Chapter 4 Chapter 4
COST ACCOUNTING COST ACCOUNTING
E.g. Fig. 4.4 A Typical Journal PageE.g. Fig. 4.4 A Typical Journal Page
Date Date 2009 2009
Analysis
Analysis F F DebitDebit
(Rs.) (Rs.) Credit Credit (Rs.) (Rs.) April 3
April 3 SalariesSalaries Cash Cash
Payment of Salaries Payment of Salaries for week ending
for week ending
403 403 112 112 37900.00 37900.00 37900.00 37900.00 4 Rent 4 Rent Cash Cash
Building rental for Building rental for
month of April month of April 314 314 112 112 15000.00 15000.00 15000.00 15000.00 5 Cash 5 Cash Sales Sales Product „A‟ to “X‟ Product „A‟ to “X‟ company as per company as per invoice No. 6839 invoice No. 6839 112 112 201 201 52050.00 52050.00 52050.00 52050.00 8 Equipment 8 Equipment Notes Payable Notes Payable 6%, 90-days note to 6%, 90-days note to „Y‟ company „Y‟ company 104 104 521 521 90000.00 90000.00 90000.00 90000.00 10 Purchase 10 Purchase „Z‟ company „Z‟ company Tools
Tools on on openopen account
account – – TermsTerms – –
30-days 30-days 608 608 842 842 4400.00 4400.00 4400.00 4400.00
E.g. Fig. 4.5 Typical Ledger Sheet That has
been closed and Balanced Date 2009 Analysis F Debit (Rs.) Date 2009 Analysis F Credit (Rs.) April 1 Balance Forward J-1 47250.0 April 3 Salaries J-1 37900.0 5 Sales J-1 52050.0 4 Rent J-1 15000.0 10 Sales J-2 4300.0 10 Purchase J-2 8750.0 11 „R‟ Company J-2 35000.0 12 Insurance J-2 22750.0 11 Sales J-2 27500.0 13 Taxes J-2 43750.0 12 Sales J-2 4700.0 17 Salaries J-3 41050.0 18 Sales J-3 60000.0 21 Purchase J-3 49250.0 22 Sales J-3 8750.0 29 Office Supplies J-3 7900.0 28 Sales J-3 27400.0 30 Purchase J-3 7700.0 29 Sales J-3 31500.0 30 Sales J-3 37000.0 Total 302150.0 Balance 68100.0 Balance Forward 68100.0 Total 302150.0
Methods Of Cost Accounting
Cost accounting --- determination of cost for
producing product or rendering service; helps in future cost predictions
Cost estimation --- cost accounting itself
Accountant --- maintain records of actual
expenses for variety of activities; interpretation of these records --- “Actual” or “Post-mortem” cost
accounting
Standard cost accounting --- prediction of
future cost --- determines future capital requirements & income
Variance --- deviation of standard costs from
actual costs
Various types of systems --- for reporting various
costs
One common type is Cost Estimation
(Manufacturing cost & General expenses)
Each industry --- use own method of cost
distribution on account
Overall procedure remains same (journal, ledger,
balance sheet, income statement)
Accumulation, Inventory & Cost-of-Sales
Account
Basic cost accounting methods --- requires posting
of all costs --- accumulation accounts
Series of accumulation accounts--- handles various
At the end of given period --- accumulated costs –
transferred to inventory account
Inventory account --- summary of all expenses in
given time period --- shows, amount of all materials produced or consumed
Information in inventory account – combined with
data on amount of product sales --- together transferred to --- cost-of-sales account
Cost-of-sales account – helps in determining
profit or loss for each product sold
Plant producing several products & by-products
---allocation of cost to each product – must be made on some predetermined basis
Allocation of costs – method depends on policies
of company
Fig. 4.6: Example of Accumulation Account
Item:Chemical „A‟ for use in producing product, „X‟
Date 2009 Received (lb) Cost (Rs. /lb) Balance on hand (lb) Delivered for use in process (lb) May 2 5000 1.8 5000 15 10000 2.0 15000 17 9000 6000
Fig. 4.7: Inventory Account
Manufacturing Cost Works Inventory
Refining of Crude Product, „D‟ For month of Sept. 2009
Cost Element Units on hand Units used per unit produced (b) Total units used or produced (c) (c=a × b) Price per unit (Rs.) (d) Total cost (Rs.) (e) (e=c×d) Cost per unit produced (f) (f=e/a) Name Unit Start
of month End of month Crude Product „D‟ Gallons 13,000 11,000 1.5 1,50,000 13.94 20,91,000 20.91 Operating wages Hours 0.0150 1,500 62.50 93,750 0.9375 Operating supplies Maintenance wages Hours 0.0250 2,500 100.00 2,50,000 2.5 Maintenance materials 5,25,000 5.25 Utilities 4,00,000 4.00 Depreciation Rs. Investment 250.00 2,50,00,000 0.5 1,25,000 1.25 Overhead 1,90,000 1.90
Total cost & Production
Gallons 5,000 4,000 1,00,000 (a)
36.75 36,74,750 36.75
Fig. 4.8: Cost-of-Sales Account
Cost – of – Sales - Account
Product ‘E’ For Month of Sept. 2009
Item This Month Last Month Year to date Sales, (lb) 4,75,000 5,90,000 32,20,000
Rs. / unit Rs. / unit Rs. / unit
Selling price: 10.00 10.00 10.00 Cost of sales:
Manufacturing cost 06.00 05.00 05.25
Freight & delivery 00.35 00.40 00.35
Selling expense 00.90 01.00 00.80
Administrative expense 01.25 01.00 01.10
Materials Cost
Price fluctuations --- varies cost--- may cause
difficulty to transfer from accumulation account to inventory & cost-of-sales account
E.g. consider fig. 4.6 : 2 different costs for chemical
„A‟ (i.e. Rs. 1.8 & Rs. 2 / lb) on different dates in
same month
For such case 3 basic methods can be used while
transferring
1. The current Average method: average price of all inventories on hand at time of delivery is used
e.g. fig. 4.6: Rs. 1.93/lb for chemical, „A‟
2. The First-In-First-Out (fifo) method: assumes oldest material is always used first e.g. price of 6000 lbs of chemical „A‟ would be Rs. 1.8 for first
5000 lbs & Rs. 2 for remaining 1000 lb
3. The Last-In-First-Out (lifo) method: the most recent price are always used e.g. price for 6000 lb
of chemical „A‟ would be Rs.2
Any one of 3 methods can be used
Current average method --- gives best picture of
true cost in given time interval ; misleads if used for predicting future costs
Meaning of Some Frequent & Important Terms in Cost Accounting
1. Consolidated Balance sheet: document with all financial data for parent as well as subsidiary companies if any
2. Balance sheet--- contains --- Real figures--- (cash,
marketable securities), Estimated
numbers---(inventories, accounts receivable), Fictitious
numbers-- (numbers difficult to assess)
3. Accounts receivable: goods sold to customer on 30-, 60- or 90- days basis, full payment not received as of the date of balance sheet
4. Allowances: made for uncollected bills from customers who are unable to pay
5. Inventories: raw materials, goods in process, finished goods ready for shipment, etc. Costing of inventories --- raw material – at cost; goods in process --- at raw material cost plus one half the conversion cost; finished goods – at market price; frequently inventory costs --- carried at slightly less than these figures --- to allow for deterioration, decline, obsolescence
6. Prepaid Expenses: insurance premiums, leases for equipments, computers, office machineries, etc.
7. Marketable securities: commercial papers,
government bonds
Item 3 to 7 --- combines to --- current asset
8. Accounts payable: invoices for raw materials, supplies, purchased from supplier, for which
9. Notes Payable: money owed to banks, other creditors (promissory notes)
10. Accrued expenses payable: salaries, wages,
interests on loans, insurance premiums, pensions
Items 8 to 10 + Income taxes payable ---combines to --- current liabilities
11. Deferred Income Taxes: encouraged by
government as tax incentives – benefits economy e.g. accelerated depreciation ; net effect – to reduce full amount to be paid by company as in future
12. Stockholder’s Equity: total interest that stockholders have in the business; equal to (total asset) – (total liabilities)
Capital Stock:
Preferred Stock: have preference over shareholders regarding dividends or distribution of asset; some preferred stocks – called as cumulative – preferred stock holders receive dividends before common
stock holders; don‟t have voice in company affairs or
voting rights
Common Stock: no limitations on dividends paid to them; company earnings high – high dividends are paid; if earnings are low --- no dividends are paid
13. Capital surplus: amount of money stockholder paid for stock over & above the par value of stock
14. Par value of stock, bond: face value; value at the time of issue
15. Accumulated retained earnings: also called
earned surplus = (Net profit) – (Dividends paid to
stockholders)
Item 12 to 14 --- combines to --- total
stockholder’s equity
16. Depreciation: money kept aside as operating expenses for devalue of asset due to wear & tear
Depletion: diminishing of natural resources
Amortization: decline in useful value of tangible asset such as patent
17. Some selected Financial ratios
a. Liquidity
Current liquidity Cash liquidity
b. Leverage
Date to total assets Times interest earned
Fixed charge coverage c. Activity
Inventory turnover
Average collection period Fixed asset turnover
Total asset turnover
d. Profitability
Gross profit margin Net operating margin Profit margin on sales Return on net worth Return on total assets
