Cost Accounting परिव्यय लेखांकन

Quick summary

Cost accounting records, classifies and analyses costs so that management can find the cost of each product, job or service, control waste and fix prices. This first topic explains the meaning and objectives of cost accounting, the elements of cost, cost unit and cost centre, and the different ways of classifying costs.

Key points

• Cost (परिव्यय) – the amount of expenditure actually incurred on, or attributable to, a given thing.
• Costing – the technique and process of finding costs. Cost accounting – applying costing principles to record and control costs.
• Objectives: find cost per unit, help in price fixing, control costs, reduce waste, give data for decisions (make or buy, shut down), and help in budgets.
• Elements of cost: Material, Labour and Expenses. Each is direct (traced to one product) or indirect (overheads).
• Indirect material + indirect labour + indirect expenses = overheads, grouped as factory, office/administration, and selling & distribution.
• Cost unit – the unit in which cost is measured (per tonne of steel, per kWh of power, per passenger-km, per bed-day in a hospital).
• Cost centre – a location, person or machine for which costs are collected (production or service cost centre).
• Profit centre – a segment responsible for both cost and revenue.
• Classification of cost: by nature/element, by function (production, administration, selling, distribution, R&D), by behaviour (fixed, variable, semi-variable), by controllability (controllable, uncontrollable), by normality (normal, abnormal), by time (historical, pre-determined/standard), and for decisions (sunk, opportunity, marginal, differential cost).
• Financial vs cost accounting: financial accounts show the overall result for outsiders and are compulsory; cost accounts show product-wise cost for management and are needed by law only for certain industries under the Companies (Cost Records and Audit) Rules, 2014.

Important terms

• Fixed cost – stays the same in total when output changes (rent, salaries); cost per unit falls as output rises.
• Variable cost – changes in total in direct proportion to output (raw material); per unit it stays the same.
• Semi-variable cost – partly fixed, partly variable (electricity, telephone).
• Sunk cost – a past cost that cannot be recovered and is ignored in decisions.
• Opportunity cost – the benefit given up by choosing one option over the next best one.

Formats and formulas

• Prime cost = direct material + direct labour + direct expenses.
• Total cost = prime cost + all overheads.
• High–low method: variable cost per unit = change in cost ÷ change in output; fixed cost = total cost − (variable cost per unit × output).

Worked problem: At 1,000 units the power cost is ₹25,000; at 1,500 units it is ₹32,500. Find fixed and variable parts.

5 important questions

Q1. Define cost unit and cost centre with examples.

Cost unit is the unit of product or service in which cost is expressed, e.g. per tonne for cement, per km for transport. Cost centre is a location, person or equipment for which costs are collected, e.g. machine shop, packing department.

Q2. Give four examples each of direct and indirect material.

Direct: wood in furniture, cloth in shirts, steel in a car body, leather in shoes. Indirect: lubricating oil, cotton waste, small nails and glue, cleaning material.

Q3. Explain the classification of costs.

Outline: by element (material, labour, expenses); by traceability (direct, indirect); by function; by behaviour with a short graph description; by controllability; by normality; by time; for decision-making. Give one example under each.

Q4. Distinguish between cost accounting and financial accounting.

Points: purpose (management vs outsiders), legal need, scope (product-wise vs whole firm), period (frequent vs yearly), stock valuation (cost vs lower of cost or net realisable value), use of estimates, control of costs, form of reports.

Q5. At 2,000 units total cost is ₹60,000 and at 3,000 units ₹80,000. Find fixed cost and the cost at 3,500 units.

Variable cost per unit = 20,000 ÷ 1,000 = ₹20. Fixed = 60,000 − (2,000 × 20) = ₹20,000. Cost at 3,500 units = 20,000 + (3,500 × 20) = ₹90,000.

Exam tip

For a "classification of cost" question, draw a neat chart first and then explain each head with an example. It fetches full marks quickly.

Quick summary

A cost sheet is a statement that shows the total cost and cost per unit of production for a period, step by step: prime cost, works cost, cost of production, cost of sales, and profit. It also helps in comparing costs and preparing quotations (tenders).

Key points

• A cost sheet (परिव्यय पत्रक) is prepared for output-based units (unit or output costing), usually monthly or yearly.
• Steps: materials consumed → prime cost → works/factory cost → cost of production → cost of goods sold → cost of sales → profit → sales.
• Materials consumed = opening stock of raw material + purchases + carriage inwards − closing stock of raw material.
• Opening and closing work-in-progress (WIP) are adjusted at works cost level.
• Opening and closing finished goods are adjusted after cost of production to get cost of goods sold.
• Items excluded from a cost sheet (pure financial items): interest on capital, income tax, dividends, loss on sale of assets, donations, goodwill written off, discount on shares, transfer to reserves, interest/dividend received.
• Scrap sold is deducted from works cost (or from materials, as the problem says).
• Showing cost per unit beside the total makes comparison easy.
• Tender/quotation: past cost sheet ratios (e.g. factory overhead as % of direct wages, office overhead as % of works cost) are used to estimate the price for a new order.

Important terms

• Prime cost – total of all direct costs.
• Works cost (factory cost) – prime cost plus factory overheads, adjusted for WIP.
• Cost of production – works cost plus office and administration overheads.
• Cost of sales – cost of goods sold plus selling and distribution overheads.

Formats and formulas

Worked problem: Data for 10,000 units (all sold): opening raw material ₹10,000, purchases ₹48,000, carriage inwards ₹2,000, closing raw material ₹10,000, direct wages ₹30,000, direct expenses ₹5,000, factory overheads ₹20,000, opening WIP ₹5,000, closing WIP ₹3,000, office overheads ₹10,000, selling and distribution ₹8,000, sales ₹1,50,000.

Profit as % of cost = 25,000 ÷ 1,25,000 × 100 = 20%. Profit as % of sales = 25,000 ÷ 1,50,000 × 100 = 16.67%.

5 important questions

Q1. What is a cost sheet? State its uses.

A statement showing the total and per-unit cost of output under different heads for a period. Uses: shows cost per unit, helps fix selling price, compare with past periods, control costs and prepare tenders.

Q2. Name four items that are not shown in a cost sheet.

Interest on capital, income tax paid, dividend paid, loss on sale of fixed assets (also donations and goodwill written off).

Q3. Prepare a statement of cost from given data (as above) and show profit.

Use the format above: materials consumed, prime cost, works cost with WIP, cost of production, finished goods adjustment, cost of sales, profit and sales, with per-unit column.

Q4. In the problem above, a tender for 2,000 units is to be quoted using the same per-unit cost and 20% profit on cost. Find the price.

Cost of sales per unit = ₹12.50. Total cost = 2,000 × 12.50 = ₹25,000. Profit 20% = ₹5,000. Tender price = ₹30,000 (₹15 per unit).

Q5. Explain the treatment of WIP, finished goods and scrap in a cost sheet.

Opening WIP is added and closing WIP deducted at works cost level. Opening finished goods are added and closing finished goods deducted after cost of production to get cost of goods sold. Sale value of normal scrap is deducted from works cost.

Exam tip

Always add a per-unit column and label each subtotal in bold words. Check that profit = sales − cost of sales before you finish.

Quick summary

Material is often the biggest part of product cost, so it must be bought, stored and issued carefully. Material control means having the right material, in the right quantity, at the right time and at the lowest cost, without waste. This topic covers purchase procedure, stock levels, EOQ, ABC analysis and the methods of pricing material issues (FIFO, LIFO, weighted average).

Key points

• Purchase procedure: purchase requisition → inquiry and quotations → purchase order → receipt and inspection (goods received note) → checking the invoice → payment.
• Store records: bin card (quantity only, kept by the storekeeper) and stores ledger (quantity and value, kept by the costing department).
• Material requisition note is used to issue material; material return note for unused material.
• Stock levels keep stock neither too high (blocked capital) nor too low (stoppage).
• EOQ (Economic Order Quantity) – the order size at which ordering cost + carrying cost is lowest.
• ABC analysis: A items – few items, high value (about 10% items, 70% value) – strict control; B items – moderate; C items – many items, low value – simple control.
• Perpetual inventory system – continuous record of receipts, issues and balance, with continuous stock verification.
• JIT (Just-in-Time) – material arrives exactly when needed, keeping stock near zero.
• Pricing of issues: FIFO (first in, first out), LIFO (last in, first out), simple average, weighted average, standard price. AS-2 does not allow LIFO for financial statements, but it is still taught in costing.
• Normal loss of material is absorbed in the cost of good units; abnormal loss goes to Costing P&L.

Important terms

• Lead time (reorder period) – time between placing an order and receiving the material.
• Reorder level (पुनर्मागणी पातळी) – stock level at which a fresh order is placed.
• Ordering cost – cost of placing and receiving one order.
• Carrying cost – cost of holding one unit in stock for a year (interest, storage, insurance).

Formats and formulas

• EOQ = √(2AO ÷ C), where A = annual requirement (units), O = ordering cost per order, C = carrying cost per unit per year.
• Reorder level = maximum usage × maximum reorder period.
• Minimum level = reorder level − (normal usage × normal reorder period).
• Maximum level = reorder level + reorder quantity − (minimum usage × minimum reorder period).
• Average stock level = minimum level + ½ reorder quantity.

Worked problem 1 (EOQ): A = 12,000 units, O = ₹150, C = ₹10. EOQ = √(2 × 12,000 × 150 ÷ 10) = √3,60,000 = 600 units. Orders per year = 12,000 ÷ 600 = 20.

Worked problem 2 (levels): normal usage 100 units/week, minimum 50, maximum 150; reorder period 4–6 weeks (normal 5); reorder quantity 600.

Worked problem 3 (pricing): Opening 200 units @ ₹10; 5 Jan purchased 300 units @ ₹12; 10 Jan issued 400 units.

Check: in each method issue + closing = ₹5,600.

5 important questions

Q1. What is EOQ?

EOQ is the quantity to order each time so that the total of ordering and carrying costs is the lowest. EOQ = √(2AO ÷ C).

Q2. Distinguish between bin card and stores ledger.

Bin card is kept by the storekeeper inside the store and shows quantity only; entries are made before the transaction. Stores ledger is kept in the costing office and shows quantity, rate and value; entries are made after the transaction.

Q3. Explain the various stock levels with formulas.

Outline: reorder, minimum, maximum, average and danger level; formula and purpose of each; factors affecting levels (lead time, usage, EOQ, storage space, capital, price trends).

Q4. Explain FIFO and weighted average methods with merits and demerits.

FIFO: issues at oldest prices; closing stock at latest prices; simple; in rising prices cost is understated. Weighted average: new average after each purchase; smooths price changes; needs more calculation. Illustrate with the table above.

Q5. Explain ABC analysis and perpetual inventory system.

ABC: grouping by value, control effort in proportion to value, merits. Perpetual inventory: bin cards, stores ledger, continuous verification, early detection of loss and theft, accurate interim accounts.

Exam tip

In stores ledger problems, always show a "balance" column after every receipt and issue. A final check that issues + closing stock = opening + purchases catches mistakes.

Quick summary

Labour cost is the wages and other benefits paid to workers. To control it, a firm records time correctly, pays wages by a suitable method, studies labour turnover and uses incentive plans that reward faster work. This topic covers time-keeping, time and piece wage systems, premium bonus plans (Halsey, Rowan), Taylor and Merrick plans, idle time, overtime and labour turnover.

Key points

• Direct labour works on the product (machine operator); indirect labour supports production (supervisor, cleaner).
• Time-keeping records attendance (gate entry, attendance register, biometric/card systems); time-booking records time spent on each job (job card).
• Time rate: wages = hours worked × rate per hour. Piece rate: wages = units produced × rate per unit.
• Halsey premium plan: time wages + 50% of time saved × rate (bonus share may be 33⅓% in Halsey-Weir).
• Rowan plan: time wages + (time saved ÷ time allowed) × time taken × rate. Bonus can never exceed time wages.
• Taylor's differential piece rate: low rate (83% of normal piece rate) if efficiency is below standard; high rate (125%) if at or above standard.
• Merrick's multiple piece rate: normal piece rate up to 83% efficiency; 110% of piece rate for 83–100%; 120% above 100%.
• Idle time: paid time with no work. Normal idle time (tea breaks, tool change) is added to labour cost; abnormal idle time (strike, power failure, machine breakdown) goes to Costing P&L.
• Overtime premium: if caused by general pressure of work, treat as overhead; if at the customer's request, charge to that job; if abnormal, to Costing P&L.
• Labour turnover (कामगार उलाढाल) – rate at which workers leave and are replaced. High turnover raises training and recruitment costs.

Important terms

• Time allowed (standard time) – time fixed for a job by time study.
• Time saved – time allowed minus time taken.
• Separation – worker leaving the firm. Replacement – new worker in place of one who left.
• Flux method – turnover based on both separations and replacements.

Formats and formulas

• Halsey: Earnings = (T × R) + 50% × (S − T) × R
• Rowan: Earnings = (T × R) + [(S − T) ÷ S] × T × R
• (S = standard time, T = time taken, R = rate per hour)
• Separation rate = separations ÷ average number of workers × 100
• Replacement rate = replacements ÷ average workers × 100
• Flux rate = (separations + replacements) ÷ average workers × 100

Worked problem 1: S = 10 hours, T = 8 hours, R = ₹50 per hour.

Worked problem 2: Workers at the start of the year 380, at the end 420. Separations 20, replacements 16.

5 important questions

Q1. What is idle time? How is it treated in cost accounts?

Idle time is paid time when the worker does no productive work. Normal idle time is part of labour cost (or factory overhead); abnormal idle time is charged to Costing Profit and Loss account.

Q2. State two merits each of time rate and piece rate.

Time rate: simple to calculate; quality is not hurt by hurry. Piece rate: rewards efficient workers; less supervision needed and cost per unit is known.

Q3. Standard time 40 hours, time taken 30 hours, rate ₹40. Calculate earnings under Halsey and Rowan.

Time wages = 30 × 40 = ₹1,200. Halsey bonus = 50% × 10 × 40 = ₹200, earnings ₹1,400. Rowan bonus = (10 ÷ 40) × 30 × 40 = ₹300, earnings ₹1,500.

Q4. Explain Taylor's differential piece-rate system.

Outline: standard output fixed by time and motion study; two piece rates – 83% of normal rate below standard, 125% at or above standard; merits (motivates efficient workers, simple); demerits (harsh on slow and new workers, can hurt quality). Small example: normal rate ₹2 per unit, standard 100 units.

Q5. What is labour turnover? Explain its causes, effects and remedies.

Outline: meaning and three methods of measurement; causes – avoidable (low pay, poor conditions, bad relations) and unavoidable (retirement, death, marriage); costs – preventive and replacement costs; remedies – fair wages, job security, welfare, grievance procedure, exit interviews.

Exam tip

In Halsey–Rowan sums, write S, T and R first, then the formula, then the figures. Rowan gives more bonus than Halsey when time saved is less than 50%; both are equal when exactly 50% is saved.