CU-BCOM-SEM-III-Cost Accounting-Second Draft-converted

6.Administrative Overheads 30,000 7.Cost Of Production(5+6) 6,30,000 Percentage of Factory Overheads to Wages 60,000/2,40,000 = 25% Percentage of administrative overheads to works cost = 30,000/6,00,000 = 5% STATEMENT SHOWING QUOTATION PRICE PARTICULARS AMOUNT(RS.) 1.Material 2500 2.Wages 1500 3.Prime Cost(1+2) 4000 4.Factory Overheads(25% Of Wages) 375 5.Works Cost(3+4) 4375 6.Administrative Overheads(4375x5%) 218.75 7.Cost Of Production(5+6) 4593.75 QUESTIONS FOR PRACTICE 1. Classify the following expenses items in their respective groups, such as Production; Administrative; Selling and Distribution and costs excluded from Cost Accounts: a. Fuel and Power. b. Office Salaries. c. Foreman’s Wages. d. Drawing Office Expenses. e. Depreciation of Plant f. Donations g. Hospital and Dispensary Expenses of Workers h. Bank Charges i. Holiday and Leave pay of Workers j. Market Research Expenses k. Dividend Paid 101 CU IDOL SELF LEARNING MATERIAL (SLM)

l. Technical Director’s Fees m. Wages of Idle Time n. Cash Discount Allowed o. Stores Expenses; and Carriage Outwards. 2. Mr. Lakshman furnished the following date relating the manufacture of X Standard product during the month of April 2020. Raw material consumed Rs. 45,000 Direct Labour charges Rs. 22,500 Machine hours worked 2250 hours. Machine hour rate Rs.12. Administrative overhead 30% on works cost Selling overhead 90 paise per unit Unite produced 22500 Unite sold 18000 of Rs.15 per unit You are required to prepare a cost sheet from the above showing a) Cost per unit b) Profit per unit sold and profit for the period. 3. From the following particulars you are required to prepare a statement showing (a) the cost of Materials Consumed (b) Prime Cost (c) Works Cost (d) Total Cost (e) the percentage of works overheads to productive wages and (f) the percentage of general overheads to works cost. Stock of Finished Goods on 1-1-2020 75,000 Stock of Raw Materials on 1-1-2020 35,000 Purchases of Raw Materials 8,50,000 Sales of Finished Goods 16,00,000 Wages paid 5,40,000 Stock of Finished Goods in the year end 90,000 Stock of Raw Materials in the year end 36,000 Factory overheads 1,45,000 Office and general overheads 72,000 A tender for a big plant is about to be sent out by the company. The supplies available, according to the Costing Department, would cost Rs.60,000, and the salaries paid to workers 102 CU IDOL SELF LEARNING MATERIAL (SLM)

to construct the plant would cost Rs.32,000. The tender will be conducted at a 25% net profit margin on the sale price. Show how much the tender would be if the figures above were used. 4. The following information relates to a product that was manufactured in January 2016. 30,000 rupees was spent on raw materials. Rs. 19,600 in direct wages 2300 hours employed by the machine Office on cost 10% of job cost Machine hours rate Re. 1.00 Units are being sold at a rate of Re.0.20 each. 19030 units were made, with 11418 units sold at $4 each. You must create a cost sheet for the above that shows the cost of output per unit. 5.Following information is given by A ltd for the year ended 2020 Materials Rs 3,50,000; Labour Rs 2,70,000; Factory overheads Rs 81,000 and Administration overheads Rs 56,080. What price should the company quote for a refrigerator? It is estimated that Rs 1,000 in material and Rs 700 in Labour will be required for one refrigerator. Absorb Factory overheads on the basis of Labour and Administration overheads based on works c½.A profit of 12 1/2% on selling price is required. 6. The accounts of a manufacturing company disclose the following information for the six months ending 31st December,2020: Materials used Rs.1,50,000. Direct wages Rs.1,20,000 Factory overhead Rs.30,000 Admirative Expenses Rs.15,000. Prepare the cost sheet of the machine and calculate the price which the company should quote for manufacture of the machine requiring materials valued Rs.1,250 and expenditure in productive wages Rs.750 so that the price might yield a profit of 20% on the selling price 103 CU IDOL SELF LEARNING MATERIAL (SLM)

6.7 SUMMARY • Unit costing is a costing procedure that is best used when a company is producing a single item on a large scale using continuous manufacturing. • The cost units are equal, and the costs are identical. • The cost per unit is determined by dividing the total production by the cost incurred over a period. • A cost sheet is a paper that allows the precise cost of a cost centre or cost unit to be assembled. • A production account is a statement that shows the cost of production, the cost of sales, and the profit earned over a given period. • Work costing determines the cost of a job that is generated according to the customer's specifications. • Job costing is a costing method that handles each job as a separate cost unit. A work is a cost unit that is made up of one order or contract. • When processing is done in batches, a batch costing method is used. • A batch is a cost unit made up of a distinct, easily recognizable group of product units that keeps its identity during the manufacturing process. 6.8 KEYWORDS • Direct Material Cost: Cost of material which can be directly allocated to a cost centre or a cost object in an economically feasible way. • Direct labour Cost: Cost of wages of those workers who are readily identified or linked with a cost centre or cost object. • Direct Expenses: Expenses other than direct material and direct Labour which can be identified or linked with cost centre or cost object. • Pre-Production Costs: These are costs incurred when a new factory is in the process of establishment, a new project is undertaken, or a new product line or product is taken up but there is no established or formal production to which such costs may be charged. Preproduction costs are normally treated as deferred revenue expenditure and charged to the costs of future production. 6.9 LEARNING ACTIVITY 1. List out various costs involved in making a furniture ___________________________________________________________________________ ___________________________________________________________________________ 2. Direct material 2.Direct Labour 3.Overheads 4.Direct Expenses 5.Indirect expenses 104 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ ___________________________________________________________________________ 6.10 UNIT END QUESTIONS A. Descriptive Questions: Short Questions 1. Give few examples of Direct Material and Indirect Material. 2. Explain the uses of preparation of Cost sheet 3. Explain the term Uniform Costing? 4. Explain Why sunk cost is not a relevant cost? 5. Explain what is Factory cost? 6. Prime Cost is Rs.41,000. Direct labor cost consists of skilled labor Rs.6,000 and unskilled labor Rs.2,000. Variable works overhead is 100% of direct wages and fixed works overhead is 60% of direct wages. Sale of scrap is Rs.1,800. Find works cost. Long Questions 1. Explain Format of Cost sheet 2. Explain the meaning of the term Cost 3. List items of cost included in preparation of Cost sheet? B. Multiple Choice Questions 1. Which of the following items is not included in preparation of cost sheet? a. Carriage inward b. Purchase returns c. Sales commission d. Interest paid 2. Which of the following items is not excluded while preparing a cost sheet? a. Goodwill written off b. Provision for taxation c. Property tax on Factory building d. Transfer to reserves 3. Which of the following are direct expenses? 105 CU IDOL SELF LEARNING MATERIAL (SLM)

I. The cost of special designs, drawings or layouts 106 II. The hire of tools or equipment for a particular job III. Salesman’s wages IV. Rent, rates and insurance of a factory a. (I) and (II) b. (I) and (III) c. (I) and (IV) d. (III) and (IV) 4. What is prime cost a. Total direct costs only b. Total indirect costs only c. Total non-production costs d. Total production costs 5. Which of the following is not an element of works overhead? a. Sales manager’s salary b. Plant manager’s salary c. Factory repairman’s wages d. Product inspector’s salary 6. For the purpose of Cost sheet preparation, costs are classified based on: a. Functions b. Relevance c. Variability d. Nature 7. Audit fees paid to cost auditors is part of: a. Selling & Distribution cost b. Production cost c. Administration Cost d. Not recorded in the cost sheet CU IDOL SELF LEARNING MATERIAL (SLM)

8. Which of the following does not form part of prime cost: a. GST Paid on raw materials (input credit can be claimed b. Cost of transportation paid to bring materials to factory c. Cost of packing d. Overtime premium paid to workers. Answer 1-D,2- C,3- A,4- A,5- A,6- A,7- B,8- C,] State the following statements are true or false: 1. Total cost = prime cost + All indirect costs. 2. Closing stock of work-in-progress should be valued on the basis of prime cost. 3. Closing stock of finished goods should be valued on the basis of cost of sales. 4. Production cost includes only direct costs related to the production. 5. Primary packaging cost is included in distribution cost. Answer 1- T,2- F,3- F,4- F,5- F 6.11 REFERENCES Textbooks: • T1 Introduction to Cost Accounting, Charles T. Horngren, PHI. • T2 Cost Accounting, Jawahar Lall & Seema Srivastava, TMH, 4th edition. Reference Books: • R1 Cost and Management Accounting, Arora M N, Vikas Publishing, 8thedition. • R2 Cost Accounting, S.N Maheshwari, S.Chand Publications 107 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 7: RECONCILIATION OF COST AND FINANCIAL ACCOUNTS Structure 7.0 Learning Objectives 7.1 Need for reconciliation 7.2 Causes for difference 7.3 Items included in Cost accounts only 7.4 Reconciliation 7.5 Summary 7.6 Keywords 7.7 Learning Activity 7.8 Unit End Questions 7.9 References 7.0 LEARNING OBJECTIVES After studying this unit students will be able to: • Need for reconciliation • Reconciliation of cost and financial accounts. • Understanding various reasons for difference. • Items included in cost accounts. 7.1 NEED FOR RECONCILIATION • Financial accounts are concerned with the ascertainment of profit or loss for the whole operation of the organization • whereas cost accounts are provided for ascertaining the profit or • Loss made by manufacturing or product divisions/products for cost comparison. Thus, reconciliation between the results of the two sets of books is necessary due to the following reasons: • It finds out the reasons for the difference in the profit or loss in cost and financial accounts. • It ensures the mathematical accuracy • Reliability of cost accounts • It contributes to the standardization of policies regarding stock valuation, depreciation and overheads. 108 CU IDOL SELF LEARNING MATERIAL (SLM)

• It facilitates more coordination and promotes better co-operation, between the activities of financial and cost sections of the accounting department. 7.2 CAUSES OF DIFFERENCES The items may be classified as under: Purely Financial Charges: • Loss on sale of fixed assets. • Loss in investments. • Discount on issue of shares. • Interest on bank loan, mortgages, debentures etc. • Expenses of the company’s share transfer office. • Damages payable. • Penalties and fines. • Losses due to scrapping of machinery. • Remuneration paid to the proprietor in excess of a fair reward for services rendered. Purely Financial Income: • Rent receivable, (when rent is receivable from subletting part of business premises - then it can also be included in cost accounts). • Interest received on bank deposits. • Profit made on sale of investments, fixed assets etc. • Transfer fees received. • Interest, dividends etc. received on investments. • Brokerage received. • Discount, commission etc. received. Appropriation of Profits: • Donations and charities paid. • Taxes on income and profits. • Dividend paid. • Transfer to reserves and sinking fund. • Additional provision for depreciation of building, plant etc. and for bad debts. • Amounts written off - goodwill, preliminary expenses, underwriting commission, discount on debentures issued, organization expenses etc. • Capital expenditure, specifically charged to revenue. 7.3 ITEMS INCLUDED IN COST ACCOUNTS ONLY 109 CU IDOL SELF LEARNING MATERIAL (SLM)

There are certain items which are excluded from financial accounts but are included in cost accounts: • Interest on money that is used in development but is not paying interest on. It is recorded in cost books to display the nominal (notional) cost of employing capital rather than spending it outside the business. It is also recorded in charge in lieu of rent where the premises are held. • Depreciation on an asset, even though the asset's book value has been reduced to a marginal amount. • The proprietor's salary, if he works but does not charge a salary. 7.4 RECONCILIATION STATEMENT When there is a difference between the profits disclosed by cost accounts and financial accounts, the following steps shall be taken to prepare a Reconciliation Statement: I. Ascertain the various reasons of disagreement between the profits disclosed by two sets of books of accounts. II. If profit as per cost accounts (or loss as per financial accounts) is taken as the base. ADD: • Items of income included in financial accounts but not in cost accounts. • Items of expenditure (as interest on capital, rent on owned premises etc.) included in cost accounts but not in financial accounts. • Amounts by which items of expenditure have been shown in excess in cost accounts as compared to the corresponding entries in financial accounts. • Amounts by which items of income have been shown in excess in financial accounts as compared to the corresponding entries in cost accounts. • Over absorption of overheads in cost accounts. • The amount by which closing stock of inventory is undervalued in cost accounts. • The amount by which the opening stock of inventory is overvalued in cost accounts. DEDUCT: • Items of income included in cost accounts but not in financial accounts. • Items of expenditure included in financial accounts but not in cost accounts. • Amounts by which items of income have been shown in excess in cost accounts over the corresponding entries in financial accounts. • Amounts by which items of expenditure have been shown in excess in financial accounts over the corresponding entries in cost accounts. 110 CU IDOL SELF LEARNING MATERIAL (SLM)

• Under absorption of overhead in cost accounts. • The amount by which closing stock of inventory is overvalued in cost accounts. • The amount by which the opening stock of inventory is undervalued in cost accounts. III. After making all the above additions and deductions, the resulting figure will be profit as per financial accounts. Illustration 1: During the year ended 31st March, 2014, the profit of a company stood at 36,450 as per financial records. The cost book, however, showed a profit of Rs.51,950 for the same period. You are required to reconcile the profit as shown by two sets of accounts: (i) Opening stock overstated in cost accounts 3,500 (ii) Closing stock understated in cost accounts 4,600 (iii) Factory overheads under recovered in cost accounts 2,500 (iv) Administration expenses over recovered in cost accounts 750 (v) Selling and distribution expenses under-recovered in cost accounts 1,650 (vi) Depreciation over-recovered in cost accounts 1,500 (vii) Interest on investment not included cost accounts 5,000 (viii) Obsolescence loss in respect of machineries charged in financial accounts 2,450 (ix) Income-tax provided in financial accounts 25,000 (x) Bank interest credited in financial accounts 1,500 (xi) Stores adjustments (debit in financial book) 750 Solution: Reconciliation Statement Particulars Amount Amount Net profit as per financial accounts 36,450 Add: Items not debited in cost accounts: 111 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Obsolescence loss 2,450 (ii) Income tax provisions 25,000 (iii) Stores adjustments 750 28,200 Under recover of factory overheads in cost accounts 2,500 Under recovery of selling and distribution expenses in cost accounts 1,650 32,350 68,800 (TOTAL -A) 16,850 Less: Items not credited in cost accounts: 51,950 (i) Interest on investments 5000 (ii) bank interest in financial accounts 1500 6500 Over recovery of administration expenses 750 Over recovery of depreciation 1,500 (TOTAL – B) 8,750 Difference in value of stock: (i) Opening stock overstated in cost accounts 3500 (ii) Closing stock understated in cost accounts 4,600 Net profit as per cost accounts Illustration 2: The net profits of a manufacturing company appeared at 64,500 as per financial records for the year ended 31st December, 2019. The cost books however, showed a net profit of 86,460 for the same period. A careful scrutiny of the figures from both the sets of accounts revealed the following facts. 112 CU IDOL SELF LEARNING MATERIAL (SLM)

Particulars Amount Income-tax provided in financial books 20,000 Bank Interest (Cr) in financial books 250 Work overhead under recovered 1,550 Depreciation charged in financial records 5,600 Depreciation recovered in cost 6,000 Administrative overheads over-recovered 850 Loss due to obsolescence charged in financial accounts 2,800 Interest on Investments not included in cost accounts 4,000 Stores adjustments (Credit in financial books) 240 Stores adjustments (Credit in financial books) 3,350 Prepare reconciliation statement. Particulars Amount Amount Profit as per Financial Accounts 64,500 Add: Income tax provided in financial books only Works overhead under recovered 20,000 Loss to obsolescence considered. Financial A/c only. 1,550 Loss due to depreciation in stock 1,550 3,350 27,700 Less: Bank interest credited in financial books. 250 -5,740 Over recovery of depreciation 400 86,460 Administration OH’s over recovered 850 Interest on investment not included in cost books 4,000 Stores adjustment 240 Profit as per Cost Accounts Questions for Practice 1. The net profit shown by financial A/c ‘s of a company amounted to Rs.2,85,500 while profit as per cost accounts for that period was Rs. 388600 on reconciliation the following differences were noticed. a) The following items were included in the Financial books: a. Director fees (Dr) 6500 b. Bank interest (Cr) 300 c. Income tax (Dr) 83000 b) Bad and doubtful debts for Rs.5700 were written off in financial books. c) Overhead in cost accounts absorbed were Rs.85000 with the actual were Rs.83200. d) A net loss of Rs. l0,000 on sale of old machinery was dealt with in the Financial books. 113 CU IDOL SELF LEARNING MATERIAL (SLM)

Reconcile the profits between the cost and financial accounts. 2. The Net profit of Sundar Co., Ltd., appeared at Rs.8200 as per financial records for the year ending 31st March 2020. The cost books should show a Net profit of Rs.90,000 for the same period A scrutiny of the figures from both the sets of accounts showed the following facts. 1. Factory overhead under recovered in costs 2,000 2. Administrative overhead over recovered in costs 1,000 3. Depreciation charged in financial books 4,500 4. Depreciation recovered in Costs 7,000 5. Interest on investments not included in costs. 3,000 6. Goodwill written off in financial books 6,000 7. Preliminary expenses written off in financial books 5,000 8. Income tax provided in financial books v: 10,000 9. Loss due to obsolescence charged in financial books 3,500 10. Bank interest and transfer fee credited in financial books 9,000 11. Stores Adjustments credited in financial books 9,000 12. Value of opening stock: a) Cost a/c 7000 b) Financial a/c 9000 13. Value of closing stock: a) Cost a/c 12000 b) Financial a/c 8000 c) Interest charged in cost a/c 6000 d) Loss from sale of furniture 1000 Prepare a statement showing the reconciliation between the figure of net profit as per cost A/cs and figure of net profit as shown in the financial books. 7.5 SUMMARY • There is no cost accounting base of the financial accounting system. • A reconciliation statement indicates all sources of discrepancies between the benefit stated in Expense Accounts and the profit reported in Financial Accounts. • Reconciliation puts management in a stronger position to recognize the reasons for benefit variances, making for more effective internal control. • A non-integrated accounting system is one in which two sets of books are kept: one for costing transactions and another for financial transactions. 7.6 KEYWORDS 114 CU IDOL SELF LEARNING MATERIAL (SLM)

• Cost Collection: Cost collection is the process of booking costs against a particular cost account code under a particular cost centre or directly under a cost unit, as the case may be. • Cost Control Accounts: Cost control accounts are accounts maintained for the purpose of exercising control over the costing ledgers and also to complete the double entry in cost accounts. • Integral Accounting: Integrated accounting system is a system of accounting, whereby cost and financial accounts are kept in the same set of books. Integral accounts provide the information required by costing and financial accounts. • Non-Integral Accounting: Non-Integrated accounting system is a system of accounting where two sets of books are maintained- (i) for costing transactions; and (ii) for financial transactions. 7.7 LEARNING ACTIVITY 1. Prepare a flow chart for integrated and non-integrated Accounting system ___________________________________________________________________________ 7.8 UNIT END QUESTIONS QUESTIONS A. Descriptive Questions Short Questions 1. List the steps involved in reconciliation of Accounting and Cost records 2. List few items which are included in financial accounts but excluded from Cost Accounts? 3. List few items which are included in Cost accounts but excluded from Financial Accounts? Long Questions 1. Give reasons as to why it is necessary to reconcile Cost accounts and Financial accounts 2. Compute Profit as per Financial books from the following information: a) Profit as per cost accounts 25,000 b) Closing stock over valued in cost books 12,500 c) Preliminary expenses written off 3,000 d) Profit on sale of building 30,000 e) Administration expenses over valued in cost books 50,375 f) Works overhead under recovered in cost books 30,375 115 CU IDOL SELF LEARNING MATERIAL (SLM)

g) Bank interest and transfer fee in financial books 5,000 h) Interest on investment recorded in financial books 10,000 i) Depreciation shown in excess in cost books 4,000 j) Provision made for income tax 40,000 3. The net profit shown by financial accounts of a company amount to Rs.18,000, while the profit as per cost accounts for that period were Rs.28,000. On reconciliation, the following differences were noticed. (a) The following items were included in the financial books : Director’s fees (Dr.) Rs.650 Bank interest (Cr.) Rs.120 Income Tax (Dr.) Rs.8,300 Bad and doubtful debts far Rs.570 were written off in financial books. Overheads in cost accounts absorbed were Rs.8,500 while the actuals were Rs.8,300 Work was started during the year on a new factory and expenditure of Rs. 16,000 was incurred. Depreciation of 5% was provided in financial accounts. Reconcile the profit between the cost and financial accounts. B. Multiple choice questions: 1. In Reconciliations Statements Expenses shown only in financial accounts are. a. Added to financial profit b. Deducted from financial profit c. Ignored d. Added to costing profit 2. In Reconciliation Statement Expenses shown only in cost accounts are. a. Added to financial profit b. Deducted from financial profit c. Ignored d. Deducted from costing profit 3. In Reconciliation Statement, transfers to reserves are. 116 a. Added to financial profit b. Deducted from financial profit CU IDOL SELF LEARNING MATERIAL (SLM)

c. Ignored d. Added to costing profit 4. In Reconciliation Statement, Incomes shown only in financial accounts are. a. Added to financial profit b. Deducted from financial profit c. Ignored d. Deducted from costing profit 5. In Reconciliation Statement, Closing Stock Undervalued in Financial accounts is a. Added to financial profit b. Deducted from financial profit c. Ignored d. Added to costing profit Answer 1-a,2- b,3- a,4- b,5- a] 7.9 REFERENCES Textbooks: • T1 Introduction to Cost Accounting, Charles T. Horngren, PHI. • T2 Cost Accounting, Jawahar Lall & Seema Srivastava, TMH, 4th edition. Reference Books: • R1 Cost and Management Accounting, Arora M N, Vikas Publishing, 8thedition. • R2 Cost Accounting, S.N Maheshwari, S.Chand Publications 117 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 8: OPERATING COSTING Structure 8.0 Learning Objectives 8.1 Introduction 8.2 Service costing 8.3 Preparation of operating cost sheet. 8.4 Hotels 8.5 Hospitals 8.6 Summary 8.7 Keywords 8.8 Learning Activity 8.9 Unit End Questions 8.10 References 8.0 LEARNING OBJECTIVES After studying this unit students will be able to: • Understand operating costing • Evaluate Calculation of cost per unit. • Understand Operating costing in Hotels, Hospitals and transport costing. 8.1 INTRODUCTION The \"list, assignment, and interpretation of expense\" is what cost accounting is all about. Costing is the method or practice of estimating the costs of different types of inputs used in an enterprise and allocating those costs to various goods and activities. In the manufacturing industry, cost accounting methods are commonly used. Cost accounting is now widely used in the service sector, including banks, insurance firms, transportation agencies, electricity generation companies, hospitals, passenger transport and railways, hotels, road maintenance, educational institutions, road lighting, canteens, port trusts, and a variety of other service organizations. The method of costing used in these industries is known as \"Operating Costing.\" Operating costing is defined as \"that type of operating costing that applies where standardized services are provided either by an undertaking or by a service cost centre within an undertaking,\" according to CIMA [London]. Nature of Operating Costing 118 CU IDOL SELF LEARNING MATERIAL (SLM)

The primary goal of operational costing is to determine the expense of the organization's services. In such cases, determining the unit of cost is needed. Cost units differ from one sector to the next. For instance, in the goods transportation industry, cost per tonne kilometer must be determined, while in the passenger transportation industry, cost per passenger kilometer must be calculated. Later in the chapter, the cost units used in various service units are discussed in detail. The next move is to gather and categorize various costs under various headings. The heads used are, (a) Fixed or standing charges (b) Semi-fixed or maintenance charges (c) Variable or running charges 8.2 SERVICE COSTING Service Costing as “that form of operation costing which applies where standardized services are rendered either by an undertaking or by a service cost render with in an undertaking”. Classification of Costs – Transport costing: Operating costs of a transport undertaking comprising different items, which are classified under the following three groups. Standing or fixed charges: These charges are incurred in spite of the kilometers run. It is fixed in nature. E.g., Insurance, Motor vehicle tax, license fee, rent, salary of operating manager etc. Maintenance charges: It includes semi variable expenses E.g., Tyres and tubes, repairs and paintings etc. Operating and running charges: These payments differ in direct relation to the number of kilometers travelled. This category includes all variable charges on moving vehicles. In general, it covers things like gasoline, oil, grease, and the salaries of the driver and attendant whether the payment is based on the length of the ride or the distance travelled. All expenses can be divided into two types: fixed costs and variable costs, in lieu of the latter grouping. Both maintenance and operating costs are called variable costs in this case. Absolute passenger or commercial passenger/ tone km: • In the case of goods transport the equation is Distance of each part of journey x weight carried • In the case of passenger transport, the following formula is used 119 CU IDOL SELF LEARNING MATERIAL (SLM)

Distance of each part of journey x No. of passengers taken for the same distance Illustration A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at station Q and rest of the goods at station R. It reaches back directly to station P after getting reloaded with 8 tonnes of goods at station R. The distance between P to Q, Q to R and then from R to P are 40 kms, 60 kms, and 80 kms respectively. Compute absolute tone kms and commercial tone-km. Solution: Absolute ton/ km = Total distance x weight carried = (40x10) + (60x6) + (80x8) =400+360+640= 1400 Commercial tone/km = Distance x average load = [40+60+80] x {10+6+8/3} = 180x8=1440 8.3 PREPARATION OF OPERATING COST SHEET An operating cost sheet is prepared periodically in order to ascertain the cost per unit. The Performa of an operating cost sheet is given below: Particulars Total cost Cost per unit A. Fixed or standing charges: Garage rent License fee Insurance Motor vehicle tax Interest on capital Supervision Office establishment Administrative overheads Salary of foreman , manager etc 120 CU IDOL SELF LEARNING MATERIAL (SLM)

Total B. Maintenance charges: Repairs and renewals Tyres and tubes Paintings Overhauling Cleaning Gas and electric charges Spare parts and accessories Total C. Operating charges: Petrol Engine oil Lubricating oil, grease etc Wages of operators Depreciation Salaries of running staff Water Total Calculation of Depreciation: If the rate of depreciation is not given, depreciation is calculated as follows: Depreciation = Cost – scrap ÷ Life in years Depreciation per mile, or km = Depreciation p.a (per annum) ÷ Km/miles run p.a (per annum) Illustration: 121 CU IDOL SELF LEARNING MATERIAL (SLM)

From the following data calculate the cost per mile of a vehicle: Value of vehicle Rs. 15,000 Road license for the year 500 Insurance charges per year 100 Garage rent per year 600 Drivers’ wages per month 200 Cost of petrol per liter 0.8 Miles per liter 8 Proportional charge for tyre and maintenance per mile 0.2 Estimated life 1,50,000 miles Ignore interest on capital. Solution: Operating cost statement Particulars Annual cost Cost per unit Fixed expenses: Road license fee 500 0.08 Insurance charge 100 0.02 Garage rent 600 0.1 Maintenance charges: Cost of tyre and maintenance of per mile 0.2 0.2 Operating /running charges: Cost of petrol per mile 80p/8 0.1 Drivers wage per mile 2400/6000 0.4 Depreciation of vehicle 15000X6000/1,50,000 0.1 Cost per unit 1 122 CU IDOL SELF LEARNING MATERIAL (SLM)

8.4 HOTELS In the hotel sector, which works on a commercial basis, service costing is an important method. As a result, it is important to compute the cost in order to calculate the price of the hotel's various facilities and to determine the profit or loss at the end of a given period. Guest-day or room-day could be the cost unit. Estimated occupancy rates at various points in time, such as high season or lean season, are taken into account when calculating cost per guest day or room day. 8.5 HOSPITALS Patients may receive a range of medical services from hospitals. The cost of these facilities is determined using hospital costing. A hospital can have various divisions that provide a wide range of services to patients. - such as • Out-Patient • In-Patient • Medical services like X-Ray, Scanning, etc. • General services like Catering, Laundry, Power house, etc. • Miscellaneous services like Transport, Pharmacy, etc. Unit of Cost Common unit of costs of various departments are as follows: • Out-Patient - Per Outpatient • In-Patient - Per Room Day • Scanning - Per Case • Laundry - Per 100 items laundered Questions for Practice 1. A truck starts with a load of 20 tonnes of goods from station A. 8 tonnes are unloaded in station B. It reaches back directly to station A after getting reloaded with 16 tonnes of goods at station C. The distance between A to B, B to C and then from C to A are 40 kms, 60 kms, and 80 kms respectively. Compute absolute tone kms and commercial tone-km. 2. Dharani Transport Co. is running four buses between two cities A and B which are fifty miles apart, seating capacity of each bus is 40 passengers. 123 CU IDOL SELF LEARNING MATERIAL (SLM)

The following particulars were obtained from their books for the month of April 2020. Office staff salary Rs. 6000 Oil expenses Rs 8000 Driver and conductor salary Rs. 2400 Repairs and maintenance Rs. 800 Insurance for bus Rs. 1600 Depreciation. Rs. 2600 Interest and other charges Rs. 2000 ----------- 23,400 Actual passengers carried were 80% of the seating capacity. All four buses made one trip a day for all 30 days. Prepare an operating cost statement for the month showing cost per passenger mile. 3. Work out in appropriate cost sheet form the unit cost per passenger km for the year 2009- 10 for a fleet of passenger buses run by a transport company from the following figures extracted from its books:- 5 passenger buses costing Rs.60,000, Rs.1,20,000, Rs.50,000, Rs. 65,000 and Rs. 45,000. respectively. Yearly depreciation of vehicles is 20% of cost. a. Annual repairs, maintenance and spare parts is 80% of depreciation. b. Wages of 10 drivers @Rs.100 each per month, c. wages of 20 cleaners @ Rs. 50 each per month. d. Yearly rate of interest @ 4% on capital. e. Rent of 6 garages @ Rs. 50 each per month. f. Directors’ fees @ Rs.400 per month, g. office establishment @ Rs. 1000 per month, h. license and taxes@ Rs.1000 every six months, i. realization by sale of old tyres and tubes @ Rs. 3,200 every six months, j. 900 passengers were carried over 1,600kms during the year. 4. VISHWA Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more beds can be added, if required. Rent per month: Rs.1,50,000 Supervisors - 2 persons @ Rs.50,000 per month each Nurses - 4 persons @ Rs.40,000 per month each Ward Boys - 4 persons @ Rs.10,000 per month each Doctors were paid Rs.250,000 per month on the basis of number of patients attended and the time spent by them. Other expenses for the year are as follows: Repairs (fixed) – Rs.1,74,000/- Food to patients (variable) – Rs.17,60,000 124 CU IDOL SELF LEARNING MATERIAL (SLM)

Other services to patients (variable) – Rs.6,00,000 Laundry charges (variable) – Rs.12,00,000 Medicines (variable) – Rs.7,50,000 Other fixed expenses – Rs. 21,60,000 Administration expenses allocated – Rs.20,00,000 It was estimated that for 100 days in a year 35 beds are occupied, and 25 beds are occupied for 75 days only. The hospital hired 750 beds at a charge of Rs.100 per bed per day to accommodate the flow of patients. However, this does not exceed more than 5 extra beds over and above the normal capacity of 35 beds on any day. You are required to - (a) Calculate profit per Patient day, If the hospital recovers on an average Rs.3,000 per day from each patient (b) Find out Break-even point for the hospital. (CMA EXAM) 5. With 50 single rooms, the Krishna lodging home is located in a small hill station near OOTY. During the six off-season months of the year, the home provides discounted prices. During this time, you will be paying half of the entire room rent. The profit margin for the management is set at 20% of the room rent. The expense figures are as follows and other information for the fiscal year ending March 31, 2020. [Assume a month is 30 days long.] Seasonal occupancy is 80 percent, while off-season occupancy is just 40 percent. Expenses: Staff salaries of Rs.5,50,000 (excluding space attendants) • Rs.1,35,000 in construction repairs • Rs.60,000 for laundry and linen • Rs.1,70,000 for the interior and tapestry • Miscellaneous expenses: Rs.1,90,800 (iii) A 10% annual depreciation for buildings and a 15% annual depreciation for furniture and appliances is needed. in the basis of a straight line (iv) Room attendants are charged Rs.7.5 per room day based on the number of rooms occupied in a month. (v) Lighting charges are 240 per room per month, except for four months in the winter where they are 60 per room. 125 CU IDOL SELF LEARNING MATERIAL (SLM)

This price is based on a month's worth of complete occupancy. (vi) The total expenditure in the home is Rs. 200 lakhs, of which Rs. 160 lakhs is for the structure and Rs. 20 lakhs is for the rest. Furnishings and appliances On the basis of the above details, you must calculate the daily room rent chargeable both during the season and during the offseason months. 8.6 SUMMARY • Service costing is a method of costing that is applied to businesses that offer services rather than produce goods. • Operational Costing: According to CIMA, operating costing is a type of operating costing that applies when a company or a service cost centre within a company provides standardized services. • In the hotel industry, which works on a commercial basis, service costing is an important method. • To calculate the expense of these facilities, hospital costing is used. • Depreciation = Cost – Scrap / life in years • Fixed or standing charges: These charges are incurred regardless of the number of kilometers travelled. • Maintenance costs: These are expenditures that are semi-variable. • Administrative and running costs: These costs differ in direct relation to the amount of kilometers travelled. 8.7 KEYWORDS • Operating Costing: - Used by those undertakings which provide services rather than producing commodities. Cost units used in the following services undertaken as below:- • Transport service − Passenger km., quintal km., or tonne km. • Supply service − Kwh, Cubic meter, per kg., per litre. • Hospital − Patient per day, room per day or per bed, per operation etc. • Canteen− Per item, per meal etc. • Cinema − Per ticket 8.8 LEARNING ACTIVITY 1. Visit a transportation company and try to understand the various cost incurred by it and how plying cost is determined. 126 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ _______________________________________________ 8.9 UNIT END QUESTIONS QUESTIONS A. Descriptive Questions Short Questions 1. What is operating or service cost? State the industries where is it to be used. 2. State the salient features of service costing? 3. What do you mean by Operating and running charges? 4. How will you calculate Absolute passenger kms? Long Questions: 1. GURU Transport Ltd. charges Rs. 90 per ton for its 6-tonnes truck lorry load from city ‘X’ to city ‘Y’. The charges for the return journey are Rs. 84 per ton. No concession or reduction in these rates is made for any delivery of goods at intermediate station ‘Z’. In January 2020, the truck made 12 outward journeys for city ‘Y’ with full load out of which 2 tons were unloaded twice in the way at city ‘Z’. The truck carried a load of 8 tons in its return journey for 5 times but was once caught by police and Rs. 1,200 was paid as fine. For the remaining trips the truck carried full load out of which all the goods on load were unloaded once at city ‘Z’, but it returned without any load once only from ‘Z’ station to ‘X’ station. The distance from city ‘X’ to city ‘Z’ and city ‘Y’ are 140 km. and 300 km. respectively. Annual fixed costs and maintenance charges are Rs. 60,000 and Rs. 12,000 respectively. Running charges spent during January 2012 are Rs. 2,944. You are required to find out the cost per absolute tonne-kilometre and the profit for January 2020. Calculate total passenger kilometers from the following information: Number of buses 6, number of days operating in a month 25, trips made by each bus per day 8, distance covered 20 kilometers (one side), capacity of bus 40 passengers, normally 80% of capacity utilization. 2. What do you understand by Operating Costing and How are composite units computed? 3. What is meant by operating Costs? 4. A lorry starts with a load of 24 tons of goods from station A. It unloads 10 tons at station B and rest of goods at station C. It reaches back directly to station A after getting reloaded with 18 tons of goods at station C. The distance between A to B, B to 127 CU IDOL SELF LEARNING MATERIAL (SLM)

C and then from C to A are 270 kms, 150 kms and 325 kms respectively. Compute ‘Absolute tons km.’ and ‘Commercial tones-km’ B. Multiple Choice Questions: 1. Cost of service under operating costing is ascertained by preparing: a. Cost sheet b. Process account c. Job cost sheet d. Production account 2. Operating costing is applicable to: a. Hospitals b. Cinemas c. Transport undertaking d. All of these 3. Composite cost unit for a hospital is: a. Per day b. Per bed c. Per patient-day d. Per patient 4. Cost units used in power sector is called: a. Number of hours b. Number of electric points c. Kilowatt-hour(KWH) d. Kilo meter (K. M) 5. Absolute Tonne-km. is an example of: a. Composite unit for bus operation b. Composite unit of transport sector c. Composite unit for oil and natural gas d. Composite unit in power sector Answer 1-a, 2- d,3- c,4- c,5- b] 128 CU IDOL SELF LEARNING MATERIAL (SLM)

8.10 REFERENCES Textbooks: • T1 Introduction to Cost Accounting, Charles T. Horngren, PHI. • T2 Cost Accounting, Jawahar Lall & Seema Srivastava, TMH, 4th edition. Reference Books: • R1 Cost and Management Accounting, Arora M N, Vikas Publishing, 8thedition. • R2 Cost Accounting, S.N Maheshwari, S.Chand Publications 129 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 9: METHOD OF COSTING Structure 9.0 Learning Objectives 9.1 Job Costing 9.2 Contract costing 9.3 Process costing 9.4 By-Product and Joint Product 9.5 Summary 9.6 Keywords 9.7 Learning Activity 9.8 Unit End Questions 9.9 References 9.0 LEARNING OBJECTIVES After studying this unit students will be able to: • Explain the methods of cost accounting • Analyze the preparation of process account • Describe the concept of by product and joint product. 9.1 JOB COSTING It entails determining the costs of each task, work order, or project separately. Work is typically performed inside the factory or workshop in the case of a job. Occasionally, a job is done on the customer's premises. Shipbuilding, printing, manufacturing, machine tools, readymade clothes, shoes, hats, furniture, musical instruments, interior decorations, and other industries use this form of costing. Features: • Each job has its own features, which are determined by the customer's special order. • Each job is viewed as a cost unit. •On the basis of identifying numbers, a separate work cost sheet is created for each job. • For each task, a separate work in progress ledger is held. • The work is usually only for a brief period of time. 130 CU IDOL SELF LEARNING MATERIAL (SLM)

Advantages of Job costing: • It can easily discern profitable jobs from unprofitable jobs. • It can easily recognize faulty work and spoilage for a department or person; • It can easily correct the selling price of special orders. • It assists in the preparation of cost estimates for submitting quotations and tenders for similar work. Illustration From the following particulars calculate the cost of Job No.505 and price for the job to give a profit of 25% on the selling price. Material: Rs. 6820 Wage details Department X: 60 hrs. @ Rs. 3 per hr. Y: 50 hrs. @ Rs. 3 per hr. Z: 30 hrs. @ Rs. 5 per hr. The variable Overheads are as follows: Department X: Rs. 5000 for 5000 hrs. Y: Rs. 4000 for 2000 hrs. Z: Rs. 2000 for 500 hrs. The total fixed expenses amounted to Rs. 20,000 for 10,000 working hours. Calculate the cost of Job No. 505 and price for the job to give a profit of 25% on selling price Solution: Job Cost Sheet No. 505 Particulars Amount Amount Direct Material 6,820 Wages: 131 CU IDOL SELF LEARNING MATERIAL (SLM)

Department X 60x3=180 480 Department Y 50x3=150 7,300 Department Z 30x5=150 Prime Cost 280 Overheads: - Variables 60 x1 = 60 7,580 Department X 50 x2= 100 280 Department Y 30x 4= 120 7,860 Department Z 2, 620 10,480 Fixed OH 140 x 2 = 280(60+50+30 x 2) Total cost Profit 25% on selling price i.e., 1/3 of cost 7860 x1/3 Selling price 9.2 CONTRACT COSTING Introduction: Job order costing concepts may be applied in a variety of ways, including contract (or terminal) costing. Each contract is viewed as a cost unit in contract costing, and costs are calculated separately for each contract. It is appropriate for businesses involved in design or engineering projects, as well as structural or construction contracts. In contract costing, specific aspects and transaction recording are important. Material: • Materials can be purchased in bulk and stored for use on the contract as required, or they can be purchased and delivered directly to the contract. The cost of materials will be debited directly to the contract in the above case. 132 CU IDOL SELF LEARNING MATERIAL (SLM)

•If any goods are moved from one contract to another, their costs are changed using a Material Transfer Note, which is signed by both the transferor and the transferee foreman. Certain materials paid to a contract would be credited to the contract account if they are returned to stores. • Materials that have been stolen or destroyed by fire will be credited to the benefit and loss account. • Materials on hand at the end of the year will appear on the contract account's credit side. Labour: • Regardless of the type of the work performed by the labor, all labor directly working on the site is considered direct labor. • If it is desired to determine the labor cost for a specific job or work, each individual will be given a job card on which he or she must report the nature of the work done by them. • Labor analysis sheets are prepared based on the analysis of the job cards in order to determine the actual cost of labor on various operations. Direct expenses: • Costs that may be specifically paid to various contracts, such as the cost of special equipment, the cost of construction, the electric charge, and insurance, will be posted directly to the respective contracts. Overhead expenses: • Overhead expenses in contracts are few and only apply to works or administrative costs that cannot be directly attributed to specific contracts. • These indirect costs can be spread through several contracts as a percentage of material costs, salaries charged, or the prime cost. • If the contracts are large, however, the labor hour approach is often used to distribute expenditures because it is more effective. Sub-contracts: • Work of a specialized nature, such as the construction of lifts, special flooring, and so on, is usually delegated to other contractors by the main contractor. • The expense of such subcontracts is deducted directly from the contract under which the work was completed. Escalation clause: 133 CU IDOL SELF LEARNING MATERIAL (SLM)

• An escalation clause is usually included in a contract as a safeguard against any likely changes in the price or utilization of materials and/or labor. • This clause states that if the prices of raw materials, labor, and other items specified in the contract change beyond a specified limit during the contract's execution, the contract will be terminated. Cost plus contract: • A cost-plus contract is one in which the contract's value is determined by adding a certain percentage of benefit to the overall cost of the work; it's used when the exact cost of a project can't be reliably measured at the time of completion. • The profit to be paid to the contractor may be a set sum or a percentage of the expense or capital invested. Progress payment, Retention money and Architects’ certificate: • Since a contractor cannot afford to hold a large sum of money before the contract is completed for a long period of time while working on a long-term contract, the method of progress payment is used in large contracts. • The contractee agrees to pay a percentage of the contract price over time if the job is progressing satisfactorily. • The contractee's architect, surveyor, or engineer may determine the progress and issue a certificate indicating the importance of work performed and accepted by him. Job accredited is a term used to describe this form of work. • The contract stipulates that the full amount displayed on the certificate will not be charged immediately, but that the contractee will keep a portion of it until the contract is concluded. • Retention money refers to the amount held. Depending on the contract terms, the contractor can be paid 75 percent or 80 percent of the certified work. The aim of this retention is to put the contractee in a better position if the contractor fails to meet any of the contract's requirements. Work that has not yet been accepted by the contractee's architect or surveyor is referred to as work uncertified. Profit on incomplete contracts: • At the end of an accounting period it may be found that certain contracts which have been completed while others are still in process and will be completed in the coming years. AN • If profit or loss is not shown in the intermittent years for the work in progress, contract will show high figure of profit in the year of completion and reverse may be the case in the year in which a large number of contracts will remain incomplete. 134 CU IDOL SELF LEARNING MATERIAL (SLM)

However, the following rules may be followed: • If the amount of work certified is 1/4th or more but less than 1/2 of the contract price, 1/3rd of the profit disclosed as reduced by the percentage of cash received from the contractee, should be taken to the profit and loss account or Profit =1/3 x Notional Profit x (Cash received / Work certified). • If the amount of work certified is 1/2 or more of the contract price, 2/3rd of the profit disclosed, as reduced by the percentage of cash received from the contractee, should be taken to the profit and loss account. Profit= 2/3 x Notional Profit x (Cash received / Work certified) • In case the contract is very much near to completion, the profit and loss account should be credited with that proportion of total estimated profit on cash basis, which the work certified bears to the total contract price. Profit=Estimated total profit x (Work certified / Contract price) Work-in-Progress: • The amount of work accredited and uncertified is included in the value of work-in-progress in contract accounts. • The assets side of the balance sheet will display the work-in-progress account. • This amount would be decreased by the cash obtained from the contractee and the reserve for contingencies. Illustration 1: Particulars Amount Materials issued to site 6,27,200 Wages Paid 7,34,550 Wages outstanding on 31.3.2014 7,200 Plant issued to site 60,000 Direct charges paid 25,150 Direct charges outstanding on 31.3.2014 2,100 Establishment charges 56,500 Stock of materials at site on 31.3.2014 12,000 Value of work certified on 31.3.2014 16,50,000 Cost of work not yet certified 35,000 Cash received on account of architect’s certificate after deduction by customer of 5% retention money 14,10,750 The work was commenced on April 1, 2013 and the contract price agreed at 24,50,000 135 CU IDOL SELF LEARNING MATERIAL (SLM)

Prepare contract account for the year providing for depreciation of plant of 25 per cent. Calculate the Profit or Loss in the contract to date and make such provision in the contract account as you consider desirable. Set out also contractor’s balance sheet so far as it relates to the contract. Solution: Contract Account Dr Cr Particulars Amount Particulars Amount To Materials to site 6,27,200 By Stock of material at site 12,000 To Wages paid 7,34,550 By Work-in-Progress: To Wages outstanding 7,200 Work certified 16,50,000 To Direct charges 25,150 Work uncertified 35,000 To Direct charges outstanding 2,100 To Establishment charges 56,500 To Depreciation-Plant 15,000 To National Profit c/d 2,29,300 16,97,000 16,97,000 To Profit and Loss A/c (229300 * 2/3*85.5%) 1,30,700 By Notional Profit 2,29,300 To Work-in-Progress-Reserve 98,600 2,29,300 2,29,300 Illustration 2: Compute profit to be recognized in the current period with the following information: Contract price 99,00,000 To end of previous period-profit recognized 2,25,000 To end of current period-total costs 49,50,000 Cost of work certified 36,00,000 Estimated future costs to completion 27,00,000 Estimated rectification costs 10% of contract price Solution: 136 CU IDOL SELF LEARNING MATERIAL (SLM)

Particulars Amount Amount Contract Price 99,00,000 Less: Costs to date 49,50,000 Costs to complete 27,00,000 86,40,000 Rectification costs 9,90,000 12,60,000 Estimated contract profit 5,25,000 Profit to date (36,00,000/86,40,000*12,60,000) Profit in current period = (5,25,000 – 2,25,000) 3,00,000 9.3 PROCESS COSTING Introduction When standardized homogeneous products are made, process costing is a type of operations costing. Chemicals, textiles, steel, rubber, sugar, shoes, petrol, and other industries use this costing process. Process costing is also used in manufacturing and assembly sectors. In process costing, the average cost is considered to reflect the cost per unit. Process costing is described by CIMA London as \"that type of operation costing that applies where standardized products are made.\" Features of Process Costing • The production is continuous • The product is homogeneous • The process is standardized • Output of one process become raw material of another process • The output of the last process is transferred to finished stock • Costs are collected process-wise. • Application of process costing • Identical Products Industries: Process costing is most often used when manufacturers release identical products. • Industries with Multiple Departments: Businesses that have multiple departments usually use process costing so that management can assess the costs accumulated by each department. 137 CU IDOL SELF LEARNING MATERIAL (SLM)

• Industries with Interchangeable Parts: Process costing comes into play when a factory manufactures identical parts. • Industries with Varying Product Features: Products that have multiple extraneous features can benefit from process costing. Manufacturers can release two versions of the product, with one version costing less but having fewer features and another product costing more but having more features. • Innovative Industries: Process costs are important in industries that have high innovation. For example, manufacturers cannot determine an appropriate price for a new type of product without knowing how much the product will cost to manufacture overall. Advantages of Process costing: • It is easy to assign expenses to systems in order to provide correct costs • It is convenient and requires less clerical work than job costing • Standard costing systems are particularly useful in process costing situations. • Method costing assists in the preparation of tenders and quotes. • Since cost data is available for each process, operation and department, good managerial control is possible. Limitations of Process costing: • The costs obtained at each process are just historical costs and are thus ineffective for successful control. • The average cost method is used to cost processes. • Work-in-progress is often performed on an approximate basis, resulting in mistakes in total cost estimates. • When several goods are produced in the same process and common costs are prorated into various cost units. Individual product costs are likely to be an approximation and therefore unreliable. Process loss: • In production systems, not all of the input is transformed to output. • During processing, a portion of the input is lost, which is unavoidable. • Material wastages and evaporation are unavoidable in certain processes. • However, losses may also occur as a result of worker negligence, low-quality raw materials, or outdated technology. These are referred to as avoidable losses. 138 CU IDOL SELF LEARNING MATERIAL (SLM)

Basically, process losses are classified into two categories: (a) Normal Loss (b) Abnormal Loss Normal loss: • Normal loss is an inevitable loss that happens under normal circumstances due to the intrinsic nature of the products and manufacturing process. • It is usually measured based on previous industry experience. • It can take the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness. Abnormal loss: Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness, accident etc. such losses are in excess of pre-determined normal losses. This loss is basically avoidable. PR Abnormal Gains: The standard loss margin is an approximation (i.e., based on expectation in process industries under normal conditions), and minor variations between the actual performance of a process and that anticipated are bound to occur. This distinction may be either positive or negative. If it's negative, it's referred to as abnormal loss, and if it's positive, it's referred to as abnormal gain, i.e., if the real loss is less than the usual loss, it's referred to as abnormal gain. Specimen of Process Account Process Account Particulars Qty Amount Particulars Qty Amount To Direct materials By Loss in weight (Normal To Direct Wages Loss) To Direct Expenses To Indirect expenses By sale of Scrap To Other Expenses (if any) By Next Process Account(Transfer) 139 CU IDOL SELF LEARNING MATERIAL (SLM)

Preparation of Process Accounts The preparation of Process Account depends upon the following situations • Simple Process Account • Process costing with normal process loss • Process costing with abnormal process loss • Process costing with abnormal process gains • Inter – process profits. VALUATION OF WORK-IN-PROGRESS Introduction: Incomplete units mean those units on which percentage of completion with regular to all elements of cost (i.e. material, labour and overhead) is not 100%. Such incomplete production units are known as Work-in-Progress. Equivalent Production The production of a process in terms of completed units is referred to as equivalent production. In other words, it entails translating incomplete units into completed units' equivalents. It's often referred to as effective production For calculating equivalent production, work-in-progress needs to be inspected. Then an estimate is made of the degree of completion, usually on a percentage basis In short the following from steps an involved. Step 1 – prepare statement of Equivalent production Step 2 – Prepare statement of cost per Equivalent unit Step 3 – Prepare of Evaluation Step 4 – Prepare process account 9.4 BY-PRODUCTS AND JOINT PRODUCTS By- Product: • By-products are secondary or subsidiary products that arise during the manufacture of the primary product (s) • It is common for materials or other items of lesser value to appear during the production of the main product. 140 CU IDOL SELF LEARNING MATERIAL (SLM)

• In an oil refinery, for example, crude oil is extracted, but by-products such as bitumen and chemical fertilizers are obtained in addition to the main product, refined oil. Joint Product: • In certain sectors, two or more items of similar value are manufactured at the same time; these products are referred to as joint products. • From crude oil, joint products include gasoline, diesel, kerosene, lubricants, tar, paraffin, and asphalt. • Co-products are a specific category of product that comes in a variety of forms. • These goods do not all come from the same operation or raw materials, and they may be manufactured in different amounts with no connection to one another depending on market demand. For example, in fan manufacturing industry, a number of co-products may be produced in different quantities, such as, ceiling fan, table fan, pedestal fan, cabin fan etc Illustration Product A requires three distinct processes and after the third process the product is transferred to finished stock. Prepare various process accounts from the following information. Total P1 P2 P3 Direct Materials 5000 4000 600 400 Direct Labour 4000 1500 1600 900 Direct Expenses 800 500 300 Production overheads 6000 Production overheads to be allocated to different processes on the basis of 150% of direct wages. Production during the period was 200 units. Assume there is no opening or closing stock. Solution: 141 CU IDOL SELF LEARNING MATERIAL (SLM)

Process I Account Particulars Unit Rs Particulars Unit Rs To Direct materials 200 4,000 By Process II Account(Trf) 200 8,250 8,250 To Direct Wages 1,500 To Direct Expenses 500 To Production overheads 2,250 (1500x150%) 200 8,250 200 Process II Account Particulars Unit Rs Particulars Unit Rs To Process I A/c 200 8,250 By Process III Account(Trf) 200 13,150 To Direct materials 600 To Direct Wages 1,600 To Direct Expenses 300 To Production overheads 2,400 1600x150%) 200 13,150 200 13,150 Process III Account Particulars Unit Rs Particulars Unit Rs 200 15,800 To Process II A/c 200 13,150 By Finished stock A/c 200 15,800 To Direct materials 400 (Output Transferred ) To Direct Wages 900 Cost per unit 15800/200=79 To Production overheads 1,350 (900x150%) 200 15,800 Questions for Practice 1. For the month of October 2020, ABC Ltd. provided you with the following details about process B. (i) No Opening WIP (ii) 10,000 units were added at a cost of Rs.5 each. (iii) Expenses that are debited to the process; 15,000 in direct materials; 25,000 in Labour; 40,000 in overhead (iv) Total production - 9,500 units (v) Finishing 350 units of work in progress; Material 100 percent completed; Labour and overheads 100 percent completed fifty percent (vi) Typical process failure of one percent of input 142 CU IDOL SELF LEARNING MATERIAL (SLM)

(vii) The extent to which the abnormal failure has been completed: 100% of the materials; 80% of the Labour and overheads (viii) Units scrapped as a result of natural wear and tear were sold for Rs.2.5 each. (ix) The irregular failure units were all sold for Rs.5. each. Make the following preparations: (a) Equivalent Production Statement (b) Cost Statement (c) B Account Process (d) Account for Abnormal losses 2. The following information is obtained in respect of process 3 of the month of January 2020: Opening Stock 2,000 units Value Direct Material (I) Rs.780; Direct material (II) Rs.150. Direct Labour – Rs.225. Production overhead – Rs.225. Process 2 transfer 6,000 units at Rs.4,800 Process 4 transfer 4,700 units. Direct material added in process Rs. 1040 Direct Labour employed Rs.2072 Production Over Heads Rs.3082 Units scrapped 300 Degree of completion Direct material 100% Direct Labour 80% Production overhead 60% Closing stock 2,000 units Degree of completion: Direct material 60% Direct Labour 50% Production overhead 40% 3. A product passes through three process, I, II, and III. From the following information, Prepare the processes accounts, assuming that there was no opening or closing stocks. Process I Process II Process III Rs. Rs. Rs. Materials 2000 3000 1000 Labour 10000 16,000 13000 Overheads 2100 2400 4000 Actual output (units) 9500 9100 8100 Normal Loss 3% 5% 8% The wastage of process I was sold at 50 paise per unit, that of process II at 75 paise per unit and that of process III at Re 1 per unit 10000 units were issued to the process I in the beginning at a cost of Re 1 per unit. 4. 143 CU IDOL SELF LEARNING MATERIAL (SLM)

9.5 SUMMARY • Abnormal Process Gain: An abnormal process gain is an unforeseen increase in productivity under normal circumstances due to an overestimation of process failure, changes in worker job performance, or the use of improved technology. • Abnormal Process Loss: An abnormal process loss is a loss that exceeds the predetermined loss (normal process loss) due to worker negligence, poor plant design or activity, sabotage, and other factors. Obviously, such a failure cannot be predicted in advance. • When processing is done in batches, a batch costing method is used. • A batch is a cost unit made up of a distinct, easily recognizable group of product units that keeps its identity during the manufacturing process. • Contract costing is a type of specific order costing that applies when work is done to satisfy the specific needs of customers and each order is lengthy. • An escalation clause in a contract allows for the modification of quoted and agreed rates in the event of stated contingencies. • A cost plus contract is one in which the contractee agrees to pay the contractor the cost of the work performed on the contract plus a portion of the cost as overhead and benefit. • Work accredited refers to work that has been accepted on a particular date by the contractee or his nominee. • Work uncertified refers to work that has not yet been accepted by the contractee or his nominee. • Where the production results from a series of continuous or repeated operations or procedures, and the items are similar and cannot be separated, the process costing approach is used. • Process costing helps you to find out how much a product costs at each point of production. • Contract costing is described as \"a type of specific order costing that assigns costs to specific contracts.\" • \"Contract Costing such jobs take a long time to complete and can last two or more accounting years for the contractor. \"In case of incomplete contracts, the following four situations may arise: • (i) Completion of contract is less than 25 per cent: No profit should be taken to profit and loss account. (ii) Completion of contract is 25 per cent or more but less than 50 per cent: 1/3x Cash received ×Notional Profit Work certified 144 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) Completion of contract is 50 per cent or more but less than 90 per cent: 2/3x WCaosrhkrceecretiivfieedd×Notional Profit (iv) Completion of contract is 90 per cent or more i.e., it is nearing completion: (a) Estimated Profit × Work certified/ Contract price (b) Estimated Profit × Work certified/ Contract price x Cash received Work certified 9.6 KEYWORDS • Process Costing: Process costing is one of the basic costing methods applicable to an organization where goods result from a sequence of repetitive operations or processes to which costs are charged before being averaged over the units produced during the period. • Equivalent Units: Equivalent units are the notional quantities of completed units substituted for the actual quantities of incomplete physical units in progress, when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity of completed units, e.g., 100 units 50% complete is equivalent to 50 completed units. • Abnormal Process Gain: Abnormal process gain is an unexpected gain in production under the normal conditions due to over-estimation of process loss, improvements in work efficiency of workers, use of better technology in production etc. • Abnormal Process Loss: Abnormal process loss is the loss in excess of the predetermined loss (normal process loss) due to carelessness of workers, a bad plant design or operation, sabotage etc. Such a loss cannot obviously be estimated in advance • Contract Costing: Contract Costing is a form of specific order costing applicable to a construction company where work is undertaken according to customers’ requirements and each order is of long duration. It is similar to Job Costing. • Cost of Work Uncertified: Cost of work uncertified represents the cost of the work which has been carried out by the contractor but has not been certified by the expert. Retention Money: Retention money is the portion of the value of work certified, which is kept by a contractee as security money for any loss or damage caused by the contractor. • Value of Work Certified: Value of work certified is the value of a contract which is certified by an expert in terms of percentage of total work. • Escalation Clause: Escalation clause is a clause in a contract which empowers a contractor to revise the price of the contract in case of increase in the prices of inputs due to some macro-economic or other agreed reasons. 145 CU IDOL SELF LEARNING MATERIAL (SLM)

9.7 LEARNING ACTIVITY 1. List few areas other than construction of buildings where Contract costing can be applied. Read and understand AS-7 Accounting for Construction contracts and understand how proportionate revenue is recognized matching with the estimated cost as determined using various techniques: Visit any company involved in production of Dairy products and list out various process involved in getting the Final product and understand how many by- products are generated during the process ___________________________________________________________________________ ____________________________________________________________________ 9.8 UNIT END QUESTIONS QUESTIONS A. Descriptive Questions Short Questions 1. Write short notes on: a. Retention money b. Equivalent units 2. Explain the term Escalation clause 3. What is meant by Process costing? State the industries where is it to be used. 4. Explain normal wastage, abnormal wastage, and abnormal gain. 5. What do u mean by notional profit in contract costing? Long Questions 1. Explain the treatment of Normal loss in process costing 2. How work in progress is valued in process costing 3. A product passes from Process I and Process II. Materials issued to Process I amounted to₹ 40,000, Labour ₹ 30,000 and manufacturing overheads were ₹ 27,000. Normal loss was 3%of input as estimated. But 500 more units of output of Process I were lost due to the carelessness of workers. Only 4,350 units of output were transferred to Process II. There were no opening stocks. Input raw material issued to Process I were 5,000 units. You are required to show Process I account. 146 CU IDOL SELF LEARNING MATERIAL (SLM)

4. What is contract costing? How is it used in valuation of cost of the contract executed till date? 5. What is meant by Cost plus contract? B. Multiple Choice Questions: 1. Cost of _____ loss is not borne by good units. a. Normal b. Abnormal c. Specific d. None of these 2. If the actual loss in a process is less than the normal loss, the difference is known as ___________________. a. Normal – loss b. Abnormal – loss c. Abnormal – gain d. None of these 3. _________ Costs are incurred after split off point. a. Subsequent b. Total c. Fixed d. Variable 4. The ____ product generally has a greater sale value than by product. a. Joint b. Main c. By-product d. None of these 5. Two principle method of evaluation of equivalent production are ______________ and __________________. a. FIFO and Average method b. Simple average and weighted average c. LIFO and FIFO d. None of these Answer 147 1 - b, 2 - c, 3 - a, 4 -b, 5 - a CU IDOL SELF LEARNING MATERIAL (SLM)

9.9 REFERENCES Textbooks: • Introduction to Cost Accounting, Charles T. Horngren, PHI. • Cost Accounting, Jawahar Lall & Seema Srivastava, TMH, 4th edition. Reference Books: • Cost and Management Accounting, Arora M N, Vikas Publishing, 8thedition. • Cost Accounting, S.N Maheshwari, S.Chand Publications 148 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 10 : ACTIVITY BASED COSTING Structure 10.0 Learning Objectives 10.1 Introduction 10.2 Features 10.3 Important terms in ABC 10.4 Steps in ABC 10.5 Activities in ABC 10.6 Summary 10.7 Keywords 10.8 Learning Activity 10.9 Unit End Questions 10.10 References 10.0 LEARNING OBJECTIVES After studying this unit students will be able to: • Explain the important terms in ABC costing • Activities in ABC 10.1 INTRODUCTION The Activity-Based Costing (ABC) framework is a costing approach that focuses on the activities that are done in the production of goods. Costs are first traced to operations, then to goods, in ABC. This costing system suggests that operations are responsible for incurring costs and generating operation demands. An accounting company, for example, prepares tax returns, while a university educates students. Costs are assigned to products depending on how often each operation is used by each product. Costs are first traced to an organizational entity, such as a department or factory, in a conventional absorption costing system, before being traced to goods. The second and final stage of both ABC and conventional absorption costing schemes is tracing costs to the commodity. Definition CIMA defines Activity Based Costing as, “Cost attribution to cost units on the basis of benefit received from indirect activities. Example: ordering, setting up, assuring quality.” 149 CU IDOL SELF LEARNING MATERIAL (SLM)

ABC has also been defined by CAM-1 organization of Arlinton Texas as “the collection of financial and operation performance information tracing the significant activities of the firm to product Costs.” 10.2 FEATURES OF ABC The features of ABC are as under: • Activity-based costing (ABC) is a two-stage product costing system in which costs are first assigned to activities and then distributed to products based on how many activities each product consumes. • In the two-stage process, activity-related costs are now accumulated in the expense pools. • Any separate operation that a company undertakes to make or offer a product or service is referred to as an action. • Activity-dependent costing is based on the assumption that goods consume actions, which consume resources. • Any company that needs a clearer understanding of the value of the products and services it offers, including production, service, and even non-profit organizations, can use activity- based costing. Objectives of ABC The objectives of Activity Based Costing are as under: • To provide necessary information for decision making • To increase product costing • To recognize non-value adding activities in the manufacturing process that may be a suitable target for attention or elimination • To minimize the usage of common resources for non-essential purposes. • Urging managers to measure the effectiveness of programmes delivered internally. • To determine cost-based pricing and measure the maximum cost of goods for financial statements. 10.3 FEW IMPORTANT TOPICS IN ABC Cost Object: It is an item for which cost measurement is required e.g. Product, job or a customer. 150 CU IDOL SELF LEARNING MATERIAL (SLM)