period

of time if standard costing is in continuous operation!

" Nor8!7 8tandard costing provides the norms and yard stics with which theactual performance can be measured and assessed!

Li8itation! of !tandard co!ting

4! It is costly, as the setting of standards needs high technical sill!

?! Leeping of up.to.date standard is a problem! Periodic revision of standard is a costly

thing!

@! Inefficient staff is incapable of operating this system!




22

).) CECB YOUR /ROGRE11

4! +*plain the advantages &isadvantages of 8tandard Costing!

?! &ifference standard costing and marginal costs!

?B

).* RE;ERENCE1


?! 8!-! /aheswary = /anagement Accounting!




23"

LE11ON * ARIANCE ANALY1I1

Content!7

*. Ai8! and Ob?ecti+e

*. Introduction*.2 Definition

*." ;a+ourab$e and unfa+ourab$e ariance

4E!@!4 %avourable variance

4E!@!? Hnfavourable variance

*.4 Uti$it' of +ariance! ana$'!i!

*.& T'#e! of ariance ana$'!i!

*.( I$$u!tration!

*.) Let u! 1u8 U#

*.* Le!!on%End Acti+itie!

*., C0ec 'our /rogre!!*. /oint! for Di!cu!!ion

*. Reference!

*. AIM1 AND O<=ECTIE

i) "o understand the meaning and definition of variance analysis ii)

"o now to different inds of material variance iii) "o study the different

type of labour variance

iv) "o learn to methods of calculation of material and labour variances

*. INTRODUCTION;ariance analysis is the process of analysing variance by sub.dividing the total

variance in such a way that management can assign responsibility for offstandard

performance! It, thus, involves the measurement of the deviation of actual performance from

the intended performance! "hat is, variance analysis is a tool to measure performances and

based on the principle of management by e*ception! In variance analysis, the attention of

management is drawn not only to the monetary value of unfavourable and favourable

managerial performance but also to the responsibility and causes for the same!

After the standard costs have been fi*ed, the ne*t stage in the operation of standard

costing is to ascertain the actual cost of each element and compare them with the standard

already set! Computation and analysis of variances is the main ob>ective of standard costing!

Actual cost and the standard cost is nown as the #cost variance$!

*.2 DE;INITION

As per I!C!/!A, ;ariance Analysis is “the resolution into constituent parts and

e*planation of variances! "he definition indicates two aspects.resolutions into constituent

parts is the first aspect which is nothing but subdivision of the total cost variance! +*planation

of variance includes the probing and inuiry for causes and responsible persons!




23!

*." ;AOURA<LE AND UN;AOURA<LE ARIANCE

;ariances may be favourable or unfavourable depending upon whether the actual

resulting cost is less or more than the standard cost!

*.". ;a+ourab$e +ariance7

9hen the actual cost incurred is less than the standard cost, the deviation is nown as

favourable variance! "he effect of the favourable variance increases the profit! Again,favourable variance would result when the actual cost is lower than the standard cost! It is

also nown as positive or credit variance and viewed only as savings!

*.".2 Unfa+ourab$e +ariance7

9hen the actual cost incurred is mote than the standard cost, there is a variance,

nown as unfavourable or adverse variance! unfavourable variance refers to deviation to the

loss of the business! It is also nown as negative or debit variance and viewed as additional

costs or losses!

9hen the profit is greater than the standard profit, it is nown as favourable variance!

9hen the profit is less than the standard profit, it is nown as unfavourable variance! "his

favourable variance is a sign or efficiency of the organisation and the unfacourable variance is

a sign of inefficiency of the organisation!

*.4 UTILITY O; ARIANCE1 ANALY1I1

i) ;ariance analysis sub divides the total variance based on difference contributory

causes! "his gives a clear picture of the different reasons for the overall variance!

ii) "he sub division of variance establishes and highlights the interrelationship between

different variances!

iii) ;ariance analysis #e*plains$ the causes for each variance! It paves way for fi*ing

responsibility for all variances! iv)It highlights all inefficient performances and the

e*tent of inefficiency! v) It is a powerful tool leading to cost control!

vi) It enables the top management to practice #management by e*ception$ by focusing onthe problem areas! vii) It segregates variance into controllable and uncontrollable, thereby

indicating where action is warranted!

viii) It acts as the basis for profit planning

i*) y revealing each and every deviation, along with the causes, variance analysis

creates and nurtures #cost consciousness$ among the employees!

*.& TY/E1 O; ARIANCE ANALY1I1

"he following are the different types of variances!

(4) &irect material cost variances (?) &irect labour cost variance (@) 0verheads cost

variances () 8ales variances!

Materia$9: Direct Materia$ Co!t ariance 9MC:7 It is the difference between standard

materials cost and actual materials cost! If the actual cost is less than the standard cost, the

variance is favourable and vice versa! /C; arises due to change in

the price of the materials or a change in the usage of materials,

/C; 2 (8X * 8P) = (AX * AP)

8X 2 8tandard Xuantity AX 2 Actual Price

8P 2 8tandard Price AP 2 Actual Price

"he following chart show the components of material cost variance1



+aterial +i ariance +aterial Jield

+aterial /rice ariance +aterial 5sa0e ariance


232

/aterial Cost ;ariance

;ariance

92: Materia$ /rice ariance 9M/:7 It is that part of material cost variance which is

due to the difference between the standard price specified and the actual price paid!

/P; 2 (8P = AP) AX

/P; arises due to the following reasons1

(a) Changes in the maret prices of materials

(b) Hneconomical size of purchase orders(c) Hneconomical transport cost

(d) %ailure to obtain cash discount

(e) %ailure to purchase materials at proper time!

/P; is mainly the responsibility of the purchase manager! 7owever, a general increase in

prices would be uncontrollable!

9": Materia$ U!age ariance 9MU:7 It is the difference between the standard uantity

specified and the actual uantity used!

/H; 2 (8X = AX) 8P

/H; may arise due to (a) carelessness in use of materials (b) loss due to pilferage (c)faulty wormanship (d) defect in plant and machinery causing e*cessive consumption of

materials! Production manager will be responsible for material usage variance!

94: Materia$ Mi- ariance 9MM:7 It is that part of material usage variance which

arises due to change in standard and actual composition of mi*!

//; 2 ('8X = AX) 8P5 '8X = 'evised 8tandard Xuantity@

otalStan

Standard

dardAuantit,

Auantit, otal $ctual Auantit,

"his variance arises in industries lie chemical, rubber etc! where definite proportions

of different raw materials are mi*ed to get a product! ;ariations may arise due to general

shortage or non purchase of materials at the proper time!9&: Materia$ Yie$d ariance 9MY:7 It is a part of material usage variance! It is the

difference between standard yield specified and actual yield obtained!

/O; 2 (8tandard yield = Actual yield) Average standard price p!u!

0r

(8tandard loss on actual input . Actual loss) Average standard price p!u!

Labour




233

9: Labour Co!t ariance 9LC:7 "his is the difference between the standard wages

specified and the actual wages paid!

3C; = (87 * 8') = (A7 * A')! "his is further divided into the following variances!

92: Labour Rate ariance 9LR:7 It is the difference between the standard rate of wage

specified and the actual rate paid!

3'; 2 (8' = A') A73abour rate variance arises due to (a) changes in the basic wage rates (b) use of different

methods of wage payment (c) unscheduled overtime!

9": Labour Efficienc' ariance 9LE:7 It is a part of labour cost variance! It is the

difference between standard labour hours specified and actual labour hours spent!

3+; 2 (87 = A7) 8'

"his variance arises due to (a) lac of proper supervision (b) insufficient training (c) poor

woring conditions (d) increase in labour grades utilized

94: Labour Mi- ariance 9LM:7 "his is the difference between the standard labour

grade specified and the actual labour grade utilised!

3/; 2 ('87 = A7) 8'

S@

otalStanStandarddardoursours otal $ctual ours

87 2 8tandard 7our 8' 2 8tandard 'ate A7 2 Actual 7ours A' 2 Actual

'ate '87 2 'evised 8tandard 7our!

9&: Labour Yie$d ariance 9LY:7 It is a part of labour efficiency variance! It arises due

to the difference between standard yield and actual yield!

3O; 2 (8tandard yield = Actual yield) Average 8tandard 'ate p!u!

0r

(8tandard loss on actual input = Actual loss) Average 8tandard 'ate p!u! O+er 0ead

O+er0ead Co!t ariance7 "his is the difference between the standard overhead specifiedand the actual overhead incurred! 0verhead Cost ;ariance 2 8tandard overhead = Actual

overhead!

6enerally, variances in overhead costs are divided into (a) ;ariable overhead variance and

(b) %i*ed overhead variance!

;ariable overheads variance is the difference between the standard and actual variable

overheads!

%i*ed overheads variance is the difference between the standard and actual fi*ed overheads!

0verheads variance is further divided into the following categories!

9i: <udget ariance or E-#enditure ariance7 "his represents the difference between

the budgeted e*penses and the actual e*penses incurred! udget ;ariance 2 udgeted

overhead = Actual overhead!"his variance arises due to (a) inflation (b) lac of control over e*penditure (c) change in

production method!

9ii: o$u8e ariance7 It is caused due to the difference between the budgeted output! In

other words, this is the difference between the standard cost of overhead absorbed in

actual output and the standard allowance allowed for the output!

;olume variance 2 (Actual production = udgeted production) 8'




234

9iii: Efficienc' ariance7 It is that portion of volume variance which is due to the

difference between the budgeted efficiency (in standard units) and the actual

efficiency attained!

+fficiency variance 2 (Actual production = 8tandard production) 8'

9i+:Ca#acit' ariance7 It is the portion of volume variance which arises on account of

over or under utilization of plant and euipment! It may be caused by idle time, strieand loc out, failure of power, machine brea.down etc!

Capacity variance 2 (8tandard production = udgeted production) 8'

9+: Ca$endar ariance7 It is a part of capacity variance! "his variance arises due to the

difference actual woring days and the budgeted woring days!

Calendar variance 2 ('evised budgeted production = udgeted production)

8'! Note7 8' refers to standard overhead rate per unit!

1a$e! ariance

8ales variance may be sub.divided into the following variances1

9i: 1a$e! a$ue ariance7 "he difference between actual sales and budgeted sales is

termed as sales value variance!8ales value variance 2 Actual sales = 8tandard sales

9ii: 1a$e! /rice ariance7 It is the difference between the actual price and standard price,

for actual uantity sold!

8ales price variance 2 (AP = 8P) Actual Xuantity sold!

9iii: 1a$e! o$u8e ariance7 It is the difference between the actual uantity of

sales and the budgeted uantity of sales at standard price!

8ales volume variance 2 (Actual Xty! = 8tandard Xty!) 8P

9i+:1a$e! Mi- ariance7 /i* variance represents that portion of volume variance which

is due to a change in the proportion (or mi*) of the various goods sold! "his variance

may arise only when more than one commodity is sold!

8ales mi* variance 2 (Actual Xty! = 'evised standard Xty!) 8P

C0ec 'our #rogre!! *

+*plain the following terms

(i) %avourable variance (ii) Hnfavourable variance


(b) Chec your answer with the ones given at the end of this 3esson (pp! ?J)!






*.( ILLU1TRATION1

4! /aterial Cost ;ariance 2 (8X * 8P) = (AX * AP)

?! /aterial Price ;ariance 2 (8P = AP) AX




235

@! /aterial Hsage ;ariance 2 (8X = AX) 8P

! /aterial /i* ;ariance 2 ('8X = AX) 8P

SA@

otalStanStandarddardAuantit,Auantit, otal $ctual Auantit,

B! /aterial 8ub.Hsage ;ariance 2 (8X = '8X) 8P

/aterial Oield ;ariance 2 (8tandard loss on actual input. Actual loss)

Average 8PAverage 8tandard Price

per Hnit 2 otalStanSdardtandardutputost

Abbre+iation! u!ed7

8X 2 8tandard Xuantity 8P 2 8tandard Price

AX 2 Actual Xuantity AP 2 Actual Price

'8X 2 'evised 8tandard Xuantity

I$$u!tration

"he standard uantity and standard price of raw material reuired for one unit of product A are given below1

Xuantity 8tandard Price /aterial Q ? gs! 's!

@ per g! /aterial O gs! 's! ? per g!

"he actual production and relevant data are as follows1

0utput BKK units of product A

/aterial "otal Xuantity "otal Cost for BKK units 's! Q

4,?KK g! @,JKK

O 4,EKK g! ,BKK

Calculate Cost, Price and Hsage ;ariances!

1o$ution7

4! /aterial Cost ;ariance 2 (8X * 8P) = (AX * AP) 8X refers to standard uantity for actual

production %or one unit of product A, /aterial Q 2 ? gs!

%or BKK units of product A, /aterial Q 2 BKK * ? 2 4KKK gs! %or one

unit of product A, /aterial O 2 gs!

%or BKK units of product A, /aterial O 2 BKK * 2 ?KKK gs!

/aterial Cost ;ariance1




236

/aterial Q1 (4,KKK * @) = @,JKK 2 's! JKK Adverse

/aterial O1 (?,KK * ?) = ,BKK 2 's! BKK Adverse

?! /aterial Price ;ariance 2 (8P =AP) AX

/aterial Q 1 (@.@!?B) 4,?KK 2 's! @KK Adverse

/aterial O 1 (?.?!BK) 4,EKK 2 's! JKK Adverse

@! /aterial Hsage ;ariance 2 (8X =AX) AX

/aterial Q 1 (4,KKK. 4,?KK) @ 2 's!KK Adverse

/aterial O 1 (?,KKK = 4,EKK) ?2 's! KK %avourable

-ote1 AP 2 Q 2 @JKK K 4?KK 2 @!?B5 O 2 BKK K 4EKK 2 ?!BK

I$$u!tration 2

%rom the following information compute material variances.

8tandard Actual Xuantity Hnit Xuantity

Hnit(Lilos) Price "otal (Lilos) Price "otal 's! 's! 's! 's!

/aterial A 4K ? ?K B @ 4B

/aterial ?K @ K 4K K /aterial C ?K 4?K 4B B DB

"otal BK ?KK @K B 4BK

1o$ution7


A 1 (4K * ? ) = (B*@)

1 ?K = 4B 2 B (%)

1 (?K * @ ) = (4K * )

K = K 2 K

C 1 (?K * ) = (4B * B)

4?K = DB B (%)

"otal /aterial Cost ;ariance BK (%)

?! /aterial Price ;ariance 2 (8P.AP) AX

A 1 (?.@) B 2 B (A)

1 (@.) 4K 2 @K (A)

C 1 (.B) 4B 2 4B (%)

"otal /aterial Price ;ariance ?K (A)

@! /aterial Hsage ;ariance 2 (8X = AX) 8PA 1 (4K.B) ? 2 4K (%)

1 (?K.4K) @ 2 @K (%)

C 1 (?K.4B) 2 @K (%)




237

"otal /aterial Hsage ;ariance DK (%)

! /aterial /i* ;ariance 2 ('8X = AX) 8P'evises 8tandard Xuantity 2

SA ofotaleachSAmaterial

otal $A

A 1 @K @

1 @K @4?

C 1 @K @4?

/aterial /i* ;ariance 's!

A 1 (4K.) ? 2 E (%)

1 (?K.4?) @ 2 ?(%)

C 1 (?K.4?) 2 E(%)

"otal /aterial 8ub.Hsage ;ariance EK (%)

C0ec7 /aterial Cost ;ariance 2 /aterial Price ;ariance <

/aterial Hsage ;ariance

BK (%) 2 ?K (A) < DK (%)

/aterial Hsage ;ariance 2/aterial /i* ;ariance <

/aterial 8ub.Hsage

;ariance

DK (%) 2 4K (A) < EK (%)

I$$u!tration "

"he standard material cost for 4KK g! of chemical & is made up of1

Chemical A.@K g! U 's! per g!

Chemical .K g! U's! B per g!

Chemical C.EK g! U 's! per g!

In a batch, BKK g! of chemical & were produced from a mi* of

Chemical A . 4K g! at a cost of 's! BEE

Chemical . ??K g! at a cost of 's! 4,KB




238

Chemical C . K g! at a cost of 's!?,EK

7ow do the yield, mi* and the price factors contribute to the variance in the actual cost

per 4KK g!of chemical &over the standard costN

1o$ution7

"he variances are to be calculated per 4KK g! of chemical &! "he actual data are

given for production of BKK g! for production of 4KKg! "he actual uantity will

be!

Chemical A 4KBKKk0. 4KK

2 ?Eg!

Actual price per g! 4K BEE @ .?K

4! /aterial Cost ;ariance

Chemical Chemical C

??Kk0. 4KK

BKK

Kk0. 4KK

BKK

g! EEg!4KB

@ .EK

??K

?EK

@ .BK

K

2 (8X * 8P) .(AX * AP)

?

Chemical A 1 (@K * ) . (?E * !?K)

4?K = 44D!K

Chemical 1 (K * B) = ( * !EK)

2 ?!K (%)

?KK = ?44!?K

Chemical C 1 (EK * ) = (EE * !K)

2 44!?K (A)

EK = BD? 2 J?!KK (A)




23

"otal /aterial Cost ;ariance 4KK!EK (A)


Chemical A 1 (.!?K) ?E 2 B!K (A)

Chemical 1 (B.!EK) 2 E!EK (%)

Chemical C 1 (.!BK) EE 2 !KK (A)

"otal /aterial Price ;ariance 2 K!EK (A)




24"

@! /aterial /i* ;ariance 2 ('8X = AX) 8P

'evised 8tandard Xuantity ('8X)2

otalS tanS tandarddardAuantit,Auantit, otal

$ctual Auantit,

'8X for Chemical A 2 @K 4K @@?k0.

4BK

Chemical 2 K 4K @ ?.Dk0

4BK

Chemical C

/aterial /i* ;ariance

2 EK 4K @@?k0.

4BK

Chemical A 1 (@?. ?E)

2 * 2 4 (%)

Chemical 1 (?!D = ) B

2 .4!@@ * B 2 !B (A)

Chemical C 1 (EB!@@.EE)

2 .?!D * 2 4!K? (A)

"otal /aterial /i* ;ariance 's! !D (A)

! /aterial 8ub.Hsage ;ariance 2 (8X = '8X) 8P

Chemical A 1 (@K.@?)

. ? * 2 E!KK (A)

Chemical 1 (K . ?!D) B

. ?!D * B 2 4@!@B (A)

Chemical C 1 (EK. EB!@@)

. B!@@ * 2 @4!JE (A)"otal /aterial 8ub.Hsage ;ariance B@!@@ (A)

"otal standard uantity 2 @K < K < EK 2 4BK g! "otal

actual uantity 2 ?E < < EE 2 4K g!

Note7 /aterial sub.usage variance is also called mater yield variance!

I$$u!tration 4

8tandard Actual




24!

/aterial Xty! Price "otal Xty! Price "otal

Lg! 's! 's! Lg! 's! 's!

A BKK !KK @,KKK KK !KK ?,KK

KK @!DB 4,BKK BKK @!K 4,EKK

C @KK @!KK JKK KK ?!EK 4,4?K

4?KK 4@KK

3ess 4K

-ormal 4?K ??K

4KEK B,KK 4,KEK B,@?K

Calculate material variances

1o$ution


/aterial A 1 (BKK * ) = (KK * )

1 @,KKK = ?,KK 2 KK (%)

/aterial 1 (KK * @!DB ) = (BKK *@! K)

4,BKK = 4,EKK 2 @KK (A)

/aterial C 1 (@KK * @) = (KK * ?!EK)

JKK = 4,4?K 2 ??K (A)

"otal /aterial Cost ;ariance 2 EK (%)

?! /aterial Price ;ariance 2 (8P.AP) AX

/aterial A 1 ( = ) KK 2 K

/aterial 1 (@!DB = @!K) BKK 2 DB (%)

/aterial C 1 (@.?!EK) KK 2 EK (%)

"otal /aterial Price ;ariance 2 4BB (%)

@! /aterial Hsage ;ariance 2 (8X = AX) 8P /aterial A 1 (BKK = KK)

2 KK (%)

/aterial 1 (KK = BKK) @!DB 2 @DB (A)

/aterial C 1 (@K = KK) @ 2 @KK (A)

"otal /aterial Hsage ;ariance 2 DB (A)




242


'evises 8tandard Xuantity

2 otalStanStandarddardAuantit,Auantit, otal $cutal

Auantit,

/aterial A 1 BKK 4?@KK @B4.Dk0

4?KK

/aterial 1 KK 4?@KK @ @@.@@k0

4?KK

/aterial C 1 @KK 4?@KK @@?B.KKk0.

4?KK

/aterial /i* ;ariance

/aterial A1 (B4!D. KK) 2 EBK (%) /aterial 1

(@@!@@ = BKK) @!DB 2 ?BK (A)

/aterial C 1 (@?B.KK)@ 2 ??B (A)

"otal /aterial /i* ;ariance 2 @DB (%)

B! /aterial Oield ;ariance 2

(8tandard loss on actual input = Actual loss) Average standard price p!u

8tandard loss on an input of 4,?KKg! 2 4?K

8tandard loss on the actual input of 4,@KK g!

@4@KK4?KK 4?K @4@K k0.

Average standard price p!u! @ otalStansdardtandardoutputcost




243

2 's! B,KK K 4KEK 2 's! B

/aterial Oield ;ariance 2 (4@K = ??K) B 2 's! BK (A)

I$$u!tration &

"he standard cost of a chemical mi*ture is an under1

E tons of material A at 's!K per ton

4? tons of material at 's! K per ton

8tandard yield is JK of input

Actual cost for a period is as under1

4? tons of material A at 's!@K per ton

?K tons of material at 's! E per ton

Actual yield is ?D tons

Compute all material variances!1o$ution7

/aterial Cost ;ariance 2 (8X * 8P) = (AX * AP) 8X

for actual production1

8tandard production 2 JK of input 2 JK of (E<4?) 2 4E

%or a standard production of 4E, 8X of A 2 E tons

%or the actual production of ?D, 8X of A 2 $ @?D

E@4? tons

4E

%or the

standard

production

of 4E, 8X

of 2 4?

tons

%or the actual

production of

?D, 8X of " @?D

4?

@4E tons

4E

4! /aterial Cost ;ariance A 2 (4? * K) = (4? * @K)

2 EK = @K

2 (4E * K) = (?K * E)

2 4?K (%)

2 4KEK = 4@K 2 ?EK (A)

"otal /aterial Cost ;ariance 2 4K (A)


A 2 (K = @K) 4? 2 4?K (%)

2 (K = E) ?K 2 4K (A)

"otal /aterial Price ;ariance 2 K (A)

@! /aterial Hsage ;ariance 2 (8X = AX) 8P

A 2 (4? = 4?) K 2 K

2 (4E = ?K) K 2 4?K (A)

"otal /aterial Hsage ;ariance 2 4?K (A)



"


244


'evised 8tandard Xuantity ('8X)

@ otal

StanStan

darddard

Auantit,Auantit, otal $ctual Auantit,

"otal 8td Xty 2 4? < 4E 2 @K5 "otal Actual Xty 2 4? < ?K 2 @?

'8X for $@ 4?

@?

@4?.E @K

'8X for @4E

@K @?@4J.?

/aterial /i* ;ariance A 2 (4?!E = 4?) K 2 @? (%)

2 (4J!? = ?K) K 2 E (A)

"otal /aterial /i* ;ariance 2 4 (A)

B! /aterial Oield ;ariance1

(8tandard loss on actual input = Actual loss) Average 8P p!u!

8tandard yield is JK! "hat is, standard loss 2 4K (4KK.JK)

8tandard loss on actual input 2 4K on @? 2 @!?

Actual loss 2 Input = 0utput 2 @? = ?D 2 BL

Average standard price p!u! @ otalS tansdardtandardoutputcost

L

2 4BK K?D 2BD!DE

/aterial Oield ;ariance 2 (@!?.B) BD!DE 2 4K (A)

Qoring

8tandard cost 2 8X * 8P 2

A 4? * K 2 EK

4E * K 2 4,KEK

@K 4,BK

3ess 8td! loss 4K @ .

8tandard output ?D 8tandard Cost 4,BK

Labour ariance!

4! 3abour Cost ;ariance 2 8tandard Cost = Actual Cost (or)




245

2 (87 * 8') = (A7 * A')

?! 3abour 'ate ;ariance 2 (8' = A') A7

@! 3abour +fficiency ;ariance 2 (87 = A7) 8'

! 3abour /i* ;ariance 2 ('87 = A7) 8'

'evised 8tandard 7ours'87 @

otalStan

Standard

dardours

ours otal $ctual ours

B! 3abour 8ub +fficiency ;ariance 2 (87 = '87) 8'

! 3abour Oield ;ariance 2 (8tandard loss on actual input =

Actual loss) Average 8tandard

3abour 'ate

Average standard rate

Abbre+iation! u!ed7

2

StanStandarddardlabouroutputcost

87 = 8tandard 7ours 8' = 8tandard 'ate

A7 = Actual 7ours A' = Actual 'ate

'87 . 'evised 8tandard 7ours

I$$u!tration (

%rom the following data, calculate 4! 3abour cost variance ?! 'ate variance @!

+fficiency variance ! /i* variance B! 3abour sub.efficiency variance!

8tandard Actual

7ours 'ate 7ours 'ate

8illed labour 4K @!KK J,KKK !KK

8emi. silled E 4!BK E,KK 4!BK

Hn.silled 4 4!KK ?K,KKK

"he actual production was 4KKK articles!

1o$ution7

4! 3abour Cost ;ariance 2 (87 * 8') = (A7 * A')

87 refers to standard hours for actual production

K!JK

87 for 4KKK articles1 8illed 4K * 4,KKK 2 4K,KKK hrs




246

8emi. silled E * 4,KKK 2 E,KKK hrs

Hnsilled 4 * 4,KKK 2 4,KKK hrs

@,KKK hrs

! 3abo

ur

/i*

;ariance 2 ('87 = A7) 8'

'evised 8tandard 7ours ('87)

@ otal

StanStan

darddard

oursours otal $ctual ours

"otal standard hours 2 4K,KKK < EKKK < 4,KKK 2 @,KKK

3abour Cost

;ariance1

8illed 2

(4K,KKK * @) = (J,KKK

* )

@K,KKK = @,KKK 2

8emi.silled 2 (E,KKK * 4!BK) = (E,KK * 4!BK)

,KKK (A)

4?,KKK = 4?,KK 2

Hnsilled 2 (4,KKK * 4!KK) = (?K,KKK * K!JK)

KK (A)

4,KKK = 4E,KKK 2 ?,KKK (A)

"otal 3abour Cost ;ariance E,KK (A)

?! 3abour 'ate ;ariance 2 (8' = A') A7

8illed 2 (@ = ) J,KKK 2 J,KKK (A)

8emi.silled 2 (4!BK = 4!BK) E,KK 2 K

Hnsilled 2 (4.K!JK) ?K,KKK 2 ?,KKK (%)

"otal 3abour 'ate ;ariance D,KKK (A)

@! 3abour +fficiency ;ariance 2 (87 = A7) 8'

8illed 2 (4K,KKK = J,KKK) @ 2 @,KKK (%)

8emi.silled 2 (E,KKK = E,KK) 4!BK2 KK (A)

Hnsilled 2 (4,KKK = ?K,KKK) 42 ,KKK (A)

"otal 3abour +fficiency ;ariance 4,KK (A)




247

"otal actual

hours 2

JKKK <

E,KK < ?K,

KKK 2

@D,KK

B! 3abour 8ub.

+fficiency

;ariance 2 (87 =

'87) 8'

8illed 2 (4K,KKK = 44,KKK) @ 2 @,KKK (A)

8emi.silled 2 (E,KKK = E,EKK) 4!BK 2 4,?K (A)

Hnsilled 2 (4,KKK = 4D,KK) 4 2 4,KK (A)

"otal 3abour 8ub.+fficiency ;ariance B,EKK (A)

C0ec7

3C; 2 3'; <3+;

E,KK (A) 2

D,KKK (A) <

4,KK (A)

3+; 2 3/;

< 38+;

4,KK (A) 2 ,?KK (%) < B,EKK (A)

I$$u!tration )

"he information regarding the composition and hourly wage rates of labour forceengaged on a >ob scheduled to be completed in @K hours are as follows1

8tandard Actual

Category of

worers

-o! of

worers

7ourly

wage rate

per worer

-o of

worers

7ourly

wage rate

per worer

8illed DB 's! DK 's! D

8emi.silled B @K B

Hn.silled K @ EK ?

"he wor was completed in @? hours! Calculate labour variances!

1o$ution7

3abour Cost ;ariance 2 (87 * 8') = (A7 * A') 87

here refers to standard man hours!

8tandard /an hours Actual /an 7ours

8illed DB * @K 2 ?,?BK DK * @? 2 ?,?K

8emi. 8illed B * @K 2 4,@BK @K * @? 2 JK

@KKK

'871 8illed .8illed2 4K??????KKKKKK @D???KK

8emi 2 EKKK @DKK

@KKK

Hnsilled 2 4KKK @DKK

@

3abour /i* ;ariance

2 44,KKK hrs

2 E,EKK hrs

2 4D,KK hrs

8illed 2 (44,KKK = J,KKK) @ 2 KKK (%)

8emi.silled 2 (E,EKK = E,KK) 4!BK 2 KK (%)

Hnsilled 2 (4D,KK = ?K,KKK)4 2 ?,KK (%)

"otal 3abour /i* ;ariance ,?KK (%)




248

Hnsilled K * @K 2 4,EKK EK * @? 2 ?,BK

BKK

3abour Cost ;ariance1

8illed 2 (?,?BK * ) =(?,?K * D)

BDK

4@,BKK = 4B,EK

8emi.silled 2 (4,@BK * ) = (JK * B)

2 ?,4EK (A)

B,KK = ,EKK

Hnsilled 2 (4,EKK * @) = (?,BK * ?)

2 KK (%)

B,KK = B,4?K 2 ?EK (%)

"otal 3abour Cost ;ariance 4,@KK (A)

?! 3abour 'ate ;ariance 2 (8' = A') A78illed 2 ( = D) ?,?K 2 ?,?K (A)

8emi.silled 2 ( = B) JK 2 JK (A)

Hnsilled 2 (@ = ?) ?,BK 2 ?,BK (%)

"otal 3abour 'ate ;ariance K (A)

@! 3abour +fficiency ;ariance 2 (87 = A7) 8' 8illed 2 (?,?BK = ?,?K) 2 K (%)

8emi.silled 2 (4,@BK = JK) 2 4,BK (%)

Hnsilled 2 (4,EKK = ?,BK) @ 2 ?,?EK (A)

"otal 3abour +fficiency ;ariance K (A)

! 3abour /i* ;ariance 2 ('87 = A7) 8'

'87 @ otalStanStandard

d ardoursoursotal $ctual ours

'evised 8tandard

7ours ('87)

8illed 2 ????BK B?DK

BKK

8emi.8illed 2 4??@BK B?DK

BKK

Hnsilled 2 4??EKKKK B?DK

B

3abour /i* ;ariance 2

2 ?,KK

2 4,K

2 4,J?K

8illed 2 (?,KK = ?,?K) 2 JK (%)

8emi.silled 2 (4,K = JK) 2 4,J?K (%)

Hnsilled 2 (4,J?K.?,BK) @ 2 4,J?K (A)

"otal 3abour /i* ;ariance JK (%)




24

B! 3abour 8ub.+fficiency ;ariance 2 (87 = '87) 8'

8illed 2 (?,?BK = ?,KK) 2 JKK (A)

8emi.silled 2 (4,@BK = 4,K) 2 @K (A)

Hnsilled 2 (4,EKK = 4,J?K) @ 2 @K (A)

"otal 3abour 8ub.+fficiency ;ariance 4,?K (A)

C0ec7

3C; 2 3'; < 3+;

4,@KK (A) 2 K (A) < K (A)

3+; 2 3/; < 38+;

K (A) 2 JK (%) < 4,?K (A)

*.) LET U1 1UM U/

;ariance is the difference between standard and actual performance! If the

standard cost is more than the actual cost, then this variance is called favourable

variance else unfavourable variance! /aterial cost variance is the difference between

standard material cost and actual material cost! /aterial cost variance arise due to

change in price of material or change in usage of material! 3abour variance is the

difference between standard wage fi*ed and actual wage paid!

*.* LE11ON END ACTIITIE1

4! 9hat is variance AnalysisN 9hat is its importanceN

?! &escribe to managerial use of variance analysis!

@! &escribe variance analysis significance to the management!

! "he standard material cost for 4KK g of chemical & is made up of1

Chemical A1 @Kgs!U 's!!KK per g!

Chemical 1 Kgs!U 's!B!KK per g!

Chemical C1 EKgs!U 's!!KK per g!

In a batch of BKK gs! 0f chemical & were produced from a mi* of1

Chemical A1 4K gs! at a cost of 's!BEE

Chemical 1 ??K gs! at a cost of 's!4,KB ChemicalC1 K gs! at a cost of 's!?,EK

7ow do the yield, mi* and the price factors contribute to the variance in the actual cost

per 4KK g of chemical & over the standard costN

B! %rom the following information calculate the /aterials /i*ture ;ariance

/aterials 8tandard Actual 8tandard Actual Xuantity

Xuantity Price per unit Price per unit



$

"

288388

1=8

2=8988

s.=

s.Bs.9

s.B.88s.3.=8

<=


25"

4KK

's!B!BK

! Calculate the material (a) cost variance (b) price variance and (c) uantity variance8tandard Actual

Xty 'ateAmount

's!Xty! 'ate

Amount

's!

A

C

?

?

4KK

?KK

KK

KK

KK

EKK

?

4

@

@BK

?KK

@KK

DKK

?KK

JKK

E 4,KK 4,EKK

D! A company manufactures particular product the standard material cost of which is

's!4Kper unit! "he following information is obtained from the cost records!

(i) 8tandard mi*

/aterial Xuantity 'ate Amount

units 's! 's!

A DK 4K DKK

EBK

BK B,KK

Calculate1 (4) /aterial price variance (?) /aterial

mi* variance (@) /aterial

usage

variance ()

/aterial yield

variance (B)

/aterial cost

variance

*. Calculate material price variance in each of the following7

(a) 8tandard 1 ?,DK units at 's!4B each

Actual 1 @,KKK units at 's!4D each

(b) 8tandard 1 B,KKK units at 's! each

Actual 1 ?,KKK units, purchased at 's!!B each

?,KK units, purchased at 's!B each

(ii)

Actual results

for Fanuary

4JED1

/aterial Xuantity

units

'ate

's!

Amount

's!

A KK 44 ,KK

?KK 4,?KK

KK B,KK

3oss 4B K .

@K B 4BK

4KK EBK

3oss 4B 4B .



+aterial Standard >uantit, $ctual >uantit, Standard price per unit

M0. M0. s.

N 9B8=88 18

J 388 9<8 12

O 288 2B8 <

18 . &rom the details 0i-en calculate*


25!

4,@KK units, purchased at 's!B!B! each

(c) 0pening stoc 1 -il

Purchase of material 1 4,KK tons at 's!4B per ton

Closing stoc 1 4,KK tons

8tandard price 1 's!4 per ton

(d) 8tandard Price per !g! of 1 's!KK

chemical #O$

8toc at the beginning of the 1 ?KKgs!

period

Purchase during the period 1 EKKgs at 's!?B per g!

Closing stoc at the end of 1 @KKgs!

the period

,. %rom the following particulars calculate the revised standard uantity for each material and

material mi* variance1

(a) /aterial cost variance

(b) /aterial price variance

(c) /aterial usage variance

Xuantity of material purchased . @,KKK units;alue of materials purchased 's!J,KKK

8tandard uantity of material reuired per ton of output @K units

8tandard rate of materials 's!?!BK per unit

0pening stoc of materials -il

Closing stoc of materials BKK units




252

0utput during the period

44. %rom the following details, calculate the variances specified1

(a) 8tandard material 1

EK tons

/aterial A 1 4,KKK units 's!4K each

/aterial 1 ?,KKK units ate 's! each

8tandard loss 1 4K Actual

material 1

/aterial A 1 4,?KK units at 's!J each/aterial 1 ?,4KK units at 's!D each

0utput, 1 ?,EKK units!

Calculate material mi* and yield variances!

(b) /aterial used 1

A 1 4K,KKKgs at 's!4K per g

1 ,KKKgs at 's!?K per g

0utput 1 4,KKKgs!

8tandard loss 1 4K of input

Compute material yield variance

(c) 8tandard mi* 1

Q 1 @KK units at 's! each

O 1 KK units at 's!@ each

Z 1 BKK units at 's!? each

Actual mi* 1

Q 1 BKK units at 's!B each

O 1 KK units at 's! each

Z 1 @KK units at 's!@ each

Calculate material mi* variance!

*., CECB YOUR /ROGRE11

Oour answer is given below

. ;a+ourab$e +ariance7 9hen the actual cost incurred is less than the standard

cost, the deviation is nown as favourable variance! "he effect of the

favourable variance increases the profit! Again, favourable variance would

result when the actual cost is lower than the standard cost! It is also nown as

positive or credit variance and viewed only as savings!




253

2. Unfa+ourab$e +ariance7 9hen the actual cost incurred is mote than the

standard cost, there is a variance, nown as unfavourable or adverse variance!

unfavourable variance refers to deviation to the loss of the business! It is also

nown as negative or debit variance and viewed as additional costs or losses!

*. /OINT1 ;OR DI1CU11ION

4! %rom the following details you are reuired to compute material usage or uantity

variance in each case separately!

(a) 8tandard 1 KK units at 's!4K each

Actual 1 @K units at 's!D each

(b) 8tandard material for one unit of output 1 @.g at 's!4K per g!

Production during /arch 4JJJ 1 ,KKK units of output!/aterials consumed 1 ?K,KKgs at 's!44 per g!

(c) 8tandard1

%or production of 4KK articles, /aterial

Kgs at 's!E per g!

Actual1

0utput ?B,KKK articles

/aterial used J,?KKgs at 's!J per g!

(d) 8tandard1

/aterial A1 K5 /aterial K at 's!B and 's!4K per unit respectively!

8tandard loss 4K

Actual1

B,KKK units at 's! per g!

B,KKK unit at 's!44 per g!

0utput E, 4KK units!

?! %rom the following data compute (a) 3abour cost variance (b) 3abour rate

variance (c) 3abour efficiency variance (d) 3abour mi* variance!

udgeted labour composition for producing 4KK units!

?K men at 's!4!?B per hour for ?B hour

@K women at 's!4!4K per hour for ?B hours Actual

labour composition for producing 4KK units ?B men

at 's! 4!BK per hour for ? hours!




254

?B women at 's!4!?K per hour for ?B hours!

@! Calculate the labour variances from the following

8tandard cost 7ours 'ate Amount

's! 's!

/en

9omen

EKK

?KK

@

?

?,KK

KK4,KKK ?,EKK

?E?

Actual cost 7ours 'ate Amount

's! 's!

/en

9omen

KK

BKK

?!BK

?!KK

4,BKK

4,BKK

4,4KK ?,BKK

*. RE;ERENCE1

4! Fain -arang = Cost Accouanting!

?! '!L! 8harma L! 6upta = /anagement Accounting!




255

LE11ON , MARGINAL CO1TINGContent!7

,. Ai8! and ob?ecti+e!

,.2 Introduction

,." Definition of Margina$ co!t

,.4 Definition of Margina$ Co!ting

,.& A##$ication of 8argina$ co!ting

,.( Ab!or#tion Co!ting

,.) Difference bet3een Ab!or#tion Co!ting and Margina$ Co!ting

,.* Co!t!%o$u8e /rofit Ana$'!i!

,., 1o8e i8#ortant conce#t! of co!t%+o$u8e%#rofit ana$'!i!

4J!E!4 %i*ed cost

4J!E!? ;ariable costs

4J!E!@ Contribution

4J!E! Contribution to 8ales S (or) PG; (Profit ;olume) 'atio

4J!E!B rea even Analysis and rea even Point

4J!E! /argin of 8afety

4J!E!D Angle of Incidence

,., <rea E+en C0art!

4J!J!4 Advantage

4J!J!? 3imitations of !+!C!

4J!J!@ "ypes of rea +ven Charts,. I$$u!tration!

,. Let u! 1u8 U#

,.2 Le!!on%End Acti+itie!

,." C0ec 'our /rogre!!

,.4 /oint! for Di!cu!!ion

,.& Reference!

,. AIM1 AND O<=ECTIE1

i) "o study the definition of /arginal cost and marginal costing!

ii) "o now the cost volume profit analysis and some impotents points! iii) "ounderstand the rea even chart and types of rea even charts! iv) "o study the

difference between Absorption costing and /arginal costing!

,. INTRODUCTION

/arginal costing is not a method of cost ascertainment lie >ob costing or contract

costing! /arginal costing is a techniue of costing, which may be used with other methods of

costing, viz!, >ob process! %or decision.maing, it is more helpful to the management! "he




256

other names for marginal costing are direct costing, differential costing, incremental costing

and comparative costing!

In marginal costing, only variable items of costs are taen into account! "hese

variable costs will change in direct relation to the change in the volume of production or

change in the production by one unit! As such, variable costs are called product costs and are

charged to production! %i*ed costs are not allocated to cost unit5 and these are charged

directly to profit and loss account during the period and are called as period costs or capacity

costs!

,.2 DE;INITION O; MARGINAL CO1T

/arginal cost is the additional cost of producing an additional unit of a product!

/arginal cost is defined by I!C!/!A, 3ondon as #the amount at any given volume of

output by which aggregate costs are changed if the volume of output is increased or decreased

by one unit! In practice, this is measured by the total variable costs attributable to one unit!

,." DE;INITION O; MARGINAL CO1TING

/arginal costing is defined by I!C!/!A! as “the ascertainment of marginal costs and

of the effect on profit of changes in volume or type of output by differentiating between fi*edcosts and variable costs!

,.4 A//LICATION O; MARGINAL CO1TING

/arginal costing is the most powerful and popular techniue in aid of managerial

decision maing! As already seen, it reveals the cost, volume profit relationship in all its

ramifications which is useful in profit planning, selling price determination, selection of

optimum volume of production, etc! /arginal costing, with its focus on variability of costs

and avoidance of overhead apportionment, is so versatile that it is applied in varied

circumstances and to tacle divers problems by those in charge of such situations!

"he following are some of the more popular areas of application of marginal costing1

(4) Ley factor (or) 3imiting factor(?) /ae or buy decision

(@) %i*ation of selling prices

() +*port decision

(B) 8ales mi* decision

() Product elimination decision

(D) Plant merger decision

(E) Plant purchase decision

(J) %urther processing decision

(4K) 8hut down decision

"he above list is not e*haustive! "here are numerous situations suitable for applyingthe principles of marginal costing and the situations chosen above are only a few of the

popular areas of application of marginal costing!

,.& A<1OR/TION CO1TING

Absorption costing is the practice of charging all costs, both fi*ed and variable to

operations, process or products! In marginal costing, only variable costs are charged to

productions!




257

"he Institute of Cost and /anagement Accountants (H!L!) defines it as, “the practice of

charging all costs, both variable and fi*ed to operations, processes or products! "his e*plains

why this techniue is also called full costing! Administrative, selling and distribution

overheads as much form part of total cost as prime cost and factory burden!

,.( DI;;ERENCE <ETEEN A<1OR/TION CO1TING AND MARGINALCO1TING

Ab!or#tion Co!ting Margina$ Co!ting

4! Charging of %i*ed costs form part of ;ariable costs alone form part of costs

total costs of production cost of production, and sales and distribution!

whereas fi*ed cost are charged against contribution for

determination of profit!

?! ;aluation of 8tocs and wor.in. 8tocs are valued at variable cost

stocs progress are valued at both only!

fi*ed and variable costs

i!e!, total costs!

@! ;ariation in

profits

9hen there is no sale the If there is no sale, the fi*ed entire stoc

is carried overhead will be treated as loss in forward and there is

no the absence of contribution! It is trading profit or loss! not

carried forward as part of stoc value!

! Purpose Absorption costing is more /arginal costing is more useful for

suitable for long.term short.term managerial

decision decision maing and for maing!

pricing policy over longterm!

B! +mphasis Absorption costing lays /arginal costing emphasizes emphasis on

production! selling and pricing aspects!

,.) CO1T1%OLUME /RO;IT ANALY1I1

As the term itself suggests, the cost.volume.profit (C;P) analysis is the analysis of

three variables, viz!, cost, volume and profit! In C;P analysis, an attempt is made to measure

variations of costs and profit with volume! Profit as a variable is the reflection of a number of

internal and e*ternal conditions which e*ert influence on sales revenue and costs!

"he cost volume profit analysis helps or assists the management in profit planning!

In order to increase the profit, a concern must increase the output! 9hen the output is at

ma*imum, within the installed capacity, it adds to the contribution! In the words of 7eiser,“"he most significant single factor in profit planning of the average business is the

relationship between the volume of business, costs and profit! "hereby, cost volume profit

analysis is the relationship among cost, volume and profit! 9hen volume of output increases,

unit cost of production decreases, and vice versa5 because the fi*ed cost remains unaffected!

9hen the output increases, the fi*ed cost per unit decreases! "herefore, profit will be more,

when sales price remains constant! 6enerally, costs may not change in direct proportion to the

volume! "hus, a small change in the volume will affect the profit!




258

"he management is always interested in nowing that which product or product mi*

is most profitable, what effect a change in the volume of output will have on the cost of

production and profit etc! All these problems are solved with the help of the cost.volume.

profit analysis!

"o now the cost volume profit relationship, a study of the following is essential1

4! /arginal cost analysis5?! rea.even analysis5

@! Profit volume ratio5

! Profit graph5 B! Ley factor5 and

! 8ales mi*! etc!

,.* 1OME IM/ORTANT CONCE/T1 O; CO1T%OLUME%/RO;IT

ANALY1I1

,.*. ;i-ed co!t

It is the total of all those costs which are termed #period costs$ or #"ime costs$! "hey

do not depend on the volume of production and sales! "hey must be incurred irrespective of the actual activity or operations! +*amples1 0ffice rent, %actory rent, /anager$s salary, etc!

i!e!, fi*ed overheads!

"he fi*ed costs do not normally change upto the full capacity of a firm! 8o unless

otherwise mentioned, between #K$ and 4KK of a firm$s capacity, fi*ed cost remain constant!

%i*ed cost are fi*ed in total but variable per unit!

,.*.2 ariab$e co!t!

"hese are the costs which increase or decrease in proportion to the output and sales!

;ariable costs are called #Product costs$ or #/arginal costs! Hsually they vary in direct

proportion to the output! "hey include all the direct costs, i!e!, direct material, direct wages,

direct e*penses and variable overheads! "he variable costs vary in total but they remainconstant per unit ;ariable costs or marginal costs are the focal point in the application of

marginal costing as a techniue!

,.*." Contribution

Contribution is the difference between sales and marginal cost! It is the contribution

towards fi*ed costs and profit! In marginal costing techniue contribution is a very important

concept as it is used to find the profitability of products, processes, departments and

divisions! Practically all decision are based on and oriented towards contribution!

Contribution is different from the profit which is the net margin remaining after

reducing fi*ed e*penses from the total contribution! Contribution can be ascertained as given

below1Contribution 2 8elling price = /arginal cost

Contribution 2 %i*ed e*penses < Profit

Contribution = %i*ed e*penses 2 Profit

,.*.4 Contribution to 1a$e! S 9or: / 9/rofit o$u8e:

Ratio




25

"his is the ratio of contribution to sales! It is an important ratio analyzing the

relationship between sales and contribution! A high PG; ratio indicates high profitability and

low PG; ratio indicates low profitability! "his ratio helps in comparison of profitability of

various products! 8ince high PG; ratio indicates high profits, the ob>ective of every

organization should be to improve or increase the PG; ratio!

PG; 'atio can be improved by1

(4) &ecreasing the variable cost by efficiently utilizing material, machines and men!

(?) 8electing most profitable product mi* for production and sales!

(@) Increasing the selling price per unit!

;or8u$a for / Ratio

PG; 'atio 2 ontributiSales on 2 S

(or) (or)

2Sales FariableSales costs 2 S SF

2 (or) (or) &iedcosSalests:

/r o6t2

&

S:

/

9hen two periods$ profits and sales are given, the PG; ratio is calculated as

given below1

/ P atio@

han0ehan0eininpro6tssales

PG; 'atio is generally e*pressed as a percentage!

,.*.& <rea e+en Ana$'!i! and <rea e+en /oint

rea even analysis is a method of studying relationship between revenue and costs in

relation to sales volume of a business enterprise and determination of volume of sales at

which total costs are eual to revenue! According to /atz Curry an %ran “a brea.even

analysis determines at what level cost and revenue are in euilibrium! "hus, brea even

analysis refers to a system of determination of that level of activity where total sales are >ust

eual to total costs! "his level of activity is generally termed as brea.even point (!+!P!)! Atthe brea even point a business man neither earns any profit nor incurs any loss! rea even

point is also called “-o profit, no loss point or “Zero profit zero loss point!

;or8u$a for ca$cu$ating brea e+en #oint

<rea e+en #oint 9in unit!:

@Sel in0 price per

&iedunit

epF+

ensesar0 inal cost

per unit




26"

(or)

ontributi&iedon(or cos)pert unit

rea even point (in rupees)"reakSel in0e-enpricesalesper -alueunit

(or)

rea even sales value

rea even sales value 2 rea even point in units * 8elling price per unit! rea even ratio1

rea even ratio is the ratio between brea(or) @ /&iedP atiocost @ / &P.even salesand actual

Co8#o!ite <rea e+en #oint sales of a business concern! rea even ratio is ascertained by

the following formula1rea even ratio 2 @"reak

$ctuale-en

salessales

4KK

"his is the combined brea even point or overall brea even point of a concern

calculated only when a business concern maes two or more products! "he composite

breaComposite brea even point in value9here total fi*ed cost is the total fi*ed cost of the

business concern as a whole!Composite PG; ratio 2 Individual PG; 'atio * of each product

to tota.even point is calculated by the following formula@ ompositeotal

&ied/ Pcosatiot 1 l sales




26!

ea even capacity or Capacity rea even point1 "his is e*pression of brea even point as

percentage of capacity! Capacity !+!P! @ otal"capacit,.

(or)./. in unitsin units 4KK

,.*.( Margin of 1afet'@ "reakotale-encapacit,pointininrupeesrupees

4KK

rea even analysis includes the concept of margin of safety! /argin of safety is the

difference between actual sales and brea even sales! /argin of safety is calculated in rupees,

units or even in percentage form! /argin of safety indicates the valueGvolume of sales which

directly contribute to profit, as fi*ed costs have already been recovered at brea even point!

/argin of safety is calculated by the following formula1

Margin of 1afet' Actua$ !a$e! /argin of safety ratio1 8ometimes margin of safety ise*pressed as a ra(or)@ / P/ro6tatio @ / /P H <rea e+en !a$e! tio! It is

the ratio of margin of safety to actual sales!

/argin of safety ration @ + ar0$ctualin ofsalessafet, 4KK

,.*.) Ang$e of Incidence

In graphic presentation of marginal cost data, i!e!, a brea.even chart, the total cost line

and sales line cross each other! "he point of their crossing is termed #reaeven point$! "he

angle at which the sales line crosses the total cost line is called the #Angle of incidence$!

#"he bigger is the angle, the more will be the contribution and profit with every

additional sale! %irms with higher PG; ratio and comparatively less variable costs have a

higher angle of incidence! 8uch firm can magnify their profits in high demand conditions!

"he angle of incidence at a glance can signify or reveal the ability of a firm to earn

higher profits with every increase in sales!

,., <REAB EEN CART1




262

"he techniue of brea.even analysis can be made easy with the help of graph or

mathematical formula! 6raphical representation of brea.even point is nown as the brea.

even chart! &r!;ance is of the opinion that “it is a graph showing the amount of fi*ed variable

costs and the sales revenue at different volumes of operation! It shows at what volume the

firm first covers all costs with revenue of brea.even! !+!C! show the profitability or

otherwise of an undertaing at various levels of activity, and indicates the point at which

neither profit nor loss is made! rea.even point is nown as “no profit, no loss point! 8o the

chart is also nown as brea.even chart! At this point, the total costs are recovered and profit

begins!

,.,. Ad+antage

i) "otal cost, variable cost and fi*ed cost can be determined!

ii) !+! output or sales value can be determined!

iii) Cost, volume and profit relationship can be studied, and they are very useful to the

managerial decision.maing!

iv) Inter.firm comparison is possible!

v) It is useful for forecasting plans and profits! vi) "he best products mi* can beselected!

vii)"otal profits can be calculated!

viii) Profitability of different levels of activity, various products or profit, i!e!, plant

can be nown!

i*) It is helpful for cost control!

,.,.2 Li8itation! of <.E.C.

!+!C! is constructed under some unrealistic assumptions!

i) Constant selling price is not true!

ii) &etailed information cannot be nown from the chart! "o now all the informationabout fi*ed cost, ;ariable cost and 8elling price, a number of charts must be drawn!

iii) -o importance is given to opening and closing stocs!

iv) ;arious product mi* on profits cannot be studied as the study is concerned with only

one sales mi* or product mi*!

v) If the business conditions change during a period, the !+!C! becomes out of data as it

assumes no change in business condition!

,.,." T'#e! of <rea E+en C0art!

%rom the point of view of methods of preparation and purpose for which the chart is

prepared, brea even chart may be various types! -ormally, following types are most

commonly used!

(4) 8imple brea.even chart

(?) Contribution brea even chart

(@) Profit brea even chart

() Profit chart for product.wise analysis

(B) Cash brea even chart

() Control brea even chart




263

C0ec 'our #rogre!! ,

+*plain the rea even analysis and rea even point -otes1 (a)


(b) Chec your answer with the ones given at the end of this 3esson (pp! @4?)!






,. ILLU1TRATION1

I$$u!tration 7 Calculate rea.+ven Point from the following particulars!'s! %i*ed

e*penses 4,BK,KKK ;ariable cost per unit

4K

8elling price per unit 4B

1o$ution7

!+!P! (in units) @ ontributi&ied epon ensesper

unit Ca$cu$ation of <rea%e+en #oint7

Contribution per unit 2

8elling price p!u! = ;ariable cost p!u! 's!4B =

's!4K 2 's!B

!+!P! (in units) @ s.4?BK

B ?KKK

@ @K?KKK units

!+!P! (in rupees) 2 !+!P! in units * 8elling price per unit

2 @K,KKK * 's!4B

2 's!, BK,KKK

I$$u!tration 27 Calculate rea.even point1

's! 8ales

,KK,KKK %i*ed e*penses 4,BK,KKK;ariable costs1

&irect /aterial ?,KK,KKK

&irect 3abour 4,?K,KKK

0ther ;ariable e*penses EK,KKK

!+!P! (in 's!) @ &iedontributiepenseson Sales1o$ution7

Contribution 2 8ales = ;ariable cost

2 's!, KK,KKK = 's!, KK,KKK 2 's!?, KK,KKK




264

@4??

BKKK??

KKKKKK ?KK?KKK@ s.?BK?KKK

?

Note7 9hen per unit cost and selling price are not given, !+!P! can be calculated only in

terms of 'upees!

I$$u!tration % "7 %rom the following particulars find out the !+!P! 9hat will be the selling

price per unit if !+!P! is to be brought down to J,KKK unitsN

's! ;ariable

cost per unit DB %i*ed e*penses

?,DK,KKK

8elling price per unit 4KK

!+!P! (in units) @ ontributi&ied epon ensesperunit 1o$ution7

Contribution 2 8elling price p!u! = ;ariable cost p!u!

!+!P! (in units) @??DK

?B?KKK

@ 4K?EKK units 2

's!4KK = 's!DB 2 's!?B

If brea.even point is brought down to J,KKK units, fi*ed e*penses are to be

%i*ed e*penses per unit ??JDK?KKK?KKK@ &ieds#o..

ofepunitsenses recovered from J,KKK units to have no profit and

no loss!

@ s. @ @K

9hen !+!P! is J,KKK units, 8elling price p!u! is calculated as follows1 8elling price

2 %i*ed e*penses < ;ariable e*penses per unit!

2 's!@K < 's!DB 2 's!4KBI$$u!tration 47 %rom the following information relating to Xuic 8tandard 3td!, you are

reuired to find out (a) P!;! ratio (b) rea even point (c) Profit (d) /argin of safety

"otal %i*ed Costs 's! ,BKK

"otal ;ariable cost D,BKK

"otal sales 4B,KKK

(e) Also Calculate the ;olume of sales to earn profit of 's!,KKK!

1o$ution72 D

??BKKKKK

Salesep

.4KK

ratioenses@

BK

H

(a) Profit volume ratio 2 ontribution 4KK

4B




265

(b) rea even point (in 's!) 2 &ied/.

2 ?BKK 4KK @ s.J?KKK

BK

(c) Profit 2 8ales = "otal cost

2 's!4B,KKK = 's!4?,KKK 2 's!@,KKK

(or) 2 Contribution = %i*ed e*penses 2 's!D,BKK = 's!,BKK 2 's!@,KKK (d)

/argin of safety 2 Present sales = rea even sales

2 's!4B,KKK = 's!J,KKK 2 's!,KKK

(or)2/./r.o6tratio @ @?BKKKK 4KK @ ?KKK

(e) 8ales reuired to earn a profit of 's!,KKK

2&ied?BKK ep? enses/.4KK. atio

:

'esireds. ? pro6t

2 : KKK

BK @ ?4 KKK

I$$u!tration &7 Oou are given1

/argin of safety 's!4K,KKK which represents K of sales! P!;! ratio BK! Calculate

(a) 8ales (b) rea even sales (c) %i*ed cost (d) Profit 1o$ution7

9a: 1a$e!7

/argin of safety K of sales

If margin of safety is 's!K, sales 2 's!4KK

If margin of safety is 's!4K,KKK, 8ales 2 4K?KKK 4KKK

2 's!?B,KKK

9b: <rea E+en 1a$e!7

rea +ven 8ales 2 8ales = /argin of 8afety




266

9c: ;i-ed Co!t7

2 's!?B,KKK = 's!4K,KKK 2 's!4B,KKK

P!;! ratio 2 BK

It means contribution is 's!BK when 8ales are 's!4KK

4 Contribution at brea even sales2 rea even sales * P!;! ratio

2 's! 4B,KKK * BK

Contribution 2 's! D,BKK

3ess %i*ed cost (N) 2 's! D,BKK

Profit at !+!P! 2 's!

9d: /rofit

Contribution 2 8ales * P!;! ratio 2

?B,KKK * BK

K

Contribution 2 's! 4?,BKK

3ess %i*ed cost 2 's! D,BKKProfit 2 's! B,KKK

I$$u!tration (7 An analysis of 3alitha /anufacturing Co!3td! 3ed to the following

information1

Cost elements

;ariable

cost ( of

sales)

%i*ed cost

&irect /aterial @?!E

&irect 3abour ?E!

%actory 0verheads 4?! 4,EJ,JKK

&istribution 0verheads !4 BE,KK

Administrative 0verheads 4!4 ,DKK

udgeted sales are 's!4E, BK,KKK! Oou are reuired to determine

(i) the brea.even sales volume

(ii) the profit at the budgeted sales volume

(iii) the profit, if actual sales

(a) drop by 4K (b) increase by B from budgeted sales!

1o$ution7

Percentage of variable cost of sales is DJ calculated as follows1

&irect /aterial @?!E of sales

&irect 3abour ?E! of sales

%actory 0verheads 4?! of sales

&istribution overheads !4 of sales

Administrative overheads 4!4 of sales

"otal ;ariable Cost DJ!K of 8ales

Percentage of contribution to 8ales 2 4KK = DJ 2 ?4

P!;! ratio4KK@ ontributiSalesH on 4KK




267

@ ?4 4KK @ ?4 @

s.4@??4B??&iedJKKKKKK/..

atio4KK

ostss?4?4.BEHs?KK.

?s?. ?

9i: <rea%e+en 1a$e! o$u8e

EJ : : DKK

@ @ 4B KK KKK

9ii: /rofit at t0e budgeted !a$e! of R!.*&7

Percentage of Contribution to 8ales 2 ?4

Contribution at the budgetd sales @ 4E?BK?KKK 4KK?4

2 's!@,EE,BKK

Profit 2 Contribution = %i*ed e*penses

2 's!@,EE,BKK . 's!@,4B,KKK 2 's!D@,BKK




268

9iii: 9a) Profit is actual sales drop by 4K

's!

udgeted 8ales 2 4E,BK,KKK

3ess 1 4K decline 2 4,EB,KKK

Actual 8ales 2 4,B,KKK

's!

Contribution ?4 of sales 4,B,KKK * 2 @,J,BK 2 @,J,BK

3ess1 %i*ed e*penses 2 @,4B,KKK

Profit 's! @,BK

(b) Profit if actual sales increase by B from budgeted sales

's!

I$$u!tration )7

'a> Corpn! 3td! has

prepared the

following budgetestimates for the

year 4JJJ.?KKK!

8ales (units) 4B,KKK %i*ed +*penses 's!

@,KKK 8ales 's! 4,BK,KKK ;ariable

costs 's! per unit

Oou are reuired to1

(i) %ind the PG; ration, brea.even point and margin of safety!

(ii) Calculate the revised PG; ration, brea.even point and margin of safety in each of the

following cases1

(a) &ecrease of 4K in selling price1

(b) Increase of 4K in variable costs1

(c) Increase of sales volume by ?,KKK units1

(d) Increase of 's!,KKK in fi*ed costs!

1o$ution7

9: At t0e e-i!ting $e+e$7

P!;! ratio 2 ontributiSales on 4KK

8ales ;alue 2 's!4, BK,KKK

8ales Hnits 2 4B,KKK

4 8elling price per unit 2 4?BK??KKK @ s.4K

udgeted 8ales 2 4E,BK,KKK

Add1 B increase 2 J?,BKK

Actual 8ales 2 4J,?,BKK

Contribution at ?4 of sales 4J??4KK?BKK?4

2 ,KD,J?B

3ess1 %i*ed e*penses 2 @,4B,KKK Profit 's! J?,J?B



?


26

4BKKK

Contribution 2 's!4K = 's! 2 's!

4K

P!;! ratio2

ontributi4KK&ied@ KHepon ensesper unit

!+!P! (in units) 2

2 @?KKK @ E?BKK units

!+!P! (in 's!) 2 !+!P! in units * 8elling price per unit

E,BKK * 's!4K 2 's!EB,KKK

/argin of safety 2 Present 8ales = !+!P! 8ales

2 's!4,BK,KKK . 's!EB,KKK 2 's!B,KKK

II. 9a: Decrea!e of P in !e$$ing #rice7

8elling price per unit 's! 4K 3ess 1 4K 'eduction

4

'evised selling price per unit J

Contribution 2 's!J = 's! 2 's!@

P!;! ratio 2

@ 4KK @ @@ 4H

J@

!+!P! (in units) 2 @KKK

@ 44?@@@ units

@

!+!P! (in 's!) 2 44,@@@ * J 2 's!4,K4,JJD

/argin of safety 2 (4B,KKK * J) = 4,K4,JJD

2 's!4,@B,KKK = 's!4,K4,JJD 2 's!@@,KK@ 9b:Increa!e of P in +ariab$e co!t!7

;ariable cost per unit 2 's! !KK Add 1 4K

increase 2 's! K!K

'evised variable cost 2 's! !K



?


27"

Contribution 2 's!4K = 's!!K 2

's!@!K 4KK @ @H

P!;! ratio 2 @.K

4K @.KKK @ 4K?KKK units

!+!P! (in units) 2

@K

!+!P! (in 's!) 2 4K,KKK * 4K 2 's!4,KK,KKK /argin of safety 2

's!4,BK,KKK = 's!4,KK,KKK 2 's!BK,KKK 9c: Increa!e of !a$e! +o$u8e b' 2

unit!7

8ales 4B,KKK units Add1 Increase ?,KKK units

'evised sales 4D,KKK units

2 's!4,DK,KKK =

's!EB,KKK 2 's,EB,KKK

9d: Increa!e of R!.(in fi-ed co!t!7

P!;! ratio 2 4KK @K H

4K

%i*ed costs 2 's! @,KKK Add1 increase 2

's! ,KKK

'evised %i*ed costs 2 's! K,KKK

!+!P! (in units) 2 K?KKK ? units

@ 4K KKK

!+!P! (in 's!) 2 4K,KKK * 4K 2 's! 4,KK,KKK

/argin of safety 2 's!4,BK,KKK = 's!4,KK,KKK 2 's!BK,KKK

P!;! ratio

!+!P! (in units)

!+!P! (in 's!)

2

2

2

4K

4KK @ KH

@?KKK @ E?BKK units

E,BKK * 4K 2 's!EB,KKK

/argin of safety 2 (4D,KKK * 4K) = 's!EB,KKK




27!

,. LET U1 1UM U/

/arginal costing techniues is helpful to management to tae decision, is in which we are

considering only variable cost! Cost volume profit analysis, an attempt is made to measure

variations of cost and profits with volume! rea even point is a point at which sales eual to

total cost! %or finding +P, we are considering fi*ed cost! 9ith the help of +P we can find

profit at desired levels!

,. Le!!on%End Acti+itie!

4!9hat are the salient features of marginal costingN

?! &istinguish between absorption costing and marginal costing by showing their ma>or

points of difference!

@! 9hat do you understand by #Cost volume profit$ AnalysisN 9hat is its significanceN

! 9hat is brea even pointN 7ow do you calculate itN

B! +*plain the meaning and significance of #/argin of 8afety$!

! 9hat are the limitations of brea even chartN /ention the assumptions underlying a

brea even chart!D "he following information is obtained from 'avichandran and Co! for 4JJ@1

8ales 's!?K,KKK

;ariable costs 's!4K,KKK

%i*ed costs 's!,KKK

(a) %ind PG; 'atio

(b) rea even point and

(c) /argin of safety at the current sales level!

E %rom the following details find out

(a) Profit volume ratio

(b) rea.even sales and

(c) /argin of safety

8ales 's! 4,KK,KKK

"otal cost 's!EK,KKK

%i*ed cost 's!?K,KKK

-et profit 's!?K,KKKJ %rom the following information relating to 7onest 3td!, you are reuired to find out1

(a) P!;! 'atio

(b) rea.even point

(c) Profit(d) /argin of safety

's!

"otal fi*ed costs ,BKK

"otal variable costs D,BKK

"otal sales 4B,KKK

4K %rom the following data calculate

(a) rea even point (in units)

(b) If sales are 4K and 4B above he brea even volume! &etermine the net profit!




272

8elling price per unit . 's!4K

&irect material per unit . 's!@

%i*ed overheads . 's!4K,KKK

;ariable overhead per unit . 's!?

&irect labour cost per unit . 's!?

44 8ales 's!4, KK,KKK5 Profit 's!4K,KKK5 ;ariable cost DK!

%ind out

(e) PG; 'atio

(f) %i*ed cost

(g) 8ales to earn a profit of 's!K,KKK

4? %rom the following information relating to 6owtham 3td!, you are reuired to find

out

8ales price . 's! ?K per unit ;ariable manufacturing cost . 's! 44

per unit

;ariable selling cost . 's! @ per unit

%i*ed factory overheads . 's! B,K,KKK per year %i*ed selling costs .

's! ?,B?,KKK per year

Calculate1

(a) rea even point in volume and value5

(b) 8ales reuired to earn a profit of 's! K,KKK

(c) 8ales reuired to earn a profit of 4K of sales

4@ %rom the following particulars you are reuired to determine1

(a) rea even sales volume

(b) the profit at the budgeted sales volume

(c) "he profit if actual sales drop by 4K over the budgeted sales!

udgeted sales 2 's!4E,BK,KKK!

Particulars ;ariable cost %i*ed Cost

of sales

&irect material ?!E

&irect labour 4E!

%actory overhead 4K! ?,EJ,JKK

&istribution overhead !4 E,KKK

6eneral administrative overhead B!4

4 "he sales and profit for 4JJ and 4JJD are as follows1

8ales Profit 's! 's! 4JJ

4,BK,KKK ?K,KKK

4JJD 4,DK,KKK ?B,KKK

B,KKK

%ind out1

(a) PG; 'atio

(b) +P

(c) 8ales for a profit of 's!K,KKK

(d) Profit for sales of 's!?,BK,KKK and

(e) /argin of safety at a profit of 's!BK,KKK

,.2 CECB YOUR /ROGRE11




273

Oour answer may the following1

rea even analysis is a method of studying relationship between revenue and costs

in relation to sales volume of a business enterprise and determination of volume of sales at

which total costs are eual to revenue! According to /atz Curry an %ran “a brea.even

analysis determines at what level cost and revenue are in euilibrium! "hus, brea even

analysis refers to a system of determination of that level of activity where total sales are >ust

eual to total costs!

"his level of activity is generally termed as brea.even point (!+!P!)! At the brea

even point a business man neither earns any profit nor incurs any loss! rea even point is

also called “-o profit, no loss point or “Zero profit zero loss point!

,." /OINT1 ;OR DI1CU11ION

4! &ifferentiate managerial costing Absorption costing!

?! +*plain the managerial costing techniues!

,.4 RE;ERENCE1

4! !L! 8harma L! 6upta = /anagement Accounting!

?! 8 ! - ! / a h e s w a r i = /anagement Accounting!




274

LE11ON 2 <UDGETING

Content!7

2. Ob?ecti+e!

2.2 Introduction

2." Meaning and Definition of <udget

?K!?!4 0b>ectives of udget

2." <udgeting

?K!@!4 0b>ectives of udgeting

2.4 Contro$

2.& <udgetar' Contro$

?K!B!4 0b>ectives of udgetary Control

2.( ;oreca!t and <udget

2.) Organi!ation

?K!D!4 udget centre

?K!D!? udget manual

?K!D!@ udget Period

2.* C$a!!ification of <udget!

?K!E!4 Classification according to time

?K!E!? Classification based on functions

?K!E!@ Classification on the basis of fle*ibility

2., ero <a!e <udgeting 9.<.<.: ?K!J!4 Process of Zero ase udgeting1

2. I$$u!tration!

2. Let u! 1u8 U#

2.2 Le!!on%End Acti+itie!

2." C0ec Your /rogre!!

2.4 /oint! for Di!cu!!ion

2.& Reference!

2. O<=ECTIE1

i) "o now the meaning of budget, budgetary control ii) "o

understand the difference between forecast and budget iii) "o now to

different types of budgets

2. INTRODUCTION

/odern business world is full of competition, uncertainty and e*posed to differenttypes of riss! "his comple*ity of managerial problems has led to the development of various

managerial tools, techniues and procedures useful for the management in managing the

business successfully! udgeting is the most common, useful and widely used standard device

of planning and control! "he budgetary control has now become an essential tool of the

management for controlling costs and ma*imising profit! Costs can be reduced, wastage can

be prevented and proper relationship between costs and incomes can be established only

when the various factors of production are combined in profitable way! "he resources of a

business can be effectively utilised by efficient conduct of its operations! "his reuires




275

careful woring out of proper plans in advance, co.ordination and control of activities on the

part of management!

A proper planning and control are essential for an efficient management! A good

number of tools and devices are available! 0f all these, the most important device used is

budget! Cost accounting aims not only at cost ascertainment, but also greatly at cost control

and cost reduction! "his the management aims at the proper

and ma*imum utilization of resources available! It is possible when there is a Preplanning!

/odern management aims that all types of operations should be predetermined in advance, so

that the cost can be controlled at every step! "he more important point is that the actual

programme is compared with the pre.planned programme and the variances are analysed and

investigated! All are familiar with the idea of budget, at every wal of life.state, firm, business

etc!,

2.2 MEANING AND DE;INITION O; <UDGET7

A budget is the monetary and G or uantitative e*pression of business plans and

policies to be pursued in the future period of time! udgeting is preparing budgets and other

procedures for planning, coordination and control or business enterprises!I!C!/!A! defines a budget as “A financial and G or uantitative statement, prepared

prior to a defined period of time, of the policy to be pursued during that period for the

purpose of attaining a given ob>ective!

2.2.Ob?ecti+e! of <udget

4! It directs the attention of all concerned to the attainment of a common goal!

?! It leads to the disclosure of organisational weaness! "he budgets are compared with

actual performance5 and variances, if any, are investigated!

@! It aims at careful control over the performance and cost of every function!

! It contributes to co.ordinate efforts of all departments in order to achieve an integratedgoal! udgets grow from bottom and are controlled from top.level!

2." <UDGETING

udgeting refers to the process of preparing the budgets! It involves a detailed study

of business environment clearly grasping the management ob>ectives, the available resources

of the enterprise and capacity of the enterprise!

udgeting is defined by F!atty as under1 “"he entire process of preparing the budgets

is nown as budgeting! In the words of 'owland and 7arr1 “udgeting may be said to be the

act of building budgets!

"hus budgeting is a process of maing the budget plans! Preparation of budgets or

budgeting is a planning function and their implementation is a control function! #udgetarycontrol$ starts with budgeting and ends with control!

2.". Ob?ecti+e! of <udgeting

"he main ob>ectives of budgeting are1

4! "o obtain more economical use of capital!

?! "o prevent waste and reduce e*penses!

@! "o facilitate various departments to operate efficiently and economically!

! "o plan and control the income and e*penditure of the firm,




276

B! "o create a good business practice by planning for future!

! "o fi* responsibilities on different departments or heads!

D! "o co.ordinate the activities of various departments!

E! "o ensure the availability of woring capital!

J! "o smooth out seasonal variations, by developing new products!

4K!"o ensure the matching of sales with productions!

2.4 CONTROL

Control may be defined as “comparing operating results with the plans, and taing

corrective action when results deviate from the plans! Control is a mechanism according to

which something or some one is guided to follow the predetermined course!

Control reuires two things5 first that there is a clear.cut and specific plan according

to which any wor is to proceed! 8econdly, that it is possible to measure the results of

operations with a view to detecting deviations! 0nly then action can be taen to prevent or

correct deviations!

2.& <UDGETARY CONTROL

udgetary control is the process of preparation of budgets for various activities and

comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in

future! "hus budget is a means and budgetary control is the end result! udgetary control is a

continuous process which helps in planning and coordination! It also provides a method of

control!

Definition

According to rown and 7oward “udgetary control is a system of

coordinating costs which includes the preparation of budgets, coordinating the wor of

departments and establishing responsibilities, comparing the actual performance with the

budgeted and acting upon results to achieve ma*imum profitability!9heldon characterises budgetary control as planning in advance of the various

functions of a business so that the business as a whole is controlled!

I!C!/!A! define budgetary control as “the establishment of budgets, relating the

responsibilities of e*ecutives to the reuirements of a policy, and the continuous comparison

of actual with budgeted results either to secure by individual actions the ob>ectives of that

policy or to provide a basis for its revision!

2.&. Ob?ecti+e! of <udgetar' Contro$

udgetary control is inevitable for policy formulation, planning, control and

coordination! "he essence of budgeting is to plan and control! %ollowing are the main

ob>ectives of budgetary control!

i) /$anning7 udgeting ensures effective planning by setting up of budgets! ii)

Coordination7 udgets are helpful in coordination of business activities!

iii) Efficienc' and Econo8'7 +ffective budgetary control results in cost control and cost

reduction!

iv) Increa!e in /rofitabi$it'7 Cost are controlled with help of budgets and profits targeted

are achieved!




277

v) Antici#ation of future ca#ita$ e-#enditure7 +stimated increase in sales necessitating

higher production capacity provides advance warning for the possible capital

e*penditure in near future!

vi) Contro$7 Controlling function is made to be effective as the control is centralised while

budgets are prepared and implemented!

vii)De+iation!7 Ascertainments of deviations is essential to fi* responsibility and correctthe deviations as far as possible!

2.( ;ORECA1T AND <UDGET

(i) %orecast is mainly concerned with probable events5 but budget is concerned with

planned events!

(ii) %orecast may be done for longer time5 but budget is prepared for shorter periods!

(iii) %orecast is only a tentative estimate and can be revised5 but budget remains

unchanged for the budget period!

(iv)%orecast results in planning and the planning results in budgeting!

(v) %orecast is the base while a budget is the structure built on the base!(vi)%orecast is not used for evaluating the efficiency of performance while a budget is

always used for this purpose!

2.) ORGANI1ATION

"he following are the essentials for a sound system of budgetary control

2.). <udget centre

%or the purpose of effective budgetary control, budget centres are defined! A budge

centre may be a department or a section of the undertaing! 8eparate budgets are prepared for

each department and the departmental head is responsible for carrying out budgets!

&epartmental heads should have effective control over the e*ecution of the budget, to preventunfavourble variation!

2.).2 <udget 8anua$

It is a document which sets out the responsibilities of persons engaged in the routine

wor! udget manual lays down the ob>ectives of the organisation, responsibilities of all

e*ecutives and the procedure to be followed for budgetary control! &uties, authorities, powers

of each official of the different departments are clearly defined, so as to avoid conflicts among

the personnel! It also specifies different forms and records to be used for the purpose of

budgetary control!

2.)." <udget /eriod

"his is the period or time for which the budget is prepared and remains in operation!

"he length of period depends on the nature of business, the production period, the control

aspect etc! "here is no definite rule as regards the duration of a budget period! 6enerally, the

budget is prepared for a year, which is preferred by most concerns! %or e*ample

manufacturers of consumer goods may prepare budgets for a year, whereas in industries lie

ship.building the period of the budget may be B to 4K years!

2.* CLA11I;ICATION O; <UDGET1

udgets are classified according to their nature! "he following ae the different

classifications of budgets!




278

2.*.. C$a!!ification according to ti8e

4! 3ong.term budgets

?! 8hort.term budgets

@! Current budgets

2.*.2. C$a!!ification ba!ed on function!

4! %unctional or subsidiary budgets?! /aster budget

2.*.". C$a!!ification on t0e ba!i! of f$e-ibi$it'

4! %i*ed budget

?! %le*ible budget

2.*. C$a!!ification on t0e ba!i! of Ti8e

(4) Long%ter8 <udget!7 3ong.term budgets are prepared to reflect long.term planning of

the business! 6enerally, the long.term period varies between five to ten years! "hey

are prepared by the top level management! 3ong.term budgets are prepared for

specialised activities lie capital e*penditure, research and development, long.term

finances, etc!(?) 10ort%ter8 <udget!1 "hese budgets are generally for a duration of one year and are

e*pressed in monetary terms!

(@) Current <udget!1 "he duration of current budgets is generally in months and wees!

"hese budgets are prepared for the current operations of the business! As per I!C!/!A!

3ondon, #current budget is a budget which is established for use over a short period of

time and is related to current conditions!

2.*.2 C$a!!ification on t0e ba!i! of function!

(4) ;unctiona$ <udget!1 "hese budgets relate to various functions of the concern!

%ollowing are the commonly prepared functional budgets1

(a) Purchase udget

(b) Cash budget

(c) Production budget

(d) 8ales budget

(e) /aterials budget

(?) Ma!ter <udget1 "his budget is a summary of various functional budgets! It

encompasses the activities of the whole organisation! According to I!C!/!A!,

3ondon “"he master budget is the summary budget incorporating its functional

budgets! /aster budget is prepared to coordinate the activities of various functional

departments!

2.*." C$a!!ification on t0e ba!i! of f$e-ibi$it'

4! ;i-ed <udget7 it is prepared for a given level of activity and remains sameirrespective of change of activity!

? ;$e-ib$e budget1 It is a budget prepared for various levels of activity by

classification of e*penditure under fi*ed, variable and semi fi*ed categories!

2.*.4 1o8e I8#ortant <udget!

9: 1a$e! <udget7

In the budgeting process, sales is a starting point, as sales is the ey factor in many

cases! 9!9!igg 9rites, “"his is probably most important budget, as it is usually the most

difficult of forecast to attain!




27

92: /roduction <udget7

"his budget is based on sales budget, unless production itself is the ey.factor! It shows the

budgeted uantity of output to be produced during a specific period! It has two parts, one

showing the output for the period and the other showing production costs! "he following ey

elements are considered while preparing the production budget!

9": Materia$! <udget7"his budget is prepared in coordination with production budget! Preparation of materials

budget is useful and helpful in achieving continuous, uninterrupted production as the non.

availability of materials at the right time can affect the production! /aterial budget consists of

two parts, one is the consumption budget and another is materials purchase budget!

94: Labour budget7

3abour budget is also a part of production budget! 3abour budget is prepared by the

personnel department! "his budget consists of the following details1

(4) -umber of different grades of worers

reuired

(?) 'ates of wages of worers (@) 3abour hours

needed for production!() 3abour cost for the period, etc!

9&: O+er0ead budget7

9a: /roduction o+er0ead budget7 It is a budget of indirect costs in the form of

indirect wages, indirect material and indirect e*penses to be incurred in the

factory! It is prepared with the help of production, and labour budgets! It is

prepared on the basis of past year$s figures and future changes e*pected!

9b: Ad8ini!tration o+er0ead budget7 "his budget is prepared to estimate the

e*penditure to be incurred for planning, organising, direction and control

functions of the management! "he budget is based on the past year$s e*penditure

incurred with e*pected future changes!9c: 1e$$ing and di!tribution o+er0ead budget7 "his budget is prepared to estimate

e*penditure to be incurred to sell the product and is distribution! It is based on

sales budget! It is generally prepared in consultation with sales managers of each

territory!

9(: Re!earc0 and De+e$o#8ent <udget

"his budget is prepared to estimate the research and development e*penditure to be

incurred during specific period! "he budget is prepared in two parts, one is for revenue

e*penditure and another is to estimate the capital e*penditure to be incurred!

9): Ca#ita$ E-#enditure <udget7

"his budget is prepared to estimate the capital e*penditure on fi*ed assetsuildings,

machinery, plant, furniture, etc! It is generally a long.term budget! It is prepared for replacement of assets, e*pansion of production facilities, adoption of new technologies,

diversification, etc!

9*: Ca!0 <udget7

Cash budget is an important budget! It estimates the amount of cash receipts and

payments and the balance of cash during a specific budget period! "he cash budget is based

on forecasts of cash or estimates of cash showing what funds would be available at what

times and whether the funds available would meet reuirements! "he ob>ective of cash budget




28"

is to provide for all cash reuirements in time and avoid accumulation of e*cess cash!

Met0od! of #re#aring ca!0 budget

(4) 'eceipts and payments method

(?) alance 8heet method

(@) Ad>usted Profit and 3oss Account method!

9,: Ma!ter <udget7A comprehensive master budget is prepared for the entire organisation, by integrating

all the functional budgets of a period! "he master budget is an overall plan for the guidance of

the management! I!C!/!A!, +ngland, defines it as “summary budget incorporating its

component functional budges which is finally approved, adopted and employed! ;$e-ib$e

Ma!ter <udget

I!C!/!A!, 3ondon defines a fle*ible budget as “a budget which, by recognising the

difference between fi*ed, semi.variable and variable costs is designed to change in relation to

the level of activity attained!

%le*ible budget is prepared to now the costs at different levels of activity! It is also termed

as #variable budget$ or #sliding scale budget$!

1te#! in+o$+ed in #re#aring t0e ;$e-ib$e <udget!After completing the above mentioned preliminary steps, the following are the steps in

preparing a fle*ible master budget!

4! C$a!!ification of co!t7 "he cost is classified according to variability as variable, cost,

fi*ed and semi variable cost!

?! E!ti8ation of ariab$e Co!t7 ;ariable cost comprises of all those costs which vary in

direct proportion to the level of activity! Hsually, all the direct costs and variable

portions of the indirect costs are combinedly called #variable cost$!

@! E!ti8ation of ;i-ed Co!t!7 All those e*penses which remain constant irrespective of

the level of activity are fi*ed costs! "hey usually include all the fi*ed portion of the

overheads! "he total of such e*penses has to be estimated!! E!ti8ation of 1e8i%+ariab$e Co!t7 It remains fi*ed upto a particular level of capacity

and there after it increases if the activity level goes up further! "he semi variable cost

should be estimated for the chosen activity levels!

/re!entation of ;$e-ib$e <udget

"he fle*ible budget can be presented in the following forms1

4! In Tabu$ar ;or87 "his is the most commonly used method! Hnder this method costs

are classified under fi*ed variable and semi variable! "hese costs are estimated for

different levels of activity!

?! In Gra#0 ;or87 7ere also e*penses are classified as under tabular from and

presented on a graph sheet!

@! In t0e ;or8 of Ration!7 "his method is used by concerns with standard lines of

business and the e*penses are uniform! "he e*penses are e*pressed in terms of ratios

or percentages of production! "he ratios are generally e*pressed in

@KD




28!

terms of percentages for any level with a variation of 4K say DK, EK, JK

and 4KK etc!




282

2., ero <a!e <udgeting 9.<.<.:

"he purpose of management control is to ensure better performance and better

utilisation of scarce resources! "raditional budgeting fails to achieve this ob>ective of

management effectively! #Zero base budgeting$ provides a solution towards this end!

#Zero base budgeting$ was originally developed by Peter A! Pyhrr at "e*as

Instruments! Peter A! Pyhrr has defined Z as “an operating, planning and budgeting process which reuires each manager to >ustify his entire budget reuest in detail from

scratch (hence zero base) and shifts the burden of proof to each manager to >ustify why

we should spend any money at all!

2.,. /roce!! of ero <a!e <udgeting7

"he following are the steps involved in Z!

4! 8pecification of decision units!

?! &evelopment of decision pacages!

@! Prioritisation of activities pro>ects and programmes!

! Approval and allotment of funds!

C0ec 'our #rogre!!

9hat are the steps involved in preparing the fle*ible budgetsN



@@@)!






2. ILLU1TRATION1

I$$u!tration %

3arsen 3td!, plans to sell 4,4K,KKK units of a certain product line in the first

fiscal uarter, 4,?K,KKK units in the second uarter, 4,@K,KKK units in the third uarter

and 4,BK,KKK units in the fourth uarter and 4,K,KKK units in the first uarter of the

following year! At the beginning of the first uarter of the current year, there are 4,KKK

units of product in stoc! At the end of each uarter, the company plans to have aninventory eual to one.fifth of the sales for the ne*t fiscal uarter!

7ow many units must be manufactured in each uarter of the current yearN

1o$ution7




283

/RODUCTION <UDGET

I$$u!tartion %2

"he 8ales &irector of a manufacturing company reports that ne*t year he e*pects to

sell BK,KKK units of a particular product!

"he production /anager consults the 8toreeeper and casts his figure as follows1"wo inds of raw materials A and , are reuired for manufacturing the product!

+ach unit of the product reuires ? units of A and @ units of ! "he estimated opening

balances at the commencement of the ne*t year are1

%inished product 1 4K,KKK units

'aw /aterials 1 4?,KKK units5

14B,KKK units

"he desirable closing balances at the end of the ne*t year are1

%inished product 4,KKK units,

A1 4@,KKK units

1 4,KKK unitsPrepare Production udget and /aterials Purchase udget for the ne*t year!

1o$ution7

/roduction <udget 9Unit!:

+stimated sales BK,KKK Add1 &esired

closing stoc 4,KKK

,KKK

3ess1 0pening stoc 4K,KKK

+stimated Production B,KKK

/roduction <udget 9Unit!:/aterial A /aterial

+stimated consumption ? * B,KKK 4,KE,KKK

(@ * B,KKK) 4,?,KKK

Add1 &esired closing stoc 4@,KKK 4,KKK

4,?4,KKK 4,DE,KKK

3ess1 0pening stoc 4?,KKK 4B,KKK

+stimated purchases 4,KJ,KKK 4,@,KKK

I$$u!tartion % "

%irst

Xuarter

Hnits

8econd

Xuarter

Hnits

"hird

Xuarter

Hnits

%ourth

Xuarter

Hnits8ales

Add1 &esired closing

stoc

4,4K,KKK 4,?K,KKK 4,@K,KKK 4,BK,KKK

closing stoc ?,KKK ?,KKK @K,KKK ?E,KKK

4,@,KKK 4,,KKK 4,K,KKK 4,DE,KKK

3ess1 0pening stoc 4,KKK ?,KKK ?,KKK @K,KKK

+stimated production 4,?K,KKK 4,??,KKK 4,@,KKK 4,E,KKK




284

'a>eswari 3td!, manufactures two products Q and O and sells them through

two divisions +ast and 9est! %or the purpose of submission of sales budget to the

budget committed the following information has been made available1

udgeted sales for the current year were1

Product +ast 9est

Q KK at 's!J KK at 's!J

O @KK at 's!?4

Actual sales for the current year were1

BKK at 's!?4

Product +ast 9est

Q BKKat 's!J DKK at 's!J

O ?KK at 's!?4 KK at 's!?4

Adeuate maret studies reveal that product Q is popular but under priced! It

is observed that if price of Q is increased by 'e!4 it will find a ready maret! 0n theother hand, O is over.priced to customers and maret could absorb more if sales price

of O be reduced by 'e!4! "he management has agreed to give effect to the above price

changes!

%rom the information based on these price changes and reports from salesman,

the following estimates have been prepared by divisional managers1

Percentage increase in sales over current budget is1

Product +ast 9est

Q <4K <B

O <?K <4K9ith the help of an intensive advertisement campaign, the following additional

sales above the estimated sales of divisional managers are possible1

Product +ast 9est

Q K DK

O K BK

Oou are reuired to prepare udget for 8ales incorporating the above estimates

and also show the budgeted and actual sales for the current year!

1o$ution7

Ra?e!3ari Ltd.

1a$e! <udget for t0e 'ear........

<udget for future #eriod <udget for current #eriod Actua$ !a$e! for current #eriod

Di+i!ion /roduct 5uantit' /rice a$ue 5uantit' /rice a$ue 5uantit' /rice a$ue

's! 's! 's! 's! 's!

+ast Q BKK 4K B,KKK KK J @,KK BKK J ,BKK

O KK ?K E,KKK @KK ?4 ,@KK ?KK ?4 ,?KK

Tota$ 9A: JKK 4@,KKK DKK J,JKK DKK E,DKK




285

9est Q DKK 4K D,KKK KK J B,KK DKK J ,@KK

O KK ?K 4?,KKK BKK ?4 4K,BKK KK ?4 E,KK

Tota$ 9<: 4,@KK 4J,KKK 4,4KK 4B,JKK 4,4KK 4,DKK

"otal Q 4,?KK 4K 4?,KKK 4,KKK J J,KKK 4,?KK J 4K,EKK

"otal O 4,KKK ?K ?K,KKK EKK ?4 4,EKK KK ?4 4?,KK

Tota$ 9A<: ?,?KK @?,KKK 4,EKK ?B,EKK 4,EKK ?@,KK

oring

udget for future period!

+ast 1 Product Q KK < (4K increase) K < K 2 BKK units

Product O @KK < (?K increase) K < K 2 KK units

9est 1 Product Q KK < (B increase) @K < DK 2 DKK units

Product O BKK < (4K increase) BK <BK 2 KK units

I$$u!tartion % 4

8ummarised below are the Income and +*penditure forecasts of Fothi 3td! for

the months of /arch to August, ?KKK1

/onth 8ales

(all

credit)

Purchases

(all credit)

9ages /anufacturing

+*penses

0ffice

+*penses

8elling

+*penses

's! 's! 's! 's! 's! 's!

/arch K,KKK @,KKK J,KKK ,KKK ?,KKK ,KKK

April ?,KKK @E,KKK E,KKK @,KKK 4,BKK B,KKK

/ay ,KKK @@,KKK 4K,KKK ,BKK ?,BKK ,BKK

Fune BE,KKK @B,KKK E,BKK @,BKK ?,KKK @,BKK

Fuly B,KKK @J,KKK J,BKK ,KKK 4,KKK ,BKK

August K,KKK @,KKK E,KKK @,KKK 4,BKK ,BKKOou are given the following further information!

(a) Plant costing 's!4,KKK is due for delivery in Fuly payable 4K on delivery

and the balance after three months!

(b) Advance "a* of 's!E,KKK is payable in /arch and Fune each!

(c) Period of credit allowed (i) by suppliers ? months and (ii) to customers 4

month!

(d) 3ag in payment of manufacturing e*penses Y month!

(e) 3ag in payment of all other e*penses 4 month!

Oou are reuired to prepare a cash budget for three months starting on 4st /ay,




286

?KKK when there was a cash balance of 's!E,KKK!

1o$ution7

=ot0i Li8ited

Ca!0 <udget for t0e 6uarter ended " =u$' 2

'eceipts1

Ma'R!.

=uneR!.

=u$'R!.

0pening alance E,KKK 4B,DBK 4?,DBK

&ebtors ?,KKK ,KKK BE,KKK

Payments1

"otal (A) DK,KKK DJ,DBK DK,DBK

Creditors @,KKK @E,KKK @@,KKK

9ages E,KKK 4K,KKK E,BKK

/anufacturing +*penses @,DBK ,KKK @,DBK

0ffice +*penses 4,BKK ?,BKK ?,KKK

8elling +*penses B,KKK ,BKK @,BKK

Advance "a* . E,KKK .

&elivery of Plant (4K Payment on delivery) . . 4,KK

"otal () B,?BK D,KKK B?,@BK

Closing alance (A.) 4B,DBK 4?,DBK 4E,KKI$$u!tration% &

"he e*penses for budgeted production of 4K,KKK units in a factory are

furnished below1

Per Hnit

's!

/aterial DK

3abour ?B

;ariable 0verheads ?K

%i*ed 0verheads ('s!4,KK,KKK) 4K

;ariable +*penses (&irect) B

8elling +*penses (4K %i*ed) 4@

&istribution +*penses (?K %i*ed) D

Administration +*penses B

"otal Cost per unit 4BB




287

Prepare a budget for production of1

(a) E,KKK units

(b) ,KKK units

(c) indicate cost per unit at both the levels!

Assume that administration e*penses are fi*ed for all levels of production!

1o$ution

;$e-ib$e <udget

Unit! * Unit! ( Unit!

/er

Unit

Tota$

A8ount

/er

Unit

Tota$

A8ount

/er

Unit

Tota$

A8ount

Production +*penses1

's! 's! 's! 's! 's! 's!

/aterials DK!KK D,KK,KKK DK!KK B,K,KK DK!KK ,?K,KKK

3abour ?B!KK ?,BK,KKK ?B!KK ?,KK,KKK ?B!KK 4,BK,KKK

0verheads ?K!KK ?,KK,KKK ?K!KK 4,K,KKK ?K!KK 4,?K,KKK

&irect variable e*penses B!KK BK,KKK B!KK K,KKK B!KK @K,KKK

%i*ed 0verheads1 4K!KK 4,KK,KKK 4?!BK 4,KK,KKK 4!D 4,KK,KKK('s!4,KK,KKK)

8elling +*penses1

%i*ed 4!@K 4@,KKK 4!?B 4@,KKK ?!4D 4@,KKK

;ariable

&istribution +*penses1

44!DK 4,4D,KKK 44!DKK J@,KK 44!DKK DK,?KK

%i*ed 4!K 4,KKK 4!DBK 4,KKK ?!@@ 4,KKK

;ariable B!K B,KKK B!KK ,EKK B!KK @@,KK

Administration

+*penses

B!KK BK,KKK !?BK BK,KKK E!@@@ BK,KKK

4BB!KK 4B,BK,KKK 4BJ!?B 4?,DB,KK 4!EK4 4K,KK,EKK

oring7

%i*ed e*penses remain fi*ed irrespective of the level of output!

8elling e*penses 's!4@5 ;ariable e*penses per unit is constant!

%i*ed 4K (i!e! 4@ * ) 2 's!4.@K!

%or 4K,KKK units 2 4K,KKK * 4!@K 2 's!4@,KKK

;ariable JK (i!e! 4@ * ) 2 's!44!DK

I$$u!tartion%(

&raw up a fle*ible budget for overhead e*penses on the basis of the following data



12?888

9?888

28?888

2?888

11?888

3?888 18?888

B2?888


288

and determine the overhead rates at DK, EK and JK plant capacity!

At DK At EK At JK

Capacity Capacity Capacity

's! 's! 's!

ariab$e

O+er0ead!7

Indirect labour

8tore including

spares

1e8i%ariab$e

O+er0ead!7

Power

(@K fi*ed, DK

variable) 'epairsand maintenance

(K

fi*ed, K variable)

;i-ed O+er0ead!7

&epreciation

Insurance

8alaries

"otal 0verheads

+stimated direct labour hours1 4,?,KK hrs!

1o$ution7;$e-ib$e <udget for t0e #eriod

At )P

Ca#acit'

At *P

Ca#acit'

At ,P

Ca#acit'

;ariable 0verheads1

R!. R!. R!.

Indirect labour 4K,BKK 4?,KKK 4@,BKK

8tores including spares 8emi.

;ariable 0verheads1

@,BKK ,KKK ,BKK

Power. %i*ed (@K) ,KKK ,KKK ,KKK

;ariable (DK)

'epairs and /aintenance

4?,?BK 4,KKK 4B,DBK

%i*ed (K) 4,?KK 4,?KK 4,?KK

;ariable (K)

%i*ed 0verheads1

DKK EKK JKK




28

&epreciation 44,KKK 44,KKK 44,KKK

Insurance @,KKK @,KKK @,KKK

8alaries 4K,KKK 4K,KKK 4K,KKK

"otal 0verheads BE,4BK ?,KKK B,EBK

+stimated direct labour hours 4,KE,BKK 4,?,KKK 4,@J,BKK

&irect labour hour rate

oring7

's!K!B@ 's!K!BKK 's!K!D?

&irect labour rates have been computed as follows1

At DK capacity@ 4?sKE?.BKK

BE

?

4BK

hrs. 'e!

K!B@ At EK capacity @ 4?s??.KKK?

?KKK

hrs.

2 'e! KBKK

At JK capacity @ 4?s@J?.BKKB

?EBK

hrs.2 'e! K!D?

2. LET U1 1UM U/

udget is a techniue in the hands of management to control costs! udgeting

control starts with budgeting and ends with control! +very department heads are ased

to prepare budget of there own departments! After the budget period the budgeted

performance is compared with actual performance! It a concern unable to attain the

budgeted performance, then they analyse the causes of non.attainment of budgeted

performance!

2.2 Le!!on%End Acti+itie!

4! &efine #udget$, #udgeting$ and #udgetary control$!

?! &escribe the ob>ectives of budgetary control!

@! &istinguish between forecasts and budgets!

! 9hat are the essential reuisites for successful implementation of a budgetary

control systemN



N J


2"

B! riefly e*plain the different classifications of budgets!

! 9hat is Z!!N &escribe the process of preparing Z!!!

D "he following figures relating to product #&uper$ for the uarter ending @4!@!?KK4 are

available1

udgeted sales 1 Fanuary @,KK,KKK units

%ebruary ?,K,KKK units

/arch @,K,KKK units

8toc position 1 4.4.?KK4 = BK of Fanuary$s budgeted sales!@4!@!?KK4 = EK,KKK units

@4!4!?KK4 = K of %ebruary$s budgeted sales ?E.?.?KK4

= K of /arch$s budgeted sales!

Oour are reuired to prepare a production budget for the uarter ending

@4!@!?KK4!

D! Prabu +ngg! Co! 3td! /anufactures ? product Q and O! An estimate of the number of units to be sold in the first D months of ?KK? are given below1

/onth

Fan! B,KKK 4,KKK

%eb! ,KKK 4,KKK

/ar! E,KKK 4?,KKK

Apr! 4K,KKK 4K,KKK

/ay 4?,KKK E,KKK

Fune 4?,KKK E,KKK

Fuly 4K,KKK J,KKKIt is anticipated that there will be no wor.in.progress at the end of any month

and finished units are eual to half the anticipated sales for the ne*t month will be in

stoc at the end of each month (including &ec!?KK4)! Oour are reuired to prepare a

production budget showing the number of units to be manufactured each month!

J! &raw a material procurement budget SuantitativeT from the following information

+stimated sales of a product K,KKK units! +ach unit of the product reuires @ units of

material A and B units of material !

+stimate opening balances at the commencement of the ne*t year!

%inished product B,KKK units

/aterial A 4?,KKK units

/aterial

/aterials on order

?K,KKK units

/aterial A D,KKK units

/aterial 44,KKK units

"he desirable closing balances at the end of the ne*t year!

%inished product D,KKK units



Sales "ud0et units


2!

/aterial A 4B,KKK units

/aterial

/aterial on order

?B,KKK units

/aterial A E,KKK units

/aterial 4K,KKK units4K! "he sales director of %uture Problem Co! reports that ne*t year he e*pects to sell

4,KK,KKK units of a particular product! "he Production /anager consults the store

eeper and casts his figures as follows1

"wo ind of raw materials #P$ and #X$ are reuired for manufacturing the

product! +ach unit of the product reuires ? units of P and @ units of X! "he estimated

opening balances at the commencement of ne*t year are

%inished product = ?K,KKK units

'aw material #P$ = ?,KKK units

'aw material #X$ = @K,KKK units

"he desirable closing balances at the end of ne*t year are1

%inished product = ?E,KKK units

'aw material #P$ = ?,KKK units

'aw material #X$ = @?,KKK units

Prepare production budget and materials purchase budget for the ne*t year!

44! 'etail "raders 3td!, manufactures two products #8$ and #"$ and sells them in tow

marets #+ast$ and #9est$, -ormal sales estimates prepared by the mareting

department for the year 4JJJ bases on the reports of regional managers are asfollows1

Product 81 +ast 4?,KKK units5 9est ?K,KKK units

Product "1 +ast E,KKK units5 9est ,KKK units

8elling price1 8 's!4KK per unit5 " 's!?KK per unit!

A special incentive system is proposed by the director of mareting for the salesman in

east zone which is e*pected to push up the estimated sales of #8$ and #"$ by ?K in that

zone! "he advertising department has finalised an intensive compaign in west zone

which is estimated to get additional sales of ?,KKK units and 4,BKK units of products #8$

and #"$ respectively in the 9est Zone!

4?! e$a+an <ro!. !e$$! t3o #roduct! R and / 30ic0 are 8anufactured in one

#$ant. During t0e 'ear ,*, it #$ant to !e$$ t0e fo$$o3ing 6uantitie! of eac0

#roduct.

%irst uarter 8econd uarter "hird uarter %ourth uarter

Product ' JK,KKK ?,BK,KKK @,KK,KKK EK,KKK




22

Product P EK,KKK DB,KKK K,KKK JK,KKK

+ach of these two products is sold on a seasonal basis! ;elavan ros! plans to sell

product #'$ throughout the year at a price of 's!4K per unit and product #P$ at a price of

's!?K per unit!

A study of the past e*perience reveals that ;elavan ros! has lost @ of its billed revenueeach year because of returns, (constituting ? of loss of revenue) allowances and bad

debts (4 loss)!

Prepare a sales budget incorporating the above information!

4@! A firm e*pects to have 's!@K!,KKK on 4 st /ay ?KK? and reuires you to prepare an

estimate of the cash position during the @ months /ay to Fuly ?KK?! "he

following information is supplied to you!

/onth 8ales Purchases 9ages %actory

e*penses

0ffice

e*penses

8elling

e*penses's! 's! 's! 's! 's! 's!

/arch K,KKK ?,KKK ,KKK @,KKK ,KKK @,KKK

April ,KKK ?E,KKK ,BKK @,BKK ,KKK @,BKK

/ay BK,KKK @?,KKK ,BKK ,KKK ,KKK @,BKK

Fune D?,KKK @,KKK D,KKK ,KK ,KKK ,KKK

Fuly E,KKK ,KKK D,?BK ,?BK ,KKK ,KKK

Ot0er infor8ation7

(i) ?B of the sale is for cash, remaining amount is collected in the month

following that of sale!

(ii) 8uppliers supply goods on two months credit!

(iii) &elay in payment of wages and all other e*penses1 0ne month (iv)

Income ta* of 's!4K,KKK is due to be paid in Fuly!

(v) Preference shares dividend of 4K on 's!4,KK,KKK is to be paid in /ay!

4! Prepare a cash budget for the months of /ay, Fune and Fuly ?KK@ on the basis of

the following information1

(a) Income and +*penditure forecasts1

/onth Credit

8ales

Credit

purchases

9ages /anufacturing

e*penses

0ffice

e*penses

8elling

e*penses

?KK@ 's! 's! 's! 's! 's! 's!

/arch K,KKK @,KKK J,KKK ,KKK ?,KKK ,KKK

April ?,KKK @E,KKK E,KKK @,KKK 4,BKK B,KKK

/ay ,KKK @@,KKK 4K,KKK ,BKK ?,BKK ,BKK

Fune BE,KKK @B,KKK E,BKK @,BKK ?,KKK @,BKK

Fuly B,KKK @J,KKK J,BKK ,KKK 4,KKK ,BKK

August K,KKK @,KKK E,KKK @,KKK 4,BKK ,KKK

(b) Cash balance on 4st /ay ?KK@ 's!E,KKK!

(c) Plant costing 's!4,KKK is due for delivery in Fuly1 Payable 4K on delivery and

the balance after @ months!

(d) Advance ta* of 's!E,KKK each is payable in /arch and Fune!




23

(e) Period of credit allowed (i) by supplier.two months and (ii) to customers. one

month!

(f) 3ag in payment of manufacturing e*penses = 4G? month!

(g) 3ag in payment of office and selling e*penses = 4 month!

4B!"he e*penses budgeted for production of 4K,KKK units in a factory are furnished

below1

Per unit

's!

/aterials DK3abour ?B

;ariable overhead ?K

%i*ed overhead ('s!4,KK,KKK) 4K

;ariable e*penses (&irect) B

8elling e*penses (4K fi*ed) 4@

&istribution e*penses (?K fi*ed) DAdministration e*penses (BK,KKK) B

"otal cost per unit (to mae or sell) 4BB

Prepare a fle*ible budget for the production of (a) E,KKK units and (b) ,KKK

units!

4! 0n the basis of the following particulars, draw up a fle*ible budget for overhead e*penses

and determine the overhead rates at DK, EK and JK plant capacity! Plant Capacity

2." CECB YOUR

/ROGRE11

Oour answer may include

the following1

. C$a!!ification of

co!t7 "he cost is

classified according to

variability as variable, cost,

fi*ed and semi variable

cost!

2. E!ti8ation of ariab$e

Co!t7 ;ariable cost

comprises of all those costs

which vary in direct

proportion to the level of

activity! Hsually, all the

direct costs and variable portions of the indirect costs are combinedly called #variable

cost$!

DK

's!

EK

's!

JK

's!

;ariable overheads1Indirect labour . 4?,KKK .

Indirect materials 8emi.variable

overheads1

. ,KKK .

Power (@K fi*ed) . ?K,KKK .

'epairs (K fi*ed)

%i*ed overheads1

. ?,KKK .

&epreciation . 44,KKK .

Insurance . @,KKK .

8alaries . 4K,KKK .

"otal overhead e*penses ?,KKK

+stimated direct labour hours 4,?,KKK




24

". E!ti8ation of ;i-ed Co!t!7 All those e*penses which remain constant irrespective of

the level of activity are fi*ed costs! "hey usually include all the fi*ed portion of the

overheads! "he total of such e*penses has to be estimated!

4. E!ti8ation of 1e8i%+ariab$e Co!t7 It remains fi*ed upto a particular level of capacity

and there after it increases if the activity level goes up further! "he semi variable cost

should be estimated for the chosen activity levels!




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Accounting XI

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