Accounting-Finance

The terms variance refers to the deviation of the actual costs from the standard costs due to various causes. Variance analysis is the process of calculating the deviation of the actual costs from the standards and of interpreting the results. Variance analysis helps to ascertain the magnitude of each of the variances...

The following are the notable limitations or disadvantages of standard costing system: * Standard costing system may be tedious, expensive and time consuming to install and keep up to date. * The standard costing system controls the operating part of an organization only as it ignores the other items like quality,...

The following are the advantages of the standard costing system: * A standard costing is a rule of measurement established by authority, which provides a yardstick for performance evaluation. * Standard costing system minimizes the wastage by detecting variance and suggesting for corrective actions. * Under the standard...

Although budgetary control and standard costing both are based on some common principles; both are pre-determined, comparison will be made with the actual costs and both system need a revision of the standards or the budget, these two systems have certain differences which are as follows: 1. Budgetary control deals...

Estimates are the expressions of of opinion based upon past experiences whereas the standard costs are based upon standard rate that are very carefully developed and set as scientifically as possible. However, both estimated costs and standard costs are related to future period of time but there are some significant...

Standard costs are also known as predetermined costs in terms of money, quantity or time as the basis of standard costing. Standard costs are target costs, which should be attained and can be considered as a measuring rod or norms for performance evaluation. Terminology There are various types of standards in use. Out...

Historical costs are the actual costs that are ascertained after they are incurred. During the initial stages of development of cost accounting, historical costing systems like process costing, contract costing, service costing etc. were available for ascertaining the costs. The historical costing methods are used to...

Following are the main roles or contribution of responsibility accounting: * Decentralization By dividing the total organization in smaller subunits, the organization becomes more manageable. * Performance Evaluation Responsibility accounting establishes a sound and fair system of performance evaluation of each manager...

Responsibility accounting is a concept that views the organization in parts or sub-systems rather than in total or a single system. Of course, the ultimate goal is to achieve organization's objective but that does not come at once. Total achievement is the aggregation of the achievements individual sector. Responsibility...

1. Cost Center A cost center is an organizational sub-unit such as department or division, whose manager is held accountable for the costs incurred in that division. For example, a Power and Airco Department can can be defined as a cost center within the Operation and Maintenance Department in United Telecommunication...

What Is Responsibility Accounting ? Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals...

The term 'capacity' means a "constraint" or an upper limit. Determining the right level of capacity is one of the most challenging tasks facing managers. Having too much capacity relative to demand means incurring sizable costs to an unused capacity. Having too low capacity means that the demand from some customers may...

Income reported under variable costing and absorption costing are different. It is only the different value of inventory under the two costing income statements that changes the amount of the net income. Except the value of inventory, we do not find any other differences. As the size of inventory increases or decreases...

Since inventory is an asset, the difference in the value of inventory changes the size of income and the size of assets in a balance sheet. Income statement and balance sheet both are affected by the value of inventory. That is why we get different income and assets under these two costing methods. Inventoriable costs...

Income Statement Under Absorption Costing Approach (ACA) Working Notes: 1. PCR = PCR as per variable costing approach + FMOR 2. FMOR = Standard fixed manufacturing overheads/ Standard Output 3. Stock Valuation = Units X PCR 4. Capacity Variance = (AO-SO) X Fmor. 5. Non- Mfg. Costs: * Administrative overhead costs *...

The variable costing system is widely used for internal management purposes rather than for external reporting. It is more useful for taking managerial decisions, profit planning, cost controlling, pricing etc. The importance or uses of variable costing system can be expressed as follows: 1. Profit Planning It...

A costing method that includes only variable manufacturing costs as inventoriable costs is known as variable costing system. It excludes all fixed manufacturing costs from inventoriable costs. The main characteristics or features of variable costing system can be expressed as follows: 1. Cost Differentiation Variable...

Advantages Of Absorption Costing System Following are the main advantages of absorption costing system: 1. Absorption costing recognizes fixed costs in product cost. As it is suitable for determining price of the product. The pricing based on absorption costing ensures that all costs are covered. 2. Absorption...

Advantages Of Variable Costing System The major advantages of variable costing are summarized as follows: 1. Variable costing is easy to understand and use. It is applicable to standard costing and budgetary control. 2. The valuation of closing stock on the basis of variability of cost will not facilitate the transfer...

We can determine Income under variable costing approach (VCA) as follows: *Essential Working Notes: i. Product cost rate, PCR= Total per unit cost of:* Direct Material* Direct Labor* Direct Expenses* Variable manufacturing overheadsii. Stock valuation = Units X PCRiii. Closing stock of finished goods = Opening stock...

The heart of the difference between variable costing and absorption costing for financial accounting is the accounting for fixed manufacturing costs. All variable manufacturing costs are inventoriable product costs under the both methods. But fixed manufacturing costs are treated differently. Under variable costing,...

What Is Product Cost ? The cost of making a product is called product cost. Product cost is also known as manufacturing cost.Product costs are taken for inventory valuation. Therefore, product costs are sometimes called the inventorial costs. Inventorial costs are all costs of a product that are regarded as assets when...

Variable Costing variable costing is a method of inventory costing in which all variable manufacturing costs are included as inventoriable costs. In variable costing method, all fixed manufacturing costs are excluded from inventoriable costs. They are instead treated as costs of the period in which they are incurred....

Services or activities, having public utilities, need to determine cost of the services or activities offered. A public utility undertaking, offering services to a community rather than manufacturing a tangible product, uses service costing. The service or function, having public utilities, covers water supply service,...

Meaning Of Defective Units The faulty or substandard finished goods or spoilage are called defective units. Defective goods arise due to sub-standard materials, bad supervision, bad planning of production, poor workmanship, inadequate equipment, careless inspection etc. Defective units can be rectified and turned out...

Meaning Of Spoilage Badly damaged material in a manufacturing operation is spoilage. The spoil /damaged material during processing is called spoilage. Spoilage material is not possible to be rectified economically and put for further processing. Thus, such a spoilage material is taken out of the process and disposed...

Meaning Of Scrap Scrap is a left over or residue after a product has been manufactured. The remnant of material resulting after producing the product is scrap. Thus, the residue of raw material incidentally realized in course of manufacturing goods is called scrap. Low quality raw material or abnormal size of raw material...

Meaning Of Waste The loss of raw materials in processing is waste. Waste has no receivable value. It is a quantity loss of material in the process of producing goods. Waste is brought into record by comparing the input quantity with the output quantity. Waste may occur due to shrinkage, smoke, weight loss and evaporation...

By-product accounting depends on the circumstances under which it is realized The following could be the possible circumstances of a by-product realization. * At the separation point * After further processing Based on the possible circumstances for the by-product realization, the following are the main types of by-product...

Salable or usable products having a relatively low value incidentally realized in the course of manufacturing the main product is called by-product. In many instances, there may be several joint products and several by-products depending upon the nature of the input raw materials being processed. A by-product is an outcome...

Following methods are used for apportioning joint costs to joint products: 1. Average Unit Cost Method This method is highly effective where the output of individual products can be expressed in some common unit. Under average unit cost method, each unit of output shares a proportionate amount of joint cost. This method...

Two or more consumable or usable products having a similar economic value separated in the course of a manufacturing process are called joint products. Some joint products need further manufacturing operations to realize the final products. It is , therefore, essential to determine the cost 0f individual products. End...

What Is Inter-Process Profit ? The profit associated with the transfer of goods from one process to another process is called inter-process profit. Normally, finished goods are transferred to the immediate next process at the cost of production basis. In some process industries, finished goods are transfer to the immediate...

Meaning Of Abnormal Gain More output over the expected or normal output realized is called an abnormal gain. Abnormal gain arises because of an abnormal effective in the use of raw material or efficiency in performance so it is known as abnormal effective. Abnormal gain reduces the normal loss quantity so it comes in...

The loss that occurs in the course of converting an input raw material into finished products is known as process loss. Such a loss may occur because of the nature of the raw materials. This type of loss occurs in terms of the difference between the input quantity and the output quantity. The difference between the input...

A separate account is prepared for each stage of a manufacturing process or operation. The cost incurred at each manufacturing stage, process or operation are charged separately. A separate process account prepared for each process is debited by the costs incurred in that process. Cost of materials, direct labor, direct...

Following are the main differences between process costing and job costing: 1. Applicability Process costing is applied to ascertain the cost of standardized products produced in mass. So, naturally, materials, labor and other facilities remain indifferent. Job costing is applied to ascertain the cost of a specific...

Process costing is used by processing or manufacturing companies to ascertain the cost of production at each stage or process of production. It helps to evaluate the efficiency and control unnecessary  costs. Separate cost center, transfer of output to next process, mass volume of production, difficult to differentiate...

Following are the main users of process costing: * Manufacturing industries such as flour mills, iron and steel, paper, rubber, textile,soap, food products etc. including assembly type industries lie typewriters, automobiles, household electrical appliances such as washing machines, refrigerators, electric irons, radios,...

What Is Process Costing ? The method of cost accounting used by processing firms is called process costing system. For each process function, product costs lie direct materials, direct labor and factory overheads are accumulated under process costing method. For instance, the processing of a herbal medicine includes herbs...

Work-in-progress value = Work certified value + Work uncertified value The volume of the work done by the contractor under the terms of a contract to date is called work-in-progress. Work-in-progress value makes it possible for the contractor to check the time schedule to complete the contract work. The work progress...

A contract account obviously maintains utility to report the total work cost to date. The unique nature of contract account is that it reports costs taking individual contracts as cost centers or units and costs are determined similarly. This type of unique nature provides an opportunity to ascertain the total work cost...

The need of a contract account is obvious as the financial accounting does not report distinctly the cost of a contract and the profit earned from the contract work. Under contract costing, a separate contract account is prepared for each contract work undertaken. A contract account so prepared separately provides an...

The costing method used to determine the total cost of construction work is known as contract costing. Following are the main features of contract costing: 1. Separate Account A separate contract account is maintained for each contract. 2. Cost Unit Each contract is considered as a cost unit. 3. Contract Site A...

What Is Contract Costing ? Some firms such as builders, construction contractors, civil engineering firms, construction and mechanical engineering firms are engaged in construction works such as construction of buildings, bridges, roads and so on. A firm engaged in the construction works requires to know the total cost...

Following are the main differences between job and contract costing: * A job is normally carried out inside a factory. A contract work is done at a site away from the factory. * Number of jobs at any time may be more. Comparatively, the number of the pieces of contract work may be fewer. * Direct charging of expenses...

Advantages Of Job Order Costing * Job order costing offers a detailed analysis of the costs of materials, labor cost and overheads by functions and nature. * Job order costing makes it possible to appraise the profitability of a job. * Job order costing facilitates the estimation of the cost of a similar job. * Job...