An Orientation to Cost Accounting

Presented by :Amit Kumar, Amit Pandey,Anand Prakash, Arjun Kafle,Ashish Kumar

COST

• Cost is the amount of expenditure incurred relating to a specific thing or activity.

• Cost is the cash or cash equivalent values sacrificed to obtain some goods or services.

COST ACCOUNTING

• Cost accounting is classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for the purpose of control and guidance of management.

OBJECTIVE OF COST ACCOUNTING

To ascertain the product cost.

To facilitate planning and control of regular

business activities.To supply

information for short and long run

decisions.

Direct Material

Direct Labor

Direct Expenses

Factory Overhead

Selling, Distribution & Administrative

overhead ELEMENTS OF COST

Direct Material : The cost of materials which become a major part of finished product.

Direct Labour : The labour associated with workers engaged in the production process.

Direct Expenses : expenditure other than direct material and direct labour directly incurred on a specific cost unit.

Indirect material

Indirect labour

Indirect expenses

Factory overhead : defined as cost of indirect materials, indirect labour and indirect expenses.

Selling and distribution and administrative overhead : Distribution expenses begins when factory cost ends. It covers the cost of making sale and delivering products. Administrative overhead includes cost of planning and controlling general policies and the operations of the enterprise.

Prime cost : Direct materials, direct labour and expenses constitute prime cost.

Conversion cost : Direct labour and factory overhead together are called conversion cost.

•Committed cost•Managed cost•Discretionary cost

Fixed Cost

•Vary directly and proportionately with the output

Variable Cost

•Total Fixed Cost + (units x) variable cost per unitMixed Cost

Cost Classification

Direct and Indirect Cost : A direct cost is one that can be economically traced to a single cost object. An indirect cost is one that is associated with the manufacture of two or more units of finished product.

Costing is the techniques and process of determining costs of a product manufactured or a service rendered.

Costing

Job costing-

Job costing used in those business concern where production is carried out as per specific order of a group of identical or similar product.

Types of costing

Batch costing

Contract costing

Mutual or terminal costing

Process costing-

This costing method is used in those industries where manufacture is done continuously.

Unit or single output costing

Operating costing

Operation costing

Types of costing

Technique of costing

Historical costing

Standard costing

Absorption or Full costing

Variable or Marginal costing

Uniform costing

• The expenses which are incurred in converting the raw materials into the finished form plus all other expenses incurred in purchasing raw material and distribution of goods.

Costs:

• Based on behavior

• Based on decision making and control

• Element wise classification

• Functional classification

• Based on financial nature of costs

Types of classification

• Fixed costs

• Variable costs

• Total costs

Classification based on behavior

• The costs which will not vary with the level of output.

• Examples are rent, property taxes, depreciation, etc.

Fixed costs

• The costs which vary with the level of output.

• Examples include raw materials, sales commission, etc.

• If the operation is shut down , the variable costs will be eliminated.

Variable costs

Total Cost= Fixed Cost +Variable Cost

Variable cost

Fixed cost

Total Cost

Total costs

• Opportunity cost

• Sunk cost

• Explicit costs

• Imputed cost

• Out –of-pocket cost

Cost for Decision making and Control

• The expected returns from the second best use of resources which are forgone due to the scarcity of resources.

Opportunity Costs

• The costs which cant be increased, decreased or altered .

• The costs are incurred in the past.

Sunk costs

• The costs which are entered in the books of accounts.

• These costs involve cash payments.

Explicit costs

• The costs which did not enter in the books of accounts .

• Note: A combination of implicit and explicit costs makes economic cost.

Imputed Costs

• The items of expenditure which involve cash payments .

• All explicit costs fall in this category.

Out-of –Pocket Costs

• Direct costs

• Indirect costs

Element wise classification

• Also known as traceable costs

• The costs which can be identified easily and traced easily with a product is called direct costs.

• E.g.. Cost for direct labor, direct materials, etc

Direct costs

• The costs which cant be allocated to a single product.

• For e.g. Electricity.

Indirect Costs

• Production costs

• Administration costs

• Selling and distribution costs

• Research and development costs

Functional classification

• It is the inclusive of all direct material, direct labor, direct expenses, and manufacturing expenses.

• It refers to costs concerns with manufacturing activity which starts with supply of material and ends with the primary packaging of the product.

Production Costs

• These costs are incurred for carrying the administrative functions of the organization

• For example: cost of policy formulation and implementation etc.

Administration Costs

• The costs which are incurred in the selling and distribution activities.

• For example: salesman commission, logistics expenses, advertising costs, etc

Selling And Distribution Costs

• The cost incurred in the search of new product, modification of existing products .

• For Example: Cost incurred in idea generation, prototype development, market testing, etc.

Research & Development Costs

• Financial costs–cash costs–Non cash costs

• Non-financial costs

Based On Financial Nature Of Costs

• Cash costs are those costs that are reflected on actual cash outflows

• Includes both revenue and costs

• Non cash costs are those costs that do not involve cash outlays at the time when cost is recognized

• For example: depreciation, opportunity costs

Cash Costs & Non Cash Costs

• These are the costs that are not directly traceable through the company's cash flows.

• Examples are morale of employees

Non-financial Costs

• Management Accounting by Khan and Jain• Cost Accounting by Jain and Narang• Introduction to management accounting by Horngren,

Sundem, and Stratton: 13th edition• Advanced management accounting by Ravi M. Kishore:

2nd edition• Cost accounting: Jawaharlal Lal by 2nd edition• Managerial economics: DN Diwedi by 6th edition

References

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