Cost Accounting Cost Accounting (2(2ndnd

session)session)Prof. Amit DeProf. Amit De

JOB COSTINGJOB COSTING

Job costing refers to the cost Job costing refers to the cost

procedure or system of cost procedure or system of cost

accumulation that ascertains the accumulation that ascertains the

costs of an individual job or work costs of an individual job or work

order separately. A job represents or order separately. A job represents or

constitutes the unit of costing.constitutes the unit of costing.

TYPES OF PRODUCTION ACTIVITY SUITABLE FOR JOB

COSTING

TYPES OF PRODUCTION ACTIVITY SUITABLE FOR JOB

COSTING1. Production consists of special jobs or projects 1. Production consists of special jobs or projects

based on customer's specifications.based on customer's specifications.

2. Production pattern is not repetitive and 2. Production pattern is not repetitive and

continuous.continuous.

3. Virtually every job produced is somewhat 3. Virtually every job produced is somewhat

different.different.

4. Each job maintains its separate identity 4. Each job maintains its separate identity

throughout the production stage.throughout the production stage.

5. The different jobs are independent of each other.5. The different jobs are independent of each other.

BATCH COSTINGBATCH COSTING

Batch costing is essentially a Batch costing is essentially a

variation of job costing. Instead of a variation of job costing. Instead of a

single job, a number of similar single job, a number of similar

product units are processed or product units are processed or

manufactured in a group as a batch.manufactured in a group as a batch.

ECONOMIC BATCH SIZEECONOMIC BATCH SIZEECONOMIC BATCH SIZEECONOMIC BATCH SIZE

TOTALCOST

HOLDING COST

SET-UP COST

BATCH SIZEqO

Rs.

Economic Production Batch SizeEconomic Production Batch Size

Where Q = total demand in time period TWhere Q = total demand in time period T

CC11 = holding costs per unit = holding costs per unitCC22 = set up cost per batch = set up cost per batch

2C2C22QQ

CC11TT==

CONTRACT COSTINGCONTRACT COSTINGCONTRACT COSTINGCONTRACT COSTING

Contract costing is a type of job

costing in which contract

constitutes a unit of cost.

ESCALATION CLAUSEESCALATION CLAUSEESCALATION CLAUSEESCALATION CLAUSE

Escalation clause is usually provided in

the contract as a safeguard against

likely changes in price and utilization of

material and labour. By adding this

clause, the contractor makes it known to

his customer that price quoted is

dependent on prevailing market prices

of cost elements.

COST-PLUS CONTRACTCOST-PLUS CONTRACTCOST-PLUS CONTRACTCOST-PLUS CONTRACT

It is provided in the contract that

customer/contractee should pay to the

contractor actual cost of manufacture or

rendering services plus a stipulated

profit. The profit to be paid to the

contractor may be a fixed amount or it

may be a particular percentage of capital

employed.

PROFIT OF INCOMPLETE PROFIT OF INCOMPLETE CONTRACTCONTRACT

PROFIT OF INCOMPLETE PROFIT OF INCOMPLETE CONTRACTCONTRACT

1.When work on contract has not reasonably

advanced, no profit is taken into account.

2.When work of a contract has reasonable

advanced, a particular percentage of notional

profit is credited to profit and loss account and

balance is carried forward as provision against

future losses, increase in price and other

contingencies.

When a contract has sufficiently advanced and

it is also not in final stages, following practices

are followed :

(a) If the work certified is more than ¼ but less

than half of the contract price, following

formula is used to determine the figures of

profit to be credited to profit and loss account:

National ProfitCash received

Work certified1

3XX

3. Where the contract is almost complete, an

estimated total profit is determined by

deducting aggregate of cost to date and

estimated additional expenditure from

contract price. A portion of this estimated total

profit is credited to profit and loss account.

Estimated total profitWork certified

Contract PriceX

WORK CERTIFIED AND WORK CERTIFIED AND WORK UNCERTIFIED.WORK UNCERTIFIED.

WORK CERTIFIED AND WORK CERTIFIED AND WORK UNCERTIFIED.WORK UNCERTIFIED.

The work certified represents the

work approved by architect,

engineer or surveyor etc. of the

contractee. It is possible that a part

of the work remains to be

approved at the end of the

accounting period.

MARGINAL COSTINGMARGINAL COSTINGMARGINAL COSTINGMARGINAL COSTING

Sales – Cost = Profit or Sales – (Fixed cost+Variable

Cost)= Profit.

MARGINAL COSTMARGINAL COSTMARGINAL COSTMARGINAL COST

CIMA defines marginal cost as “the

cost of one unit of product or service

which would be avoided if that unit

were not produced or provided.”

VARIABLE COST.VARIABLE COST.VARIABLE COST.VARIABLE COST.

Variable cost is that part of total cost, which changes directly in proportion with volume.

FIXED COST.FIXED COST.FIXED COST.FIXED COST.It represents the cost which is incurred for a period, and which, within certain output tends to be unaffected by fluctuations in output.

BREAK-EVEN POINTBREAK-EVEN POINTBREAK-EVEN POINTBREAK-EVEN POINT

Break even point is the point of sale

at which company makes neither

profit nor loss.

Contribution = sales – variable cost of sales

KEY FACTOR OR LIMITING KEY FACTOR OR LIMITING FACTOR.FACTOR.

KEY FACTOR OR LIMITING KEY FACTOR OR LIMITING FACTOR.FACTOR.

There are always factors that do not lend

themselves to managerial control.

Key factor is the factor whose influence

must be first ascertained to ensure that

there is maximum utilization of resources.

BASIC MARGINAL COST BASIC MARGINAL COST EQUATIONEQUATION

BASIC MARGINAL COST BASIC MARGINAL COST EQUATIONEQUATION

Sales – (Fixed costs + variable costs) = Profit

PROFIT/ VOLUME RATIO.PROFIT/ VOLUME RATIO.PROFIT/ VOLUME RATIO.PROFIT/ VOLUME RATIO.

When the contribution from sales is

expressed as a percentage of sales value,

it is known as profit/volume ratio (or P/V

ratio).

IMPROVEMENT OF P/V IMPROVEMENT OF P/V RATIO.RATIO.

IMPROVEMENT OF P/V IMPROVEMENT OF P/V RATIO.RATIO.

(i) Increase in sale price,

(ii) Reducing marginal cost by efficient

utilization of men, material and machines.

(iii) Concentrating on the sale of products with relatively better P/V ratio. This

will help to improve overall P/V ratio.

MARGIN OF SAFETY.MARGIN OF SAFETY.MARGIN OF SAFETY.MARGIN OF SAFETY.

Margin of safety represents the difference between sales at a given activity and sales at break-even point.

Sales – Sales at B.E.P = Margin of safety.

Margin of safety X P/V ratio = Profit

ANGLE OF INCIDENCEANGLE OF INCIDENCEANGLE OF INCIDENCEANGLE OF INCIDENCE

The angle which the sales line

makes with the total cost lines, is

known as the angle of incidence.

This angle gives the pictorial

relationship between profit and

sales.