P/V Ratio is Profit Volume Ratio which indicates the contribution earned with respect to one rupee of sales. The fundamental property of P/V Ratio is that it remains constant at all the levels of activities, provided per unit sales price and variable cost remains constant. A high P/V ration indicates that a slight increase in sales without corresponding increase in fixed costs will result in higher profits whereas a low P/V ratio indicates low profitability so that efforts can be made to increase the profits by increasing selling price or by reducing variable cost.
Marginal Costing is based on the following the basic assumptions
Marginal Cost :is the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unity. The aggregate costs consists of both, fixed cost and variable cost. In simple words, marginal cost indicates the per unit variable cost.
Marginal Costing :is on the other hand is the ascertainment, by differentiating between fixed costs, variable costs, of the marginal costs and of the effect on profit of changes in volume and type of output.
Prime Cost is an aggregate of direct material cost, direct labour cost and direct expenses.
Non operating financial income represents that income which arises not as a part of regular operations of the organization. Due to these incomes operating profit as per cost statement may be less than profit as per Profit and Loss account. For example: profit on the sale of assets, dividend received etc.
Non operating financial expense represents that expense which arises not as a part of regular operations of the organization. Due to these expenses the operating profit as per the cost statement may be more than the profit as per Profit and Loss Account. For example: a loss on the sale of assets, provision for income tax, interest paid etc.
Elements of costs
Margin of safety are the sales beyond Break Even Point. In simple words, this is the amount of sales which generates profits. The soundness of the business is indicated by the margin of safety. A high margin of safety indicates that the Break Even Point is much below the actual sales and even if there is reduction in sales, business will be still in profits whereas a low margin of safety accompanied by high fixed cost and high P/V ration indicates that efforts are required to be made for reducing the fixed cost or increasing sales volume.
Under Simple average method: the simple average of the prices of the lots available for making the issues is considered for pricing the issues. After the receipt of new lot, a new average price is worked out. This method is suitable if the material is received in uniform quantity.
Under Weighted average method: the price of each lot and the quantity of the same is considered. This method proves to be very useful in the event of varying prices and quantities. It is very simple to calculate.
Remuneration on time basis
Remuneration on work basis
Indirect monetary remuneration
Sunk cost indicates the historical cost which has been incurred in the past. This type of cost is not relevant in the decision making process. For example-while deciding about the replacement of a machine, the depreciated book value of the machine may not be relevant in the form of sunk cost.
Cost indicates the amount of expenditure incurred on a given thing.
Following are the different types of cost:
Direct Cost – also termed as Prime cost. It indicates that cost which can be identified with the individual cost center. It consists of direct material cost, direct labour cost and direct expenses.
Indirect Cost – also termed as Overhead. It indicates that cost which cannot be identified with the individual cost center. It consists of indirect material cost, indirect labour cost and indirect expenses.
Fixed Cost – indicates that portion of total cost which remains constant at all the levels of production. As the volume of production increases, per unit fixed cost may reduce, but not the total fixed cost.
Variable – indicated that portion of the total cost which varies directly with the level of production. The higher the volume of production, the higher the variable cost and vice versa, though per unit variable cost remains constant at all the levels of production.
Semi-variable cost – indicates that portion of the total cost which is partly fixed and partly variable in relation to the volume of production.
Controllable cost – indicates that cost which can be controlled by a specific number of persons in the organization
Uncontrollable cost – indicates that cost which cannot be controlled by a specific number of persons in the organization.
Normal cost – indicates that cost which is normally incurred at a certain level of output under normal circumstances.
Abnormal cost - indicates that cost which is normally not incurred at a certain level of output under normal circumstances.
Cost accountancy is the application of Costing and Cost accounting principles, methods, and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making.
Following are the objective of cost accountancy:
Maximum level is the level above which the actual stock show Following factors are considered while fixing this level:
Element wise Classification:
Function wise Classification:
Variability wise Classification:
Controllability wise Classification:
Normality wise Classification:
Overhead is an aggregate of indirect material cost, indirect labour cost and indirect expenses.
Overheads are further classified as:
Cost center is defined as a location, person, or item of equipment in relation to which costs may be ascertained and used for the purpose of cost control. Identification of a cost center is a prerequisite for the successful implementation of the cost accounting process as the costs are ascertained and controlled with respect tot the cost centers. In many cases cost centers are termed as Responsibility Centers.
Types of cost centers:
@Impersonal cost center – Consists of location or item of equipment.
Example - department, branch etc.
@Personal cost center – Consists of a person or a group of persons.
Example – finance manager, sales manager etc.
@Production cost center – Is the one where the production activity is carried on.
For example - paint shop, a machine shop, etc.
@Service cost centers – Is the one which assists the production activity.
For example - store department, internal trport department, labour office, accounts department, etc.