Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

Inter Process Profits:

In process costing, the usual practice is to transfer the output of one process to
another and finally to finished stock at cost price. In this method of transfer,
process accounts will not reveal any profit or loss. But sometimes, the transfer is
made at transfer price or market price.
This method is adopted in order to measure the efficiency or inefficiency of
individual’s process. When market price cannot be ascertained, certain
percentage of profit margin is added to the cost of processing in order to arrive at
the transfer price. Consequently, each process account reveals a profit and this
profit is known as ‘inter process profit’.
Advantages of Accounting for Inter Process Profits:
(a) Inter process profits enable to measure the efficiency of each process.
(b) Comparison of costs with market price at each stage assist management to
take ‘make or buy’ decisions.
(c) The efficiency of or inefficiency of one process. In other words, each process
can be assessed separately on that account.

Non-Integrated System
Non-integral system is a system of accounting under which two separate
sets of account books are maintained—one for cost accounts and the other for
financial accounts. In other words, cost accounts are maintained separately from
financial accounts.
Since separate ledgers are maintained for cost and financial accounts in this
system, the cost accountant is responsible for recording of the cost accounting
transactions and the financial accountant is responsible for financial transactions.

Basic Features of Non-Integrated System:

(i) Separate ledgers are maintained for cost and financial accounts.

(ii) Like financial accounting, it is also based on double entry system.

(iii) There are no personal accounts because cost accounts do not show
relationship with outsiders.
 Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

(iv) Cost accounts are concerned with impersonal accounts i.e., real and nominal
accounts.

(v) In real accounts, only stocks are shown in cost accounts.

(vi) Transactions affecting the nominal accounts are recorded separately in detail.
Thus cost accounting department is concerned mainly with the ascertainment of
income and expenditure of business,

(vii) Under this system one main ledger (i.e., Cost Ledger) and various subsidiary
ledgers are maintained,

viii) Since the system is not properly integrated, some items may appear in
financial ledgers only, while some other items appear only in cost ledger,

(ix) The profit or loss disclosed by the two sets of accounts for a particular period
will never be the same and as such a reconciliation of costing profit or loss with
that of financial accounts is essential.

Abnormal Wastage
Abnormal wastage is a wastage which does not occur in the natural course
and is usefully in excess of the normal process wastage or loss. This occurs
because of carelessness on the part of the worker or the management, defective
scheduling or designing, sabotage etc.
Abnormal wastage should be treated in the following manner
a) Compute the normal loss, first.
b) Compute the cost of production per unit of the relevant process, after taking
into account the normal loss but assuming that there is no abnormal loss.
c) The cost of production per unit so computed should then be multiplied with the
lost abnormal units. This will give you the Total Abnormal Wastage.
d) Abnormal Wastage Account then is debited and the relevant Process Account
is credited with the amount and the quantity of abnormal wastage.
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

e) The balance standing in the Process Account will indicate the cost of good
units produced by the process concerned.
f) Abnormal Wastage Account will then be closed by transferring the balance
standing to the Costing profit and Loss Account.

Cost Driver
A cost driver is the direct cause of a cost and its effect is on the total cost
incurred. For example, if you are to determine the amount of electricity consumed
in a particular period, the number of units consumed determines the total bill for
electricity. In such a scenario, the number of units of electricity consumed is a
cost driver.

Types of Drivers in Cost Accounting

Number of set-ups
Number of machine hours
Number of processed orders
Number of orders completed
Number of labour hours
Number of orders packed and delivered

Integrated Accounting
Integral Accounting is a system of recording financial and costing
transactions in one self-contained ledger, called the Integrated Ledger. It implies
maintenance of only one set of books for both financial and cost accounts. Since
both financial as well as cost accounts use the data from the same records relating
income and expenditure it would be useful to combine both and avoid problems
of integration such as – unnecessary clerical effort, wastage of time, duplication
of effort etc.
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

Features of integral accounts are as follows:

(i) Control accounts for stores, work-in-progress and finished goods are
maintained in the general ledger itself.
(ii) Wages and overhead accounts are maintained in the usual manner. At the end
of the period an analysis is made of these accounts and transfers are made to
work-in-progress, service departments and production departments, etc.
(iii) Accruals and prepaid expenses are brought into account for each cost period,
instead of at the time of making the final accounts.

Inter-firm comparison

Inter-firm comparison means a comparison of two or more similar business

units with the objective of finding the competitive position to improve the
profitability and productivity of those business units. Thus, inter-firm comparison
is a tool used by the management of a company to compare its operating
performance and financial results with those of similar companies engaged in the
same industry.

Advantages of Inter Firm

1. The management can pay special attention on the weakness area of business to
take suitable action.

2. Uniform information is available to all participating companies of inter firm

comparison.

3. An analyst has expert knowledge and experience in interpreting the results of

inter firm comparison. Hence, every company gets very valuable information.

4. The results are obtained only on the basis of accurate data collected by the
analyst.
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

Disadvantages/ Limitations of Inter Firm

1. The success of inter-firm comparison or intra firm comparison is fully based

on the co-operation of participation companies or departments. The degree of co-
operation is responsible for degree of success.

2. Some accounting data are confidential in nature. Such data are not available to
the analyst for proper inter-firm comparison. If so, no benefit is available through
inter firm comparison.

3. Misuse of ratios may lead to misleading results.

4. Fruitful results cannot be obtained if the companies are not of the same size
and character.

Objects of Uniform Costing

The objectives of uniform costing are to standardize accounting methods and to
assist in determining suitable prices of products of firms which adopt this method.
Thus objects of a uniform costing system are:
(a) It provides reliable data for making inter-unit comparisons of cost
performances.
(b) It helps to arrive at the cost of production for the industry as a whole on a
common basis acceptable to all individual units or firm of the industry.
(c) It provides data to compare the cost of production and the production
efficiencies between one firm and others.
(d) It ensures that the product prices are based on authentic costing data.
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

Pre-requisites of uniform costing

(a) Firms or units adopting uniform costing must be ready to provide and share
accounting and costing information freely.
(b) They should adopt a common system of costing regarding classification,
distribution and absorption of costs. They must agree on a common technique of
costing e.g., absorption costing, standard costing or marginal costing.
(c) The firms must use a common terminology and procedure for cost
ascertainment and cost control.
(d) There should not be any restriction from the Government in adopting uniform
costing.
(e) A central body or proper organisation must be set up for preparing
comparative statistics for the use of member units participating in the uniform
costing.

Equivalent production units

This represents the production of a process in terms of complete units. In

other words, it means converting the incomplete production into its equivalent of
complete units. The term equivalent unit means a notional quantity of completed
units substituted for an actual quantity of incomplete physical units in progress,
when the aggregate work content of the incomplete units is deemed to be
equivalent to that of the substituted quantity. The principle applies when
operation costs are apportioned between work in progress and completed units.

Equivalent units of work in progress = Actual no. of units in progress x

Percentage of work completed

Equivalent unit should be calculated separately for each element of cost

(viz. material, labour and overheads) because the percentage of completion of the
different cost component may be different.
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

Comparison Table Between ABC and ABM

Parameters ABC ABM

Full-Form Activity-Based Costing Activity-Based Management

ABC’s primary goal is to uncover the ABM’s primary purpose is to control the
The primary causal links between cost drivers and activities of numerous corporate
goal activities. businesses.

Connection ABC is a subset of ABM. ABM includes ABC as a subclass.

Applications in Its field of application is in calculating the It is useful for calculating the earnings
Real Life cost per action. and expenditures of each activity.

ABC’s objective is
Objective ABM’s aim is financial accounting.
managerial accounting.

Advantages of Operating Costing in Transport Organisations

(a) Reliable Prices:
Prices fixed for the services are accurate, fair and reliable.
(b) Cost Recovery:
All the costs incurred are ensured to be recovered from the users of the services.
(c) Cost Control:
Costs can be controlled and wherever possible reduced with the help of the
information made available.
(d) Policy Decisions:
Comparative costs and revenues of different vehicles and also relative benefits of
owned and hired vehicles are made available. Such information is invaluable in
Policy formulation.
(e) Logistics:
Routing and scheduling the vehicles and the loads to be carried by different
vehicles become easier because of the cost data made available.
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

Running Cost and Fixed Cost

Running Cost

Variable Costs are the running and operating charges. These include
expenses of Variable Nature, for e.g. petrol, diesel, lubricating oil, grease etc. The
Material Requisition Note and Time Sheet (or log) bears the Vehicle No. The
relevant vehicle account is debited with its direct material cost and direct labour
cost. Direct Expenses such as fuel are debited to the Vehicle Account on the basis
of the Log Book and the cash/purchase/journal vouchers.

Fixed Cost

Fixed Cost (Fixed Charges) include garage rent, insurance, road licence
fees etc. The Fixed Charges are apportioned and absorbed by each Vehicle No.
on the basis of the Overheads Absorption Rate which may be actual or pre-
determined. The Fixed cost attributable to the vehicle are debited to the relevant
Vehicle Account.

Operating Costing

The operating costing is also called as service costing, period costing or

terminal costing. Service costing means rendering service to the public or to an
organization for which cost is accumulated and calculated. Period costing means
the costs data collected and calculated for a specific period. Terminal costing
means a bus or truck of a transport undertaking chartered for a specific trip.
Bagwe Sir’s Dnyandeep Commerce Classes TYBAF COST ACCOUNTING - THEORY

Features of Operating Costing

The basic features of operating costing are presented below.

1. Uniform service is provided to all the customers.

2. The costs are classified into fixed and variable.

3. The fixed and variable cost classification is necessary to ascertain the cost of
service and the unit cost of service.

4. There is no physical stock of article if an undertaking renders a service.

5. If a cost center is operating for an undertaking, there is no sale of service but

render the service. In other words, if a cost center is operating for public, it sells
its service to the public.

6. The cost unit may be simple in certain cases or composite or compound in other
cases like transport undertakings.

7. Total costs are averaged over the total amount of service rendered.

8. The costs are collected from the authentic documents like daily log sheet,
operating cost sheet, boiler house cost sheet, canteen cost sheets etc.

9. Operating cost is the cost of rendering service.

10. Operating costing is the method of ascertaining costs.

11. The productive enterprises can quote prices by ascertaining cost data.