Page 42 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 2. Predetermined costs: These costs are determined or estimated in advance to any activity by
considering the past events which are normally affecting the costs.
For Planning and Control: The following are the two major classifications, viz. standard cost and
budgetary control:
1. Standard cost: Standard cost is a cost scientifically determined by way of assuming a
particular level of efficiency in utilization of material, labour and indirect expenses.
The prepared standards are compared with the actual performance of the firm in studying
the variances in between them. The variances are studied and analysed through an exclusive
analysis.
2. Budget: A budget is detailed plan of operation for some specific future period. It is an
estimate prepared in advance of the period to which it applies. It acts as a business barometer
as it is complete programme of activities of the business for the period covered.
The control is exercised through continuous comparison of actual results with the budgets. The
ultimate aim of comparing with each other is to either to secure individuals’ action towards the
objective or to provide a basis for revision.

For Managerial Decisions: The major classifications are marginal cost and sunk cost.
Marginal cost is the amount at any given volume of output by which aggregate costs are changed
if the volume of output is decreased or increased by one unit.

Sunk costs are costs that cannot be recovered once they have been incurred.

Example: Marginal Cost: Suppose it costs ` 1000 to produce 100 units and ` 1020 to
produce 101 units. The average cost per unit is ` 10, but the marginal cost of the 101 unit is ` 20.
Sunk Cost: Spending on advertising or researching a product idea.

They can be a barrier to entry. If potential entrants would have to incur similar costs, which
would not be recoverable if the entry failed, they may be scared off.

Task Identify the key statements prepared under financial and cost accounting and
prepare the proforma of all the relevant statements.



Caselet Patent Valuation

pharmaceutical company has spent ` 5 Million in R&D of a niche product (A sachet
named Sharkara) to be used in diabetes as a substitute for insulin injections. The
A company has taken a patent for the same for 5 years after the first sachet is sold.
It has spent further 100 Million in a plant which can produce 50000 packets (each packet
has 100 sachets) of Sharkara per year. The plant is having a useful life of 10 years and the
salvage value of 10% of the initial investment. Each sachet for the first five years could be
priced at ` 10/. The variable cost is ` 3/sachet. After the expiry of the patent period, the
technology would be freely available to the competitors who may jump into the market.
The product price (rounded off to the nearest integer rupee value) would be determined by
the market forces once the market is opened.

Contd…

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