WBCHSE Costing & Taxation cheat sheet

Cost accounting records, classifies and summarises costs for internal management; financial accounting reports overall profit to outsiders; management accounting is the broader decision-support discipline.

Cost unit is the quantitative basis for expressing cost (per tonne, per machine hour); cost centre is a location, person or item of equipment for which costs are collected and apportioned.

Prime cost = direct materials + direct labour + direct expenses. Factory or works cost = prime cost + factory overheads + opening WIP - closing WIP.

Cost of goods sold = factory cost + opening finished goods - closing finished goods. Cost of sales = cost of goods sold + administration and selling/distribution overheads.

Product costs attach to units manufactured (direct material, direct labour, production overhead); period costs are written off in the period incurred (most selling and administration costs).

Fixed cost is constant in total within a relevant range and falls per unit as output rises; variable cost is constant per unit and rises in total; semi-variable cost has both elements.

Differential cost is the change in total cost between two alternatives; opportunity cost is the benefit forgone by choosing one alternative over another; sunk cost is already incurred and irrelevant to decisions.

Avoidable cost can be eliminated by discontinuing an activity; unavoidable cost cannot. Controllable cost is influenced by the responsible manager within a given period.

Re-order level = maximum consumption x maximum re-order period. Minimum level = re-order level - (normal consumption x normal re-order period).

Maximum level = re-order level + re-order quantity - (minimum consumption x minimum re-order period). Average stock level = minimum level + half the re-order quantity.

Danger level = normal consumption x maximum re-order period for emergency purchases; it signals the point below which stock must not normally fall.

Economic order quantity = square root of (2 x annual consumption x cost per order / carrying cost per unit per annum).

FIFO issues the oldest stock first, so closing stock is valued at the latest prices; LIFO issues the newest first, so closing stock reflects the oldest prices.

Simple average price = total of unit prices of all purchases divided by number of purchases; weighted average price = total purchase cost divided by total quantity purchased.

Under perpetual weighted average, a new average rate is computed after every receipt: (value of stock on hand + value of receipt) / (quantity on hand + quantity received).

Stock turnover ratio = cost of materials consumed / average stock held; a low ratio indicates slow-moving or excess inventory.

Time rate: earnings = hours worked x rate per hour. Piece rate: earnings = units produced x rate per unit.

Halsey plan: earnings = time taken x rate + (50% of time saved x rate). Rowan plan: earnings = time taken x rate + (time saved / standard time) x time taken x rate.

Under the Rowan plan the bonus proportion rises as time saved increases but total earnings never exceed twice the time-rate wage for the standard time.

Taylor differential piece rate pays a low rate per unit below standard output and a high rate per unit at or above standard, penalising inefficiency.

Merrick multiple piece rate uses 83% of the base rate below standard, 100% between standard and 110%, and 120% above 110% of standard output.

Gross wages = basic pay + dearness allowance + incentive bonus + overtime + employer's contribution to provident fund, if the latter is treated as a labour cost.

Labour turnover rate (separation method) = number of separations / average number of workers x 100; replacement method uses replacements only.

Idle time is hours paid but not worked; normal idle time is absorbed into the labour rate, abnormal idle time is charged to the costing profit and loss account.

Allocation assigns an overhead wholly to a specific cost centre; apportionment distributes a shared overhead across centres on an equitable basis.

Primary apportionment distributes service department costs to production departments; secondary apportionment redistributes service department costs among service departments before closing them to production.

Methods of secondary apportionment: direct (ignore inter-service work), step-ladder (close one service department at a time), reciprocal (simultaneous equations) and repeated distribution.

Absorption rate = budgeted overhead / budgeted base. Bases include direct labour hours, machine hours, direct wages, direct material cost and units of output.

Overhead absorbed = actual base x predetermined absorption rate. Under-absorption occurs when absorbed overhead is less than actual overhead; over-absorption when it is more.

Machine hour rate = (fixed overheads / machine hours) + (variable overheads per hour) + depreciation + power per hour, giving a rate per machine hour.

Capacity levels: theoretical maximum, practical capacity, normal capacity (average over several periods) and actual capacity; the chosen level sets the fixed overhead per unit.

Treatment of under- or over-absorbed overhead: transfer to costing profit and loss account, or apportion between WIP, finished goods and cost of sales on a supplementary rate.

Cost sheet order: direct material consumed, direct wages, direct expenses, prime cost, works overheads, works cost, administration overheads, cost of production, selling and distribution overheads, cost of sales, profit, sales.

Direct material consumed = opening raw material stock + purchases + carriage inward - closing raw material stock; purchase returns are deducted from purchases.

Works cost = prime cost + factory overheads + opening work-in-progress - closing work-in-progress. Cost of production = works cost + administration overheads.

Cost of sales = cost of production + opening finished goods - closing finished goods + selling and distribution overheads.

Scrap and defectives recovered reduce factory overheads; sale of scrap is credited to the works cost or the relevant process account.

Profit may be stated as a percentage of cost or of sales. Profit on cost = profit / cost x 100; profit on sales = profit / sales x 100.

Normal loss in a process carries no cost and is borne by good units; abnormal loss is valued at the normal cost per unit and written off; abnormal gain is credited at normal cost.

When preparing a cost statement from incomplete records, reconstruct missing figures using the cost ratios given (for example, factory overhead as a percentage of direct wages).

Job costing accumulates costs against a specific customer order, using a job cost sheet and a predetermined overhead absorption rate; suited to customised production.

Batch costing treats each batch as a cost unit; cost per unit = total batch cost / number of units in the batch, with set-up costs spread over the batch.

Contract costing uses a separate contract account; work certified and work uncertified are credited, and the balance sheet shows work in progress adjusted for cash received.

Notional profit = value of work certified + cost of work uncertified - cost incurred to date. Profit transferred = notional profit x cash received / work certified x a conservative fraction (typically two-thirds).

Process costing averages costs over continuous output; equivalent units = physical units x percentage of completion, used to spread cost between completed output and closing WIP.

Service costing uses composite cost units such as passenger-kilometre, tonne-kilometre or patient-day; total cost is divided by the total service units provided.

Operating costing for transport: fixed costs (depreciation, insurance, garage rent) plus variable running costs (fuel, tyres, repairs) divided by kilometres or hours run.

Inter-process profit arises when a later process receives goods at a transfer price above cost; unrealised profit on closing stock must be eliminated through a stock reserve.

Reconciliation statement starts with profit as per cost accounts (or financial accounts) and adjusts items recorded in one set of books but not the other to arrive at the other profit.

Items in financial accounts only: purely financial incomes and expenses such as interest received, dividend, rent received, discount, bad debts, income tax and charitable donations.

Items in cost accounts only: notional charges such as notional rent, notional interest on capital, and notional salary of the proprietor.

Differences in overheads: under- or over-absorption of overheads in cost accounts is added back or deducted to reach financial profit.

Differences in stock valuation: opening stock overvalued in cost accounts increases cost profit, so it is deducted; closing stock overvalued in cost accounts increases cost profit, so it is added back.

Differences in depreciation: excess depreciation charged in cost accounts over financial accounts is deducted from cost profit when reconciling to financial profit.

Abnormal losses or gains treated differently: abnormal loss written off in financial accounts but absorbed in cost accounts requires an adjustment in the statement.

Reconciliation is needed because cost accounts follow cost accounting principles and exclude pure financial items, while financial accounts follow statutory reporting requirements.

Five heads of income: salaries; income from house property; profits and gains of business or profession; capital gains; income from other sources.

Residential status of an individual depends on basic condition and additional conditions. Basic: stay in India for 182 days or more in the previous year, or 60 days in the previous year plus 365 days in the preceding four years.

The 60-day limb is replaced by 182 days for an Indian citizen leaving India for employment abroad or as crew, and for a person of Indian origin visiting India.

Resident and ordinarily resident: satisfies any basic condition and both additional conditions (resident in India in at least 2 of the 10 preceding years, and stay of 730 days or more in the 7 preceding years).

Resident but not ordinarily resident: satisfies a basic condition but fails one or both additional conditions. Non-resident: satisfies no basic condition.

Resident and ordinarily resident is taxed on global income; resident but not ordinarily resident on income received or accruing in India plus foreign income from a business controlled in or profession set up in India; non-resident on Indian-source income only.

Income from salary includes basic pay, allowances, perquisites and profits in lieu of salary, less standard deduction and professional tax; HRA exemption is the least of actual HRA, rent paid minus 10% of salary, and 50% (metro) or 40% (non-metro) of salary.

Income from house property: gross annual value less municipal taxes paid by the owner, then a flat 30% standard deduction, then interest on borrowed capital; a self-occupied house generally has nil annual value.

Gross total income = sum of the five heads after setting off intra-head losses; total income = gross total income minus deductions under Chapter VI-A.

Losses: house property loss is set off against other heads up to Rs 2,00,000 per year; business and capital losses are set off only against the same head in the same year, then carried forward.

Deductions under Section 80C (LIC premium, PPF, tuition fees, principal repayment) are capped at Rs 1,50,000; Section 80D covers medical insurance premiums within prescribed limits.

Under the old regime, the basic exemption limit for individuals below 60 is Rs 2,50,000; senior citizens get Rs 3,00,000 and super senior citizens Rs 5,00,000.

Under the new regime (Section 115BAC) the basic exemption is Rs 3,00,000 with wider slabs, but most Chapter VI-A deductions and the standard deduction for salaried persons are restricted.

Rebate under Section 87A reduces tax for resident individuals whose total income does not exceed the prescribed threshold; it cannot exceed the tax payable.

Surcharge applies on tax at prescribed rates when total income exceeds high thresholds; health and education cess of 4% is levied on tax plus surcharge.

Advance tax is payable in instalments during the year when tax liability after TDS is Rs 10,000 or more; shortfall attracts interest under Section 234B and 234C.

Cost accounting is the process of accounting for cost from the point of expenditure to the establishment of its relationship with cost units.

Classification by behaviour, by nature (material, labour, expense), by function (production, administration, selling, distribution) and by traceability (direct, indirect) are the four standard bases.

A cost object is anything for which a separate measurement of cost is desired, such as a product, service, department or customer.

Conversion cost = direct labour + production overhead; it measures the cost of converting raw material into finished output.

Marginal cost is the additional cost of producing one more unit, equal to variable cost per unit when fixed costs are constant.

Relevant range is the band of activity within which the assumed fixed cost and variable cost per unit behaviour holds true.

Bin card records quantity only and is kept in the store; stores ledger records quantity and value and is kept by the cost accounting department.

Purchase requisition originates from the store or user department; purchase order is sent to the supplier; goods received note records quantity received and is matched with the invoice.

A material requisition note authorises issue from store to production; a material return note records surplus material sent back to the store.

Perpetual inventory records stock continuously after every receipt and issue; periodic inventory counts stock only at fixed intervals.

ABC analysis classifies materials by value and usage: A items are high-value and tightly controlled, C items are low-value and loosely controlled.

Just-in-time purchasing minimises stock holding, reducing carrying cost but raising the risk of stock-out and dependence on supplier reliability.

Stock level formulas assume consumption and lead time are known; safety stock is added to cover uncertainty in demand or delivery.

Direct labour is identifiable with a cost unit and forms part of prime cost; indirect labour supports production and is treated as overhead.

Group bonus schemes reward collective output, reducing the individual incentive of straight piece rate but encouraging teamwork.

Overtime premium is usually treated as a production overhead unless worked at the customer's specific request, in which case it is charged as direct cost.

Employer's contribution to provident fund and ESI, and fringe benefits, form part of labour cost along with wages.

Casual workers and outworkers may be paid per day or per piece; their cost is direct if identifiable with the job.

Time and motion study sets the standard time, which is the benchmark against which time saved and bonus are computed.

Overheads are indirect costs that cannot be traced wholly to a cost unit and are therefore apportioned and absorbed.

Service department costs are ultimately borne by production departments because only production departments produce the cost units.

Reciprocal apportionment is needed when service departments serve each other as well as production departments.

Blanket absorption rate uses one rate for the whole factory; departmental rates absorb overhead more accurately where departments differ in cost behaviour.

Capacity of a machine is measured in machine hours available; idle capacity raises the fixed overhead per unit absorbed.

Administration overheads are usually absorbed as a percentage of works cost or of conversion cost.

A cost sheet is a statement showing the detailed cost build-up for a period, used for cost control, pricing and comparison with previous periods.

A statement of cost presents the same information in T-account form, with the cost of goods sold as the balancing figure.

Tender or quotation pricing adds a desired margin to the estimated total cost; the margin may be quoted on cost or on selling price.

When production exceeds sales, closing finished goods rise and cost of sales is lower than cost of production for the period.

Administration overheads are excluded from works cost; they are added after works cost to reach cost of production.

Selling and distribution overheads include advertisement, salesmen's salaries, commission, carriage outward, packing and warehousing of finished goods.

The choice of costing method depends on the nature of the product, the production process and whether output is against specific orders or for stock.

Job costing and batch costing both use job or batch cost sheets; contract costing is a form of job costing applied to long-term construction work.

In contract costing, retention money is the portion of certified work withheld by the customer until completion of the contract.

Escalation clause in a contract allows the contract price to be adjusted if material or labour costs rise beyond a specified limit.

Process costing uses a process account for each stage; normal loss is valued at nil, and the cost per good unit equals total process cost divided by expected good output.

Equivalent production in process costing may be computed by the FIFO method (separating opening WIP) or the weighted average method (combining opening WIP with current costs).

Reconciliation may start from either profit figure; the adjustments are reversed in direction when the starting point changes.

Interest on capital and rent of own premises are notional charges appearing only in cost accounts and are added back when reconciling cost profit to financial profit.

Income tax paid is a financial charge not appearing in cost accounts; it is added to cost profit to reach financial profit.

A difference in the basis of valuing closing stock changes cost profit directly and must be adjusted in the reconciliation statement.

Reconciliation does not remove the need for cost accounts; it explains why the two profit figures differ, preserving the usefulness of both.

A memorandum reconciliation account is an alternative presentation of the reconciliation statement in ledger form.

Previous year is the financial year in which income is earned; assessment year is the following year in which it is assessed and taxed.

Agricultural income is exempt from central income tax but is aggregated with total income for rate purposes when it exceeds the prescribed limit.

Casual income such as winnings from lotteries is taxed at a flat rate without the basic exemption limit or deduction.

Income from other sources includes interest, dividend, royalties and gifts exceeding the prescribed threshold.

Capital gains are long-term or short-term depending on the holding period; listed equity shares held over 12 months qualify as long-term.

Income is deemed to accrue in India if it arises from a business connection, property, asset or source of income situated in India.

Tax liability = tax on total income at slab rates + surcharge, if any, less rebate under Section 87A, plus health and education cess at 4%.

Deductions under Chapter VI-A cannot exceed gross total income; deductions are applied head-wise and then aggregated.

Set-off of losses is within the same year; carry-forward is to subsequent years, subject to time limits and conditions for each head.

House property interest on a self-occupied house is deductible up to Rs 2,00,000 under the old regime, subject to conditions on the loan.

Advance tax instalments for individuals are 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.

TDS deducted by an employer or payer is adjusted against the final tax liability; excess TDS is refundable.

Cost control compares actual cost with standard or budget and acts on variances; cost reduction seeks a genuine and permanent lowering of unit cost.

Cost ascertainment determines actual cost after it is incurred; cost estimation predicts cost before production begins.

A cost driver is any factor that causes a change in the cost of an activity, such as number of set-ups or machine hours.

Value analysis examines the function of a product to reduce cost without reducing its usefulness to the customer.

Carrying cost includes storage, insurance, obsolescence and the opportunity cost of capital tied up in stock.

Ordering cost includes clerical cost of purchase orders, inspection and receiving; it falls per unit as order size increases.

The EOQ is the order size at which total ordering cost equals total carrying cost, minimising the sum of the two.

A stores ledger account is debited for receipts and credited for issues, the balance showing stock on hand in quantity and value.

Standard time is the time allowed for a job; time saved = standard time - actual time taken.

Under the Halsey-Weir plan the bonus is a fixed percentage (commonly 331/3%) of the time saved multiplied by the rate.

An incentive scheme is effective only when the standard is attainable and the measurement of output is reliable.

Labour cost per unit falls with learning as workers repeat the task; the learning curve effect is relevant to setting standards.

An overhead absorption rate should be based on a measure that correlates with the overhead, such as machine hours in a machine-intensive department.

Machine hour rate is preferred to labour hour rate where machines dominate production and labour cost is a small proportion of total cost.

Departmentalisation of overheads improves accuracy of absorption and supports responsibility accounting.

Overhead incurred but not absorbed by production is written off; it represents an unabsorbed cost of the period.

The cost sheet is prepared for a period, whereas a job cost sheet is prepared for a specific order.

Carriage inward is a direct material cost when it relates to purchase of raw material; carriage outward is a distribution overhead.

Direct expenses include royalty on production, hire of special machinery for a job and cost of special designs.

A cost sheet supports pricing decisions by showing the total cost per unit and the margin required to reach a target selling price.

Unit costing is used where output is homogeneous and measured in units, such as cement, sugar or coal.

Operating costing applies to service organisations; transport, hospital, hotel and electricity supply are typical examples.

In contract costing, the contract account is debited with materials, wages, plant and overheads, and credited with work certified, work uncertified and materials returned.

In process costing, the cost per unit of a process is computed after allowing for normal loss and the scrap value of normal loss.

Purely financial items such as discount allowed and bad debts are recorded only in financial accounts and are added back to cost profit.

Notional charges recorded only in cost accounts are deducted from cost profit when reconciling to financial profit.

The difference in profit may also arise from different methods of depreciation or of valuing stock adopted in the two sets of accounts.

A reconciliation statement is a memorandum statement; it does not form part of the double-entry records.

The Income-tax Act, 1961 governs the charge of income tax in India; the Finance Act of each year fixes the rates for that assessment year.

Income is charged on the basis of the previous year, except for advance tax and certain deemed incomes.

Under the accrual concept, income is taxed when it accrues or arises, not necessarily when it is received.

The residential status of an individual is determined separately for each previous year and may change from year to year.

A resident individual with total income below the basic exemption limit is not liable to tax, but may still need to file a return if conditions apply.

Return of income is filed in the prescribed form (ITR-1 to ITR-7) depending on the nature and amount of income.

Deductions under Section 80C, 80D and similar sections are available under the old regime but largely withdrawn under the new regime.

Rebate and surcharge are applied before cess; cess is computed on the tax after rebate and after adding surcharge.

Financial accounting reports to shareholders and regulators; cost accounting reports to internal managers for planning and control.

Cost accounting aids inventory valuation, price fixation, cost control, variance analysis and make-or-buy decisions.

A cost centre may be personal, impersonal, production or service; a profit centre is a cost centre whose manager also controls revenue.

Semi-variable costs are separated into fixed and variable elements using the high-low method or scatter graph.

Maximum stock level controls the capital locked in inventory; minimum stock level protects against stock-out.

The re-order level is set above the minimum level to cover consumption during the lead time.

Under LIFO, during rising prices, issues are charged at recent high prices, reducing reported profit.

Inventory should be counted periodically and reconciled with the stores ledger to detect pilferage and clerical errors.

Time booking records the time spent by each worker on each job; time keeping records attendance.

Payroll preparation requires attendance, time booked, rate of pay and deductions such as provident fund and professional tax.

Overtime is paid at a premium rate, commonly double the normal rate, as prescribed by labour legislation.

Labour turnover is costly because of recruitment, training and lost productivity, so it is measured and monitored.

Overhead classification by function distinguishes production, administration, selling and distribution overheads.

Apportionment of rent may use floor area; lighting may use floor area or number of light points; power may use machine hours.

Reciprocal apportionment is solved by simultaneous equations when two service departments serve each other.

Predetermined absorption rates allow overhead to be charged to jobs as they are completed, before actual overhead is known.

Cost sheet items must be classified consistently across periods so that comparisons are meaningful.

Abnormal wastage is excluded from normal cost and charged to the profit and loss account.

Opening and closing stock adjustments are needed so that cost reflects consumption during the period, not purchases.

Profit shown in a cost sheet is the difference between sales and cost of sales; it excludes purely financial items.

The method of costing and the technique of costing are different: method is job, batch, contract or process; technique is standard costing, marginal costing or budgetary control.

Batch costing is used in industries such as pharmaceuticals, footwear and readymade garments where output is in lots.

Contract costing recognises profit only in proportion to cash received, reflecting the uncertainty of collection.

Service costing accumulates both fixed and variable costs and divides by the cost unit chosen for the service.

Reconciliation is required because cost and financial accounts serve different purposes and follow different conventions.

Only items causing a difference in profit need adjustment; items recorded identically in both sets need no adjustment.

The direction of adjustment depends on the starting profit figure and on whether the item increases or decreases that figure.

Reconciliation should be prepared periodically, not only at year end, to detect errors early.

The basic exemption limit varies with the age of the individual and with the tax regime chosen.

Income of a minor is generally clubbed with the income of the parent, subject to exceptions.

Gifts received from relatives are exempt; other gifts above the prescribed threshold are taxable as income from other sources.

The due date for filing the return of a non-audit individual is generally 31 July of the assessment year.

Deductions under Chapter VI-A are allowed from gross total income, not from individual heads of income.

Tax planning arranges affairs within the law to reduce tax; tax evasion is illegal and attracts penalty.

Interest under Section 234A applies for late filing, 234B for default in advance tax and 234C for deferment of instalments.

The choice between the old and new regimes is made each year based on the deductions available and the slab benefit.