Treatment of opening stock and closing stock Posted by birendra kunwar on 9:49 PM

The stock is valued on the basis of manufacturing cost and production for the period . Under absorption costing , the fixed as well as variable manufacturing cost are included in total cost of production
In absorption costing , three types of stocks have to be valued on the basis of manufacturing cost . They are manufactured stock , opening stock .
The valuation of opening and closing stock depends upon the valuation method applied by the concern . In the case of first-in-first-out (FIFO) method, the beginning stock is valued on the basis of manufacturing cost of the previous period . However, the closing stock should be valued on the basis of production cost of the current period . If the manufacturing cost of the previous period is not given , the cost per unit of opening stock will be equal to the production cost for the current period . Sometimes the closing stock unit may be more than production units. In that case the excess units to production units is valued at the value of opening stock.
In the case of last-in-first-out (LIFO) , the ending stock is valued as same to the beginning stock. If the ending stock is more than the beginning stock, the excess units in beginning stock are valued at production cost of the current period . It should be mentioned in the question for an application of LIFO, otherwise FIFO method of stock valuation should be applied.

Advantages of Variable Costing Posted by birendra kunwar on 6:48 AM

The main advantages of variable costing are :

(1) Variable costing is a simple and easy method . It is less confusing.

(2) Fixed costs are excluded in cost of production and hence it avoids the complication of over or under absorption of fixed manufacturing overhead.

(3) It provides useful data for managerial decision making.

(4) It helps the management in pricing.

(5) It allows for compatibility with standard costing and budgeting.

(6) The clear cut division of costs into fixed and variable cost paves the way for better and efficient cost control .

(7) The profit under variable costing depends upon the sales volume . Profit in variable costing is not affected by changes in inventory as it is in absorption costing. In absorption costing, both sales and production influence profit.

(8) Variable costing is very useful in management reporting.

Characteristics of Variable Costing Posted by birendra kunwar on 6:24 AM

The main characteristics of variable costing are as follows :

(1) All the costs like production , administration, selling and distribution costs are classified into fixed and variable cost.

(2) Variable costs are charged to production cost. Fixed costs are not charged to production costs .Rather, it is charged to contribution margin.

(3) All the fixed costs are taken as periodical cost and it is charged to the profit and loss account of that year when it occurred.

(4) Finished goods and work in progress are valued by taking variable manufacturing cost only.

(5) It has its own method of calculation of profit . The profit is determined by deducting total fixed cost from contribution margin . The contribution margin is ascertained by deducting total variable cost from sales .

Features of operating costing Posted by birendra kunwar on 7:51 PM

The main features of operating costing are as following:

(1) The undertaking which adopts service costing does not produce any tangible goods. These undertakings render unique services to their customers.

(2) The expenses are divided into fixed and variable cost . Such a classification is necessary to ascertain the cost of service and the unit cost of service.

(3) The cost unit may be simple or composite. The examples of simple cost units are cost per unit in electricity supply , cost per litre in water supply, cost per meal in canteen etc. Similarly cost per passenger kilometers in transport cost per patient-day in hospital, cost per room-day in hotel etc. are the examples of composite cost unit.

(4) Total cost are averaged over the total amount of service rendered.

(5) Costs are usually computed period-wise. However,in the case of utilization of vehicles, use of road-rollers etc., the costs are computed orderwise.

(6) Service costing can be used for service performed internally or externally.

(7) documents like the daily log sheet, cost sheet etc. are used for the collection of cost data.

Accounting for joint product Posted by birendra kunwar on 6:32 PM

The joints products cannot be identified as separate products up to a certain stage in manufacturing. This stage is known split-off point. The exact point in a manufacturing process where two or more products can be distinguished is defined as the split-off point.

The cost incurred up to the point of separation is called joint cost. likewise the cost incurred after the split off point is known as separate or subsequent cost .

C.I.M.A. terminology defines joint cost as "the cost of providing two or more products or services whose production could not, for physical reason , be segregated".

In the words of cost management ,joint cost are "Costs to operate joint processes, including the disposal of waste".

In short , joint cost means all costs incurred prior to the point of separation. Joint cost cannot be traced to the particular product. The appointment of joint cost to each of the joint product is the meaning accounting for joint product. The apportionment of joint cost is very important for finding out the total cost of each joint product .

There are various accounting method adopted for the apportionment of joint cost to each product . The following methods are generally used for this purpose:

(1) Unit Method:

Average Unit Cost Method.

Physical Unit Method.

(2) Sales Volume Method .

Market Value at Separation Point.

Market Value after Further Processing.

Reverse Cost Method.

Introduction of Cost-Volume-profit Analysis Posted by birendra kunwar on 8:03 AM

The relationship between cost volume and profit is shown by cost-volume-profit analysis. it is an analytical tool for analyzing the relationship among cost, price, profit, sales and production volume. Mainly there are three element in cost-volume-profit analysis.

It is highly essential for the management to have the complete knowledge about the inter relationship among the cost, volume and profit. for this purpose cost-volume-profit analysis can be regarded as a sophisticated method or analytical tool used in management.

(1) What sales volume is needed to break-even?

(2) What sales volume is necessary to earn a desired net profit?

(3) How will the change in selling price affect the profit position of the company?

(4) How will the change in cost affect profit?

(5) Which product or product mix is profitable?

(6) Which product or operation of a plant should be discontinued?

(7) What will be new break even sales if these certain changes on fixed and variable cost?

Method of Reconciliation Posted by birendra kunwar on 7:16 AM

The reconciliation statement is prepared with an objective of reconciling the profit between cost and financial account. In place of reconciliation statement, memorandum reconciliation account can also be prepared.

For the sake of reconciliation profit shown by one set of account can be taken as a starting point. The profit taken as a starting point has to be adjusted for an ascertainment of profit of another set of book. If the starting profit is found to be more, because of any reason, then the related amount has to be subtracted. Similarly, if the profit, which is assumed as a starting, is less, then the related amount has to be added.

The following steps are involved in reconciling the profit between cost and financial account:

Step 1 : To begin with profit shown by any one set of account - cost or financial account.

Step 2 : To find out the reasons responsible for the disagreement of profit between two sets of

books.

Step 3 : To determine the addition or deduction items. (Due to any reason if the profit taken as

starting point is more, the related amount should be deducted and vice-versa)

Step 4 : To complete the Reconciliation Statement. (If the profit of cost account is taken as

starting point, it will be completed by showing the profit of financial account and vice-

versa.)

Limitations of Standard Costing Posted by birendra kunwar on 6:33 AM

Standard costing has certain limitations which are as follows :

(1) Setting of standard is a very difficult task and it involves a high degree of technical skill. Therefore it is costly and will be expensive from the point of view of small concern.

(2) Conditions of the business are charging. Hence , standard must be revised from time to time otherwise they lose importance.

(3) Fixation of standard is not possible for every type of work or operation. It cannot be implemented in those industries which do not produce any standard product.

(4) Sometimes it creates adverse psychological effects. if the it is set at a high level its non-achievement results in frustration and builds up resistance. It acts as a discouragement rather than incentive for better efficiency.

(5) It is partly determined on the basis of past experience and partly on the basis of forecast of future expenses. Thus uncertainties are around standard and determination of correct standard is very difficult.

(6) Too much care and attention are required to introduce as well as to keep up-to-date the system otherwise the very purpose of the system will be frustrated.

Cash budget in accountancycareers Posted by birendra kunwar on 5:35 AM

The cash budget is a plan of future cash receipt and payment. The statement showing the estimated cash income (cash flow) and cash expenditure (cash outflow) over a projected time period is known as cash budget. A very helpful tool in cash management is the cash budget. It helps management in planning to avoid unnecessary idle cash balance. In the same way, it also helps to eliminate unneeded expensive borrowing. Thus, the cash budget helps a management keep cash balances in reasonable relationship to its needs.

A cash budget serves the following purposes:

(1) It indicates the effect on the cash position of seasonal requirement large inventories unusual receipts and slowness in collecting bills receivable.

(2) It indicates such cash requirement for a plant or equipment expansion programme.

(3) It points to the need for additional funds from external sources such as bank loans issue of securities.

(4) It indicates the availability of cash for taking advantages of discount offered.

(5) It helps in planning redemption of preference shares or redeemable debentures payment of pension etc.

(6) It shows the availability of excess funds for short or long term investments.

A cash budget includes no accrual items. For example income earned or accrued but not received and expenses incurred or outstanding but not paid are not included in cash budget. Only the cash transactions are included in cash budget. The cash transactions for preparing this budget is obtained from various operating budget discussed above. for example, cash sale and collection from customers can be ascertained from sales budget. Monthly cash purchase and cash payment to form labour budget overhead cost from overhead budgets can be ascertained. This method of preparing cash budget is known as receipt and payment method and is a common method of preparation.

The cash budget consists of following four major section sections:

Step 1 Receipt section.

Step 2 Disbursement section.

Step 3 Cash surplus or deficit section.

Step 4 Financing section