1. Management Accounting
Management
g Accounting g is p
primarily
y
concerned with the use of accounting
information to assist managers in decision
f g
making and provides information meant for
g
internal use. This includes costing.
Costing is defined as the technique and process
of ascertaining costs
narain@fms.edu
2. Principles of Costing
1. Cost is related to its cause
2. Cost is charged after it is incurred
3.
3 Abnormal costs are excluded from costing
4. Conservatism has no place in costing
5. Cost accounting is also based on double
entry principles
narain@fms.edu
3. Concepts in Costing
p g
Cost is an amount of expenditure (actual or
notional)l)
Cost unit is a unit of quantity of product, service or
time (or a their combination) for expressing the
cost
Cost centre is a convenient segment of organisation
or its activity for cost ascertainment
yf
narain@fms.edu
4. Cost Classification
• Functionality Basis
y
• Manufacturing (or Factory) costs
• Office & Administration costs
O ce d st at o
• Selling & Distribution costs
• Traceability Basis
• Direct costs
• Indirect costs (or Overheads)
O erheads)
narain@fms.edu
6. Illustration
Classify the following into: Functional : Factory, Administration, Selling
Traceability : Direct , Indirect
Behavioural : Variable, Fixed
S. No. Example Functional Traceability Behavioural
1.
1 Wheat fl
Wh flour i bread
in b d
2. Tailoring charges in garment making
3. Factory rent
4. General manager’s salary
5. Salesmen’s remuneration
6.
6 Legal expense
7. Loss due to theft
8. Cost of installing machinery
9. Dividend paid
10. Income Tax narain@fms.edu
7. Techniques of costing
• Marginal costing
• Where costs charged to the cost unit is only the
marginal (variable) cost
• Absorption costing
• Where costs charged to the cost unit is all the
costs incurred
narain@fms.edu
8. Illustration
Prepare the cost sheet for the month of July 2009
h h f h h f l 2009
Stock of Raw Material on 1/jul/09 Rs 3,000
Raw Material purchased in july Rs 28,000
Stock of Raw Material on 31/jul/09 Rs 4,500
Manufacturing wages Rs 7,000
p
Depreciation on Plant Rs 1,500
Loss on sale of part of Plant Rs
300
Factory rent & rates Rs 3,000
Office rent Rs 500
General expenses Rs
400
Discount on Sales Rs
300
p y
Advertisement expenses to be fully charged g Rs 600
Income tax paid Rs 2,000
Sales Rs
45,000
Stock of finished goods on 1/Jul/09
Stock of finished goods on 1/Jul/09 200 Units
200 Units Rs 2,800
Rs
Stock of finished goods on 31/Jul/09 400 Units ‐‐‐‐‐‐‐‐‐‐‐
narain@fms.edu
Number of units produced in July 3000 Units ‐‐‐‐‐‐‐‐‐‐‐
9. Cost Statement
for the month of July 09
Particulars Amount Amount
Raw Material consumed:
Opening Stock Rs 3,000
Purchases Rs
28,000
Less: Closing Stock
Less: Closing Stock Rs 4,500
Rs Rs 26,500
Rs
Direct Wages Rs
7,000
Prime Cost Rs
33,500
Factory Overheads:
Depreciation on Plant
Depreciation on Plant Rs 1,500
Rs
Factory rent & rates Rs 3,000 Rs
4,500
Factory Cost Rs
38,000
Office & Administrative Overheads:
Office rent
Office rent Rs 500
Rs
General expenses Rs
400 Rs
900
Cost of Production Rs
38,900
Opening Stock of finished goods Rs 2,800
Closing Stock of finished goods
Closing Stock of finished goods Rs 5,187
Rs Rs 2,387
Rs
Cost of Goods Sold Rs
36,513
Selling & Distribution Overheads:
Discount on sales Rs
300
Advertisement expenses
Advertisement expenses Rs 600
Rs Rs 900
Rs
Cost of Sales Rs
37,413
Profit narain@fms.edu Rs
7,587
Sales Rs
45,000
10. Illustrating Costing Techniques
For 39,000 tonnes of output, the selling price
per tonne is Rs. 5 and variable cost is Rs. 3
with fixed cost per tonne been Re. 1. The
production and stock figures are as follows:
Units of April May June
Opening stock -- 9,000 3,000
Closing stock
g 9,000
, 3,000
, --
Production 45,000 36,000 45,000
Sales 36,000 42,000 48,000
Prepare C t St t
P Cost Statement.
t
narain@fms.edu
11. Marginal costing solution
Marginal Cost Statement
Marginal Cost Statement
for the month of ‐‐
Particulars April
p May y June
Prime cost @ Rs. 3 135,000 108,000 135,000
Add: Op. stock @ Rs. 3 ‐
27,000 9,000
Less: Cl. Stock @ Rs. 3
Cl S k @ 3 2 000 9 000
27,000 9,000 ‐
Cost of goods sold 108,000 126,000 144,000
Sales @ Rs. 5
Sales @ Rs. 5 180,000 210,000 240,000
Contribution
72,000 84,000
96,000
Less: Fixed cost
39,000 39,000
39,000
Profit 33,000 45,000 57,000
narain@fms.edu
12. Absorption Costing solution
Absorption Cost Statement
for the month of ‐‐
Particulars April
p May y June
Direct cost @ Rs. 4
180,000
144,000 180,000
Add: Op. stock Rs. 4
‐ 36,000 12,000
Less: Cl. Stock Rs. 4
Less: Cl. Stock Rs. 4 36,000 12,000 ‐
Cost of goods sold
144,000
168,000 192,000
Less: Over absorption of fixed cost 6,000
‐
6,000
Add: Under absorption of fixed cost
Add: Under absorption of fixed cost
‐ 3 000
3,000 ‐
Adjusted cost of goods sold
138,000
171,000 186,000
Sales
180,000
210,000 240,000
Profit 42 000
42,000 39 000
39,000 54 000
54,000
narain@fms.edu
13. Exercise
Prepare the cost statement:
Product A
Sales Rs 30 000
Rs 30,000
Direct Material Rs 12,000
Direct Labour Rs 8,000
Factory Overheads
Factory Overheads
Fixed Rs 6,000
Variable Rs 2,000
Administrative Overheads
Ad i i t ti O h d
Fixed Rs 1,000
Selling Overheads
Fixed Rs 2,000
Variable narain@fms.edu Rs 1,000
14. Absorption Costing solution
Absorption Cost Statement
Absorption Cost Statement
Product A
Direct material 12,000
Direct labour
Di t l b 8 000
8,000
Prime Cost 20,000
Factory overheads
8,000
Factory Cost 28,000
Administrative overheads
1,000
Cost of Production 29,000
Selling overheads
3,000
Cost of Sales 32,000
/
Profit / Loss ‐ 2,000
,
Sales 30,000
narain@fms.edu
15. Marginal costing solution
Marginal Cost Statement
Marginal Cost Statement
Product A
Sales 30,000
Less: Marginal cost of sale
Less: Marginal cost of sale
Direct material 12000
Direct labour 8000
Variable factory overheads
V i bl f t h d 2000
variable selling overheads 1000
Total 23000
Contribution
ib i 7,000
Less: Fixed costs
Factory+Admn.+Selling 9000
Profit ‐ 2,000
narain@fms.edu
16. Extended Exercise
Prepare the cost statement:
Product A Product B
Sales Rs 30,000 Rs 60,000
Direct Material Rs 12,000 Rs 25,000
Direct Labour Rs 8,000 Rs 10,000
Factory Overheads
Factory Overheads
Fixed Rs 6,000 Rs 8,000
Variable Rs 2,000 Rs 3,000
Administrative Overheads
d h d
Fixed Rs 1,000 Rs 2,000
Selling Overheads
Fixed Rs 2,000 Rs 2,000
narain@fms.edu
Variable Rs 1,000 Rs 3,000
17. Absorption Costing solution
Absorption Cost Statement
Absorption Cost Statement
Product A Product B Total
Direct material 12,000 25,000 37,000
Direct labour
Di t l b 8 000
8,000 10 000
10,000 18 000
18,000
Prime Cost 20,000 35,000 55,000
Factory overheads
8,000 11,000 19,000
Factory Cost 28,000 46,000 74,000
Administrative overheads
1,000
2,000 3,000
Cost of Production 29,000 48,000 77,000
Selling overheads
3,000
5,000 8,000
Cost of Sales 32,000 53,000 85,000
Profit / Loss
/ ‐ 2,000
, 7,000
, 5,000
,
Sales 30,000 60,000 90,000
narain@fms.edu
18. Marginal costing solution
Marginal Cost Statement
Marginal Cost Statement
Product A Product B Total
Sales 30,000 60,000 90,000
Less: Marginal cost of sale
L M i l t f l
Direct material 12000 25000 37000
Direct labour 8000 10000 18000
Variable factory overheads 2000 3000 5000
variable selling overheads 1000 3000 4000
Total 23000 41000 64000
Contribution
7,000 19,000 26,000
Less: Fixed costs
y
Factory+Admn.+Selling g 9000 12000 21000
Profit ‐
2,000
7,000 5,000
narain@fms.edu
