Management accounting Cost Accounting a

By Shirley Martin,2014-05-17 09:04
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Management accounting Cost Accounting a



1) Reorder level = Maximum usage * Maximum lead time

     (Or) Minimum level + (Average usage * Average Lead time)

2) Minimum level = Reorder level (Average usage * Average lead time)

    3) Maximum level = Reorder level + Reorder quantity (Minimum usage *

     Minimum lead time)

    4) Average level = Minimum level +Maximum level (or)


     Minimum level + ? Reorder quantity

     5) Danger level (or) safety stock level

     =Minimum usage * Minimum lead time (preferred)

     (or) Average usage * Average lead time

     (or) Average usage * Lead time for emergency purposes

    6) EOQ (Economic Order Quantity - Wilson‟s Formula) = ?2AO/C

     Where A = Annual usage units

     O = Ordering cost per unit

     C = Annual carrying cost of one unit

     i.e. Carrying cast % * Carrying cost of unit

7) Associated cost = Buying cost pa + Carrying cost pa

8) Under EOQ Buying cost = Carrying cost

9) Carrying Cost = Average inventory * Carrying cost per unit pa * Carrying cost %

     (Or) Average Inventory * Carrying cost per order pa

10) Average inventory = EOQ/2

11) Buying cost = Number of Orders * ordering cost

12) Number of Orders = Annual Demand / EOQ

    13) Inventory Turnover (T.O) Ratio = Material consumed

     Average Inventory

    14) Inventory T.O Period = 365 .


     Inventory Turn over Ratio

    15) safety stock = Annual Demand *(Maximum lead time - Average lead time)


    16) Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost

    17) Input Output Ratio = Quantity of input of material to production

     Standard material content of actual output

Remarks :-

1) High Inventory T.O Ratio indicates that the material in the question is fast moving

2) Low Inventory T.O Ratio indicates over investment and locking up of working

     Capital in inventories

Pricing of material Issues:-

1) Cost price method:-

     a) Specific price method

     b) First in First Out method (FIFO)

     c) Last in First Out method (LIFO)

     d) Base stock method

2) Average price method:-

     a) Simple average price method = Total unit price

     Total No. of purchases

     b) Weighted average price method = Total cost

     Total No. of units

     c) Periodic simple average price method = Total unit price of certain period

     Total Number of purchases of that period

    (This rate is used for all issues for that period. Period means a month (or) week (or)


     d) Periodic weighted average price method = Total cost of certain period

     Total Number of units of that period

     e) Moving simple average price method

     = Total of periodic simple average of certain number of periods

     Number of periods


     f) Moving weighted average price method

     = Total of periodic weighted average of certain number of periods

     Number of periods

3) Market price method:-

     a) Replacement price method = Issues are valued as if it was purchased now at

     current market price

     b) Realizable price method = Issues are valued at price if it is sold now

4) Notional price method:-

     a) Standard price method = Materials are priced at pre determined rate (or)

     Standard rate

     b) Inflated price method = The issue price is inflated to cover the losses incurred

     due to natural(or)climatic losses

5) Re use price method = When materials are returned (or) rejected it is valued at

     different price. There is no final procedure for this method.

ABC Analysis (or) Pareto Analysis :- In this materials are categorized into

     Particulars Quantity Value

    “A” – Important material 10% 70% “B” – Neither important nor unimportant 20% 20% “C” – UN Important 70% 10%


1) Material received as replacement from supplier is treated as fresh supply

2) If any material is returned from Department after issue, it has to be first

     disposed in the next issue of material

3) loss in the book balance of stock and actual is to be transferred to Inventory

     adjustment a/c and from there if the loss is normal it is transferred to Over Head

     control a/c. If it is abnormal it is transferred to costing profit and loss a/c.

     4) CIF = Cost Insurance and Freight (This consignment is inclusive of prepaid

     insurance and freight)


5) FOB = Free on Board (Materials moving by sea insurance premium is not


6) FOR = Free on Rail (Insurance and freight is not borne by the supplier but paid

     by the company or purchase)

7) For each receipt of goods = Goods Receipt note

8) For each issue of goods = Materials Requisition note (or) Material Issue note

    Accounting Treatment :-

1) Normal Wastage = It should be distributed over goods output increasing per unit


2) Abnormal Wastage= It will be charged to costing profit and loss a/c

3) Sale value of scrap is credited to costing profit and loss a/c as an abnormal gain.

4) Sale proceeds of the scrap can be deducted from material cost or factory


5) Sale proceeds of scrap may be credited to particular job.

6) Normal Defectives = cost of rectification of defectives should be charged to


7) Abnormal Defectives = This should be charged to costing profit and loss a/c

8) Cost of Normal spoilage is to borne by good units

9) Abnormal spoilage should be charged to costing profit and loss a/c



    Method of Remuneration:

1) Time Rate system

     a) Flat time Rate

     b) High wage system

     c) Graduated time rate

2) Payment by Results

     a) Piece rate system

     i) Straight piece rate

     ii) Differential piece rate

    ? Taylor system

    ? Merrick system

    b) Group Bonus System

     i) Budgeted Expenses

     ii) Towne gain sharing scheme

     iii) Cost efficiency bonus

     iv) Priest man system

    c) Combination of Time and Piece rate

     i) Gantt task and Bonus scheme

     ii) Emerson Efficiency system

     iii) Point scheme

    ? Bedaux system

    ? Haynes manit system

    d) Premium bonus plans

     i) Halsey premium plan

     ii) Halsey weir premium plan

    iii) Rowan scheme

     iv) Barth scheme

     v) Accelerating premium bonus scheme

    e) Other incentive schemes

     i) Indirect monetary incentive

    ? Profit sharing

    ? Co-partnership

    ii) Non-Monetary Incentive


1) Time rate system = Hours worked * Rate per hour (Basic wages)

2) Piece rate system:

     i) Straight piece rate earnings = Number of units produced * Rate per unit

     ii) Differential Piece rate

    a) F.W.Taylor‟s differential rate system

     ? 83% of piece rate when below standard

     ? 125% of piece rate when above or at standard

    b) Merrick differential or multiple piece rate system

    Efficiency level Piece rate

    ? up to 83% ?Normal piece rate

    ? 83% to 100% ? 110% of Normal rate

     ? Above 100% ? 120% of Normal rate

     iii) Gantt Task and Bonus system

     Output Payment

     ? Below standard ? Time rate (guaranteed)

     ? At standard ? 20% Bonus of Time rate

     ? Above standard ? 120% of ordinary piece rate

     iv) Emerson‟s Efficiency system

     Efficiency Payment

     ? Below 66.7% ? Hourly Rate

     ? from 66.7% ? Hourly rate (+) increasing bonus according to degree

     to 100% of efficiency on the basis of step bonus rates

     ? Above 100% ? Hourly rate (+) 20% Bonus (+) additional bonus of 1%

     of hourly rate for every 1% increase in efficiency

     v) Halsey Premium Plan = Basic wages + 50% of time saved * Hourly Rate

     vi) Halsey Weir Premium Plan = Basic wages + 30% of time saved * Hourly rate

     vii) Rowan Plan = Basic wages + Time saved * Basic Wages

     Time allowed


     viii) Bedaus Point system = Basic wages + 75% * Bedaus point/60 * Rate/hr

     ix) Barth‟s System = Hourly rate * ?Std time *Time taken

Labour Turnover:-

    1) Separation rate method = Separation during the period

     Average No. of worker‟s during the period

2) Net labour T.O rate (or) Replacement method

     = Number of replacements

     Average No. of worker‟s during the period

    3) Labour flux rate = No. of separation + No. of replacement

     Average No. of worker‟s during the period

Accounting Treatment

1) Normal Idle time = Charged to factory overheads

2) Normal but un-controllable = It should be charged to job by inflating wage rate.

3) Abnormal = It should be charged to costing P & L a/c



Reapportionment of service department expenses over production department :-

1) Direct redistribution method:

    ? Service department costs are divided over production department.

    ? Ignore service rended by one dept. to another

2) Step method of secondary distribution (or) Non reciprocal method:

    ? Service department which serves largest number of service department is

    divided first and go on.

3) Reciprocal service method:

     i) Simultaneous equation method (or) Algebraic method

    ? Equation is formed between service departments and is solved to find the

    amount due.

     ii) Repeated distribution method:

    ? Service department cost separated repeatedly till figure of service dept. is

    exhausted or too small.

     iii) Trial and Error method:

    ? Cost of service department is apportioned among them repeatedly till the

    amount is negligible and the total is divided among production department.

Treatment of Over/Under absorption of overheads:-

i) If under absorbed and over absorbed overheads are of small value then it should be

     transferred to costing profit and loss a/c

ii) If under and over absorption occurs due to wrong estimates then cost of product

     manufactured should be adjusted accordingly.

iii) If the same accrued due to same abnormal reasons the same should be transferred

     to costing profit & loss a/c

Apportionment of overhead expenses Basis

a) Stores service expenses = Value of materials consumed

b) Factory rent = Floor area


c) Municipal rent, rates and taxes = floor area

d) Insurance on Building and machinery = Insurable value

    e) Welfare department expenses

    f) Supervision

     Number of employees

    g) Amenities to employee‟s

    h) Employees liability for insurance

j) Lighting power = Plug point

k) Stores over heads = Direct material

l) General over heads = Direct wages

Reapportionment of service department cost to production department :-

1) Maintenance dept. = Hours worked for each dept.

2) Pay roll and time keeping = Total labour (or) machine hours (or) Number of

     employees in each department

3) Employment (or) Personnel department = Rate of labour T.O (or) No. of

     employees of each department

4) Stores Keeping department = No. of requisitions (or) value of materials of each


5) Purchase department = No. of purchase orders value of materials of each


6) Welfare, ambulance, canteen, service, recreation room expenses

     = No. of employees in each department.

7) Building service department = Relative area each dept.

8) Internal transport service (or) overhead crane service

     = weight, value graded product handled, weight and distance traveled.


9) Transport department = Crane hours, truck hours, truck mileage,

     Number of packages.

10) Power house (electric power cost) = Housing power, horse power machine hours,

     No. of electric points etc.

11) Power house = Floor area, cubic content.

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