Tag: University of Mumbai BMS Notes

The following methods are used in separation of such costs into fixed cost and variable cost. They are: 1. Industrial Engineering Method 2. Account Inspection Method 3. Scatter Graph Method 4. High and Low Method.

1. Industrial Engineering Method:

This method is used to collect cost information that is not available in an organization’s records and is particularly relevant when an organization is just beginning a new activity. Every productive process involves employing a particular mix of materials, labour and capital equipment in order to yield physical output.

When the relationship between the input and output is established by an engineer or technical expert e.g., 2 kgs. of materials + 3 hours of labour = 1 unit of output. The material and labour costs can be estimated by imputing material prices and wage rates to physical input needs. It is important to note that these costs are estimates because of possible uncertainty with regard to wastage in material usage and changes in labour efficiency in production process.

The engineering method is particularly useful when applied to material and labour costs which represent a large proportion of the total output cost. If the relationship between material and labour inputs and outputs remain static over time, then these cost estimates can be used in the future without significant adjustment. When costing new products, the engineering method is the only approach that can be used due to lack of historic data.

However, there are three main disadvantages of the engineering method:

(1) It is expensive as work measurement involves detailed analysis of the physical movements required in each task, in order to produce one unit of output.

(2) There are other costs incurred in the production process e.g., machine maintenance and supervision which cannot be associated with specific units of output, but may be direct costs of the department. The engineering method cannot be applied to these costs, whose equations will have to be derived from an analysis of past data or from subjective evaluation.

(3) Different mixes of materials and skills may be used to produce the same unit of output, leading to several conflicting cost estimates.

Although the engineering method is usually associated with production, work study techniques are applied to other areas, such as selling and administrative functions of the organization.

2. Account Inspection Method:

This method is a fast and inexpensive way of estimating costs as it simply involves examining each account and subjectively classifying the account’s total cost into either fixed or variable elements. This requires that the Management Accountant inspect each item of expenditure within the ledgers at a given level of output to determine whether a cost is fixed, variable or semi-variable.

Limitations:

This technique has the following limitations:

(a) It depends heavily on the initial decision to classify an account as fixed or variable.

(b) It fails to recognize that semi-variable costs exist.

(c) It relies on a single observation of the account to determine the cost equation rather than using an average based on several observations of each account.

(d) It assumes that transactions have been correctly charged to one account or another. The account inspection method should be used only when a crude approximation of cost behaviour is sufficient for making decisions.

3. Scatter Graph Method:

In this method, it involves plotting several observed levels of cost and their associated levels of activity on a scatter-graph and then applying statistical analysis to fit the best line through these points.

Illustration:

Output (unit)	1000	2000	3000	4000	5000	6000
Costs (Rs.)	10500	12500	13800	15100	15900	17200

The point at which the line of best fit touches the ordinate indicates fixed component of the cost i.e., Rs. 9,500 in this case. The slope of the line indicates the degree of variability of costs.

The scatter-graph as shown in figure 2.4 can be drawn with the help of the above data

The line of best fit is relatively simple to apply and it does attempt to use all the information in the relevant range of production to arrive at the estimated cost function. However, it remains rather crude and does not adequately handle data points which are far away from the main body of points (called out liners).

Another problem with this method is that each accountant using the same cost data to estimate the cost of equation may draw different total cost lines by eye, to describe the relationship between cost and activity. Despite the short-coming, the method may be sufficient for the small company that does not possess the expertise to use complicated statistical technique.

4. High and Low Method:

Under this method, the highest and lowest volumes of output and the relevant cost figures are taken into consideration. The difference of cost between volumes, i.e., incremental cost for incremental output will be arrived at. The incremental cost will be further divided by the incremental output. This will give the variable cost per unit.

Total variable cost for any level of output can be determined easily. Now, the total cost of the volume of output less the total variable cost at that level of output gives the fixed cost which will remain for all levels of activity.

Direct labor cost is wages that are incurred in order to produce goods or provide services to customers. The total amount of direct labor cost is much more than wages paid. It also includes the payroll taxes associated with those wages, plus the cost of company-paid medical insurance, life insurance, workers’ compensation insurance, any company-matched pension contributions, and other company benefits.

Direct labor costs are most commonly associated with products in a job costing environment, where the production staff is expected to record the time they spend working on various jobs. This can be a substantial chore if employees work on a multitude of different products. In the services industries, such as auditing, tax preparation, and consulting, employees are expected to track their hours by job, so their employer can bill customers based on direct labor hours worked. These are also considered to be direct labor costs. In a process costing environment, where the same product is created in very large quantities, direct labor cost is included in a general pool of conversion costs, which are then allocated equally to all of the products manufactured.

A strong case can be made in some production environments that direct labor does not really exist, and should be categorized as indirect labor, because production employees will not be sent home (and therefore not be paid) if one less unit of product is manufactured – instead, direct labor hours tend to be incurred at the same steady rate, irrespective of production volume levels, and so should be considered part of the general overhead costs associated with running a production operation.

Calculate Direct Labor Cost per Unit

The amount incurred as direct labor cost depends on how efficiently the workers produced finished items. Usually, companies calculate a standard direct labor cost against which to compare their actual direct labor costs. Here is how to calculate direct labor cost per unit of production:

1. Calculate the direct labor hourly rate

First, calculate the direct labor hourly rate that factors in the fringe benefits, hourly pay rate, and employee payroll taxes. The hourly rate is obtained by dividing the value of fringe benefits and payroll taxes by the number of hours worked in the specific payroll period.

For example, assume that employees work 40 hours per week, earning $13 per hour. They also get $100 in fringe benefits and $50 in payroll taxes. Get the sum of the benefits and taxes (100+50) and divide the figure by 40 to get 3.75. The $3.75 is added to $13 to get an hourly rate of $16.75.

2. Calculate the direct labor hours

The direct labor hours are the number of direct labor hours needed to produce one unit of a product. The figure is obtained by dividing the total number of finished products by the total number of direct labor hours needed to produce them. For example, if it takes 100 hours to produce 1,000 items, it means that 1 hour is needed to produce 10 products, and 0.1 hours to produce 1 unit.

3. Calculate the labor cost per unitThe labor cost per unit is obtained by multiplying the direct labor hourly rate by the time required to complete one unit of a product. For example, if the hourly rate is $16.75, and it takes 0.1 hours to manufacture one unit of a product, the direct labor cost per unit equals $1.68 ($16.75 x 0.1).
4. Calculate the variance between the standard and actual labor cost

The variance is obtained by calculating the difference between the direct labor standard cost per unit and the actual direct labor cost per unit. If the actual direct labor cost per unit is higher than the standard direct labor cost per unit, it means that the company incurs more to produce one unit of a product than is expected, making the cost unfavorable to the business. If the actual direct labor cost is lower, it means that it costs lower to produce one unit of a product than the standard direct labor rate, and therefore, favorable.

There are so many expenditures which are incurred in respect of the employees of the business firm which are neither official nor personal; even then these are booked as business expenditure. For example:- Tea and refreshment expenses for the employees, medical expenses for the health of the employees or their family members, uniforms given to employees, concessional foods given to employees, personal accident insurance premium paid for employees etc. For control purpose, the sub heads may be created under staff welfare expense like tea & refreshment expenses, medical expenses, personal accident expenses, uniform expenses etc.

Employee welfare entails everything from services, facilities and benefits that are provided or done by an employer for the advantage or comfort of an employee. It is undertaken in order to motivate employees and raise the productivity levels.

In most cases, employee welfare comes in monetary form, but it doesn’t always bend that way. Other forms of employee welfare include housing, health insurance, stipends, transportation and provision of food. An employer may also cater for employees’ welfare by monitoring their working conditions.

Importance of employee welfare

Employee welfare raises the company’s expenses but if it is done correctly, it has huge benefits for both employer and employee. Under the principles of employee welfare, if an employee feels that the management is concerned and cares for him/her as a person and not just as another employee, he/she will be more committed to his/her work. Other forms of welfare will aid the employee of financial burdens while welfare activities break the monotony of work.

An employee who feels appreciated will be more fulfilled, satisfied and more productive. This will not only lead to higher productivity but also satisfied customers and hence profitability for the company. A satisfied employee will also not go looking for other job opportunities and hence an employer will get to keep the best talents and record lower employee turnover.

During employment, the offered benefits will determine whether an employee commits to an organization or not. As such, good employee welfare enables a company to compete favorably with other employers for the recruitment and retention of quality personnel.

Five Techniques of Inventory Control

1. Economic Order Quantity

A problem which always remains in that how much material may be ordered at a time. An industry making bolts will definitely would like to know the length of steel bars to be purchased at any one time.

This length is called “economic order quantity” and an economic order quantity is one which permits lowest cost per unit and is most advantages.

This can be calculated by the following formula:

Q = √2AS/I

Where Q stands for quantity per order

A stands for annual requirements of an item in terms of rupees

S stands for cost of placement of an order in rupees; and

I stand for inventory carrying cost per unit per year in rupees.

2. Inventory Models

Inventory models determine when and how inventory to carry.

(i) Inventory models handle chiefly two decisions:

• How much to order at one time.
• When to order this quantity to minimize total costs.

(ii) Lowest-cost decision rules for inventory management pertain to either buying products from outside or producing then within the company.

(iii) Single inventory models assume no delivery delay and that demand is known.

(iv) Probabilistic models handle situations of risks and uncertainty.

3. ABC Analysis

In order to exercise effective control over materials, A.B.C. (Always Better Control) method is of immense use. Under this method materials are classified into three categories in accordance with their respective values. Group ‘A’ constitutes costly items which may be only 10 to 20% of the total items but account for about 50% of the total value of the stores.

A greater degree of control is exercised to preserve these items. Group ‘B’ consists of items which constitutes 20 to 30% of the store items and represent about 30% of the total value of stores.

A reasonable degree of care may be taken in order to control these items. In the last category i.e. group ‘Q’ about 70 to 80% of the items is covered costing about 20% of the total value. This can be referred to as residuary category. A routine type of care may be taken in the case of third category.

This method is also known as ‘stock control according to value method’, ‘selective value approach’ and ‘proportional parts value approach’.

If this method is applied with care, it ensures considerable reduction in the storage expenses and it is also greatly helpful in preserving costly items.

4. Material Requirements Planning

MRP is a computational technique that converts the master schedule for end products into a detailed schedule for raw material and components used in the end products. The detailed schedule indentifies the quantities of each raw material and component items. It also tells when each item must be ordered and delivered so as to meet the master schedule for the final products.

5. VED Analysis

Vital essential and desirable analysis is used primarily for the control of spare parts. The spare parts can be divided into three categories:

(i) Vital

(ii) Essential

(iii) Desirable

(i) Vital: The spares the stock out of which even for a short time will stop production for quite some time and future the cost of stock out is very high are known as vital spares.

(ii) Essential: The spare stock out of which even for a few hours of days and cost of lost production is high is called essential.

(iii) Desirable: Spares are those which are needed but their absence for even a week or so will not lead to stoppage of production.

There are two basic methods of labour remuneration, i.e., time rate and piece rate system of wage payment. In modern days a number of incentive plans to induce workers to work hard so as to produce more and earn more are being used.

Method 1. Time Rate System:

Under this system of wage payment, workers are paid according to the time for which they work. Payment may be on hourly basis, daily basis, weakly basis, or monthly basis. In this system, no consideration is given to the quantity and quality of work done.

When payment is made on hourly basis, total wages payable are calculated as follows:

Wages = No. of hours worked x Rate per hour

For example – if a worker is paid at the rate of Rs. 7.50 per hour, his wages for a day of 8 hours will be 7.5 × 8 = Rs. 60.

Though this is the oldest system of wage payment, yet it is commonly used these days.

Suitability:

This method of wage payment is suitable under the following type of situations:

1. Where quality of work is more important than quantity of work (i.e., high class tailoring)
2. Where output cannot be measured in quantitative terms, e.g., in the case of indirect workers like watch man, cleaners and sweepers, etc.
3. Where output is beyond the control of the worker, e.g., in process industries, where the work of a worker is dependent on the work of other workers.
4. Where work is being done on a small scale so that close supervision is possible.
5. Where the worker is a learner or an apprentice.

Advantages:

Following are the main advantages of this method:

1. Simplicity:

The system is simple and calculation of wages is easily understood by the workers.

2. Security to Workers:

Under this method, workers are assured of a certain amount of wages payable even if there is stoppage of work due to power failure, machine break-down etc. This gives a sense of security to workers.

3. Quality of Work:

As this method does not give weight to the quantity of work done, workers can concentrate on the quality of goods produced. Thus, the quality of work under this method is better.

4. Economical:

Under this method, no detailed records are required to be maintained regarding the work done by workers. This results in saving of clerical costs. Moreover, workers avoid over-speeding and causeless damage to Plant and Machinery and also materials. This also results in economy.

5. Accepted by Trade Unions:

This method is favoured by trade unions because it treats all workers alike and no distinction is made between efficient and inefficient workers.

6. Unity in Labour:

No hard line of distinction is drawn between an efficient and inefficient worker on the basis of production. This promotes a feeling of unity among the workers.

Disadvantages:

The main disadvantages of this method are:

1. Lack of Incentive:

This method of wage payment offers no positive inducement to workers to improve performance as it does not distinguish between an efficient and inefficient workers.

2. Lower Production:

As workers are paid on time basis, they tend to be slow in work. This results in lower production quantity.

3. More Supervision:

Under this method, more supervision is required, so that workers may not waste time. Appointment of additional supervisors increases supervision costs.

4. Idle Time:

Under this method of wage payment, workers waste a lot of time resulting in increasing in idle time.

5. Costing Difficulties:

From costing point of view, it creates difficulties in the calculation of labour cost per unit because the output is quite fluctuating.

6. It Makes Workers Lazy and Dull:

Due to the adoption of this method, workers become lazy and dull and try to avoid work, and thus production suffers.

Method 2. Piece Wage System:

Under this method, workers are paid in proportion to the work done by them. The rate is fixed per unit of output, per article, per commodity, etc. The worker is paid for the total units manufactured. The system is thus is result oriented. For example, if the rate per unit is Rs. 5 and the worker manufacturers 100 units in a week, his week’s wages shall be Rs. 500 (i.e., 100 x 5).

It may be expressed in the form of the following formula:

Total earnings = Units Manufactured x Rate per unit

Suitability:

Conditions under which piece rate method of wage payment may be usefully employed are:

1. Where the output of workers can be measured.
2. Where production is standardised and repetitive in nature.
3. When the aim is continuous maximum production.
4. Where workers continue at the same job for a long period.
5. Where the standard time required to complete a job can be measured accurately.

Advantages:

Piece rate system has the following advantages:

1. Incentive to Efficient Workers:

Under this method, as remuneration is paid in proportion to the worker’s effort, the method provides a strong incentive to work move.

2. Increase in Production:

Under this method, each worker tries his best to produce more to earn higher wages. This results in increase in production.

3. Decrease in Supervision:

Under this method of wage payment, strict supervision is not required because the workers are themselves interested in maximising their earnings through the maximisation of output.

4. Equitable Wages:

This system is more equitable in comparison to time rate system because wages are paid according to the efficiency of each worker.

5. Simple and Easy:

This method is simple and easily understood by the workers.

6. Simplifies Costing:

As, under this method, wages are paid at a rate per unit, it simplifies cost ascertainment because labour cost per unit is known in advance.

7. Decreased Cost:

On account of increase in production, fixed cost per unit is reduced resulting in higher profit.

Disadvantages:

Piece rate system of wage payment suffers from the following demerits:

1. Lack of Secured Wages:

This system does not guarantee of minimum wage to a worker. If a worker is not able to complete his allotted work in a day, due to any reason, he is paid less amount of wages. Thus, under this method, earnings of workers are uncertain.

2. Inferior Quality of the Product:

Under this method, much emphasis is given on quantity of production and ignores quality of the product. In order to maximise their wages, workers try to produce more and more without caring for the quality of production.

3. Injurious to Health of Workers:

In an effort to earn more wages, workers try to work excessively with greater speed. This proves to injurious to health of workers.

4. Misuse of Equipment and Materials:

In the greed to produce more, workers cause extra wastage of material and damage plant and machinery.

5. Unsuitable in Certain Cases:

This method does not suit where work is of artistic and refined nature.

6. Difficulties in Fixing Piece Rate:

Fixing equitable piece rate is quite a difficult task and may require considerable amount of work in the form of time studies.

7. Opposed by Trade Unions:

Price rate system is generally opposed by trade unions because it creates inequality in the wages of workers. Slow and inefficient workers feel jealous of the higher of their follow workers.

Incentive Plans:

Both time rate system and piece rate system discussed above have their merits and demerits. Incentive plans attempt to combine the good points of both the systems.

The primary purpose of an incentive plan is to induce a worker to produce more to earn a higher wage. Naturally, producing more in the same period of time should result in higher wages for the workers. Because of greater number of units produced, it should also result in a lower cost per unit for fixed factory cost and also for labour cost.

Objectives of Incentive Plans:

The main objectives of incentives wage plans are:

1. To induce the workers to increase their productivity.
2. To provide additional remuneration to the workers to their efforts and efficiency.
3. To have a contented labour force, and to reduce the labour turnover.
4. To keep the morale of the workers high.
5. To have increased production from the improved productivity of the workers.
6. To have reduction in the fixed overhead cost per unit through increased production.

Suitability of the Plan:

Incentive wage plans are suitable in the following cases:

1. Those industries where proper time and motion studies can be undertaken and proper standards of time and output can be fixed.
2. Those industries where overhead charges are considerable and which can be reduced through increased production resulting from incentive schemes.

Essentials of a Good Incentive Plan:

A good incentive plan should contain certain essentials.

The essentials of a good incentive plan are:

1. For the successful implementation of an incentive plan, proper and accurate time and motion studies should be conducted and proper standards should be fixed.
2. The standard set for production should be such that any worker of normal efficiency can attain them.
3. The standards, on set, should not be changed unless there is a change in the method of production.
4. Job analysis and standardisation must be made on scientific and equitable basis.
5. Tools, equipment and machines must be maintained in efficient working condition.
6. Proper and comfortable working conditions should be provided to workers.
7. Uniform working conditions should be provided to all the workers.
8. Regular flow of materials and other supplies should be ensured.
9. Every worker should be given equal opportunity to earn.
10. The workers should be taught the proper way of doing the work.
11. The workers should not suffer on account of factors beyond their control, such as – break-down of machines, power failure, etc.
12. The incentive plan should be permanent and not temporary.
13. The plant should be flexible enough to permit changes to suit the changes in the method of work.
14. The plan should be easy for the workers to understand.
15. The workers should be properly educated about the scheme and motivated to improve their efficiency and earn more.
16. It should be economical to operate.
17. The plan should be acceptable to both employer and the employees.
18. The incentive provided should be sufficiently attractive.
19. There should be no maximum limit on the amount of earnings of the workers.
20. Indirect workers should also be included under the incentive scheme.
21. The scheme should have the approval of workers and the union.

Advantages of Incentive Plan:

Incentive wage schemes have the following advantages:

1. The workers are assured of their time rates or day rates of wages, whether they attain the standard or not.
2. In-efficiency is not penalised, as the workers are assured of their day rates of wages, whether they attain the standard or not.
3. Efficiency is rewarded, as the workers of higher efficiency are given bonus in addition to their time wages.
4. Incentive is given to workers to increase their productivity.
5. Opportunity is given to workers to increase their earnings by efficient work.
6. It keeps the labour force contented, and thereby, helps to reduce labour turnover.
7. The increase in production leads to reduction in cost per unit.
8. The gain or losses arising from the efficiency of the workers are shared by both the employer and the employees.

Disadvantages of Incentive Plan:

The incentive schemes are not without drawbacks. They suffer from several drawbacks.

Their main drawbacks are:

1. The incentive schemes cannot be gain-fully employed in concerns where the overheads are less.
2. These schemes cannot be adopted in undertakings where proper standards cannot be fixed.
3. It is difficult to calculate indirect labour under the common incentive schemes.
4. These schemes require careful determination of standard time and standard output which involves additional work and expenditure.
5. The bonus paid to workers under these schemes may not be proportionate to the improved efforts or productivity of the workers.
6. The quality of the product may suffer, because of their eagerness to save time and earn more.
7. Once an incentive scheme is introduced, it will be very difficult to withdraw that scheme later, it becomes uneconomical.

Cost Accounting is a business practice in which we record, examine, summarize, and study the company’s cost spent on any process, service, product or anything else in the organization. This helps the organization in cost controlling and making strategic planning and decision on improving cost efficiency. Such financial statements and ledgers give the management visibility on their cost information. Management gets the idea where they have to control the cost and where they have to increase more, which helps in creating a vision and future plan. There are different types of cost accounting such as marginal costing, activity-based costing, standard cost accounting, lean accounting. In this article, we will discuss more objectives, advantages, costing and meaning of costs.

Features of Cost Accounting

• It is a sub-field in accounting. It is the process of accounting for costs
• Provides data to management for decision making and budgeting for the future
• It helps to establish certain standard costs and budgets.
• provides costing data that helps in fixing prices of goods and services
• Is also a great tool to figure out the efficiency of a unit or a process. It can disclose wastage of time and resources

Types and Classification of Cost Accounting

• Activity Based Costing
• Lean Accounting
• Standard Accounting
• Marginal Costing

Standard Accounting

Standard costing is a technique where the firm compares the costs that were incurred for the production of the goods and the costs that should have been incurred for the same.

Marginal Costing

This type of costing is based on the principle of dividing all costs into fixed cost and variable cost.

Fixed costs are unrelated to the levels of production. As the name suggests these costs remain the same irrespective of the production quantities.

Variable costs change in relation to production levels. They are directly proportionate. The variable cost per unit, however, remains the same.

Importance and Objectives of Cost Accounting

• Classification of Cost
• Cost Control
• Price Determination
• Fixing of Standards

Advantages

• Measuring and Improving Efficiency
• Identification of Unprofitable Activities
• Fixing Prices
• Price Reduction
• Control over Stock
• Evaluates the Reasons for Losses
• Aids Future Planning

Nature

Helps in Decision Making: Cost accounting helps in decision making. It provides vital information necessary for decision making. For instance, cost accounting helps in deciding:

1. Whether to make a product buy a product?
2. Whether to accept or reject an export order?
3. How to utilize the scarce materials profitably?

Helps in fixing prices: Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.

Formulation of future plans: Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitative terms. Budgets are prepared and they give direction to the enterprise.

Avoidance of wastage: Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.

Highlights causes: The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.

Reward to efficiency: Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work -force.

Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.

Improvement in profitability: Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.

Preparation of final accounts: Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.

Facilitates control: Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.

 Scope

The term scope here refers to field of activity. Cost accounting refers to the process of determining the cost of a particular product or activity. It provides useful data both for internal and external reports reporting. Internal reporting presents details of cost data in a summarized and aggregate form. For instance, in case a company manufacturing electrical goods cost of each product.

In order that cost accounting satisfies the requirements of both internal and external reporting, the following are the different activities which are undertaken under cost accounting system:

Cost Determination: This is the first step in the cost accounting system. It refers to determining the cost for a specific product or activity. This is a critical activity since the other three activities, explained below, depend on it.

Cost Recording: It is concerned with recording of costs in the cost journal and their subsequent posting to the ledger. Cost recording may be done according to integral or non-integral system a separate set of books is maintained for costing and financial transactions.

Cost Analyzing: It is concerned with critical evaluation of cost information to assist the management in planning and controlling the business activates. Meaningful cost analysis depends largely upon the clear understanding of the cost finding methods used in cost accounting.

Cost Reporting: It is concerned with reporting cost data both for internal and external reporting purpose. In order to use cost information intelligently it is necessary for the managers to have good understanding of different cost accounting concepts.

Limitations

In spite of the various advantages claimed by cost accounting, the discipline suffers from the following limitations:

Cost Accounting is costly to operate: It involves heavy expenditure to operate. The benefits derived by operating the system are more than the cost.

Cost Accounting involves many forms and statements: It involves usage of many forms and statements which leads to increase of paper work.

Costing may not be applicable in all types of Industries: Existing methods of cost accounting may not be applicable in all types of industries. Cost accounting methods can be devised for all types of industries, and services.

It is based on Estimations: Costing system relies on predetermined data and therefore it is not reliable. Costing system estimates costs scientifically based on past and present situations and with suitable modifications for the future. This leads to accurate cost figures based on which management can initiate decisions. But for the predetermined costs, cost accounting also becomes another ‘Historical Accounting’.

It is not an exact science: Like any others accounting system, it is not an exact science but an art that has developed through theories and practices.

Bias Judgments: Many judgments are biased and depend on individual discretion.

Difference in opinion: Different views are held by different cost accounts about the items to be includes in cost.

Material Losses:

Material losses may take the form of waste, scrap, defectives and spoilage. Problems of spoilage, waste, defective units and scrap are bound to arise in almost all manufacturing concerns, so there is usually a difference between the quantity of the output and the input.

Usually the quantity of the output is less than that of the input because of waste, scrap or spoilage. Efforts should be made to reduce the difference between the quantities of the output and the input so that cost of production may be reduced.

Methods of treatment of spoilage, waste etc. and the interpretations given to these terms vary considerably from one industrial concern to another because of different situations arising in different concerns. The terms are also loosely used; for example, waste and scrap may be taken to have the same meaning.

1. Waste:

Waste is defined as discarded substances having no values. In many industries, some waste is inevitable. Such waste may arise due to the inherent nature of materials, chemical reaction, evaporation, drying, sublimation of goods etc. Waste can also be in the form of smoke, gas, slag or dust which arises in the course of a manufacturing process.

Waste may be invisible or visible. The former type of waste (i.e., waste due to drying, evaporation etc.) is invisible whereas the latter type of waste (i.e., gas, smoke, slag etc.) is visible. Waste has practically no measureable value. Rather in some industries, the waste instead of realising any value creates a problem for its disposal incurring further costs. The waste may be normal and abnormal from the point of view of treatment in costing.

Normal Waste:

It is the loss which is unavoidable on account of inherent nature of material. Some materials such as liquid materials lose their weight due to evaporation. Similarly, there are some materials (i.e. coal) which are wasted due to loading and unloading. Materials may be wasted due to breaking the bulk into smaller parts.

Normal waste is unavoidable and as such may be reduced to some extent if there is strict control but cannot be totally eliminated. Such loss can be estimated in advance on the basis of past experience or chemical data. As waste has practically no value, its treatment in costing is relatively simple. The normal process loss is recorded only in terms of quantity.

Abnormal Waste:

Any loss caused by unexpected or abnormal conditions such as sub-standard materials, carelessness, accident etc. or loss in excess of the margin anticipated for normal process loss should be regarded as abnormal waste.

All cases of abnormal waste should be thoroughly investigated and steps taken to prevent their recurrence in future. Responsibility for abnormal wastage should be fixed on purchasing, storage, production and inspection staff to maintain standards. Abnormal waste should not be allowed to affect the cost of production as it is caused by abnormal or unexpected conditions.

Such loss representing the cost of materials, labour and overhead incurred on the wastage should he transferred to Profit and Loss Account (Costing Profit and Loss Account where no integral system of accounting is maintained) and not added to the cost of production so as to make meaningful comparison of costs of production of different periods.

2. Scrap:

Scrap is discarded material having some values. It represents fragments or remnants of material that are left from certain type of manufacture. It is a material loss but has small value without further processing. Examples of scrap are available in operations like turning, boring, punching, sawing, shavings, moulding, etc. from metals on which machine operations are carried out; saw dust and trimmings in the timber industry; dead heads and bottom ends in foundries; and cuttings, pieces and splits in leather industry.

Such scrap can be solid because it can be used by other industries by melting in furnaces. Scrap is always physically available unlike waste which may or may not be physically present in the form of a residue. Thus scrap is always visible whereas waste may or may not be visible. Further, waste may not have any value whereas scrap must necessarily have a value.

There are three types of scrap, namely:

(a) Legitimate scrap,

(b) Administrative scrap,

(c) Defective scrap.

Legitimate scrap arises due to the nature of operation like turning, boring, punching etc. as discussed above. This type of scrap can be pre-determined and efforts should be made that it should not be more than the pre-determined quantity. Administrative scrap arises due to administrative action, such as, a change in the method of production.

Defective scrap arises because of use of inferior quality of material or bad workmanship or defective machines. Such type of scrap is abnormal because it arises due to abnormal reasons.

Treatment of Scrap:

The useful methods for the treatment of scrap are as follows:

1. If realisable value of normal scrap is insignificant (i.e., legitimate scrap and administrative scrap) it may be credited to Profit and Loss Account like other income. This method of treatment of scrap is suitable when the scrap is of very little value and when the market for it is uncertain. This method is known as treatment by neglect.

This method is not suitable for effective control over scrap because detailed records of scrap are not kept and scrap cost is not shown as an element of cost in the cost sheet. Scrap which is not sold and is in stock is valued at nil for balance sheet purposes and thus vitiates the valuation of closing stock.

Accounting of scrap by this method is also inaccurate as there is a time lag between the sales and the production. There is also a possibility that scrap may arise in one period but may be accounted (i.e., sold) in another period and thus distorts the profits of two periods.

2. The sale value of scrap may be deducted from the cost of materials consumed or factory overhead. This method is suitable when several production orders are commenced at a time and it is not possible to find scrap for each other. This method is, however, not effective in controlling scrap arising in different processes, jobs or orders.

When overheads are absorbed on the basis of pre-determined rates, it is more appropriate to credit an estimated allowance for the scrap instead of the amount of actual scrap.

The journal entries for recording the scrap are:

(i) Dr. Scrap Account (with an estimated allowance) Cr. Factory Overhead Control Account

(ii) Dr. Cash/Debtors (Amount realised on sale) Cr. Scrap Account.

Profit or loss on sale of scrap may be transferred to the Profit and Loss Account at the end of the year. When scrap is sold on a day-to-day basis and no stock is maintained, the journal entry is: Dr. Cash/Debtors Account (with realisable value) Cr. Factory Overhead Control Account

3. The scrap may be assigned a cost if it can be related to the job which yielded the scrap. It will help in giving reasonable credit to the jobs which yielded scraps. This method of treatment is suitable when scraps from the various jobs widely differ in nature.
4. It is possible that scrap arising in one job may be used in another job. In such a case material transfer note for transfer of scrap from one job to another job should be prepared and credit should be given to the job where scrap arises and debit should be given to the job for the amount of scrap transferred to it.

Sometimes, scrap may be returned to stores when some further processing has to be done before that can be utilised for other jobs. Job returning the scrap is credited with the value of the scrap returned to stores.

5. When the actual scrap is in excess of the pre-determined quantity (i.e., normal quantity), the cost of the excess scrap is transferred to Costing Profit and Loss Account after deducting there-from the sale proceeds of such excess scrap. The valuation of excess scrap is done in the same way as the valuation of abnormal waste is done.
6. The cost of defective scraps after deduction there-from the sale a proceeds of such scrap is transferred to Costing Profit and Loss Account because it is an abnormal loss.

3. Defectives:

Defective products or units are those which do not meet with dimensional or quality standards and are reworked for rectification of defects by application of material, labour and/or processing and salvaged to the point of either standard product or sub­standard product to be sold as seconds. Therefore, defectives are that portion which can be rectified at some extra cost of re-operation.

Defectives may arise due to the following reasons:

1. Sub-standard materials.
2. Poor workmanship.
3. Poor maintenance of machines.
4. Wrong tool setting.
5. Faulty design of products.
6. Bad supervision.
7. Careless inspection.
8. Poor working conditions.
9. Lack of control, such as humidity, furnace temperature etc.
10. Excessive short runs.

Defectives are bad products which are not totally spoiled and can be rectified or restored to original or near-original condition at some extra cost of re-operation. The additional cost of rectifying the defectives is added to the total cost and the quantity of defectives rectified is added to the quantity of good output because defective units rectified can be sold as “seconds”. Rectification of defective units is advisable only when the cost of rectification is low and more profitable than to sell as spoil 3d units.

Treatment of Cost of Rectification of Defectives:

Following methods may be adopted for the treatment of this cost:

1. If the defective production is identified with a specific job or department, the cost of rectification is charged to that specific job or department.
2. If the defective production is not identified with a particular job or department, the cost of rectification is added to general factory overhead.
3. If the defective production is due to abnormal reasons, the rectification cost is transferred to Costing Profit and Loss Account.

Every possible effort should be made to reduce the number of defectives because they increase the cost of production. Control of defectives is an operational correction, so steps should be taken to eliminate the reasons responsible for defectives. Right from the design stage to the output of the final product stage, each one should be looked into carefully for avoiding defectives.

Standardisation of products and operations, comparison of actual performance with standards laid down in regard to defectives, feedback and reporting and incentive scheme for minimising defectives will go a long way in reducing the quantity of defectives.

4. Spoilage:

Spoilage refers to production that does not meet with dimensional or quality standards in such a way that it cannot be rectified economically and is junked and sold for a disposal value. So it occurs when goods are so damaged in course of manufacturing process as to become not rectifiable with some additional cost.

Material used in spoiled units can be used again as material by the same or another process or product. Spoilage cost is the difference between the cost incurred upto the point of rejection less salvage value or cost of material used.

Spoilage arises due to sub-standard materials, poor workmanship, faulty tool setting, poor maintenance of machines, bad supervision and careless inspection.

Spoilage should not be confused with scrap. Scrap arises at the initial stages of production operations whereas spoilage takes place more towards the finishing production stages with larger loss of added value to the cost of material used.

Spoilage can be of two types:

(1) Normal spoilage and

(2) Abnormal spoilage.

According to Charles T. Horngren, “Normal spoilage is what arises under efficient operating conditions; it is an inherent result of the particular process and is thus uncontrollable in the short run.

Abnormal spoilage is spoilage that is not expected to arise under efficient operating conditions; it is not an inherent part of the selected production process”. Abnormal spoilage can be controlled because it arises as a result of inefficient operating conditions.

Normal spoilage is planned spoilage that management is willing to accept and is controllable by higher level of management which determines the nature of products and processes. On the other hand, abnormal spoilage can be controlled by first-line supervision which can exert influence over inefficiency.

Treatment of Cost of Spoilage:

The treatment of cost of spoilage depends upon the nature of spoilage. If the spoilage is normal, the cost is borne by good units of output. In case of abnormal spoilage, cost of spoilage is transferred to Costing Profit and Loss Account. When, however, the normal spoiled units are used again as raw material in the same manufacturing process, no separate treatment becomes necessary.

If they are used for another process, job or order, a proper credit should be given to the process job or order giving rise to the spoilage keeping in view the utility value of the spoilage to the process, job or order for which the same is used.

Control of Wastage, Scrap, Defectives and Spoilage:

Every effort should be made to reduce the cost of production by exercising control on wastage, scrap, defectives and spoilage.

Following steps may be taken in this direction:

1. Reports relating to the wastage, scrap, defectives and spoilage should be prepared in time to locate the reason responsible for the wastage etc. An immediate corrective action should be taken on the basis of the reasons responsible for the loss.
2. Wastage, scrap, defectives and spoilage should be standardised by following standard costing system. It should be seen that actual wastage, scrap, etc. should be within normal limits allowed.
3. Good quality of materials should be used. Better the quality of materials less is the wastage, scrap and spoilage.
4. Control of wastage, scrap, defectives and spoilage should start with the designing of the products. The type of materials that will result in the minimum wastage, scrap, defectives and spoilage are decided at the designing stage. Better quality of equipment should be used to get better return, so type and shape of equipments to be used for manufacturing process should be decided at the designing stage.
5. Properly trained personnel should be employed to reduce the quantum of wastage, scrap, defectives and spoilage.

One of the most popular activities on the Web is shopping. It has much allure in it  you can shop at your leisure, anytime, and in your pajamas. Literally anyone can have their pages built to display their specific goods and services.

History of ecommerce dates back to the invention of the very old notion of “sell and buy”, electricity, cables, computers, modems, and the Internet. Ecommerce became possible in 1991 when the Internet was opened to commercial use. Since that date thousands of businesses have taken up residence at web sites.

At first, the term ecommerce meant the process of execution of commercial transactions electronically with the help of the leading technologies such as Electronic Data Interchange (EDI) and Electronic Funds Transfer (EFT) which gave an opportunity for users to exchange business information and do electronic transactions. The ability to use these technologies appeared in the late 1970s and allowed business companies and organizations to send commercial documentation electronically.

Although the Internet began to advance in popularity among the general public in 1994, it took approximately four years to develop the security protocols (for example, HTTP) and DSL which allowed rapid access and a persistent connection to the Internet. In 2000 a great number of business companies in the United States and Western Europe represented their services in the World Wide Web. At this time the meaning of the word ecommerce was changed. People began to define the term ecommerce as the process of purchasing of available goods and services over the Internet using secure connections and electronic payment services. Although the dot-com collapse in 2000 led to unfortunate results and many of ecommerce companies disappeared, the “brick and mortar” retailers recognized the advantages of electronic commerce and began to add such capabilities to their web sites (e.g., after the online grocery store Webvan came to ruin, two supermarket chains, Albertsons and Safeway, began to use ecommerce to enable their customers to buy groceries online). By the end of 2001, the largest form of ecommerce, Business-to-Business (B2B) model, had around $700 billion in transactions.

According to all available data, ecommerce sales continued to grow in the next few years and, by the end of 2007, ecommerce sales accounted for 3.4 percent of total sales.

Ecommerce has a great deal of advantages over “brick and mortar” stores and mail order catalogs. Consumers can easily search through a large database of products and services. They can see actual prices, build an order over several days and email it as a “wish list” hoping that someone will pay for their selected goods. Customers can compare prices with a click of the mouse and buy the selected product at best prices.

Online vendors, in their turn, also get distinct advantages. The web and its search engines provide a way to be found by customers without expensive advertising campaign. Even small online shops can reach global markets. Web technology also allows to track customer preferences and to deliver individually-tailored marketing.

History of ecommerce is unthinkable without Amazon and Ebay which were among the first Internet companies to allow electronic transactions. Thanks to their founders we now have a handsome ecommerce sector and enjoy the buying and selling advantages of the Internet. Currently there are 5 largest and most famous worldwide Internet retailers: Amazon, Dell, Staples, Office Depot and Hewlett Packard. According to statistics, the most popular categories of products sold in the World Wide Web are music, books, computers, office supplies and other consumer electronics.

Amazon.com, Inc. is one of the most famous ecommerce companies and is located in Seattle, Washington (USA). It was founded in 1994 by Jeff Bezos and was one of the first American ecommerce companies to sell products over the Internet. After the dot-com collapse Amazon lost its position as a successful business model, however, in 2003 the company made its first annual profit which was the first step to the further development.

At the outset Amazon.com was considered as an online bookstore, but in time it extended a variety of goods by adding electronics, software, DVDs, video games, music CDs, MP3s, apparel, footwear, health products, etc. The original name of the company was Cadabra.com, but shortly after it become popular in the Internet Bezos decided to rename his business “Amazon” after the world’s most voluminous river. In 1999 Jeff Bezos was entitled as the Person of the Year by Time Magazine in recognition of the company’s success. Although the company’s main headquarters is located in the USA, WA, Amazon has set up separate websites in other economically developed countries such as the United Kingdom, Canada, France, Germany, Japan, and China. The company supports and operates retail web sites for many famous businesses, including Marks & Spencer, Lacoste, the NBA, Bebe Stores, Target, etc.

Amazon is one of the first ecommerce businesses to establish an affiliate marketing program, and nowadays the company gets about 40% of its sales from affiliates and third party sellers who list and sell goods on the web site. In 2008 Amazon penetrated into the cinema and is currently sponsoring the film “The Stolen Child” with 20th Century Fox.

According to the research conducted in 2008, the domain Amazon.com attracted about 615 million customers every year. The most popular feature of the web site is the review system, i.e. the ability for visitors to submit their reviews and rate any product on a rating scale from one to five stars. Amazon.com is also well-known for its clear and user-friendly advanced search facility which enables visitors to search for keywords in the full text of many books in the database.

One more company which has contributed much to the process of ecommerce development is Dell Inc., an American company located in Texas, which stands third in computer sales within the industry behind Hewlett-Packard and Acer.

Launched in 1994 as a static page, Dell.com has made rapid strides, and by the end of 1997 was the first company to record a million dollars in online sales. The company’s unique strategy of selling goods over the World Wide Web with no retail outlets and no middlemen has been admired by a lot of customers and imitated by a great number of ecommerce businesses. The key factor of Dell’s success is that Dell.com enables customers to choose and to control, i.e. visitors can browse the site and assemble PCs piece by piece choosing each single component based on their budget and requirements. According to statistics, approximately half of the company’s profit comes from the web site.

In 2007, Fortune magazine ranked Dell as the 34th-largest company in the Fortune 500 list and 8th on its annual Top 20 list of the most successful and admired companies in the USA in recognition of the company’s business model.

History of ecommerce is a history of a new, virtual world which is evolving according to the customer advantage. It is a world which we are all building together brick by brick, laying a secure foundation for the future generations.

Selling online has become easily possible nowadays. In fact, it has become one of the most popular platforms people prefer buying from.

If you plan to start a business of your own, and wondering how to go about it, then this post will help you learn the complete e-Commerce Selling Process.

Follow the steps as mentioned, and to the end, you’ll be done.

Step #1: Give your business a name – Register it

The first and foremost requirement is to give your business an identity in terms of a name. The name is something your audience will recognize your business with. Thus, choosing a good name is imperative.

Once you select a name, make sure you register it.

Why is registration important?

This is because if someday someone else comes up in the market with the same name, you will stand nowhere since you do not have proof that you own that title.

Moreover, one needs to comply with the registration as mandatory per law. Thus, it is essential to get your business registered. Each state may have its own policies; therefore, you may refer to your respective state policies for registration.

Step #2: Create a domain name and a website – Register as a seller

Once you are registered, either create your own website using a hosting platform or register as a seller. There are two different possibilities you might want to opt, i.e.

Register as a seller on popular websites like Amazon, and eBay OR start your own e-commerce business by buying space at popular sites such as Shopify, BigCommerce, etc.

The other possibility that arises when you want to set your own e-commerce store is to build a website using web hosting platforms and register your domain.

For example, buy a domain for the e-commerce platform through WordPress and install plugins that help you set up your business and sell online.

Registering as a seller on e-commerce platforms is the easiest way to start selling.

The complexity level increases when you opt for platforms to open up your own store. However, the primary benefit here is that you have your own store where you can sell unlike being just a seller on other e-commerce platforms.

You actually tend to build your own brand here. The most complicated method is to create a new website altogether to start a business.

However, if you plan to do business on a massive scale, it is the optimum choice to make.

Step #3: Upload Products

Once you’ve chosen where you want to sell and have a space to upload your stock, you may now start uploading high-quality images of your products.

Give them a name and mention their price.

If you are into selling various categories of products, make sure to categorize them. This makes the website look neater and easy to use for the customer.

Give the products a suitable description that is easy to understand and explains each and every feature of the product.

When doing business online, your interaction with customers is not direct. The customer cannot touch and feel the product physically. Thus, in order to succeed despite the demerit, it is important to explain each and everything about the product through descriptions.

Step #4: Use SEO

In order to get your website or listed products to rank on top of the Google search results, it is essential to have relevant keywords in the content.

For example, if a person is looking out for a juicer, and you have it as one of your products, then make sure your product title has the word juicer. This will help the search engines identify that you have the same thing that the buyer is looking for and will list your products on the top.

Similarly, make sure that the description along with being informative and easy to read, is also SEO optimized.

Step #5: Choose your shipping method

The next and most important thing is to choose a shipping strategy. Make sure you connect with only famous shipping companies who can make sure that they will deliver your product timely without any damage.

Final words

You are all set to start selling. You have an e-commerce store, have your shipping planned and the products are listed.

Now the buyers will simply have to click on the buy now option, make payments through the payment gateway you’ve opted for and buy your product.

In order to attract more customers, use all the digital marketing tactics and take your business to greater heights.

Following are the key drivers of e-commerce:-

1. Make sure your e-commerce efforts are in sync with corporate goals

• Have a clear understanding of company’s overall growth objectives.
• Have a clear understanding of company’s branding and marketing objectives.
• Have a clear understanding of company’s target customers and demographics.
• Have a clear understanding of company’s products/margins which product sales move the bottom line needle the most.
• Have a clear understanding of company’s financial targets (revenues, margins, ROI).

2. Omni-channel design/customer of one

• You are not building a website in isolation from other customer channels break down divisional silos.
• All decisions should be made with a customer-centric mindset.
• Allow customers to shop where, how and when they choose, anytime and anyplace.
• This means integrating all website, mobile, store, call center systems, etc.
• This means tailoring offering and messaging down to the person-by-person basis.

3. Driving new users to the site

• Determine the proper marketing plan that works within your budgets.
• Bias online marketing as most trackable and one-click away from your site.
• Constantly test and iterate all offers and creative strategies used to maximize engagement.
• Drive traffic to specific product landing pages, which should be unique and tested.
• Have a clear understanding of the keywords that matter most for your business and optimize your site for SEO and PPC efforts.
• Cross-promote e-commerce capabilities across all channels of your business.
• Cross-promote e-commerce links across within all other channel marketing.
• Leverage the power of social media maintain and promote your own profile pages on major social networks (e.g., Facebook, Twitter, Pinterest) and allow for social sharing from all product pages and conversational communications/viral marketing therefrom.

4. Getting existing users more engaged

• Continually optimize and fine-tune the product/pricing offering to match demand.
• Maintain consistent communication with customers via monthly newsletters or other means.
• Create loyalty programs that reward increased spending with increased rewards.
• Allow customers to create wishlists that they can send to their friends and family.
• Tailor product offers to specific customer profile data.
• Optimize upselling and cross-selling techniques (e.g., promote related items and “people who bought this, also bought that” functionality).
• Use machine learning techniques to keep a “memory” of user behaviors in session and over time to allow for behavioral targeting.
• Use targeted pull back ads after a user leaves the site without buying
• Employ automated repurchase reminders for things that need to be replaced over time
• Opt customers into company newsletters during the time of e-commerce purchases.

5. Website Design/Functionality

• It needs a clear and simple way to navigate the site (e.g., think “one click” away).
• Constantly test page layouts to increase user engagement, using eye pattern heat maps, user mouse tracking or otherwise.
• Constantly test shopping cart flow to limit abandon rates.
• Study all abandon rates to figure out why customers end up not buying—and address such concerns.
• Leverage video where you can, as it is much more effective than static images and text in terms of driving engagement.
• Leverage the reviews and feedback of other customers who bought same items.

6. Fulfillment/customer service

• Offer two-way free shipping for orders over a certain size (e.g., $50) don’t give users any reason not to buy.
• Offer no-hassle customer satisfaction guarantees for a full refund if they are not satisfied for any reason.
• Provide clear communication on all shipping-related issues (e.g., time to ship, expected arrival dates) with opportunities to get overnight, if needed.
• Provide the ability to check inventory online for items available in the stores for same day pickup.
• Simple credit card processing online and the ability to collect payment information via phone.
• Allow returns either via mail or direct to the stores.
• Consider kiosk or tablet-based opportunities and services within the stores.

7. CRM/BIG DATA

• Invest in customer CRMs as a central repository to track all client profile, preferences, sales and social media history behavior.
• Invest in big data analytics technology to make sense of the fire hose of data available.
• The future of marketing is moving toward person-by-person targeting of products, offers and messaging based on their past behaviors and profile preferences. It is no longer mass-marketing of the same messaging to all.
• Study cross-channel behaviors to learn how customers prefer to engage with the company (e.g., they researched first online but bought in the store, or vice versa).
• Test, test and retest all marketing activities and look to sharpen efforts with each iteration.

8. Mobility

• The PC market is actually declining, while the mobile market is exploding—you need to have native mobile apps built for each major platform (e.g., Apple, Android), or a mobile friendly touch site.
• Take advantage of mobile locations of your customers with targeted offers and services related to their exact location (e.g., “Check out our new store near your location,” “here are local restaurant deals to go with your recent movie tickets purchase,” “here is our mobile mapping app to go with your new car”).