Terminology of Cost Accounting

Lincy Rinil

Cost ConceptCost Object

Cost UnitCost Centre

Cost Allocation&

Costing Methods

Concept of Cost

• Cost is a measurement, in monetary terms, of the amount of resources used for some purposes. Thus cost represents the amount of resources given up to obtain a given object or objective.

• In management accounting, cost data which are relevant and useful in one situation may be quite irrelevant and useless in another. Developing the data on the required lines can be designated as “the concept of cost relevancy”. The concept implies the need of different sets of cost data for different objectives, purposes and situations.

Cost Object

• A cost object is an activity, a product or a service, a customer, a project, a contract, a process or a department of an organization for which cost measurement is made.

• Eg: cost of a Maruti swift Dzire, cost towards building a hostel, etc.

Cost Unit

• It is a device for the purpose of breaking up or separating cost into smaller sub-divisions attributable to products or services. It is the unit of product, service or time in relation to which cost may be ascertained.

• Eg: Tonne in the case of coal, 1000 bricks in case of bricks manufacturing, in case of goods transport, the unit will be tonne – km (the effort involved in carrying one tonne of goods for a distance of one kilometre.

Cost Centre

• A cost centre is the smallest segment of activity or area or responsibility for which costs are accumulated. Typically cost centres are departments, but in some instances, a department may contain several cost centres.

• These cost centres are the departments or sub-departments of an organisation with reference to which cost is collected for cost ascertainment and cost control.

• Eg: An assembly department may be supervised by one foreman, it may contain several assembly lines. Sometimes each assembly line is regarded as a separate cost centre with its own assistant foreman.

Cost Accumulation

• Cost accumulation refers to a systematic process engaged by the organizations to collect cost data of its operations by using an accounting system.

• Eg: Job Costing, Process costing

Cost Allocation

• It is the process of charging the entire amount of cost object to cost unit or cost centre.

• Eg: The charges of repairing a photocopier can be exclusively charged to the photocopying section of the organization.

Costing Methods

• The methods to be used for the ascertainment of cost of production differ from industry to industry.

• It primarily depends on the manufacturing process and also on the methods of measuring the departmental and finished products.

• Costing methods are broadly classified into two:

1. Job costing

2. Process costing

Costing Methods

• Job Costing– Contract Costing

– Batch Costing

– Multiple Costing

• Process Costing– Service Costing

– Operation Costing

– Output Costing

Job Costing

• Under this method, costs are collected and accumulated for each job, work order, or project separately . Each job is separately identified; so it becomes essential to analyze the cost according to each job.

FEATURES OF JOB COSTING:

• Production is undertaken after obtaining customer’s order.

• Identity of each job is retained from start to finish.

• Cost information is collected from each job.

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Examples of Job Costing:

Machine-tool

manufacturing

Foundries

Printing

Furniture-making

Repair-shops

Contract Costing

• When job is big and spread over long period of time,the method of contract costing is used. A separateaccount is kept for each individual contract.

• FEATURES OF CONTRACT COSTING:

The contract terminates on its completion.

Work is carried out at a site other than contractor’s own premises

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SOME BUSINESSES WHERE CONTRACT

COSTING APPLIES-

Builders

Dams

Bridges

Ship building

Aircraft manufacturing

other constructional work.

Batch Costing

• This is an extension of job costing. A batch mayrepresent a number of small orders passedthrough the factory in batch. Each batch is treatedas a unit of cost and cost is separately calculated.

• FEATURES OF BATCH COSTING:

Reduces overall cost of the product ifcomponents are manufactured in batches of largequantity.

Costs are collected against each batch.

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SOME AREAS WHERE BATCH COSTING IS

USED:

Radio manufacturing

Television manufacturing

Watch manufacturing

Pen manufacturing

Computer manufacturing

Process Costing

• This is suitable for industries where production is continuous,manufacturing is carried on by distinct and well defined processes,the finished product of one process becomes the raw material of thesubsequent process.

• A separate account is opened for each process to which allexpenditure incurred thereon is charged.

• It is best suitable for organizations where the work cannot bestopped and is continuously performed throughout the year (I.e.24hours a day and 7 days a week) except for stoppage for maintenancework. Thus it is also known as Continuous Costing.

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FEATURES OF PROCESS COSTING:

Production is done having a continuous flow of identical

products except where plant and machinery is shut down

for maintenance, etc.

Clearly defined process cost centres

Product of one process becomes input-material of

another process.

Avoidable and unavoidable losses arise at different

stages of manufacture for various reasons. Abnormal

gain also arises.

Continuous and Mass production, against particular

order

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PROCESS COSTING IS USED IN THE

FOLLOWING TYPES OF INDUSTRIES:

Manufacturing industries-

Iron and steel, textiles, chemicals, cement, paper,

flour mills, food products, toys making, milk

dairies, biscuit manufacturing, etc.

Mining industries-

Coal, Oil, etc.

Public utility services

Generation of Electricity, Gas,

Water Supply, etc.

Service (Operating) Costing

• This method applies to activities that provide aservice rather than producing goods.

• This method may be used for both services to outsidecustomers as well as internal use (in an manufacturingunit, certain sections may provide ancillary services toproduction department, such as canteen, maintenance,etc.).

• In this method operating costs are collected periodically.

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THIS METHOD IS USUALLY APPLIED TO:

Transportation services – road, rail, air, etc.

Utility services – hospitals, canteen, etc.

Distribution services – electricity, gas, etc.

Professional services – courier service,

management consultants, etc.

Operation Costing

• It is suitable for such organizations where the output is not only homogeneous but also is the outcome of a sequence of continuous or repetitive operations or processes.

• Since the industries that use operation costing recognize the output task in terms of operations, operating costing ascertains cost per operation rather than cost per unit.

• this method of costing is popular in industries that are engaged in operations like mines or drilling, dairies, cement works, etc.

Output Costing

• This is suitable for industries that are engaged in producing a single product on continuous basis and units are identical.

• Eg: brick making, cement manufacturing, mining, diary and flour mills, etc.

Multiple Costing

• It represents the application of more than one method of costing in respect of the same product.

• This is suitable for industries where a number of component parts are separately produced and subsequently assembled into a final product. In each industries each component differs from the others as to price, material used and process of manufacture undergone. So it will necessary to ascertain the cost of each component.

• For this purpose, process costing may be applied. To ascertain the cost of the final product, batch cost may be applied.

THIS METHOD IS USUALLY

APPLIED TO:

• Factories manufacturing:

– automobiles

– Engines

– Radios

– Aero planes and other complex products

Thank you