CHSE Odisha Cost Accounting cheat sheet

Costing is the technique of ascertaining cost; cost accounting is the formal system of recording, classifying and summarising costs; cost control compares actual cost with a standard and acts on the difference.

Three elements of cost are material, labour and expenses; each is direct (traceable to the cost unit) or indirect (overhead, not traceable).

Prime cost = direct material + direct labour + direct expenses.

By behaviour: fixed cost is constant in total within the relevant range; variable cost varies in total with output but is constant per unit; semi-variable cost has both parts (telephone rent plus call charges).

By function: production cost, administration cost, selling cost and distribution cost; by nature: direct and indirect cost.

Cost unit examples: tonne of cement, kilowatt-hour of power, passenger-kilometre, 1,000 bricks. A cost centre is a location, person or machine for which costs are collected and controlled.

Financial accounting reports the whole business annually to outsiders; cost accounting reports by product, process or department to internal management at any frequency required.

Decision costs: opportunity cost (benefit forgone), sunk cost (already incurred, irrelevant), imputed cost (notional, e.g. interest on owner's capital), differential cost (difference between alternatives), out-of-pocket cost (needs fresh cash).

Controllable cost can be influenced by the manager of the responsibility centre at the level concerned; uncontrollable cost is the portion fixed by decisions taken elsewhere.

EOQ = √(2AO ÷ C), where A = annual consumption in units, O = ordering cost per order, C = carrying cost per unit per year.

Re-order level = maximum consumption × maximum re-order period; minimum level = re-order level − (normal consumption × normal re-order period); maximum level = re-order level + EOQ − (minimum consumption × minimum re-order period).

Average stock level = minimum level + ½ EOQ; danger level = normal consumption × emergency re-order period.

In rising prices FIFO leaves the latest and highest closing stock and shows higher profit; LIFO issues at the latest prices and shows lower profit.

Weighted average issue rate = total cost of materials in stock ÷ total quantity in stock, recalculated after every receipt; simple average ignores quantities and is less accurate.

Halsey premium plan: earnings = (time taken × hourly rate) + 50% × (time saved × hourly rate).

Rowan premium plan: earnings = (time taken × hourly rate) + [(time saved ÷ standard time) × time taken × hourly rate]; the bonus can never exceed time wages.

Taylor differential piece rate: below standard output pay 80% of the normal piece rate; at or above standard output pay 120%.

Labour turnover = (separations ÷ average number of workers) × 100; replacement method uses replacements only in the numerator, flux method uses separations plus replacements. Idle time and overtime premium are normally indirect labour charged to production overhead.

Cost sheet build-up: works cost = prime cost + factory overheads + opening WIP − closing WIP; cost of production = works cost + administration overheads; cost of goods sold = cost of production + opening finished goods − closing finished goods; cost of sales = cost of goods sold + selling and distribution overheads; sales = cost of sales + profit.

Allocation charges an overhead wholly to the centre that caused it; apportionment divides a common overhead among centres on an equitable basis such as floor area, machine hours, direct wages, light points or asset value.

Primary distribution apportions overheads to production and service departments; secondary distribution reapportions service department costs to production departments by the direct, step-ladder or reciprocal method (repeated distribution or simultaneous equations).

Predetermined overhead rate = budgeted overhead ÷ budgeted base; overhead absorbed = actual base × predetermined rate.

Over-absorption means absorbed overhead exceeds actual overhead; under-absorption means actual exceeds absorbed; the balance is written off to costing profit and loss or recovered by a supplementary rate = difference ÷ actual base.

Machine hour rate = total machine overhead ÷ machine hours; machine overhead = standing charges + machine running expenses; depreciation = (cost − scrap value) ÷ effective life in machine hours.

Absorption bases: production departments on machine hours or direct labour hours; administration on works cost, cost of production or sales; selling on sales value or units sold; distribution on weight, volume or units.

A blanket (single) rate suits a single-product factory; departmental rates are necessary when products pass through departments in different proportions.

Capacity terms: theoretical (maximum possible), practical (allowing normal idle time), normal (long-run average demand), actual (hours actually worked); cost of idle capacity is usually written off to costing profit and loss.

Job costing accumulates cost against each customer order (printing, repairs, furniture); batch costing finds cost per batch (biscuits, components, footwear) and uses the economic batch quantity.

Economic batch quantity = √(2AS ÷ C), where A = annual demand in units, S = set-up cost per batch, C = carrying cost per unit per year.

Contract costing keeps a separate account for each contract; work certified is valued at contract price, work uncertified at cost; retention money is the portion of certified work withheld by the customer; an escalation clause protects against price rises.

Notional profit = value of work certified + work uncertified − cost incurred to date; profit transferred to profit and loss is normally one-third of notional profit × (cash received ÷ work certified) at 25%–50% completion and two-thirds at 50%–90% completion; no profit is taken below 25%.

Process costing: normal loss = normal percentage × input, credited at scrap value; abnormal loss = (cost of normal output ÷ normal output units) × abnormal units; abnormal gain is the reverse entry and is debited to the process account.

Equivalent production = units completed + closing work-in-progress × degree of completion; cost per equivalent unit is then used to value output, closing WIP and abnormal loss.

Marginal costing: contribution = sales − variable cost; P/V ratio = contribution ÷ sales = (sales − variable cost) ÷ sales; break-even units = fixed cost ÷ contribution per unit; break-even sales = fixed cost ÷ P/V ratio; margin of safety = actual sales − break-even sales.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity for actual output − actual quantity) × standard price; labour rate = (standard rate − actual rate) × actual hours; labour efficiency = (standard hours for actual output − actual hours) × standard rate.

Operating costing (transport, hospitals, hotels, electricity) uses composite units such as passenger-kilometre, tonne-kilometre or bed-day; cost per unit = (fixed operating cost + variable operating cost) ÷ units of service.

Cost control keeps costs within predetermined standards and budgets; cost reduction seeks a permanent, genuine fall in unit cost without impairing quality or function.

Main cost control techniques: standard costing, budgetary control, inventory control (EOQ, ABC, VED, JIT), value analysis, cost audit and management by exception.

ABC analysis: A items are roughly 10%–20% of items but 70%–80% of value and need tight control; C items are the reverse (large number of items, small value); B items lie in between.

VED analysis grades stores by criticality: vital (stock-out stops production), essential (stock-out causes temporary setback), desirable (stock-out causes no immediate harm).

Value analysis: value = function ÷ cost; the objective is to secure the required function at the lowest total cost, using functional tests and cost-worth comparisons.

Responsibility accounting judges each centre on controllable items only: cost centre on costs, revenue centre on revenue, profit centre on profit, investment centre on return on investment.

Cost audit: cost records and cost audit fall under Section 148 of the Companies Act, 2013; the cost auditor is appointed by the Board on the audit committee's recommendation and submits the report to the Board within 180 days from the close of the financial year.

Management by exception: investigate only variances that exceed a set limit in amount or percentage; favourable variances may also be examined to confirm whether the gain is genuine.

Cost reduction tools: target costing (market price − desired profit), kaizen costing, activity-based costing, learning curve effect and business process re-engineering.

A budget is a quantified plan for a defined period; budgetary control is the establishment of budgets, continuous comparison of actual with budget and remedial action on differences.

Production budget in units = sales units + closing finished goods − opening finished goods; purchase budget in units = production consumption + closing raw material − opening raw material.

A fixed budget is prepared for one activity level and misleads when output differs; a flexible budget covers a range of activity and is recast at the actual level for meaningful comparison.

Cash budget: the receipts and payments method lists expected inflows and outflows by period; the adjusted profit and loss (balance sheet) method derives cash flow from profit by removing non-cash items and balance sheet changes.

Zero-base budgeting requires every activity and every amount to be justified afresh from zero each period through ranked decision packages; it suits support and service activities.

Break-even sales = fixed cost ÷ P/V ratio; sales required for a target profit = (fixed cost + desired profit) ÷ P/V ratio; margin of safety ratio = (actual sales − break-even sales) ÷ actual sales.

Special order rule: accept if the price exceeds variable cost and spare capacity exists; if capacity is fully used, add the contribution lost on the sales displaced.

Make or buy: buy if the purchase price is below the avoidable variable cost of making plus the opportunity cost of the facilities released; ignore apportioned fixed overhead and sunk costs.

Limiting factor (key factor): rank products by contribution per unit of the scarce resource, e.g. contribution per machine hour or per kg of material, not by contribution per unit; short-run shut-down is avoided while contribution remains positive.