E2E3 Telecom Factory. Chapter No 17 COSTING OF PRODUCTS/ BALANCE SHEET/ PROFIT & LOSS ACCOUNT

Transcription

1 E2E3 Telecom Factory Chapter No 17 COSTING OF PRODUCTS/ BALANCE SHEET/ PROFIT & LOSS ACCOUNT

2 COSTING OF PRODUCTS 1. COSTING:- Costing is a systematic procedure for determining the unit cost of output produced or service rendered. It provides for an analysis of expenditure which enables the management to know not only the total cost but also its constituents. 2. OBJECTS OF COSTING:- To ascertain the cost of products and/or services. To control costs. To provide guidelines for management policy. 3. Advantages of Costing:- Profitable and unprofitable activities are disclosed. Management can take steps to eliminate or to reduce those activities from which little or no profit is obtained. Management can change the method of production in order to render activities more profitable. Costing provides such informations on which estimates/tenders may be based. Price may be adjusted to meet market conditions. Costing reveals losses or inefficiencies such as idle time, excessive spoilage or scrap, under utilization of Plant & Machinery etc. It helps to identify the exact cause of decrease or increase in the profit or loss. Costing guides future production policies. It provides a perpetual inventory which helps in the preparation of interim Profit & Loss Account and Balance Sheet without stock taking. It helps in controlling the cost with the application of standard costing and budgetary control. Cost comparison also helps in cost control. It helps the Management in taking vital decisions, like:- (a) Whether it would be more profitable to purchase a component or to continue its production. (b) Comparative cost of different types of a machine or methods of manufacture and the profitability of the proposed capital expenditure. (c) Whether to accept orders below the cost

3 4. COST ACCOUNTING & FINANCIAL ACCOUNTING:- The process of accounting for cost which begins with the recording of income and expenditure and ends with the preparation of periodical statements and reports for ascertaining and controlling cost. The terminology as published by the Institute of Cost & Management Accountants, London, defines Cost Accountancy as the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control, ascertainment of cost of product and its profitability. Again, cost accounting is defined as the process of accounting for cost from the point at which expenditure incurred for a product or committed to the establishment of its ultimate relationship with cost centres and cost units. Let us also understand the difference between the Financial Accounting and Cost Accounting. Financial Accounting safeguards the interest of the business and its shareholders by providing suitable information to the shareholders and prospective creditors and the Government. In this case, the accounts are kept to meet the provisions of the Companies Act to present the correct figures to Income Tax, Excise and other authorities. These accounts show how gainfully the resources of the business were employed. But do not give clear indication to the Management as to what should be done in a particular situation. On the contrary, Cost Accounting renders information for the guidance of the Management for proper planning, operation, control and decision making. For example, while Financial Accounts show whether materials purchased have been correctly accounted and paid or whether there has been any loss during storage and whether the opening and closing balance of stock are correct, on the other hand Cost Accounting reveals matters such as whether the quantity purchased was reasonable, whether the purchase was at all necessary, whether an item should be manufactured instead of purchase, whether the quantity of the material utilized for production was reasonable, whether there was any loss or wastage during production. So Financial Accounting system is the post-mortem analysis macroscopically whereas Cost Accounting system starts from the very concept of incurring an expenditure for any production microscopically. As a result, Cost Accounting is the science for determining any cost of product in the changing scenario

4 5. ELEMENTS OF COSTS:- The cost of a job of manufacture comprises:- (a) (b) (c) Direct Materials viz., Materials which form part of the finished product and are drawn against Production Work Orders. Direct Labour viz., Labour identifiable with the particular job or product or process. Overhead viz., consumable stores and supplies and auxiliary services which are incurred in general and cannot conveniently be identified with any particular job or process. 5.1 WORK ORDER:- Orders for manufacture of articles (products) in Telecom Factories are mainly received from the various BSNL Telecom Circles and their SSAs. On receipt of the demand, the Planning Section of the Factory shall draw up an estimate for the quantity of materials. The valuation of the material in the estimate shall be made at the current rate list based on average rate and labour hours at a pre-determined quarterly flat rate per hour in each shop or production centre. The estimate is to be sanctioned by the Competent Authority. No job shall be undertaken in the shops unless a Work Order No. have been allotted to it. The scheme of Work Orders is briefly, as under:- (a) Expense Orders Series 001 to 1500 The expenditure which forms part of the overhead of the Factory shall be booked against this series. (b) Experimental Work Orders Series 1501 to 1800 The expenditure on experimental works of a general nature undertaken for the benefit of the Factory shall be booked against these Work Orders. No overhead shall be levied on these Work Orders. The total charges for these series for any accounting period shall be treated as an item of works overhead. (c) Shop Orders Series 1801 to 1850 The expenditure which is to be distributed to a number of other jobs shall be initially booked against Shop Orders

5 (d) Farmed out Work Orders Series The expenditure on work entrusted to outside agencies for execution on behalf of the Factory shall be charged against these Work Orders. The booking of fabrication charges should be for labour without any overhead charges to the Work Orders. The Head of Account in the bill will be Labour without Overhead. The total charges on these Work Orders shall ultimately be transferred or distributed to the respective Production Work Orders. (e) Production Work Orders Series The production of the Factories comprises of the following:- (i) Articles manufactured against requisitions received from the BSNL Telecom Circles and their SSAs. (ii) Miscellaneous works done for other branches of the department through Standing Work Orders. (iii) Other miscellaneous jobs not falling in any other categories. (iv) Articles manufactured against Sale Orders. (v) Capital Works. (vi) Components manufactured and issued to Factory Stores. The different Work Order numbers are allotted to the above categories of which the details are given under Rule of F.H.B. Volume-III, Part-III. 5.2 MATERIAL:- All stores required for executing work in the Factory shall be drawn from the Factory Stores. The stock of Factory Stores is organized into three Godowns namely A,B and C. After issue of materials against Materials Requisition and acceptance of returned materials through Material Credit Notes, the Storekeeper shall send one copy of the Requisition/Credit Note direct to the Stores Section and another to the Costing Section through the concerned Shop PROCESS SCRAPS & BY-PRODUCTS:- Process scraps and by-products arising in the process of manufacture shall not be allowed to accumulate in the Shops but shall be returned to the Storekeeper at a regular monthly interval through the Material Credit Notes. The process scraps shall be re-taken to stock at the rates fixed from time to time by pro contra credit to the relevant Work Order

6 5.3 LABOUR:- Labour accounting involves:- (a) Time keeping viz., recording the workers attendance time including Overtime. (b) Time booking i.e. booking the workers attendance time to the individual jobs they were engaged on and (c) Determining the total time expended and the money value thereof allocable to individual jobs. Workers attendance time including Overtime shall be booked to individual jobs by the Chargeman concerned through a Shop Time Book maintained by him in Form L-1, the folios of which shall be written up in duplicate. It shall be the personal responsibility of the Chargeman to ensure that the booking of time to jobs is made with the utmost accuracy and care. Time spent on productive work shall be booked to a Production Work Orders while time spent on works which aid production but do not themselves form part of production for example, internal transport, maintenance of Workshops assets etc. shall be booked against the appropriate Expense Orders. The Shop Time Book shall be scrutinized by the Shop-Incharge at least once daily and the entries verified and initialed. The concerned JTO/SDE/Sr.SDE the next higher authority also shall conduct frequent surprise checks to ensure that time booking is done correctly. If a worker is engaged on more than one Work Order or Expense Order in the same day, the numbers of all such Orders and the period for which he was so engaged on each shall be recorded in the Shop Time Book but periods of 15 minutes or less shall not be recorded separately against any order. If such rounding off of duration to the nearest quarter of an hour results in a dfference, the same shall be adjusted against the Work Order/ Expense Order on which the Workman was engaged during the largest part of the day. The total hours worked by each worker on all Work Orders and/or Expense Orders for the day and the total hours worked on each Work Order and/or Expense Order by all workers during the same day viz., horizontal and vertical totals shall be struck and reconciled. The duplicate copy of the relevant folio of the Shop Time Book shall then be sent by the Chargeman to the concerned Shop Clerk at the close of each day. The allocation of the time spent by the Workers on Production Work Orders shall be made by the Shop Clerk through a monthly Labour and Overhead - 5 -

7 abstract in Form L-2 and that of the time book to Expense Orders shall be made through an Indirect Labour Summary in Form L-3. The direct labour hours booked and the direct labour and overhead amounts charged to each Production Work Order shall then besent to the Costing Section for transcribed in the Cost Card for the job. The indirect labour hours booked and the indirect labour amount charged to each Expense Orders shall similarly be posted in the relevant Expense Cards. 5.4 OVERHEADS:- Such expenses as are incurred for working of the Factory and are of a general nature and cannot conveniently be identified with a particular Production Work Order shall be treated as Overhead of the Telecom Factories. Overheads shall be grouped into Factory Overheads and Administrative Overhead, the former again being subdivided into Shop Overhead and General Works Overhead. Some items of Overhead expenses are controllable at different levels of Management, while some remain relatively fixed. Items which constitute Shop Overhead, General Works Overhead and Administration Overhead and their susceptibility to control are indicated in the Chart below:- OVERHEAD IN TELECOM FACTORIES FACTORY OVERHEAD ADMINISTRATION OVERHEAD Shop Overhead General Works Overhead 1. Pay & Allowances. 1. Clerical estb.giving 1. Pay & Allcs, of regular super general service to fac- contingencies visory & clerical tory ( P.C.) of Office-(P.C.) staff attached to shops (P.C.) 2. Factory Contg Maintenance & Repair charges of 2. Pensionary Indirect Labour & Plant & Machy charges of Stores (C).serving the Factory as a office & Estb. whole(not Included in shopover- Head)---(P.C.) 3. Maintenance & 3. Depreciation of P&M 3. Stores A/c.Exp. repair charges of serving the factory (P.C.) Plant & Machy.of as a whole (not inthe shop (P.C.) cluded in shop over- head) - 6 -

8 4. Maintenance & 4. Mtce.charges of 4. Control Expenses Repair charges of deptl.motor Vehicles Share of cost of Bldg.occupied by (C) GMF s Office Shop ---(P.C.) (P.C.) 5. Depreciation of 5. Compassionate gratuity. 5. Audit expenses Plant & Machy.in Of D.A.A. S & the shop. W & T.C s Office (P.C.) 6. Depreciation of 6. Amenities to staff 6. Postage Charges Bldg.occupied by etc. -- (C). Shop. 7. Rent & Rates paid 7. Stock Adjustment 7. Stationery & Printto outside agencies Expenses (C) ing for office (C) for space occupied by shops. 8. Pensionary charges 8. Charges for inspection 8. Maintenance & for supervisory and of manufactured Repair Charges clerical staff borne on articles made by QA of office Estb. Regular estb.attached (C). to shops. 9. Govt.contribution 9. Service charges relat- 9. Depreciation of to W.C.P.F./ ing to factory (C) office buildings. B.T.C.P.F. for Workers of the shop. 10. Payment under 10. Stationary & Printing. W.C.Act. 11. Pensionary charges for electrical estb.giving general service to the factory. 12. Expenditure on Experimental Work Order. P.C. ---Partially controllable C --- Controllable. 6. COMPONENTS OF TOTAL COST 6.1 Prime Cost:- It consists of direct material, direct labour and direct expenses. It is also known as basic, first or flat cost. 6.2 Factory Cost:- It comprises prime cost and, in addition, works or factory overheads which include cost of indirect material, indirect labour and indirect factory - 7 -

9 expenses. This cost is also known as Works Cost, Production or Manufacturing Cost. 6.3 Office Cost:- It comprises of factory cost and office and administration overheads. This is also known as Total Cost Of Production. 6.4 Total Cost:- It comprises of cost of production and selling and distribution overheads. It is also termed as Cost Of Sales. 7. METHODS OF COSTING:- Costs are ascertained by Cost Centres or by Cost Units. Cost Centre is defined as a location, person or element of equipment for which cost may be ascertained and used for the purpose of Cost Control. Basically there are two systems of costing viz., Job Costing and Process Costing. Job Costing:- This method of costing is suitable when it is required to obtain the cost of a job, or a specific order or a batch of finished products. Process Costing:- Process Costing is employed in Industries where a continuous process of manufacturing is carried out. 8. MARGINAL COSTING:- Marginal Costing is not a system of cost ascertainment on the same lines as job costing or process costing. It is a special technique which presents management with information enabling it to study the effect on profits of changes in volume or type of output. Marginal costing necessitates the analysis of cost into fixed and variable. These two types of costs behave differently with changes in the volume of output. Fixed cost tend to change in total with time rather than the level of output but variable cost tend to change in total with increase or decrease in the level of output. Marginal costing is basically concerned with the determination of product cost which consists of the total cost less the fixed costs. The technique of marginal costing can be used in conjuction with job or with other techniques such as standard costing or budgetary control

10 9. EXAMPLE OF COST SHEET:- The components of total cost can be presented in the form of a statement known as Cost Sheet. The Cost Sheet may be prepared separately for each Cost Centre. The technique of preparing the Cost Sheet can be understood with the help of the following example:- Example: Cost Sheet for August 2007 Material used/consumption Amount in Rs. Opening stock 10, Purchase 15, Carriage 5, Total 30, Less Closing Stock 12, Material consumed 18, Direct Wages. 12, Direct expense. 10, Prime cost 40, Works expense.(indirect) Indirect wages Rs Power. Rs Maintenance of Plant & Machinery etc. Rs Insurance Rs Sundry Expense Rs Depreciation Plant. } Rs Factory Building } Rs.18, Less Sale of Scrap Rs. 2, , , Add Opening WIP 3, , Less-Closing WIP 4, Works cost. 55, Administrative Expense Office Salary Rs Office Power etc. Rs Building Repair. Rs Driver Salary Rs Taxes. Rs

11 Depreciation Office Building Rs Rent (Office) Rs , Selling & Distribution Expenses. Salary of salesman Rs Commission Rs Advertisement Rs , Cost of sales/production , Profit , Sales , COST CONTROL 10.1 PRINCIPLES:- Cost control involves physical as well as financial control of all the elements. The control consists of the following functions:- Establishment of a standard of performance, Ascertainment of actual performance, Comparison of actual performance with the pre-determined standard, and Investigation into variation, if any and initiation of action to control them CONTROL OF MATERIALS:- Material control involves control at the stages of :- Purchase of materials and manufacture of components, Receiving and store keeping and Usage. Standards for use of materials shall be fixed and no material shall be issued by the Storekeeper unless authorized by the Competent Authority in the prescribed manner. To assess the extent of hold-up of production for want of materials, a report shall be prepared in the first week of every month which shall be examined by the Factory Manager in consultation with the concerned officers. Necessary action shall be taken in respect of such contributory factors as are capable of control at workshop level. In respect of other cases, action

12 required at higher level shall be indicated and the report shall be submitted to the General Manager before 15 th of the month, for necessary action. To control the excessive drawal of materials by the shop, the Cost Control Section shall prepare a statement showing the value of materials drawn in excess by each shop during each month in Form C-2(a). The statement shall be submitted to the Factory Manager by the end of the following month who shall examine the statement critically and shall cause necessary investigations being instituted in respect of shops which are consistently drawing materials in excess of provisions in Schedules or estimates. A consolidated statement showing the excess drawal of materials by all shops shall be submitted to the General Manager in Form C-2(b) CONTROL OF LABOUR:- Labour control involves control at the stages of employment of labour staff and their utilization on productive work. Standards for labour in terms of labour hour shall be fixed for all items of production on the basis of norms arrived at after scientific time and motion study. The productivity of labour shall be measured as under:- Standard Hours x 100 Actual Hours A monthly labour productivity statement in Form C-3(a) shall be prepared by the Cost Control Section in respect of each production shops in triplicate. Two copies shall be sent to the Officer-Incharge of the Shop before the 10 th of the month following, who shall investigate into the reasons, take necessary measures for improvement and return the duplicate copy with his comments within 7 days. Any persistent decline in productivity shall be brought to the notice of the Factory Manager for revision of lay out sheets, if considered necessary. A consolidated labour productivity statement for all shops shall be submitted to the General Manager in Form C-3(b) by 20 th of the month following together with brief reasons for decline in productivity, if any and measures taken for improvement. Idle labour may be caused by the factors controllable at different levels of Management or by those beyond the normal control of the Factory. The Officer-Incharge of each shop shall, by appropriate action, ensure that idle labour due to factors controllable at his level do not occur. Idle labour incurred in each shop shall be booked against the relevant Expense Orders. The idle labour incurred by each shop during each month shall be intimated to the Cost Control Section which shall submit every month a consolidated

13 idle labour statement for all the shops in Form C-4 to the Factory Manager together with the reasons offered by the Officer-Incharge of each shop, by the end of the month following. If the idle labour in any shop due to any factor is consistently disproportionate with reference to past actuals and if there has been idle labour on account of any cause which is controllable, the Factory Manager shall personally investigate into the contributory causes and satisfy himself that the idle labour was unavoidable in each case. To assess the extent of utilization of labour on productive work, the ratio of indirect labour hours to direct labour hours for each shop shall be calculated by the Cost Control Section and reported in the prescribed form to the Factory Manager by the end of the month following, indicating the reasons for increase/decrease CONTROL OF OVERHEADS:- Control of Overheads implies control of indirect expenses in relation to production and involves adequate checks against disproportionate expenses at the initial stages. Whereas the initiative to control the overheads should come from the unit or Centre incurring it, the Factory Manager shall have the overall responsibility for controlling overheads. Overheads shall be controlled by means of budget. The anticipated amount of overheads estimated in the proforma accounts for each shop or section for a year prepared in accordance with the Rules, shall be treated as the budgeted overhead for the shop or section for the year and shall be split up for shorter periods, usually for a month, for purposes of budgetary control. In respect of such items of overheads as are controllable at shop level, the Cost Control Section shall bring it to the notice of the Officer-Incharge of the Shop by 25 th of the month following who shall examine each item of expenditure book against his shop for the month and compare the monthly and progressive actuals with the budgeted provisions. He shall also investigate into the items where expenditure is more and record his comments and send it to the Cost Control Section, which shall furnish the quarterly overhead control statement to the General Manager indicating, in brief, the reasons ascertained from shops or otherwise, for abnormal increase, over budgeted expenditure in respect of controllable items of overhead and steps taken to control them

14 10.5 CONTROL OF IDLE CAPACITY:- Production facility in the form of fixed assets like Plant & Machinery may remain idle due to various reasons, controllable as well as non-controllable. To assess the extent of utilization of these facilities, shop shall maintain a Register in Form C-5(a), separate folio being utilized for each machine. The Officer-Incharge of shop shall review this Register by the 7 th of the month following and enter his remarks against each date indicating the controls exercised to avoid idle time. At the end of the month following, a statement in Form C-5(b) in respect of all shops shall be prepared by the Cost Control Section and submitted to the General Manager explaining in brief the reasons for idle time of production facility and the measures taken/suggested for the control MASTER COST CARD AND COST COMPARISON:- A Master Cost Card in Form C-6 shall be maintained by the Cost Control Section in respect of each item of manufacture. Review of estimates prepared at different times for the same items shall be made as soon as a work order is opened and copy of the estimate is received in the Costing Section. The reasons for variation exceeding 10% in the estimate shall be analysed and recorded in the Master Cost Card after necessary scrutiny. The cost of production of the items in which each Factory enjoys a monopoly, during different periods or against different Work Orders during the same period shall be compared and reasons for variation of 10% and above under one or more elements of total cost shall be recorded in the Master Cost Card with suitable explanations. Such review shall be done immediately after closure of accounts of Work orders for each item. The cost of production for the same articles manufactured in common by two or more Factories shall be reviewed every quarter and the reasons for difference, if any shall be investigated by the Cost Control Section in the Factory. In respect of items which are manufactured by the Competitors in the market, the market price shall be ascertained. Where the departmental cost is consistently higher than the market rates, the reasons shall be investigated and a detailed report including remedial measures shall be submitted. The Number of Work orders closed during a month, in which there is variation between the estimated cost and the actual cost shall be grouped

15 into: (a) less than 10% and (b) 10% and above. Variations of 10% and above shall be investigated in detail and analysed into the contributing factors clearly showing the amount involved under each factor. The analysis shall be made separately for each element of cost viz. materials, labour and overhead. Variation in Material Cost shall be analysed into Material Price or Rate Variation, Material Usage Variation, Variations due to wrong valuation of Vouchers, Unaccounted Vouchers, wrong pricing in Estimates and other causes. Labour variation shall be analysed into Labour Rate Variation, Labour Efficiency Variation, Variations due to wrong estimate or schedule and other causes. Overhead Variation shall be analysed into Overhead Rate Variation and Efficiency Variation. The Variation Statements as prepared for all the 3 elements of cost shall be scrutinized by the General manager who shall initiate action in respect of such contributory factors as are capable of control at the Factory level. PROFIT & LOSS ACCOUNT This account shows the net profit or earnings generated by the company/ Factory. Thus, this measures the management s ability to generate income from assets. The profit and loss account summarises the revenues and expenses of an accounting period. As a result of this summary it shows the net profit or net loss experienced by the company during the period. The reader of this account is provided with the past cost structure and profitability. The net profit after payment of dividends shows the amount retained and hence links the balance sheet with the profit and loss account. A profit & loss a/c, starts with the credit from the trading a/c, in respect of gross profit. All those expenses or losses which have not been debited to the trading a/c, are debited to the profit & loss a/c

16 Fundamental principles for preparing profit & loss a/c. is that the expenses and income for the full trading period are taken to the profit & loss a/c. This means that if an expense has been incurred but not yet paid for, liability for the unpaid amount must be created before the account can be said to show a true picture. All expenses a/c. should be properly adjusted. All expense apart from those that have already been taken to the trading a/c. will appear in the profit & loss a/c. In other words revenue expenditures (except that has already figured in the trading a/c.) and losses will be debited in the P&L a/c. If credit side is more than the debit side then there will be net profit which is to be carried to the balance sheet. Similarly if debit side is more than the credit side there will be net loss and the same is to be carried to the balance sheet. Example of P&L A/c. P&L Account for the year ended Dr. Particulars To Opening stock To Salaries a/c. To Discount Allowed. To Advertising. To Sundry Office expense To Depreciation. To Administrative expense To Rent, Rates, Taxes. To Power & Fuel. To Stationary. To Factory Light Expendr To Insurance. To Travelling Expense. To Postage & Telegram. To Interest & Bank Charges To Net Profit carried down to Balance Sheet. (If Cr.side is more the Dr.side) Amount in Rs. Particulars By Transfer/Sale By Discount received. By Closing Stock By Net loss carried down to Balance Sheet. (If debit side is more than the credit side.) Cr. Amount in Rs

17 BALANCE SHEET Balance Sheet is defined as a statement showing the financial position of a business on a given date. The characteristics of the Balance Sheet are:- 1. It is prepared on a particular date and not for a period. Balance Sheet is true only on the date concerned and not on any other date. Even a single transaction will upset the Balance Sheet. 2. It is to be noted that the total of all the Assets must be equal to total of all the Liabilities. It is a test of accuracy whether P&L Account is OK or not. 3. It is to be noted that after the Trading Account and P&L Account is prepared, the Balance Sheet is prepared. Balance Sheet is not an account. It does not have debit or credit. 4. Section-210 of the Companies Act requires preparation of the Balance Sheet at the end of each Trading period. If all the information required by Schedule VI is disclosed in the Balance Sheet (Part-I) or in the P&L Account (Part-II), a Company cannot be accused of not complying with the requirements in this respect. When the items are large in numbers, then the schedules for each item is to be annexed to the Balance Sheet. The various groups interested in the Company can draw useful inferences from an analysis of the information contained in the Balance Sheet. Shareholders usually have twin interest: an interest in receiving a regular income and an interest in the appreciation of their investment in shares. The market worth of their shares depends not only on the dividends they receive but also on the extent of retained earnings which the company has accumulated over the years. The materialization of the shareholders expectation regarding bonus shares also depend on the retained earnings build by the company. Investment decision of the prospective investors and disinvestment decisions of the existing investors are influenced by the composition of assets and liabilities shown in the Balance Sheet. The main interest of the trade creditors centres on the liquidity position of the company. They would like to make an assessment as to whether the company will be able to meet its obligation when the occasion arises. They are, therefore, concerned about the working capital available with the Enterprise and its cash resources. All this information can be gathered from

18 the Balance Sheet. The interest of long-term creditors lies in two things, they are interested in the regular payment of periodic interest and repayments of their loans after the expiry of stipulated period. They are interested not only in the profitability of the Enterprise but also in its longterm solvency and financial viabilities. A study of the Balance Sheet of the company over the past several years can yield a lot of useful information to such long-term investors. Similarly, other interested parties like regulatory and developmental agencies of the Government, consumer and welfare organizations can derive useful conclusions from a study of the Balance Sheet about the working of the Company and its contribution to the National Economy