Chapter 4 COST ACCOUNTING E.g. Fig. 4.

.4 A Typical Journal Page Date Analysis 2009 April 3 Salaries Cash Payment of Salaries for week ending 4 Rent Cash Building rental for month of April 5 Cash Sales Product A to X company as per invoice No. 6839 8 Equipment Notes Payable 6%, 90-days note to Y company 10 Purchase Z company Tools on open account Terms 30-days
1

F 403 112 314 112 112 201

Debit Credit (Rs.) (Rs.)

37900.00 37900.00

15000.00 15000.00

52050.00 52050.00

104 521 608 842

90000.00 90000.00

4400.00 4400.00

Compiled by Prof. Prasad Parulekar

 Date 2009 April 1 5 10 11 11 12 18 22 28 29 30

E.g. Fig. 4.5 Typical Ledger Sheet That has been closed and Balanced Analysis Balance Forward Sales Sales R Company Sales Sales Sales Sales Sales Sales Sales Total Balance Forward F Debit Date Analysis F Credit (Rs.) 2009 (Rs.) April 3 J-1 47250.0 Salaries J-1 37900.0
J-1 52050.0 J-2 4300.0

4 10 12 13 17 21 29 30

Rent Purchase Insurance Taxes Salaries Purchase Office Supplies Purchase

J-1 15000.0 J-2 8750.0

J-2 35000.0 J-2 27500.0 J-2 4700.0

J-2 22750.0 J-2 43750.0 J-3 41050.0 J-3 49250.0 J-3 J-3 7900.0 7700.0

J-3 60000.0 J-3 8750.0

J-3 27400.0 J-3 31500.0 J-3 37000.0 302150.0 68100.0

Balance Total

68100.0 302150.0

Compiled by Prof. Prasad Parulekar

 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 costs for each product
3 Compiled by Prof. Prasad Parulekar

 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 Received Cost 2009 (lb) (Rs. /lb) May 2 5000 1.8 15 10000 2.0 17 Balance on Delivered hand (lb) for use in process (lb) 5000 15000 9000 6000

Compiled by Prof. Prasad Parulekar

Fig. 4.7: Inventory Account Manufacturing Cost Works Inventory Refining of Crude Product, D For month of Sept. 2009
Cost Element Name Unit Units on hand Start End of of month month 13,000 11,000 Units used per unit produced (b) 1.5 0.0150 Total units used or produced (c) (c=a b) 1,50,000 1,500 Price per unit (Rs.) (d) 13.94 62.50 Total cost (Rs.) (e) (e=cd) 20,91,000 93,750 Cost per unit produced (f) (f=e/a) 20.91 0.9375

Crude Product D Operating wages Operating supplies Maintenance wages Maintenance materials Utilities Depreciation Overhead Total cost & Production

Gallons Hours

Hours

0.0250

2,500

100.00

2,50,000 5,25,000

2.5 5.25 4.00 1.25 1.90 36.75

Rs. Investment Gallons 5,000 4,000

250.00

2,50,00,000 1,00,000 (a)

0.5 36.75

4,00,000 1,25,000 1,90,000 36,74,750

Fig. 4.8: Cost-of-Sales Account

Cost of Sales - Account Product E For Month of Sept. 2009 Item This Last Year to Month Month date Sales, (lb) 4,75,000 5,90,000 32,20,000
Rs. / unit
Selling price: Cost of sales: 10.00

Rs. / unit
10.00

Rs. / unit
10.00

Manufacturing cost Freight & delivery Selling expense Administrative expense Research expense Total cost of sales
Profits before taxes

06.00 00.35 00.90 01.25 00.50 09.00

01.00 5

05.00 00.40 01.00 01.00 00.40 07.80

02.20

05.25 00.35 00.80 01.10 00.40 07.90

02.10 Compiled by Prof. Prasad Parulekar

 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

Compiled by Prof. Prasad Parulekar

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 payment due within 30- , 60-, or 90- days
7 Compiled by Prof. Prasad Parulekar

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. Stockholders 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; dont 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
8 Compiled by Prof. Prasad Parulekar

15. Accumulated retained earnings: also called earned surplus = (Net profit) (Dividends paid to stockholders) Item 12 to 14 --- combines to --- total stockholders 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

Compiled by Prof. Prasad Parulekar