DISTINGUISH BETWEEN NORMAL COSTING AND ACTUAL COSTING

NAME ROLL NO

SANKET JAIN 25

HARSHIT JOSHI 27

MAYUR LIMBACHIYA 36

PARESH CHAUDHARY

BHARAT CHAUDHARY 10

RAJU GAMIT

KAMLESH MEVADA 42

Actual costing

• Actual costing is a costing system that traces direct cost to a direct object by using actual direct cost rate times the actual quantities of direct cost input.

• It allocates indirect cost based on the actual indirect cost- based on times the actual quantities of the cost allocation bases.

• In its job costing system, HEC accumulates costs incurred on a job in different parts of value chain – for example manufacturing , marketing and customer services

General approach to job costing

1. Identify the job that is the chosen cost object2. Identify the direct cost of the job

a) direct materialsb) direct manufacturing labor

3. Select the cost allocation bases to use for allocating indirect cost to the job

4. Identify the indirect costs associated with each cost – allocation base

5. Compute the rate per unit of each cost – allocation base used to allocate indirect cost to the job

6. Compute the indirect costs allocated to the job.7. Compute the total cost of the job by adding all direct & indirect

costs assigned to the job•

The role of technology

• To improve the efficiency of their operations managers use costing information about products and jobs to control materials , labor & overhead costs.

• Modern information technology provides managers with quick and accurate product – cost information , making it easier to manage and control jobs.

• For example , in many costing system , source documents exists only in the form of computer records. We next describe bar coding & other form of online information recording that reduce human intervention and improve the accuracy of the records of materials and labor time for individuals jobs.

Time period used to compute indirect – cost rates

1. The numerator reason ( indirect cost pool )

2. The denominator reason ( quantity of the cost allocation base )

NORMAL COSTING

• The difficulty of calculating actual indirect – cost rates on a weekly or monthly basis means managers can not calculate the actual costs of jobs as they are completed.

• Normal costing is a costing system that ( 1 ) traces direct cost to a direct object by using the actual direct cost rate times the actual quantities of the direct – cost inputs and ( 2 ) allocates indirect costs based on the budgeted indirect cost rates times the actual – allocation bases.

• Both actual and normal costing traces direct costs to jobs in the same way.

• The only difference between costing a job with actual costing and normal costing is that the actual costing uses actual indirect – cost rates , whereas normal costing uses budgeted indirect cost rates.

• Budgeted manufacturing overhead = budgeted annual manufacturing indirect cost / budgeted annual quantity of the cost - allocation base

Normal job costing system in manufacturing

1. General ledger

2. Subsidiary ledgersa ) material records by type of materialsb ) labor records by employeec ) manufacturing department overhead records by monthd ) work in process inventory records by jobs e ) finished goods inventory records by jobsf ) other subsidiary records

Budgeted indirect costs & end of accounting year adjustments

• Adjusted allocation rate approach.• Proportion approach• Write off to cost of goods sold approach.

standard cost is a predetermined cost which is calculated from management’s standards of efficient operation and the relevant necessary expenditure. it may be used as basis for price fixing and cost control .

Objectives of standard costing

To establish control To set standard for various elements of cost

Standard costing

• To fix responsibility• To make budgetary control more effective

Establishing a system of standard costing

• Setting up cost centres• Classification of accounts• Determination of size of the standard• Current standard• Basic standards

• Setting up of Standard• Standard of direct material cost• Direct labor cost standard• Overhead cost standard• Standard hour• Standard cost card

Need for standard• Cost control• Pricing decisions

• Performance appraisal• Cost awareness • Management by objective

Advantages of standard costing• Formulation of price and production policies• Comparison and analysis of data• Management by exception • Delegation of authority and responsibility

• Cost consciousness• Better capacity to anticipate• Better economy, efficiency, and productivity• Preparation of periodical financial statement• Facilities budgeting

Limitations of standard costing• High degree of technical skill and costly• Segregation of variance into controllable and non-

controllable factors

• Duplication in recording • Too strict or too liberal• Lacks the dynamic approach

Application of standard costing• Process industries where the method of production and the

nature of output are the same • Industries where the methods of manufacture are repetitive

and products are more or less homogeneous

• Service industries where operating costing is applicable• Engineering and textile industries where a large range of

products are manufactured• Extraction industries, such as coal,oil and timber

BUDGETARY CONTROL SYSTEM & STANDARD COSTING

Budgetary control system and standard costing are closely related with each other. Both aim at cost control. For effective cost control,generally,budgetary control and standard costing, both are considered to be essential. Thus, both these methods are supposed to be necessary tools of cost control. Though both these methods are closely related , the two methods have sine differences which are highlighted in table.

Basic of difference Budgetary control Standard costing

Items to be included While making budgetary control plan,all related items with income and expenditure are included in the budget.

In standard costing,only the items of expenditure related with production are included.

Scope It is prepared only for the activities related with production of goods.Its scope is limited.

Budget is prepared for all the business activities of the factory.Therefore,it has a vast scope.

Units used In a budget,the total expenditure on a certain items is shown.

Under this method,the standard cost of an items is shown per units.

Departments units

Budget is prepared for each department.

It is based on the production units.

Interdependence Budgetary control can not function even in the absence of standard cost accounting.

Standard costing cannot be possible without budgetary control.

Display of variance

Variance are not presented on this method.

Variance are presented through statements.

Analysis Analysis is carried out if actual expenses are more than the budgeted expenses.

Analysis is carried out in both cases,whether actual cost is less or more than the standard cosr.

Projection Budgetary control is the projection financial accounts.

Standard costing is the projection of cost accounts.

Budgeting costing

• It is a plan quantified in monetary terms prepared and approved prior to a defined period of time usually showing planned income to be generated and expenditure to be incurred during that period and the capital to be employed to attains a given objective.

Budgeting

• It is process of preparation implementation and the operation of budget is referred to as budgeting.

Budgetary control• Budgetary control is the establishment of budget relating

the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budget result either to secure by individual action the objectives of that policy, or to provides a basis.

OBJECTIVES OF BUDGETARY CONTROL

• Basic purpose• Co-operative spirit• Maximum profitability• Centralized control• Optimum use of resources• Co-ordination• Execution• Remedial measures• Revision.

ADVANTAGES

• Planning • Control• Co-ordination• Delegation of authority• Criteria for evaluation• Communication• Motivation• Review• Fore runners of standard cos

LIMITATION

• Based on estimates • Conflicts of goals• Changing economy• Ambitious target• Rigidity• Time factor• costly

Pre-requisites for the adoption of budgetary control

• organizational structure• budget centers• clear goal• budget committee• key factor (budget factor)• budget manual.• Budget period• Level of activity• Accounting system• Communication

Classification of Budget

(A) Based on Scope\coverage: (1) Functional Budget:• Functional Budget is a budget which relate to the individual

functions in an organization, are known as functional budgets.• Examples:• Purchase Budget, Sales Budget, Production Budget, Plant-

Utilization Budget, Cash Budget. (2) Master Budget:• It is a consolidated summary of various functional budgets.• It serves as the basis upon which budgeted profit and loss account

and forecasted Balance sheet are built up.

Based on time period

(1) Long-term budget:• The budgets which are prepared for periods longer than a year

are called long-term budgets.• Such budget are helpful in Business forecasting and forward

planning. Capital expenditure budgets and research and development budgets are examples of long term budgets

(2) Short-term budget:• Budgets which are prepared for periods less than a year are

known as short term budgets.• Such budgets are prepared in cases where a specific action has

to be immediately taken to bring any variation under control.• Cash budget is an example of short term budget.

Based on conditions:

(1) Basic Budget:• A budget, which remains unaltered over a

long period of time is called basic budget.(2) Current Budget:• A budget which is established for use over a

short period of time and is related to the current conditions, is called current budget.

Based on capacity (1) Fixed budgeting:• It is a budget designed to remain unchanged irrespective of the level

of activity actually attained. It is based on a single level of activity. Fixed budgets do not change when production level changes.

• e.g. If actual production is 12000 units in place of the budget 10000 units the cost incurred can not be compared with the budget which relates to different levels of activity.

(2) Flexible Budgeting:• It is a budget which by recognizing the difference between fixed,

semi-variable and variable costs is designed to change in relation to the level of activity attained.

• This budget is prepared for more than one level of activity. It is set of alternative budgets to different expected level if activity.

Budgetary control system:

• As defined by the terminology of CIMA: “Budgetary control is the establishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy, or to provide a basis for its revision”.

• It is essence a system which uses budgets as a means of planning and controlling all aspects of production and sale of all goods or services.

Pre requisites:

• Top management support• Proper organisational structure• Realistic nature of goals• Flexibility• Participative process• Conducive environment

Objectives:

• Definition of goals• Defining responsibilities• Basis for performance evaluation• Optimum use of resources• Co-ordination• Planned action• Basis for policy

Advantages:

• Efficiency• Cost control• Performance evaluation• Standard costing\

variance costing• Policy formulation.

Limitations:

• Estimates• Rigidity• False sense of security• Lack of coordination• Time and cost

Zero- Base budgeting:

• Zero-based budgeting is an analytical approach to budgeting. It is a method of budgeting in which all activities are re-evaluated each time a budget is formulated.

• Each functional budget starts with the assumption that the function does not exist and is at zero cost. Previous years actual results are not given any due consideration.

Steps in zero budgeting:

• Determination of objectives.• Consideration of alternative ways of doing each activity.• Evaluation of all alternative ways in terms of costs and

benefits at different levels.• Fixing criteria for evaluation of work load and the

performance.• Ranking of all the activities in order of preference.

PROCESS:

• Definitions of decision units.• Preparation of set of decision packages for each

decision units.• Ranking of decision packages.• Forwarding of decision packages.• Decision making.• Resources to be appropriated.