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 "Social Audits" to monitor and verify the socialperformance claims of
the organisations and institutions.
Social Audit is a tool through which government departments can plan,
manage and measure non-financial activities and monitor both internal and
external consequences of the departments' social and commercial operations.
Social Audit gives an understanding of the administrative system from the
perspective of the vast majority of people in the society for whom the
veryinstitutional /administrative system is being promoted and legitimised. Social
Audit of administration means understanding the administrative system and its
internal dynamics from the angle of what they mean for the vast majority of the
people, who are not essentially a part of the State or its machinery or the ruling
class of the day, for whom they are meant to work.
Social Audit is an independent evaluation of the performance of an organisation as
it relates to the attainment of its social goals. It is an instrument of social
accountability of an organisation. In other words, Social Audit may be defined as
an in-depth scrutiny and analysis of the working of any public utility vis-a-vis its
social relevance. Social Auditing is a process that enables an organisation to assess
and demonstrate its social, economic and environmental benefits. It is a way of
measuring the extent to which an organisation lives up to the shared values and
objectives it has committed itself to. It provides an assessment of the impact of an
organisation's nonfinancial objectives through systematic and regular monitoring
based on the views of its stakeholders. Stakeholders include employees, clients,
volunteers, funders, contractors, suppliers and the general public affected by the
organisation. Stakeholders are defined as those persons or organisations who have
an interest in, or who have invested resources in the organisation. Tata Iron and
Steel Company (TISCO), Jamshedpur, implemented Social Audit in 1979 and is

the first company in India to do so. Social Audit gained significance after the 73rd
Amendment of the Constitution relating to Panchayat Raj institutions.

Principles of Social Audit

The foremost principle of Social Audit is to achieve continuously improving
performances relative to the chosen social objectives. Eight specific key principles
have been identified from Social Auditing practices around the world.
Multi-Perspective/Polyvocal: Aim to reflect the views (voices) of all those
people
(stakeholders) involved with or affected by the organisation/department/
programme.
Comprehensive: Aims to (eventually) report on all aspects of the organisation's
work
and performance.
Participatory: Encourages participation of stakeholders and sharing of their
values.
Multidirectional: Stakeholders share and give feedback on multiple aspects.
Regular: Aims to produce social accounts on a regular basis so that the concept
and the
practice become embedded in the culture of the organisation covering all the
activities.
Comparative: Provides a means whereby the organisation can compare its own
performance each year and against appropriate external norms or benchmarks; and
provide for comparisons to be made between organisations doing similar work and
reporting in similar fashion.
Verified: Ensures that the social accounts are audited by a suitably experienced
person or agency with no vested interest in the organisation.
Disclosed: Ensures that the audited accounts are disclosed to stakeholders and the
wider community in the interests of accountability and transparency.

These are the pillars of Social Audit, where socio-cultural, administrative, legal
and democratic settings form the foundation for operationalising Social Audit.
DISTINGUISH BETWEEN FINANCIAL AUDIT AND SOCIAL AUDIT

B
enefits of Social Auditing
1. Enhances reputation: The information generated from a Social Audit can
provide crucial knowledge about the departments/institutions ethical performance
and how stakeholders perceive the services offered by the government. The social
angle in the delivery of services, real or perceived, can be a major factor adding
to the reputation of the department and its functionaries.
2. Alerts policymakers to stakeholder trends: SocialAuditing is a tool that helps
managers understand and anticipate stakeholder concerns. This tool provides
essential information about the interests, perspectives and expectations of
stakeholders facilitating the interdependency that exists between the government
and the community.
3. Affects positive organisational change: Social Auditing identifies specific
organizational improvement goals and highlights progress on their implementation
and completeness. Also, by integrating Social Audit into existing management

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

effectively consider stakeholders' issues and concerns.
4. Increases accountability: Due to the strong emphasis on openness and
accountability for government departments, the information disclosed needs to be
fair and accurate. Social Auditing uses external verification to validate that the
Social Audit is inclusive and complete. An externally verified audit can add
credibility to the department's efforts. But the greatest demonstration of a Social
Audit's authenticity must be seen in how the performance of the department
improves over time in relation to its mission, values and objectives.
5. Assists in re-orienting and re-focusing priorities: Social Auditing could be a
useful tool to help departments reshape their priorities in tune with people's
expectations.
6. Provides increased confidence in social areas: Social Audit 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

Social Audit 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. A conventional financial audit focuses on financial records and
their scrutiny by an external auditor following financial accountancy principles,
whereas the concept of Social Audit is more comprehensive, having a greater scope
than that of traditional audit. In general, Social Audit refers to a process for
measuring, understanding and improving the social performance of an activity of
an organisation. Social Auditing is again distinct from evaluation in that it is an
internally generated process whereby the organisation itself shapes the Social Audit
process according to its stated objectives. In particular, it aims to involve all
stakeholders in the process. It 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.
Similarly, operation audit looks at compliance with policies, plan procedures, laws,
regulations, established objectives and efficient use of resources. On the contrary,

Social Audit examinesperformance of a department/programme vis--vis its stated

core values in the light of community values and the distribution of benefits among
different social groups reached through good governance principles. Social Audit
adds another dimension of key performance measurements in creating social
wealth in the form of useful networks and administration/ accountable and
transparent to the stakeholders. Creating social wealth is one of the contributions of
Social Audit. Thus, Social Audit strengthens the legitimacy of the state, as
well as trust between the state and the civil society.
FINANCIAL AUDITDirected towards recording, processing, summarizing and reporting of
financialdata .
OPERATIONAL AUDIT

Establishing standards of operation, measuring performance against standards,

examining and analyzing deviations, taking corrective actions and reappraising
standards based on experience are the main focus .
SOCIAL AUDIT
Social Audit provides an assessment of the impact of a departments non-financial
objectives through systematicand regular monitoring on the basis of the views of
its stakeholders.
Social Audit is proposed as a supplement to conventional audit to help Government
departments/ public agencies to understand and improve their performance as
perceived by the stakeholders. Social Audit is to be done at different levels of the
government and the civil society. SocialAudit is an ongoing process, often done in
12-month cycles that result in the preparation of
annual Social Audit document or report of an organisation.

Six Key Steps for Social Audit

1.

Preparatory Activities
Understand key principles of Social Audit.
List core values of the department/programmes.
List down social objectives the department is working towards or
programmes it aims to contribute.
Match activities with objectives.
List current practices and delivery systems.
Fix the responsibility for doing Social Audit in the department.
2. Defining Audit Boundaries and Identifying Stakeholders

Elaborate key issues for Social Auditing based on thesocial objectives.

Prepare a statement of purpose,
objectives, key issues and activities for Social Auditing.
Identify key stakeholders for consultation (Government and Civil Society).
Forge consensus on audit boundaries; identify stakeholders and formalise
commitments.
3. Social Accounting and Book-keeping
Select performance indicators for social accounting.
Identify which existing records can be used.
Identify what additional data to be collected, who would collect this data,
when and how.
Identify when stakeholders would be consulted and for what.
Prepare a social accounting plan and timeline.
Plan for monitoring social accounting activities.
4. Preparing and Using Social Accounts
Prepare social accounts using existing information,data collected and views
of stakeholders.
Identify key issues for action.
Take stock of objectives, activities and core values.
Set targets for future.

5 . Social Audit and Dissemination

Presenting social accounts to Social Auditor.
Social Auditor verifies data used, assess the interpretation and comment on
the quality of social accounting and reporting.
Social accounts revised in accordance with Social Auditors
recommendations.
Social Auditor has to collect information from the stakeholders regarding
programme implementation and benefits accrued tothem.
Disseminate Social Auditors consolidated report to the decision-making
committee that includes stakeholders.
Disseminate report to civil society.
Begin next cycle of social accounting.
6 . Feedback and Institutionalisation of Social Audit
Feedback for fine-tuning policy, legislation, administrative functioning and
programming towards social objectives.
Follow-up action.
Reviewing support to civil society for its participation
Institutionalisation of the process.

History of Social Audit

The word 'audit' is derived from Latin, which means 'to hear'. In ancient times,
emperors used to recruit persons designated as auditors to get feedback about the
activities undertaken by the kings in their kingdoms. These auditors used to go to
public places to listen to citizens' opinions on various matters, like behaviour of
employees, incidence of tax, image of local officials etc.
Charles Medawar pioneered the concept of Social Audit in 1972 with the
application of the idea in medicine policy, drug safety issues and on matters of
corporate, governmental and professional accountability. According to Medawar,
the concept of Social Audit starts with the principle that in a democracy the
decision makers should account for the use of their Charles Medawar pioneered the
concept of Social Audit in 1972 with the application of the idea in medicine policy,
drug safety issues and on matters of corporate, governmental and professional
accountability. According to Medawar, the concept of Social Audit 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.

Budgeting and Budgetary Control

Introduction
Budgeting has come to be accepted as an efficient method of
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 informal manner. Through the budgets, a business
wants to know clearly as to what it proposes to do during an
accounting period or a part thereof. The technique of budgeting is
an important application of Management Accounting. Probably,
the greatest aid to good management that has ever been devised
is the use of budgets and budgetary control. It is a versatile tool
and has helped managers cope with many problems including
inflation.
DEFINITION OF BUDGET
The Chartered Institute of Management Accountants, England,
defines a 'budget' as under: " A financial and/or quantitative
statement, prepared and approved prior to define period of time,
of the policy to be persued during that period for the purpose of
attaining a given objective." According to Brown and Howard of
Management Accountant "a budget is a predetermined statement
of managerial policy during the given period which provides a
standard for comparison with the results actually achieved."
Essentials of a Budget An analysis of the above said definitions
reveal the following essentials of a budget:
(1) It is prepared for a definite future period.
(2) It is a statement prepared prior to a defined period of time.
(3) The Budget is monetary and I or quantitative statement of
policy.

(4) The Budget is a predetermined statement and its purpose is to

attain a given objective. A budget, therefore, be taken as a
document which is closely related to both the managerial as well
as accounting functions of an organization.

Forecast Vs Budget
Forecast is mainly concerned with an assessment of probable
future events. Budget is a planned result that an enterprise aims
to attain. Forecasting precedes preparation of a budget as it is an
important part of the budgeting process. It is said that the
budgetary process is more a test of forecasting skill than anything
else. A budget is both a mechanism for profit planning and
technique of operating cost control. In order to establish a budget
it is essential to forecast various important variables like sales,
selling prices, availability of materials, prices of materials, wage
rates etc.
Difference between Forecast and Budget
Both budgets and forecasts refer to the anticipated actions and
events. But still there are wide differences between budgets and
forecasts as given below:
Forecasts
(1)
Forecasts is mainly concerned with anticipated or
probable events
(2) Forecasts may cover for longer period or years
(3) Forecast is only a tentative estimate
(4) Forecast results in planning
(5) The function of forecast ends with the forecast of likely
events

(6) Forecast usually covers a specific business function

(7) Forecasting does not act as a tool of controlling
measurement.
Budgets
(1)
Budget is related to planned events
(2)
Budget is planned or prepared for a shorter period
(3)
Budget is a target fixed for a periOd.
(4)
Result of planning is budgeting
(5)
The process of budget starts where forecast ends and
converts it into a budget
(6)
Budget is prepared for the business as a whole
(7)
Purpose of budget is not merely a planning device but
also a controlling tool.
BUDGETARY CONTROL
Budgetary Control is the process of establishment of budgets
relating to various activities and comparing the budgeted figures
with the actual performance for arriving at deviations, if any.
Accordingly, there cannot be budgetary control without budgets.
Budgetary Control is a system which uses budgets as a means of
planning and controlling.
According to I.C.M.A. England Budgetary control is defined by
Terminology as the establishment of budgets relating to the
responsibilities of executives to the requirements of a policy and
the continuous comparison of actual with the budgeted results,
either to secure by individual actions the objectives of that policy
or to provide a basis for its revision.
Brown and Howard defines budgetary control is "a system of
controlling costs which includes the preparation of budgets, coordinating the department and establishing responsibilities,
comparing actual performance with the budgeted and acting upon
results to achieve maximum profitability."

The above definitions reveal the following essentials of budgetary

control:
(1) Establishment of objectives for each function and section of
the organization.
(2) Comparison of actual performance with budget.
(3) Ascertainment of the causes for such deviations of actual from
the budgeted performance.
(4) Taking suitable corrective action from different available
alternatives to achieve the desired objectives.

Objectives of Budgetary Control

Budgetary Control is planned to assist the management for policy
formulation, planning, controlling and co-ordinating the general
objectives of budgetary control and can be stated in the following
ways:
(1)
Planning: A budget is a plan of action. Budgeting
ensures a detailed plan of action for a business over a period
of time.
(2)
Co-ordination: Budgetary control co-ordinates the
various activities of the entity or organization and secure cooperation of all concerned towards the common goal.
(3)
Control: Control is necessary to ensure that plans and
objectives are being achieved. Control follows planning and
co-ordination. No control performance is possible without
predetermined standards. Thus, budgetary control makes
control possible by continuous measures against
predetermined targets. If there is any variation between the
budgeted performance and the actual performance, the
same is subject to analysis and corrective action.

Scope and Techniques of Standard Costing and Budgetary

Control
Scope:
(1)
Budgets are prepared for different functions of business
such as production, sales etc. Actual results are compared
with the budgets and control is exercised. Standards on the
other hand are complied by classifying, recording and
allocation of the expenses to cost units. Actual costs are
compared with standard costs.
(2)
Budgets have a wide range of coverage of the entire
organization. Each operation or process is divided into
number of elements and standards are set for each such
element.
(3)
Budgetary control is concerned with origin of
expenditure at functional levels. Standard costing is
concerned with the requirements of each element of cost.
(4)
Budget is a projection of financial accounts whereas
standard costing projects the cost accounts.
Technique:
(1) Budgetary control is exercised by putting budgets and actuals
side by side. Variances are not normally revealed in the accounts.
Standard costing variances are revealed through accounts.
(2) Budgetary control system can be operated in parts. For
example, Advertisement Budgets, Research and Development
Budgets, etc. Standard costing is not put into operation in parts.
(3) Budgetary control of expenses is broad in nature whereas
standard costing system is a far more technically improved
system by means of which the variances are analysed in detail.
Requisites for Effective Budgetary Control
The following are the requisites for effective budgetary control :

(1) Clear cut objectives and goals should be well defined.

(2) The ultimate objective of realising maximum benefits should
always be kept uppermost.
(3) There should be a budget manual which contains all details
regarding plan and procedures for its execution. It should also
specify the time table for budget preparation for approval, details
about responsibility, cost centers etc.
(4) Budget committee should be set up for budget preparation
and efficient execution of the plan.
(5) A budget should always be related to a specified time period.
564 A TeXlbook of Financial Cost and Management Accounting
(6) Support of top management is necessary in order to get the
full support and co-operation of the system of budgetary control.
(7) To make budgetary control successful, there should be a
proper delegation of authority and responsibility.
(8) Adequate accounting system is essential to make the
budgeting successful.
(9) The employees should be properly educated about the
benefits of budgeting system.
(10) The budgeting system should not cost more to operate than
it is worth.
(11) Key factor or limiting factor, if any, should consider before
preparation of budget.
(12) For budgetary control to be effective, proper periodic
reporting system should be introduced.
Organization for Budgetary Control

In order to introduce budgetary control system, the following are

essential to be considered for a sound and efficient organization.
The important aspects to be considered are :
1. Organisation Chart
2. Budget Center
3. Budget Officer
4. Budget Committee
5. Budget Manual
6. Budget Period
7. Key Factor

Advantages of Budgetary Control

The advantages of budgetary control may be summarized as
follows :
(1) It facilitates reduction of cost.
(2) Budgetary control guides the management in planning and
formulation of policies.
(3) Budgetary control facilitates effective co-ordination of
activities of the various departments and functions by setting
their limits and goals.
(4) It ensures maximization of profits through cost control and
optimum utilization of resources.

(5) It evaluates for the continuous review of performance of

different budget centers.
(6) It helps to the management efficient and economic production
control.
(7) It facilitates corrective actions, whenever there is inefficiencies
and weaknesses comparing actual performance with budget.
(8) It guides management in research and development.
(9) It ensures economy in working.
(10) It helps to adopt the principles of standard costing.

Limitations of Budgetary Control

Budgetary Control is an effective tool for management control.
However, it has certain important limitations which are identified
below:
(1) The budget plan is based on estimates and forecasting.
Forecasting cannot be considered to be an exact science. If the
budget plans are made on the basis of inaccurate forecasts then
the budget progamme may not be accurate and ineffective.
(2) For reasons of uncertainty about future, and changing
circumstances which may develop later on, budget may prove
short or excess of actual requirements.

(3) Effective implementation of budgetary control depends upon

willingness, co-operation and understanding among people
reasonable for execution. Lack of co-operation leads to inefficient
performance.
(4) The system does not substitute for management. It is mere
like a management tool.
(5) Budgeting may be cumbersome and time consuming process.

INTRODUCTION
The 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. This is because either fixed costs tend to be impossible to alter in the
short term or managers are reluctant to alter them in the short term. Marginal
costing distinguishes between fixed costs and variable costs as convention ally
classified. The marginal cost of a product is its variable cost. This is normally
taken to be; direct labor, direct material, direct expenses and the variable part of
overheads.

Like Marginal costing or job costing, Marginal costing is not a distinct method of
ascertainment of cost but is a technique which applies existing methods in a
particular manner so that the relationship between profit & the volume of output
can be clearly brought out. Marginal costing ascertains marginal or variable costs
& the effect on profit, of the changes in volume or type of output, by
differentiating between variable costs & fixed costs. To any type of costing such as
historical, standard, Marginal or job; the Marginal costing technique may be
applied.
Under the Marginal of Marginal costing, from the cost components, fixed costs are
excluded. The difference which arises between the variable costs incurred for
activities & the revenue earned from those activities is defined as the gross margin
or contribution. It 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 pool of total contribution. The fixed
costs of the business are paid from this pool & then the part of the total
contribution which remains becomes the profit of the business as a whole.

MEANING OF MARGINAL COSTING

It 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.
Accordingly, marginal cost may also be defined as the variable cost incurred due to
a specific activity. It is concerned with variable costs, because fixed costs by
definition do not change with the volume produced.

DEFINATION OF MARGINAL COSTING

The Official C.I.M.A Costs of the Terminology defines Marginal costing as, The
accounting system in which variable costs are changed to costs units and fixed period are
written off in full against the aggregate contribution. Its special value is in decision-making
Accordingly, Marginal cost = Variable cost = Direct material + Direct labor
+Direct expenses + Variable overheads.
Marginal costing is formally defined as: the accounting system in which variable
costs are charged to cost units and the fixed costs of the period are written-off in
full against the aggregate contribution. Its special value is in decision making. The
term contribution mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. Thus M A R G I N A L C O S T
= V A R I A B L E C O S T D I R E C T L A B O U R +DIRECT
MATERIAL+DIRECT EXPENSE+VARIABLE OVERHEADS CONTRIBUTION
SALES - MARGINAL COST. The 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.

FEATURES OF MARGINAL COSTING

Classification of costs into fixed costs & variable costs is done under
Marginal costing system. Also semi-fixed or semi-variable cots get further
classified into fixed & variable elements.
To the product, only variable elements of cost, which constitute marginal
cost, are attached.
After the marginal cost & marginal contribution are taken into consideration;
price is fixed.
From the total contribution for any period, fixed cost for the period are
deducted.
The profitability of a department or product is decided by the marginal
contribution.
At variable production cost, the valuation of work-in-progress & finished
product is made.

ADVANTAGES OF MARGINAL COSTING

As there is involvement of computation of variable costs only in Marginal
costing, it is easy to understand & operate the same.
Among different products or departments, arbitrary apportionment of fixed
costs is avoided & the under-recovery or over-recovery problems are
eliminated.
Any attempt of measurement of relative profitability of different products or
different departments becomes complicated due to the arbitrary
apportionment of fixed costs.
Analysis of contribution, break even charts & analysis of cost-volumeprofit-analysis are resulted out of a Marginal costing system; for making
short term decisions all of these are important.
More uniform & realistic figures are resulted out of Marginal costing system
because fixed overhead costs are excluded from valuation of stock & workin-progress.
Apportionment 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.
The effects of their decisions can be more readily seen by all levels of
management- sometimes even before taking of an action.

MARGINAL COSTING V/S ABSORPTION COSTING

The difference between Marginal costing & absorption costing is as below:
1. Under Marginal costing: for product costing & inventory valuation, only
variable cost is considered whereas, under absorption costing; for product
costing & inventory valuation, both fixed cost & variable cost are
considered.
2. Under Marginal costing, there is a different treatment of fixed overhead.
Fixed cost is considered as period cost & by Profit/Volume ratio (P/V ratio),
profitability of different products is judged. On the other hand, under
absorption costing system, the fixed cost is charged to cost of production. A
reasonable share of fixed cost is to be borne by each product & thereby
subjective apportionment of fixed overheads influences the profitability of
product.
3. Under Marginal costing, the presentation of data is so oriented that total
contribution & contribution from each product gets highlighted. Under
absorption costing, the presentation of cost data is on conventional pattern.
After deducting fixed overhead, the net profit of each product is determined.
4. Under Marginal costing, the unit cost of production does not get affected by
the difference in the magnitude of opening stock & closing stock. Whereas,
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.

CONTRIBUTION ANALYSIS
Contribution is the most important concept in Marginal costing. It is, as seen above
equal to Sales Less Variable Cost. Contribution is the profit before adjusting the
fixed costs. Marginal costing is concerned with the `product costs` rather than the
`periods costs`. Contribution indicates the
Product profit = product Income product cost i.e.
Contribution = sale Value Variable cost.
Marginal 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 concern`s
profits. The amount of contribution is credited to the marginal profit and loss
account. The fixed costs are debited to the marginal profit and loss account. If the
contribution is equal to the fixed costs, the concern is said to break- even profit. If
the contribution is less than the fixed costs, there will be net loss. Thus, the fixed
costs which are period costs do not affect the product cost. Fixed costs are directly
adjusted in the profit and loss account prepared for the relevant period. The
concept of contribution plays a key role in assisting the management in taking
many important decisions such as1. Deciding the break-even point,
2. Deciding which article to produce, or continue or discontinue to produce,
3. Deciding the quantity of each article to be produce or sold,
4. Fixing the selling price, especially in a trade depression, or for a special
order.
The difference between contribution and accounting profit is explained below.
No. Contribution
Profit
1.
It is a concept used in Marginal It is an accounting concept.
2.
costing.
It is after deducting Fixed Costs.
3.
It is before deducting Fixed Costs.
Profit arises only when Sales go
At break- over point, Contribution is beyond the break- even point.
equal to fixed cost.

Assumptions and Limitations Underlying

BREAK-EVEN ANALYSIS
1.

All costs are classified as either fixed or variable. If not impossible or

impractical, dividing costs into the variable and fixed cost elements as an
extremely difficult job. This is attributable to the inherent nature or
characteristics of the cost per se.

2.

Fixed costs remain constant within the relevant range. Fixed costs remain
unchanged at any level of activity within the relevant range, even at the zero
level.

3.

The behavior of total revenues and total costs will be linear over the
relevant range, i.e. will appear as a straight line on the BE chart. This is
based on the idea that variable costs vary in direct proportion to volume; the
fixed costs remain unchanged, hence drawn as a straight horizontal line on
the graph within the relevant range; and that selling price is constant.

4.

In case of multiple product companies, the selling prices, costs and

proportion of units (sales mix) sold will not change. This cannot always be
correct. Sales mix ratio may be due to the change in the consuming habits of
customers. Selling prices of the individual products may likewise change
due to competition, popularity and salability of the products, etc.

5.

There is no significant change in the inventory levels during the period

under review. Stated in another way, production volume is assumed to be
almost (if not exactly) equal to the sales volume, which causes an immaterial
(or none at all) difference between the beginning and ending inventories.

6.

Other assumptions which have already been discussed in the preceding

numbers, are again credited and highlighted here as follows:
o Unit selling price will remain constant.

o Unit variable cost will not change. (This may include

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

Cost-Volume-Profit (CVP) Analysis

Cost-Volume-Profit (CVP) Analysis analysis is defined as a systematic
examination of the relationships among costs, activity levels, or volume, and
profit. CVP analysis establishes the relationship of profit to level of sales. And one
of these relationships is the Break-even analysis.
Since direct connection of expenses to production cannot be conclusively
established under functional classification of costs, analysis under CVP is directed
towards cost behavior; the way costs behave or change with respect to a change in
the activity level. Costs can be classified according to its behavior as:
1. Fixed Costs
These are costs that do not change regardless of changes in the level of
activity within a relevant range. In other words, they remain constant
regardless of the change in the activity level per total; however, fixed cost
per unit is inversely proportional to the activity level.
2. Variable Costs
In total, these costs change directly and proportionately with the level of
activity. As the activity level increases, variable cost per total will also
increase proportionately to the increase in activity level. However, variable
cost per unit remains constant, within the relevant range.
3. Semi-Variable Costs
Costs that varies with the change of activity level but not proportionately,
they are called semi-variable costs. They may either increase at an
increasing rate or increase at a decreasing rate. A typical example of this is
the cost of electricity (increasing at an increasing rate) because it is subject

to graduated brackets, thus, the greater the consumption, the higher the rate
per kilowatt hour as they will be categorized in a higher bracket.
4. Semi-Fixed Costs
This kind of costs has the characteristics of both variable and fixed cost
and is usually known as the step function cost or step cost. Like semivariable cost, semi-fixed cost increases with activity level but not
proportionately. And like fixed cost, it is constant for some stretches of
activity levels.
5. Mixed Costs
Costs that cannot be identified by a single cost behavior pattern are called
mixed costs. This kind of cost is composed of variable and fixed cost. We
have concluded earlier that costs are more meaningful when they are
classified according to behavior. When costs therefore are mixed, it is
important that we know how to segregate them. Some tools and techniques
popularly used are the High-Low Method, Scatter Graph Method,
Regression Analysis, and Correlation .

INTRODUCTION TO OPERATING COSTING

It is a method of costing applied by undertakings which provide
service rather than production of commodities. Like unit costing
and process costing, operating costing is thus a form of operation
costing.
The emphasis under operating costing is on the ascertainment of
cost

of

rendering

services

rather

than

on

the

cost

of

manufacturing a product. It is applied by transport companies,

gas and water works, electricity supply companies, canteens,
hospitals, theatres school etc. Within an organisation itself certain
departments too are known as service departments which provide
ancillary

services

to

the

production

departments.

E.g.

Maintenance department, power house, boiler house, canteen,

hospital, internal transport.

The information concerning the business enterprise is very helpful

to the management to control it in an efficiently way. As the other
branches

like

financial

accountancy

and

management

accountancy, the cost accountancy also serves the important

information

to

the

management

regarding

the

operating

efficiency of the business. It becomes very easy for management

to lay down management policies, to guide management

decisions or evaluate operating management performance with

the information provided by cost accounting.

The term operation in business terminology refers to an activity of

the business. It is very important to study the operations of the
business in detail because depends on the operations, which it
performs. The management should always concentrate on the
efficiency of the operation and also the costs associated to the
operations. It is very important to control the costs associated to
the operations for the enterprises like manufacturing companies,
companies engaged in the process of extraction of materials from
earth like, coal mines etc.

Generally, the above mentioned business enterprises depend on

the operation that it has to be performed in to produce in to
produce the final output. The costs associated with such
operations are generally higher. These costs are called as
operating costs.

The costs, which are incurred to perform the operation of the

enterprise, are called as operating costs. These costs are to be
accounted for in order to arrive at the total costs of operation or
process, which helps in determining the price of the final product.

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 of the costs of every process,

operation, services or contrast as may be appropriate. It deals
with the cost of production, selling and distribution. It thus, the
provision of such analysis and classification of expenditure as will
enable the total cost of any particular unit of production to be
ascertained with reasonable degree of accuracy and at the same
time to disclose exactly how such total cost is constituted (i.e. the
value of material used, the amount of labour and other expenses
incurred) so as to control and reduce the cost.

Operating Costs are the costs incurred by undertakings which do

not manufacture any product but provide a service. Such
undertakings
agencies;

for

example

Electricity

are

Undertakings;

Transport

concerns,

Gas

Hospitals;

Theatres

etc.

Because of the varied nature of activities carried out by the

service undertakings, the cost system used is obviously different
from that followed in manufacturing concerns.

ESSENTIAL

FEATURES

OF

OPERATING

COSTS

ARE

AS

FOLLOWS:
(1) The operating costs can be classified under three categories.
For example in the case of transport undertaking these three
categories are as follows:
(a) Operating and running charges. It includes expenses of
variable

nature.

For

example

expenses

on

petrol,

diesel,

lubricating oil, and grease etc.

(b) Maintenance charges. These expenses are of semi-variable
nature and include the cost of 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 of
operating manager, etc.
(2) The cost unit used is a double unit like passenger-mile;
Kilowatt-hour, etc.
It can be implemented in all firms of transport, airlines, busservice, etc., and by all firms of Distribution Undertakings.
THE FEATURES OF COST ACCOUNTING:
1. It is a process of accounting for costs.
2. It records income and expenditure relating to goods and
services

3. It provides statistical data on the basis of which future

estimates are prepared and quotations are submitted.
4. It is concerned with cost ascertainment, cost control and cost
reduction.
5. Finally it involves the preparation of right information to the
right person at the right time so that it may be helpful to
management

for

planning,

evaluation

of

performance,

control and decision-making

ADVANTAGES OF COST ACCOUNTANCY
1. It enables a concern to measure the efficiency and than to
maintain and improve it. This can be done with the help of
comparison of data made available of the previous periods
and current period.
2. It provides information upon which estimates and tenders are
based.
3. It guides for future production polices. It explains the cost
incurred and there by provides data on the basis of which
production can be appropriately planned.
4. The extract cause of decrease or increase in profit/loss can be
detected. A concern may suffer not because of the cost of
production is high or prices are low but also because the
output is much below the capacity of the concern.
5. Efficiency of public enterprises. Costing has a more important
role to play in public enterprises than in private enterprises.
The primary objective of the public enterprises is not to raise

profits but it is to serve the society by providing quality good

at cheaper rates.
OPERATING COSTING: A BRIEF REVIEW
It is defined as the refinement of process costing. It is concerned
with the determination ofthe cost of each operation rather than
the process. In those industries where a process consistsof
distinct operations, the method of costing applied or used is
called operation costing.Operation costing offers better scope for
control. It facilitates the computation of unitoperation cost at the
end of each operation by dividing the total operation cost by total
inputunits. The two costing methods included under this head are
process costing and servicecosting.
Preparation of Cost Sheet under Operating Costing
For preparing a cost sheet under operating cost, costs are usually
accumulated for a specified period viz., a month, a quarter, or
a year etc.
All of the accumulated costs should be classified under the
following three heads:
1. Fixed costs or standing charges:
Which are the same whether the operation is closed or running at
100% capacity. Fixed Costsinclude items such as the rent of the
building. These generally have to be paid regardless ofwhat state
the business is in.
2. Variable costs or running charges, (Fuel, Driver Wages,
Depreciation, oil etc.):
Which may increase depending on whether more production is
done, and how it is done(producing 100 items of product might
require 10 days of normal time or take 7 days ifovertime is used.
It may be more or less expensive to use overtime production
depending onwhether faster production means the product can be

more profitable). Variable Costs includeindirect overhead costs

such as Cell Phone Services, Computer Supplies, Credit
CardProcessing, Electrical use, Janitorial Supplies, Office Products,
Payroll Services, Telecom,Uniforms, Utilities, or Waste Disposal
etc.
3. Semi-variable costs or maintenance costs. (Supervision salary,
Repairs and Maintenance)
Under operating costing, the per unit cost of service may be
calculated by dividing the totalcost for the period by the total
units of service in the period.
Overhead costs for a business are the cost of resources used by
an organization just tomaintain its existence. Overhead costs are
usually measured in monetary terms, but non-monetary overhead
is possible in the form of time required to accomplish tasks.
Examples of overhead costs include:
payment of rent on the office space a business occupies
cost of electricity for the office lights
some office personnel wages
Non-overhead costs are incremental costs, such as the cost of raw
materials used in the goodsa business sells.
Operating Cost is calculated by Cost of goods sold + Operating
Expenses. OperatingExpenses consist of:
Administrative and office expenses like rent, salaries, to
staff, insurance, directors
fees etc.
Selling and distribution expenses like advertisement,
salaries of salesmen. It includesall operating cost such as
salary, rent, stationery, furniture etc.
In the case of a device, component, piece of equipment or facility
(for the rest of this article,all of these items will be referred to in
general as equipment), it is the regular, usual andcustomary
recurring costs of operating the equipment. This does not include
the capital costof constructing or purchasing the equipment

(depending on whether it is made by the owneror was purchased

as a constructed system).Operating costs are incurred by all
equipment unless the equipment has no cost to operate,
requires no personnel or space and never wearsout (any
examples? perhaps intangibles, though not equipment, per se). In
some cases,equipment may appear to have low or no operating
cost because either the cost is notrecognized or is being absorbed
in whole or part by the cost of something else.
Equipment operating costs may include:
Salaries or Wages of personnel
Advertising
Raw materials
License or equivalent fees (such as Corporation yearly
registration fees) imposed by agovernment
Real estate expenses, including
Rent or Lease payments
Office space rent
furniture and equipment
investment value of the funds used to purchase the land, if
it is owned insteadof rented or leased
property taxes and equivalent assessments

 Operations taxes, such as fees assessed on transportation

carriers for use of highways
Fuel costs such as power for operations, fuel for production
Public Utilities such as telephone service, Internet
connectivity, etc.
Maintenance of equipment
Office supplies and consumables
Insurance premium
Depreciation of equipment and eventual replacement costs
(unless the facility has nomoving parts it probably will wear
out eventually)
Damage due to uninsured losses, accident, sabotage,
negligence, terrorism and routinewear and tear.
Taxes on production or operation (such as subsidence fees
imposed on oil wells)
Income taxes

Some of these are not applicable in all instances. For example,

A solar panel placed on one's home for use in generating
electric power generally hasonly capital costs; once it's
running there are no personnel costs, utility costs
ordepreciation and it uses no extra land (that wasn't already
part of the place where it islocated) so it has no real
operating costs; however there may need to be taken
intoaccount costs of replacement if damaged.
An automobile or any other item purchased for personal use
has no salary cost because the owner does not charge
themselves for operating the device.
An item which is leased may have some or all of these costs
included as part of the purchase price.
It might be questionable to assert that the cost of ten extra
people on the sales force are an incremental cost or an overhead
cost, since the wages for these people are both overhead an
dincremental. The staffs needed to keep the shop operational are
mostly considered as overhead.

INDEX
SR NO.

TITLE

TOPIC 1
SOCIAL AUDIT

1
Introduction

Principles Of Social Audit

Benefits Of Social Auditing
Social Audit Vs Other Audits
Six Key Steps For Social Audit
History Of Social Audit

TOPIC 2
Budgeting and Budgetary Control
Introduction
DEFINITION OF BUDGET
BUDGETARY CONTROL
Objectives of Budgetary Control
Advantages of Budgetary Control
Limitations of Budgetary Control

PAGE NO.

TOPIC 3
MARGINALCOSTING

3
Introduction

DEFINATION OF MARGINAL COSTING

FEATURES OF MARGINAL COSTING
ADVANTAGES OF MARGINAL COSTING
MARGINAL COSTING V/S ABSORPTION COSTING

TOPIC 4
OPERATING COSTING

4
Introduction

ESSENTIAL FEATURES OF OPERATING COSTS

Preparation of Cost Sheet under Operating Costing

A PROJECT REPORT ON
Social Audit
Budgetary Control
Marginal Costing
Operating Costing
SUBMITTED BY

Dhawal N Trivedi
ROLL NO: 67
M.Com. SEM- I I
(ADVANCED COST ACCOUNTING)
ACADEMIC YEAR: 2015-16

Under the guidance of

PROF. CA NITIN KADAM

SUBMITTED TO UNIVERSITY OF MUMBAI,

V.K.KRISHNA MENON COLLEGE OF COMMERCE AND SCIENCE
BHANDUP (EAST) MUMBAI - 400042

CERTIFICATE
I, Prof . CA Nitin Kadam , hereby certify that Dhawal N Trivedi of V.K.Krishna
MENON COLLEGE OF COMMERCE AND SCIENCE, BHANDUP (EAST), Mumbai -400042
of M.com Part I (ADVANCED COST ACCOUNTING ) has completed her project on
Social Audit , Budgetary Control, Marginal Costin, Operating Costing

during the academic year 2015-16 The information submitted is true and original to
the best of my knowledge.

____________________
Project Guide

___________________
External guide

_____________________
___________________
Co-coordinator

Principal

Date :

DECLARATION FROM THE STUDENT

I DHAWAL N TRIVEDI. ROLL NO 67, Student of V.K.Krishna MENON

College Of Commerce and Science, Bhandup (EAST) Mumbai 400042, studying
in M.Com Part- I hereby declare that I have completed the project on ADVANCED
COSTING under the guidance of project guide Prof. CA NITIN KADAM during the

academic year 2015-16. The information submitted is true to the best of my

knowledge.

Date:

Signature

Place: Bhandup

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Principal of V.K.Krishna

Menon College of Bhandup,(Ms Saroj Phednis) and our project guide Prof. CA
Nitin Kadam. for providing me an opportunity to do my project work on
ADVANCED COSTING.. I also wish to express my sincere gratitude to
the non - teaching staff of our college. I sincerely thank to all of them in
helping me to carrying out this project work. Last but not the least, I 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.

PLACE: BHANDUP

DATE:

Signature