Welcome students, since the previous two classes
we were learning about how to prepare the
cost sheet or the statement of cost.
Because this is the first statement in the
management accounting because as I told you
in the lectures in the beginning, in the first
or second lecture that the management accounting
itself is not an independent discipline, it
depends upon the other two accounting branches,
financial accounting and cost accounting,
right?
So, now by using the different techniques
of the financial accounting and the cost accounting,
we will first generate some information and
after generating that information we will
analyze it and we will use that information
for the decision making.
Since, the management accounting we use the
information generated by the financial accounting
or with the help of financial accounting and
cost accounting and whatever that information
comes up we will have to use that for the
decision making, right?
So, now we are different types of the information
which can be generated, we are dealing with
the statement of the cost or the cost sheet,
right?
In the previous class I discussed with you
that how to prepare the cost sheet.
First, we learned that first simple cost sheet
is very simple that it is a statement of the
cost, total cost of the product can be divided
in to five different types of the cost or
the four different types of the cost.
First component of the cost is the prime cost
which includes the material cost, labor cost
and the other direct overheads.
Some total of this three becomes the prime
cost.
Prime cost means without this cost we cannot
think of any production, right?
Then there are some other overheads which
we call them as the factory overheads, which
have to be incurred at the level of the factory
when the raw material moves to the factory,
when the labor start working in the factory
and when other factory requirement for the
say, for example, if the factory building
is on the rent then the factory rent is the
factory cost, part of the factory cost not
the part of prime cost.
Factory lighting, that is a part of the, there
can be two kind of lighting, one is in the
office lighting that will be the part of administrative
overheads, that will be included into the
cost of production.
But here the factory cost will include the
that part of light which is used, that part
of the power which is used in the factory.
So, there are so many overheads apart from
the direct material, wages and the other direct
expenses, there are so many other overheads
the sub overheads which are incurred at the
level of the factory when the raw material
is taken to the factory and we start the production
process.
So, after prime cost we will add up the factory
overheads, it will become the works cost,
then in the works cost we will add up the
production, we will have to calculate the
production cost we will add up the say administrative
overheads and after the cost of production
we will add up the selling and distribution
overheads so it will give us the cost of sales.
So we will arrive at the cost of sale that
is the final cost of the production.
And from the total sales value either its
anticipated value, expected value or the actual
value, from that sales value we will subtract
the cost of production then the difference
is called as the operating profit, right.
The difference is called as the operating
profit.
That part of the profit is coming from the
operations.
There are the two kinds of the profits, one
profit which we calculate in the profit and
loss account or in the income statement.
One profit is which we calculate in the cost
sheet.
So, in the cost sheet the profit calculated
is called as the operating profit, right.
And then that information will be taken to
the profit and loss account and apart from
that information relating to operations if
you add up the other information say interest
incomes, if the firm has made the investment
outside its firm.
In the market so they will get the interest
incomes, some consultancy incomes, some other
kind of indirect incomes will come to the
firm and on the debit side of profit and loss
account some indirect expenses will also be
there.
So, all those expenses which are not operating
expenses, non-operating expenses, for example,
salaries of the office employees.
They will have to be added in the profit and
loss account.
So, in the profit and loss account first we
calculate the gross profit which is simply
the sales minus the cost of production and
then in the lower part by adding up the non-operating
incomes and non-operating expenses, finally
we calculate the net profit before tax and
net profit after tax when we adjust for the
tax, right?
So that is the, that part is in the income
statement.
In the income statement, in the profit and
loss account we can calculate the net profit
before tax, net profit after tax and when
we calculate that net profit before tax and
after tax that includes the operating profit
also which is otherwise calculate in the cost
sheet, right?
So the first problem which we discussed in
the last class it was a simple problem.
right?
We had the information with the regard to
the prime cost, factory cost, cost of production
and the cost of sales.
When we prepare the cost sheet and when we
subtracted the cost of sales from the sales,
we were left with the difference and that
difference is called the operating profit.
Then we did the second problem in the second
problem, say this is the second problem here,
what is the second problem?
We have seen it and we have done it.
The following information has been obtained
from the records of left center corporation
for the period from December 1 to December
31 2017.
So, we are given here two kinds of information,
one is a general information that is the,
for the transactions during the month of December
and the upper part of information includes
the stocks.
So we will learn about how to treat the stocks.
In the first problem which we did we did not
do any adjustment for the stocks, but the
second problem which is this problem which
I did in the last class here we learned that
how to prepare a cost sheet, or the statement
of cost by adjusting the three different types
of the stocks, that is the stock of raw material,
stock of WIP that is work in process and the
stock of the finished goods.
So we learned about that and after adjusting
the three different types of stocks we had
to calculate the different cost, so you can
calculate again the cost of raw material consumed
after adjusting the stocks of raw materials
opening and closing stock, then you can calculate
the factory cost that is the total factory
cost.
After adjusting the stock of WIP opening as
well as closing and then we will calculate
the cost of production after adjusting the
stock of finished goods, both opening as well
as the closing stock, fine?
So we have done that in the last part, simply
prepare the cost sheet, but see this cost
sheet is different, this problem is different
from the first problem, because in this problem
we are asked two things, one thing is we are
asked to prepare a cost sheet statement of
the cost, and in the statement of the cost
we will work out only the cost up to the factory
cost or the works cost.
Beyond that cost of production, cost of sales
and the operating profit has to be calculated
in the income statement, we will have to prepare
the separate income statement and remaining
information we will have to take to the income
statement and adjust it there and then prepare
an income statement separate income statement
or separate profit and loss account.
So now we will be learning in this class how
to prepare the separate income statement or
the profit and loss account by taking into
account the factory cost which will come from
the cost sheet and the further adjustment
we will do about the administrative overheads
and selling and distribution overheads and
finally we will arrive at the net profit.
Because profit calculated in the income statement
is called as the net profit.
If the tax information is also given then
we work out the net profit before tax and
after that we treat the tax, adjust the text
and we work out the final profit which is
called as the net profit after tax, net operating
profit after tax.
You must have heard about which is very common
term used NOPAT – Net Operating Profit After
Tax.
So, regarding tax no information is given
to us here, we are only given the information
over the sales and the cost of production,
complete cost of production, including the
information over the stocks.
So, now we will be after preparing the cost
sheet first part and calculating the work
cost, we will be now moving to prepare the
second statement that is the income statement.
Income statement or the profit and loss account.
You must be knowing, I am sure that you must
be knowing how to prepare the income statement
or the profit and loss account.
So you can prepare the income statement in
two formats.
One is the vertical format where in the upper
part you put the sales and then you put the
all the expenses you calculate the differences
and that difference is the net operating profit
before tax or after tax if the tax information
is given.
Second format is the T format, in the T format
you prepare the income statement by calculating
two things, then we do not jump in to the
direct directly to calculate the net profit.
In the T format we prepare the two parts,
this income statement is preparing two parts,
first part is called as trading, account second
part is called as a profit and loss account.
And in total this statement this statement
is called as the income statement.
One side is it has two sides, one side is
called as the debit side another side is called
as the credit side.
In the debit side we put all expenses and
in the credit side we put all income coming
from sales or any non-operating income and
then finally we say balance both the sides
and difference is called as the profit or
loss.
If the expense side debit side is bigger than
the credit side, then that is called as the
net loss and if the vice versa that if the
credit side is bigger means the income side
is bigger than the cost side debit side then
the result is the net profit.
So after preparing the cost sheet in the previous
class now we will learn how to prepare the
income statement separately and for preparing
the income statement let us now follow the
T format and learn how to prepare the income
statement here.
So, for calculating the or preparing the income
statement here I will prepare a T format.
So this is the T formant and in this format
we will have to put the things like this that
is the income statement, we will write here
what that is income statement, income statement
of left center corporation for the month of,
for the month of December, because this information
belongs to December 2017.
These are the two parts, what we write here
particulars, what we write here particulars,
we write here amount and this side is called
as debit side.
Then again particulars and amount, this is
called as credit side.
Credit side means received side or income
side, debit side means expense side or the
payment side, so we will put respective items
on both the sides and then we will find out
the balance.
Now when we prepare the traditional income
statement then we start the upper part from
the upper part that is called as trading account.
Because income account has two parts, upper
part is called as trading account; lower part
is called as the profit and loss account.
So in the trading account we take in to account
five items, on the credit side we take two
items that is sales and closing stock and
on the debit side we take three items that
is the raw material cost, wedges cost that
is incurred at the factory, level production
level and the other direct expenses.
So, we balance these five items and we see
which side is bigger, net result is that the
credit side is bigger than the debit side
though the difference is called as gross profit
and if the reverse happens that debit side
is bigger than the credit side then we are
in the state of gross loss.
But in this case we have done half of the
work in the cost sheet.
In the cost sheet we have calculated one cost
by adjusting the opening stock of raw material,
closing stock of raw material, calculating
the cost of raw material consumed plus information
about the factory wages, we have already calculated
one cost that is called as the factory cost
or the works cost.
So that factory cost or works cost will directly
be taken from the cost sheet to the income
statement.
And on the credit side we will put the information
with regard to the sales.
So we start with the credit side because there
is only one item and this is what this is
called as sales, by sales and what is the
information about sales, it is 9 lakhs.
It is 9 lakhs and this side will be taking
the two factory cost.
Two factory cost.
So, what is the factory cost in the cost sheet
if you open up the cost sheet prepared in
the last class you will find the item is 7,74,000.
Now, before taking this 7,74,000 to the outer
column, we will have to adjust one more type
of the stock that is called as the stock of
finished goods.
We have not adjusted this stock in the cost
sheet, we adjusted in the cost the sheet the
stock of raw material and the stock of WIP
work in process.
But the stock of finished goods has to be
adjusted here for calculating the cost of
production.
So in this 7,74,000 rupees this information
I have brought from the cost sheet.
We ended of the cost sheet by calculating
this information, now that information is
transferred to the income statement and now
we will go for the treatment of the stocks.
So, in this, what will you do, add opening
stocks of finished goods and what is opening
stocks of finished goods the amount given
to us is 60000.
So, you add it up put it up in the inner column
itself, it will not go to outer column so
it works out as how much, 8,34,000.
Now, less closing stock of closing stock of
finished goods.
So if you take the closing stock of finished
goods how much this information this is 55,000.
So after subtracting it what we are left with
this the final information works out is how
much that is 7,79,000.
This is your cost of production total cost
of production whatever the production we have
made so far in the month of December as well
as what was the previous stock left in the
warehouse, we produced in the month of December
worth rupees 7,74,000 and 60,000 worth of
the goods were already with us in the stock,
total production became by the end of December
834000, when we subtracted the closing stock
which we are not selling in the market in
the current month that amount was 55000.
So, finally the amount which will go to the
market the cost of that amount is 7,79,000.
So, now on the one side we have put the sales
on the other side we have put the cost, now
let us see whether we are in the state of
gross profit or we are in the state of gross
loss.
So, this is the 9,00,000 you close it and
this is the, now we have to find out what
this is called as GP, by gross profit and
if you calculate the gross profit GP how much
it is works out because this side is bigger
so this side is 9,00,000.
You make it 9,00,00.
Close it and the gross profit is how much
this is 1,21,000, this is the gross profit
but this is not the final profit.
In this profit we will have to do some further
more adjustments in the lower part, so this
upper part which helps us to calculate the
gross profit is called as the trading account,
first part of income statement and the second
part of the income statement is the profit
and loss account.
So, now we will take this GP, now this GP
is the income with the surplus and this surplus
will become the credit balance.
If you recall the income statement you will
be understand it, so it will become now by
gross profit and what is the gross profit,
it is 1,21,000.
It came here.
Now, we will have to adjust the indirect overheads.
So what are the indirect overheads to administrative
overheads or administrative cost.
So, the administrative overheads given to
us are, for example, you are given the administrative
here 30,000 and selling the distribution overheads
are given to us are 20,000.
So we will have to adjust them, this are the
indirect overheads.
We produce the production but now apart from
the production unit we need the administrative
office also, support of the administrative
people there cost also has to be added and
when this total production goes to the market
we will have to incurred some selling and
distribution overheads so that will give us
the total cost.
So but this are called as the indirect cost.
Administrative cost and selling and distribution
cost, this costs are called as the indirect
cost.
So, now we are adding the administrative overheads,
so what is administrative overheads?
30,000.
Take is directly here.
This is 30,000 and then is the, to selling
and distribution overheads, so selling and
distribution overheads.
How much is the selling and distribution overheads?
We are given 20,000.
So, this is the total amount, and this side
nothing is there so what can you do now?
You total it up, this works as 121000.
Close it by two lines and what is the difference
now this is called as to operating profit.
To operating profit this is the, how much
is to operating profit this is 71,000 and
both the sides are now equal this is called
as 1,21,000.
So, in the cost sheet in this problem we did
two things, one thing is that preparing the
cost sheet but not complete.
Part of the information was found out by preparing
the cost sheet and part of the information
was found out by preparing the income statement,
first is the gross profit which is in the
trading account and lower part is the net
profit which is from the profit and loss account.
So, we have found out, so in the first problem
we calculated the operating profit itself
in the cost of statement or statement of the
cost.
There is no problem, we can do that, but in
this it was asked that part of the cost will
worked out in the cost sheet and then remaining
cost will be taken to the income statement
and the operating profit we will have to work
out in the income statement.
So we prepared both the statement and we know
now that this cost sheet is ready with us,
this income is ready with us, this cost sheet
is ready with us.
so this is one part of the statement of the
cost after treating the stock of the raw material,
how to prepare the cost sheet, we have learned
that, so first we learned the simple cost
sheet, then we learned the cost sheet or the
statement of the cost we are adjusting three
types of stocks.
And the third thing we learned till now is
that when entire information has not to be
worked out in the cost sheet part of the information
will be created in the cost sheet and part
of the information will be created in the
income statement so if that kind of the things
are asked in the question or we have to do
it, so it means partly you prepared the income
cost statement leave it at the point where
it is asked up to that is in this case and
then remaining part you take to the income
statement.
So, I think you must be clear by now with
the concept of the statement of the cost or
the cost sheet.
As, I told you that this is the most confidential
statement for the companies, for the manufacturing
organizations because cost, reducing the cost
of production is a secret for the companies.
Lower the cost of production and higher the
selling price, the margin will be bigger because
the companies have no liability in today’s
competitive scenario to decide the selling
price.
Market forces decide the selling price, if
increase the selling price beyond the limit
people may reject the product.
So you have to fix up the selling price somewhere
between the range within the range given by
the other players in the market because you
say competitive market.
So, if you want to maximize your profits you
will have to look at the cost part and how
to innovatively reduce the cost of production
that is done by preparing the cost sheet that
is why we divide the total cost of production
into four cost.
We calculate the prime cost, we calculate
the factory cost, we calculate the cost of
production and we calculate the cost of sales.
So, first part in the management accounting
is generation of the information and that
is what we are doing here and after that we
will be, on the basis of this generated information
we will present it to the decision makers
in the firm, they will look at the different
components of this cost and then they will
try to find out which part of the cost is
on the higher side and which can be controlled.
Again while making the use of this information
for decision making again the basis of the
decision making will be the cost and benefit
analysis.
If we reduce the cost, how much benefit we
are going to have out of that reduced cost
and how to take care of that.
So, this is the second problem we did there
we prepared half cost sheet in the cost sheet
and the remaining information was taken to
the income statement to the profit and loss
account.
Now we will do one more problem.
And that one more problem will be that I will
add up little more wrinkle into that and there
sometimes we will have to calculate the per
unit cost also.
We have not to calculate the total cost, we
will have to calculate the per unit cost also.
Per unit cost of for that production which
will go to the market.
So, on the one side you will calculate the
total cost from the cost sheet and then you
will calculate the per unit cost also because
number of units information is also given
to us, so you can calculate the cost total
cost for unit, you can calculate the total
selling value and then the profit per unit
which can be calculated.
So, we learned till now that is the two types
of cost sheets.
One is simple another one is after treating
the different type of stocks, and then preparing
the income statement separately.
Now, in the next part we will be learning
about one more thing that is if the units
information is also given, in this, these
two problems we were given only the cost related
information and income related information,
income was coming from sales, and then the
cost was coming from the different input of
the cost and the balance we calculated was
an operating profit.
In the first problem we calculated the operating
profit in the cost sheet and now second problem
we calculated the operating profit in the
income statement.
Third thing can be that we can prepare one
more statement cost statement where we will
have to make one more column where the information
about the units produced and sold is also
given.
If that information is given about the units
produced and sold, then how to treat that.
What we can do there is we can even calculate
the per unit cost.
We can calculate even the per unit cost, we
will put in the one column the total number
of units, total number of units which are
produced in the current period.
And, then the total number of units which
are shifted from the previous period to the
current period.
So total production we will get in the terms
of the units and in the terms of cost of production,
from that how much is kept as a closing stock
those units will be subtracted so whatever
the number of units are left with us, they
are available for the sales for the current
period and the cost of production is also
available with us.
So, since we have the total cost available
is the cost of sales and number of units so
you can easily find out the per unit cost,
per unit sales value and the per unit profits.
So, in the next class I will be discussing
with you one more problem and that problem
will be how to deal with, that will be a complete
cost sheet, where we will start from raw material,
we will calculate the prime cost then we will
end up by say calculating the cost of sales,
by taking into account per unit cost, the
total cost of production and calculating the
per unit operating profit.
So we will do that third problem, after that
we will close the discussion on the cost sheet
and then we will move to the next parts that
is the budgets and the budgetary control.
So, the third problem with the regard to the
statement of the cost I will discuss in the
next class along with how to analyze the cost
sheet and use that information generated in
the cost sheet for the management decision
making.
Again I repeat that the cost sheet we are
preparing that is the part of cost accounting.
The income statement which we are prepared
in the second problem that was the profit
and loss account and that is the financial
accounting.
So, financial accounting and cost accounting,
they help us to generate different kind of
information and that information can be suitably
used for the management decision making that
is why it is called as the management accounting.
How efficiently the information generated
with the help of financial accounting and
with the help of cost accounting, so one part
is generating the information.
Till now we are learning about by preparing
the cost sheet that how to generate the cost
related information, how to generate the operating
profit related information and then second
part would be the analyzing that information
and using that for the management decision
making.
Because largely the purpose of preparing the
cost sheet is controlling the cost that is
why we do not jump to calculation of the total
cost in one go, we divide the cost into different
types of the sub cost that is of four types
of the cost.
Prime cost, factory cost, cost of production
and cost of sales.
So why we sub divide that into four, parts
because ultimate purpose is cost control.
Again I repeat that in today’s competitive
scenario if you want to maximize the profits
of the company or you want to keep the profit
of 
the company intact so what you will have to
do, in that case you will have to reduce the
cost only.
You cannot increase the selling price, the
moment you increase the selling price your
sales start falling down, because people have
number of alternative now, they are not only
means required to wait for one company and
their products only and be dependent on that
company number of companies are manufacturing
the similar kind of the products and generating
similar kind of the services.
So, it means if the price of one product goes
up, one company’s product goes up, its substitute
is available in the market.
And if the other company does not jack up
the price so it 
means the company who increases the selling
price their sales are bound to dip.
So cost sheet helps us in controlling the
cost of production, in reducing the cost of
production.
So only prepare the third cost sheet third
problem we will do and hen after that 
we will learn about how to analyze the cost
sheet and 
how 
to arrive at the important decision making
which is the subject matter of 
the management accounting.
So third problem I 
will 
do 
in the 
next class.
Thank you very much.
