COSTING, COST ACCOUNTING AND COST ACCOUNTANCY

Costing :The term costing is defined as :the technique and the process of determiningcosts:
Cost Accounting :
Cost Accounting is the branch of acecounting dealing with classification, recording,
summarising and reporting of current and prospective costs. The process begings with classify ing
and recording of incomes and expenditures or the bases on which the costs are calculated and ends
with the prepartion of periodical statements and reports for ascertaining and controiling costs.
Cost Accountancy :
Cost Accountancy has been defined Institution ofCosting and Management Accountants, London,
(L.C.M.A.)as the application ofcostingand cost accounting principles methods and techniques to
the science art andpractice of costcontrol and ascertainment ofprofitablity. It includes the presentation
of information derived therefrom for the purpose of managerial decision making"
Cost Accountancy is awider term which includes costing, cost accounting, budgetary control,
cost control techniques and cost audit. The American Accounting Association ot de fined Cost as
"Cost is a foregoing, measured in monetary terms. incurred or potentially to be inevrred on or
attributable to achievc aspecificed objectve.'
 FEATURES OFCOST ACCOUNTING:
1.4technique and process of ascertaining Costs :
Cost accounting is atechnique of ascertaing cost. It
consists of principles and rules
which govern the procedure of ascertaining cost of aproductservice.
2. Recording of income and expenditure relating to the
services production of goods and
lt classifies, records and appropriates allocation of
expenditure for determination of
coSts of products and services. It also records, income for ascertaiing costing profit.
3. Providing statistical data.
It provides statistical data on the basis of which future
estimates are prepared and
quotations are subimitted.
4. Itis concerned with cost ascertainment, cost control and cost reduction.
4. Preparation ofBudget and Standard
It, establishes budgets and standards to facilitate comparision between actual cost and
targetedcost and to ascertai deviatios.
6. Providing information.
It provides timely information to the management for planning, evaluation of
performance, control and devision making.
In essence, Cost accounting is the application of accounting and costing
methods and techniques in the ascertainment of costs and analysis of savings/or excess cost principles,
incurred
as compared with previous experience or with standards.'
 Introduction LA.11
OBJECTIVES OF COST ACCOUNTING:
() Ascertainment of Cost :
There are two methods of ascertaining cost viz Post costing and Continuous costing.
Post costing : Post costing means analysis of actual information as recorded in financial
books. It is accurate and is useful in case of costpluse contract where price is to be determined finally
on the basis of actual cost.
Continuous costing: It aims at collecting information about cost as and when the activity
takes place so that as soon as a job is completed, the cost of completion would be known, This
involves careful estimates being prepared of overheads. In order to be of any use, costing must be a
continuous process.
Costs ascertaiinged by the above two methods may be compared withe the standard
which are the target figures already compiled on the basis of experience and experiments.
(2) Determination of Selling price :
Seliing price of aproduct is the influenced by market conditionson which the business
has no control, but it is still prossible to determine the selling price within the
market constraints. For
this purpose, it is necessary to rely upon cost data supplied by cost
(3) Cost Control and cost reduction : accountancy.
(a) Cost control :
Cost control means taking excecutive action where there is adeviation fromwhat is
laid downas targeted performance. The action to be taken by the persons,
out the jobor opeation. The action is to be excercised through modern methods responsible for carrying
of costing in respect
of expenses in operating an undertaking.
In order to exercise cost control, brouadly speaking, the following steps should be taken.
1) Determine clearly the objective i.e. predetermine the desired results :
2) Measure the actualperformance
3) Investigute into the causes of failure to perform according io plan. and
4)Institute corrective action.
Target cost and/or targets of performance should be laid down in respect of cach
departmentor operation and these targets should be related to individuals who control the actuai
performance by their action and bring them intoline with the targets.
Actual cost of performance should be measured in the same manner in which the targets
are set up. If targets are setup operationwise, then the actual cost should also be collected operation
wise and cost centre or depart1ment wise.
 NEED FOR COSTING
Need for Costing in an assured
market andthere is an
In an assured market, sale of product oror rendering of service is ass1red
govornment.So it
absence of compeliton agaist the product or service due to restrictive policy of the working
IS argued that cost costing system
system andits
conseiousness issirrelevant. Moreover, installation of
Involves huge cost. So, it is argeed that there is no need for introducing costing systern.free
economy,
But this argument is not tenable because in the present environment of
for not a og
S een compatition and the market for any produet will not remain assured
market. so ts
onpeii0n willcompet the reduction in selling price in order to stay in the
evessity pre supposes the introduction of acosting system which will provide the firm cost struvture
in order to enable it to reduce selling price.
to the ninimum when a
Again, the cost of wastage, loss, efficiency etc can be reduced
System of costing works efficiently and consequently the selling price of the product/service can be
reduced without affecting the margin of profit. Reduction in selling price will increase the volume of
sale leading to increase in profit.
Again, many losses can be avoided by taking right decision at the reght timeon the basis
of relevant and reliable cost data provided by acosting system. Positive aspect of costing is reductng
in production and selling cost.
However, costing system should be cost effective having it related to the industrial and
financial needs of the concern.
The above statement justifies the need of introduction of costing system.
NEED OFCOSTING IN VIEWOF EMPLOYEE'SOBJECTIONS:
Employees may object to the installation of costing system because fo
(a) lack of knowledge about the new system.
(b) suspicion and unwillingness to adapt them selves to the changing environment.
(c) Tendency to continus willexisting system.
Such resistances from the employees can be over come through discussion to impres
upon them the advantages of costing system.
Moreover traning may be imported to them to helpthem change over to the new syste
as fast as possible.
1.
Advand'bgu Introduction
L.A.21
Disclosure of profitable and unprofitable activities :
A COStng system reveals profitable and
climinate or reduce unprofitable activities and steps can be taken to
activities those activitics fiom which loss arises.. Again action can be taken to make those
such as profitable by changing tthe method of production and by reducing wastages and
spoilage of materials, idle tine, under utiliasation of plant capacity, etc. inefficiencies
2. Basis for
fixing selling price
in COstaccounting provides cost-data. It helps the management
advance. It is very useful nfixXng ihe selling price
to be fixed
3.
below cost. particularly duringthe period of depression when seiling price may have
Measurement of
performance
Cost accounting
:
provides cost-data for
costs of a product between two each element of cost. It facilitates
in determining the periods and comparison of
efficiencies or inefficiencies can be ascertained.
4. Cost Control: deviations from targeted performance and the It helps
management can take action thereon.
Cost
By applying these accounting provides budgets and standards which are techniques of
techniques
action at cach stage of the management can control cost. The managcmnt can takecost control.
5. Aid in
decision production.
making:
executive
lt supplies
such as introduction of asuitable cost-data and other related information for
new product line. replacement managerial decision making
make or buy decision, etc. It is helpful in of an old machinery with an automatic plant,
6. Minimum
wastage and losses : selecting suitable alternative.
Cost accounting system locates areas and
causes of losses and wastages in respect of
materials, idle time, unutilised capacities and suitable action
to the minimum. can be taken to eliminate or reduce them
7. Cost reduction
measures:
Ithelps the management in introducing cost
reduction measures such as elimination of
unnecessary process, introduction of improved technology and process, various labour
schemes for improving labour productivity. incentive
8. Basis for formulating policies:
Cost accounting provides cost data product vwise, process wise or department wise at
different levels of capacity andother relevant cost information to the management in order to formulate
production policy, labour policy, sales policy and investment policy. Thus it helps the management
in fixing quotation, contract or tender price, adopting labour incentive programme, ete.
9. Inventory Control :
Costing system enforces control on inventory and reduces wastages and losses in the
form of over stocking. It helps in the valuation of inventory for preparing interim accounts.
10. Helpful to the Government.
It is helpful to the government in fixing cconomie polices and assessing excise duties
and income tax. It is also helpful to thegovernment for preparing national plan.
I. Helpful to the consumners :
minimum and enables the
Cost accounting reduces cost of productor service to the
market.
producer to sellthe product at a lower price ina competitive
12. MarginalCosting : executive in taking shorttern decision.
The use of marginal costing helps the
 Cost Accontiny
1.A.22
ACCOUNTINC:
SCOPE AND LIMITATIONS OF COST
THE NAURE, understood from its characteristics of coct
canbe
Thc nature of costaccounting
ACCOUNTING:
accounting CHARACTERISTICS OFCOST
characteristicsof cost accounting
Follon ing are the
a Science: and rules.
1. Cost Accounting iN an empirical science, Ithas its own principles
Cost accounting is
policy ofu
: Empiricai Science:
cost accounting are conditioned by the operations, personnel and
Rules of applied
ing with respect to which its techniques are to be
undertak
3. Dynamic Nature: accounting are not static but dynarnic, Th
of cost
The principles, rules and techniques
and situation.
change with passage of time
scien
proved by controlled experiments like exact
4.Social Science:
Its principles cannot be verified and
social science.
(like Mathematics, Physics, Chemistry, etc.) because it is a
5. Behavioural Science: also called
is operated by human beings with feelings and emotions, it is
As it
behavioural science.
6. Itis an Art requiring skill: its principles requires skills, efforts and practio
It is also an art. So the application of
on the part of cost
accountant.
SCOPE OF COSTACCOUNTING:
aspects:
The scope of cost accounting covers five
(i) Cost ascertainment or costing:
(ii) Cost Accounting
(ii)Cost presentation;
(iv) Cost control,and
(v)Cost audit
(ij Cost Ascertainment:
finding or cost ascertainment.
One of the important aspects of cost accounting is cost
job. It deals with:
mears ascertaining the cost of aproduct or a service or a
(a) The collection and analysis of expenses;
stages of
(b)The measurement of production of the different products at the different
manufacture.
(c) The linking up of production with expenses.
The collection and analysis of expenses is done by adopting certain systems of costin
such as historicalcost, estimated cost and standard cost.
The measurement of productionat different stages is made by adopting certain method
or types of costingsuch as single or output costing, job costing, contract costing. process Costing, eu
the methods or types of cosling imply different procedures used in the measurement of produtio
The linking-up of production with the analysed expenses is done by adopting certain techniques 0
costing such as absorption costing. marginal costing, standard costing, direct costing. ete. Thus a
these three i.e. the systems, methods and techniques are used simultaneousiy
 Introduction 1.A.23

(ii) Cost Accounting :

Cost accounting is the process of accounting for costs. It implies the application of
accounting and costing prnciples, methods and techniques in the ascertainment of costs and the
analvsis of savings and/or exCeSseS as compared with previous experiences or with standards.
t starts witih recording of expenditure and ends with the preparation of statistical data.
It uses double cntry book keeping in recording expenses and uses also it as a basis for
cost ascertainment,Thus cost accounting is a mechanism for Cost ascertainment and cost control and
standard cost.
cost can be ascertained by following the system of historjcal cost, estimatcd cost or
(üi) Cost Presentation :
Cost presentationrefers to the reporting of cost data to the various levels of management
to help them in their managerial decisions. It involves the presentation of cost data to the right
personnelat the right time in the right form.
(iv) Cost Control :
Cost controlmeans the guidance andregulation of actualcost of operating an undertaking.
deviate or
It aims at guiding the actuals towards the line of targets. It regulates the actuals if they
Thus cost can be
vary from the targets. This guidance and regulation is done by an executive action.
controlled by standard costing, budgetary control, proper presentation and reporting of cost data.
(v) Cost Audit :
Cost audit is the verification of the correctness of the cost accounts. It is a check on the
adherence to the cost accounting plan. It ascertains the efficiency of the system of cost ascertainment.
lines. It sees
Italso checks whether the particular cost was ascertained on the normal and reasonable
whether the routine process of costing and cost accounting has been carried out.
LIMITATIONS OF COSTACCOUNTING:
Following are the limitations of cost accounting.
1. Lack ofuniform procedure : product determined
There are different procedures for ascertaining costs. Thus costs of a
by different procedures will be different. the needs of the
Howeve, this limitation can be avoided by adapting the procedure to
according to the changing situations.
organisation and such procedure should be constantly updated
2. Flexibility in conventions and estimates :
different elements, issues materials at different
Cost accounting classifies costs into into fixed and variable, etc.
costs, divides overheads
prices, apportions overheads, allocates joint determination
which are very often arbitrary. Asa result
basing on different conventions and estimates
of cost may not be correct. by introducing a sound costing system and
However, this shortcoming can be overcome
clearly defining cost centres, cost units and responsibility centres.
by
3. Expensive System : costing system isexpensive and it isnot
Introduction and functioning, of an elaborate
suitable to smallorganisations. overcome by introducing a flexible costing system suitable to
This limitation can be accordingly.
an organisation big or small and expenses can be reduced
serve the needs of
situation : based
4. Unhelpful in Inflationary fails in inflationary situation because it provides futuristic data
Cost accounting
 oswhat are Marginal Cost and Marginal Costing ? What are the advantages andlimitations
of Marginal Costing. (GU. 2012)
Marginal Cost:
CIMA defines marginal cost as "The amount at any given volume of ouiput by which
gogregate costs are changed if the volume of output is increased or decreased by one unit.
This unit may be a single article or a batch ofarticles or an order.
I means that marginal cost is the incremental or decremental cost due to an increase or
decrease in the number of units produced. Thus marginal cost consists of variable cost only
and relates to change in output in a particular circumstance.
Inshort, Marginal cost is the change in total cost due to change in output.
Marginal Costing:
CIMA defines marginal costing as "The ascertainment of marginalcost and ofthe effect
on profit of changes in volume or type of output by differentiating between fred costs and
variable costs. " Thus marginalcosting means the determination of marginalcost and its effect
onprofit due to changes in the number of output or change in type of output. It is done bymaking
adistinction between fixed and variable costs.
In this type ofcosting. only variable costs are chargedto cost units (operations,processes or
products) and the fixed costs attributable to the relevant period are writen offin full against the
contribution ofthat period. Thus only the variable costs form the part of productcost because only
Variable costs change due to increase or decrease in output and fixed costs remain the same within
the capacity.
The theoryof marginal costing is based on the assumption that some elemenns of costs
 Management Aecounting
tend to varn diecthh with variation in the volme of output while others do not.
onl wariable costs fom part of product cost and fixed costs as period costs
are That
is why
MarginalPfit and LossS Account. Asa result. he product cost will be a constant,
the fxcd costs will be a constant amount regardless of level of output within ratio, v
the transterwheedreaS
to
lInderthis technique, therefore, all costs are classifiedinto two groups: fixed
and for this purpose. fixed and variable elements are also separated from capacit
and ory.
semi-variable variable
fixed costs and are included into the respective groups i.e. fixed and variable costs groups. sThus
emi
marginal cost is the aggregate of variable costs.
As for example. ifthe cost of direct materials is?5,000; direct labour is
overhead is 1000 and fixedoverhead I 2,000for producing 1,000units; the marginal 2000;costvariable
will be: per unit
Direct Materials 5,000
Direct Labour 2,000
Prime Cost 7,000
Variable overhead 1,000
Marginal cost 8,000
Number of units produced 1.000 (Units)
Marginal cost per unit 78 8,000 +1,000units)
It is referred to as
U.S.A. though there are someMarginal Costing in U.K. where as it is termed as Direct
It is to be noted that differences between them.
Costinginthe
marginal costing is one of the techniques of
productionof goods maufactured
could be used in or services rendered. It is ascertaining costof
also be used with conjunctions with any method of costing such asnotjoba method of costing but it
other techniques of costing such as or process costing. It can
also known by other names standard
such as direct costing, variable costing and budgetary control. It is
pocketcosting, etc. costing, attributable costing, out of
Following Characteristics
are the features ofFeatures of Marginal Costing: (GU. 2013)
(i) Itis a technique of costing marginal costing:
variable cost on the volume used to ascertain the marginal cost
ofoutput. and to know the impact of
(ü) All costs are
classified into fixed and
variable costs are segregated into fixedvariable
and
costs on the basis of variability. Even semi
(ii) Variable costs alone are variable costs.
charged to production while fixed costs are
contribution. recovered from
(iv) Stock of
(v) Selling price work-in-progress and finished
is based on marginal costgoods are valued on the basis of marginal cost.
(vi) Profitis calculated by plus contribution.
(vii) Break-even analysis and deducting both marginal cost and fxed cost from sales.
cost-volume profit
(vii) Profitability of aproduct or a department isanalysis are integral part of this technique.
based on contribution made available by
each product or department.
 Marginal Costing IL7

Summary :
Itis atechnique of detemining marginal cost:
() Classificatio of costs into Fixed andvariable:
(i)
(ii) Only variable costs
are charged to production:
(iv) Stock of finished goods are valued at marginal cost;
(v) selling price is equal to marginal cost; cost and volume analysis is made possible.
Detemination ofprofit ability of aproduct is poseble.
Advantages:
Following are the advantages of marginal costing:
L.Avoids complication of absorptionoffixed costs:
It avoids the complication of over and under absorption of fixed cost as fixed costs are
excluded from cost of production.
Datafor decision nmaking:
It nrovides useful data for managerial decision making such as productionor shutting down.
buyor make etc.
AFacilitates comparison of costs:
It facilitates the comparison of costs of different periods and costs at different leveis
because fixed costs are not carried forward from period to period.
4. Impact of sales volume on profit :
Impact ofchanges in sales volume on profit is shown under this system as fixed cost are
not considered.
5. Relationship:
Itestablishes arelationship between costs, sales and volume ofoutput and facilitates break
even analysis.
KTool of profitplanning:
It is a useful tool ofprofit planning as it shows profit at different levels of output.
7. Use ofReponsiblily Accounting:
Responsibility Accounting is more fruitfully used in marginal costing.
8. Profit and Loss Statement :
Profit and Loss statement is not distorted due to changes in closing stock.
9. Better understanding of proft:
in fixed costs.
In mariginal costing, profit is not affected by changes
10. Segment Reporting : reporting in a better way.
Marginal costing shows the performance ofsegment
Limitations:

1. Difficulties in classification of costs intofixed and variable: variable

involves technical ditficulties because no
Classification ofcosts into fixed and variable
is completely fixed.
cost iscompletely variable and no fixed cost
2. Ignoring offixed costs altogether impactfromcost ofproduction:
though the offixed cost on production has increased significantly
It ignores fixed costs and it forms a significant portion ofthetotal cost.
with the development oftechnology
 Management Accounting
3. Under statement of Profit:
Closing stock is under-valued and profit is understated.
4. Ineffective tool of control:
It does not provide an yardstick to exercise control.
5. Comparison ofcost ofjobs not feasible:
COst compar1son of two jobs cannot be made thouoh marginal cost may be the same
because the jobs may take different amount oftime.
6. Unsuitable in case of contractsand ship-building:
It is unsuitable to contracts or ship building industries where the value of work-in-progress
is very high because in incomplete stage it may show loss whereas in complete stage it
may show very high profit.
7. Misleading Selling Price:
It is misleading to fix selling price considering only variable costs and ignoring fixed costs
as it may result in a loss.
8. Difficulties in Apportionment of Variable overheads:
ltavoids apportionment of fixedcosts but cannot avoid the apportionment of variable costs
which are sometimes difficult to apportion.
9. The asumptions of Fixed Cost and variable costs :
The asumptions that total fixed cost and variable cost per unit remain constant are not
always true.
 Discuss the concept and characteristics of Marginal costing as a
or

Management Accounting. t(GU.echni2004|

que
of
Marginal Costing is a technique of ascertaining cost. U'nder this technique, all cos
classified into two groups viz. fixed and variable. Even the fixed and variable elements.are also
division
separated from semivariable costs and are included in the respective group. Thischargp
variable costs are
expenses into fixcd and variable is essential because only
because they are treate
production under this technique. Fixed expenses are excluded from costofcontribution.
recovered out
as period costs and not the co_t of production. They are
Characteristics ofMarginal cost: 2013
the
Fixed Unit Cost : The primary characteristic of marginal cost is that unit cost remains
changes
same in a given condition regardless of the level of output and the total variable cost
directly with the change in the level ofoutput. Thus marginal cost consists of the variable costs only
and as a result, the product cost will be a constant ratio regardless ofchanges in the level ofoutput
ractivity.
Income Statement: Under this technique, difference between selling price and marginal
cost is termed as contribution and difference between contribution and fixed expenses is termed as
profitorloss.
Usefulness to ManagementAccounting: Marginal costing technique is avaluable
technique to the management in taking managerial decisions. It is very useful in determining
business policy, important decisions, profit planning and cost control.
Pecision Making: Marginalcosting helps the management in various important decision
making regarding the following matters:
() Introduction of aproduct;
(ii) Whether to make or buy;
(üi) Selection ofmost profitable product or sales mix,
(iv) Price reduction in competition or depression,
(v) Utilisation of spare capacity;
(vi) Selection of capital projects;
(vii) Determination of most profitable level ofactivity; etc.
In formulating the business policy and decision making, the management uses various tools=
offered by marginal costing such as contribution, break-even chart, profit-volume graphs, break
event point, cost-volume-profit ratio, etc.
In marginal costing technique, only the variable costs and not the fixed costs are considered
as production costs andcontribution being the difference between the sales and variable costs I
the primary factor for taking decisionson the above matters. The contribution may be the aggrega
contribution or per unitcontribution or contribution per factor of productionor contribution per
limiting factor.
Praft Planning: Profit planning is the planning of future operations to attain adefined proti
goal i.e. the desired amount of profit or to maintain a specified level of profit. Marginal costn
provides the necessary data for profit planning and decision making. It facilitates the cost-VOluu
 MarginalCosting

nelationship by separatingthe fixed and variable costs in the income statement. It helps the
i and evaluating profit from:
managementinplanning
volume:
(a) achangein sales mix:
(b)achange in products:
(c)achange in pricing of
decision
(d)a make or buy
(e)selection offmost profitable products, customers, territories, etc.
ialuation of Performance: Different products, departments, markets and sales division
haveedifferent earning
potentialities..Marginal cost analysis is avery useful
performance each sector of a concern..This evaluation is
offeach technique for evaluating
the
made betweenfixed: dand variable expenses. .The evaluation of
possible because ofthe distinction
performance is based on the respec
ontribution made by each sector and higher the contribution, better is the performance
considering fixedexpenses remaining constant.
ost Control : Marginal costing provides continuing opportunities to the
iew costs in relation to the level of sales and revenue. This opportunity for management to
review arises from
isionofcosts into fixed and variable. Fixed costs can be controlled by the top
that to alimited extent. In marginal costing, the management focuses the points which management and
are
atlower level of management by the use of standards, budgets, responsibility reports, etc.controllable
Marginal
costing provides, through the reports, all the data to the management for their interpretation and
suitable action against the person responsible.
Thus marginal costing is an effective tool for the controlling variable costs.
Again it also facilitates the controlof fixed costs by the management through the
n
ofixed costs with contribution. In marginal costing, fixed costs are separately shown incomparison
the Income
Statement and its role in the determination of net profit can be ascertained casily by matching tixed
costs against contribution. Thus marginal costing helps the management in the control of fixed
costs als0.
 o. 11. What is meant by Break-even Chart ? What are its utilities ? GU.1987, 2013|
Meaning of Break even Chart:
Break-even chart is the graphical representation of the marginal costing show ing inter
relationship berween cost, volume and profit. It shows the break-even point (i.e. no profit no
loss point of sale) and also indicates the estimated cost and estimated profit or loss at various
volumes ofactivity.
Thusthe Break-even Chart has been defined by CIMA as "A Chart which shovs the
profitability or otherwise of an undertaking at various levels of activity and as a result
indicates the point at which neither profit nor loss is made.
It shows the following information at various levels of activity:
Variable costs: fixed costs and total costs:
(ii)Sales value;
(ii) Profit or loss;
(iv) Break-even point i.e. the point at which the total cost is justequal to sales;
IL16 Management Accounting

(v)
It isMargin
achart ofwhich
Safety.
hshowsthe inter-action of volume. selling price, variable costs:and fixe
costs at different levels. I also shows the relevant variables and their impact upon prOr

This is why break-even graph is also caled a profit planning chart.

Simultaneously. Construction:
Assamptinns for Break-even Chartconstruction ofa break-even char.
Following assumptions are required tobe made in the
constant.
Fixed costs willtend to remain remain unchanged;
of variable cost factorswill
The price segregated into variable and fixed elements;
Semi-variable costs can be ofmanufacturing and selling will remain
Productspecifications and methods
unchanged:
increaseor decrease;
(V) Operating eficiency willnot
policy;
There will not be any change in pricing number of units produced will be the
The number of units of sales and the
closing stock;and
same i.e. there willbe no opening or
Product-nmix will remain unchanged.
Utilities/Advantages:
managemer
Understand: It is simple to compile and easy to understand for the
1. Simple to
cost-volume-profit structure in a simpler waythan in Profit and LossAccoun
hecause it presents
operating statements, etcThe management can easily grasp the significance ofth
cost schedules,
information represented in the chart.) relationshi
Management: It is a useful tool to guide the management in studying the
2. Guide to It shows the effect on profit of changes in:
between cost, volume and profit.
(a) Selling price
(b) Variable costs;
(c) Fixed costs; and
(d) Volume of sales
important decisions.
Thus the management can take
and profit earning capacity of the
3.Shows Profitearning Capacity: It shows the strength Thus management can take decisio
business through Margin ofSafety andAngle of Incidence. Price fixation (d) Product substitution and (e
inrespect of (a) Activity level; (b) Cost reduction; (c)
Product-mix.
of alternative product-mix so
4. Effect ofalternative Product-mix: It shows the effect on profit
that management can select the most profitable product-mix.
forecasting costs and
5. Helps in forecast and profit planning: It helps the management in
planning profits.
6. A tool ofcostcontrol: It is atool for cost control because it shows the relative importance of
fixed costs and the variable costs.
7. Price fixation: It helps the management in determining the sale price in order to attain a
desired profi.
 Marginal Costing II.17

Limitations/Disadvantages:
conditions may not
alwaysremain same: Break-even point shows a static picture
conditions may not remain unchanged.þelling price, fixed
Static ofdatebecauseremain of actvity.
L bccomeo t may not n constant at different levels
ondmay
variable.cost per unit
costs, Break-evenchart may be
ineffective: The effect of various product-mixes on profit
2Single studiedfrom asingle Break-even Chart.
cannot be:
consider the capital enployed: Break-even chart does not generally take into
not
3 h does capitalemployed which is one of
the vital factors in many policy decisions. Thus
consideration the basis of only break-even chart may not be safe and reliable.
on
decisiontaken
Separation ofsemiivariable cost may not be always possible: Break-even chart requires the
4 costs into fixed:l and variable which cannot be made accurately.
separationoffsemi-variable
ofproduction andssales may not hold good: Break-even Charttassurnes that production
SEquality ealways to be co-ordinateddat the same volume and sales always concide with production.
andsalesare that whatever produced is: sold and that revenue from sales increases in
However,the assumption
good in practice.
direct proportion to output, does not hold
below:
sDecimen of a Break Even Chart isgiven
A
Y

A n g
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20,000 25,000
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Output
 Management Accounting

variances to their causes and

V4
analysis of
STANDARD COsTING. actual costs and
costs, their comparison with
incid nce. technique is known as Standard Costing Standard
points of
Thus when standard costs are used,
the calculation of how much cost should
pre-determined
Lucey as "A
costs have been defined byconditions.). ofcostaccounting
wb:.
Specified working Costing is Atechnique
be under Howard,(Standard costto determine the
Accordingto Brown and ofeach produci and service with the actualimmediately '
cost taken
Comparesthe standard
so that any remedial action can be
etficiency of the operationinvolves the following steps:
Thusstandardcosting different elements ofcosts i.e. material, labour and
standard costs for
The setting up of
overheads.
Ascertaining ofactual costs.
determine the differences known as varian
costs to
Comparingthe standards with actual the reasons for differences.
ascertaining
Analysing variances for thereof to management for appropriate action
Reporting of these variances and analysis
2014
where necessary.
Costing ? (GU.1988,1992, 2013]
What are the advantages of Standard points of view.
advantages of Standard Costing fromthe management
.5.
or, Discuss the [GU.2001|
Following are the variousadvantages of standardcosting:
1.Effective Cost Control
facilitates effective
Standards set act as yardsticks against which actuals are compared. Thus it
cost control and provides information for cost reduction.
ZHelpingin formulating Policies and Planning
t provides avaluable guidance to the management in their function of formulating policies, in
deteming pricing and planning
3Provides Incentives :
Standards provide incentives and motivate workers to work with greater efforts for appropriate
reward
4. Determination of causes for inefficiency
Measurement and analysis of variances help in detecting mistakes and inefficiencies. It enables
the management to investigate their causes.
S.Delegation ofAutharity :
It delegates authority and establishes responsibility ofeach executive for
6. Facilitates Co-ordination
his performance.
It enforces co-ordination between different departments by
establishing standards for the
performance of cach department)
ZCost Consciousness :
It infuses the cost consciousness among the labour force and thus productivity is improved.
8. Valuation of Closing Stock :
It simplifies the valuation of closing stock because it is valued at
standar d'cost.
 IVS
Standard Costing and Variance Analysis
sandardisingoffBusiness Activities :
materials,
Itsetsstandards for various business activities. Thus it enables the use ofstandard
standard o
imethodssofproduction,etc.
Management by exception :
Reporting ofvariances is based onthe principle of Managementtby Exception. Only variances
beyonda pre-determined limit may be considered by the management for corrective
p action.
Prompttpreparation of Profit and Loss Account : (GU.2012|
a Loss Account fora short period.
Thiswillhelpthe management for prompt preparation Profit tand
(12) It measures efficiency of employees
(13) It provides a toolof control to management
(14) Itreduces clerical work.
Define Standard and Standard cost (GU. 2012]
Standard : The ten standard may be used to refer to the pre-deternined rate or any pre
determinedlamount against which performance is judged. As for example, for an output of 1000
anits, standard material cost is Rs. 5,000. Therefore, the standard rate per unit is Rs. 5.
Pre-determined rate is fixed on the basis of pastexperience, study and analysis of prevailing
conditions and expected future changes.
Sandard Cost : Standard cost is apreditermined cost which determines in advance what each
noduct or service should cost under given circumstances. It is deternined on the basis oftechnical
stimate of for materials, labour and overheads for aselected period of time and for aprescribed
set of workingconditions.
CIMA Loandon defines standard cost as a pre determined cost which is calculated from
management standard of efficient operations and the relevant necessary expenditure.
Brown and Howard defined the standard cost as "Pre-determined cost which each
product or service should incur under given circumstances.
Thus it is a pre-determined calculation ofhow much should be costs ofa product or a service
under specified working conditions.
overheads, etc.
It involves the assessment ofthe value of cost elements such as material, labour,
|GU.1992, 2012]
2.7. What are the purposes or objects of StandardCosting?
Standard costing has the following purposes/objects : against actual
1. Promoting and Measuring efficiencies by using standards as yardsticks
performances. taking actions against
2 Controlling and reducing costs by comparing actuals with standards and
the persons responsible for variances. service is calculated on the basis of
3. Simplifying the costing procedure as cost ofa product or
standards.
standards.
4 Valuing inventories on the basis of
on the basis of standards.
5. Fixing selling price and quotations Costing ?
Standard
8. What are the limitations of standardscosting:
Following are the limitations of in practice.
standards
1. It is dificult toestablish
V.6 Management Accounting

2. Standards require constant revisions in view ofchanging costs. Revision involves cost and
creates problems.
3. Inaccurate and unreliable standards cause misleading results.
4. Installation of standardcosting is acostly affair.
5. It is expensive and unsuitable in job-order industries, manufacturing non-standard products.
6. It isunsuitable for service industries.
7. Standard costing can not be used in those concerns where non standard products are produced
or goods are produced according to the specifications of a customer.
8. Standards can not be set easily where situations are constantly changing
9. Fixinng resposibility isnot easy by means of variance only
10. Standards can not be easily set where technology changes quickly