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METHODS/ TECHNIQUES OF COSTINGPowerPoint Presentation

METHODS/ TECHNIQUES OF COSTING

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METHODS/ TECHNIQUES OF COSTING. JOB COSTING PROCESS COSTING. COST SHEET. MARGINAL COSTING.

METHODS/ TECHNIQUES OF COSTING

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- JOB COSTING
- PROCESS COSTING

According to Institute of Cost &Management Accountants London Marginal Cost represents “the amount of any given volume of output by which aggregate costs are changed if the volume of output is increased by one unit”

- Cost of production of 1000 units =Rs.200,000
- Cost of production for 1001 units=Rs.200,150
difference= Rs. 150 (Marginal Cost)

- Elements of Cost: Production, Administration and Selling Expenses are divided into fixed and variable cost
- Variable cost fluctuates directly in proportion to changes in volume of output.
- Selling price remains constant
- Fixed cost remains constant
- Volume of production Influences cost
- Volume cost are regarded as cost of the products.

- According to Herman C. Heiser “ The most important single factor in profit planning of Average business is the relationship between volume of business, cost & profit”

- Two aspects:
- Broad Aspect: Study of Relationship between CVP
- Narrow Aspect: Technique of determining level of operations where Total Revenue=Total Expense

- CONTRIBUTION: Contribution is the excess of selling price over variable cost is the amount contributed towards fixed expenses and profit.
- Contribution= Sales-variable cost
- Example: Selling Price: Rs.20 per unit
- Variable Cost : Rs 15 per unit
- Contribution Rs. 5 per Unit

- Fixed Expenses : Rs 50,000
- Total units Sold : 8000 units
- Total Contribution : 8000*5= 40,000(in contin)( not sufficient to meet Fixed Expenses)
- If increase total output by 10,000 units, total contribution 50,000 ( No profit No loss)
- Any output beyond 10,000 Units will give profits ( total output increased by 15000 units, total contribution 75,000)

- Contribution = sales – variable cost
- Contribution = fixed cost +/- profit (loss)
- Contribution per unit= selling price – variable cost per unit
- We can derive marginal costing equation:
- Sales-variable cost= contribution
- Sales- variable cost= fixed cost +/- profit
- In case three factors known fourth factor can be known:

- Example: sales: 2,40,000/-
- Profit : 50,000/-
- Direct material : 80,000/-
- Direct labor : 50,000/-
- Variable overheads : 20,000
- Variable cost: 1,50,000
- Sales – Variable Cost = Fixed Cost +/- Profit
- 2,40,000-1,50,000 -50,000 = 40,000
- Fixed Cost = 40,000

- Profit/ Volume Ratio (contribution Ratio)
- P/V ratio = Contribution/ sales
- = sales- variable cost / sales
- = Fixed Cost +/- Profit (loss) / sales
- = Change in profit or contribution / change in sales
- This can be shown in the form of percentage by multiplying by100.
- Example: selling price = 15/-
- Variable cost = 10/-

- P/V ratio = 15-10/15 = 1/3*100 = 33 1/3%
- It establishes relationship between contribution and sales:
- High P/V ratio reflects high profit
- Low P/V ration reflects low profit
- Ratio can be increased by increasing contribution:
- Increasing selling price per unit
- Reducing variable cost per unit
- Switching the production to more profitable products.

- For example:
- Sales: 100,000/-
- Profit: 10,000/-
- Variable Cost =70%
- Calculate PV ratio, Fixed Cost, Sales volume to earn profit of 40,000/-
- 70% *100,000 = 70,000
- P/V Ratio= 100,000-70,000 / 100,000 *100 = 30%
- Contribution = Fixed Cost +/- Profit (loss)
- 30,000 = Fixed Cost + 10,000
- Fixed Cost = 20,000
- Sales volume required to earn given profit : FC + Profit / pv ratio
- 20,000+40,000 /30% = 60,000 /30% = 200,000

- BREAK EVEN POINT
- It is defined as that point of sales volume at which total revenue is equal to total cost. (No profit No loss)
- Sales revenue at B.E.P. = fixed cost + variable Cost
- Algebraic form
- Break even point in units = Fixed Cost / Contribution per unit
- Break Even point in terms of money value =
- Total sales= TFC = TVC
- S= F+ VC
- S-VC =FC
- Dividing by S-VC
- S-VC / S-VC = FC / S-VC
- 1= FC / S-VC (multiplying by S)
- S= (FC / S-VC )*S

- break Even point as percentage of estimated capacity:
- Fixed Cost / total contribution
- For Example: Output : 3000 units
- Selling price per unit : Rs. 30/-
- Variable cost per unit : Rs. 20/-
- Total fixed cost : Rs 20,000/-
- Calculate B.E.P. in units and Sales value
- B.E.P. (units) 20,000/ 30-20 = 2000 units
- Sales = FC*S / S-VC = 20,000* 90,000 / 90,000-60,000 = 60,000

- Margin Of Safety: Excess of actual sales over break even sales is known as Margin of safety.
- MOS : Total sales – Sales at B.E.P.
- Angle of Incidence
- Angle between sales line and total cost line formed at B.E.P. where sales line and total cost line intersect each other. AOI indicates the profit earning capacity of business.
- AOI and MOS indicate the soundness of business.

- PRICING DECISION:
- Under normal conditions prices are based on total cost of sales so as to cover both fixed and variable cost and to certain extent profit.
- Other circumstances like stiff competition, exploring new markets etc. Products are sold at price below total cost.

- During depression prices can be reduced to an extent which covers the variable cost and contribute something towards fixed cost.
- Accepting bulk order and exploring foreign markets is generally made to utilize the idle capacity. The order from the local merchants should not be accepted at a below normal price it affects the relationship of the concern with the other customers. In case of foreign markets goods may be sold at prices below normal price.

- Operate or shutdown cost: Differential cost analysis is used when the business is confronted with the possibility of temporary shutdown.. This type of analysis has to determine whether in the short run a firm is better off operating than not operating.

- For Example: an analysis of a possible temporary shutdown ,assume that company operating below 50% of its capacity expects that the volume of sales will drop below the present level of 10,000 units per month. Management is concerned that further drop in sales volume will create a loss and has under consideration, a recommendation that operation be suspended until better market condition prevail and also a better selling price available. The present operating statement:

- Sales revenue (10,000 units @30/-) 300,000
- Less variable cost@20 per unit 200,000
- Fixed cost 100,000
- (fixed cost at shut down is 40,000/-)
- Net Income : 0

- Make or Buy decision: the clear distinction must be made between fixed cost and variable cost. The variable cost must be compared with the purchase price of the product available in the market. If variable cost is less than the purchase price it’s preferred to make the product and if the variable price is more than the purchase rice its preferred to buy the product.

- For Example:: A machine manufactures 10,000 units of a part at a total cost of Rs21 of which Rs 18 is variable. This part is readily available in market at Rs 19 per unit. If the part is purchased from the market then the machine can either be utilized to manufacture a component in same quantity contributing Rs2 per component or it can be hired out at Rs21000

- Key or Limiting Factor: Factor which puts limit on production and profits of business generally it is sales. Production can be limited due to shortage of material, labor, and plant capacity.

- Example: If there is a limited material which is used on two products X and Y. 3 units used for X and 5units of Y. Contribution per unit is 12 for X and 15 for Y. X gives contribution (12/3) 4 per unit and Y gives contribution(15/5) 3 per unit. X makes more contribution per unit.

- Selection of suitable product or sales mix: Best product mix which yield maximum contribution should be retained and production should be increased. This can be done by comparing the PV ratio and break even point of various alternatives.

- Effect of changes in sales price: Change in sales price effect the profitability of the concern.

- Example: Sales:60,000 per unit
- Variable Cost : 30,000 per unit
- Fixed Cost: 15,000
- Calculate: a) pv ratio, BEP, MOS
- b) effect of 10% increase in sales
- c) 10% decrease in sales price.
- a) PV Ratio: 50%
- BEP: Fixed Cost / PV Ratio = 30,000
- MOS: present sales- Sales at BEP=30,000
- b) Sales= 60,000+10% = 66,000
- PV Ratio = 54.55%
- BEP = 27,500
- MOS = 38500
- Sales= 60,000-10% = 54,000
- PV Ratio: 44.4%
- BEP = 33,750
- MOS = 20,250

- Alternative Methods of Production : Employing machine 1 or Machine 2, if to choose among them marginal costing technique can be applied highest contribution can be adopted keeping in view limiting factor.
- Determine the optimum level of activity. To determine this activity contribution at different levels of activity can be found.

- Can you name three consecutive days without using the words Monday Tuesday Wednesday Thursday Friday Saturday or Sunday?

- Runs over fields and woods all day Under the bed at night sits not alone With long tongue hanging out Awaiting for a bone.

- Bob was out shopping one day and had a look at a few items as listed below.Item 1.) Scribbled picture on a notepadItem 2.) Portrait of a mouseItem 3.) Da Vinci's "The Last Supper"Bob decided on Item 3.) meaning, in rebus form, he was interested in...?
- Hint
- Bob is the sort of person who isn't so concerned with small details. People like Bob tend to be C.E.O.'s or Directors of companies

- Answer
- The Big Picture

- What expression is represented in the scenario below?1 o'clock = FAIL2 o'clock = PASS3 o'clock = PASS4 o'clock = FAIL5 o'clock = PASS

- Answer
- Testing times.

- What is shown here?H20ly

- Answer
- Holy water

- What expression is this?Ex = 20kgpec = 10kgtat = 5kgion = 30kg65kg = ?
- Hint
- If you are a seasoned teaser solver then you might feel a little of this as you ponder an answer... it's k like pressure.

- Answer
- The weight of expectation

- WHO IS IN THE PHOTOGRAPH?
- I am staring at a photo of someone. I don’t have any brothers or sisters and yet that man’s father is my father’s son. Who am I looking at?

- I am looking at a photograph of my son

- If you have it, you want to share it. If you share it, you don’t have it. What is it?

- A secret