dhawal costing

8/16/2019 Dhawal Costing

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SOCIAL AUDIT

INTRODUCTION

Governments are facing an ever-growing demand to be more accountable and

socially responsible and the community is becoming more assertive about its right

to be informed and to influence governments' decision-making processes. Faced

with these vociferous demands, the executive and the legislature are looking for

new ways to evaluate their performance. Civil society organisations are also

undertaking !ocial "udits to monitor and verify the socialperformance claims of

the organisations and institutions.

!ocial "udit is a tool through which government departments can plan,manage and measure non-financial activities and monitor both internal and

external conse#uences of the departments' social and commercial operations.

!ocial "udit gives an understanding of the administrative system from the

perspective of the vast ma$ority of people in the society for whom the

veryinstitutional %administrative system is being promoted and legitimised. !ocial

"udit of administration means understanding the administrative system and its

internal dynamics from the angle of what they mean for the vast ma$ority of the

people, who are not essentially a part of the !tate or its machinery or the ruling

class of the day, for whom they are meant to work.

!ocial "udit is an independent evaluation of the performance of an organisation as

it relates to the attainment of its social goals. &t is an instrument of social

accountability of an organisation. &n other words, !ocial "udit may be defined as

an in-depth scrutiny and analysis of the working of any public utility vis-a-vis its

social relevance. !ocial "uditing is a process that enables an organisation to assess

and demonstrate its social, economic and environmental benefits. &t is a way of

measuring the extent to which an organisation lives up to the shared values and

ob$ectives it has committed itself to. &t provides an assessment of the impact of an

organisation's nonfinancial ob$ectives through systematic and regular monitoring based on the views of its stakeholders. !takeholders include employees, clients,

volunteers, funders, contractors, suppliers and the general public affected by the

organisation. !takeholders are defined as those persons or organisations who have

an interest in, or who have invested resources in the organisation. ata &ron and

!teel Company (&!C)*, +amshedpur, implemented !ocial "udit in and is


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the first company in &ndia to do so. !ocial "udit gained significance after the /rd

"mendment of the Constitution relating to 0anchayat 1a$ institutions.

Principles of Social Audit

he foremost principle of !ocial "udit is to achieve continuously improving

performances relative to the chosen social ob$ectives. 2ight specific key principles

have been identified from !ocial "uditing practices around the world.

• Multi-Perspective/Polyvocal: "im to reflect the views (voices* of all those

people

(stakeholders* involved with or affected by the organisation%department%

programme.

• Copre!e"sive: "ims to (eventually* report on all aspects of the organisation's

work

and performance.

• Participatory: 2ncourages participation of stakeholders and sharing of their

values.

• Multi#irectio"al: !takeholders share and give feedback on multiple aspects.

• Re$ular: "ims to produce social accounts on a regular basis so that the conceptand the

practice become embedded in the culture of the organisation covering all the

activities.

Coparative: 0rovides a means whereby the organisation can compare its own

performance each year and against appropriate external norms or benchmarks3 and

provide for comparisons to be made between organisations doing similar work and

reporting in similar fashion.

• %eri&ie#: 2nsures that the social accounts are audited by a suitably experienced

person or agency with no vested interest in the organisation.

• Disclose#: 2nsures that the audited accounts are disclosed to stakeholders and the

wider community in the interests of accountability and transparency.


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hese are the pillars of !ocial "udit, where socio-cultural, administrative, legal

and democratic settings form the foundation for operationalising !ocial "udit.

DISTIN'UIS( )*T+**N ,INANCIAL AUDIT AND SOCIAL AUDIT


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Benefits of Social Auditing

. *"!a"ces reputatio": he information generated from a !ocial "udit can

provide crucial knowledge about the departments4%institutions4 ethical performanceand how stakeholders perceive the services offered by the government. he social

angle in the delivery of services, real or perceived, can be a ma$or factor adding

to the reputation of the department and its functionaries.

5. Alerts policyaers to stae!ol#er tre"#s: !ocial"uditing is a tool that helps

managers understand and anticipate stakeholder concerns. his tool provides

essential information about the interests, perspectives and expectations of

stakeholders facilitating the interdependency that exists between the government

and the community.

/. A&&ects positive or$a"isatio"al c!a"$e: !ocial "uditing identifies specific

organi6ational improvement goals and highlights progress on their implementation

and completeness. "lso, by integrating !ocial "udit into existing management


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systems, employees responsible for day-to-day decision making can more

effectively consider stakeholders' issues and concerns.

7. I"creases accou"ta.ility: 8ue to the strong emphasis on openness and

accountability for government departments, the information disclosed needs to be

fair and accurate. !ocial "uditing uses external verification to validate that the

!ocial "udit is inclusive and complete. "n externally verified audit can add

credibility to the department's efforts. 9ut the greatest demonstration of a !ocial

"udit's authenticity must be seen in how the performance of the department

improves over time in relation to its mission, values and ob$ectives.

:. Assists i" re-orie"ti"$ a"# re-&ocusi"$ priorities: !ocial "uditing could be a

useful tool to help departments reshape their priorities in tune with people'sexpectations.

;. Provi#es i"crease# co"&i#e"ce i" social areas: !ocial "udit can enable

departments% institutions to act with greater confidence in social areas that have

been neglected in the past or have been given a lower priority.

Social Audit Vs Other Audits

!ocial "udit is often misinterpreted as another form of audit to determine the

accuracy of financial or statistical statements or reports and the fairness of the

facts they present. " conventional financial audit focuses on financial records and

their scrutiny by an external auditor following financial accountancy principles,

whereas the concept of !ocial "udit is more comprehensive, having a greater scope

than that of traditional audit. &n general, !ocial "udit refers to a process for

measuring, understanding and improving the social performance of an activity of

an organisation. !ocial "uditing is again distinct from evaluation in that it is an

internally generated process whereby the organisation itself shapes the !ocial "udit

process according to its stated ob$ectives. &n particular, it aims to involve allstakeholders in the process. &t measures social performance in order to achieve

improvement as well as to report accurately on what has been done.Financial audit

is geared towards verification of reliability and integrity of financial information.

!imilarly, operation audit looks at compliance with policies, plan procedures, laws,

regulations, established ob$ectives and efficient use of resources. )n the contrary,


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!ocial "udit examinesperformance of a department%programme vis-


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Six Key Steps for Social Audit

1 Preparatory Activities

• =nderstand key principles of !ocial "udit.

• >ist core values of the department%programmes.• >ist down social ob$ectives the department is working towards or

programmes it aims to contribute.

• ?atch activities with ob$ectives.

• >ist current practices and delivery systems.

• Fix the responsibility for doing !ocial "udit in the department.

5. De&i"i"$ Au#it )ou"#aries a"# I#e"ti&yi"$ Stae!ol#ers

• 2laborate key issues for !ocial "uditing based on thesocial ob$ectives.

• 0repare a statement of purpose,

• ob$ectives, key issues and activities for !ocial "uditing.

• &dentify key stakeholders for consultation (Government and Civil !ociety*.

• Forge consensus on audit boundaries3 identify stakeholders and formalise

commitments.

/. Social Accou"ti"$ a"# )oo-eepi"$

• !elect performance indicators for social accounting.

• &dentify which existing records can be used.

• &dentify what additional data to be collected, who would collect this data,

when and how.

• &dentify when stakeholders would be consulted and for what.

• 0repare a social accounting plan and timeline.

• 0lan for monitoring social accounting activities.

7. Prepari"$ a"# Usi"$ Social Accou"ts

• 0repare social accounts using existing information,data collected and views

of stakeholders.

• &dentify key issues for action.

• ake stock of ob$ectives, activities and core values.

• !et targets for future.


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2 Social Au#it a"# Dissei"atio"

• 0resenting social accounts to !ocial "uditor.

• !ocial "uditor verifies data used, assess the interpretation and comment on

the #uality of social accounting and reporting.

• !ocial accounts revised in accordance with !ocial "uditor4s

recommendations.

• !ocial "uditor has to collect information from the stakeholders regarding

programme implementation and benefits accrued tothem.

• 8isseminate !ocial "uditor4s consolidated report to the decision-making

committee that includes stakeholders.

• 8isseminate report to civil society.

•

9egin next cycle of social accounting.

3 ,ee#.ac a"# I"stitutio"alisatio" o& Social Au#it

• Feedback for fine-tuning policy, legislation, administrative functioning and

programming towards social ob$ectives.

• Follow-up action.

• 1eviewing support to civil society for its participation

• &nstitutionalisation of the process.


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History of Social Audit

he word 'audit' is derived from >atin, which means 'to hear'. &n ancient times,

emperors used to recruit persons designated as auditors to get feedback about the

activities undertaken by the kings in their kingdoms. hese auditors used to go to

public places to listen to citi6ens' opinions on various matters, like behaviour of

employees, incidence of tax, image of local officials etc.

Charles ?edawar pioneered the concept of !ocial "udit in 5 with the

application of the idea in medicine policy, drug safety issues and on matters of

corporate, governmental and professional accountability. "ccording to ?edawar,

the concept of !ocial "udit starts with the principle that in a democracy the

decision makers should account for the use of their Charles ?edawar pioneered the

concept of !ocial "udit in 5 with the application of the idea in medicine policy,

drug safety issues and on matters of corporate, governmental and professional

accountability. "ccording to ?edawar, the concept of !ocial "udit starts

with the principle that in a democracy the decision makers should account for the

use of their powers, which should be used as far as possible with the consent and

understanding of all concerned.


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Budgeting and Budgetary Control

Introduction

Budgeting has come to be accepted as an efcient method o

short-term planning and control. It is employed, no doubt, in large

business houses, but even the small businesses are using it at

least in some inormal manner. Through the budgets, a business

wants to know clearly as to what it proposes to do during an

accounting period or a part thereo. The technique o budgeting is

an important application o anagement !ccounting. "robably,

the greatest aid to good management that has ever been devisedis the use o budgets and budgetary control. It is a versatile tool

and has helped managers cope with many problems including

in#ation.

DEFINITION OF BUDGET

The $hartered Institute o anagement !ccountants, %ngland,

de&nes a 'budget' as under( ) ! &nancial and*or quantitative

statement, prepared and approved prior to de&ne period o time,o the policy to be persued during that period or the purpose o

attaining a given ob+ective.) !ccording to Brown and oward o

anagement !ccountant )a budget is a predetermined statement

o managerial policy during the given period which provides a

standard or comparison with the results actually achieved.)

%ssentials o a Budget !n analysis o the above said de&nitions

reveal the ollowing essentials o a budget(

/ It is prepared or a de&nite uture period.

0/ It is a statement prepared prior to a de&ned period o time.

1/ The Budget is monetary and I or quantitative statement o

policy.


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2/ The Budget is a predetermined statement and its purpose is to

attain a given ob+ective. ! budget, thereore, be taken as a

document which is closely related to both the managerial as well

as accounting unctions o an organi3ation.

Forecast Vs Budget

4orecast is mainly concerned with an assessment o probable

uture events. Budget is a planned result that an enterprise aims

to attain. 4orecasting precedes preparation o a budget as it is an

important part o the budgeting process. It is said that the

budgetary process is more a test o orecasting skill than anything

else. ! budget is both a mechanism or pro&t planning and

technique o operating cost control. In order to establish a budget

it is essential to orecast various important variables like sales,

selling prices, availability o materials, prices o materials, wage

rates etc.

Diference between Forecast and Budget

Both budgets and orecasts reer to the anticipated actions and

events. But still there are wide di5erences between budgets and

orecasts as given below(

Forecasts

/ 4orecasts is mainly concerned with anticipated or

probable events

0/ 4orecasts may cover or longer period or years

1/ 4orecast is only a tentative estimate

2/ 4orecast results in planning

6/ The unction o orecast ends with the orecast o likely

events


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7/ 4orecast usually covers a speci&c business unction

8/ 4orecasting does not act as a tool o controlling

measurement.

Budgets

/ Budget is related to planned events0/ Budget is planned or prepared or a shorter period1/ Budget is a target &9ed or a peri:d.2/ ;esult o planning is budgeting6/ The process o budget starts where orecast ends and

converts it into a budget7/ Budget is prepared or the business as a whole

8/ "urpose o budget is not merely a planning device butalso a controlling tool.

BUDGETA! CONTO"

Budgetary $ontrol is the process o establishment o budgets

relating to various activities and comparing the budgeted &gures

with the actual perormance or arriving at deviations, i any.

!ccordingly, there cannot be budgetary control without budgets.

Budgetary $ontrol is a system which uses budgets as a means oplanning and controlling.

!ccording to I.$..!. %ngland Budgetary control is de&ned by

Terminology as the establishment o budgets relating to the

responsibilities o e9ecutives to the requirements o a policy and

the continuous comparison o actual with the budgeted results,

either to secure by individual actions the ob+ectives o that policy

or to provide a basis or its revision.

Brown and oward de&nes budgetary control is )a system o

controlling costs which includes the preparation o budgets, co-

ordinating the department and establishing responsibilities,

comparing actual perormance with the budgeted and acting upon

results to achieve ma9imum pro&tability.)


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The above de&nitions reveal the ollowing essentials o budgetary

control(

/ %stablishment o ob+ectives or each unction and section o

the organi3ation.0/ $omparison o actual perormance with budget.

1/ !scertainment o the causes or such deviations o actual rom

the budgeted perormance.

2/ Taking suitable corrective action rom di5erent available

alternatives to achieve the desired ob+ectives.

Ob#ecti$es o% Budgetary Control

Budgetary $ontrol is planned to assist the management or policy

ormulation, planning, controlling and co-ordinating the general

ob+ectives o budgetary control and can be stated in the ollowing

ways(

/ "lanning( ! budget is a plan o action. Budgeting

ensures a detailed plan o action or a business over a periodo time.

0/ $o-ordination( Budgetary control co-ordinates the

various activities o the entity or organi3ation and secure co-

operation o all concerned towards the common goal.1/ $ontrol( $ontrol is necessary to ensure that plans and

ob+ectives are being achieved. $ontrol ollows planning and

co-ordination.


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&co'e and Tec(ni)ues o% &tandard Costing and Budgetary

Control

&co'e*

/ Budgets are prepared or di5erent unctions o businesssuch as production, sales etc. !ctual results are compared

with the budgets and control is e9ercised. =tandards on the

other hand are complied by classiying, recording and

allocation o the e9penses to cost units. !ctual costs are

compared with standard costs.0/ Budgets have a wide range o coverage o the entire

organi3ation. %ach operation or process is divided into

number o elements and standards are set or each suchelement.

1/ Budgetary control is concerned with origin o

e9penditure at unctional levels. =tandard costing is

concerned with the requirements o each element o cost.2/ Budget is a pro+ection o &nancial accounts whereas

standard costing pro+ects the cost accounts.

Tec(ni)ue*

/ Budgetary control is e9ercised by putting budgets and actuals

side by side. >ariances are not normally revealed in the accounts.

=tandard costing variances are revealed through accounts.

0/ Budgetary control system can be operated in parts. 4or

e9ample, !dvertisement Budgets, ;esearch and ?evelopment

Budgets, etc. =tandard costing is not put into operation in parts.

1/ Budgetary control o e9penses is broad in nature whereas

standard costing system is a ar more technically improved

system by means o which the variances are analysed in detail.

e)uisites %or Efecti$e Budgetary Control

The ollowing are the requisites or e5ective budgetary control (


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/ $lear cut ob+ectives and goals should be well de&ned.

0/ The ultimate ob+ective o realising ma9imum bene&ts should

always be kept uppermost.

1/ There should be a budget manual which contains all detailsregarding plan and procedures or its e9ecution. It should also

speciy the time table or budget preparation or approval, details

about responsibility, cost centers etc.

2/ Budget committee should be set up or budget preparation

and efcient e9ecution o the plan.

6/ ! budget should always be related to a speci&ed time period.

672 ! Te@lbook o 4inancial $ost and anagement !ccounting

7/ =upport o top management is necessary in order to get the

ull support and co-operation o the system o budgetary control.

8/ To make budgetary control successul, there should be a

proper delegation o authority and responsibility.

A/ !dequate accounting system is essential to make the

budgeting successul.

/ The employees should be properly educated about the

bene&ts o budgeting system.

C/ The budgeting system should not cost more to operate than

it is worth.

/ Dey actor or limiting actor, i any, should consider beore

preparation o budget.

0/ 4or budgetary control to be e5ective, proper periodic

reporting system should be introduced.

Organi+ation %or Budgetary Control


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In order to introduce budgetary control system, the ollowing are

essential to be considered or a sound and efcient organi3ation.

The important aspects to be considered are (

. :rganisation $hart0. Budget $enter

1. Budget :fcer

2. Budget $ommittee

6. Budget anual

7. Budget "eriod

8. Dey 4actor

Ad$antages o% Budgetary Control

The advantages o budgetary control may be summari3ed asollows (

/ It acilitates reduction o cost.

0/ Budgetary control guides the management in planning and

ormulation o policies.

1/ Budgetary control acilitates e5ective co-ordination o

activities o the various departments and unctions by settingtheir limits and goals.

2/ It ensures ma9imi3ation o pro&ts through cost control and

optimum utili3ation o resources.


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6/ It evaluates or the continuous review o perormance o

di5erent budget centers.

7/ It helps to the management efcient and economic production

control.8/ It acilitates corrective actions, whenever there is inefciencies

and weaknesses comparing actual perormance with budget.

A/ It guides management in research and development.

/ It ensures economy in working.

C/ It helps to adopt the principles o standard costing.

"i,itations o% Budgetary Control

Budgetary $ontrol is an e5ective tool or management control.

owever, it has certain important limitations which are identi&ed

below(

/ The budget plan is based on estimates and orecasting.

4orecasting cannot be considered to be an e9act science. I the

budget plans are made on the basis o inaccurate orecasts thenthe budget progamme may not be accurate and ine5ective.

0/ 4or reasons o uncertainty about uture, and changing

circumstances which may develop later on, budget may prove

short or e9cess o actual requirements.


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1/ %5ective implementation o budgetary control depends upon

willingness, co-operation and understanding among people

reasonable or e9ecution. Eack o co-operation leads to inefcient

perormance.

2/ The system does not substitute or management. It is mere

like a management tool.

6/ Budgeting may be cumbersome and time consuming process.

INTRO!"TION

he costs that vary with a decision should only be included in decision analysis.

For many decisions that involve relatively small variations from existing practice

and%or are for relatively limited periods of time, fixed costs are not relevant to the

decision. his is because either fixed costs tend to be impossible to alter in theshort term or managers are reluctant to alter them in the short term. ?arginal

costing distinguishes between fixed costs and variable costs as convention ally

classified. he marginal cost of a product @Ais its variable costB. his is normally

taken to be3 direct labor, direct material, direct expenses and the variable part of

overheads.


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>ike ?arginal costing or $ob costing, ?arginal costing is not a distinct method of

ascertainment of cost but is a techni#ue which applies existing methods in a

particular manner so that the relationship between profit the volume of output

can be clearly brought out. ?arginal costing ascertains marginal or variable costs

the effect on profit, of the changes in volume or type of output, bydifferentiating between variable costs fixed costs. o any type of costing such as

historical, standard, ?arginal or $ob3 the ?arginal costing techni#ue may be

applied.

=nder the ?arginal of ?arginal costing, from the cost components, fixed costs are

excluded. he difference which arises between the variable costs incurred for

activities the revenue earned from those activities is defined as the gross margin

or contribution. &t may relate to total sales or may relate to one unit.

For the business as a whole, Contribution earned by specific products or group of

products, are added so as to calculate the Dpool4 of total contribution. he fixed

costs of the business are paid from this Dpool4 then the part of the total

contribution which remains becomes the profit of the business as a whole.


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M*ANIN' O, MAR'INAL COSTIN'

&t is the amount by which total cost increases when one extra unit is produced,or the amount of cost which can be avoided by producing one unit less.

"ccordingly, marginal cost may also be defined as the variable cost incurred due to

a specific activity. &t is concerned with variable costs, because fixed costs by

definition do not change with the volume produced.

D*,INATION O, MAR'INAL COSTIN'

he )fficial C.&.?." Costs of the erminology defines ?arginal costing as, he

accounting system in which variable costs are changed to costs units and fixed period are

written off in full against the aggregate contribution. &ts special value is in decision-making

E"ccordingly, ?arginal cost ariable cost 8irect material H 8irect labor

H8irect expenses H ariable overheads.

?arginal costing is formally defined asI Dthe accounting system in which variablecosts are charged to cost units and the fixed costs of the period are written-off in

full against the aggregate contribution. &ts special value is in decision making4. he

term Dcontribution4 mentioned in the formal definition is the term given to the

difference between !ales and ?arginal cost. hus ? " 1 G & J " > C ) !

" 1 & " 9 > 2 C ) ! 8 & 1 2 C > " 9 ) = 1 H8&12C

?"21&">H8&12C 2K02J!2H"1&"9>2 )21L2"8! C)J1&9=&)J

!">2! - ?"1G&J"> C)!. he term marginal cost sometimes refers to the

marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation.


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#$AT!R$S O# %AR&INA' "OSTIN&

• Classification of costs into fixed costs variable costs is done under

?arginal costing system. "lso semi-fixed or semi-variable cots get further

classified into fixed variable elements.

• o the product, only variable elements of cost, which constitute marginal

cost, are attached.

• "fter the marginal cost marginal contribution are taken into consideration3

price is fixed.

• From the total contribution for any period, fixed cost for the period are

deducted.

• he profitability of a department or product is decided by the marginal

contribution.

• "t variable production cost, the valuation of work-in-progress finished

product is made.


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AVANTA&$S O# %AR&INA' "OSTIN&

• "s there is involvement of computation of variable costs only in ?arginal

costing, it is easy to understand operate the same.

• "mong different products or departments, arbitrary apportionment of fixed

costs is avoided the under-recovery or over-recovery problems are

eliminated.

• "ny attempt of measurement of relative profitability of different products or

different departments becomes complicated due to the arbitraryapportionment of fixed costs.

• "nalysis of contribution, break even charts analysis of cost-volume-

profit-analysis are resulted out of a ?arginal costing system3 for making

short term decisions all of these are important.

• ?ore uniform realistic figures are resulted out of ?arginal costing system

because fixed overhead costs are excluded from valuation of stock work-

in-progress.

• "pportionment of responsibility of control can be more easily done since to

each level of management only variable costs are presented over which they

have control.

• he effects of their decisions can be more readily seen by all levels of

management- sometimes even before taking of an action.


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%AR&INA' "OSTIN& V(S ABSORPTION "OSTIN&

he difference between ?arginal costing absorption costing is as belowI

. =nder ?arginal costingI for product costing inventory valuation, only

variable cost is considered whereas, under absorption costing3 for product

costing inventory valuation, both fixed cost variable cost are

considered.

5. =nder ?arginal costing, there is a different treatment of fixed overhead.

Fixed cost is considered as period cost by 0rofit%olume ratio (0% ratio*,

profitability of different products is $udged. )n the other hand, under

absorption costing system, the fixed cost is charged to cost of production. "reasonable share of fixed cost is to be borne by each product thereby

sub$ective apportionment of fixed overheads influences the profitability of

product.

/. =nder ?arginal costing, the presentation of data is so oriented that total

contribution contribution from each product gets highlighted. =nder

absorption costing, the presentation of cost data is on conventional pattern.

"fter deducting fixed overhead, the net profit of each product is determined.

7. =nder ?arginal costing, the unit cost of production does not get affected by

the difference in the magnitude of opening stock closing stock. Mhereas,

under absorption costing, due to the impact of the related fixed overheads,

the unit cost of production get affected by the difference in the magnitude of

opening stock closing stock.


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"ONTRIB!TION ANA')SIS

Contribution is the most important concept in ?arginal costing. &t is, as seen above

e#ual to !ales >ess ariable Cost. Contribution is the profit before ad$usting the

fixed costs. ?arginal costing is concerned with the Nproduct costsN rather than the

Nperiods costsN. Contribution indicates the

Pro#uct pro&it 4 pro#uct I"coe 0 pro#uct cost ie

Co"tri.utio" 4 sale %alue 0 %aria.le cost

?arginal costing assumes that ht excess of sales value over variable costs

contributes to a fund which will cover fixed costs as well as provide the concernNs

profits. he amount of contribution is credited to the marginal profit and loss

account. he fixed costs are debited to the marginal profit and loss account. &f the

contribution is e#ual to the fixed costs, the concern is said to break- even profit. &f

the contribution is less than the fixed costs, there will be net loss. hus, the fixed

costs which are period costs do not affect the product cost. Fixed costs are directly

ad$usted in the profit and loss account prepared for the relevant period. he

concept of contribution plays a key role in assisting the management in taking

many important decisions such as-. 8eciding the break-even point,

5. 8eciding which article to produce, or continue or discontinue to produce,

/. 8eciding the #uantity of each article to be produce or sold,

7. Fixing the selling price, especially in a trade depression, or for a special

order.

he difference between contribution and accounting profit is explained below.

Jo.

.

5.

/.

Contribution

&t is a concept used in ?arginal

costing.

&t is before deducting Fixed Costs.

"t break- over point, Contribution is

e#ual to fixed cost.

0rofit

&t is an accounting concept.

&t is after deducting Fixed Costs.

0rofit arises only when !ales go

beyond the break- even point.


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Assu*ptions and 'i*itations !nderlying

BR$AK+$V$N ANA')SIS

. "ll costs are classified as either fixed or variable. &f not impossible or

impractical, dividing costs into the variable and fixed cost elements as an

extremely difficult $ob. his is attributable to the inherent nature or

characteristics of the cost per se.

5. Fixed costs remain constant within the relevant range. Fixed costs remain

unchanged at any level of activity within the relevant range, even at the 6ero

level.

/. he behavior of total revenues and total costs will be linear over the

relevant range, i.e. will appear as a straight line on the 92 chart. his is

based on the idea that variable costs vary in direct proportion to volume3 the

fixed costs remain unchanged, hence drawn as a straight hori6ontal line on

the graph within the relevant range3 and that selling price is constant.

7. &n case of multiple product companies, the selling prices, costs and

proportion of units (sales mix* sold will not change. his cannot always be

correct. !ales mix ratio may be due to the change in the consuming habits of

customers. !elling prices of the individual products may likewise change

due to competition, popularity and salability of the products, etc.

:. here is no significant change in the inventory levels during the period

under review. !tated in another way, production volume is assumed to be

almost (if not exactly* e#ual to the sales volume, which causes an immaterial

(or none at all* difference between the beginning and ending inventories.

;. )ther assumptions which have already been discussed in the preceding

numbers, are again credited and highlighted here as followsI

o =nit selling price will remain constant.


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o =nit variable cost will not change. (his may include

prices of the factors of production like material costs, labor costs

etc.

Cost-%olue-Pro&it 5C%P6 A"alysis

Cost-olume-0rofit (C0* "nalysis analysis is defined as a systematic

examination of the relationships among costs, activity levels, or volume, and

profit. C0 analysis establishes the relationship of profit to level of sales. "nd one

of these relationships is the 9reak-even analysis.

!ince direct connection of expenses to production cannot be conclusively

established under functional classification of costs, analysis under C0 is directed

towards cost behavior3 the way costs behave or change with respect to a change in

the activity level. Costs can be classified according to its behavior asI

. ,i7e# Costs

hese are costs that do not change regardless of changes in the level of

activity within a relevant range. &n other words, they remain constantregardless of the change in the activity level per total3 however, fixed cost

per unit is inversely proportional to the activity level.

5. %aria.le Costs

&n total, these costs change directly and proportionately with the level of

activity. "s the activity level increases, variable cost per total will also

increase proportionately to the increase in activity level. Lowever, variable

cost per unit remains constant, within the relevant range.

/. Sei-%aria.le Costs

Costs that varies with the change of activity level but not proportionately,

they are called semi-variable costs. hey may either increase at an

increasing rate or increase at a decreasing rate. " typical example of this is

the cost of electricity (increasing at an increasing rate* because it is sub$ect


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to graduated brackets, thus, the greater the consumption, the higher the rate

per kilowatt hour as they will be categori6ed in a higher bracket.

7. Sei-,i7e# Costs his kind of costs has the characteristics of both variable and fixed cost

and is usually known as the step function cost or step cost. >ike semi-

variable cost, semi-fixed cost increases with activity level but not

proportionately. "nd like fixed cost, it is constant for some stretches of

activity levels.

:. Mi7e# Costs

Costs that cannot be identified by a single cost behavior pattern are called

mixed costs. his kind of cost is composed of variable and fixed cost. Me

have concluded earlier that costs are more meaningful when they are

classified according to behavior. Mhen costs therefore are mixed, it is

important that we know how to segregate them. !ome tools and techni#ues

popularly used are the Ligh->ow ?ethod, !catter Graph ?ethod,

1egression "nalysis, and Correlation .


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INTODUCTION TO O-EATING CO&TING

It is a method o costing applied by undertakings which provide

service rather than production o commodities. Eike unit costing

and process costing, operating costing is thus a orm o operation

costing.

The emphasis under operating costing is on the ascertainment o

cost o rendering services rather than on the cost o manuacturing a product. It is applied by transport companies,

gas and water works, electricity supply companies, canteens,

hospitals, theatres school etc. Fithin an organisation itsel certain

departments too are known as service departments which provide

ancillary services to the production departments. %.g.

aintenance department, power house, boiler house, canteen,

hospital, internal transport.

The inormation concerning the business enterprise is very helpul

to the management to control it in an efciently way. !s the other

branches like &nancial accountancy and management

accountancy, the cost accountancy also serves the important

inormation to the management regarding the operating

efciency o the business. It becomes very easy or management

to lay down management policies, to guide management


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decisions or evaluate operating management perormance with

the inormation provided by cost accounting.

The term operation in business terminology reers to an activity o

the business. It is very important to study the operations o the

business in detail because depends on the operations, which it

perorms. The management should always concentrate on the

efciency o the operation and also the costs associated to the

operations. It is very important to control the costs associated to

the operations or the enterprises like manuacturing companies,

companies engaged in the process o e9traction o materials rom

earth like, coal mines etc.

Generally, the above mentioned business enterprises depend on

the operation that it has to be perormed in to produce in to

produce the &nal output. The costs associated with such

operations are generally higher. These costs are called as

Hoperating costs.

The costs, which are incurred to perorm the operation o theenterprise, are called as operating costs. These costs are to be

accounted or in order to arrive at the total costs o operation or

process, which helps in determining the price o the &nal product.


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“Cost accounting is the classifying, recording and appropriate

allocation of expenditure for the determination of the costs of

products or services, and to the presentation of suitably;arranged data for the purposes of control and guidance of

management.”

It includes the ascertainment o the costs o every process,

operation, services or contrast as may be appropriate. It deals

with the cost o production, selling and distribution. It thus, the

provision o such analysis and classi&cation o e9penditure as will

enable the total cost o any particular unit o production to be

ascertained with reasonable degree o accuracy and at the same

time to disclose e9actly how such total cost is constituted i.e. the

value o material used, the amount o labour and other e9penses

incurred/ so as to control and reduce the cost.

:perating $osts are the costs incurred by undertakings which do

not manuacture any product but provide a service. =uch

undertakings or e9ample are J Transport concerns, Gas

agenciesK %lectricity LndertakingsK ospitalsK Theatres etc.Because o the varied nature o activities carried out by the

service undertakings, the cost system used is obviously di5erent

rom that ollowed in manuacturing concerns.


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E&&ENTIA" FEATUE& OF O-EATING CO&T& AE A&

FO""O.&*

/ The operating costs can be classi&ed under three categories.

4or e9ample in the case o transport undertaking these three

categories are as ollows(

a/ Operating and running charges. It includes e9penses o

variable nature. 4or e9ample e9penses on petrol, diesel,

lubricating oil, and grease etc.

b/ Maintenance charges. These e9penses are o semi-variable

nature and include the cost o tyres and tubes, repairs and

maintenance, spares and accessories, overhaul, etc.

c/ Fixed or standing charges. These includes garage rent,

insurance, road licence, depreciation, interest on capital, salary o

operating manager, etc.

0/ The cost unit used is a double unit like passenger-mileK

Dilowatt-hour, etc.

It can be implemented in all &rms o transport, airlines, bus-

service, etc., and by all &rms o ?istribution Lndertakings.

T/E FEATUE& OF CO&T ACCOUNTING*

. It is a process o accounting or costs.

0. It records income and e9penditure relating to goods and

services


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1. It provides statistical data on the basis o which uture

estimates are prepared and quotations are submitted.

2. It is concerned with cost ascertainment, cost control and cost

reduction.

6. 4inally it involves the preparation o right inormation to the

right person at the right time so that it may be helpul to

management or planning, evaluation o perormance,

control and decision-making

ADVANTAGE& OF CO&T ACCOUNTANC!

. It enables a concern to measure the efciency and than tomaintain and improve it. This can be done with the help o

comparison o data made available o the previous periods

and current period.

0. It provides inormation upon which estimates and tenders are

based.

1. It guides or uture production polices. It e9plains the cost

incurred and there by provides data on the basis o which

production can be appropriately planned.

2. The e9tract cause o decrease or increase in pro&t*loss can be

detected. ! concern may su5er not because o the cost o

production is high or prices are low but also because the

output is much below the capacity o the concern.

6. %fciency o public enterprises. $osting has a more important

role to play in public enterprises than in private enterprises.

The primary ob+ective o the public enterprises is not to raise


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pro&ts but it is to serve the society by providing quality good

at cheaper rates.

O-EATING CO&TING* A BIEF EVIE.

It is de&ned as the re&nement o process costing. It is concerned

with the determination othe cost o each operation rather than

the process. In those industries where a process consistso

distinct operations, the method o costing applied or used is

called operation costing.:peration costing o5ers better scope or

control. It acilitates the computation o unitoperation cost at the

end o each operation by dividing the total operation cost by totalinputunits. The two costing methods included under this head are

process costing and servicecosting.

-re'aration o% Cost &(eet under O'erating Costing

4or preparing a cost sheet under operating cost, costs are usuallyaccumulated or a speci&ed period vi3., a month, a quarter, ora year etc.!ll o the accumulated costs should be classi&ed under the

ollowing three heads(. 4i9ed costs or standing charges(Fhich are the same whether the operation is closed or running at

CCM capacity. 4i9ed $ostsinclude items such as the rent o the

building. These generally have to be paid regardless owhat state

the business is in.

0. >ariable costs or running charges, 4uel, ?river Fages,

?epreciation, oil etc./(

Fhich may increase depending on whether more production is

done, and how it is doneproducing CC items o product might

require C days o normal time or take 8 days iovertime is used.

It may be more or less e9pensive to use overtime production

depending onwhether aster production means the product can be


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more pro&table/. >ariable $osts includeindirect overhead costs

such as $ell "hone =ervices, $omputer =upplies, $redit

$ard"rocessing, %lectrical use, Nanitorial =upplies, :fce "roducts,

"ayroll =ervices, Telecom,Lniorms, Ltilities, or Faste ?isposal

etc.

1. =emi-variable costs or maintenance costs. =upervision salary,

;epairs and aintenance/

Lnder operating costing, the per unit cost o service may be

calculated by dividing the totalcost or the period by the total

units o service in the period.

:verhead costs or a business are the cost o resources used byan organi3ation +ust tomaintain its e9istence. :verhead costs areusually measured in monetary terms, but non-monetary overheadis possible in the orm o time required to accomplish tasks.%9amples o overhead costs include(

• payment o rent on the ofce space a business occupies

• cost o electricity or the ofce lights

• some ofce personnel wages


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depending on whether it is made by the owneror was purchasedas a constructed system/.:perating costs are incurred by allequipment J unless the equipment has no cost to operate,requires no personnel or space and never wearsout any

e9amplesQ perhaps intangibles, though not equipment, per se/. Insome cases,equipment may appear to have low or no operatingcost because either the cost is notrecogni3ed or is being absorbedin whole or part by the cost o something else. %quipment operating costs may include(

• =alaries or Fages o personnel

• !dvertising

• ;aw materials

• Eicense or equivalent ees such as $orporation yearly

registration ees/ imposed by agovernment

• ;eal estate e9penses, including

• ;ent or Eease payments

• :fce space rent

• urniture and equipment

• investment value o the unds used to purchase the land, i

it is owned insteado rented or leased

• property ta9es and equivalent assessments


37/45

• :perations ta9es, such as ees assessed on transportation

carriers or use o highways

• 4uel costs such as power or operations, uel or production

• "ublic Ltilities such as telephone service, Internet

connectivity, etc.

• aintenance o equipment

• :fce supplies and consumables

• Insurance premium

• ?epreciation o equipment and eventual replacement costs

unless the acility has nomoving parts it probably will wearout eventually/

• ?amage due to uninsured losses, accident, sabotage,

negligence, terrorism and routinewear and tear.

• Ta9es on production or operation such as subsidence ees

imposed on oil wells/

• Income ta9es


38/45

=ome o these are not applicable in all instances. 4or e9ample,

• ! solar panel placed on one's home or use in generating

electric power generally hasonly capital costsK once it'srunning there are no personnel costs, utility costsordepreciation and it uses no e9tra land that wasn't alreadypart o the place where it islocated/ so it has no realoperating costsK however there may need to be taken

intoaccount costs o replacement i damaged.

• !n automobile or any other item purchased or personal use

has no salary cost because the owner does not chargethemselves or operating the device.

• !n item which is leased may have some or all o these costs

included as part o the purchase price.

It might be questionable to assert that the cost o ten e9trapeople on the sales orce are an incremental cost or an overheadcost, since the wages or these people are both overhead andincremental. The sta5s needed to keep the shop operational aremostly considered as overhead.


39/45

INDEX!1 J). &>2 0"G2 J).

1 TOPI" ,SO"IA' A!IT

Introduction

Principles Of Social Audit

Benefits Of Social Auditing

Social Audit Vs Other Audits

Six Ke Steps !or Social Audit

"istor Of Social Audit

# TOPI" -Budgeting and Budgetary Control

Introduction

DE!INI$ION O! B%D&E$

B%D&E$A'( )ON$'O*

O+,ecti-es of Budgetar )ontrol

Ad-antages of Budgetar )ontrol

*i.itations of Budgetar )ontrol


40/45

/ TOPI" .0AGINA"CO&TING

Introduction

DE!INA$ION O! 0A'&INA* )OS$IN&

!EA$%'ES O! 0A'&INA* )OS$IN&

ADVAN$A&ES O! 0A'&INA* )OS$IN&

0A'&INA* )OS$IN& VS ABSO'P$ION )OS$IN&

2 TOPI" /O-EATING CO&TING

Introduction

ESSEN$IA* !EA$%'ES O! OPE'A$IN& )OS$S

Preparation of )ost Sheet under Operating )osting


41/45

A PRO8*CT R*PORT ON

ASocial Au#itB

9)u#$etary Co"trol

9Mar$i"al Costi"$

9Operati"$ Costi"$

!=9?&28 9O

D!a;al N Trive#i

1)>> J)I ;

MCo S*M- I I

("8"JC28 C)! "CC)=J&JG*

"C"82?&C O2"1I 5P:-;

=nder the guidance of

PRO, CA NITIN


42/45

!=9?&28 ) =J&21!&O )F ?=?9"&,

.Q.Q1&!LJ" ?2J)J C)>>2G2 )F C)??21C2 "J8 !C&2JC2

9L"J8=0 (2"!* ?=?9"& - 7PPP75

"$RTI#I"AT$

&, 0rof . CA Niti" >2G2 )F C)??21C2 "J8 !C&2JC2, 9L"J8=0 (2"!*, ?umbai -7PPP75

of ?.com 0art & ("8"JC28 C)! "CC)=J&JG * has completed her pro$ect on

ASocial Au#it = )u#$etary Co"trol= Mar$i"al Costi"= Operati"$ Costi"$

during the academic year 5P:-; he information submitted is true and original to

the best of my knowledge.

RRRRRRRRRRRRRRRRRRRR RRRRRRRRRRRRRRRRRRR

0ro$ect Guide 2xternal guide

RRRRRRRRRRRRRRRRRRRRR

RRRRRRRRRRRRRRRRRRR

Co-coordinator 0rincipal


43/45

?ate (

$"'ARATION #RO% TH$ ST!$NT

& D(A+AL N TRI%*DI ROLL NO 3>= !tudent of .Q.Qrishna ?2J)J

College )f Commerce and !cience, 9handup (2"!* ?umbai 7PPP75, studying

in ?.Com 0art- & hereby declare that & have completed the pro$ect on A "8"JC28

C)!&JGB under the guidance of pro$ect guide Pro& CA NITIN


44/45

0laceI 9handup

ACast but not the least, & wish

to avail myself of this opportunity, to express a sense of gratitude and love

to my friends and my beloved parents for their mutual support, strength,

help and for everything.


45/45

0>"C2I 9L"J8=0 !ignature

8"2I

dhawal costing

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