This document provides an overview of cost accounting, including definitions, objectives, functions, importance, classification of costs, elements of costs, and inventory control techniques. It discusses key cost accounting concepts such as cost centers, profit centers, cost sheets, and different wage systems. The key points are: 1) Cost accounting is the application of accounting and costing principles to ascertain costs and analyze savings/excess costs compared to previous experience or standards. 2) The objectives of cost accounting include cost ascertainment, determining selling prices, cost control and reduction, and assisting management decision making. 3) Costs can be classified in various ways such as by nature, function, variability, and controllability. Inventory control

1. Overview of Cost Accounting
Cost: isthe actual expenditure incurredonagiventhingandnational expenditure attributable toagiven
thing.
Costing:is refferedtoasclassifying,recordingandapproprite allocationof expediture forthe
determinationof the costof products or services.
Cost Accounting: isthe applicationof accountingandcostingprinciples,methodsandtechniquesinthe
ascertainmentof costand th analysisof savingsand/orexcessascomparedwithpreviousexperienceor
withthe standard.
Cost Accountancy: is the science,artand practice of a cost accountant.
ObjectivesofCost Accounting: Ascertainmentof cost,determinationof sellingprice,costcontrol and
cost reduction,ascertainingthdprofitof eachactivity,assistingmanagementindecisionmaking,
matchingcost withrevenue,preparationof financial statements,P&L A/cand balance sheet.
Functionsof Cost Accounting:
To serve as a guide toprice fixingof products
To disclose sourcesof wastage inproduction
T reveal sourcesof economyinproductionprocess
To provide foran effective systemof stores,materialsetc
To excercise effective control onfactoryof production
To ascertainthe profitabilityof eachproduct
To suggestmanagemenetof future expansionpolicies
To presentandinterpretdataformanagerial decisions
To organize costreductionprogrammes
To facilitate planningandcontrl of businessactivities
To supplytimelyinformationforvariousdecisions
To organize the internal auditsystemetc
Importance of Cost Accounting:control of material cost,control of labourcost, control of overheads,
measuringefficiency,budgeting,price determination,curtailment of lossduringthe off season,
expansion,arrivingof decisions
Meritsof Cost Accounting:

2. (To the management) facilitatesdecisionmaking,measuringefficiency,costreduction,fixationof selling
price,facilitatescostcontrol,improveefficiency,facilitatesinventorycontrol,reductionof wastages,
effectiveutilizationof resources,helpineffectivebudgeting
(To the employees) soundwage policy,higherbonusplan,rewardsforhigherefficiencythrough
incentive scheme,securityof job
(To the creditors) bankers,creditors,investorsetccanhave a betterunderstandingof the organization
(To the public) removesall typesof wastage,customerneedpayonlythe fairprice,create more
employmentopportunities
(To the government)
• Useful inthe preparationof national plans,econmicdevelopmentsetc
• Can make policieslike taxation,import,export,price ceiling,grantingsubsidyetc,
• Importantthat industrieskeepbooksof accountstoshow utilizationof materials,labourand
othercosts
Objectionsto Cost accounting:
• expensive toinstall andoperate
• feltunnecessaryandredundant
• May notbe applicable toall typesof industries
• involvesmanyformsandstatements
• basedon estimationandpredetermination
Demeritsof Cost accountancy:
1. not an exactscience andivolvesinherentelementof judgement
2. establishmentcostmaybe heavytobe affordedbymediumsize concern
3. Most cost accountingtechniquesare basedonsome pre assumednotions
4. it isnot static,itis dynamicwiththe change of time estimation,conventinsetcare adoptedin
the system
5. Presentsthe base fortakingthe bestdecisionbutdoesnotgive outthe rightsolutiontothe
problem.
6. differentviewsare heldbydifferentcostaccountantsaboutthe itemstobe includedincost

3. 7. difficulttoderive correctcostof the valuationof stock,workin progress,estimatedcostetcare
calculatedinthe basisof estimation
Characteristics ofa good Costingsystem: simplicity,flexibilityandadaptability,economy,comparability.
suitability tothe firms,minimumchangestothe existingone,uniformityof forms,lessclerical work,
efficientmaterial control andwage system.asoundplan,reconciliation
Installationof a Costingsystem:determinationof objectives,studyof the nature of business,studyof
the nature of the organization,decidingthe structure of costaccounts,determinationof costrates,
organizationof the costoffice,introducingthe system
Classification of Cost
Cost unit: isa unit of a product or service ortime to whichcostsare ascertainedbymeansof allocation,
appoinmentandabsorption.
Cost centre:is a location,personoritemof equipmentforwhichcostmaybe ascertainedandusedfor
the purpose of cost control.
Profit centre: is a segmentof a businessresponsibleforall activitiesinvolvedinthe productionand
salesof productsand services.
Difference btwncost center & profit centre
• Cost centre iscreatedbythe cost accountantand profitcentre bytop management
• Cost centre iscreatedforcost ascertainmentandcontrol,profitcentre iscreatedforevaluation
of performance
• Cost centre isa small segment,profitcentre islarge segment
• Cost centresdonot enjoyautonomywhereasprofitcentresdo
• Cost centresdonot have a targetfor costs,whereasprofitcentreshave targetforprofit
ClassificationofCost:
1. Cost accordingto nature or element
2. Functional clarification(Productioncost,administration,selling,distribution,research,
developmentcost)
3. Directand indirect cost
4. By variability(fixed,variable,semivariable)
5. On the basisof controllability(controllable,uncontrollable)

4. 6. By Normality(normal,abnormal)
7. By capital and revenue orfinancial accountingclassification
8. By Time (historical,predeterminedcosts)
9. Accordingto planningandcontrol (budgeted,standard)
10. For manegerial decisions( marginakcost,outof pocketcosts,differentialcosts,sunkcosts,
imputedcosts,opportunitycost,replacementcost,avoidable andunavoidable)
ElementsofCost:
a. Materials(directmaterials,indirectmaterials)
b. Labour (directlabour,indirectlabour)
c. Expenses(directorchargeable expenses,indirectexpenses)
d. Indirectcosts/overheads(factoryoverhead,office & administrationoverhead,sellingoverhead,
distributionoverhead)
Methodsof Costing:Job costing,contract costing,batchcosting,processcosting,unitcosting,operating
costing,operationcosting,multiple costing
TechniquesofCosting: Historical costing,directcosting,absorptioncosting,uniformcosting,marginal
costing,standardcosting
Cost Sheet
Cost sheet: the expensesof aproductare analysedunderdifferentheadsinthe formof a statement.
Thisstatementiscalledcostsheet.

5. Material Purchase procedure
Material control: isa systemwhichensuresrequiredquantityof material of the requiredqualityatthe
righttime and place withminimuminvestmentof capital.
ObjectivesofMaterial control:
1. Material shouldbe continuouslyavailable forproducton

6. 2. to control obsolescenceandspoilage
3. it isa propercontrol systemfor settlementof invoices
4. preventionof misappropriationof material
5. for favourable termsof purchase
6. properreporting tomanagement
7. avoidsexcessive investmentinstock
8. to achieve economyof buyingandstorage cost
Purchase: centralized,decentralized)
Advantages of centralizedpurchasing: favourable purchase terms,specialization,avoidance of
duplication,reductionof administrationcost,maintenance of recorders,uiformpolicy
Demeritsof centralizedpurchasing: delayinpurchasing,lackof knowledge of specificdepartments
requirements, nonutilizationof locallyavailable materials.highcostof maintainingaseparate
department
Purchase Procedure:
a. receivingpurchase requsitions
b. exploringthe sourcesof supplyandchoosingsupplier
c. preparationandexecutionogpurchase orders
d. receivingandinspectingmaterials
e. checkingandpassingof billsforpayment
Inventory Control and its Technology
Inventory:is a tangible propertyheldforsale inthe ordinarycourse of businessinthe processof
productionforsale or consumptionof goodsorservice forsale,includingmaintenance suppliesand
consumable otherthanmachineryspares
Classificationofinventory: raw materials,workinprogress,finishedproducts
Inventorycontrol: is a systemwhichensuresthe maintenance of requiredquantityof inventoriesof the
requiredqualityatthe requiredtimewithminimumamountof investment.
ObjectivesofInventory control:
1. achieve maximumpossible inventoryturnover

7. 2. optimizinginvestmentininventoryandreducingcarryingcost
3. keepingrequired naterialsof adequatequantityinordertoavoiddisruptioninproduction
4. followingthe policyof managementbyexceptionbyrelievingthe topmanagementfrom
invlvingineachandeverydecisionrelatingtoinventory
Important Techniquesof Inventorycontrol:
1. Stock levelsandEOQ(minimumstocklevel,maximum, re orderlevel,dangerlevel,re ordering
quantity,average stock)
2. ABC Analysis
3. VED Analysis
4. JIT or justin time inventory
5. Perpetual inventorysystem
6. Inventoryturnover
7. input-outputratio
Labour Cost Analysis and Wages System
Direct labour cost: is the cost incurredonthe employeeswhoare engageddirectlyinmakingthe
product,theirworkcan be identifiedclearlyinthe processof convertingthe raw materialsintofinished
product.
Indirectlabour cost: isthe cost associatedwiththe conversionprocessbutassistinthe processbythe
wayof supervision,maintenance,transportationof materials,materialshandlingetc.
ObjectivesofLabour Cost Analysis:
• To estimate the correctlabourcost opf orders,jobsand processestoascertainthe costof each
job,processor order.
• reductionof labourturnover
• absorptionof overheadsbyusinglabourcostas a basis
• to findoutthe correct amount of overheadsbyascertainingthe indirectlabourcost
• to increase the efficiencyof labourbytakingdirectlabourcostas a guideline
Methodsof remuneration(wages): Time rate,piece rate,bonussystemsorincentive schemes,indirect
monetaryincentive,nonmonetaryincentive

8. Essentialsof a good wage system:
• Wage systemhasto be fairto employeesandthe employer
• workersare to be assuredof minimumwagesirrespective of workdone
• workersare to be compensatedonthe basisof theirrelativeefficiency
• wage systemshouldbe flexible toincorporate futurechanges
• wage systemshouldencourage higherproductivityandreduce labourturnover
• wage systemshouldbe asper the labourpolicyof govtand follow legislations
• wage systemshouldequate withindustrywage levels
• methodofcalculationof wages,wage rates andincentive systemshouldbe simpleandeasyfor
workerstounderstand
Time rate system:
Suitabe for:
• Where highqualitygoodsare beingproduced
• situationswhere outputcannotbe measured
• where incentive schemescannotbe introducedasworkersmaynotbe directlyinvolvedwith
final output
Disadvantages:
• employeesare notrewardedonthe basisof meritas everyone getspaidthe same
• employeesare paidwagesforidle time also
• labourcost perunitdoesnot remaincostantas ouputfluctuatesandmakesitdifficultto
prepare tendersorquotations
• supervisioncostmaygo up as strictsupervisionisessential togetthe workdone
• the workersmaygo slowon workto create scope for overtime which doublesthe labourcost
Piece rate system:
a. Straight piece rate
b. Differential piece rate (taylor'sdifferential piece rate,merrick'smultiple piece rate,gantt'stask
and bonusplan)

9. Straight piece rate:
Advantages:
• employeesare paidaccordingtomeritas the efficientworkersearnmore wagesastheiroutput
ismore
• acts as incentive toinduce workersproduce more
• higheroutputbringsdowncostper unitandincreasesprofitmargin
• employerhasnoworriesaboutpaymentforidle time anditevenreducesidle time
• submittingof tendersiseasieraslanourcost perunitisconstant
• machineryandtoolsare takencare of by workersastheyknow it increasestheirproductivity
• supervisioncostislow
• average workersare encouragedtoproduce more
Disadvantages:
• fixingof straightpiece rate isdifficult,low rate willfrustrate workers
• may notinduce efficientworkerstoreachhigherskill levels
• wagesof employeesmaybe affecteddue tofaultof employerorco workers
• the productonmay go on increasingevenwhen demandof goodsare declining
• workers'anxietyforhigherproductionmaycasue accidents
• workers'anxietymayleadtodefectivegoodsandwastage of raw materials
Nature and scope of management accounting
Managementaccounting: is concernedwithaccountinginformationthatisuseful tomanagement.
Objectivesofmanagementaccounting:
• to assistthe managementinpromoting effeciency.effiiencyincludesbestpossibleservicesto
the custmers,investorsandemployees.
• to prepare budgetcoveringall functions of abusiness
• to analyse monetaryandnonmonetarytransactions
• to compare the actual performance withplanforidentifyingdeviationsandtheircauses

10. • to interpretfinancialstatementstoenable the managementtoformulate future policies
• to submittothe managementatfrequentintervalsoperatingstatementsandshortterm
financial statements
• to arrange for the systematicallocationof responsibilities
• to provide asuitable organizationfordischargingthe responsibilities
Scope ofmanagement accounting: Financial accounting,costaccounting,budgetingandforecasting,
inventorycontrol,statistical analysis,analysisof data,internal audit,tax accounting,methodsand
procedures
Functionsof managementaccounting: presentationof data,aidto planningandforecasting,decision
making,communicationof managementpolicies,effective controls,incorporationof non-financial
information,coordination
Advantages of managementaccounting: helpsindecisionmaking,helpsinplanning,helpsinorganizing,
facilitatescommunication,helpsincoordinating,evaluationandcontrol of performance,interpretation
of financial information,economicappraisals
Limitationsof managementaccounting: basedon accountinginformation,wide scope,costly,
evolutionaystages,oppositiontochange,intuitive decisions,notanalternative tomanagement
Differencesbtwnmanagementaccounting & cost accounting:
Purpose:mainobjective of costaccountingisto ascertainand control cost of productionor services,but
of managementaccountingistoprovide informationtomanagementforefficientlyperforming
planning,directingandcontrolling.
Emphases: costaccountingis basedonboth historicakandpresentdata,whereasmanagement
accountingdealswithfuture projectionsonthe basisof historical andpresentcostdata.
Principlesand procedures:establishedproceduresandpracticesare followedincostaccountingbutno
such prescribedpracticesare followedinmanagmentaccounting.
Data used:cost accountingusesonlyquantitative informationwhereasmanagementaccountingboth
qualitative andquantitativeinformation.
Scope: managementaccountingincludesfinancial accounting,costaccounting,budgeting,tax planning
and reportingtomanagement,whereascostaccountingisconcernedmainlywithcostascertainment
and control.
Differencesbtwnmanagementaccounting & financial accounting:

11. Objectives:the mainobjectivesof financial accountingistosupplyinformationinthe formof profitand
lossaccount andbalance sheettooutside partieslike shareholders,creditors,govtetc.butthe objective
of managementaccountingistoprovode informationforthe internal use of management.
Performance analysis: financial accountingisconcernedwiththe overall performanceof the business.
On the otherhand,managementaccountingisconcernedwiththe departmentsordivisions.Itreports
aboutthe performance andprofitabilityof eachof them.
Data used:financial accountingismainlyconcernedwiththe rcordingof pasteventswhereas
managementaccountingisconcernedwithfture plansandpolicies.
Nature: Financial accountingisbasedonmeasurementwhile mangementaccountingis basedon
judgement.becauseof this,financial accountingismore objectiveandmanagementaccountingismore
subjective.
Accuracy: accuracy is an importantfactorin financial accounting.Butapproximationsare widelyusedin
managementaccounting.Thisisbecause mostof the informationisrelatedtothe future andintended
for internal use.
Legal compulsion:financial accountingiscompulsoryforall jointstockcompaniesbutmanagement
accountingisoptional.
Monetary transactions: financial accountingrecordsonlythose transactionswhichcanbe expressedin
termsof money.onthe otherhand,managementaccountingrecordsnotonlymonetarytransactions
but alsononmonetaryevents,namelytechnical changes,govtpoliciesetc.
Control: financial accountingwill notreveal whetherplansare properlyimplemented.Managament
accountingwill reveal the deviationsof actual performance fromplans.Itwillalsoindicate the causes
for suchdeviations.
Financial statement analyses
Financial statement: referstoformal andoriginal statementspreparedbyabusinessconcerntodisclose
itsfinancial information.
Nature of financial statements: recordedfacts,accountingconventions,personaljudgement,postulates
Essentialsof good financial statements:figuresshouldbe readilyavailable,shouldnotbe complex,
mustfacilitate easycomparison,shouldbe designedinaway that the attentionof readersisdrawnto
mostsignificantitems,factsshouldbe presentedinsuchaway that requireditemsandfiguresare easily
obtainedforcalculatingvariousratios,shouldreflectthe true andcorrect ideaof financial positionof
the concern,comparable figuresmake the statementmore useful
Types offinancial statements:income statementsorprofit/lossaccount,balance sheet,statementof
retainedearnings,fundsflow statement,cashflow statement,schedules

12. Importance/functionof financial statements:
• as a report of stewardship
• as a basisof fiscakpolicy
• to determine the legalityof dividends
• as guide towise dividendaction
• as a basisfor grantingcredit
• as informative forprospectiveinvestorsinanenterprise
• as a guide to the vale of investmentalreadymade
• as an aid to governmentsupervision
• as a basisfor price or rate regulations
• as a basisof taxation
financial statementsare useful to:management,creditors,bankers,investors,government
Limitationsof financial statements
• informationshownisnotprecise since basedonpractical experience andthe like
• doesnotalwaysdisclose the correctfinancial positionof businessdue toprsnl influence
• balance sheetsare staticdocs anddata not up to date
• infoinprofit/lossaccountsmaynotbe real proftsas itemsare estimated
• theyare dumband can't speakforitself andrequire thoroughanalysis
• financial statementsof one periodmaynotbe comparabke tothe onesof otherperiodsdue to
changesineconomicconditions
• do notdisclose the contributionof managementtothe efficiencyof business
Meaningof financial statementanalysis & interpretations:Financial analysis,analysisof statement,
financial statementanalysis,interpretation
Objectivesoffinancial statement analysis& interpretations:
• to interpretthe profitability andefficiencyof variousbusinessactivitieswiththe helpof profit
and lossaccount
• to assessthe financial positionsof the firm

13. • to measure the managerial efficiencyandprogressof the firm
• to judge the solvencyshorttermandlongtermsolvencyof the business
• to ascertainearningcapacityinthe future period
• to determine futurepotential of the concern
• to helpinmakingfuture plans
• to measure utilizationogvariousassetsduringthe period
• to compare operational efficiencyof similarconcernsengagedinthe same industry
Types offinancial statementanalysis: external analysis,internalanalysis,horizontal analysis,vertical
analysis
Techniquesor tools offinancial statementanalysis:
1. Comparative financialstatement
2. commonsize or measurementstatemensts
3. trendanalysis
4. ratioanalysis
5. fundsflowanalysis
6. cash flowanalysis
7. cost volume profitanalysis
Ratio Analysis
Ratio analysis: isthe processwhichinvolvescomputing,determiningandpresentingthe relationshipof
itemsor groupsof itmesof financial statemensts.
Mode of expression:ratiosmaybe expressedinanyone ormore of the followingways-
In proportion,Inrate or time or coefficient,inpercentage
Stepsin ratio analysis:Selectionof relevantinformation,calculationof ratios,comparisonof calculated
ratios,interpretationandreporting
Interpretationof ratios: single absolute ratio,groupof ratios,historical comparison,projectedratios,
inter-firmcomparison
Importance of ratio analysis:

14. • aidto measure general efficiency
• aidto measure financial solvency
• aidin forecastingandplanning
• facilitatesdecisionmaking
• helpsincontrol
• act as a goodcommunication
• aidin intrafirmcomparison
• evaluationinefficiency
Limitationsof ratio analysis:practical knowledge,ratiosandmeans,inter-relationship,nonavailability
of standardsor norms,accuracy of financial information,consistencyinpreparationof financial
statements,time lag,change inprice level
Classificationofratios:
classificationbystatements:profitandlossaccountratios,balance sheetorpositionstatementratios,
composite/mixedratios
Funds flow analysis
Fund: referstomoneyvaluesinwhateverformitmayexist.
Flowof funds: meansmovementof fundsandincludesbothinflow andoutflow.
Funds flowstatement:is a financial statementwhichrevealsmethodsbywhichthe businesshasbeen
financedandhowithas useditsfundsbetweenthe openingandclosingbalance sheetdate.
Objectivesoffunds flowstatement:
• to showhowthe resourceshave beenobtainedandused
• to highlightthe mostimportant changestakenplace duringthe time
• to showhowthe general expansionof businesshasfinanced
• to indicate relationshipbtwn profitsfromoperations,distributionof dividendandraisingnew
capital or termloans
• to have an assessmentof the workingcapital positionof the concern
Procedure for knowing flowof funds

15. 1. analyse the transactionsandfindoutthe two accountsinvolved
2. make journal entryof the transaction
3. determine whetherthe accountsinvolvedinthe transactionare currentor noncurrent
4. if both accountsinvolvedare current,itdoesnotresultinthe flow of funds
5. if both the accountsinvolvedare of noncurrentnature,it doesnotresultinthe flow of funds
6. if the accounts involvedare suchthatone is currentand otherisa non-current,thenitresultsin
flowof funds
Importance/uses/benefitsoffunds flowstatements
1. Fundsflowstatementdeterminesthe financial consequencesof businessoperations.Itshows
howthe fundswere obtainedandusedinthe past.financial managercantake correcting
actions.
2. the managementcanformulate itsfinancial policies-dividend,reserve etconthe basisof the
statement.
3. it servesasa control device,whencomparingwithbudgetedfeatures.the financial managercan
take remedial steps,if there isanydeviation.
4. it pointsoutthe soundand weakfinancial positionof the enterprise
5. it pointsoutthe causesfor changesinworkingcapital
6. it enablesbankers,creditors,orfinancialinstitutionsinassessingthe degree of riskinvolvedin
grantingcreditto the business.
7. the managementcanrearrange the firm'sfinancingmore efficientlyonthe basisof the
statement
8. varioususe of fundscan be knownand aftercomparingthemwiththe usesof previousyears,
improvementordownfall inthe firmcanbe assessed
9. the statementcomparedwiththe budgetconcernedwill show towhatextentthe resourcesof
the firmwere usedaccordingto plan and whatextentthe utilizationwasunplanned
10. it tellswhethersourcesof fundsare increasingordecreasingorconstant
Limitationsof funds flowstatement
1. the fundsflowstatementlacksoriginalitybecause itisonlyrearrangementof dataappearingin
accounts books

16. 2. it ishistorical innature.itshowswhathappenedinthe past.sonecessarily,isvalueislimited
fromthe pointof viewof future operations.
3. it indicatesfundsflowinsummaryformanditdoesnot show variouschangeswhichtake place
continuously
4. whenboththe aspectsof a transactionare non-current,eventhentheyare notincludedinthe
statement
5. it isnot an original statementbutsimplyarearrangementof datainthe financial statements
6. it isa summarizedpresentationof figuresandcannotprovide informationabovethe changes
ona continuousbasis
7. it alsoignorestransactionsbtwnlongtermassetsandliabilities
8. it isnot generallyconsideredassophisticatedtechniquesof financial analysis
9. whenbothaspectsof a transactionare current,theyare not evenconsidered
Cash flow analysis
Cash flow:meansthe inflowsandoutflowsof cash- cashreceiptsandcash paymentsduringaperios.
Usesof cash flow statement:
1. facilitatestoprepare soundfinancial policies.italsohelpstoevaluatethe currentcashposition
2. a projectedcashflowstatementcanbe preparedtoknow the future cash positionof a concern
so as to enable afirmto planand coordinate itsfinancial operationsproperly
3. it helpsintakingloansfrombanksandotherfinancial institutions
4. it helpsthe managementintakingshorttermfinancial decsisions
5. explainsthe causesforpoorcashpositininspite of substantial profitsinafirm
6. it helpsinshorttermfinancial decisionsrelatingtoliquidity
Comparisonbtwn fundsflowstatement & cash flowstatement:
1. fundsflowstatementshowsthe causesof changesinthe networkingcapital whereasthe cash
flowstatementshowsthe causesforchangesincash
2. cash flowstatementisstartedwiththe openingandclosingbalancesof cashwhile there are no
openingorclosingbalancesinfundsflow statement
3. cash flowstatementdealsonlywithcashwhereasfundsflowstatementdealswithall the
componentsof workingcapital

17. 4. cash flowstatementisusefulforshortforshort termfinancingwhilefundsflowstatementis
useful forlongtermfinancing
5. cash flowstatementisbasedoncashbasisof accountingwhile fundsflow statementisbasedon
actual basisof accounting
6. cash flowstatementdepictsonlythe changesincashpositionwhile fundsflow statementis
concernedwiththe changesinworkingcapital btwntwobalance sheetdates
7. cash isa part of workingcapital.improvementincashpositionasindicatedbycashflow
statementcanbe takenas an indicatorof improvedworkingcapital position.
Limitationsof cash flowstatement
1. revealsonlythe inflowandoutflow of cash.the cashbalance disclosedbythisstatementmay
not depictthe true liquidityposition.
2. cannot be equatedwiththe income statement.anincome statementtakesintoaccountboth
cash an non cash items.hence,cashfunddoesnotmeannetincome of business
3. workingcapital beingawiderconceptof funds,a fundflow statementpresentsamore
complete picture thancashflowstatement
Standard costing
Standard cost: isa predeterminedcostwhichiscalculatedfrommanagementstandardsof efficient
operationsandthe relevantnecessaryexpenditure.
Standard costing:is the preparationanduse of standardcosts,theircomparisonwithactual costsand
the anaysisof variance to theircausesand pointsof incidence.
Advantages of standard costing: cost control,eliminationof wastage andinefficiency,norms,locates
sourcesof inefficiency,fixingreponsibility,managementbyexception,improvementinmethodsand
operations,guidance forproductionandpricingpolicies,planningandbudgeting,inventoryvaluation
Limitationsof standard costing:
1. it iscostly,as the settingof standardsneedshightechnical skill
2. keepinguptodate standard isa problem, periodicrevisioniscostly
3. inefficientstaff isincapable of operatingthissystem
4. since itis difficulttosetcorrect standards,itisdifficulttoascertaincorrectvariance
5. industries,whichare notsubjecttofrequentchangesintechnological processorthe qualityof
material orthe character of labour,needaconstant revisionof standard.butrevisionof
standardis expensive.

18. Introduction ofstandard costing system:
steps:establishmentof costcentres,classificationandcodificationof accounts,determiningthe typesof
standardsand theirbasis,determiningthe exectedlevelof activity,settingstandards
Basic for standards: ideal standards,pastperformance basedstandards,normal standard,attainable
highperformance standard
Standards for directmaterial cost: material usage or quantitystandards,material price standards,
Standards for directlabour cost: labourtime standards,labourrate standards
Standards for overheadcost: standardoutputand itsstandard cost,standard hour
Variance analysis
Variance: isthe difference betweenastandardcostand the comparable actual cost incurredduring a
period.
Favourable variance- cost incurredislessthanstandardcost
unfavourable variance- cost incurredismore than standardcost
Utilitiesofvariance analysis:
1. variane analysissubdividesthe total variance basedondifferentcontributorycauses.
2. the sub divisionof variance establishesandhighlightsthe interrelationshipbetweendifferent
variances
3. variance analysisexplainsthe causesforeachvariance. itpaveswayfor fixingresponsibilityfor
all variances
4. highlightsall inefficientperformancesandthe etentof inefficiency
5. it isa powerful tool leadingtocostcontrol
6. it enablesthe topmanagementtopractice managementbyexceptionbyfocusingonthe
problemareas
7. it segregatesvariancesintocontrollable anduncontrollable therebyindicatingwhereactionis
warranted
8. it acts as the basisfor profitplanning
9. by revealingeachandeverydeviation,alongwiththe causes,variance analysiscreaturesand
nurturerscost consciousnessamongthe employees

19. Computationof variances: material costvariances,labouror wage variances,overheadcostvariances,
salesvariances
Budgets and budgetary control
Budget: isa financial orquantitative statementpreparedandapprovedpriortoa definedperiodof time
of the policytobe pursuedduringthe periodforthe purpose of attainingagivenobjective.
Budgetary control: is the establishmentof budgetsrelatingthe responsibilitiesof executivestothe
requirementsof apolicyandthe continuouscomparisonof actual withbudetedresults,eithertosecure
by individual actionthe objectivesof thatpolicyorto provide abasisfor itsrevision.
Objectivesofbudgetary control:
1. to define the goal of the enterprise
2. to provide longandshortperiodplansforattainingthese goals
3. to co ordinate the activitiesof differentdepartments
4. to operate varouscost centresanddepartmentswithefficiencyandeconomy
5. to eliminatewaste andincreasthe profitability
6. to estimate capital expenditurerequirementsof the future
7. to centralize the control system
8. to correct deviationsfromestablishedstandards
9. to fix the responsibilityof variousindividuals
10. to ensure thatadequate workingcapital isavailable forthe efficientoperationof business
11. to indicate tothe managementasto where actionisneededtosolve problemswithoutdelay
Advantages of budgetarycontrol
1. definesthe objectivesandpoliciesof the undertakingasawhole
2. it isan effectivemethodof controllingthe activitiesof variousdepartmentsof abusinessunit.
3. it securespropercoordinationamongthe activitiesof variousdepartments
4. it helpsthe managementtofix upresponsibilityincase the performance iselow expectations
5. it helpsthe managamenttoreduce wastefulexpenditure.
6. it bringsinefficiencyandeconomybypromotingcostconsciousnessamongthe employees

20. 7. it facilitatescentralizedcontrol withdecentralizedactivity
8. it aidsinobtainingbankcredit
9. it helpsinestimatingthe financialneedsof the concern.
10. it facilitatesintroductionof standardcosting
11. it acts as internal auditbya continuousevaluationof departmentalresults
12. it providesabasisforintroducingincentive,remunerationplansbasedonperformance
13. it helpsinthe smoothrunningof the businessunit.therewillbe nostoppage of productonon
account of shortage of raw materialsorworkingcapital.
14. it indicatestothe managementastowhere actionisneededtosolve problemswithoutdelay
Limitationsof budgetary control:
1. the preparationof a budgetunderinflationaryconditionsandchanginggovtpoliciesisreally
difficult.
2. accuracy in budgetingcomesthroughexperience.hence itshouldnotbe reliedontomuchinthe
intial stages.
3. budgetisonlya managementtool.itisnota substitute formanagementindecisionmaking.
4. budgetinginvolvesheavyexpenditure,whichsmall concernscannotafford.
5. there will be active andpassive resistance tobudgetarycontrol asitpointsoutthe efficiencyor
inefficiency
6. the successof budgetarycontrol dependsonwillingtocooperationandteamwork.thisisoften
lacking.
Installationof budgetary control system:organizationchart,budgetcentre,budgetcomitee,budget
manual,budgetperiod,keyfactor
Essentialsof budgetarycontrol system:
1. budgetarycontrol systemshouldhave the wholeheartedsupportof management
2. a budgetcommitee shouldbe establishedconsisitingof the budgetdirectorandthe executives
of variousdepartmentsof the organization
3. there shouldbe properfixationof authorityandresponsibility.the delegationof authority
shouldbe done ina properway.
4. the budgetfiguresshouldbe realisticandeasilyattainable

21. 5. variationbtwnactual figuresandbudgtetedfiguresshouldbe reportedpromptlyanclearlyto
the appropriate levelsof management.
6. a good accountingsystemisessential tomake budgetingsuccessfull
7. the budgetshouldnotcost more to operate thanisworth
Classificationofbudgets:
Classificationaccording to time:short periodbudget,longperiodbudget,currentbudget
Classificationaccording to function:salesbudget,productionbudget,materialsbudget,directlabour
budget,factoryoverheadbudget,administrative expensesbudget,sellinganddistributionoverhead
budget,capital expenditure budget,cashbudget,masterbudget
Classificationaccording to flexibility:fixedbudget,flexiblebudget
Zero Base Budgeting:isa managementtechnique aimedatcostreductionandoptimumutilizationof
resources.
Stepsin zero base budgeting:determinationof objectives,determinationof the extentof application,
identificationof decisionunit,cost-benefitanalysis,preparationof budgets
Advantages of zerobase budgeting:
1. it providesasystematicwaytoevaluate differentoperationsandprogrammers.noarbitrarycut
or increase inbudgetestimatesare made.
2. it enablesthe managementtoallocate resource accordingtobenefitorimportance
3. it ensuresthatonlyessential programmersare unertakenandactivitiesare performedinthe
bestpossible manner.
4. it helpsinidentifyingandcontrollingwastefulexpenditure
5. doesnotallowsome expenditure/activitysimplybecauseitwasdone inthe past.management
isrequiredtoreviewactivitiesbefore allowingfundsforthem.thispromotesoperational
efficiency
6. appropriate forstaff andsupportareas
7. budgetingwillbe relatedtoorganizational goals.onlythoseactivitieswhichwill helpinthe
achievementof organizational goalswill be allowed
8. it isa convenienttool inintegratingthe mangerialfucntionsof planningandcontrol
Marginal costing

22. Marginal cost: referstoincrease or decrease inthe amountof cost on account of increase of production
by a single unit.
Marginal costing: isa technique where onlythe variable costsare consideredwhile computingthe cost
of a product.
Salientfeaturesof marginal costing:
1. isa technique of control ordecisionmaking
2. total cost is classifiedasfixedandvariablecosts
3. fixedcostsare ascertainedseparatelyandexcludedfromthe costof products.
4. the stock of work inprogressand finishedgoods.stocksare valuedat variable cost.fixedcosts
will notbe includedinvaluationof costs.
5. contributionisascertainedbyreducingthe marginal costor variable costfromthe sellingprice.
6. the profitabilityof products,departmentsorprocessisdeterminedonthe basisof contribution.
7. profitsare ascertainedbyreducingthe fixedcostfromthe contributionof all the productsof
departmentsorprocessor divisionsetc.
8. the profitabilityof variouslevelsof activityisascertainedbycalculatingcostvolume-profit
analysis
Meritsof marginal costing: simplicity,stockvaluation,meaningful reporting,effectof fixedcosts,profit
planning,costcontrol andcost reduction,pricingpolicy,helpful tomanagement
Demeritsof marginal costing: difficulttoanalyse overhead,time lementisignored,notsuitable for
external reporting,undervaluationof stocks,automation,productionaspectisignored,notapplicablein
all typesof business,misleadingpricing
Important concepts of cost-volue-profit-analysis:fixedcost,variable costs,contribution,contribution
to sales
Break evenanalysis and break evenpoint: isa methodof studyingrelationshipbetweenrevenueand
costs inrelatonto salesvolume of abusinessenterprise anddeterminationof volumeof salesatwhich
total costs are equal torevenue.
Break evencharts: graphical representationof the break-evenpoint
Advantages of break-evencharts:
1. total cost, variable costandfixedcostcan be determined.
2. BE outputor salesvalue canbe determined

23. 3. cost, volume andprofit,relationshipcanbe studiedandtheyare veryuseful tothe managerial
decision-making
4. interfirmcomparisonispossible
5. it isuseful forforecastingplansandprofits
6. the bestproductsmix can be selected
7. total profitscan be calculated
8. profitabilityof differentlevelsof activity,variousproductsorprofit,plantcanbe known.
9. it ishelpful forcostcontrol
Limitationsof break evencharts
1. constantsellingprice isnottrue
2. detailedinfocan'tbe knownfromthe chart
3. no importance isgiventoopeninganclosingstocks
4. variousproductmix on profitscannotbe studiedasthe studyisconcernedwithonlyone sales
mix or productmix
5. if the businessconditionschange duringaperiod,the becbecomesoutof data as itassumesno
change in businesscondition.
Types ofbreak evencharts: simple,contribution,profit,profitchartfor productwise analysis,cash
breakevenchart,control bec
Applicationsof marginal costingtechniques:Salesmix decisions,keyfactor,make orbuydecisions,
fixationof sellingprice,calculation of listprice
Capital budgeting
Capital budgeting:isthe processof makinginvestmentdecisionsregardingimprovingthe fixedassets,
the benefitsof whichare expectedtobe receivedoveranumberof yearsinthe future.
Featuresof capital budgeting:
1. capital budgetingdecsisionsare essentiallyalongtermfunction
2. huge fundsare investedinlongtermassets
3. future benefitswilloccurto the firmovera seriesof years
4. involve the exchangeof currentfundsforthe benefitstobe achievedlater

24. 5. have a significanteffectonthe profitabilityof the concern
6. theyare strategicinvestmentdecisions
7. theyare irreversibledecisions
Importance of capital budgeting:huge investments,long-termimplications,longtermimpacton
profitability,growthanexpansion,costoverruns,multiplicutyof variabiles,topmanagementactivity,
complicaciesof investmentdecisions,nationalimportance
Capital budgetingprocess:identificationof investmentproposals,screeingthe proposals,evaluationof
variousproposals,establishingpriorities,final approval,implementingproposals,performance review
Factors influencingcapital budgetingdecisions:availabilityof funds,minimumrate of returnon
investment,cut-off point,returnexpectedfromthe investment
Types ofcapital expenditure:expenditure increasesrevenue,expenditure reducingcosts
Classificationofcapital budgetingproposals: independantproposals,dependentcontingentproposals,
mutuallyexclusive proposals
Capital budgetingappraisal methods:
a) Traditional methods:pay back method,accountingrate of returnor average rate of returnmethod
b) Time adjusted or discountedcash flow methods: Netpresentvalue,profitabilityindex,internalrate
of return