COST ACCOUNTING

S.CLEMENT
 Cost accounting
• Cost accounting is that part of the
accounting system that measures costs
for the purposes of management decision
making and financial reporting.
 Cost accounting
• Cost accounting concerned with recoding,
classifying and summarizing cost for
determination of cost of products and services for
planning, controlling and reducing such costs and
furnishing information to management for well
informed decision making.
• Chartered Institute of Management
Accountantants, London – “cost accounting is the
process of accounting for costs from the point at
which the expenditure is incurred or committed to
the establishments of ultimate relationship with
cost units”.
 What Does Cost Mean?
• There is no single definition of cost
– Costs are developed and used for some
specific purpose
– The way the cost is to be used will
define the way it should be computed
• Management accountants have used
different systems, or classifications, to
develop cost information
 What Does Cost Mean?
• GAAP( generally accepted accounting principles
of USA) defines cost as the monetary value of
goods and services expended to obtain current
or future benefits
• Cost means expenditure.
• Expenses are the costs of goods or services
that have expired. i.e., used up in the process of
creating goods or services.
• E.g. purchase of book for Re 150.
 Why cost accounting?

• If a company wants to increase its output

by 10%,question is
• A) whether cost will increase by 10%
• B) whether cost will increase less than
10%
• C) whether cost will increase by more than
10%
• Management should have answer.
 MANAGEMENT

DECISIONS

Controlling Planning Analyzing Analyzing

PRICING Production Market Segments Contribution Margins
cost
 Cost Objective
• Determining selling price – to decide the rpofit
margin. SP > CP = profit.
• Controlling and reducing cost – increase in
put cost cannot e passed on final consumers
due to price elasticity. Controlling cost is a must
factor for operational effiency and survival.
• Basis for operating policy – to decide cost
volume profit relationship, shutting down un
viable units, changing technologies, outsourcing
activities ( US outsourcing from India).
 Financial and cost accounting
• Financial accounting • Cost accounting
• 1.Objective - To • 1.cost and cost control
determine volume of • 2.cost and relate aspect
earnings and financial including monetary
position transactions.
• 2.Scope – • 3.it deals with cost aspect.
• Deals only with monetary • 4.it also deals with the past
transactions and present data
• 3.Utilization –
• Deals with Financial
transaction alone
• 4. Nature –
• It deals with the past and
present data.
 Cost and Management accounting
• Cost accounting • Management accounting
• 1.objective - • 1.it deals not only with cost but
• it deals only with cost and also revenue.it is wider than cost
related aspect accounting
• 2.Scope - • 2.it uses both quantitative and
• it uses quantitative information qualitative for decision making
pertaining to the information • 3.it starts where cost accounting
• 3. utility – ends i.e. cost accounting is one of
the inputs.
• It only ends at the presentation
• 4.it deals with future of policies and
of information
course of action
• 4.nature -
• 5.it aids decision amking by giving
• It deals with past and present
supplicating with accounting
• 5.ojective – information
• Cost and cost control.
 Manufacturing company
• Cost/ over head can be grouped under
following heads viz
• A) Factory
• B) Office administration
• C) Selling and Distribution
• D) Interest
 Direct Cost
• Cost which can be directly allocated to
specific cost units
• E.g. A dining room table
– Cost of the wood that went into the dining
room table
• Cost object = Line of dining room tables
– A manager’s salary would be a direct cost if a
manager were hired to supervise the
production of dining room tables and only
dining room tables
 Indirect Cost
• The cost of a resource that was acquired to be
used by more than one cost object particular
cost which cannot be allocated to a particular
product
• The cost of a saw used in a furniture factory to
make different products
– It is used to make different products such as dining
room tables, china cabinets, and dining room chairs
e.g.manager’s salary to supervise all divisions.
– Rent for factory where 5 products are produced
 Direct or Indirect?
• A cost classification can vary as the chosen cost
object varies
– Consider a factory supervisor’s salary
• If the cost object is a product the factory supervisor’s
salary is an indirect cost
• If the factory is the cost object, the factory
supervisor’s salary is a direct cost
• A cost object can be any unit of analysis including
product, product line, customer, department,
division, geographical area, country, or continent
 Elements of cost

Material cost Expenses

Direct Overheads
Direct Labour e.g. cost of repairing Factory, office,
e.g. RM Direct /Indirect
Indirect Indirect Selling etc.
Oil/stores Rent/lighting
 Cost based on variability – Fixed cost
• Cost can be Fixed or Variable cost
• Cost based on variability function i.e. according to
volume of output.
• Fixed cost- Irrespective level of production , cost
remaining same.
• E.g.. Rent, Depreciation, Salary etc
• Committed FC – arising out of possession of
assets.E.g. land, building, machinery – insurance,
taxes.
• Discretionary FC –fixed amount for a fixed period
and no relationship with output.
• E.g.R & D. expenses.
 Variable cost
• Variable cost – vary according to volume
of production. E.g..raw material,power,
fuel etc
• Semi variable cost – mix of FC & VC.
Changes not in accordance with same
proportion to change in output. E.g.
depreciation,repairs,telephone etc.
 Other costs
• Shutdown cost – insurance , taxes etc
• Sunk cost – machinery purchased for Re
60,000.exepcted savings in operating cost
around Re 40,000. But not materialized.
Sold it for Re 42,000.
• Controllable cost – foreman can control
cost of power in his floor.
• Un Controllable cost – foreman cannot
control for the entire factory.
 Capacity-Related Costs
• The costs associated with capacity-related
resources
• Capacity-related resources are acquired
in advance of the work being done
– Most personnel costs
– Depreciation on machinery and buildings
• Capacity-related costs depend upon how
much of the resource is acquired, not used
• May be direct or indirect costs
 Product Costs
• Organizations incur product costs to
produce the volume and mix of products
made during the period
– Materials costs, labor costs, and the cost of
equipment, machinery and buildings
 Period Costs
• Nonmanufacturing costs such as:
−Administrative −Research & development
-Marketing −Selling Costs
• Some nonmanufacturing costs, such as selling,
clearly do not apply to inventory items since they
relate to products that have been sold
• Other nonmanufacturing costs (e.g., administrative)
have such an ambiguous relationship to inventory
that GAAP refuses to include these elements of
cost in valuing inventory
 Classifying Costs by Function
• GAAP uses two broad functional cost
classifications:
– Manufacturing costs: all costs incurred
inside the factory associated with
transforming raw materials into a
finished product
– Nonmanufacturing Costs: an
organization’s other costs
 Manufacturing Costs
• Direct manufacturing costs are traced or
assigned to the products that created
those costs and include the cost of
material and the cost of labor that is paid
based on the amount of work done
• Indirect manufacturing costs include
costs of equipment, as well as the wages
and benefits paid to production
supervisors and workers who provide the
general capacity to undertake production
activities in the factory
Indirect Manufacturing Costs
• More difficult to trace to products because
these costs have a cause-and-effect
relationship with capacity rather than with
individual units of production
• Assigning to a product involves allocating
what is deemed to be a fair share of the
indirect cost to that product
• Generally allocated based on the product’s
use of the various capacity resources
 Nonmanufacturing Costs
• Distribution costs involve delivering
finished products to customers
– Examples are freight and the salaries of
shipping and delivery personnel
• Selling costs include sales personnel
salaries and commissions and other
sales office expenses
• Marketing costs include advertising and
promotion expenses
 Nonmanufacturing Costs
• After-sales costs involve dealing with
customers after the sale and include warranty
repairs and the cost of maintaining help and
complaint lines
• Research and development costs include
expenditures for designing and bringing new
products to the market
• General and administrative costs include
expenses, such as the chief executive officer’s
salary and legal and accounting office costs,
that do not fall into any of the above categories
 Opportunity Cost
• An opportunity cost is the sacrifice you make
when you use a resource for one purpose
instead of another
• Opportunity costs are implicit costs that do not
appear anywhere in the accounting records
• Machine time used to make one product cannot
be used to make another, so a product that has
a higher contribution margin per unit may not be
more profitable if it takes longer to make.
• Management accountants often use the concept
of opportunity cost
 Creating Costs
• An organization creates different costs at
different stages:
– Starting up
– Early growth
– Reaching the boundaries of existing capacity
– Expanding product lines
– Expanding capacity
– Redefining the business
– Continued growth
• These costs are not created evenly over time
and should be planned for
 Cost Centres/Unit
• Parts of the business to which particular costs can be
attributed
• In large businesses this can be a particular location,
section of the business, capital asset
or human resource/s
• Enable a business to identify where costs are arising and
to manage those costs more effectively
• E.g. Electricity companies – per unit electricity
consumed. Transport companies – per passenger/KM.
Textile Mills – Per Yard of cloth manufactured.
 Methods of costing
• Job costing – where production is not highly repetitive and consist of
different jobs so that material and labour can be identified by order
number, the system of job costing is used.
• Contract costing – it is usually applied where at different sites large
scale contracts are carried out. E.g. Building contractors.
• Batch costing – where order or jobs are arranged in different batches
after taking in to account convenience of producing articles, job costing
is employed. E.g. Pharma Industry.
• Process costing – if a product passes different stages each distinct and
well defined. It is desirable to know the cost at each stage . A separate
account is opened for each process. E.g. Textiles, Chemicals, Paints etc.
• Operation costing – involves mass repetitive production process or
articles of have to be stores in semi finished stage. E.g. Cycle Industry
where Handles to be made. Process involves number of operations such
as cutting steel sheets , moulding, machining and polishing .
• Unit costing – cost per unit of output is ascertained where products can
be identified in identical quantitative units and manafaturing is continous.
E.g. Brick industry.
 Methods of costing
• Department costing – cost per department.
• Multiple costing – costs of different sections of
production are combined whre a product has
different assembled products. E.g. Motor cars.
Cycles etc.
• For controlling the cost and for managerial
decisions different types of costing techniques
were adopted. E.g. Marginal costing, activity
based costingetc.
 Marginal Costing
• The cost of producing one extra unit of output (the variable costs)
• Marginal cost is the amount of any given volume of output by which
aggregate cost are changed if the volume of output is increased or
decreased by one unit.
• Since FC remain constant over a period, change in volume of
production is fully accounted for by VC. Thus MC is some times
described as VC.VC includes direct material, labour, expenses and over
head. Total cost increases at the rate of marginal cost and FC remaining
same. Total cost = FC+VC X Quantity
• TC = VQ + FC (TC = total cost , V=VC ,Q= quantity and FC = fixed cost)
• MC = V = TC – F / Q

•Thus every change in the out put only VC will change.

 Marginal cost
• A factory produces 500 tricycles p.a. VC per unit Re 100
per unit. FC@Re 10,000.
• Cost sheet for cycles
• VC ( Re 100 X 500) = 50,000.
• FC = 10,000
• Total cost = 60,000
• If production goes up one unit ie. It become 501 units p.a.,
cost sheet will be
• VC ( 501 X 100 ) = 50,100
• FC = 10,000
• Total cost = 60,100
• Marginal cost per unit is Re 100 since there is no change in
FC. MC equals total VC.
 Marginal costing – test of equation

• Cost of production Total cost Unit cost

of 5,000 units
Materials Re 40,000 8.00

Labour Re 20,000 4.00

Variable over Re 12,000 2.40

head (40%) &
fixed@ 60%

Marginal Re 72,000 14.40

cost
Marginal costing – test of equatrion
• TC = VQ+F and F is 60%of Re 30,000
• TC = Re 14.40 X 5000 + Re 18,000
• TC= Re 90,000.
• Suppose – Qty. 8000 units
• VC –Re 14.40
• FC goes up by 10% (18,000 X 1.10= Re
19,800)
• What will be change in marginal cost?
 Marginal costing
• Units – 8,000
• VC 8,000 X 14.40 = 1,15,000.
• FC – 19,800
• TC = 8,000 X 14.40 + 19,8000 = 1,25,000
• Cost per unit =1,25,000/8000 = Re 15.62
• Reduction MC = 2.38 ( 18.00 – 15.62)
 Benefits of marginal costing
• Change of product mix – marginal cost of new
products all its possible models to be considered
• Make or buying decision- components to out
sourced or made in the factory.
• Pricing decisions – to decide normal price,
minimum price, depression price, special price
including dumping etc
• Exploring new markets -
• Shut down decision –temporary or permanent.
• Guiding principle = price > MC – accept. If price
< MC , reject.
 MC – Limitations
• Difficulty in secreting cost such as VC, FC
and semi variable.
• FC assumed as period cost. Some times
FC also may undergo a change.
• Not useful in all types of business. E.g.
Job contracts
• Estimation of over head may lead to under
estimation or over estimation in recovery
of over heads.
 Standard Costing
• The expected level of costs associated with the
production of a good/service.
• CIMA, London – “ the preparation of and use of
standard cost, their comparison with actual cost,
and analysis of variances to their causes and
ponts of incidence”.
Actual costs – Standard costs = Variance.
* Standard costing does not refer to what
costs are or what costs shall be but refers to
what cost should be or ought to be. That is it
is different from estimated which simply
says what cost shall be based on past data.
• Monitoring variances ( differences between SC
and actual cost) can help the business to identify
where inefficiencies or efficiencies might lie.
 Standard Costing – a management tool
• Price determination –inventory pricing, product
pricing, profit planning etc
• Comparison and analysis – comparison with actual
data, analysis of internal and external causes for
variance and remedial action.
• Cost consciousness among the staff at all level and
also incentives for cost control.
• Better capacity to anticipate and tight budgetary
control
• Delegation of responsibility and accountability.
 Standard cost of standard output

Standard output 1,000 units

Standard qty. of RM 2 kg per unit
Standard rate per Kg. Re1
Standard rate time for 1 hour
completing one unit
Standard rate per hour Re 2
Fixed over head Re 2,000
Variable overheads Re1 per hour.
 Standard cost of standard output

Direct material Re 2
Direct labour 2

Fixed over head 2

Variable over head 1
Total standard cost per 7
unit
 Standard cost of standard output

Cost of material (2000 X Re 2,000

Re1 )
Direct labour (1000 hrs 2000
X2)
Fixed overhead 2000

Variable overhead (1000 1000

hrs X 1)
Total cost 7,000
Activity-Based Costing System
• ABC calculates the costs of
individual activities and assigns
costs to cost objects such as
products and services on the basis
of the activities undertaken to
produce each product or service.
 Classification of Activities
(Hierarchies)
1. Unit-level activities:
• Performed each time a unit of the
product or service is produced.
• Resources are consumed in
proportion to the number of units
produced or sold.
• Examples —Direct materials and
labour, energy costs and expenses
consumed in proportion to machine
processing time.
 Classification of Activities
(Hierarchies)…
2. Batch-related activities:
Performed each time a batch of
goods is produced.
• Costs vary with the number of
batches made.
• Examples include set-ups,
purchase ordering and first-item
inspection activities.
 Classification of Activities
(Hierarchies)…

3. Product/service sustaining
activities:
Performed to enable the production
of individual products or services.
• Examples include activities related
to maintaining an accurate bill of
materials, preparing engineering
change notices.
 Classification of Activities
(Hierarchies)…
4. Facility-sustaining (or business-
sustaining) activities:
Performed to support the organization
as a whole.
• Examples include plant management,
property costs and salaries of general
administrative staff.
• Common to all products and services
–.not allocated to products/services.
 Implementing ABC

• Step 1: Identify the chosen cost

objects.
• Step 2: Identify the direct costs
of the product.
• Step 3: Select the cost-allocation
bases to use in allocating
indirect costs to the products.
 Implementing ABC
• Step 4: Identify the indirect costs
associated with each cost-allocation
base.
• Overhead costs incurred are
assigned to activities, to the extent
possible, on the basis of a cause-
and-effect relationship.
 Implementing ABC

• Step 5: Compute the rate per unit

of each cost allocation base used
to allocate indirect costs to the
products.
• Step 6: Compute the indirect costs
allocated to the products.
• Step 7: Compute the costs of the
products by adding all direct and
indirect costs assigned to them.
 Activity-Based Management

• ABM describes management

decisions that use activity-based
costing information to satisfy
customers and improve profits.
– Product pricing and mix decisions
– Cost reduction and process
improvement decisions
– Design decisions
 COST OF GOODS MANUFACTURED

COST OF RM CONSUMED
+ DIRECT MANUFACTURING LABOR COSTS
PRIME COST =>
+ INDIRECT MANUFACTURING COSTS
FACTORY COST =
+ OP. STOCK WIP
- CL. STOCK WIP
COST OF GOODS MANUFACTURED =
 COST OF GOODS SOLD (COGS)

OP. STOCK FG
+ COGM
- CL. STOCK FG
COST OF GOOD SOLD =>
 INCOME STATEMENT

REVENUES (SALES)
- COGS
GROSS PROFIT/MARGIN
- Sales & Dist. Cost
OPERATING INCOME
 Prepare Cost sheet from 1st June to 30th June
Cost of raw material 30,000
Purchase of RM 4,50,000
Wages paid 2,30,000
Factory over head 92,000
Cost of works in progress as on 1st 12,000
June
Cost of RM as on 30th June 15,000
Cost of stock of FG 1st June 60,000
Cost of stock of FG 30th June 55,000

Selling and Dist.exp. 20,000

Admin. Over head 30,000
Sales 9,00,000
Opening of stock of RM 30,000
+ purchase 4,50,000
- Closing stock 15,000
Consumption of RM 4,65,000
Wages paid 2,30,000
Prime cost 6,95,000
Factory over head 92000
7,87,000
- Op.stock pf WIP 12,000
+ closing stock of WIP -
Factory cost 7,99,000
Admin.Over head 30,000
COST OF PRODUCTION 8,29,000
Cost of production b/f 8,29,000
+ opening stock of FG 60,000
8,89,000
- Closing of FG 55,000

Cost of sales 8,34,000

Selling & Admin exp. 20,000
Cost of sales 8,54,000
Profit – 9,00,000 – 8,54,000 46,000
 Changing Cost Structures (1 of 4)
• The composition of manufacturing costs has
changed substantially in recent years
• Many formal cost systems were first implemented
in the early 1900’s:
– Direct labor represented a large proportion, sometimes
50% or more, of the total manufacturing costs
– Direct material costs were also substantial
– Capacity-related costs generally represented a small
fraction of total manufacturing costs
• Usually accumulated in a single pool and allocated
to products in proportion to some volume measure
such as the labor or machine hours used by the
product
Direct materials 2,00,000 Office stationery 1,000
Direct wages 50,000 Telephone 250
Dir.Exp. 10,000 Postage 500 Prepare cost sheet
Wages 5000 Sal.M.salary 2500
Electy 1000 Travel 1000
Lighting Repairs
Factory 3000 Plant 7000
office 1000 office 1000
Store kep wages 2000 Carr.outward 750
Factory rent 10000 Disc.on.shar.wr.of 1000
Office rent 5000 Advt. 2500
Depre.- plant 1000 Ware.H. charges 1000
office 2500 Sales 379000
Cons.stores 5000 Income tax 20000
Manger salary 10000 Dividend 4000
director fees 2500 Tr. To reserves 1000
Oil & Water 10000
Direct materials 200000
Direct wages 50000
Direct expenses 10000
Prime cost 260000

Wages 5000
Electricity 1000
Lighting 3000
Store keeper wages 2000
oil & water 1000
Rent 10000
plant- depreciation 1000
consumable stores 5000
repairs and renewal 7000
Factory overhead 35000
Factory cost 295000
Admin. overhead
office rent 5000
depreciation 2500
manager salary 10000
director fees 2500
stationery 1000
telephone 250
postage 500
repairs 1000
lighting 1000
office over ehad 23750
cost of production 318750
(295000+23750)
S & Admin.
carriage outward 750
sale men salaries 2500
travel 1000
advertising 2500
ware house charges 1000
S & A expenses 7750
cost of sales 326500
(318750+7750)
profit 52500
sales 379000
 Changing Cost Structures (2 of 4)
• Today, direct labor is only a small portion
of manufacturing costs
– E.g., in the electronics industry direct labor is often
less than 5% of the total manufacturing cost
• The cost of direct materials remains
important, representing 40% to 60% of the
costs in many plants
• The big change has been the vastly
increased share of total costs from
capacity-related costs
 Changing Cost Structures (4 of 4)
• Changing cost structures have caused cost
systems allocating indirect costs using volume
measures to become increasingly inaccurate in
computing product costs
• Many costing systems take costs that did not
vary proportionally with volume, accumulate
them, and then allocate them using a measure
of volume
• These systems often underallocate costs to cost
objects (e.g., product lines) produced in low
volumes
 Life-Cycle Costs
• Life-cycle costing is a relatively new perspective
that argues that organizations should consider a
product’s costs over its entire lifetime when
deciding whether to introduce a new product
• There are five distinct stages in a typical
product’s life cycle such as product development
& planning. Introduction phase, growth phase,
maturity phase and decline phase.
– Not all products will follow this pattern
– Some products will fail early and have a truncated life
cycle
 Product Life Cycle
• Product development and planning
– The organization incurs significant research and
development costs and product testing costs
– Because of the increasing costs of launching
products, organizations are devoting more effort to
the product development and planning phase
– The nature and magnitude of these costs should be
identified so that when products are initially
proposed, planners have some idea of the cost that
new product development will inflict on the
organization
– Shorter life cycles provide less time to recover costs
 Product Life Cycle
• Introduction phase
– The organization incurs significant
promotional costs as the new product is
introduced to the marketplace
– At this stage the product’s revenue will often
not cover the flexible and capacity-related
costs that it has inflicted on the organization
 Product Life Cycle
• Growth phase
– The product’s revenues finally begin to cover
the flexible and capacity-related costs
incurred to produce, market, and distribute
the product
– There is often little or no price competition
– The focus of attention is on developing
systems to deliver the product to the
customer in the most effective way
 Product Life Cycle
• Product maturity phase
– Price competition becomes intense and
product margins begin to decline
– While the product is still profitable,
profitability is declining relative to the growth
phase
– The organization undertakes intense efforts
to reduce costs to remain competitive and
profitable
 Product Life Cycle
• Product decline and abandonment phase
– Phase in which the product begins to become
unprofitable
– Competitors begin to drop out—the least
efficient first—and the remaining competitors
find themselves competing for a share of a
smaller and declining market
– The organization incurs abandonment costs,
which can include selling off equipment no
longer required or restoring an asset (e.g.,
land) prior to abandoning it
 Product Life Cycle
– Product-related costs occur unevenly over
the product’s lifetime
– The motivation for considering total life cycle
costs before the product is introduced is to
ensure that the difference between the
product’s revenues and its manufacturing
and distribution costs cover the other costs
associated with developing, supporting, and
abandoning the product
– Life-cycle costing is a good example of a
costing system designed for decision making
that has little or no practical relevance in
external reporting
Internal Use Of Cost Information
• Inside the organization costs serve many
different purposes, broadly categorized as:
– Planning
• Using cost as a basis for determining the selling
price of a prospective product
• Using cost in a budgeting model to forecast costs
under different levels of activity
– Evaluation
• Deciding whether the market price for an existing
product makes the product profitable
• Determining whether a process is cost efficient
compared to similar internal or external processes
Management Accounting’s Role
• Decision makers use costs to make
decisions and to control the processes
they manage
• The cost calculation may be tailored to the
specific decision that is being made
• Tailoring the cost calculation is the role of
the management accountant and the
management accounting system
Absorption Costing Compared to
Variable Costing
Absorption Costing
Cost of Goods Manufactured

Direct Direct Variable Fixed

Materials Labor Factory OH Factory OH

Cost of Goods Manufactured Period Expense

Variable Costing
 Units Manufactured Equal Units Sold
Variable Costing Income Statement
Sales (15,000 x 50) 750,000
Variable cost of goods sold:
Variable cost of goods mfg.
(15,000 x 25) 375,000
Less ending inventory 0
Variable cost of goods sold 375,000
Manufacturing margin 375,000
Variable selling and administrative
expenses (15,000 x 5) 75,000
Contribution margin (Sales – VC) 300,000
Fixed costs:
Fixed manufacturing costs 150,000
Fixed selling and administrative
expenses 50,000 200,000
Income from operations 100,000
 Units Manufactured Equal Units Sold
Absorption Costing Income Statement
Sales
Sales(15,000
(15,000xx50)
50) 750,000
750,000
Cost
Costofofgoods
goodssold:
sold:
Cost
Costof ofgoods
goodsmanufactured
manufactured
(15,000
(15,000xx35)
35)(VC
(VC375+FC
375+FC150)
150) 525,000
525,000
Less
Lessending
endinginventory
inventory 00
Cost
Costof ofgoods
goodssold
sold 525,000
525,000
Gross
Grossprofit
profit 225,000
225,000
Selling
Sellingand
andadministrative
administrativeexpenses
expenses
(75,000
(75,000++50,000)
50,000) 125,000
125,000
Income
Incomefromfromoperations
operations 100,000
100,000

When the number of units manufactured equals the

number of units sold, income from operations will be
the same under both methods.
 Units Manufactured Exceed Units Sold
Variable Costing Income Statement
Sales (12,000 x 50) 600,000
Variable cost of goods sold:
Variable cost of goods manufactured
(15,000 x 25) 375,000
Less ending inventory (3,000 x 25) 75,000
Variable cost of goods sold 300,000
Manufacturing margin 300,000
Variable selling and admin. expenses 60,000
Contribution margin 240,000
Fixed costs:
Fixed manufacturing costs 150,000
Fixed selling and admin. expenses 50,000 200,000
Income from operations 40,000
 Units Manufactured Exceed Units Sold
Absorption Costing Income Statement
Sales (12,000 x 50) 600,000
Cost of goods sold:
Cost of goods manufactured
(15,000 x 35) 525,000
Less ending inventory (3,000 x 35) 105,000
Cost of goods sold 420,000
Gross profit 180,000
Selling and administrative expenses
[(12,000 x 5) + 50,000] 110,000
Income from operations 70,000
 Units Manufactured Are Less Than Units Sold
Variable Costing Income Statement
Sales (15,000 x 50) 750,000
Variable cost of goods sold:
Beginning inventory (5,000 x 25) 125,000
Variable cost of goods manufactured
(10,000 x 25) 250,000 375,000
Manufacturing margin 375,000
Variable selling and admin. expenses 75,000
Contribution margin 300,000
Fixed costs:
Fixed manufacturing costs 150,000
Fixed selling and admin. expenses 50,000 200,000
Income from operations 100,000
 Units Manufactured Are Less Than Units Sold
Absorption Costing Income Statement
Sales (15,000 x 50) 750,000
Cost of goods sold:
Beginning inventory (5,000 x 35) 175,000
Cost of good manufactured
(10,000 x 45) 400,000
Cost of goods sold 575,000
Gross profit 175,000
Selling and administrative expenses
(75,000 + 50,000) 125,000
Income from operations 50,000
Units Manufactured Are Less Than Units Sold
Operating Income:
Variable costing 100,000
Absorption costing 50,000
Difference 50,000

Why
Why isis variable
variable costing
costing income
income
higher
higher when
when units
units manufactured
manufactured are
are
less
less than
than units
units sold?
sold?
Units Manufactured Are Less Than Units Sold
Operating Income:
Variable costing 100,000
Absorption costing 50,000
Difference 50,000

Analysis:
Units sold 15,000
Units manufactured 10,000
Ending inventory units 5,000
Fixed cost per unit x $10
Difference 50,000
 IF Units Sold < Units produced

THEN Variable Costing < Absorption Costing

Income Income
 IF Units Sold > Units produced

THEN Variable Costing > Absorption Costing

Income Income
Income
Income Analysis
Analysis Under
Under Variable
Variable
Costing
Costing and
and Absorption
Absorption Costing
Costing

Frand
Frand Manufacturing
Manufacturing
Company
Company has has no
no beginning
beginning
inventory
inventory and
and sales
sales are
are
estimated
estimated toto be
be 20,000
20,000 units
units at
at
RE
RE 7575 per
per unit,
unit, regardless
regardless of
of
production
production levels.
levels.
 Income
Income Analysis
Analysis Under
Under Variable
Variable
Costing
Costing and
and Absorption
Absorption Costing
Costing
Proposal 1: 20,000 Units to Be Manufactured and Sold
Total Cost Unit Cost
Manufacturing costs:
Variable 700,000 35
Fixed 400,000 20
Total costs 1,100,000 55
Selling and administrative exp.
Variable ($5 per unit sold) 100,000
Fixed 100,000
Total expenses 200,000
 Income
Income Analysis
Analysis Under
Under Variable
Variable
Costing
Costing and
and Absorption
Absorption Costing
Costing
Proposal 2: 25,000 Units to Be Manufactured; 20,000 Units to Be Sold
Total Cost Unit Cost
Manufacturing costs:
Variable 875,000 35
Fixed 400,000 16
Total costs 1,275,000 51
Selling and administrative exp.
Variable ($5 per unit sold) 100,000
Fixed 100,000
Total expenses 200,000
 Frand Manufacturing Company
Absorption Costing Income Statements
20,000 Units 25,000 Units
Manufactured Manufactured
Sales 1,500,000 1,500,000
Cost of goods sold:
Cost of goods manufactured
(20,000 units x 55) 1,100,000
(25,000 units x 51) 1,275,000
Less ending inventory:
(5,000 units x 51) 255,000
Cost of goods sold 1,100,000 1,020,000
Gross profit 400,000 480,000
Selling and administrative expenses
(100,000 + 100,000) 200,000 200,000
Income from operations 200,000 280,000
 Frand Manufacturing Company
Variable Costing Income Statements
20,000 Units 25,000 Units
Manufactured Manufactured
Sales 1,500,000 1,500,000
Variable cost of goods sold:
Variable cost of goods manufactured:
(20,000 units x 35) 700,000
(25,000 units x 35) 875,000
Less ending inventory:
(0 units x 35) 0
(5,000 units x 35) 175,000
Variable cost of goods sold 700,000 700,000
Manufacturing margin 800,000 800,000

Continued
Continued
 Frand Manufacturing Company
Variable Costing Income Statements
20,000 Units 25,000 Units
Manufactured Manufactured

Manufacturing margin 800,000 800,000

Variable selling and administrative
expenses 100,000 100,000
Contribution margin 700,000 700,000
Fixed costs:
Fixed manufacturing costs 400,000 400,000
Fixed selling and administrative
expenses 100,000 100,000
Total fixed costs 500,000 500,000
Income from operations 200,000 200,000
What
What would
would be
be the
the income
income
from
from operations
operations ifif the
the firm
firm
manufactured
manufactured 30,000
30,000 units?
units?
 Frand Manufacturing Company
Variable Costing Income Statements
30,000 Units
Manufactured
Sales 1,500,000
Variable cost of goods sold:
Variable cost of goods manufactured:
(30,000 units x 35) 1,050,000
Less ending inventory:
(10,000 units x 35) 350,000
Variable cost of goods sold 700,000
Manufacturing margin 800,000

Continued
Continued
 Frand Manufacturing Company
Variable Costing Income Statements
30,000 Units
Manufactured
Manufacturing margin 800,000
Variable selling and administrative
expenses 100,000
Contribution margin 700,000
Fixed costs:
Fixed manufacturing costs 400,000
Fixed selling and administrative
expenses 100,000
Total fixed costs 500,000
Income from operations 200,000
 HR accounting
• Human Resource Accounting (HRA) is basically
an information system that tells management
what changes are occurring over time to the
human resources of the business.
• HRA also involves accounting for investment in
people and their replacement costs, and also the
economic value of people in an organisation,”
says P K Gupta, the director of strategic
development-intercontinental operations, of
Legato Systems India.
 HR accounting
• Many companies world-over are making HRA as a
necessary element on their balance sheets.
• One of the best examples is of the Denmark
Government.
• The Danish Ministry of Business and Industry has issued
a directive that with effect from the trading year 2005, all
companies registered in Denmark will be required to
include in their annual reports information on customers,
processes and human capital.
• A minimum of five measures for each is required, and
comparison with the previous two years must be shown.
Figures for investment in intellectual capital must be
shown and compared with the previous two years
 HR accounting
• Basically HRA can be tracked through two
methods—cost-based analysis and value-based
analysis.
• The cost-based approach focuses on the cost
parameters, which may relate to historical cost,
replacement cost, or opportunity cost.
• The value-based approach suggests that the
value of human resources depends upon their
capacity to generate revenue. This approach
can be further sub-divided into two broad
categories: non-monetary and monetary.