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COST ACCOUNTING
Theory and Practice
Thirteenth Edition

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BHABATOSH BANERJEE
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Indian Institute of Management Calcutta
Former Professor of Commerce
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Dean of Commerce, Social Welfare and Business Management
University of Calcutta
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Delhi-110092
2014
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COST ACCOUNTING: Theory and Practice, Thirteenth Edition

Bhabatosh Banerjee

© 2014 by PHI Learning Private Limited, Delhi. All rights reserved. No part of this book may be
reproduced in any form, by mimeograph or any other means, without permission in writing from the
publisher.

ISBN-978-81-203-4908-7

The export rights of this book are vested solely with the publisher.

Ninth Printing (Thirteenth Edition) … … January, 2014

Published by Asoke K. Ghosh, PHI Learning Private Limited, Rimjhim House, 111, Parparganj Industrial
Estate, Delhi-110092 and Printed by Syndicate Binders, A-20, Hosiery Complex, Noida, Phase-II
Extension, Noida-201305 (N.C.R. Delhi).
 To

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The Loving Memory of My Wife
NAMITA BANERJEE
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(October 1950–July 2012)
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 CONTENTS

Preface xvii

Acknowledgements xix

PART I INTRODUCTION, BASIC CONCEPTS AND COST CLASSIFICATION

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1. BASIC CONCEPTS AND TERMS 3–23
Cost Accounting ta
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Cost Concept and Cost Object
Types of Costs 4
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Cost and Expense 6
Financial Accounting and Cost Accounting 6
Cost Accounting and Management Accounting 8
Functions of an Organization 9
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Business Functions as Value Chain 11

Cost Management 12
Methods of Costing 12
Techniques of Costing 15
Comparison of Costing Methods and Techniques 16
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Evolution of Cost Accounting 17

Need for Costing and Installation of a Costing System 19
Multiple Choice Questions 21
Exercises 22

2. CLASSIFICATION OF COSTS AND COST SHEET 24–45

Classification of Costs 24
Cost of Sales 30
Cost Centre, Cost Unit, Profit Centre and Investment Centre 31
Cost Sheet 33
Total Costs and Unit Costs 39
Different Costs for Different Purposes 39
Multiple Choice Questions 40
Exercises 42

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vi Contents

PART II ELEMENTS OF COST AND OVERHEADS

3. MATERIAL COST MANAGEMENT 49–129
Section I: Managing Purchase Functions 49
Need for Efficient Purchasing 49
Organization for Purchasing 50
Procedure in the Purchasing Department 51
Material Costs 59
Multiple Choice Questions 60
Exercises 61
Section II: Storing of Materials 63
Why Efficient Storing? 63
Location and Types of Stores 63
The Storekeeper 64

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Requisitioning for Stores 65
Receipt, Issue and Transfer of Materials 76
Stores Records
Stores Losses
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Accounting for Material 81
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Problems and Solutions 82
Multiple Choice Questions 86
Exercises 87
Section III: Valuing Material Issues 92
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Various Methods for Valuing Materials Issued 92

Stock Valuation 103
Problems and Solutions 104
Multiple Choice Questions 110
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Exercises 112
Section IV: Operating Control Systems 117
Why Material Control? 117
Organization 117
Installation of the System 118
Just-in-Time (JIT) Purchasing 120
Stock Turnover 120
Perpetual Inventory 122
Periodic Inventory 124
ABC Analysis 124
Multiple Choice Questions 127
Exercises 128
 Contents vii

4. LABOUR COST MANAGEMENT 130–204

Section I: Recruitment, Time-Keeping and Time-Booking 130
Introduction 130
Recruitment 131
Time-Keeping 132
Time-Booking 133
Job Evaluation 137
Merit Rating 139
Multiple Choice Questions 140
Exercises 141
Section II: Methods of Remuneration 142
Introduction 142
Need for Incentive Schemes 142
Factors to be Considered 143

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Essential Features of an Effective Wage Plan 143
Methods of Remuneration 144
Problems and Solutionsta
Multiple Choice Questions
Exercises 167
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Section III: Preparation and Payment of Wages and Accounting 173
Preparation and Payment of Wages 173
Accounting for wages 176
Problems and Solutions 182
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Multiple Choice Questions 185

Exercises 186
Section IV: Labour Turnover 189
Labour Turnover: Meaning and Nature 189
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Causes of Labour Turnover 189

Measurement of Labour Turnover 190
Effect of Labour Turnover 191
Cost of Labour Turnover 192
Treatment of Cost of Labour Turnover 193
Problems and Solutions 194
Multiple Choice Questions 197
Exercises 197
Section V: Labour Cost Control 200
Introduction 200
Organization for Control 200
Areas of Control 201
Techniques of Control 202
Multiple Choice Questions 203
Exercises 204
viii Contents

5. OVERHEADS 205–299
Section I: Definition and Classification 205
Meaning and Importance 205
Classification 206
Classification into Groups: Standing Order Numbers and Cost Account Numbers 210
Multiple Choice Questions 212
Section II: Production Overheads 214
Introduction 214
Collection of Overheads 214
Distribution to Production and Service Departments 215
Redistribution of Service Department Costs 217
Allocation and Apportionment of Cost 223
Limitations of Apportionment of Overheads 223
Absorption of Overheads by Production Units 224

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Methods of Absorption 226
Choice of Appropriate Overhead Rate 232

Capacity Costs
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Under- or Over-absorbed Overheads
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Problems and Solutions 239
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Multiple Choice Questions 251

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Exercises 254
Section III: Administration and Selling and Distribution Overheads 265
Administration Overheads 265
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Selling and Distribution Overheads 267

Problems and Solutions 271
Multiple Choice Questions 274
Exercises 276
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Section IV: Miscellaneous Indirect Expenses 279

Depreciation 279
Maintenance of Plant and Machinery 286
Obsolescence 287
Interest on Capital 288
Rent 289
Research and Development Costs 289
Treatment of Certain Other Items in Costs 291
Multiple Choice Questions 297
Exercises 298

6. ACTIVITY BASED COSTING (Allocation of Overhead) 300–333

Problems of Traditional Costing 300
Refining a Costing System 301
Activity Based Costing 302
 Contents ix

Cost Analysis under ABC 306

Full Costs as the Product Costs under ABC 308
Benefits and Weaknesses of ABC 310
Factors Influencing Application of ABC 311
ABC as Resource Usage Model 315
Growing Interest in ABC 316
Installation of ABC 317
Activity Based Management (ABM) 319
Activity Based Budgeting (ABB) 320
Problems and Solutions 321
Multiple Choice Questions 329
Exercises 331

PART III COST BOOK-KEEPING

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7. COST CONTROL ACCOUNTS 337–366
Costing Books 337
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Advantages and Disadvantages 338
Ledgers to be Maintained 338
Principal Accounts 338
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Journal Entries 341
Problems and Solutions 346
Multiple Choice Questions 359
Exercises 361
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8. RECONCILIATION OF COST AND FINANCIAL ACCOUNTS 367–381

Need for Reconciliation 367
Reasons for Variation 367
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Types of Problems on Reconciliation 370

Problems and Solutions 370
Multiple Choice Questions 375
Exercises 376

9. INTEGRATED ACCOUNTS 382–390

Integrated Accounting 382
Procedure 382
Integrated Accounts vis-a-vis Cost and Financial Accounts 383
Valuation of Stocks 385
Integrated Accounting System 385
Integrated Accounts and Standard Costing 387
Multiple Choice Questions 387
Exercises 388
x Contents

PART IV COSTING METHODS

10. JOB AND CONTRACT COSTING 391–435
Section I: Job Costing 393
Meaning and Purpose 393
Choice between Process and Job Costing 394
Procedure 394
Job Cost Sheet 396
Accounting 396
Batch Costing 397
Job, Batch and Contract Costing 399
Activity Based Costing 400
Problems and Solutions 401
Multiple Choice Questions 410

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Exercises 412
Section II: Contract Costing 417
Meaning and Features
Types and Procedure
Costs for Contracts
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Retention Money 419
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Profit on Uncompleted Contracts 420
Loss on Uncompleted Contracts 421
Escalation Clause 422
Cost-plus Contracts 423
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Problems and Solutions 424

Multiple Choice Questions 430
Exercises 432
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11. PROCESS COSTING 436–512

Section I: Process Losses and Inter-process Profits 436
Meaning 436
Application of Process Costing 437
Procedure 437
Normal and Abnormal Loss and Abnormal Gain 438
Inter-process Profits 441
Problems and Solutions 443
Multiple Choice Questions 449
Exercises 451
Section II: Equivalent Production 455
Meaning 455
Procedure 456
Problems and Solutions 466
Multiple Choice Questions 469
Exercises 471
 Contents xi

Section III: Joint Products and By-products 477

Introduction 477
Joint Products and By-products 477
Waste, Scrap, Defectives and Spoilage 479
Apportionment of Joint Costs 483
Depth of Processing 494
Problems and Solutions 495
Multiple Choice Questions 504
Exercises 507

12. SERVICE COSTING 513–538

Meaning and Scope 513
Transport 514
Boiler House 521
Canteen 521

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Hospital 525
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Problems and Solutions
Multiple Choice Questions
Exercises 534
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13. UNIFORM COSTING AND INTER-FIRM COMPARISON 539–549
Uniform Costing 539
Inter-firm Comparison 542
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Multiple Choice Questions 547

Exercises 548

PART V COST ANALYSIS FOR DECISION-MAKING

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14. MARGINAL COSTING 553–648

Section I: Conceptual Framework 553
Marginal Costing—Nature and Scope 553
Marginal Cost Equation 564
Profit/Volume Ratio 565
Break-Even Chart 566
The Profit/Volume Graph or Profit Chart 572
Multi-product Break-Even Chart 575
Different Types of Break-Even Chart 576
Advantages and Limitations of a Break-Even Chart 580
Impact on Profits Due to Changes in Various Factors 581
Use of Probabilities 585
Degree of Operating Leverage and CVP Analysis 585
Advantages and Disadvantages of Marginal Costing 586
xii Contents

Problems and Solutions 587

Multiple Choice Questions 598
Exercises 602
Section II: Management Decisions 611
Application of Marginal Costing 611
Problems and Solutions 631
Multiple Choice Questions 639
Exercises 642

15. RELEVANT COST ANALYSIS AND MANAGEMENT DECISIONS 649–676

Decision-Making Process 649
Relevant Costs and Revenues 650
Marginal Costing and Relevant Cost Analysis 651
Differential Cost Analysis 651

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Marginal Costing vs Differential Cost Analysis 652
Applications of Differential Cost Analysis 653
Decision-Making: Relevant Costs and Benefits
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Problems and Solutions 665
Multiple Choice Questions 669
Exercises 671
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PART VI COSTING TECHNIQUES FOR PLANNING AND CONTROL
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16. BUDGETARY CONTROL 679–747

Section I: Functional Budgets and Master Budget 679
Introduction 679
Budget and Budgetary Control 679
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Objectives of Budgetary Control 680

Organization for Budgetary Control 681
Functional Budgets 684
Cash Budget 694
The Master Budget 699
Performance Budgeting (PB) 703
Zero-Base Budgeting (ZBB) 705
Problems and Solutions 708
Multiple Choice Questions 718
Exercises 720
Section II: Flexible Budgets 726
Meaning and Usefulness 726
Preparation of Flexible Budgets 727
Seasonal Correction/Adjustment 730
Operation of Flexible Budgetary Control 732
 Contents xiii

Problems and Solutions 736

Multiple Choice Questions 742
Exercises 744

17. STANDARD COSTING 748–818

Section I: Cost and Sales Variances 748
Introduction 748
Standard, Standard Cost and Standard Costing 749
Standard Costing and Budgetary Control 749
Advantages and Disadvantages of Standard Costing 750
Preliminaries to the Establishment of Standard Costs 751
Establishment of Standard Costs 752
Analysis of Variances 755
Operating and Planning Variances 774
Presentation of Variances 776

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Variance Investigations 776
Disposal of Variances 777
Problems and Solutionsta
Multiple Choice Questions
Exercises 791
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Section II: Accounting Methods 802
Accounting Methods 802
Partial Plan Method 802
Single Plan Method 807
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Dual Plan Method 811

Comparison of the Accounting Methods 818
Exercises 818

18. CAPITAL EXPENDITURE DECISIONS 819–875

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Section I: Basic Concepts, Tools and Techniques 819

Introduction 819
Replacement Investment Decisions 820
New Investment Decisions 823
Capital Expenditure Decisions and Cost of Capital 843
Capital Rationing 847
Problems and Solutions 849
Multiple Choice Questions 853
Exercises 854
Section II: Risk Analysis 859
Introduction 859
Risk and Uncertainty 859
Types of Risk and Usefulness of Risk Analysis 860
Incorporating Risk 861
Problems and Solutions 849
Exercises 874
xiv Contents

PART VII EXTERNAL OVERSIGHT

19. COST AUDIT 879–896
Definition 879
Objectives 880
Appointing Authorities 880
Advantages of Cost Audit 881
Organization for Cost Audit 881
Cost Audit Programme 882
Areas of Cost Audit 884
Management Audit 885
Cost Audit in India 887
Cost Audit in Other Areas 893
Multiple Choice Questions 893

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Exercises 895

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20. STRATEGIC COST MANAGEMENT
PART VIII EMERGING AREAS

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Introduction 899
Strategic Cost Management 900
Tools of Strategic Cost Management 906
Problems and Solutions 923
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Multiple Choice Questions 930

Exercises 933

21. CONTEMPORARY TOPICS 937–987

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Section I: Some Concepts and Techniques 937

Profitability 937
Return on Capital Employed (ROCE) 938
Improvement of Profitability 941
Benchmarking 942
Cost Reduction 942
Value Analysis or Value Engineering 945
Productivity 946
Cost Estimating 950
Pricing 953
Transfer Pricing 957
Problems and Solutions 959
Exercises 961
Section II: Operations Research and Quantitative Techniques 964
Operations Research 964
Network Analysis 966
 Cost Accounting Theory And Practice

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Author : Bhabatosh
Publisher : PHI Learning ISBN : 9788120349087
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