MODULE 1-OVERVIEW OF COST ACCOUNTING • Profitability analysis – Determines profits of different

products and departments.

Meaning of Cost Accounting
• Inventory valuation – Helps in valuing stock accurately.
• Cost Accounting – A system of accounting that
identifies, records, analyses, and controls costs of Scope of Cost Accounting
products or services to assist management in decision- • Cost ascertainment – Measuring cost of production.
making.
• Cost control and reduction – Setting standards and
Definition of Cost Accounting identifying variances.
• Definition – “Cost accounting is the process of • Budgetary control – Planning income and expenditure.
accounting for costs from the point they are incurred to
their final relationship with cost centres and cost units.” • Inventory control – Managing materials, labour, and
overheads.
• Simple definition – It is the technique of determining
the cost of production and controlling expenses. • Cost audit – Verifying correctness of cost records.

Basic Concepts of Cost Accounting • Decision-making – Assistance in managerial decisions

like pricing, shutdown, and product mix.
a) Cost: Total expenditure incurred to produce a product or
service. Relevance / Importance of Cost Accounting

b) Costing: Techniques and processes used to ascertain cost. • Helps management planning – Provides vital cost
information.
c) Cost Accountancy: Application of costing principles for cost
control and managerial decision-making. • Improves efficiency – Identifies losses, waste, and
inefficiency.
d) Cost Centre: A location or department where costs are
collected (e.g., production unit). • Assists in fixing selling price – Determines cost-based
pricing.
e) Cost Unit: Unit of product or service for which cost is
measured (e.g., per kg, per litre, per service). • Facilitates comparison – Compares cost trends and
performance over time.
f) Elements of Cost: Materials, Labour, Expenses.
• Aids government decisions – Useful for price fixation,
g) Direct and Indirect Costs tariff setting, and taxation.
• Direct: Traceable to product; • Useful for investors and creditors – Shows profitability
• Indirect: Not directly traceable (overheads). and cost structure.

h) Fixed, Variable, Semi-variable Costs: Behaviour of cost based Limitations of Cost Accounting
on output level. • Costly to implement – Requires skilled staff and
Objectives of Cost Accounting detailed records.

• Not suitable for small firms – Complex and expensive.

• Ascertain cost of products – Knowing the exact cost per
unit. • Based on estimates – Many costs are approximated,
• Cost control – Identifying wastage and improving not exact.
efficiency. • Different methods and techniques – Lack of uniformity
• Cost reduction – Achieving permanent savings. causes inconsistency.

• Time-consuming – Detailed record-keeping delays

• Decision-making support – Helps in pricing, make-or-
buy, and budgeting decisions. reporting.
 • Not a substitute for financial accounting – Cannot Importance
provide complete financial results.
• Helps determine production efficiency, labour
Elements of Cost productivity, and labour cost control.

Cost of production is generally divided into three main 3. Overheads

elements:
All indirect costs other than direct material and direct labour.
1. Material Cost
Classification of Overheads
Cost of all materials used in production.
a) Factory / Production Overheads
Types
• Indirect costs incurred in the factory.
a) Direct Material Examples: factory rent, power, depreciation of
machinery, supervisors' salary.
• Materials that can be directly identified with the
product. b) Administration Overheads
Example: wood in furniture, fabric in garments.
• Costs of general management and administrative
b) Indirect Material activities.
Examples: office salaries, stationery, audit fees, office
• Materials used not directly identifiable with the final rent.
product.
Example: lubricants, cleaning materials, repair supplies. c) Selling and Distribution Overheads

Components • Costs related to selling and delivering products.

Examples: advertising, sales commission, packing,
• Purchase cost, freight, insurance, taxes (excluding transportation.
recoverable GST), storage cost.
Overhead Absorption
Important points
• Method of charging overheads to production using
• Material control through stores management, EOQ, labour hours, machine hours, or percentage rate.
and stock levels.
Element Direct Indirect
2. Labour Cost

Cost of human effort used in production. Raw material used in Consumables, storage
Material
product materials
Types
Labour Production workers Supervisors, helpers
a) Direct Labour

• Labour that can be directly traced to specific products. Factory, admin, selling
Overheads —
Example: machine operators, carpenters. expenses

b) Indirect Labour Cost Unit

• Labour not directly engaged in production. • Meaning – A unit of product, service, or time for which
Example: supervisors, maintenance workers, cost is measured.
storekeepers.
• Purpose – Helps determine the cost per unit of output.
Components
• Examples – Per kg (sugar), per litre (milk), per metre
• Wages, salaries, overtime, bonus, allowances, (cloth), per passenger-km (transport).
employer’s PF/ESI contribution.
Composite Cost Unit • Purpose – Evaluates profitability and performance of
different divisions.
• Meaning – A cost unit that combines two or more units
of measurement. Investment Centre

• Used when output is expressed in multiple • Meaning – A centre responsible not only for profit but
dimensions. also for the efficient use of assets invested.

• Examples – • Manager’s responsibility – Profitability + Return on

investment (ROI).
o Passenger-kilometre (transport).
• Used in – Large organisations with decentralised
o Tonne-kilometre (freight services).
decision-making.
o Room-day (hotels).
• Examples – Subsidiaries, Strategic Business Units
Cost Object (SBUs), major divisions.

• Meaning – Any item for which cost information is • Performance measure – Return on Capital Employed
required. (ROCE) or ROI.

• Can be – A product, service, department, job, project, Responsibility

Term Meaning Example
or customer. Focus
• Purpose – Helps track and analyse costs for better
Unit of measurement Per kg, per
decision-making. Cost Unit Cost per unit
for cost litre
• Example – Cost of a project, cost of servicing a
customer, cost of a contract. Composite Cost of Passenger-
Combined unit
Cost Unit service km
Cost Centre
Cost Anything needing Any cost Project,
• Meaning – A location, department, person, or activity
Object cost info purpose product
where costs are collected.

• Purpose – Helps in controlling costs and assigning Cost Location/department Machine

Cost control
responsibility. Centre collecting costs shop

• Types – Profit Earns revenue & Branch,

Profit
Centre incurs cost department
o Production cost centre – where production
takes place (e.g., machine shop). Investment Controls assets +
ROI Subsidiary
o Service cost centre – supports production (e.g., Centre profit
maintenance, power house).
Cost Sheet
• Example – Assembly department, welding section,
• Cost Sheet – A statement that shows the total cost and
maintenance division.
cost per unit of production for a given period; it
Profit Centre summarises all elements of cost in a systematic format.

• Meaning – A segment of the business responsible for • Used in manufacturing and service industries to
both revenue and cost, thus profit. analyse and control costs.

• Manager’s responsibility – To maximise profit. Purpose of a Cost Sheet

• Examples – A branch office, a product line, a sales • Ascertain cost per unit – Helps determine the exact
division. cost of production.
 • Fix selling price – Provides a basis for pricing decisions. • Customised production – Each job is different (e.g.,
printing, furniture making).
• Cost control – Identifies areas of wastage or
inefficiency. • Cost accumulation – Costs are collected job-wise.

• Comparison – Compare actual cost with estimates or • Cost unit – Each individual job is the cost unit.
previous periods.
• Direct and indirect costs – Material/labour traced
• Budgeting & planning – Helps in forecasting future directly to job; overheads allocated on a suitable basis.
costs.
Accounting Procedure (Steps)
• Decision making – Useful for decisions like make-or-
Step 1: Job Order Received
buy, tender pricing, and profitability analysis.
• Customer places an order → Job number assigned.
Format of Cost Sheet
Step 2: Material Cost

• Materials issued to job → Recorded through Material

Requisition Note → Charged to job cost sheet.

Step 3: Labour Cost

• Labour time spent on job → Recorded using Time

Tickets → Charged to job cost sheet.

Step 4: Allocate Overheads

• Factory overheads added using a predetermined rate

(e.g., machine hour rate).

Step 5: Prepare Job Cost Sheet

• Summarise:

o Direct materials

o Direct labour

o Direct expenses

o Factory overheads
Total Job Cost / Cost per job
MODULE 2-SPECIFIC ORDER COSTING Step 6: Completion and Transfer
JOB COSTING • On completion, cost transferred to Finished Goods.
Job Costing – A costing method used to determine the cost of a • If sold, transferred to Cost of Sales.
specific job or work order, where each job is distinct and
production is not continuous. BATCH COSTING

Concepts in Job Costing Meaning

• Job – A specific order or assignment requested by a • Batch Costing – A costing method used when identical
customer. units are produced in batches.

• Job Cost Sheet – A document that records all costs • The batch is treated as one cost unit, not each
related to a job. individual item.
Concepts in Batch Costing • Used in batch production industries to determine the
most economical number of units to produce in one
• Batch – A group of identical units produced together.
batch.
• Batch Number – Assigned for identification.
Purpose of EBQ
• Batch size – Number of units in a batch, determined by
• Minimise total cost – Balances setup cost and inventory
production efficiency.
carrying cost.
• Economies of scale – Costs spread over many units,
• Ensure efficient production – Reduces frequent setups
lowering cost per unit.
and idle time.
• Cost per unit – Total batch cost ÷ Number of units in
• Avoid overproduction – Prevents unnecessary storage
the batch.
and holding costs.
Accounting Procedure (Steps)
• Improve inventory control – Helps decide how much to
Step 1: Identify Batch produce in each batch.

• Order received or production schedule prepared → Formula for EBQ

Batch number assigned.

Step 2: Material Cost

• Materials issued for the whole batch → Charged to

batch cost sheet.

Step 3: Labour Cost

Where:
• Labour time spent on batch → Total labour cost • D = Annual demand
recorded for the batch.
• S = Setup cost per batch
Step 4: Allocate Overheads
• H = Carrying/holding cost per unit per year
• Overheads applied on batch basis (labour hours,
machine hours, or % of material cost). • P = Annual production rate

Step 5: Prepare Batch Cost Sheet If production rate (P) is very high, EBQ simplifies to:

• Summarise costs:

o Direct materials

o Direct labour

o Direct expenses Concepts Included in EBQ

o Factory overheads • Setup Cost – Cost of preparing machines for

Total Batch Cost production.

Step 6: Compute Cost per Unit • Carrying Cost – Cost of storing each unit (rent,
insurance, deterioration).
• Divide total batch cost by number of units in the batch.
• Production Rate – Speed at which goods are produced.
Meaning of Economic Batch Quantity (EBQ)
• Demand Rate – Required consumption or sale of goods.
• EBQ – The optimum batch size that minimises the total
cost of production, including setup (or ordering) cost Factors Affecting EBQ
and carrying (holding) cost. • Setup cost – Higher setup costs increase EBQ.
 • Carrying cost – Higher holding costs decrease EBQ. • Separate account maintained for each contract,
showing all materials, labour, overheads, and plant
• Demand – Higher demand requires larger batches.
used.
• Production capacity – Limitations of machinery affect
c) Work Certified
batch size.
• Portion of work completed and certified by an architect
• Storage space – Insufficient space reduces EBQ.
or engineer.
Assumptions of EBQ
d) Work Uncertified
• Demand is known and constant.
• Work completed but not yet certified; valued at cost.
• Production rate is higher than demand.
e) Retention Money
• Setup cost per batch is fixed.
• Amount withheld by the contractee (client) as security
• Carrying cost per unit is constant. for performance; paid after full completion.

• No stock-outs or shortages occur. f) Cost of Plant

Advantages of EBQ • Depreciation or usage cost of machinery at the contract

site.
• Reduces total cost of production.
Determination of Profit or Loss on Contracts
• Improves machine utilisation.
Profit on contracts is calculated based on the stage of
• Minimises inventory holding cost. completion.
• Helps in planning production schedules. Case 1: Contract not substantially complete
Limitations of EBQ • Only a small proportion of work done → No profit
• Assumes constant demand and cost, not realistic. transferred; work-in-progress shown as cost.

• Ignores fluctuations in production capacity. Case 2: Contract sufficiently complete (work certified ≥ 25%
but < 50%)
• Requires accurate estimation of setup and carrying
costs. • Transfer 1/3 × (Notional Profit × Cash Received / Work
Certified) to P&L.
Contract Costing
Case 3: Contract more than 50% complete but not finished
• Contract Costing – A costing method used for large,
• Transfer 2/3 × (Notional Profit × Cash Received / Work
long-term, site-based projects such as construction of
Certified) to P&L.
buildings, roads, bridges, etc.
Case 4: Contract nearing completion
• Each contract is treated as a separate cost unit, and
costs are collected contract-wise. • Estimate total cost and compute Estimated Profit:
Concepts in Contract Costing

a) Contract

• A large agreement for construction or installation work

executed over a long period. Case 5: Completed contract

b) Contract Account • All profit or loss transferred to P&L account.

Cost-Plus Contracts
Meaning MODULE 3-PROCESS COSTING
A contract where the contractor is reimbursed for the actual Process Costing – A costing method used where production is
cost incurred plus an agreed percentage of profit or fee. continuous, units are identical, and output passes through
Features several processes (e.g., oil refining, paper, chemicals).

• Used when costs are uncertain (government defence Features of Process Costing
contracts, custom machinery). • Continuous production – Products flow through
• Protects contractor from rising costs. multiple stages or departments.

• Ensures transparency; client can inspect cost records. • Homogeneous output – Units produced are identical.

Advantages • Costs collected process-wise – Material, labour, and

overheads are recorded for each process.
• Reduces risk to contractor, ensures fair pricing.
• Average cost per unit – Total process cost divided by
Disadvantages total output.
• Less incentive to control costs (as actual cost is • Work-in-progress – Often present at each stage.
reimbursed).
• Transfer of cost – Cost of completed output of one
Escalation Clause process becomes input cost of the next process.
A clause in contract agreement allowing revision of contract • Suitable for mass production – Industries producing
price when costs of materials, labour, or other inputs rise large quantities.
beyond an agreed limit.
Treatment of Process Losses
Purpose
In process industries, some loss is normal and expected.
• Protects contractors from unexpected inflation.
A. Normal Loss
• Ensures project completion even with rising costs.
• Meaning – Unavoidable loss due to evaporation,
How it works breakage, shrinkage, chemical reaction, etc.
• Contract price is increased proportionately based on • Treatment in accounts –
actual price rises.
o Value of normal loss is absorbed by good units.
Sub-Contracts
o If scrap from normal loss has value → deducted
Part of the contract work assigned to another contractor (sub- from total process cost.
contractor).

Purpose

• To complete specialised or labour-intensive tasks (e.g., B. Abnormal Loss

electrical work, plumbing).
• Meaning – Loss above the expected (normal) level;
Treatment in Accounts avoidable and due to inefficiency.
• Payments to sub-contractors are charged to the • Value Calculation –
Contract Account as direct expenses.

• Work done by sub-contractors becomes part of contract

value.
 • Treatment in accounts – Step 5: Transfer Output

o Shown separately as a loss in Costing P&L • Transfer cost of units completed to the next process or
Account. finished goods, as applicable.

o Scrap value of abnormal loss → credited to Joint Products

Abnormal Loss Account.
• Joint Products – Two or more main products produced
Abnormal Gain simultaneously from the same raw material and same
• Meaning – When actual loss is less than normal loss → process, each having significant value.
extra good units gained. • Examples – Petrol, diesel, kerosene from crude oil;
• Value Calculation – butter and skim milk.

By-Products
• Treatment in accounts – • By-Products – Products that are incidental or
o Credited to Costing P&L Account (gain). secondary to joint production; they have relatively low
economic value.
o Scrap value of avoided loss → debited (as
company saves the loss). • Examples – Molasses from sugar industry; sawdust
from timber processing.
Computation in Process Costing
Difference Between Joint Products and By-Products
General steps for preparing a Process Account:
Joint
Step 1: Collect Costs Basis By-Products
Products
• Direct materials
Value High Low
• Direct labour
Main
• Direct expenses Importance Secondary outputs
outputs
• Factory overheads
Share joint Often credited to process cost or
Treatment
All charged to the Process Account. costs treated as other income

Step 2: Account for Normal Loss Methods of Apportioning Joint Costs

• Calculate expected normal loss units. Joint costs (common costs incurred before separation point)
• Deduct scrap value (if any) from process cost. must be apportioned to joint products.
Below are the main methods:
Step 3: Compute Cost per Good Unit
1. Physical Units Method

• Based on quantity (weight, volume, units) produced.

• Simple method, used when products are similar.

• Limitation: Does not consider value of products.

Step 4: Record Abnormal Loss or Gain (if any)

• Calculate abnormal loss/gain units. 2. Sales Value at Split-off Method

• Joint costs apportioned based on sales value at the

• Value them using the cost per good unit.
split-off point.
• Transfer to Costing P&L Account.
 • Products with higher sales value receive a higher share Steps in Equivalent Production Calculation
of joint cost.
Step 1: Determine WIP units
• Most commonly used method.
• Identify opening and closing WIP and their %
3. Net Realisable Value (NRV) Method completion.
• NRV = Final sales value – Further processing cost. Step 2: Convert partially completed units into equivalent units
• Joint costs assigned in proportion to NRV.

• Suitable when products require additional processing

Step 3: Compute total equivalent units
after split-off.
(Separate for material, labour, and overhead if degree of
4. Weighted Average Method
completion differs.)
• Uses weights based on labour, material, processing
Step 4: Compute cost per equivalent unit
difficulty, or other factors.

• Used when products differ significantly in nature.

5. Constant Gross Margin Method

• Allocates joint costs so that each product has the same Step 5: Value WIP and completed units
gross profit percentage. • Multiply equivalent units by cost per equivalent unit.
• Helps maintain consistent profitability across products. Methods of Equivalent Production Calculation
5. By-Product Accounting Methods 1. FIFO Method
A. Non-cost Methods • Considers only current period work.
• By-product value treated as other income. • Opening WIP treated separately.
• Deduct by-product revenue from total process cost. 2. Weighted Average Method
B. Cost Methods • Combines opening WIP + current costs; averages them.
• By-product credited at NRV, estimated sales value, or Service Costing – Meaning
opportunity cost.
• Service Costing (Operating Costing) – A method of
• Helps reduce cost of main products. costing used to determine the cost of providing
Equivalent Production services rather than producing goods.

• Equivalent Production – The process of converting • Applied in industries like transportation, hospitals,
partially completed units (WIP) into equivalent fully hotels, power supply, canteens, etc.
completed units.
Service Costing
• Used when units in production are at different stages of
• Costs are collected and analysed for service units
completion.
instead of goods.
Purpose of Equivalent Production
• Main objective: determine cost per unit of service
• To calculate cost per equivalent unit. (e.g., per km, per bed-day, per meal).

• To value work-in-progress, normal loss, and completed • Cost classification is often divided into fixed, variable,
output accurately. and semi-variable costs.
Features of Service Costing • Vehicle tax

• Intangible output – No physical products, only services. • Insurance

• Use of cost units – Cost measurement in suitable • Driver salary

service units.
• Garage rent
• High proportion of indirect costs – Overheads form a
• Depreciation
major portion.
B. Variable Costs (vary directly with usage)
• Uniform or repetitive services – Services are usually
similar in nature. • Fuel
• Importance of efficiency – Helps control fuel, labour, • Lubricants
maintenance, and capacity utilisation.
• Tyres
• Comparative analysis – Cost per service unit compared
with standards or past performance. • Maintenance

• Repairs
Composite Cost Unit

• Meaning – A cost unit that combines more than one C. Semi-variable Costs
measure to express service output. • Supervision cost
• Used in service industries where a single unit is • Office expenses
insufficient.
Step 3: Compute Total Operating Cost
Examples in Transport:

• Passenger-kilometre (Passenger-km) = Number of

passengers × Kilometres travelled
Step 4: Compute Cost per Composite Unit
• Tonne-kilometre (Tonne-km) = Tons carried × Distance
travelled

• Bus-kilometre = Distance travelled by bus irrespective

of passengers

• These units help measure cost per composite unit for

efficiency and pricing. Step 5: Fix the Fare or Rate
Service Costing Applied to Transport • After determining cost per unit, add desired profit
margin to compute fare or freight charge.
Transport costing involves determining the cost of operating
vehicles (bus, truck, taxi, etc.). Importance of Transport Costing

Steps in Transport Costing: • Helps in fixing economically justified fares.

Step 1: Identify Cost Units • Assists in controlling fuel and maintenance costs.

• Passenger-kilometre • Useful for comparing vehicle performance.

• Tonne-kilometre • Helps determine profitable or unprofitable routes.

• Vehicle-kilometre • Supports management in decision making (hire or own,

route planning, vehicle replacement).
Step 2: Classify Transport Costs

A. Fixed Costs (do not vary with distance)

MODULE 4-COST CONTROL Basis Standard Cost Estimated Cost

Standard Costing – A costing technique in which Forecasting,

predetermined costs (standards) are set for materials, labour, Cost control and variance
Purpose budgeting, and
and overheads, and actual costs are compared with these analysis
price quotations
standards to identify variances.
More accurate, based on
• Used for cost control, performance measurement, and Less accurate, based
Accuracy technical studies and time–
budgeting. on educated guess
motion analysis
Concept of Standard Costing
Used to fix selling
• Standard Cost – A scientifically predetermined cost for Used for evaluating
Use price or prepare
producing a product or service under efficient operating performance
tenders
conditions.
Compared with actual cost No formal variance
• Variance – The difference between standard cost and Comparison
to identify variances analysis required
actual cost.

o Favourable variance: Actual < Standard Time Usually set for short periods Used for long-term
period (e.g., monthly/quarterly) predictions
o Unfavourable variance: Actual > Standard
Normative (what cost Predictive (what
• Purpose – To measure efficiency, detect wastages, and Nature
should be) cost may be)
help management take corrective actions.

• Standards are set for: Past trends and

Technical efficiency
Basis managerial
o Material price and usage standards
judgement
o Labour rate and time
Historical Costing
o Overhead costs
• Historical Costing – A system where costs are recorded
Types of Standards: after they are incurred, based on actual expenditure.
o Ideal Standards – No waste; perfect efficiency Standard Costing
(rarely used).
• Standard Costing – A system where pre-determined
o Attainable Standards – Achievable under (standard) costs are set and actual costs are compared
normal working conditions (widely used). with these standards to measure variances and control
o Basic Standards – Long-term historic standards performance.
used for trend comparison. Difference Between Historical Costing and Standard Costing
Difference between Standard Cost and Estimated Cost
Basis Historical Costing Standard Costing
Basis Standard Cost Estimated Cost
Records past
Nature Sets future costs
Approximate cost costs
Predetermined cost based
based on past
Meaning on scientific analysis and Cost known after Cost known before
experience or Timing
efficiency standards production production
judgement
To record actual To control cost and
Purpose
cost measure efficiency
 Basis Historical Costing Standard Costing b) Fixed Overheads

• Based on budgeted fixed overheads ÷ standard output

No control—only Strong cost control
Cost Control or hours.
reporting through variances
5. Total Standard Cost
Highly useful for
Limited for
Usefulness budgeting & decision-
planning This helps in estimating cost per unit under efficient operating
making
conditions.
Variance
Not possible Essential part of system Material Cost Variance (MCV)
Analysis
• Meaning – Difference between standard cost of
Management Reactive (after Proactive (before and materials for actual output and actual cost incurred.
Action cost occurs) during production)
• Formula:
Pre-determined; ideal or
Accuracy Exact actual cost
attainable

Constituents of Standard Cost

or
Standard cost is built from three main elements of cost, each
having predetermined standards:

1. Standard Material Cost Where:

• Consists of: • SQ = Standard Quantity for actual output
o Standard Quantity of material per unit • AQ = Actual Quantity
o Standard Price per unit of material • SP = Standard Price
• Formula: • AP = Actual Price

Favourable → Actual Cost < Standard Cost

Unfavourable → Actual Cost > Standard Cost
2. Standard Labour Cost
Material Price Variance (MPV)
• Includes:
• Meaning – Difference caused by paying a price higher
o Standard Time required per unit or lower than the standard price.
o Standard Labour Rate per hour • Formula:
• Formula:

3. Standard Overhead Cost If AP < SP → Favourable

If AP > SP → Unfavourable
Overheads are predetermined based on past data and expected
activity. Material Quantity Variance (MQV)
a) Variable Overheads • Meaning – Difference due to using more or less
quantity than standard.
• Based on standard hours × standard variable OH rate.
 • Formula: • Simple definition: A budget is a tool for planning and
controlling business activities.

Types of Budget

We focus on Flexible Budget, Master Budget, Performance

If AQ < SQ → Favourable
Budgeting, and Zero-Based Budgeting.
If AQ > SQ → Unfavourable
A. Flexible Budget
Relationship
A budget that changes (or is adjusted) according to different
levels of activity or output.
Material Mix Variance (MMV) Features
• Meaning – Arises when the proportion of materials • Prepared for multiple levels (e.g., 50%, 75%, 100%
used in the mixture differs from the standard mix. capacity).
• Formula: • Separates costs into fixed, variable, and semi-variable.

• Suitable when output fluctuates.

Uses
Revised Standard Quantity (RSQ):
• Helps in performance evaluation.

• Useful for industries with seasonal or unstable demand.

If actual mix differs from standard, this variance appears. B. Master Budget

Material Yield Variance (MYV) A comprehensive budget that consolidates all functional
budgets of an organisation.
• Meaning – Difference due to actual output being
higher or lower than expected from given inputs. Presents the overall financial plan for the entire business.

• Formula: Components

• Operating budgets (sales, production, materials,

labour).
or
• Financial budgets (cash budget, budgeted income
statement, balance sheet).

If Actual Yield > Standard Yield → Favourable Purpose

If Actual Yield < Standard Yield → Unfavourable
• Coordination of all departments.
Budget – Meaning
• Provides a complete view of business operations.
• Budget – A financial plan that estimates income and
C. Performance Budgeting
expenditure for a future period.
A budgeting method that links expenditure with
• It represents a statement of expected results expressed
performance/results.
in monetary or quantitative terms.
Emphasises outputs and achievements rather than just
Budget spending.
• “A budget is a pre-determined statement of plans Features
expressed in financial terms for a specified period.”
• Sets measurable performance indicators.
 • Compares actual performance with targets.

• Used widely in government and public sector.

Benefits

• Improves accountability.

• Ensures efficient utilisation of funds.

D. Zero-Based Budgeting (ZBB)

A budgeting method where every activity must be justified

from zero, instead of basing it on past budgets.

Features

• No automatic approval of past expenses.

• Activities ranked based on priority.

• Resources allocated to the most essential tasks.

Advantages

• Eliminates wasteful expenditure.

• Encourages managerial responsibility.

Limitations

• Time-consuming and expensive.

• Requires skilled managers and detailed analysis.