Tag: Financial Accounting Bangalore University BBA Notes

A collection cost is the cost incurred to collect debt that is owed, a process called debt collection. This could include expenditures for hiring a collection agency. Some contracts and regulations prescribe liquidated damages for collection costs. When collection costs occur, the debtor has pay off debt to get the collector out of collection cost.

When a consumer borrows money, finances a purchase or applies for a line of credit, he usually signs an agreement to repay the money borrowed, with interest. Most such agreements include default provisions, outlining the steps the lender may take if the borrower doesn’t pay the debt as agreed. The default provision usually contains a clause that provides for the borrower to pay the collection cost that is, all costs incurred by the lender in attempting to collect the unpaid debt.

As long as the borrower pays at least the minimum amount due, on time, the loan is considered to be in good standing. It generally takes a while before a creditor considers a loan to be in default such issues as a single late payment don’t generally lead the creditor to declare the loan in default. Generally, though, if a borrower misses two consecutive payments, most creditors will declare the loan in default and trigger the collection process.

When lenders contract with outside collection agencies to collect a defaulted debt, the collection agencies keep track of the costs they incur in collecting the debt. The postage paid to mail a collection notice, for example, is one such collection cost, as is the cost of making calls to the borrower. In many cases, though, the collection agency will simply add a flat fee or a percentage of the debt to be collected rather than itemize expenses.

Another collection cost is attorney’s fees. If the collection agency is unsuccessful in collecting the debt, the original lender will refer the case to an attorney, who will continue collection efforts, using the threat of a lawsuit to persuade the borrower to pay. The attorney generally has the right to negotiate with the debtor, and the amount under negotiation is the total amount owed to the lender plus the collection costs added by the collection agency and the attorney. If the case goes to court, the amounts are less likely to be adjusted through negotiation. If the lender’s attorney wins the case, the debtor is ordered by the court to pay the amount due, which is generally the full amount owed to the lender, plus the attorney fees and court costs.

For every job a job card is maintained, recording all expenses regarding materials labour and overheads from cost records. Actually, it is a cost sheet of a specific job.

The basis of collection of casts would follow the following pattern:

(a) Materials: Materials Requisition, Bill of Materials or Materials Issue Analysis Sheet.

(b) Wages: Operation Schedule, Job Card or Wages Analysis Sheet.

(c) Direct expenses: Direct expenses vouchers.

(d) Overheads: Standing Order Numbers or Cost Account Numbers.

It should be kept in mind that for convenience in collection of costs, all the basic documents will contain cross reference to respective production order numbers.

After completion of the job, the actual cost, as recorded in the Job Cost Sheet, is compared with the estimated cost so as to reveal efficiency or inefficiency in operation. This serves as a guide to future course of action.

It is possible to prepare a job account and debit the same with all expenses incurred on the job and credit the same with the price of the job.

The difference between the two sides would give us profit made on the job.

Production Account:

Production Account is an account created under unit costing, which exhibit, the product produced, total cost of sales and the per unit cost incurred during the given period.

Production Account is something that integrates into itself, the components of cost sheet and the trading and profit and loss account. It not only includes the total cost of production but also accounts for the selling and distribution overheads.

• It consists of four parts. The first part gives prime cost, second part gives cost of goods manufactured, third part shows gross profit and fourth part shows net profit.
• It is based on double entry system.
• It shows the cost in aggregate and thus facilitates comparison with other financial accounts.
• It is prepared in the form of an account.
• It is not useful for preparing tenders and quotations.
• Expenses are not classified in this account.
• It is based on actual figures of expenses.
• No comparison in possible due to non-availability of previous year’s figures.
• It is prepared for each production department.

Cost Sheet:

Cost sheet can be described as a statement of cost expended or to be expended, by the company in connection to the cost unit or cost centre, for a definite period or level of activity. It exhibits both cost per unit of production and total cost. Simply put, a cost sheet is a periodical statement, which accounts for the all the cost of a cost centre.

• It presents the elements of cost in a classified manner and the cost is ascertained at different stages such as prime cost, works cost, cost of production, cost of goods sold, cost of sales and total cost.
• It is not based on double entry system.
• It shows the cost in detail and analytical manner which facilitates comparison of cost for the purpose of cost control.
• It is prepaid in the form of a statement.
• Estimate cost sheets can be prepared on the basis of actual cost sheets and these are useful for preparing tenders and quotations.
• Expenses are classified to ascertain different divisions of cost as prime cost, works cost, total cost etc.
• It is based on actual and estimated figures of expenses.
• Figures of previous year are provided to enable comparison.
• It is prepared for each job and sometimes for the whole factory also.

Production Account is a statement of cost or cost-sheet in a ledger account form, showing output during a given period, total cost and per unit cost incurred during the period and their components, as also the profit or loss for that period.

According to Glover and Williams, ‘The term Production Account is used to denote a particular form of Manufacturing Account, prepared in conjunction with the financial accounts in order to show the actual cost of producing the goods manufactured during the period under review. These accounts may be drawn up at short intervals e.g. monthly’.

Production Account is an account created under unit costing, which exhibit, the product produced, total cost of sales and the per unit cost incurred during the given period.

Production Account is something that integrates into itself, the components of cost sheet and the trading and profit and loss account. It not only includes the total cost of production but also accounts for the selling and distribution overheads.

There are three parts of a production account, in which the first part represents the cost of production, the second one shows the cost of goods sold and the last indicates the cost of sales, i.e. total cost.

It should be noted that Production Account is prepared in the form in which Trading Account is prepared. It has normally two parts. The first part gives total cost as well as cost per unit. The second part gives the cost of goods sold and sales.

Canteen Costing

The government organizations, factories, companies, offices, colleges, schools and even hospitals have canteens to provide affordable foodstuff like meals, refreshment, snacks, etc. to the staff, students and patients.

The canteen manager or supervisor keeps control over the costs and performs service costing to ascertain revenue of these business organizations. The costs involved in canteen services include the cost of material, labour, services, consumable stores and miscellaneous overheads.

The object of canteen costing is to ascertain the cost per meal, cost per cup of tea etc.

In a canteen, the expenses are generally classified as follows:

• Wages and salaries of staff e.g., cooks, helpers, waiters and supervisors.
• Provisions like meat, fish, fruits, flour, oil, milk, sugar, cream, tea, coffee, and soft drinks.
• Services like steam, gas, electricity, power, water etc.
• Consumable stores like cutlery, crockery, glassware, table linen, mops and washing up clothes, drying up clothes, cleaning materials, dust pans and brushes.
• Miscellaneous overheads like rent, rates, depreciation and insurance.

A monthly operating cost statement is usually prepared to ascertain the total cost and cost per meal. As most factory canteens are subsidised by the employer to some extent, the amount of subsidy is deducted from the total cost.

Hotel Costing:

The hotels provide accommodation to the guests as services; thus, it involves a high maintenance cost along with the fixed cost. The fixed cost includes depreciation, staff salaries, interest on capital, taxes, etc. Whereas, variable cost involves electricity charges, temporary staff salary, etc.

A hotel is engaged in providing food, accommodation and other comforts to its customers. Costs incurred by a hotel may be fixed or variable. Fixed costs may include salaries of staff, depreciation of fixed assets etc., while variable costs may comprise lighting and power charges, wages of room attendants etc. The object of hotel costing is to ascertain the cost per room or cost per man.

Hospital costing

The services provided by the medical organizations like hospitals health centres, nursing homes, medical camps and clinics require cost analysis, which is possible through service costing.

The hospital cost includes fixed charges such as labour salaries, maintenance charges, rent, administration expenses and other overheads. Also, the variable charges like medicines, bed charges, doctors fees, etc. are involved in the total cost.

A hospital is engaged in providing various medical services to the patients and hospital costing is applied to determine the cost of these services.

A hospital may have the following departments on the basis of functions performed by them:

• Outdoor Patient Department (O.P.D.).
• Indoor Patient Department (Medical Wards).
• Medical Service Departments e.g., X-Ray Department, Scanning Centre, Pathology Laboratory etc.
• General Service Departments e.g., Boiler House, Power House, Catering Department, Laundry Room, Administrative Office, Works Maintenance Department etc.
• Miscellaneous Service Departments i.e., the departments engaged in providing services to the above four departments such as transport department, dispensary, general porting etc.

The operating costs of Outdoor Patient Department, Indoor Patient Department, Medical Service Departments and General Service Departments are determined with reference to the suitable unit of cost and in doing so the costs of miscellaneous service departments are apportioned to them on some suitable basis.

The common units of cost of various departments in a hospital are follows:

• Outdoor Patient Department Per Out-patient attended.
• Indoor Patient Department Per Room-day.
• X-Ray Department Per 100 units.
• Scanning Centre per Case
• Pathology Laboratory per 100 Requests
• Laundry Department per 100 items laundered
• Catering Department per Patient per Week.

The costs of a hospital are divided into fixed and variable costs. Fixed costs may comprise salaries of administrative staff, depreciation of building, rent of building, depreciation of surgical and medical equipments etc., while variable costs may comprise light and power, water, laundry charges, food supplied to patients etc.

Transport Costing

Transport Costing refers to the determination of the cost per unit of services rendered by a vehicle. Its include Water, Air, Road and Railways. Motor transport includes Buses, Taxies, Private Cars, Carriers and Lorries etc. E.g. The cost/passenger/km or cost/ton/km.

Objects of Transport Costing

1. It helps in controlling, operating and maintenance costs.
2. Cost of using own vehicle and hired vehicle can be compared.
3. Operating costs of different vehicles can be compared and thus efficiency can be improved.
4. Comparison of oil consumption and time taken for a trip with other trips is possible.
5. Proper apportionment of costs to different departments which use the service is possible.
6. It provides information for giving quotation and fixing the rates.

Objectives of Transport Costing

• To find cost per unit of operating a vehicle and to fix the rate for the carriage of passengers or goods.
• The control of the cost of operating each vehicle.
• To compare the cost per unit of one means of transport with that of another, and to find out the profitable means of transport.
• To compare the cost per unit of operating one vehicle, with another vehicle, and to ascertain the efficiency of each vehicle.
• To help to fix the hire charges of a vehicle where a vehicle is given on hire.

Cost Classification

The expenses incurred by a transport concern can be classified into three categories.

1. Fixed charges or Standing charges.
2. Maintenance charges.
3. Operating or Running charges.

1. Fixed Charges or Standing Charges

It includes expenses, which remain fixed, whatever may be the distance covered, or trips made. The vehicle may be idle, but these expenses have to be met. Therefore, they are called as fixed charges.

Example: Garage rent, insurance premium, road license fee, interest on capital, vehicle tax, establishment expenses of the work shop, head office expenses, depreciation of the vehicle (based on time), wages of drivers, conductors etc. (based on amount to be paid on a fixed rate, regardless of distance covered).

2. Maintenance Charges

These expenses are incurred on the repairs and maintenance of the vehicle, so as to keep the vehicle in proper condition. They are semi-variable or semi-fixed in nature.

Example: Repairs and maintenance, spares and accessories, wear and tear of tyres and tubes, supervision expenses, painting charges, overhaul expenses.

3. Operating Charges

These expenses are incurred on the actual running of the vehicle. They vary with the distance covered or the trips made. They are variable in nature.

Example: Petrol or diesel expenses, lubricating oil and grease, salaries and wages of drivers, conductors etc. (if it depends upon the distance covered, or by the number of trips made), depreciation of vehicles (based on the mileage run) etc.

Advantages:

The usefulness of transport costs becomes apparent when we consider the following advantages:

(a) Choosing between alternative means of transport. A transport company- owning Lorries may compare the cost of using a lorry with the prevailing railway rates and decide to make use of the alternative if that appears to be cheaper.

(b) Comparing the cost of maintaining one vehicle with the cost of another vehicle of the same type.

(c) Determining the basis for charging to departments using the service.

(d) Determining the price at which a vehicle should be hired out.

(e) Comparison between owned transport and hired transport to decide whether it is economical to go in for a hired one.

Power House Costing is concerned with the ascertainment of cost per unit of steam or electricity produced. The costs of producing steam used in power house for the generation of electricity is also included in the power house costs.

The specimen of cost sheet prepared by power-house:

Boiler House Costing (With Cost Sheet Format)

Operating Costing is also applied in those undertakings engaged in steam production. In large firms, a boiler house is a service department providing services to production departments. The total costs are obtained for producing steam. A cost unit is generally in terms of pounds.

Job costing involves the detailed accumulation of production costs attributable to specific units or groups of units. For example, the construction of a custom-designed piece of furniture would be accounted for with a job costing system. The costs of all labour worked on that specific item of furniture would be recorded on a time sheet and then compiled on a cost sheet for that job. Similarly, any wood or other parts used in the construction of the furniture would be charged to the production job linked to that piece of furniture. This information may then be used to bill the customer for work performed and materials used, or to track the extent of the company’s profits on the production job associated with that specific item of furniture.

Each job is a project that has its own distinct entity.

• No job is the same. Each job will have to be done differently to successfully complete it.
• Based on client requirements or needs.
• The difference in work in progress exists in each period.

Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. For example, the production of 100,000 gallons of gasoline would require that all oil used in the process, as well as all labor in the refinery facility be accumulated into a cost account, and then divided by the number of units produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level, and no lower within the organization.

Differences

Assignment: In job costing, it is calculating the cost of each job. In process costing, the cost is first determined by the process and then decided based on the number of units produced.

Production: In job costing, production is customized, while it is standardized in process costing.

Reduction in Cost: With job costing, there are fewer scopes of reduction in costs; the opposite is true with process costing.

Individuality: Because all jobs are different from each other, all products have individuality in job costing. Because process costing means products are produced in high volume, they lack individuality.

Cost Transfer: Costs cannot be transferred in job costing, but can be transferred from one process to another in process costing.

Industry: Job costing is best for industries where products or services are customized based on consumers’ demands. Process costing is best for mass production industries with standardized products.

Work in Progress: With job costing, there may or may not be any work in progress (WIP). With process costing, there is always WIP at the beginning and end of a period.

Losses: In job costing, losses are not separated, but with process costing, losses can be separated.

Record Keeping: For job costing, keeping records is tedious and time-consuming, but process costing keeps things streamlined and efficient.

Size of Job: Job costing is best for small production units, while process costing is best for large production units.

The market value method (also known as reversal cost method) of costing by-products is identical to the recognition of gross revenue method of costing by-products. Both the methods reduce the production or manufacturing cost of the main product by the value of by-product.

Under recognition of gross revenue method, the production cost of the main product is reduced by the actual revenue realized from the sale of by product. However, the market value or reversal cost method reduces the production cost of the main product by the estimated value of the by-product at time of recovery or split-off point.

An account usually titled as “by-product account” is charged with the estimated value at the time of recovery (i.e., split-off point) and the cost of main product is credited. The materials, labour or factory overhead costs incurred on the by-product after split-off point is charged to the by-product. Any marketing or administrative costs belonging to the by-product may also be allocated to it.

The balance of the by-product account can be shown on the income statement using one of the four approaches described in recognition of gross revenue method of costing by-products.

The manufacturing cost that is applicable to any unsold inventory of by-product is presented on the balance sheet.

Need for Determining:

• Every time a component/product is to be made, setting up of the tool is involved. Because of this some loss in production time will be there. Therefore, maximum number of units are produced once the machine is set in order to reduce the cost per unit.
• Such large production at one run will lead to accumulation of inventory and the costs related thereto.
• Thus, there is a quantity for which reduced cost of production is just offset by costs of carrying the quantity inventory. The determination of most economical batch quantity requires consideration of many related factors of costs and economies.

Cost Influence:

• Set up cost
• Rate of consumption.
• Storage cost
• Interest on capital
• Manufacturing cost

Types of Cost:

• Set-up costs
• Carrying costs

The following formula is used to calculate Economic Batch Quantity is as follows:

Economic Batch Quantity = √{DS/IC}

Were,

D = Demand for a period

S = Set up cost

I = Interest Rate

C = Cost per unit of manufacture