This is a point up to which, input factors are commonly used for production of multiple products, which can be either joint products or by-products. After this point, the joint products or by-products gain individual identity. In other words, up to a certain stage, the manufacturing process is the same for all the products and a stage comes after which, the individual processing becomes different and distinct. (Show diagram).
2. Supply – Chain Analysis:
Supply chain begins from the supplier from where the raw materials are obtained. The end point of supply chain is the customer where all goods and services are given. Supply chain analysis is the analysis of every point of supply chain beginning from source of raw materials and ending at
customer. It is very valuable analysis because the companies can also implement strategy, cut costs and create value by enhancing their supply chain. It is not necessary that same firm should be part of all points of supply chain. The term ‘Supply Chain’ describes the flow of goods, services and information from the initial sources of materials and services to the delivery of products to customers regardless of whether those activities occur in the same organization or in other organization. Customers expect improved performance from companies through the supply chain. They expect that the companies should perform all these activities in an efficient manner so as to reduce costs and also maintain quality of the products and the products be available easily for them.
3. Scrap, Spoilage And Defectives In Engineering Industries:
Scrap: ‘Scrap’ is that loss which is visible, can be collected and is unusable, but is saleable. Thus, the saleable portion of the unusable material is scrap. It has a recovery value, and may be sold or re- used elsewhere. The scrap is always visible.
Scrap is a residual material resulting from a manufacturing process. It has a recovery value and is measurable. The treatment of scrap in cost accounts is normally as per the following details:
If the value of scrap is negligible, the good units should bear the cost of scrap and any income collected will be treated as other income.
If the value of scrap is considerable and identifiable with the process or job, the cost of job will be transferred to scrap account and any realization from sale of such scrap will be credited to the job or process account and any unrecovered balance in the scrap account will be
transferred to the Costing Profit and Loss Account.
If scrap value is quite substantial and it is not identifiable with a particular job or process, the amount will be transferred to factory overhead account after deducting the selling cost. This will reduce the cost of production to the extent of the scrap value.
Spoilage: Spoilage is that production which can not be repaired economically. It is that production that fails to meet quality or dimensional requirements. It is so much damaged in manufacturing operations that they are not capable of rectification. As these can not be rectified, they are sold in the market at whatever price they can get. Rectification can be done at a cost which may not be economical. If the spoilage is within limits, it is called as ‘normal’ spoilage and anything exceeding this limit is called as ‘abnormal’ spoilage. The accounting treatment of spoilage is as follows:
The cost of normal spoilage is spread over to the good production by charging either to the specific production order or to the product overheads.
The cost of abnormal spoilage is charged to the Costing Profit and Loss Account.
Defectives: The defectives are that production which can be rectified with reasonable cost. The defectives are part of production units which do not conform to the standards of quality but can be rectified with additional application of materials, labor and/or processing and made it into saleable condition either as firsts or seconds depending upon the characteristics of the product. The accounting treatment of defectives is the same like that of spoilage. The cost of normal defectives is spread over the good units and the cost of additional processing is charged to a particular department / process if it is identifiable with the same. If it cannot be identified, it is charged to factory overheads. Cost of abnormal defectives is charged to the Costing Profit and Loss Account. The point of
difference from spoilage is that while spoilage cannot be rectified. Defectives can be rectified well within reasonable costs.
Waste : It is that part of basic material which is lost in the manufacturing process in a natural way. Some material may evaporate some may shrink, this is waste. Waste may be visible like pieces of clothes in tailoring shop or evaporation of petrol during filling and storage. The waste has no market value. If it has sale value it will not be called waste but will be called scrap. The scrap is always visible.
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1. Transfer pricing methods:A ‘Transfer Price’ is that notional value at which goods and services are transferred between divisions in a decentralized organization. Transfer prices are normally set for intermediate products, which are goods, and services that are supplied by the selling division to the buying division. Their profitability is measured by fixation of ‘transfer price’ for inter divisional transfers.
Following are the transfer pricing methods: 1. COST BASED PRICING:
Actual Cost of Production:- This is in fact the simplest method of fixation of transfer price. In this
method, the actual cost of production is taken as transfer price for inter divisional transfers.
Full Cost Plus:- In this method, the total cost of sales plus some percentage of profit is charged
by the transferring division to the transferee division.
Standard Cost:- Standard cost is ‘predetermined cost’ based on technical analysis for material,
labour and overhead.
Marginal Cost Pricing:- Under this method, only the marginal cost is charged as ‘transfer prices’.
As fixed costs are in any case unavoidable and hence is not charged to the buying division.
2. MARKET BASED PRICING:
Under this method, the transfer price will be determined according to the
market price prevailing in the market. It acts as a good incentive for efficient production to the selling
division and any inefficiency in production and abnormal costs will not be borne by the buying division. The logic used in this method is that if the buying division would have purchased the goods/services from the open market, they would have paid the market price and hence the same price should be paid to the selling division. One of the variation of this method is that from the market price, selling and distribution overheads should be deducted and price thus arrived should be charged as transfer price. The reason behind this is that no selling efforts are required to sale the goods/services to the buying division and therefore these costs should not be charged to the buying division.
Limitations of market based transfer pricing are as follows;
There may be resistance from the buying division. They may question buying from the selling
division if in any way they have to pay the market price?
Like cost based prices, market prices may also be fluctuating and hence there may be difficulties
in fixation of these prices.
Market price is a rather vague term as such prices may be ex-factory price, wholesale price, retail
price etc.
Market prices may not be available for intermediate products, as these products may not have
any market.
This method may be difficult to operate if the intermediate product is for captive consumption. 3. NEGOTIATED PRICING:
In this method the transfer prices may be fixed on the basis of ‘Negotiated Prices’ that are fixed through negotiations between the selling and the buying division. Sometimes it may happen that the concerned product may be available in the market at a cheaper price than charged by the selling division. In this situation the buying division may be tempted to purchase the product from outside sellers rather than the selling division. Alternatively the selling division may notice that in the outside market, the product is sold at a higher price but the buying division is not ready to pay the market price. In all these conflicts, the overall profitability of the firm may be affected adversely. Therefore it becomes beneficial for both the divisions to negotiate the prices and arrive at a price, which is mutually beneficial to both the divisions. Such prices are called as ‘Negotiated Prices’.
4. OPPORTUNITY COST PRICING:
This pricing recognizes the minimum price that the selling division is ready to accept and the maximum price that the buying division is ready to pay. The final transfer price may be based on these minimum expectations of both the divisions.
2. Treatment of scrap in cost accounts: (see scrap above)
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1. Uniform costing:It is not a method of costing. It is simply the common idea among the different units of an industry to adopt same principles, procedures and policies for determining the cost of a common product. Uniform costing simply denotes that a number of undertakings in a same industry may use same costing principles and procedures to arrive to cost, so that mutual comparison may be possible among them. It is the adoption of identical costing principles and procedures by several units of the same industry or by several undertakings by mutual agreement. Uniform costing facilitates valid comparisons between organizations and helps in eliminating inefficiencies.
Objective Of Uniform Costing:
1. To help for meaningful and valid cost comparison among the members.
2 .To locate and eliminate inefficiencies in the firm by measuring own efficiency in terms of industry in general and in terms of close rivals in particular.
3. To stop cut-throat competition and create healthy competition.
5. To provide uniform data and information to Government for different purposes like tax policy, subsidies, concessions, restrictions, etc.
2. Under Absorption and Over Absorption Overheads:
Absorption of overheads means charging share of overhead expenses to the products. As the overhead expenses are indirect expenses, the absorption is to be made on some suitable basis. The basis is the ‘absorption rate’. Unit of base selected can be based on direct material, direct labour or prime cost.
Overhead Absorption Rate: Overhead Expenses / Unit of the base selected.
Where the actual overhead of a period is absorbed at actual rate, the overheads absorbed are equal to the overheads incurred. So there is no under-recovery or over-recovery of overheads. But where the predetermined rate is applied, as commonly done, the overheads absorbed may be more or less than the actual overheads. If the amount applied overhead on predetermined rates absorbed is less than the overheads actually incurred, it is ‘Under- Absorption’. Otherwise, it is ‘Over- Absorption’. Under- absorption arises if:
i. Actual expenses exceed the estimated. ii. Production is less than estimated. iii. Hours worked are less than estimated.
Over absorption occurs if the above conditions are reversed. Both the under and over absorption may arise due to any one or more of the following causes:
i. Error in estimating overheads.
ii. Error in estimating quantum of production.
iii. Seasonal fluctuation in overheads from time to time. iv. Unforeseen changes in the productive capacity.
“v” 1. VED Analysis: (See also ABC analysis)
This analysis divides items into three categories in the descending order of their criticality as follows:
‘V’ stands for vital items and their stock analysis requires more attention. The reason is that if these items are not available, the resulting stock outs will cause heavy losses due to stoppage of production. Thus these items are required to be stored adequately to ensure smooth
operation of the plant.
‘E’ means essential items. Such items are considered essential for efficient running but without these items, the system will not fail. Care must be taken to see that they are always in stock.
‘D’ stands for desirable items, which do not affect production immediately but availability of these items will lead to more efficiency and less fatigue.
Thus VED analysis can be very useful to capital intensive process industries. “w”
The Work Measurement aims at determining the effective time required to perform a job. The
ineffective, wasteful or avoidable time is separated from effective required time to complete the work. The effective time so established in work measurement can be used for the following purposes:
Incentive wage schemes which require data about the time allowed and time taken for a particular job.
Improving utilization of men, machines and materials.
Assisting in production control
Assist in setting labor standards
Cost control and reduction.
The following stages are involved in work measurement. i. Selection of work
ii. Measuring the actual time taken in the work done
iii. Making comparison between the standard time and the actual time. “z”
1. Zero Base Budgeting:
Zero Base Budgeting is method of budgeting whereby all activities are revaluated each time budget is formulated and every item of expenditure in the budget is fully justified. Thus the Zero Base Budgeting involves from scratch or zero. Zero based budgeting [also known as priority based budgeting]. It is an attempt to overcome the limitation of traditional budgeting where previous year’s figures are taken as base for the preparation of budget. This approach requires that all activities are justified and prioritized before decisions are taken relating to the amount of resources allocated to each activity.
ZBB is superior to traditional budgeting in many ways as given below : (Advantages of ZBB)
a. It is not change of figures in old budget as is done in traditional budgets. The manager has to do cost benefit analysis for every rupee he or she is demanding.
b. It highlights the area where fund is likely to be wasted and helps to eliminate them.
c. It is a system of management by objectives while traditional budgeting is system of management by system.
d. It identifies inefficient operation and considers every time alternative ways of performing the same task.
e. It is very suitable for R&D, Pollution control, Quality control etc. Requirements :
1. It requires trained staff and managers.
2. It faces many problems in its implementation. 3. It is time consuming and costly.