Cost Accounting (2 nd session) Prof. Amit De

JOB COSTING Job costing refers to the cost procedure or system of cost accumulation that ascertains the costs of an individual job or work order separately. A job represents or constitutes the unit of costing.

TYPES OF PRODUCTION ACTIVITY SUITABLE FOR JOB COSTING 1. Production consists of special jobs or projects based on customer's specifications. 2. Production pattern is not repetitive and continuous. continuous. 3. Virtually every job produced is somewhat different. different. 4. Each job maintains its separate identity throughout the production stage. throughout the production stage. 5. The different jobs are independent of each other.

BATCH COSTING Batch costing is essentially a variation of job costing. Instead of a single job, a number of similar product units are processed or manufactured in a group as a batch. Batch costing is essentially a variation of job costing. Instead of a single job, a number of similar product units are processed or manufactured in a group as a batch.

ECONOMIC BATCH SIZE TOTAL COST HOLDING COST SET-UP COST BATCH SIZE q O Rs. Economic Production Batch Size Where Q = total demand in time period T C 1 = holding costs per unit C 2 = set up cost per batch 2C 2 Q C1TC1TC1TC1T =

CONTRACT COSTING Contract costing is a type of job costing in which contract constitutes a unit of cost.

ESCALATION 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 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 CONTRACT 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 Profit Cash received Work certified 1 3 X X

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 profit Work certified Contract Price X

WORK CERTIFIED AND 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 COSTING Sales – Cost = Profit or Sales – (Fixed cost+Variable Cost)= Profit.

MARGINAL 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 is that part of total cost, which changes directly in proportion with volume. 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 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 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 EQUATION Sales – (Fixed costs + variable costs) = Profit

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 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 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 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.