(a) DISCUSS the Net Realisable Value (NRV) method of apportioning joint costs to by-products. (b) DIFFERENTIATE between Service costing and Product…

(a) 19. (a) Net Realisable Value method: The realisation on the disposal of the by-product may be deducted from the total cost of production so as to arrive at the cost of the main product. For example, the amount realised by the sale of molasses in a sugar factory goes to reduce the cost of sugar produced in the factory. When the by-product requires some additional processing and expenses are incurred in making it saleable to the best advantage of the concern, the expenses so incurred should be deducted from the total value realised from the sale of the by-product and only the net realisations should be deducted from the total cost of production to arrive at the cost of production of the main product. Separate accounts should be maintained for collecting additional expenses incurred on: (i) further processing of the by-product, and (ii) selling, distribution and administration expenses attributable to the by-product. (b) Service costing differs from product costing (such as job or process costing) in the following ways due to some basic and peculiar nature. (i) Unlike products, services are intangible and cannot be stored, hence, there is no inventory for the services. (ii) Use of Composite cost units for cost measurement and to express the volume of outputs. (iii) Unlike a product manufacturing, employee (labour) cost constitutes a major cost element than material cost. (iv) Indirect costs like administration overheads are generally have a significant proportion in total cost of a service as unlike manufacturing sector, service sector heavily depends on support services and traceability of costs to a service may not economically feasible (c) Controllable and un-controllable variances: The purpose of the standard costing reports is to investigate the reasons for significant variances so as to identify the problems and take corrective action. Variances are broadly of two types, namely, controllable and uncontrollable. Controllable variances are those which can be controlled by the departmental heads whereas uncontrollable variances are those which are beyond their control. Responsibility centres are answerable for all adverse variances which are controllable and are appreciated for favourable variances. Controllability is a subjective matter and varies from situation to situation. If the uncontrollable variances are of significant nature and are persistent, the standard may need revision. (d) (i) Standards Cost Centres: Cost Centre where output is measurable and input required for the output can be specified. Based on a well-established study, an estimate of standard units of input to produce a unit of output is set. The actual cost for inputs is compared with the standard cost. Any deviation (variance) in cost is measured and analysed into controllable and uncontrollable cost. The manager of the cost centre is supposed to comply with the standard and held responsible for adverse cost variances. The input-output ratio for a standard cost centre is clearly identifiable. (ii) Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms, thus input-output ratio cannot be defined. The cost of input is compared with allocated budget for the activity. Example of discretionary cost centres are Research & Development department, Advertisement department where output of these department cannot be measured with certainty and co-related with cost incurred on inputs.