CMA Inter Paper 8: Cost Accounting cheat sheet

Cost accounting measures, records and reports cost information for internal decision-making; financial accounting reports to external parties under statutory formats.

Cost object: anything for which a separate cost measurement is made (product, service, department, customer, activity).

Cost unit is a unit of product/service for which cost is ascertained (e.g., per tonne, per passenger-km); cost centre is a location or function where costs are incurred.

Cost centre types: personal (a person/group), impersonal (a machine/location), production (directly involved in making), service (support), and profit/investment centres.

Classification by behaviour: fixed (constant in total within relevant range), variable (constant per unit), semi-variable (mixed, e.g., electricity with fixed demand charge plus usage rate).

Cost vs expense: cost is a sacrifice of resources to obtain future benefit; expense is a cost expired against revenue in the period.

Prime cost = direct material + direct labour + direct expenses; conversion cost = direct labour + direct expenses + factory overhead.

Cost accounting objectives: ascertainment of cost, cost control and reduction, decision-making, pricing, and performance measurement.

EOQ = √(2 × annual consumption × ordering cost / holding cost per unit per year); total cost is minimised where ordering cost equals holding cost.

Stock levels: Reorder level = Maximum consumption × Maximum reorder period; Minimum level = Reorder level − (Normal consumption × Normal reorder period); Maximum level = Reorder level + EOQ − (Minimum consumption × Minimum reorder period).

Inventory valuation: FIFO leaves closing stock at latest prices; weighted average recalculates after each receipt; LIFO is not permitted under Ind AS 2 but may appear in cost problems.

Labour turnover rate = (Number of separations + Replacements) / Average number of workers × 100; also computed by separation, replacement and flux methods.

Remuneration: Halsey plan earnings = Time taken × Rate + 50% × (Time saved × Rate); Rowan = Time taken × Rate + (Time saved / Time allowed) × Time taken × Rate.

Idle time is lost time paid but not productive; normal idle time is charged to overheads, abnormal idle time to Costing P&L.

Overhead absorption rate = Budgeted overhead / Budgeted base (direct labour hours, machine hours, direct wages or units); under/over absorption = Absorbed − Actual.

Primary distribution apportions service department costs to production departments; secondary distribution uses direct, step-down (elimination) or reciprocal (repeated/simultaneous equations) methods.

Job costing accumulates costs per customer order or batch; suitable for customised, non-standard, low-volume production.

Batch costing treats each batch as a cost unit; cost per unit = total batch cost / units in batch.

Contract costing: costs charged to each contract; work certified and work uncertified determine progress; retention money is withheld until completion.

Notional profit = Value of work certified + Work uncertified − Cost of work to date; profit transferred = Notional profit × Cash received / Work certified × (2/3 for early stage, 1/3 or 2/3 by convention).

Process costing: normal loss is valued at scrap value and borne by good units; abnormal loss/gain valued at cost per good unit.

Equivalent production = Units completed + (Closing WIP × Degree of completion); cost per equivalent unit = Total cost / Equivalent units, with abnormal loss/gain adjusted separately.

Operating costing (service costing) uses composite cost units such as passenger-km, tonne-km, bed-day, or kilowatt-hour.

Reconciliation of cost and financial profit: adjust for items recorded in one set only (notional rent, interest on capital, abnormal losses, closing stock differences, dividends).

Standard costing variances: Material price = (Standard price − Actual price) × Actual quantity; Material usage = (Standard quantity − Actual quantity) × Standard price.

Labour rate variance = (Standard rate − Actual rate) × Actual hours; Labour efficiency = (Standard hours − Actual hours) × Standard rate.

Variable overhead efficiency variance = (Standard hours − Actual hours) × Standard variable overhead rate; expenditure variance = Budgeted − Actual variable overhead.

Fixed overhead variances: expenditure = Budgeted − Actual; volume = (Standard hours − Budgeted hours) × Standard rate; volume splits into efficiency and capacity.

Target costing: Target cost = Competitive selling price − Desired profit margin; cost gap = Current estimated cost − Target cost.

Activity-based costing assigns overheads via cost drivers (set-ups, inspections, machine hours, orders); activity cost driver rate = Activity cost pool / Total driver quantity.

Life-cycle costing accumulates costs over a product's whole life (design, development, manufacture, distribution, disposal); most costs are committed at the design stage.

Throughput accounting: Throughput = Sales − Direct material; throughput ratio = Throughput / Total factory cost; bottleneck (binding resource) governs output.

Relevant costs are future, incremental and differ between alternatives; sunk costs, committed costs and allocated common fixed costs are irrelevant.

Opportunity cost is the contribution forgone from the next best alternative use of a scarce resource; include it in decision analysis.

Contribution per unit = Selling price − Variable cost; contribution per unit of limiting factor ranks products when a resource is scarce.

Break-even point (units) = Fixed cost / Contribution per unit; BEP (value) = Fixed cost / P/V ratio; P/V ratio = Contribution / Sales.

Margin of safety = Actual sales − Break-even sales; expressed as a percentage of actual sales.

Required sales for target profit = (Fixed cost + Desired profit) / Contribution per unit.

Shut-down decision: continue in the short run if contribution covers variable costs and some fixed costs; shut down if contribution is negative.

Make-or-buy: compare avoidable internal cost with purchase price plus any opportunity cost of freed capacity; ignore allocated fixed overheads.

CAS 1: Classification of Cost - defines cost elements and cost behaviour classifications used consistently across cost statements.

CAS 2: Capacity Determination - establishes installed, normal, and actual capacity and defines idle capacity for absorption.

CAS 3: Overheads - requires primary and secondary distribution and absorption of production overheads on a consistent, documented basis.

CAS 4: Cost of Production for Captive Consumption - prescribes cost build-up for goods transferred internally before excise valuation.

CAS 5: Average (Equalised) Cost of Transportation - equalises freight cost per unit across consignments irrespective of distance.

CAS 6: Material Cost - covers procurement, storage, and valuation principles for direct and indirect materials.

CAS 7: Employee Cost - prescribes identification, measurement and allocation of wages, benefits and idle-time treatment.

Cost records under Section 148 of the Companies Act 2013 are maintained in the prescribed format by specified industries; cost audit is conducted by a cost accountant in practice.

Worked EOQ: annual demand 12,000 units, ordering cost Rs 100, holding cost Rs 6 per unit-year → EOQ = √(2 × 12,000 × 100 / 6) = 632 units (approx).

Worked Halsey: time allowed 10 h, time taken 8 h, rate Rs 50/h → earnings = 8 × 50 + 0.5 × 2 × 50 = Rs 450.

Worked Rowan: same data → earnings = 8 × 50 + (2/10) × 8 × 50 = Rs 480.

Worked BEP: fixed cost Rs 90,000, selling price Rs 30, variable cost Rs 18 → contribution Rs 12, BEP = 7,500 units; P/V ratio = 40%.

Worked margin of safety: sales 10,000 units at BEP 7,500 → MoS = 2,500 units or 25% of sales.

Worked process costing: cost Rs 1,00,000, input 1,000 kg, normal loss 10% with scrap Rs 5/kg → cost per good kg = (1,00,000 − 500) / 900 = Rs 110.56.

Worked overhead absorption: budgeted overhead Rs 4,00,000, budgeted machine hours 20,000 → rate Rs 20/h; actual 21,000 h and Rs 4,10,000 → over-absorbed Rs 10,000.

Worked target costing: market price Rs 500, desired margin 20% → target cost Rs 400; current cost Rs 440 → cost gap Rs 40 per unit.