Accounting provides essential financial information to both internal and external users of a business. It involves systematically recording, classifying, and summarizing financial transactions, as well as communicating the results of business operations and financial position. The key purposes of accounting are to maintain records, determine profits and losses, ascertain the financial position, and provide information to stakeholders like managers, investors, and tax authorities for decision making.
It's a good presentation for those students who just started to learn accounting.
Basic theory of accounting must be clear, and there for here I have uploaded this presentation.
It's a good presentation for those students who just started to learn accounting.
Basic theory of accounting must be clear, and there for here I have uploaded this presentation.
Definition of accounting, what is accounting cycle? And how to record business transactions, it consist on various series which started from journal entries, ledger, and trial balance. key terms of accounting. The Accounting Rules of debit and credit, Debit money, assets and liabilities, Bad Debits, Balance Sheet, Double-entry, bad debts, inventory, Expenses, depreciation , Accumulated Depreciation , types of ledger account, categories of general ledger account, Assets and Liabilities, Owners’ Equity, Revenue Expansion of the Basic Equation and Expense, and examples.
ACCOUNTANCY PROJECT
ON THE TOPIC
CONTENTS:
MEANING OF BOOK KEEPING
BOOK KEEPING IS A PART OF ACCOUNTING THAT IS CONCERNED WITH RECORDING OF FINANCIAL TRANSACTIONS IN THE BOOKS OF ACCOUNTS.
NOTE : EVENTS RELATED TO BUSINESS THAT CAN BE EXPRESSED IN TERMS OF MONEY ONLY ARE RECORDED.
STEPS INVOLVED IN BOOK KEEPING
AIMS OF BOOK KEEPING
RELATIONSHIP BETWEEN BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY.
DIFFERENCE BETWEEN BOOK KEEPING AND ACCOUNTING.
THANK YOU
Objectives of the study :
1. To study the meaning, definition, and advantages of computerized accounting.
2. To study the comparison between Manual Accounting & Computerized Accounting System.
3. To know the accounting software Tally, it’s features and different versions.
4. To study the preparation of vouchers, steps, selections, types, altering, deleting of vouchers.
5. To understand the feeding of data and generation of report.
Although 'Accounting' has been defined by the different scholarly ways, its nature of accounting is essentially described. Conceptually, accounting is an art of recording, classifying summarizing, and interpreting the financial result. It defined as an art because it consists of certain creativity, value judgment, and skill that assist us to attain certain specific goals. The nature of Accounting mainly divided two views of point:
1. Structural viewpoint. 2. Functional viewpoint.
Here are some basics of accounting like its definition, steps involved in it, book-keeping, objectives of accounting, functions and limitations of accounting for the beginners.
It is been tried to explain all these things in a quite easy manner.
Hope that it matches what you were looking for.
The PPT consists of all the basics of Financial Accounting like Meaning, Importances, Branches, Users etc.
Accounting is the identifying , recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to various uders of accounting informations
Accounting Cycle.
Definition of accounting, what is accounting cycle? And how to record business transactions, it consist on various series which started from journal entries, ledger, and trial balance. key terms of accounting. The Accounting Rules of debit and credit, Debit money, assets and liabilities, Bad Debits, Balance Sheet, Double-entry, bad debts, inventory, Expenses, depreciation , Accumulated Depreciation , types of ledger account, categories of general ledger account, Assets and Liabilities, Owners’ Equity, Revenue Expansion of the Basic Equation and Expense, and examples.
ACCOUNTANCY PROJECT
ON THE TOPIC
CONTENTS:
MEANING OF BOOK KEEPING
BOOK KEEPING IS A PART OF ACCOUNTING THAT IS CONCERNED WITH RECORDING OF FINANCIAL TRANSACTIONS IN THE BOOKS OF ACCOUNTS.
NOTE : EVENTS RELATED TO BUSINESS THAT CAN BE EXPRESSED IN TERMS OF MONEY ONLY ARE RECORDED.
STEPS INVOLVED IN BOOK KEEPING
AIMS OF BOOK KEEPING
RELATIONSHIP BETWEEN BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY.
DIFFERENCE BETWEEN BOOK KEEPING AND ACCOUNTING.
THANK YOU
Objectives of the study :
1. To study the meaning, definition, and advantages of computerized accounting.
2. To study the comparison between Manual Accounting & Computerized Accounting System.
3. To know the accounting software Tally, it’s features and different versions.
4. To study the preparation of vouchers, steps, selections, types, altering, deleting of vouchers.
5. To understand the feeding of data and generation of report.
Although 'Accounting' has been defined by the different scholarly ways, its nature of accounting is essentially described. Conceptually, accounting is an art of recording, classifying summarizing, and interpreting the financial result. It defined as an art because it consists of certain creativity, value judgment, and skill that assist us to attain certain specific goals. The nature of Accounting mainly divided two views of point:
1. Structural viewpoint. 2. Functional viewpoint.
Here are some basics of accounting like its definition, steps involved in it, book-keeping, objectives of accounting, functions and limitations of accounting for the beginners.
It is been tried to explain all these things in a quite easy manner.
Hope that it matches what you were looking for.
The PPT consists of all the basics of Financial Accounting like Meaning, Importances, Branches, Users etc.
Accounting is the identifying , recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to various uders of accounting informations
Accounting Cycle.
Finance for non finance for employee, business man and corporatete Bibek Prajapati
The ability to effectively read financial reports and data is crucial to the
processes of day-to-day management, strategic planning and
decision-making in any firm.
-The proper understanding of the various
financial concepts and instruments and their implications to the firm’s
health and performance in the market place are indispensable for
managers who typically come from various functions within the firm.
-The comprehensive program of Finance for Non-Finance Managers
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Meaning/ WHY
Benefits
Key Personal Responsibility
Type of business
Financial planning
Three principle of corporate Finance
Why Financial Accounting
Fundamentals of Financial Accounting
Procedural Aspects of Accounting
Objectives of accounting
Function of Accounting
Accounting – Classification
Difference between Management Accounting and Financial Accounting
Bookkeeping &Process of accounting
Steps/Phases of Accounting Cycle
User of accounting Information
BASIC ACCOUNTING TERMS
Types of Accounts
Accounting Equation
ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING
CAPITAL AND REVENUE TRANSACTIONS
Cost Accounting meaning , objective
ROLE OF A COST ACCOUNTANT IN A MANUFACTURING ORGANISATION
COST CONCEPT, TYPES AND CLASSIFICATION
Cost centre and cost unit
ELEMENTS OF COST
CLASSIFICATION OF COST
TYPES / TECHNIQUES OF COSTING
METHODS OF COSTING & THEIR APPLICABILITY
COGS, INVENTRY
Capacity
Budget
Corporate objective
Cost control and variance
Standard costing
Cash flow statement
Annual Report
Ratio analysisis
Capital Budgeting
Risk and Return
Regulators
Constitutional Aspects of Taxation by the Union and States
Financial Relations between the
Union and the States
Indirect Taxes : Union and the States
Taxation by the Union and the States
REVENUE ADMINISTRATION
Gst
Existing Indirect Tax System
ACTIVE INTERFACE WITH IT SYSTEMS
INCOME TAX LAW : AN INTRODUCTION
Income-tax Act
The Finance Act
CONCEPT OF INCOME
Stapes of TOTAL INCOME AND TAX PAYABLE
Deductions from Gross Total Income
RETURN OF INCOME
Introduction, Accounting as an Information System, Branches of Accounting, Meaning of Financial Accounting, Users of Accounting Information- GAAPS- Basic Concepts and Conventions- Accounting Standards issued by ICAI and IFRS issued by IASB- Manual Vs Computerized Accounting.
Financial Accounting and Management accounting are the two branches of accounting.
Financial accounting stresses on giving true and a fair view of the financial position of the company to various parties.
On the contrary, management accounting aims at providing both qualitative and quantitative information to the managers, so as to assist them in decision making and thus maximizing the profit.
Financial Accounting is the branch of accounting which keeps track of all the financial information of the entity. Management Accounting is that branch of accounting which records and reports both the financial and nonfinancial information of an entity.
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1. Accounting is often called the language of business because the
purpose of accounting is to communicate or report the results of
business operations and its various aspects to various users of
accounting information. In fact, today, accounting statements or
reports are needed by various groups such as shareholders,
creditors, potential investors, columnist of financial newspapers,
proprietors and others..
In Summary Accounting can be define as a process of recording
, classifying and summarizing financial transactions of a business
in such a manner that the result of its operations and financial
positions can be ascertained at the end of a given period and
communicating them to various users.
2. Purpose of Accounting
To maintain complete and systematic records:
Accounting is done to keep a systematic record of financial transactions. In the
absence of accounting there would have been terrific burden on human
memory which in most cases would have been impossible to bear.
To find out result of business operation:
Accounting helps in ascertaining the net profit earned or loss suffered on
account of carrying the business. This is done by keeping a proper record of
revenues and expense of a particular period. The Profit and Loss Account is
prepared at the end of a period and if the amount of revenue for the period is
more than the expenditure incurred in earning that revenue, there is said to be
a profit. In case the expenditure exceeds the revenue, there is said to be a loss.
To ascertain the financial position of the business:
The Profit and Loss Account gives the amount of profit or loss made by the
business during a particular period. However, it is not enough. The
businessman must know about his financial position i.e. where he stands?
What he owes and what he owns? This objective is served by the Balance Sheet
or Position Statement. The Balance Sheet is a statement of assets and liabilities
of the business on a particular date. It serves as barometer for ascertaining the
financial health of the business.
3. Purpose of accounting
To communicate accounting information:
Financial information is essential to its users for taking financial decisions. Therefore
accounting communicates the information of operating results and financial positions
of the business to different users for their decision making purpose.
To comply with legal requirements:
Some business such as joint stock companies are required to submit their accounting
reports prepared under the double entry system by considering the Generally Accepted
Accounting Principles (GAAP). Therefore an important purpose of accounting is to
comply with such legal requirements.
To protect business properties :
Accounting provides protection to business properties from unjustified and
unwarranted use. This is possible on account of accounting supplying the following
information to the manager or the proprietor:
(I) The amount of the proprietor's funds invested in the business.
(ii) How much the business has to pay to others?
(iii) How much the business has to recover from others?
(iv) How much the business has in the form of (a) fixed assets, (b) cash in hand, (c) cash
at bank, (d) stock of raw materials, work-in-progress and finished goods?
To help to determine the amount of tax:
Accounting provides the financial information to the tax office which helps to
determining the amount of tax.
4. Nature of accounting
Accounting as science or art
Science is a systematic body of knowledge. It is based on some fundamental
principles. Accounting has its own principles e.g. the double entry system, which
explains that every transaction has two fold aspects i.e. debit and credit. It also
lays down rules of journalizing. So we can say that accounting is a science.
Art requires a perfect knowledge, interest and experience to do a work efficiently.
Accounting is an art as it also requires knowledge, interest and experience to
maintain the books of accounts in a systematic manner. Everybody cannot
become a good accountant. It can be concluded from the above discussion that
accounting is an art as well as a science
Accounting as an information system
Accounting is information system. it use financial transactions as inputs
processed them and provides financial information as its output to the decision
maker.
Accounting as a process:
Accounting is a process of systematic recording classifying and summarizing
financial transactions and interpreting financial information to the users.
5. Nature of accounting
Accounting as a language
Accounting is rightly referred the "language of business". It is one means
of reporting and communicating information about a business. As a
language accounting has common features as regards rules and symbols.
Both are based and propounded on fundamental rules and symbols. The
expression, exhibition and presentation of accounting data such as a
numerals and words and debits and credit are accepted as symbols which
are unique to the discipline of accounting.
Accounting as a profession
Accounting is very much a profession. A profession is a career that
involves the acquiring of a specialized formal education before rendering
any service. Accounting is a systematized body of knowledge developed
with the development of trade and business over the past century. The
accounting education is being imparted to the examinees by national
and international recognized the bodies. The candidate must pass a
vigorous examination in Accounting Theory, Accounting Practice,
Auditing and Business Law.
7. Financial Accounting
Financial accounting is concerned with monitoring, recording
and preparing financial statement. It deals with the recording,
classifying, summarizing and interpreting of a business
financial performance and economic conditions to interested
users or stakeholders. Financial accounting produces financial
statements and reports for providing accounting information
to external parties like shareholders, creditors, bank, tax
authorities, government agencies etc. It is based on Generally
Accepted Accounting Principle (GAAP).
It prepares different financial statement to provide information
to the external users. They are:
Income statement (Profit and Loss account)
Statement of Retained earnings (Profit and loss appropriation
account)
Balance sheet (position statement)
Cash flow statement (Statement of cash flow)
8. Objectives of Financial Accounting:
Financial accounting serves the information needs of
decision makers who are outside the organization. Its
main objectives of financial accounting can be
summarized in the following manner:
To maintain the systematic records of financial
transaction and event.
To ascertain the results of operations during a period.
To ascertain the financial position.
To maintain a control over business’s assets.
To Providing information to tax authorities and other
government agencies.
To provide a reliable set of data with which to prepare
financial reports for analysis purposes (for owners,
lenders, investors, etc).
9. Limitations of Financial Accounting
Provide only historical information.
Not helpful in fixation of selling price.
No classification of expense and account.
No data for decision making.
10. Meaning of Cost Accounting
Cost accounting is the technique and process of
ascertaining cost of any goods and services produced by
the manufacturing entity.
It is the process of analyzing, classifying of cost which
helps to control cost and decision making.
It is one of the major accounting system which is
associated with the determination of cost of production
of a product.
It involves classification, analyses and interpretation of
cost. It provides detailed cost information as and when
required by the management for budgeting, product
costing, pricing and controlling of cost.
11. Objectives of cost accounting
1.To ascertain the cost of product, service, activity etc.
2. To determine the selling price.
3. To control cost of product, service or activity.
4. To provide information necessary for decision
making.
5. To measure the performance of department.
6. To facilitate the preparation of financial and other
statements
12. Difference between Financial Accounting and Management
Accounting
Basis Cost Accounting Financial Accounting
Purpose The main purpose of cost accounting is
to analyze, ascertainment and control
of cost.
The main purpose of financial
accounting is to record financial
transactions, finding out profit or loss
and financial position.
Reporting
period
Cost accounting presents cost
information at frequent intervals.
Financial accounting presents
financial information at the end of the
accounting period.
Legal
requiremen
t
Cost accounting generally kept
voluntarily to meet the requirements of
the management.
Financial accounting is kept
compulsory in such a way as to meet
the requirement of the Companies
Act and income Tax Act.
Users It provides information to external as
well as internal users.
It provides information to external
users.
Principle It is not based on GAAP. It is based on GAAP.
Orientation It deals with past as well as future. It deals only with past.
13. Management Accounting
Management Accounting is a process of identifying,
measuring, accumulation, analysis, presentation,
interpretation and communication of financial
information which is used by management to plan,
control and decision making within an
organization.
Management Accounting is the Accounting for
Management because basically it fulfill the
information needs of internal users i.e. managers.
Management Accounting is the accounting for
planning, controlling and decision making
activities of an affair.
14. Features of management accounting:
Future oriented
No uniform method
Provides data but not decision
Stresses an causes and effect relationship
Not continuous in nature
Special concept and technique are used
15. Objectives of Management Accounting
To help in planning and formulation of policy.
To help in the interpretation of financial information
To help in cost controlling .
To help in decision making
To help in Budgeting.
To help in measuring the performance of managers
and sub-units within the organization
16. Difference between management accounting and
financial accounting:
Basis Management Accounting Financial accounting
Period No fixed period, many times in a year
can be prepared the reports by
management accounting.
A fixed period of an accounting
year is necessary to apply for
financial accounting.
Scope Wide scope than financial accounting. Narrow scope than the
management accounting.
Auditing No need to final auditing Compulsory for final auditing
principle It is not based on GAAP It is based on GAAP
compulsor
y
No compulsory for applying
management accounting.
Compulsory for preparing
financial accounting.
nature It is future oriented It is prepared on the basis of past
transaction.
objectives To provide information to the
management for planning, controlling
and decision making
To know the overall profitability
and financial position of the
organization.
Users Managers are the users of management
accounting.
External parties are the users of
financial accounting.
17. Nature and Scope of Management Accounting
Tools Applicable in Management A/C Origin of Tools
Cost Determination
Regression, Probability, Hypothesis test
Linear Programming
Marginal Costing
Analysis of Customers, Competitors.
Accounting information system.
SWOT Analysis.
Financial performance Analysis.
Time value of Money.
Tax effect.
Cost Accounting
Statistics
Operation management
Economics
Marketing
MIS
Strategic Management.
Financial Accounting
Financial Management.
Tax Planning
18. Limitations of Management Accounting
Based on Assumptions and Estimates.
Based on Historical Accounting Information
Lack of Knowledge
Intensive decision
Management Accounting is only a tool.
Evolutionary Stage.
Subjective.
19. Business Entity Concepts
This concept assumes that, for accounting purposes,
the business enterprise and its owners are two separate
independent entities. Thus, the business and personal
transactions of its owner are separate. For example,
when the owner invests money in the business, it is
recorded as liability of the business to the owner
20. Going Concern Concept
This concept states that a business firm will continue
to carry on its activities for an indefinite period of
time.
Simply stated, it means that every business entity has
continuity of life. Thus, it will not be dissolved in the
near future.
This is an important assumption of accounting, as it
provides a basis for showing the value of assets in the
balance sheet.
21. Money Measurement Concept:
This concept assumes that all business
transactions must be in terms of money .Thus, as
per the money measurement concept,
transactions which can be expressed in terms of
money are recorded in the books of accounts. But
the transactions which cannot be expressed in
monetary terms are not recorded in the books of
accounts.
22. Cost Concept
Cost concept states that all assets are recorded in the
books of accounts at their purchase price, which
includes cost of acquisition, transportation and
installation and not at its market price.
23. Accounting Period Concept
This concept assumes that, indefinite life of business is
divided into parts. These parts are known as
Accounting Period , which is normally of one year. All
the transactions are recorded in the books of accounts
on the assumption that profits on these transactions
are to be ascertained at the end of an accounting
period.
24. Revenue Concept (Realization
Concept)
This concept states that revenue from any business
transaction should be included in the accounting
records only when it is realized. The term realization
means creation of legal right to receive money.
Revenue is said to have been realized when goods or
services are actually delivered to customer.
25. Matching Concept
This concept provides guidelines as to how the profit
or loss of a business should be determined. The
concept, therefore, states that the revenue earned in a
period has to be matched with the expenses incurred
in the same period so as to find out the true profit or
loss of the business.
26. Convention of Accounting
Convention of Conservation
Convention of Full disclosure
Convention of consistency
Convention of Materiality
27. Convention of Conservation
The convention of conservation is accounting policy of
anticipating possible future losses but not future gain .
This policy tends to understate rather than overstate
net assets and net income therefore lead companies to
play safe. For ex. Closing stock is value at cost or
market price whichever is less.
It is a policy of anticipating possible future losses but
not future gains.
28. Convention of full disclosure
According to this convention, accounting reports
should disclose fully and fairly the information they
purport to represent. They should be honestly
prepared and sufficiently disclose information which is
of material interest proprietors, to present and
potential creditors and to investors. This convention is
gaining more importance because most of the big
businesses are run by joint stock companies where
ownership is divorced from management
29. Convention of Consistency
According to this convention, accounting practices
should remain unchained from one period to another.
For example, if stock is valued at “cost or market prices
whichever is less” this principle should be followed by
year after year, if depreciation is charged on fixed
assets according to diminishing balance method, it
should be done year after year. This is necessary for
purposes of comparison. However, consistency does
not mean inflexibility.
30. Convention of Materiality
According to this convention, the accountant should
attach importance to material details and ignore
insignificant details. This is because accounting
otherwise will be unnecessarily overburdened with
minute details. If the disclosure or non disclosure of an
information must influence the decision of the user of
financial statements than that information should be
disclosed.
31. Financial Statement
A written report which describes the financial health
of a company is known as financial statement. It
represents a formal record of the financial activities of
an entity. These are written reports that quantify the
financial strength, performance and liquidity of a
company. Financial statements are the end product of
financial accounting system prepared under Generally
Accepted Accounting Principle (GAAP). It is a basis of
communicating financial affairs to the outside world.
32. Financial Statements
Income Statement: Income Statement, also known as the
Profit and Loss Account, reports the company's financial
performance in terms of net profit or loss over a specified period.
Statement of Retained Earning: Statement of retained
earning explains the changes in a company's retained earnings
over the reporting period.
Balance Sheet: Balance sheet is also referred to as a position
statement, reports on a company's assets, liabilities, and
ownership equity at a given point in time.
Cash Flow Statement: Cash Flow Statement, presents the
movement in cash and cash equivalent over a period. The
movement in cash flows is classified into Operating Activities,
Investing Activities, and Financing Activities.
Statement of Changes in Equity: Statement of Changes in
Equity details the changes in owners' equity over a period.
33. Income Statement
Particular Amount Amount
Revenue:
Sales revenue
Interest received
Commission received
Rent received
Gin on sales of assets
Other service revenue etc.
Total Revenue
Less: expenses:
Cost of goods sold
Office expenses
Administrative expenses
Selling and distribution expenses
Tax expenses
Other income and expenses etc.
Total Expenses
Net income
******
******
*****
******
*****
*****
*****
*****
******
****
****
*******
******
*******
********
34. Statement of Retained Earning
Retained earnings are the portion of net income not
paid out to investors in the business as dividends.
The Statement of Retained Earnings explains the
change in the retained earnings account and in
dividends over a period of time.Particular Amount
Beginning Balance of
Retained earning
+++
Add: Net income +++
Less: Net loss (+++)
Total Retained Earning +++
Less: Dividend Paid (+++)
Ending balance of Retained
Earning
+++
35. Balance Sheet
Assets = shareholder’s equity+ liabilitiesAssets Amou
nt
Amou
nt
Current Assets +++
Plant, Property and Equipment +++
Investment +++
Intangibles +++
Total Assets +++
Liabilities
Current liabilities +++
Non-current liabilities +++
Total liabilities +++
Owners’ Equity
Contributed capital +++
Retained earning +++
Total Owners’ Equity +++
36. Cash Flow Statement
The statement that shows cash inflows and outflows of
a firm for a specified period is called the cash flow
statement. Cash flow statement demonstrates where
the cash has come during the period and what the firm
has done with the available cash. Cash flow statement
is divided into three sections. They are:
Cash flow from operating Activities.
Cash flow from investing Activities.
Cash flow from financing Activities.
37. Cash Flow Statement.
Operating Activities Cash flow from operating activities includes
cash inflow and cash outflow from normal
business operation
Investing Activities Cash flow from investing activities reports the
purchase and sale of long-term investments and
fixed assets.
Financing Activities Cash flow from financing activities reports cash
collection and cash payment from capital stock
and long term liabilities.
38. Cash Flow Statement
Particular Amount
Cash flow from operating activities +++
Cash flow from investing activities +++
Cash flow from financing activities +++
Total cash or changes in cash position +++
Add: Beginning cash and cash equivalent +++
Ending cash and cash equivalent +++
39. Basic Cost Concept, Cost Classification and Estimation
Cost Concept:
Cost may be defined as the amount of
expenditure incurred on production of goods and
providing services.
Cost denotes the monetary resources that have been
sacrificed to obtain particular objectives.
Cost is the amount of monitory resources given up in
exchange for some goods and services. The resources
given up are generally expressed in monetary terms.
40. Cost Object and Cost Unit
Cost object:
A cost object is for which we wants to compute cost.
A cost object is any activity for which a separate measurement of
cost is desired.
Common example of cost objects are: product lines, geographic
territories, customers, departments or anything else for which
management would like to quantify cost.
Cost unit :
Cost unit is a unit of measurement of costs for the cost object at a
given situation.
It is the unit of product, service or time in relation to which costs may
be ascertained. For e.g. direct machine hour in case of machine
department, credit hour in case of college, tone in case of iron,
passenger kilometer in case of transport etc
41. Cost Centre
A cost centre may a department, a division, a
branch, a unit, a product or a person which are
authorized and responsible for an expense
42. Classification of Cost
Classification of cost refers to grouping of costs as per their
similar nature and element. It is a systematic arrangement of cost
according to their common features. Such a classification helps
in planning and controlling of cost of product.
important classification of cost is as under:
Classification According to the element of cost:
1. Material :The substance from which a product is made is known as
material.
a) Direct Material: The material which becomes an integral part
of a finished product and which can be conveniently assigned to
specific physical unit is termed as direct material.
b) Indirect Material : The material which is used for purposes
ancillary to the business and which cannot be conveniently assigned
to specific physical units is termed as indirect material.
43. 2. Labor : For conversion of materials into finished goods, human
effort is needed and such human effort is called labor.
a. Direct labor: The labor which actively and directly takes part in
the production of a particular commodity is called direct labor.
b. Indirect labor : The labor employed for the purpose of carrying
out tasks incidental to goods produced or services provided, is
indirect .It cannot be practically traced to specific units of output.
Wages of storekeepers, foremen, timekeepers, directors’ fees labor.
3. Expenses :
a. Direct Expenses: These are the expenses that can be directly,
conveniently and wholly allocated to specific cost centers or cost
units.
b. Indirect Expenses : These are the expenses that cannot be directly,
conveniently and wholly allocated to cost centers or cost units.
Examples of such expenses are rent, lighting, insurance charges.
44. Classification of cost on the basis of function:
a. Manufacturing cost: All the costs involved in the process of
production within the factory are called manufacturing cost. It
includes the cost involved from processing of raw materials into the
finished product. It is also called production cost or factory cost or
work cost. It includes direct material, direct labor, direct expenses and
manufacturing overhead.
b. Office and Administrative cost: All expenses related to
general administration including the expenditures incurred in
formulating the policy, directing the organization and controlling the
operations of an organization and not related to production,
distribution and selling are called administrative cost.
c. Selling and distribution cost : All expenses incurred in the
process of selling and distribution of finished products fall under these
expenses.
45. Classification According to the Behaviors or change in
activity or volume
a. Fixed Cost: If any cost remains constant in total at any level
of activity within the relevant range, it is called fixed cost.
Fixed costs are those that do not vary with output or
production activity. Fixed cost accrues primarily with the
passage of time. Therefore, it is also called periodical cost.
Example: salary of factory supervisor, rent of the factory,
depreciation of plant and equipment, salary paid to office staff
etc.
Features:
Total fixed costs are unaffected by the change in volume of
activity or output.
Fixed cost per unit decreases with the increase in output.
Fixed costs are not within the control of department head.
They are controllable from the top level of management.
Fixed costs are capacity cost, time cost, or committed cost.
46. b. Variable cost: cost which change proportionately with
volume of output or services are called variable costs. They
increase or decrease in total amount with the increase or
decrease in volume of output. However the per unit
variable cost is constant. Example: direct material, direct
chargeable expenses, direct labor etc.
Features:
Such costs are assumed to be constant per unit
Total costs change proportionately with the changes in
production level.
This type of cost is within the control of departmental
head.
47. Mixed cost or Semi-variable cost or semi-fixed
cost: The cost which are partly fixed and partly
variable in nature are called semi-variable cost. These
types of costs remain constant up to certain level of
production and increase beyond that level of
production. However, the total cost would not increase
proportionately. Example: salary of supervisors,
travelling salesmen salary, electricity expenses,
telephone expenses etc.
48. Classification according to managerial decision:
a. Relevant cost : The costs which will be changed by the managerial
decision are known as relevant cost. Relevant costs are future costs
which vary as a consequence of the decision. For example, if a
manufacturer decided to drop one of its products, the cost required for
material and labor would disappear. In this case, the cost of raw
material and labor are relevant cost.
Relevant cost are future cost
They will be different for each alternative.
b. Irrelevant cost : Costs which remain unaffected by the managerial
decision is called irrelevant cost. This type of cost has to bear under
each alternative decision. All past costs are irrelevant cost. In the above
case, the depreciation of equipment is irrelevant cost.
49. Avoidable and unavoidable cost:
Some times the terms avoidable and unavoidable costs are
used instead of relevant and irrelevant cost. Avoidable costs
are those costs that may be saved by not adopting a given
alternative, whereas unavoidable costs cannot be saved.
Therefore, only avoidable costs are relevant for decision
making purposes. The decision rule is to accept those
alternatives that generate revenue in excess of the avoidable
costs.
50. On the Basis of Association with Product
Product Cost:
The costs which are incurred while making a product are known
as product cost. They are also known as manufacturing cost or
inventorial cost because they are considered for inventory
valuation. In other words, product cost or inventorial cost are
those cost which are taken as assets when they are incurred
(when goods are produced) and cost of goods sold when the
goods are sold. Product cost includes direct material, direct labor
and manufacturing overhead or factory overhead.
Period Cost:
Those cost which are not considered at the time of valuation of
inventories are called period cost. Period costs are not taken as
assets so they are recorded as expenses on that year in which they
are incurred. Period costs are incurred either in selling activities
or the passage of time. Product cost includes office & general
expenses and selling & distribution expenses.
51. Opportunity Cost
An opportunity cost is defined as the potential benefit that
is lost or sacrificed when the choice of one course of action
requires the giving up of an alternative course of action.
Opportunity cost is not usually entered on the books of
organization but it is a cost that must be expertly
considered in every decision that a manager makes. The net
good features of a rejected alternative become the
opportunity costs of the alternative that is selected.
52. Sunk Costs
Those costs that have already been incurred in the past and
will not require any current cash expenditure are sunk
costs. Sunk costs do not affect future costs cannot be
changed by any current or future action (decision). All sunk
costs are irrelevant for decision making because these are
past costs which do not alter with the change in decision.
For e.g. depreciation of the machinery bought in previous
years is a sunk cost which will remain unaltered till the life
of the machinery or replacement of it.
53. Differential Costs
Differential cost is the difference in total cost between two
alternatives or operations. Any cost which increases
between the alternatives is incremental cost while the one
that decreases is decremented cost.
Marginal Costs
A marginal cost is the extra cost incurred in producing one
additional unit of output.
54. Segregation of Semi Variable Cost
Separation of semi-variable cost into variable and fixed
cost is called segregation of cost. There are two
method of cost segregation.
Two Point Method (High-Low Method)
Least Square Equation Method.
55. Two Point Method (High-Low Method)
Under this method, variable cost per unit and fixed cost are
calculated by taking the information of any two points or level
of activities.
Total cost = Fixed cost + variable cost.
Total cost = Fixed cost + variable cost per unit × units (
level of activity)
Y = a+b.X where Y= total semi variable cost.
a= Fixed cost.
b= variable cost per unit.
X=Level of Activity( Units/Hours)
56. Two Point Method (High-Low Method)
Variable cost per unit(b)=
or
=
Fixed cost (a) = Semi Variable cost - Variable cost per unit ×
Production units.
57. The cost structure of a manufacturing company have been given
below:
Required:(i) Segregation of semi-variable cost into fixed and variable
components.
(ii) Calculate the total cost for 350 units and 500 units.
Months Outputs Cost (Rs.)
January
February
March
April
May
June
400
200
600
800
1,000
700
10,000
7,000
13,000
16,000
19,000
14,500
58. Solution
Calculation of variable cost per unit (b)
b=
= = Rs. 15 per unit.
• Fixed cost = Total cost – Variable cost per unit× units
=19,000 - 15 × 1,000 = Rs. 4000
Calculation of total cost:
Total cost of 350 units
Y= a + b.X
= 4,000 + Rs 15 x 350 = 4,000+ 5,250 = Rs 9,250
Total Cost of 500 units
= 4,000+ 15x 500 = 4,000+7,500 = Rs 11,500
59. Least Square Equation Method
It is statistical method for calculation of variable and fixed cost.
It is one of the reliable methods for calculation of variable and
fixed cost. Total cost or semi- variable costs are segregated
very efficiently under this method.
Step (i)Prepare a least square table by identifying costs, units,
hours assumed units or hours be X and cost be y
Period Units or
hours (X)
Mixed cost
(Y)
XY X2
Total (N) X = ....... Y = ........ XY = ..... X2 = .......
60. Step 2-Calculation of variable costs per unit by using the
following formula
Step 3- Calculation of Fixed Cost.
Where, Y = Semi variable cost
Fixed Cost(a) = X= Level of Activity(units/machine
hrs/labor hrs )
n= No of observations.
61. The Maintenance cost of Nepal Lube Oils Ltd. for 3 months with
corresponding machine hours are given below:
Required
Segregation of costs using the Least Square Method.
Months January February March
Machine hours
Maintenance cost (Rs.)
200
400
300
500
400
600
65. Opportunity cost
The value of benefit sacrificed in favors of an
alternative course of action is known as
opportunity cost. There are different
opportunities in business while selecting the best
alternative, profit from another alternative must
be foregone. It is normally called opportunity
cost. For example, when a vacant plot of land is
not leased out but used for its own purpose the
rent so foregone is the opportunity cost of land.
66. Classification according to controllability:
Controllable cost: Cost that can be influenced by the
action of a responsible member of a particular cost
centre is a controllable cost. Example of controllable
costs are direct material, direct labor, other overhead
such as indirect labor, factory supplies etc.
Uncontrollable cost: Costs that are not subject to
influence by the action of manager is called
uncontrollable costs. These costs remain unchanged
or unaltered. Managerial salaries, staff salaries,
depreciation after purchase of equipment, rent etc.
fall under uncontrollable costs.
67. Classification according to association with product:
Product cost: those cost which are traceable to the
product is known as product cost. All manufacturing
costs are product cost and they are included in stock
valuation. Thus, it is also called inventoriable cost.
Prior to sale, the product cost is assets. As they are
sold, they become expenses i.e. cost of goods sold.
Period cost: the costs which are not associated with
production are called period cost. These cost are
charged to the period in which they are incurred on
the basis of time. Office and administrative cost and
selling and distribution cost are period costs. Period
costs are not charged to inventory value; rather they
are directly deducted from the sales revenue of the
same period.
68. Alternative Decision Making
Decision making is the process of selecting best alternatives
from among the various course of action available.
Relevant Information :
Information which affect decision are relevant information.
Characteristics of Relevant Cost
Future cost are relevant cost.
Only the differential cost are relevant cost.
Only the avoidable cost are relevant cost.
Departmental fixed cost are relevant cost.
Opportunity cost are relevant cost.
69. Process of Decision making
Define the problem.
Identify the Alternatives.
Collect relevant information.
Make differential revenue / Cost analysis.
Consider the opportunity costs.
Qualitative Factors.
Management Report.
70. Decision to Accept a special order
Concepts:
Offer received in bulk quantity.
Such offer will be received at a price lower than the normal
selling price.
Offer at a price less than the variable cost of manufacturing
will not be acceptable because for every one unit of offer
accepted contribution margin on that unit will be lost.
All variable cost of product may not be required variable cost
of offer such as variable selling and distribution cost will not
be required.
Some alternation in manufacturing process such as cheaper
materials, over time pay may change the regular variable mfg.
cost.
Special cost such as special device cost is relevant cost.
71. Relevant Quantitative information
Incremental cost such as variable cost.
Availability of Capacity to produce special ordered
units.
Opportunity cost due to sacrifice of regular sales .
Quantity discount on bulk purchase of raw materials
and high payment of labor .
Extra cost because of acceptance of offer.
Relevant Qualitative information.
Impact upon regular customers and market due to
decrease in selling price .
Frequency of order, legal implications etc.
Decision Criteria: Accept the offer if total income
increase while accepting the offer.
72. Differential income statement
Particulars With offer Without offer Difference
Sales revenue
Less : variable costs
Direct material
Direct labor
Variable overheads
Contribution Margin
Less: Fixed Cost
xxxx
(xxxx)
(xxxx)
(Xxxx)
Xxxx
Xxxx
(xxxx)
(xxxx)
(Xxxx)
Xxxx
Xxx
Xxx
Xxx
Xxx
xxx
Fixed manufacturing Overhead
Fixed non mfg. Overhead
Extra Fixed Cost
Net Income
(Xxxx)
(Xxxx)
(xxx)
xxxx
(Xxxx)
(Xxxx)
xxxx
Xxx
Xxx
(xxx)
xxxx
73. Incremental Income statement / Cost Benefit Analysis
Particulars
Incremental sales revenue
Less: incremental Expenses
Direct materials
Direct Labor
Variable mfg . Overheads
Other costs of offer (if any)
Incremental net income before
opportunity cost
Less: Opportunity Costs
Incremental Net Income
Amount
Xxxx
Xxxx
Xxxx
Xxxx
Amount
xxxxx
(xxxx)
xxxx
(xxxx)
Xxxx
Opportunity Cost = Regular sales volume sacrifice X CMPU on regular Sales
74. Decision to Make or Buy
Concepts:
• Buying decision is buying of subassemblies/ components.
• Buying a finished produce will reduce a manufacturing
company to trading house.
Relevant Quantitative Factors:
• Incremental production cost per unit i.e. variable cost.
- Direct materials
- Direct labor.
- Variable manufacturing overheads costs.
• Purchasing cost per unit from outside suppliers.
• Availability of production capacity to manufacturing
components.
• Opportunity cost of using facility for production
75. Relevant Qualitative Factors
Regularity of supplies
Reliability regarding quality
Numbers of available suppliers
Impact on customers and markets.
Future bargaining position with suppliers.
76. BUY MAKE DIFFERENCE
Direct Materials@
Direct Labor @
Variable manufacturing overhead @
Other costs @
Purchase cost @ xxx
xxx
xxx
xxx
xxx
( xxx)
(xxx )
(xxx)
(xxx)
xxx