IPCC-Cost Accounting & Financial Management Vol. I

640 Pages·2008·3.32 MB·English

3
P
APER

C A
OST CCOUNTING AND

F M
INANCIAL ANAGEMENT

Part (cid:150) 1 : Cost Accounting

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
This study material has been prepared by the faculty of the Board of Studies. The
objective of the study material is to provide teaching material to the students to enable
them to obtain knowledge and skills in the subject. Students should also supplement their
study by reference to the recommended text books. In case students need any
clarifications or have any suggestions to make for further improvement of the material
contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for
the students. However, the study material has not been specifically discussed by the
Council of the Institute or any of its Committees and the views expressed herein may not
be taken to necessarily represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in retrieval system, or
transmitted, in any form, or by any means, Electronic, Mechanical, photocopying, recording, or
otherwise, without prior permission in writing from the publisher.
Website : www.icai.org
E-mail : [email protected]
ISBN No. : 978-81-8441-132-4
Published by : The Publication Department on behalf of CA. R. Devarajan,
Additional Director of Studies (SG), The Institute of Chartered
Accountants of India, A-94/4, Sector (cid:150)58, Noida-201 301, India.
Typeset and designed at Board of Studies.
Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003.
November, 2008/10,000 Copies
PREFACE
The recent surge in globalisation and the massive cross border flow of capital has increased
the significance of Cost Accounting and Financial Management for management and control
purposes. The study of these two important subjects opens new opportunities for Chartered
Accountancy students. It provides them with an opportunity to draw upon previous
experiences and education to apply various business concepts and analytical tools to complex
problems and issues in organizational settings.
This study material provides the basic concepts, theories and techniques relating to Cost
Accounting and Financial Management and aims to develop the students(cid:146) ability in
understanding the different concepts and their application in the real life situations.
The study material is divided into two parts. Part I relates to Cost Accounting and Part II deals
with Financial Management. The Cost Accounting portion has ten chapters having an in depth
analysis of concepts relating to Material, Labour, Overheads and other important costing
techniques. Standard Costing, Marginal Costing and Budgeting have been included in the
syllabus at an introductory level. The syllabus has been designed in such a way that it helps
students understand the traditional concepts, their applications, advantages and
disadvantages. Contemporary changes in the subject shall be dealt with in the Final stage .
The portion on Financial Management is divided into seven chapters. Chapter 1 describes the
scope, objectives and importance of financial management and its relationship with other
disciplines. Time value of money is discussed in Chapter 2. Chapter 3 explains various tools
and techniques of financial management namely Ratio Analysis and Cash Flow Analysis and
their application in practical situations. Chapters 4, 6 and 7 deal with the theories, concepts
and assumptions underlying financial decisions, namely, Financing, Investment and Working
Capital Management. Chapter 5 describes the various Sources of Finance available to
business enterprises to cater their different types of requirements.
The entire study material has been written in a simple language. A number of self-examination
questions are given at the end of each chapter for practice by students. There are also a
number of illustrations in each chapter to help students to have a better grasp of the subjects.
The concerned faculties members of Board of Studies Dr. S.Z.H. Zaidi, Dr. N.N. Sengupta, CA
Ashish Gupta, CA Vikas Kumar, Ms. Anu have put their best efforts in making this study
material lucid and students friendly.
S
YLLABUS
PAPER (cid:150) 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
(One paper ─ Three hours (cid:150) 100 Marks)
Level of Knowledge: Working knowledge

PART (cid:150) I : COST ACCOUNTING (50 MARKS)
Objectives:
(a) To understand the basic concepts and processes used to determine product costs,
(b) To be able to interpret cost accounting statements,
(c) To be able to analyse and evaluate information for cost ascertainment, planning, control
and decision making, and
(d) To be able to solve simple cases.
Contents
1. Introduction to Cost Accounting
(a) Objectives and scope of Cost Accounting
(b) Cost centres and Cost units
(c) Cost classification for stock valuation, Profit measurement, Decision making and
control
(d) Coding systems
(e) Elements of Cost
(f) Cost behaviour pattern, Separating the components of semi-variable costs
(g) Installation of a Costing system
(h) Relationship of Cost Accounting, Financial Accounting, Management Accounting
and Financial Management.
2. Cost Ascertainment
(a) Material Cost
(i) Procurement procedures(cid:151) Store procedures and documentation in respect of
receipts and issue of stock, Stock verification
(ii) Inventory control (cid:151)Techniques of fixing of minimum, maximum and reorder
levels, Economic Order Quantity, ABC classification; Stocktaking and
perpetual inventory
(iii) Inventory accounting
(iv) Consumption (cid:151) Identification with products of cost centres, Basis for
consumption entries in financial accounts, Monitoring consumption.
(b) Employee Cost
(i) Attendance and payroll procedures, Overview of statutory requirements,
Overtime, Idle time and Incentives
(ii) Labour turnover
(iii) Utilisation of labour, Direct and indirect labour, Charging of labour cost,
Identifying labour hours with work orders or batches or capital jobs
(iv) Efficiency rating procedures
(v) Remuneration systems and incentive schemes.
(c) Direct Expenses
Sub-contracting (cid:151) Control on material movements, Identification with the main
product or service.
(d) Overheads
(i) Functional analysis (cid:151) Factory, Administration, Selling, Distribution, Research
and Development
Behavioural analysis (cid:151) Fixed, Variable, Semi variable and Step cost
(ii) Factory Overheads (cid:151) Primary distribution and secondary distribution, Criteria
for choosing suitable basis for allotment, Capacity cost adjustments, Fixed
absorption rates for absorbing overheads to products or services
(iii) Administration overheads (cid:151) Method of allocation to cost centres or products
(iv) Selling and distribution overheads (cid:151) Analysis and absorption of the expenses
in products/customers, impact of marketing strategies, Cost effectiveness of
various methods of sales promotion.
3. Cost Book-keeping
Cost Ledgers(cid:151)Non-integrated accounts, Integrated accounts, Reconciliation of cost and
financial accounts.
4. Costing Systems
(a) Job Costing
Job cost cards and databases, Collecting direct costs of each job, Attributing
overhead costs to jobs, Applications of job costing.
(b) Batch Costing
(c) Contract Costing
Progress payments, Retention money, Escalation clause, Contract accounts,
Accounting for material, Accounting for plant used in a contract, Contract profit and
Balance sheet entries.
(d) Process Costing
Double entry book keeping, Process loss, Abnormal gains and losses, Equivalent
units, Inter-process profit, Joint products and by products.
(e) Operating Costing System
5. Introduction to Marginal Costing
Marginal costing compared with absorption costing, Contribution, Breakeven analysis
and profit volume graph.
6. Introduction to Standard Costing
Various types of standards, Setting of standards, Basic concepts of material and Labour
standards and variance analysis.
7. Budget and Budgetary Control
The budget manual, preparation and monitoring procedures, budget variances, flexible
budget, preparation of functional budget for operating and non operating functions, cash
budget, master budget, principal budget factors.

PART (cid:150) II : FINANCIAL MANAGEMENT (50 MARKS)
Objectives:
(a) To develop ability to analyse and interpret various tools of financial analysis and
planning,
(b) To gain knowledge of management and financing of working capital,
(c) To understand concepts relating to financing and investment decisions, and
(d) To be able to solve simple cases.
Contents
1. Scope and Objectives of Financial Management
(a) Meaning, Importance and Objectives
(b) Conflicts in profit versus value maximisation principle
(c) Role of Chief Financial Officer.
2. Time Value of Money
Compounding and Discounting techniques(cid:151) Concepts of Annuity and Perpetuity.
3. Financial Analysis and Planning
(a) Ratio Analysis for performance evaluation and financial health
(b) Application of Ratio Analysis in decision making
(c) Analysis of Cash Flow Statement.
4. Financing Decisions
(a) Cost of Capital (cid:151) Weighted average cost of capital and Marginal cost of capital
(b) Capital Structure decisions (cid:151) Capital structure patterns, Designing optimum capital
structure, Constraints, Various capital structure theories
(c) Business Risk and Financial Risk (cid:151) Operating and financial leverage, Trading on
Equity.
5. Types of Financing
(a) Different sources of finance
(b) Project financing (cid:151) Intermediate and long term financing
(c) Negotiating term loans with banks and financial institutions and appraisal thereof
(d) Introduction to lease financing
(e) Venture capital finance.
6. Investment Decisions
(a) Purpose, Objective, Process
(b) Understanding different types of projects
(c) Techniques of Decision making: Non-discounted and Discounted Cash flow
Approaches (cid:151) Payback Period method, Accounting Rate of Return, Net Present
Value, Internal Rate of Return, Modified Internal Rate of Return, Discounted
Payback Period and Profitability Index
(d) Ranking of competing projects, Ranking of projects with unequal lives.
7. Management of Working Capital
(a) Working capital policies
(b) Funds flow analysis
(c) Inventory management
(d) Receivables management
(e) Payables management
(f) Management of cash and marketable securities
(g) Financing of working capital.
CONTENTS
COST ACCOUNTING
CHAPTER 1 (cid:150) BASIC CONCEPTS ...
1.1 Evolution of Cost Accounting .........................................................................1.1
1.2 Cost Accounting and Inventory Valuation .......................................................1.2
1.3 Objectives of Cost Accounting .......................................................................1.3
1.4 Importance of Cost Accounting to Business Concern.......................................1.5
1.5 Various Reports provided by Cost Accounting Department ..............................1.6
1.6 Advantages of a Cost Accounting system ....(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)1.7
1.7 Essential Factors for Installing a Cost Accounting System ...(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)..1.8
1.8 Relationship between Cost Accounting, Financial Accounting
Management Accounting and Financial Management ....(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133). 1.9
1.9 Cost concepts and Terms ..................(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133).1.12
1.10 Elements of cost.....................................................................(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)(cid:133)..1.16
1.11 Classification of costs.................................................................................. 1.17
1.12 Coding systems........................................................................................... 1.25
1.13 Types of Costing......................................................................................... 1.26
1.14 Methods of Costing...................................................................................... 1.27
1.15 Direct expenses .......................................................................................... 1.28
1.16 Self Examination Questions......................................................................... 1.30
CHAPTER 2 (cid:150) MATERIAL
2.1 Introduction ..................................................................................................2.1
2.2 Material control ............................................................................................2.2
2.3 Material procurement procedure.....................................................................2.4
2.4 Material Issue Procedure............................................................................. 2.10.....
2.5 Material storage.......................................................................................... 2.14
2.6 Store Record............................................................................................... 2.16
2.7 Inventory control.......................................................................................... 2.19
2.8 Valuation of material receipts....................................................................... 2.45
2.9 Valuation of material issues......................................................................... 2.48
2.10 Valuation of returns and shortages............................................................... 2.65
2.11 Selection of Pricing Method.......................................................................... 2.65
2.12 Treatment of Normal and Abnormal loss of material ...................................... 2.66
2.13 Accounting and control of waste, scrap, spoilage & defective ........................ 2.66
2.14 Consumption of material.............................................................................. 2.72
2.15 Miscellaneous illustration............................................................................. 2.74
2.16 Self examination questions.......................................................................... 2.82
CHAPTER 3 (cid:150) LABOUR ...
3.1 Introduction ..................................................................................................3.1
3.2 Labour cost control........................................................................................3.1
3.3 Attendance & payroll procedures ...................................................................3.3
3.4 Idle time...................................................................................................... 3.11
3.5 Overtime..................................................................................................... 3.13
3.6 Labour turnover........................................................................................... 3.18
3.7 Incentive system ......................................................................................... 3.25
3.8 Labour utilisation......................................................................................... 3.28
3.9 System of wage payment and incentive ...................................................... 3.31
3.10 Absorption of wages.................................................................................... 3.67
3.11 Efficiency rating procedures ........................................................................ 3.74
3.12 Miscellaneous Illustration............................................................................. 3.76
3.13 Self Examination Questions......................................................................... 3.76
CHAPTER 4 (cid:150) OVERHEADS
4.1 Introduction ..................................................................................................4.1....
4.2 Classification of Overheads............................................................................4.2
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