48501270 Cost Accounting

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COST ACCOUNTING


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Cost is a loss of resources for achieving certain

objectives or benefits/ advantages.

Cost is the amount of expense (actual or

notional) incurred or attributable to a specified

article product or activity.

What is a Cost ??

Cost is always related to a particular object, i.e. difficult

to assess any cost in isolation. E.g.cost of 1 apple,

ticket cost, exam fees etc.


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Costing is the technique and process of cost

ascertainment.

Cost Accounting is the collection andrecording of costs and preparation ofperiodical reports.

Cost Accountancy is the application ofcosting and cost accounting principles,methods and techniques for the purpose of

managerial decision making.

Costing, Cost Accounting andCost Accountancy


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o Ascertainment of costs

o Determination of selling price

o Profitability analysis

o Cost control and cost reductiono Ascertainment of profits of activities

o Assisting management in decision making

o Variance analysis (actual vs. budgeted)

o Measuring use of resources

Objectives of Cost Accounting


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Cost Objectanything for which a separatemeasurement of cost is desired. E.g. a product,

a service, a project, a brand etc.

Cost Unitit is a unit of product, service ortime in relation to which costs are ascertained/

expressed. E.g. cost per km, cost per litre etc.

Cost Centreit is defined as a location, personor an item for which costs may be ascertained

for the purpose of cost control. For e.g. library

(impersonal) and librarian (personal)

Cost Concepts & Terminology


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Direct Costcosts which can be directly related

or allocated to an activity, cost unit, cost centre.E.g. raw material, labour cost in prodn.

Indirect Costcosts that cannot be directlylinked or allocated to a cost unit, cost centre. E.g.consumables, driver salary in production.

Opportunity Costvalue of sacrifice made or abenefit foregone by accepting an alternativecourse of action. E.g. land used for commercial

property, & residential development foregone.



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Out-of-pocket costcosts involving actual

cash outflows. Mainly a short-run concept, usedin determination of selling price.

Product Costcosts that are associated withpurchase/ production/ sale of material. E.g.

raw material, transport charges etc. (FIXED)

Period Costcosts that are not associated witha product, but are incurred for a specific period.

Costs are irrespective of actual activity. For e.g.

electricity, rent etc. (VARIABLE)



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Sunk Costcosts that are incurred in the past

(historical costs). Not useful in decision makingin the current period.

Relevant Costcosts that are affected bymanagement decisions are relevant costs. E.g.cost of maintenance on sale of old machine.

Profit Centrecentres which are responsiblefor generating and maximizing profits. For e.g.departments within an organization (mango

unit)



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Cost ComponentsMaterials = Direct Matl. + Indirect Matl.

(+) Labour = Direct Lab. + Indirect Lab.(+) Expenses = Direct Exp. + Indirect Exp.

Total Costs = Prime Cost + Overheads

OVERHEADS

Production, Factory,

Manufacturing,

Works, Technical

Office, General,

Administrative

Selling &

Distribution,

Promotional

Total Cost = Prime Cost + Overheads (OH)Total Cost = Prime Cost + Factory OH + Office OH +

Selling Distribution OH


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Job Costingcost of each job is separately ascertained.

Useful for customer order-wise business such asgarage, printing press etc.

Batch Costinga batch is a collection of small orders

produced together. Each batch is treated as a separatecost unit. E.g. medicines, paints

Contract Costingcost of each contract is ascertained

separately. Useful for construction contractsspreading over long periods.

Methods of Costing


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Process Costingcost of completion of each stage

of work is ascertained. It is used in a typicalmfg. industry, where cuttingmfg.assemblypackingdispatch.

Operating Costingused for ascertainment of

costs in service industry like transport, hotel etc.

Marginal Costingit is a technique of costingused for managerial decision making.

Methods of Costing


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Costing vs. Financial AccountingSr. Cost Accounting Financial Accounting

1 Purpose as a MIS tool formanagement decisions

Purpose as a statutoryrequirement

2 Reporting as required bymanagement

Reporting as per statutorycalendar

3 Audit not compulsory forevery company

Audit is compulsory forevery company

4 Provides product-wise/

process-wise profits

Provides overall profits of

the company5 Records/ reports for

internal use onlyReports, statements given toshareholders, banks etc

6 Financial items not included in cost statements such as

donations, interest on loans, income tax, bad debts etc.


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Cost Sheet Cost Sheet is a summary of all costs ascertained

for a cost unit or a cost centre.

Cost Sheet document can be prepared for

recording actual costs or estimated costs. Cost Sheet analyses and classifies different costs

as per their functions.

Cost Sheets can be prepared for two or moreperiods for comparative studies

Total Cost = Prime Cost + Overheads


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Particulars Rs. Rs.

Direct Material

Opening stock 70,000

(+) Purchases 400,000

(+) Direct Expenses on purchases 20,000

490,000

(-) Closing Stock 50,000Hence, Material Consumed 440,000 440,000

(+) Direct Labour 200,000

(+) Direct Expenses 30,000

Hence, Prime Cost 670,000 670,000

(+) Factory Overheads 90,000

Hence, Gross Factory Cost 760,000 760,000

(+) Opening stock of Work in progress (WIP) 40,000

(-) Closing stock of Work in progress (WIP) 50,000

Hence, Net Factory Cost 750,000 750,000

(+) Office Overheads 100,000

Gross Office Cost (Cost of Production) 850,000 850,000

(+) Opening stock of Finished Goods (FG) 80,000

(-) Closing stock of Finished Goods (FG) 60,000

Net Office Cost (Cost of Goods Sold COGS) 870,000 870,000

(+) Selling Distribution Overheads 130,000

Hence, Cost of Sales 1,000,000

(+) Profit 250,000

Sales 1 250 000

48501270 Cost Accounting

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