Advanced Cost Accountancy (Techniques of Costing) includea Marginal Costing & CVP Analysis, Standard Costing & Variance Analysis, Activity Based Costing (ABC) & Uniform Costing

1. Welcome

2. Advanced Cost Accountancy
(Techniques of Costing)
Preapred by
Dr. Sushil Bhimrao Bansode
(M.Com., GDC&A, SET, NET, DID, Ph.D.)

3. Marginal Costing
&
CVPAnalysis

4. Meaning of Marginal Cost
• Marginal costing is a cost accounting technique that considerations
on the variable costs related with producing one additional unit of a
product or service.
• It aids in defining the contribution margin and assists in making
decisions related to pricing, production, and profitability.
• Marginal Costing includes both fixed and variable costs. Investors
also use it to help forecast the profit growth of a company as it
increases in scale.
• Marginal Cost calculated by dividing the change in total costs by the
change in total quantity.
• Marginal cost is shown on a graph through a curve that typically
takes a U-shape. Initially, as production increases, marginal costs
decrease due to efficiencies gained.
• A company maximizing profits will produce up to the point where
marginal cost equals marginal revenue (MC=MR).
• When marginal cost decreases, it means a company can produce
more of its product or service without a significant growth in cost.

5. Contribution
• Contribution is the amount by which sales exceed variable costs.
• Contribution is also known as Contribution Margin or Gross Margin.
• Formula:
– Contribution = Sales - Variable Cost
– Contribution = Fixed cost + Profit
• Contribution is a type of saving that a business uses to recover fixed
costs. After subtracting fixed costs from contribution, the business can
determine its profit or loss.
• Contribution is the amount that contributes to fixed expenses and profit. It
indicates how much money is available to contribute to the organization's
overheads.
• Common rule of thumb is that a Contribution Margin above 20% is considered
good, while anything below 10% is considered to be relatively low.

6. Basic Equation of Marginal Costing
Particulars A B C Total
Sales X X X X
Less : Variable
Cost
X X X X
Contribution - - - -
Less :
Fixed cost
X X X X
Marginal
Costing Profit
X X X X

7. Cost Volume Profit Analysis
• Cost-Volume-Profit analysis is a technique for studying the relationship
between cost, volume and profit. Profits of an undertaking depend upon a
large number of factors. But the most important of these factors are the cost
of manufacture, volume of sales and the selling prices of the products.
• The three factors of CVP analysis i.e., costs, volume and profit are
interconnected and dependent on one another, For example, profit depends
upon sales, selling price to a large extent depends upon cost and cost
depends upon volume of production as it is only the variable cost that
varies directly with production, whereas fixed cost remains fixed regardless
of the volume produced.
• In cost-volume-profit analysis an attempt is made to analyse the
relationship between variations in cost with variations in volume.
• The cost-volume-profit relationship is of immense utility to management as
it assists in profit planning, cost control and decision making.

8. Break-even Point
• The break-even point may be defined as that point of sales volume at which total revenue is equal to
total cost. It is a point of no profit, no loss.
• A business is said to break-even when its total sales are equal to its total costs.
• The break-even point refers to that level of output which evenly breaks the costs and revenues and hence
the name. At this point, contribution, i.e., sales minus marginal cost, equals the fixed costs and “hence
this point is often called as ‘Critical Point’ or ‘Equilibrium Point’ or ‘Balancing Point’ or no profit, no loss.
• Break-even point can be stated in the form of an equation :
Sales revenue at break-even point = Fixed Costs + Variable Costs.
• Computation of the Break- Even Point
The break-even point can be computed by the following methods :
1.Algebraic Formula Method 2.Graphic or Chart Method.
Algebraic Formula Method for Computing the Break-even Point
The break-even point can be computed in terms of :
(a) Units of sales volume (b) Budget total or in terms of money value. (c) As a percentage of estimated capacity.
(a) Break-even Point in Units - As the break-even point is the point of no profit no loss, it is that level of output at
which the total contribution equals the total fixed costs. It can be calculated with the help of following formula :
Break-Even Point = Fixed Cost / (Selling Price per unit - Variable Cost per unit)
or Fixed Cost /Contribution per unit
(b) Break-even Point in terms of budget-total or money value
At break-even point: Total Sales = Total Fixed Cost + Total Variable Cost
Or S=F+V (where S = Sales, F = Fixed Cost and V = Variable cost)
or S –V = F or (S-V)/(S-V) = F / (S-V) (dividing both sides by S – V)
or I= F/(S-V)
or S x I = (F x S)/ (S-V) (Multiplying both sides by S)
Hence, break-even sales = [Fixed Cost/ (Sales — Variable Cost)] x Sales or [Fixed Cost/ Contribution] x Sales
With the use of P/V Ratio,
B.E.P = Fixed Cost/ P/V ratio As [Contribution /Sales] = P/V Ratio.
(c) Break-even Point as a percentage of estimated Capacity
Break-even point can also be computed as a percentage of the estimated sales or capacity by dividing the break-even
sales by the capacity sales.
B.E.P (as % age of capacity) = Fixed Cost / Total Contribution.

9. Break Even Analysis
The study of cost-volume-profit analysis is often
referred to as “break-even analysis’ and the two terms are
used interchangeably by many. This is so, because break-
even analysis is the most widely known form of cost-
volume-profit analysis. The term “break-even analysis’ is
used in two senses—narrow sense and broad sense. In its
broad sense, break-even analysis refers to the study of
relationship between costs, volume and profit at different
levels of sales or production, In its narrow sense, it refers
to a technique of determining that level of operations
where total revenue equal total expenses, i.e. the point of
no profit, no loss.

10. Decision Making With The Help of
Marginal Costing
• Marginal costing is a very valuable decision-making technique. It helps
management to set prices, compare alternative production methods, set
production activity levels, close production lines and choose which of a
range of potential products to manufacture.
• Decision Making Indicators In Marginal Costing.
– Profit Volume Ratio (P/V Ratio)
– Break-even Point (BEP)
– Margin of safety (MOS)
– Indifference Point and
– Shut down Point
• Marginal Costing Helps Mainly in Following Decision Making.
– Fixation of Selling Price
– Exploring New Markets
– Make or Buy Decision
– Product Mix
– Operate or Shut Down

11. Standard Costing
&
Variance Analysis

12. Meaning of Standard Costing
• Standard costing is a cost accounting technique that assigns a
predetermined or “standard” cost to each unit of production.
• Standard costing is the practice of estimating expenses in the
production process since manufacturers cannot predict actual costs
in advance. Manufacturers use this methodology to plan upcoming
costs of various expenses, such as labour, materials, production and
overhead.
• This cost is based on anticipated materials, labour, and overhead
prices.
• Companies use standard costing as a control tool to help managers
understand cost variances, which are the differences between actual
and standard costs. By analyzing these variances, companies can
make informed decisions to enhance operational efficiency and
profitability.

13. Features of Standard Cost
• Improved Cost Control: Standard costing is a beacon for cost control, establishing a clear,
predefined benchmark for organizational expenses. It enables a meticulous comparison between
actual and standard costs, highlighting areas where spending overshoots budgeted amounts. This
insight empowers organizations to identify and rectify excessive expenditures swiftly. It ensures
financial discipline and enhances cost efficiency.
• Helps with accurate budgeting: Manufacturers rely on standard costing for creating budgets, as it
is difficult to calculate the actual costs of producing an item before the production is complete.
Manufacturing budgets are usually a smart estimate and not the actual price. They compare standard
and actual costs once manufacturing is complete to identify the variances. They can then use this
information to make the following year's budget more accurate.
• Identifying Inefficiencies: Standard costing acts as a magnifying glass, revealing operational
inefficiencies and suboptimal resource utilization. It guides organizations in implementing targeted
improvements, ensuring that resources are leveraged to their fullest potential. This focus on
operational excellence drives enhanced productivity, cost reduction, and heightened profitability.
• Facilitates production benchmarking: Manufacturers use standard costs to set benchmarks so that
they can compare if actual costs meet these benchmarks. If the actual costs meet standard costs, it
indicates that the budgeting has been successful. If there is an unfavourable variance with the actual
costs exceeding standard costs, then the company works on altering its production efficiency to
lower these costs in the future.
• Provides efficient financial records management: If a company has to rely solely on actual costs,
it becomes difficult to maintain its financial records. On the contrary, standard costing makes it
easier for companies to produce and maintain their financial records. Since the company has an
intelligent estimate of expected costs, it can conduct other financial activities, such as borrowing and
overdrafts, using the numbers from standard cost calculations.

14. Disadvantages of Standard Costing
• Lack of relevance: The cost data used in standard costing may not reflect current costs, leading to
incorrect pricing and decision-making.
• Lack of incentives for cost control: When actual costs are consistently higher than standard,
management may not see the need to control costs. Because they already account for these higher
costs in the budget.
• Complexity: Standard costing can be complex to implement and maintain, especially for businesses
with multiple products and cost centers.
• Emphasis on budgeting: Standard costing strongly emphasizes budgeting. Therefore, it can detract
from other important aspects of cost accounting, such as cost analysis and cost control.
• Resistance to change: Once a standard costing system is established, there may be resistance to
changing it. Even if it is no longer relevant or suitable for the business.
• Can offer slow feedback: The accounting department does the variance calculations, usually at the
end of each production cycle or reporting period. If the production department requires immediate
feedback for instant corrective action, then standard costing with slow feedback becomes irrelevant.
• Does not offer unit-level information: The variance calculations from standard costing are for the
entire production department. Standard costing cannot provide granular information about
discrepancies for each individual unit, batch or work cell.

15. Setting of Standards
• The process of setting standard is a valuable activity in
itself. The success of standard costing system depends on
the reliability, accuracy and acceptance of the standards. If
standards have been properly set and maintained, they are
a sound basis for determining cost for various purposes.
While setting the standards, the following points should be
taken into consideration:
– Duration of use of standard
– Reasonable standard of performance
– Level of activity
– For the given units standard sets for the following items are
• (i) direct material cost
• (ii) direct wage cost
• (iii) direct expense
• (iv) factory variable overhead cost
• (v) selling and distribution variable cost
• (vi) selling price and sales margin

16. Types of Standards
• Basically, there are two types of standard:
– (a) Current Standard
– (b) Basic Standard
• (a) Current Standard: It is established for the use over a diminutive period of time and is related to
current circumstances. Such a standard remains in operation for a limited period and belongs to the
current conditions. These standards are revised at regular intervals. Current standard are of three
types like
– 1. Ideal standards: This is a hypothetical standard which is rather not practicable to attain. This ideal is
clearly unrealistic and unattainable. It pre‐ supposes that the performance of men, materials and machines is
perfect and thus makes no allowance for the loss of time, accident, wastage of materials and any other type of
waste of materials and any other type of waste or loss. Such standards have the advantage of establishing a
goal which, however, is not always attainable in practice. As such it is having a little practical value. The
standard which can be attained under the most favourable condition possible.
– 2. Expected or practical standards: Such standards are likely to be expected or utilized in the future period.
Such standards are based on expected performance after making a reasonable allowance for unavoidable
losses and other inevitable lapses from perfect efficiency. So it is most generally used standard and is best
suited for cost control. This standard can be anticipated as well as attained in future in sync with the specified
budget.
– 3.Normal standards: It is also known as ‘Past Performance Standard’ because it is based on the average
performance in the past. It should be attainable and it provides a challenge to the staff. The aim of such a
standard is to eliminate the variations in the cost which arise out of trade cycle. The average standard can be
anticipated as well as attained in a future period of time. Preferably, it should be long enough to cover one
trade‐ cycle.
• (b) Basic standards: This is a standard which is established for use unaltered for an indefinite time.
It is similar to an index number against which all results are measured. Variances from basic
standards show trends of deviations of the actual cost. However, basic standards are of no practical
utility from the point of view of cost control and cost ascertainment. This standard is set on a
long‐term basis and seldom revised. It is an underlying standard from which current standard can
be developed.

17. Concept of Variance Analysis
• Variance means the deviation of the actual cost or actual sales from
the standard cost or profit or sales. Calculation of variances is the
main object of standard costing. This calculation shows that whether
costs are under controlled or not. A variance may be favorable or
adverse.
• A controllable variance is when a variance is treated as the
responsibility of a person with the result that his or her degree of
efficiency can be reflected in size. When a variance arises due to
some unforeseen factors, it is known as uncontrollable variance.
• When actual cost is less than standard cost or profit is better than the
standard profit, it is known as ‘Favourable Variance’. On the other
hand, where the actual cost is more than standard cost or profit is
better than the standard profit, it is known as 'Unfavourable
Variance' or 'Adverse'.

18. Importance of analysis of variance
There is a lot importance of analysis of variance. There are many
objects fulfilled with their analysis. Without analysis of variance, there is no
use of standard costing. The important points of variances are as under:
• Check and control of wastage is possible.
• It improves the efficiency of the organization by the use of standard
costing.
• It exercises control over all cost centers including department, individuals
and so on.
• Responsibility of a particular person or department can be fixed.
• In the prediction of production cost, sales and profit, variance analysis is
very useful.
• On the basis of variance analysis, delegation of authority could be made
effective.
• Variance analysis is easy to introduce, apply and orient result.
• Various operational efficiencies can be measured.

19. Material Variances
• These variances include Material Cost Variances, Material Price Variances, Material Usage
Variances, Material Mix Variances and Material Yield Variances.
1. Material Cost Variances (MCV):
2. Material Price Variances (MPV):
3. Material Usage Variances (MUV):
4. Material Mix Variances (MMV):
5. Material Yield Variances (MYV):

20. Labour Variances
• Labour variances occur because of the difference in actual rates and
standard rates of labour and the variation in actual time taken by labours
and the standard time allotted to them for doing a job. These variances
include Labour Cost Variances, Labour Rate Variances, Labour Time or
Efficiency Variances, Labour Idle Time Variances, Labour Mix Variances.
• Labour Cost Variances (LCV):
• Labour Rate Variances (LRV):
• Labour Time (Efficiency) Variances: (LTV/LEV):
• Idle Time Variance (ITV):
• Labour Mix Variance / Gang Composition Variance (LMV):

21. Overhead Variances
• Overhead is the aggregate of indirect materials, indirect labour and indirect
expenses. Analysis of overhead variances is different from that of direct material
and direct labour variances by two reasons.
(1) It is difficult to establish Standard overhead rate for fixed overhead
because changes in the volume of output will affect the standard overhead rate even if
there is no change in the amount of fixed overhead cost.
(2) For computing overhead variances, there are quite a few terminological
options and methods.
The overhead variances include fixed overhead variances and variable overhead
variances. Moreover, further analysis of overhead variances is also possible according
as the available source information. It is significant to know at the beginning that the
overhead variance is not anything but under or over‐absorption of the overhead.
• (a) Variable Overhead Cost Variance (VCOV)
– (1) Variable Overhead Expenditure Variance (VOEV)
– (2) Variable Overhead Efficiency Variance (VOEV)
• (b) Fixed Overhead Cost Variances (FOCV)
– (1) Fixed Overhead Expenditure Variances (FOEV)
– (2) Fixed Overhead Volume Variances (FOVV)
• (i) Efficiency Variances (EV):
• (ii) Capacity Variances (CV):
• (iii) Calendar Variances (CV):

22. • Variable Overhead Cost Variance (VCOV)
– (1) Variable Overhead Expenditure Variance (VOEV):
– (2) Variable Overhead Efficiency Variance (VOEV):

23. • Fixed Overhead Cost Variances (FOCV)
(1) Fixed Overhead Expenditure Variances (FOEV):
(2) Fixed Overhead Volume Variances (FOVV):
– (i) Efficiency Variances (EV):
– (ii) Capacity Variances (CV):
– (iii) Calendar Variances (CV):

24. Activity Based Costing
(ABC)

25. Activity Based Costing
Activity-based costing (ABC) is a system you can use to find
production costs. It breaks down overhead costs between production-
related activities. The ABC system assigns costs to each activity that
goes into production, such as workers testing a product. Manufacturing
businesses with high overhead costs use activity-based costing to get a
clearer picture of where money is going. Because ABC gives specific
production cost breakdowns, you can see which products are actually
profitable.
By using activity-based costing, you can:
• Take into consideration both the direct and overhead costs of
creating each product
• Recognize that different products require different indirect expenses
• More accurately set prices
• See which overhead costs you might be able to cut back on

26. Concept of Activity Cost Drivers
• An activity cost driver refers to actions that cause variable costs to increase
or decrease for a business. Therefore, identifying what product/service is
causing particular costs can help the business to become more profitable by
better understanding the specific activities that are driving the costs.
• Activity cost drivers include things such as labor hours, machine hours, and
customer contacts. They are used in activity-based costing (ABC) – a
segment of managerial accounting.
• Activity cost drivers are specific activities that cause variable expenses to
be incurred. One variable expense can comprise more than a single activity
cost driver. For example, machine hours and labor hours can be activity
cost drivers in the manufacturing of a product.
• All variable expenses can be broken down and looked at by one or several
activity cost drivers, which can also be influenced by several factors. For
example, if the minimum wage increases, it can cause the cost of producing
a product to also increase.

27. Uniform Costing

28. Uniform Costing
• Uniform costing is not a particular method of costing. It is
adoption of common accounting principles and in some cases
common methods by member companies in the same industry
so that their cost figures may be comparable.
• It is a technique or method of costing by which different firms
of a field or industry apply similar costing system so as to
produce cost data which have maximum comparability.
• The success of a uniform costing system depends primarily on
the cooperation extended by different units or firm towards the
working of the system. Every unit should agree to supply
required accounting and costing information without
reservation to a central body formed by them for
implementation of the uniform costing scheme. This body has
to correlate, analyze and consolidate the information received
from the different units.

29. Need for Uniform Costing
The need for uniform costing arises from the fact that different units use different cost
procedures and principles for costing.
Such differences arise because of the following points:
1. Size of Business:
The problems arising from the size of business may differ in different industries and units.
The difference may be because of division of work, division of responsibility and level of expenditure. In
small concerns all the problems are handled by one person and there is no need of elaborate system of
costing but- in big business there is need of division of work and responsibility and the authority is given
to the different levels of managers to complete their work efficiently.
2. Nature of Business:
The nature of businesses differs because of different manufacturing processes and the types
of machines used. Some concerns use heavy machinery for carrying out their operations while others use
labour intensive machines. Moreover, for similar operations different types of machines can be used.
3. Product Differentiation:
When there is difference in products to be produced because of difference in the quality of
finished product or raw materials or change in the material mix though the size, type and nature of the
business is the same, the costing problems and procedures will also differ because of application of
different methods and principles of cost accounting.
Thus, the need for uniform costing arises because of differences in size and organisation set
up, wage structure, methods of production and degree of automation and application of different methods
and principles of cost accounting.

30. Features of Uniform Costing
• The similar costing principles are applied by all
member units for determining cost.
• Cost reports and statements are arranged on a uniform
basis.
• The accounting period is common for all member units.
• All the member units adapt the similar costing methods,
techniques and systems for gathering, ascertainment
and control of cost.

31. Advantages of Uniform Costing
The advantages of uniform costing can be discussed under different headings:
(A) To the Member :
1. It facilitates cost comparison among different units which helps to know weak points of a unit.
2. The services of a professional cost and management accountant or consultant can be taken to devise a uniform costing for all
members. This will prove more economical.
3. Computerised accounting system can be maintained for all member units.
4. One competent cost and management accountant can be appointed at the head office or association office to look after the cost
accounting system of all units instead of appointing a separate accountant for each member unit.
5. It helps in enhancing efficiency and productivity as every member unit follows standard and efficient methods of production and
production control.
6. It encourages standardisation of material and labour. It also assists in the standardisation of operations and performance.
7. It reveals profitable and unprofitable products or operations of all member units.
8. It avoids cut throat competition among the members by removing their rivalries and ensures healthy competition among the
member units.
9. It helps the weaker units to get the benefits of research and development made by big concerns.
10. It creates cost consciousness among the member units by telling them the best ways of doing the things.
11. It helps the member units in cost audit and inter firm comparison.
(B) To the Workers:
1. It ensures a uniform wage structure in all member units.
2. Employees will be benefited in sharing bonus and other amenities due to increase in efficiency and productivity.
(C) To the Trade Associations:
1. Trade associations can have better control over all the member units of the industry in eliminating wasteful competition.
2. It improves profitability of the organisations by regulating the output and prices of member units.
3. It represents the problems of member units to the government in getting subsidy and other forms of concessions.
(D) To Government:
1. It enables the government in formulating various policies relating to fixation of price, granting subsidy etc. based upon the
information of several industries.
2. It enables the government to give priority to public or private sector industry based upon their progress and prosperity.
3. The government can formulate tax rates based on the useful information supplied by it regulating profitability of the industry.

32. Limitations of Uniform Costing
1. Individual units differ:
Uniform costing presumes the application of same principles and methods in each of the
member units. But individual units differ in respect of certain key factors as methods of production, size
of the organisation, methods of accounting, location, age and condition of plant ; nature of labour force,
capital investment and degree of mechanisation which make difficult the application of uniform costing.
Moreover, the individual requirements of each concern differ from those of the other concerns.
2. Monopolistic situations:
Under uniform costing, by virtue of the activities of the different units being coordinated by
the central organisation or association, members may agree to a price which may be too high and lead to
monopolistic conditions and customers may suffer because of this.
3. High cost:
For smaller units, the cost of installation and operation of a uniform costing system may be
more than the benefits derived from it and thus may prove to be a costly system for such concerns.
4. Lack of trust and assurance:
Generally the member units do not have trust and confidence on other units and do not
provide the full information relating to technical procedures and cost information with the result the
system may not prove to be a success. Further the utility of uniform costing may be reduced because of
non-cooperation of the participating members.
Moreover, the cost computed under the uniform costing system may not be representative of all concerns.
Distorted cost data provided by the member units may not give a correct picture in specified cases.
5. Absence of flexibility:
It is not flexible means cannot be changed whenever the requirement arises.

33. Uniform Costing and Inter-firm
Comparison
An inter-firm comparison indicates the efficiency of production and selling, adequacy of
profits, weak spots in the organisation, etc. and thus demands from the firm’s management an immediate
suitable action. Inter-firm comparison may enable the management to challenge the standards which it
has set for itself and to improve upon them in the light of the current information gathered from more
efficient units. Such a comparison may be carried out in electrical industry, printing firms, cotton
spinning firms, pharmaceuticals, cycle manufacturing, etc.
• Advantages of Inter-firm comparison :
1.Such a comparison gives an overall view of the industry as a whole to its members– the present
position of the industry, progress made during the past and the future of the industry
2.It helps a concern in knowing its strengths or weaknesses in relation to others so that remedial
measures may be taken.
3.It ensures an unbiased specialized reporting on particular problems of the concern.
4.It develops cost consciousness among members of the industry.
5. It helps Government in effecting price regulation.
6. It helps to improve the quality of products manufactured and to reduce the cost of production. It is thus
advantageous to the industry as well as to the society.
• Limitations of inter-firm comparison
1. Top management feels that secrecy will be lost.
2. Middle management is usually not convinced with the utility of such a comparison.
3. In the absence of a suitable Cost Accounting System, the figures supplied may not be reliable for the
purpose of comparison.
4. Suitable basis for comparison may not be available.

34. Prerequisites of Uniform Costing
• Requisites of Uniform Costing:
Uniform costing can be adopted if certain pre-conditions exists. The success
of a uniform costing system depends primarily on the cooperation extended by different
units or firm towards the working of the system. Every unit should agree to supply
required accounting and costing information without reservation to a central body
formed by them for implementation of the uniform costing scheme. This body has to
correlate, analyze and consolidate the information received from the different units.
• Following are prerequisites of uniform costing:
(a) Firms or units adopting uniform costing must be ready to provide and share
accounting and costing information freely.
(b) They should adopt a common system of costing regarding classification,
distribution and absorption of costs. They must agree on a common technique of
costing e.g., absorption costing, standard costing or marginal costing.
(c) The firms must use a common terminology and procedure for cost ascertainment
and cost control.
(d) There should not be any restriction from the Government in adopting uniform
costing.
(e) A central body or proper organisation must be set up for preparing comparative
statistics for the use of member units participating in the uniform costing.
(f) Above all, the most important is that units or firms must have mutual trust,
confidence and cooperation.

35. Thank You. . .