Cost accounting Flashcards
Service costing
It is the method of costing employed to ascertain the cost of providing or operating a service. This method of costing is employed in those undertakings which are engaged in providing or operating services rather than in manufacturing tangible products.
Abnormal gain
When the actual process loss is less than the normal loss or when the actual output is more than the normal expected output, it gives rise to abnormal gain. It may arise due to exceptionally good quality of materials, exceptionally high degree of efficiency on the part of workers etc.
Contribution ratio
Contribution ratio is the ratio of contribution margin to sales revenue.
It shows how much of each dollar of sales revenue is available to cover the fixed costs and generate profit. It is calculated by dividing the contribution margin by the sales revenue.
Labour efficiency variance
The labour efficiency variance measures the ability to utilize labor in accordance with expectations. The variance is useful for spotlighting those areas in the production process that are using more labor hours than anticipated.
Break-even chart
It is a graphical representation of marginal costing. This chart shows the inter relationship between profit, volume of sales and cost. It reveals the BEP. MOS, angle of incidence, profit or loss at various levels of production.
Angle of incidence
It is the angle to the right of BEP formed by intersecting the total sales line and the total cost line. It indicates the profit earning capacity. The angle may be large or small. A greater angle of incidence means that the profits are made at high rate.
By-product
It is a secondary or subsidiary product which emerges as a result of manufacturing of the main products. It is the residual material which is incidentally obtained from the production of main products and has relatively small value.
Equivalent production
The problem in valuation of WIP can be solved by calculating Equivalent production. It represents the production of a process expressed in terms of completed units.
Equivalent production = actual no of units in process of manufacture X percentage of work completed
Log book
It is a book maintained by transport companies, showing the details of the trips daily made. Such permanent records maintained for each vehicle is called a log book.
Notional profit
It is the estimated profit on incomplete contract, which is not real as some portion of it is not realised and is to be kept as reserve for next year. Notional profit is the difference between the value of work in progress and the cost of work in progress.
Absorption costing
According to CIMA, absorption costing is defined as “the practice of charging all costs, both variable and fixed, to operations, processes or products”.
Inter-process profit
When market price cannot be ascertained, certain percentage of profit margin is added to the cost of processing in order to arrive at the transfer price. Consequently, each process account reveals a profit and this profit is known as ‘inter process profit’.
Transfer pricing
It is the price that one sub unit of an organisation that charges for a product/service supplied to another sub unit of the same organisation as it is only an internal transfer and not sale. Transfer price becomes a cost to the buying division and a revenue to the selling division.
MOS
It is the difference between actual sales and sales at break-even point. It is the amount of sales beyond the BEP. It can be expressed in value or as a percentage of sales. A large margin of safety indicates the strength of business.
PV ratio
It is the ratio of contribution to sales. It is also called contribution to sales ratio. It is considered to be an indicator of the profitability of the business. It can be improved by reducing variable cost or increasing the selling price.
