introduction and defination cost accounting primarily refers to the process of recording classifying...

INTRODUCTION AND DEFINATION Cost Accounting primarily refers to the process of recording classifying and allocating the costs to the ultimate desired level of the production activity. Such lowest of activity is known as The cost unit. Thus cost accounting process strives to ascertain and to control the cost per unit. The costing are two type : o Post operative exercise Historical costing o Pre operative exercise Standard costing Standard costing is a technique of ascertaining the unit cost based on standards for the purpose of cost control.

Another definition for the The Certified Institute of Management Accounts, England for the Standard cost is "The preparation and use of standard costs their comparison with the actual cost and the analysis of variances to their causes and points of incidence Another definition Wheldon say that "Standard costing is the method of ascertaining the cost whereby statics are prepared to show (a) the standard cost (b) the actual cost ; and(c) the difference between these costs which are termed as variance. Another definition Srikant Datar says that "Standard costing is the costing method that traces direct cost to cost object by multiplying the standard price or rate times the standard input allowed for actual output achieved and allocates indirect costs on the basis of the standard indirect rate times the standard inputs allowed for the actual output achieved . Another definition S.K.bhattachary and Johan Dearden says that " A standard cost system is one where product costs are developed before the fact" i.e. an estiment is made before the product is produced of what the costs should be.

HISTORICAL COSTING 1. It emphasies on Unit Cost Ascertainment. 2. It is Accounting oriented. 3. It considers the post operation data. 4. It considers What Costs have been incurred. 5. It uses the Cost Sheet for unit cost determination. STANDARD COSTING 1. It emphasises on Cost Control. 2. It is Management Planning & Controlling oriented. 3. It sets the per-operative standards & compares the post-operation data with them. 4. It consdiers What costs shoud have been incureed. 5. It develops the Variancebased on the comparision of the standard and actual data.

Requirements for a good standard costing system Standard costing is an effective method of costing compared to the historical costing. Along with with the unit costing ascertainment, it also controls the costs and is agreeable for quoting the price ahead of the production. However, a good standard costing system must possess the following characteristics :

(1) Accuracy of standards: Standards are the norms used for measuring the performance of the people. So, the standards should be accurate. They should be developed on the basis of engineering study and sound judgment should be attainable under normal performance and should be amenable for objective prescription.

(2) Control on production variables: Standard performance is a function of appropriate production variables. Production variables affecting the standard performance of an operator are machines, materials and other inputs. Proper machines and equipment must be made available, continued availability of defined quality raw materials must be provided and other production inputs like power, water, materials handling etc. should be provided appropriately.

(3) Measurement of performance: The output of the operators should be measured accurately and in objective terms. The traceable costs should be accounted properly and the common costs (i.e. overheads) should be allocated on a judicious basis.

(4)Identification of the responsibility for variances: Variances indicate the difference between the standards and the actuals.Variances may be favorable or unfavorable. Proper analysis of the variances should be made. Appropriate identification of responsibilities for variances should be made for the reward or the penalty.

(5)Performance variances should be separated from the forecast variables Variance may occur from two sources (a) efficiency level of the people and (b) the error in the forecasts. Persons should not be made responsible for the erroneous forecasts. Thus, performance variances should be separated from the variances caused by the forecast errors.

Advantages : Standard costing techniques results into following advantages : 1. Quick unit cost ascertainment 2. Tendering and quotation 3. Cost Control 4. Performance evaluation 5. Cost consciousness among people 6. Ease in accounting 7. Application of management by exception principle

(1) Quick unit cost ascertainment : Unit cost of the production can be ascertained through standard materials cost, labour cost and standard overhead recovery rate. So, as compared to historical costing, unit can be ascertained easily and quickly. (2)Tendering and quotation : Under the historical costing cost ascertainment is done at the and of the production. Under the business situation, It is necessary to quote the price before the production. Standard costing facilitates this type of tendering and quotation.

(3)Cost Control : Standard costing consider What should have been spent instead of What is spend. Thus standard or different elements of the cost reduces the wastages and inefficient operation.Thus,cost per unit is reduced. (4) Performance evaluation : Standard costing generates variances, Which are the indicators of good or bad performance. Thus, operating performances of the operators and employees can be measured through variances and the reasons for such variances.

(5) Cost consciousness among people : Because of the existence of standards or norms, the people in the organization become conscious about the cost and they strieve to the standared. They become cost conscious. (6)Ease in accounting : Where the standard costing is in use, the cost accounting data are compiled on the basis of standard cost, Which more or less remain the same during the foreseeable future. Thus, Complex accounting is exercise is simplified.

(7) Application of management by exception principle : Under the standard costing variances are identified by comparing the Actuals with the standard. Instead of detailed costing record, Only variances are analysed rigorously. Thus, variances derive the residual values which are analysed in grater detail sliving the other costing records untoucheds.

(1) Difficulty in setting standards: Standard is a measuring rod which is used in measuring the performance of employees. However, it is very difficult to set ideal or even reasonable standard. Whether standards be set on the basis of average employee performance, past records, probable futuristic events etc.Thus,standards are always subject to the challenge.

(2) Lack of flexibility : Standards are set for the longer period in advance and are required to be followed during the reasonable period. However, the variables are volatile and are changing very fast. Under such conditions standard costing becomes an unreliable activity.

(3) Employee grievances : Where standard costing is followed, the employers tend to keep high standards of performance. Thus the employees are generally not in favor of the adoption of the standard costing.

(4) Controllable and uncontrollable variances : The standard costing derives various cost variances. There are certain uncontrollable variances which are not within the control of management. Thus, the standard costing does not help controlling the uncontrollable variances.

Under the standard costing, Standard costs are ascertained for the actual production and then they are compared with the actual costs. The difference between the standard costs and actual costs are treated as variances.

~>Classification of various variances 1) Material Usage Variance Into Material Mix Variance When the production uses more than one raw-material items, with a specific standardized mix of various raw material items, like material A- 50%, B-30% and C-20%. The actual usage proportion may be different than the standard mix. Under such situation materials mix variances are calculated.

~>Classification of various variances 2)Labor Efficiency Variance and Labor Mix Variance Where the labor categories like skilled, Semi-skilled and Unskilled all are used in the production, then standard proportion, then standard proportion of labor usage is prescribed. As the skill differs, the wage rates will also differ like more wages to skilled labor and lower wages to unskilled labor. The actual production may use the labor proportion different than the standard proportion prescribed. Under such a situation labor mix variance is ascertained.

~>Classification of various variances 3) Sales Volume Variance and Sales Mix Variance Where a company is producing and selling multiple products, then the actual sales volume sometimes differ than the standard or budgeted sales volume. As ex: Three products A,B and C have budgeted sales volume of 40%, 35% and 25%. The actual sales volume may be different. Here sales mix variance is ascertained on the basis of budgeted sales and the actual sales. On the price front, generally the standard contribution margin (i.e. sales variable cost) per product category is considered instead of the standard selling price.

1.Material Cost Variance (MCV) The material cost generally consists of two parts- the price of the materials multiplied by the usage of the materials. Material Cost Variance (MCV) = (Standard Materials Costs ) (Actual Materials Costs) Or = (SQ x SR) (AQ x AR) Where,SQ = Standard Quantity,AQ = Actual Quantity SR = Standard Rate,AR = Actual Rate.

2.Labor Cost Variance (LCV) The labor cost is the result of the wage rate and the efficiency of the labor measured in terms of labor hours. Labor Cost Variance (LCV) = (Standard Labor Costs ) (Actual Labor Costs) Or = (SH x SP) (AH x AP) Where,SH = Standard Hours,AH = Actual Hour SP = Standard Price,AP = Actual Price.

3.Factory Overhead Variances Factory Overheads are the common costs which are included in the unit cost. Generally costing is confined up to the factory level and thus factory overheads are considered in the standard costing. Factory overheads are broadly classified into following two categories : A.Fixed Factory Overhead B.Variable Factory Overhead

A.Fixed Factory Overhead Variances Fixed factory overhead as per their description remain fixed irrespective of the volume of production. They are like the period cost and thus are incurred as per the passage of time, e.g. Depreciation on machinery, salary of the permanent factory supervisor etc.

A.Fixed Factory Overhead Variances However, for the purpose of standard costing, some advance budgeting is made in the beginning of the year about various items of the fixed factory overheads and such total fixed factory overheads are related to some budgeted production which is set in the beginning of the year. On the basis of such budgeted fixed factory overheads (in rupee) and the budgeted production ( in units), the per unit recovery rate is ascertained as under :

A.Fixed Factory Overhead Variances Per Unit Fixed O/H Recovery Rate = Total Budgeted Fixed Factory Overhead( In Rupee) Total Budget Production ( In Units) E.g. In the beginning of the year, Rs. 50000 have been budgeted for various heads of the fixed factory overheads and during the year, it has been budgeted that 10000 units will be manufactured. In such case per unit Recovery Rate of the Fixed Factory Overhead would be as under : Per Unit Fixed O/H Recovery Rate = Rs. 50000 10000 Units = Rs. 5 per unit.

B.Variable Factory Overhead Variances Variable factory overheads vary as per the volume of production. E.g. consumption of the trivial material in the production which are treated as overheads due to its insignificant value. E.g. butter paper used in packing the cakes of the butter in the Amul butter factory.

B.Variable Factory Overhead Variances Like direct materials and direct labor which vary with the volume of production, variable factory overheads also vary in direct proportion to production. The variable factory overhead variances are ascertained as under : Variable Factory O/H Cost Variance = Budgeted variable factory O/H cost LessActual variable factory O/H cost. = (Budgeted Units x Budgeted cost) Less (Actual Units x Actual Cost)

B.Variable Factory Overhead Variances This cost variances is further spitted into following two sub variances based on volume and rate : i.Variable Factory O/H Volume Variance = (Budgeted Units Actual Units ) x Budgeted Rate ii.Variable Factory O/H Rate Variance = ( Budgeted Rate Actual Rate ) x Actual Units

4.Sales Variances Sales variances are also developed like cost variances, i.e. materials cost, labor cost and overhead cost variances. As sales variance is related to the revenue generation, unlike cost variance the positive difference between budgeted sales and actual sales is considered as unfavorable variance and vice versa. Sales variances are used for measuring the efficiency of the sales staff. Like direct materials, direct labor and variable factory overhead variances, these variances are directly related to the Sales Volume.

4.Sales Variances Sales variance are classified as under : Sales Variance = Budgeted Sales (In Rs.) Less Actual Sales (In Rs.) = (Budgeted Sales Volume x Budgeted Price) Less(Actual Sales Volume x Actual Price) Like Direct material cost variances, the above variances is further spitted into following two subcategories on volume and price. a)Sales Volume Variance = (Budgeted Sales Volume Less Actual Sales Volume) x Budgeted Price b)Sales Price Variance = (Budgeted Price Less Actual Price) x Actual Price

~> Mixed Variances Mix Variances arise in case where the unit of production uses different mix of the material. E.g. In case of the detergent powder generally three types of raw materials are used- soda ash, slurry and color. Standard proportion of these materials is prescribed. But where the actual proportion deviates from the standard mix, then the mix variance is generated.

Various variances are analyzed by reasons for control purposes. 1.Reasons for the material price variances : o Change in price. o Cash discount not taped. o Purchase of materials other than standard material. 2. Reasons for material usage variance : o Poor workmanship resulting to wastages. o Purchase of defective material. o Rejection during inspection. REASON FOR THE VARIANCES :

3. Reasons for labor rate variances : o Change in wage rates. o Employing highly paid operator than standard operator. o Standard is ignored. 4. Reasons for labor efficiency variances : o Employment of sub-standard operator. o Inefficient operations. o Idle labor time.

5. Reasons for labor rate variances : o Change in wage rates. o Employing highly paid operator than standard operator. o Standard is ignored. 6. Reasons for the variable factory overhead variances : Variable factory overhead arise because of the variation in indirect material, indirect labor and indirect expenses which are treated as variable factory overhead due to their insignificant value.

7. Reasons for sales price variances : o Lower price to meet competition, idle capacity. o Quantity discount offered. o Cash discount offered. 8. Reasons for sales volume variances : o Inability to maintain delivery schedule. o Unexpected entry of new competitor. o Strategic aggressive market presentation by the existing competitor who will grap the market share of the company.

introduction and defination cost accounting primarily refers to the process of recording classifying...

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