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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON#2
IMPORTANT TERMINOLOGIES
Cost Unit
It is a unit of a product or service in relation to which the cost is ascertained, i.e. it is the unit
of the out put or product of the business. In simple words the unit for which cost of
producing the units is identified /allocated.
Example
Ball point for a Ball point manufacturing entity
Bottle for Beverage producing entity
Fan for a Fan manufacturing entity
Cost Center
Cost centre is a location where costs are incurred and may or may not be attributed to cost
units.
Examples
Workshop in a manufacturing concern
Auto service department
Electrical service department
Packaging department
Janitorial service department
Revenue Centre
It is part of the entity that earns sales revenue. Its manager is responsible for the revenue
earned not for the cost of operations.
Examples
Sales department
Factory outlet
Profit Centre
Profit centre is a section of an organization that is responsible for producing profit.
Examples
A branch
A division
Investment Centre
An investment centre is a segment or a profit centre where the manager has significant degree
of control over his/her division's investment policies.
Examples
A branch
A division
Relevant Cost
Relevant cost is which changes with a change in decision. These are future costs that effect the
current management decision.
Examples
Variable cost
Fixed cost which changes with in an alternatives
Opportunity cost
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Cost & Management Accounting (MGT-402)
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Irrelevant Cost
Irrelevant costs are those costs that would not affect the current management decision.
Example
A building purchased in last year, its cost is irrelevant to affect management decisions.
Sunk Cost
Sunk cost is the cost expended in the past that cannot be retrieved on product or service.
Example
The entity purchase stationary in bulk last moth. This expense has been incurred and hence
will not be relevant to the management decisions to be taken subsequent to the purchase.
Opportunity Cost
Opportunity cost is the value of a benefit sacrificed in favor of an alternative.
Example
An investor invests in stock exchange he foregoes the opportunity to invest further in his
hotel. The profit which the investor will be getting from the hotel is opportunity cost.
Product Cost
Product cost is a cost that is incurred in producing goods and services. This cost becomes part
of inventory.
Example
Direct material, direct labor and factory overhead.
Period Cost
The cost is not related to production and is matched against on a time period basis. This cost is
considered to be expired during the accounting period and is charged to the profit & loss
account.
Example
Selling and administrative expenses
Historical Cost
It is the cost which is incurred at the time of entering into the transaction. This cost is
verifiable through invoices/agreements. Historical cost is an actual cost that is borne at the
time of purchase.
Example
A building purchased for Rs 400,000, has market value of Rs. 1,000,000. Its historical cost
is Rs. 400,000.
Standard Cost
Standard cost is a Predetermine cost of the units.
Example
Standard cost for a unit of product `A' is set at Rs 30. It is compared with actual cost
incurred for control purposes.
Implicit Cost
Implicit cost imposed on a firm includes cost when it foregoes an alternative action but doesn't
make a physical payment. Such costs are related to forgone benefits of any single transaction,
and occur when a firm:
Example
Uses its own capital or
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Cost & Management Accounting (MGT-402)
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Uses its owner's time and/or financial resources
Explicit Cost
Explicit cost is the cost that is subject to actual payment or will be paid for in future.
Example
Wage
Rent
Materials
Differential Cost or Incremental cost
It is the difference of the costs of two or more alternatives.
Example
Difference between costs of raw material of two categories or quality.
Costing:
The measurement of cost of a product or service is called costing; however, it is not a
recommended terminology.
Cost Accounting:
It is the establishment of budgets, standard cost and actual costs of operations, processes,
activities or products and the analysis of variances, profitability or social use of funds. It
involves a careful evaluation of the resources used within the business. The techniques
employed are designed to provide financial information about the performance of a business
and possibly the direction which future operations should take.
Prime Cost:
The total costs which can be directly identified with a job, a product or service is known as
Prime cost. Thus prime cost = direct materials + direct labor + other direct expenses.
Conversion Cost.
This is the total cost of converting the raw materials into finished products. The total of direct
labor other direct expenses and factory overhead cost is known as conversion cost
Cost Accumulation
Cost accumulations are the various ways in which the entries in a set of cost accounts (costs
incurred) may be aggregated to provide different perspectives on the information.
Methods of cost accumulation
Process costing
It is a method of cost accounting applied to production carried out by a series of operational
stages or processes.
Job order costing
Generally, it is the allocation of all time, material and expenses to an individual project or job.
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Cost & Management Accounting (MGT-402)
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Assignment Questions
Answer to each of the following question should not exceed five lines.
1. Define Cost Accounting
2. What are the three broad elements of cost?
3. Give any five examples of factory overhead cost. Also explain.
4. Give any two examples of distribution overheads.
5. Give any two examples of office overheads
6. Define direct cost and give two examples.
7. What is indirect cost? Give three examples.
8. What is meant by step fixed cost and semi-variable cost? Also show graphs.
9. What is fixed cost? Give three items of fixed cost, also show its graph.
Exam Type Questions
1.
What is a cost unit? Give two example
2.
Define cost centre. How does it differ from cost unit
3.
What is the difference between direct and indirect materials? Give two examples of each.
4.
Fixed cost per unit remains fixed. Do you agree?
5.
How variable cost per unit behaves? Give two examples.
6.
What are semi-variable costs? Draw graph for such costs
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Table of Contents:
  1. COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION:COST CLASSIFICATION,
  2. IMPORTANT TERMINOLOGIES:Cost Center, Profit Centre, Differential Cost or Incremental cost
  3. FINANCIAL STATEMENTS:Inventory, Direct Material Consumed, Total Factory Cost
  4. FINANCIAL STATEMENTS:Adjustment in the Entire Production, Adjustment in the Income Statement
  5. PROBLEMS IN PREPARATION OF FINANCIAL STATEMENTS:Gross Profit Margin Rate, Net Profit Ratio
  6. MORE ABOUT PREPARATION OF FINANCIAL STATEMENTS:Conversion Cost
  7. MATERIAL:Inventory, Perpetual Inventory System, Weighted Average Method (W.Avg)
  8. CONTROL OVER MATERIAL:Order Level, Maximum Stock Level, Danger Level
  9. ECONOMIC ORDERING QUANTITY:EOQ Graph, PROBLEMS
  10. ACCOUNTING FOR LOSSES:Spoiled output, Accounting treatment, Inventory Turnover Ratio
  11. LABOR:Direct Labor Cost, Mechanical Methods, MAKING PAYMENTS TO EMPLOYEES
  12. PAYROLL AND INCENTIVES:Systems of Wages, Premium Plans
  13. PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS
  14. LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY OVERHEAD COST
  15. ALLOCATION AND APPORTIONMENT OF FOH COST
  16. FACTORY OVERHEAD COST:Marketing, Research and development
  17. FACTORY OVERHEAD COST:Spending Variance, Capacity/Volume Variance
  18. JOB ORDER COSTING SYSTEM:Direct Materials, Direct Labor, Factory Overhead
  19. PROCESS COSTING SYSTEM:Data Collection, Cost of Completed Output
  20. PROCESS COSTING SYSTEM:Cost of Production Report, Quantity Schedule
  21. PROCESS COSTING SYSTEM:Normal Loss at the End of Process
  22. PROCESS COSTING SYSTEM:PRACTICE QUESTION
  23. PROCESS COSTING SYSTEM:Partially-processed units, Equivalent units
  24. PROCESS COSTING SYSTEM:Weighted average method, Cost of Production Report
  25. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Accounting for joint products
  26. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Problems of common costs
  27. MARGINAL AND ABSORPTION COSTING:Contribution Margin, Marginal cost per unit
  28. MARGINAL AND ABSORPTION COSTING:Contribution and profit
  29. COST VOLUME PROFIT ANALYSIS:Contribution Margin Approach & CVP Analysis
  30. COST VOLUME PROFIT ANALYSIS:Target Contribution Margin
  31. BREAK EVEN ANALYSIS MARGIN OF SAFETY:Margin of Safety (MOS), Using Budget profit
  32. BREAKEVEN ANALYSIS CHARTS AND GRAPHS:Usefulness of charts
  33. WHAT IS A BUDGET?:Budgetary control, Making a Forecast, Preparing budgets
  34. Production & Sales Budget:Rolling budget, Sales budget
  35. Production & Sales Budget:Illustration 1, Production budget
  36. FLEXIBLE BUDGET:Capacity and volume, Theoretical Capacity
  37. FLEXIBLE BUDGET:ANALYSIS OF COST BEHAVIOR, Fixed Expenses
  38. TYPES OF BUDGET:Format of Cash Budget,
  39. Complex Cash Budget & Flexible Budget:Comparing actual with original budget
  40. FLEXIBLE & ZERO BASE BUDGETING:Efficiency Ratio, Performance budgeting
  41. DECISION MAKING IN MANAGEMENT ACCOUNTING:Spare capacity costs, Sunk cost
  42. DECISION MAKING:Size of fund, Income statement
  43. DECISION MAKING:Avoidable Costs, Non-Relevant Variable Costs, Absorbed Overhead
  44. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS
  45. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS:MAKE OR BUY DECISIONS