CLass 12 Account Theories Note: Concept/Object/Advantage/limitation of Cost and Financial Accounting,etc: (NEB Course)

Class 12 Account Note:

        In this Note You Will Learn: 

 

• Concept/Object/Advantage/limitation of Cost and Financial Accounting

• Differences between cost accounting and  financial accounting

• Classification of cost

• Accounting for materials

• Advantages/Disadvantages of centralized purchasing/decentralised purchasing

• Store- Keeping: Objectives

• Classification/Codification of Materials /Advantages

• Statement used in stores handling

• Perpetual Inventory System

• Characteristics of wage payment

• Price Rate System, etc

 

Concept of cost Accounting

Cost means the expenditure incurred in the production and accounting means to maintain the record of those expenditure as well as income in a systematic way. Cost accounting is the branch of accounting that maintain the complete records of cost and provides require information according to the cost objectives.

It determines the cost by collecting classifying and allocating the cost as per the cost objectives such as product or service or process or department or job order etc. It also provides the detailed information regarding the cost of production that facilitates cost control and other decision making process.

Objectives of cost accounting

• To help in determining cost of production.
• To help in indicating efficiency of management.

• To help in determination of selling price of a product.

• To have comparative analysis of the cost.
• To maintain control over cost.

Advantage of cost accounting.

• Helpful to determine the selling price of a product.
• Helpful to guide future production policies.

• Useful to determine idle time cost.

• Helpful to minimize the cost.
• Helpful to decision making.

Limitation of cost accounting

• Lack of uniformity.
• More formalities.
• Costlier / Expensive.

Financial Accounting

         Financial accounting is that branch of accounting which facilitates the preparation of financial statement based on the record of financial transaction occurred in the business maintained in a systematic to the various user for taking various decisions regarding operational  and  financial performance of the business form .

Objectives of financial accounting.

• To Maintain the proper records of business transactions
• To calculate profit and loss.

• To depict the financial position.

• To communicate the financial result
• To help to determine the tax liability.

Limitation of financial accounting

• Based on historical information.
• Lack of mechanism for control over cost,
• Financial accounts deals only with the overall profitability of the business concern.
• No assistance in planning and decision making.

• Differences between cost accounting and  financial accounting

S.N..	cost accounting	financial accounting
i.	It is mainly use   by manufacturing concern .	It is maintained in almost all types of business concern.
ii.	It’s objectives is to determine the cost of production and   facilitates for cost controlling and decision making.	Its objective is to determine the profit / loss and financial position of the firm at the end of   accounting period.
iiii	Cost accounting is informal and internal in nature and therefore no acts of the country governed for its preparation.	Final accounting   is governed by company is act, income tax act, finance act and other rules for the   country.
iv	The final output is in the form of cost sheet.	The final output is in   the form of profit and loss a/c and balance sheet.
v	Profit maximization is the objective.	Profit/ loss ascertainment is the objective.

Classification of cost

1. Nature of elements

a.Material

i. Direct      ii) Indirect

b. Labour

i. Direct          ii) Indirect

c. Expenses

i. Direct ii) Indirect

2. On the base of function

1. Factory cost
2. Administrative cost .
3. Selling and distribution cost .

Variability / Behaviour

1. Fixed cost
2. Variable cost
3. Semi- variable cost

Controllability

1. Controllable
2. Uncontrollable

On the basis of Nature of Element

a. Materials

1. Direct materials  —   Those material which can be easily identify in the finish product is called direct material. In other words, direct material means for those expenses which are incurred in the materials that can  be directly associated with the unit of finished goods easily .Such as leather in shoe , timber in furniture, sugarcane in sugar etc.
2. Indirect materials —Those material which cannot be identify in the finished product is called indirect materials. In other words, those expenses which are incurred in the material that do not have separate identification in the finish product are called indirect material . Such as nails use in furniture ,oil and Mobil  use in operating machine etc. 

b. Labour / wages / cost

1. Direct labour —    Direct labour cost consists of wages paid to the workers who are directly engage in converting raw material into finish products.
2. Indirect labour cost / wages —   The wage paid to the workers who help in the production process indirectly is known as indirect labour cost. Supervision , material handling , maintains tools setting etc.are indirect labour. Such labour cost incurred the product is not easily identifiable and measurable .

c. Expenses

1. Direct expenses —  All the expenses incurred for other than direct material and labour that can be directly involve to any particular product or production process or job are known as direct expenses for  the expenses relating to machinery and equipment hire for any particular job, payment made for the supervisor or  specialist or advise or appointed for only particular  job and  transportation expenses incurred  for them .
2. Indirect expenses —    All the expenses other than indirect materials and indirect labour that cannot be directly attributed to any particular cost center or cost unit are called indirect expenses. The expenses cannot be allotted for any particular job directly.

• Rent, tax ,insurance, deprecation expenses , expenses relating to labour welfare ,training expenses  on new  labourous etc are the example of indirect expenses.

2. On the basis of function

a. Factory cost/production cost/work cost —   All the cost which are incurred in the factory for processing of the material into finished goods are called production factory cost e.g. power and fuel , salary of production manager , depreciation of factory building etc are the example of factory cost.

b. Administrative cost / office cost —  All those cost incurred in the office for preparation of plan and policies formulation and controlling of it are called administrative or office cost. Legal expenses, salary  of office staff , printing and stationery, depreciation of office building etc are example of office / administrative cost.

c. Selling and distribution cost —  All the cost incurred on creating demand , advertisement , selling and distribution of goods or services are called selling and distribution cost. It includes sales commission, warehouse rent, sales man salaries, travelling expenses etc.

3. On the basis of variability

a. Fixed cost —   Fixed cost are commonly described as those which remain fixed in total with increase or  decrease in the volume of output or productive activity for given period of time . For ex.  Rent, insurance of factory building, depreciation on fixed assets etc.

b. Variable cost —    The cost which remain changeable according to the change in level or activity of production is called variable cost. When the level of production increase the total amount of variable cost also increase and vice versa. If the production level is zero, the total amount of variable cost also remains to zero.Direct material cost, direct labour cost and direct expenses are the example of variable cost.

c. Semi variable cost —   Those cost which remain fixed upto certain level of production or do not tend to change proportionately and vary to the cost beyond that level are called semi-variable cost .These cost are called semi-fixed cost or semi-variable cost .Electricity, water and  telephone  bill are the example of semi-variable cost. Such cost are partly fixed and partly variable .The total of semi-variable cost does not increase proportionately.

4. On the basis of controllability

a. Controllable cost —    Controllable cost are those which can be influenced by the action of a  specified member of a cost centre are known as controllable cost. In  other words , the cost which can be control with the effort management is known as controllable cost. All direct material cost ,direct labour cost and direct expenses are the example of controllable cost.

b. Uncontrollable cost —    Those cost which cannot be influenced by  any action  of specified member of a cost centre are known as uncontrollable cost .Such cost are not within the control of management  most of the fixed cost are uncontrollable cost .For eg. Rent of building, manager salary etc.

        

Objectives/Needs/Essential / Required of material control

1. It avoids the over stocking of material which locks up unnecessary capital.
2. It helps to minimize the wastage or losses of materials by fire ,theft , leakage etc.
3. It helps to store the materials which mean that they can provide minimum of handling time and cost.

                                      

Accounting for materials

• Material control  — Material  refers   to the physical commodities, which are used in the factory in order to make the final product .It includes raw material consumable stores and  stores and sub- assembles (parts) etc . Material may be direct or indirect .Material control system is the system  use to avoid excessive  investment in stock, to regulate the raw materials for smooth flow of production and  to reduce unnecessary consumption of materials. It helps to reduce under stocking and over stocking of materials and insure the smooth flow of production function.

Needs for material control :

a. Availability of material  – There should a continuous  availability   of materials in the factory so that production may not be held up for what a any material.

b. Minimum investment in material – there should be no excessive investment in stock. Capital should not be blocked in material by over stocking,.

c. Economy in price – The material should  be purchased at the most economical rates without compromising on the quality which is needed.

d. Minimum wastages –   There should be minimum possible wastage of material  while  there are been store in the warehouse  by the store keeper or huge in the factory by the workers

e. Source of information – Information about availability of material should be made continuously available to the management, so that planning of  production may be done.

 

Essentials/ Importance of material control

1. There should be proper co-operation and coordination among the departments involve in purchasing, receiving and inspection, storage, sales etc.
2. There should be proper scheduling of material.
3. A good method of classification and codification (code system) of material should be followed.
4. There should be proper inspection of materials when they are receiving department.
5. Purchasing of material should be centralized under expert and trained personnel .
6. The storage of material should be well-planned to avoid lasses from theft, fire and damage.
7. Issue of material should be on the basis of requisition.

Purchase Control

Purchase control refers to the purchase of materials of right quality, at right price in right time. Purchase control ovoid purchasing of unnecessary of materials is, unnecessary quality and quantity of materials and purchase at reasonable price.

1. centralized purchasing
2. Decentralized purchasing

1.  Centralized Purchasing – The purchase of all the materials requirement of an organization by the central purchase department of the enterprise the in one place. The central purchase department purchase materials at a time in bulk quantity and provides delivery to different production units on the basis of requirement. In this system, the function of purchase is planned, processed and controlled by the purchase manager of central office.

 Advantages of centralized purchasing

1. i) Bulk purchases can be made at a cheaper rate and at a good trade discount.
2. ii) Quality of the materials can be maintained through the specialized knowledge of personnel.
3. iii) Transportation cost can be reduced.
4. All the records relating to materials and stores can be kept in one central place.
5. Better coordination and cooperation with other department

Disadvantages of centralized purchasing

1. There may be delay in placing the purchase order and receiving the materials.
2.  The advantage of buying materials from local suppliers totally lost. his may create problem for organization in emergent situation.
3. Centralised purchasing makes unnecessary establishment of a separate department with huge establishment cost.
4. The replacement of defective materials also take time which is harmful to the smooth production process.

Decentralised purchasing- Under this System, materials purchases will be made at the various authorize branches or sub-units of the organization. In this system of purchase the authority of purchase of materials or stores has been delegated to responsible employees of branches. They have given right to purchase materials from local supplies on the basis of their requirement.

 Advantages of decentralised purchasing

i) Minimum investment in working capital.

ii) Possibility of favourable terms and options on purchasing

iii.Ensures timely delivery of goods.

iv. Ensures uniform flow of materials.

Disadvantage of decentralized purchasing

1. Lack of benefits of bulk purchase.
2. May not possible for material control.
3. Possibility of over-under purchase.

iv) Lack of coordination among purchasing units.

v) Lack of professional purchase executives

Store- Keeping – Store keeping is the process of storing the materials in proper manner after receiving from supplier till the Issue to production department. It is the process of inventory management and control. When the materials are received from the suppliers as per the purchase order, it requires to keep record in store k ledger with materials inspection report.

Then the store accounting system certified it and pass the invoice for payment. After the received of material, the quantity, quality and price as per invoice is observed and the materials are stored properly.

Objectives of Store- Keeping

1. Receiving and issuing materials smoothly.
2. Maintaining store at desired level.
3. Avoid over and under Stocking.
4. Keep up to date store record and minimize storage cost.

Store Keeper

 Store keeper is an incharge of store department and responsible for all the activities of store. As a formal authority he is accountable to handle all the materials movement both inflow and outflow from store besides, he is responsible to manage materials in store in systematic and scientific manner.

Classification and codification of Materials

Classification is the process of grouping of each material either on the basis of their nature or on the components, spears and tools etc. for the purpose of identification and convenience in the storage and issue.

Codification is the procedure for assigning symbols for each item in accordance with the proper arrangement. Thus, besides its name and item of materials is known by the symbol allotted to it. There are three important methods of codification of material; Alphabetical, Numeric and Alphanumeric.

  Advantage of Classification and Codification

1. It helps quick identification of material.
2. It helps to maintain secrecy of materials.
3. It helps to save time in material handling.
4. It helps to have proper material control.
5. It avoids duplication due to multiple names.

 

 Statement used in stores handling

Bin Card–

This refers to a card which shows quantity details of received, issue and balance of materials. A bin card is used by store keeper to keep quantitative record for all items of materials and goods in store. This card shows the maximum level, minimum level and re-order level of the material and thus helps the Store keeper to control materials. Bin is a place where materials have been kept.

 Store Ledger

Store ledger is maintained in costing department and kept in cost section: It shows both quantitative wise and details wise of received, issue and balance of material. It gives physical as well as value information. This is use as a subsidiary ledger. This ledger provides the information for the pricing of the material issue and monetary value at any time and each item of store.

 Perpetual Inventory System

Perpetual inventory system is a technique of controlling stock items by maintaining store records in a manner that the stock balance at any point of time, are readily (quickly ) available.  Under this system, slock balance are calculated after each transaction received and Issue.

Advantages of perpetual inventory System

1. It helps to have store records accurate and uptodate.
2. It helps to discover the errors and shortage in stock.
3. It helps to maintain control investment in stores.
4. It helps to maintain a system of internal check in store operation.

Accounting for Labour

Systems of wage payment

 Wage is the remuneration or compensation paid to the workers in return of their contribution. Wage can be based either on time contributed or units produce by the workers.

Characteristics of wage payment

1. It should be beneficial to the both workers and organisation.
2. It should be simple and easily understandable to the workers.
3. It should be flexible on the basis of time and situation.
4. It should minimize absenteeism, late attendance and labour turnover.
5. It should increase morale of the employees and should encourage productivity.

1 Time rate system and wage payment

Under this system of wage payment, the wage is paid to the workers according to the time spent i.e. per day, week or month not on the basis of quantity of production.

Formula

Total wages earning = Total time taken x Wages rate.

Advantages of time rate system

1. Simple and easy to understand and  
2. Standard of quality is maintain.
3. There is no discrimination among the workers.
4. It is benefited by average and below average workers.
5. It is preferred by trade union.

Advantages of time rate system

1. The time rate system makes no distinction between efficient and inefficient workers.
2. There is lack of incentives to the workers.
3. Constant supervision is needed to reduce idle time. Thus, it increase labour cost and cost of production.
4. Workers will get payment for idle time because they are to get wages for the time spent.

Piece Rate System

 Under piece rate system of wage Payment the labour receive the payment on the basis of work performed by them or units produced by them not according to the time spent.

Formula

Total wages earning = Total production units x Wages rate per unit.

Advantages of piece rate system

1. The rate of output is increased.
2. The System of Works becomes an incentives to workers.
3. No necessary .of high supervision.
4. Tools and machinery are handle with care.
5. No place for idle time.

Disadvantages of piece rate system

1. Workers are always in hurry as a result accidents may happens.
2. Inefficient workers will be thrown out.
3. Health of workers sufferer because of high speed work
4. Chances of over production than demand.

 

  Prepared by: Lecturer: Hom Nath Paudyal (MBS/BED TU)