Traditional accounting or financial accounting can no longer serve the purposes of all concerned.
Traditional accounting or
financial accounting can no longer serve the purposes of all concerned.
Especially the internal organs of the business concerns, namely managements,
want a lot of analytical information which could not be provided by the
financial accounting. Hence to serve the needs of management two more kinds of
accounts – management accounting and cost accounting have evolved. Simply
stated, management accounting serves the needs of management and cost
accounting tries to determine the costs through a formal system of accounting.
Costs can be classified on various bases and cost sheet is a statement
presenting the items entering into cost of products or services.
A small scale manufacturer
produces an article at the operated capacity of 10,000 units while the normal
capacity of his plant is 14,000 units. Working at a profit margin of 20% on
sales realisation, he has formulated his budget as under:
He gets an order for a quantity
equivalent to 20% of the operated Capacity and even on this additional
production profit margin is desired At the same percentage on sales realisation
as for production to operated Capacity. As you are a cost manager, he
approached you to advise him as To what should be the minimum price to realise
Since an additional production of
4000 units requires an increase of rs.2000 in semi-variable expenses, an
additional production of 2000 units will require an increase of rs.1000 in
The different cost for 1 unit is rs.21000 ÷ 2000
units i.e. Rs.10-50. Profit margin required is 20% on sale or 25% on cost.
Hence the minimum selling price = rs.10.50 + rs.2.625 = rs.13.125.
Tags : Accounting For Managers - Cost Estimation And Control-Cost Accounting
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