Chap1_CostAccounting_Lecture_ppt

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CostCost

AccountingAccounting



Cost AccountingCost Accounting

y Process of determining & accumulating

cost of product.

y Measures operating efficiency of

enterprise.

y Aims at providing :-

Cost data

Statements

Reports



Objectives of Cost AccountingObjectives of Cost Accounting

y Determining selling price

Total product cost & cost per unit of product

are important.

y Controlling cost

Increases the efficiency of enterprise.

y Ascertaining costing profit

Determine costing profit or loss on anyactivity

By matching cost with revenue of activity.



Objectives of Cost AccountingObjectives of Cost Accounting

y Providing information for decision making

Determination of cost volume profitrelationship.

Make or buy a component.

Shut down or continue operations at loss.

Continuing with existing machinery or not.

y Preparation of Financial statements

Information regarding stock of,

x Raw material

x Semi-finished goods

x Finished goods



Elements of CostsElements of Costs

y Material

Substance from which product is made.

Raw or manufactured state.

Becomes an internal part of finished product.

Two types of materials :-

x Direct Material

x Easily identified & related with specific product.

x For e.g., timber for furniture, sugarcane for making sugar.

x Indirect Material

x Cannot be easily identified & related with specific product.

x Used in factory, office, selling & distribution department.

x For e.g., printing & stationary.




y Labour

Main factor of production.

Main element of cost in product.

Two types of labour :-

x Direct Labour

x Takes direct & active part in production of commodity.

x Can be easily identified & related with specific product.

x For e.g., wages paid to carpenter for making furniture.

x Indirect Labour

x Labour not directly engaged in converting raw material into

finished product.

x

For e.g., wages of store keeper.




y Expenses

All cost incurred in production other than,

x Material cost

xLabour cost

Two types of expenses.

x Direct Expensesx Directly, easily & wholly allocated to specific cost centre.

x For e.g., fees paid to architects, consultants.

x Indirect Expensesx Cannot be directly, easily & wholly allocated to specific cost

centre.

x Treated as part of overheads.

x For e.g., Insurance & depreciation of fixed assets.



OverheadsOverheads

y Indirect cost are referred to as

overheads.

y Overheads includes :-

Indirect Material.

Indirect Labour.

Indirect Expenses.



Types of OverheadsTypes of Overheads

y Factory/ Works/ Production Overhead

Indirect cost incurred in the factory.

Concerned with the running of factory.

Indirect material

x Consumable stores, factory printing & stationary.

Indirect Labour

xSalary of factory manager, store keeper.

Indirect Expenses

x Rent & insurance of factory building, Municipal

taxes.




y Office & Administrative Overheads

Expenses related to management &

administration of business.

For e.g.,

x Office printing & stationary.

x Postage & stamp.

x Salary of cost accountant.

x Salary of legal advisor.

x Depreciation & repair of office building.

x Legal charges, bank charges, etc.




y Selling & Distribution Overheads

Incurred for :-

x Marketing of commodity.

x Securing orders.

x Dispatching goods sold.

These overheads have 2 aspects:-

x Procuring orders ² Selling overheads.

x Executing orders ² Distributing overheads.





Selling Overheads

x Indirect Material

x Catalogues, postage & stamps.

x Printing & Stationary, Cost of sample.

x Indirect Lobour

x Salary of sales manager, clerk.

x

Salary & commission of salesmen.x Indirect Expenses

x Advertising, travelling expenses.

x Rent & insurance of showroom.





Distribution Overheads

x Indirect Material

x Cost of packing material.

x Indirect Labour

x Salary of go down employees.

x Wages of driver of delivery van.

xIndirect Expensesx Packing expenses.

x Insurance in transit.

x Freight or carriage.



Classification of CostClassification of Cost

y Fixed Cost

Remains constant within given period of time.

Inverse relation between fixed cost per unit &

production units. Production increases ² fixed cost per unit

decreases.

Production decreases ² fixed cost per unit

increases. For e.g.,

x Rent & insurance of building,

x Depreciation on plant & machinery.




Output

(in Units)

Total Fixed Cost

(in Rs.)

Fixed Cost Per Unit

(in Rs.)

0 10000 10000

100 10000 100

1000 10000 10

2000 10000 5

5000 10000 2

10000 10000 1




y Variable Cost

Cost vary directly in proportion to change in

volume of production.

Direct relation between total variable cost &no. of output.

However,

x Variable cost per unit remains same & dose not

change if the total no. of output increases or

decreases.




Output

(in Units)

Total Variable Cost

(in Rs.)

Variable Cost Per

Unit

(in Rs.)

0 0 0

100 1000 10

1000 10000 10

2000 20000 10

5000 50000 10

10000 100000 10




y Semi ²Variable Cost

Cost contains both fixed & variable

component .

Affected by fluctuations in the level of production.

Some part of cost remains fixed at given level

of production.

Other part varies with the change in volume

of production.





Semi²Variable = Fixed Cost + Variable Cost

Cost

Variable Cost per unit = Change in Cost

Change in Output





For e.g., Semi-variable cost of Rs.1, 50, 000/- is

constant up to 70% capacity (7, 000 units). But

increases by 10% over 70% but up to 80% &then increases by 20% over 80% but up to

100% capacity.




Capacity Output

(in Units)

Semi-Variable

Cost

(in Rs.)

Semi-Variable

Cost Per Unit

(in Rs.)

50% 5000 150000 30

60% 6000 150000 25

70% 7000 150000 21.43

80% 8000 165000 20.62

90% 9000 195000 21.67

100% 100000 195000 19.50




y Product Cost

Cost which are charged & identified with the

product.

Cost of manufacturing a product.

Includes :-

x Direct Material Cost

x Direct Labour Cost

x Direct Expenses Cost

x Manufacturing Overheads




y Period Cost

Cost charged to product but written off as

expenses against revenue.

Includes :-x Fixed cost

x Administration cost

x Selling cost

x Distribution cost




y Direct Cost

All traceable cost.

For e.g.,

x Wages paid to labour.

x Purchase of raw material.

y Indirect Cost

Expenses incurred on those items which arenot directly charged to single product.

For e.g., salary of supervisor, rent &

depreciation.



Distinction between CostDistinction between Cost

Accounting & Financial AccountingAccounting & Financial Accountingy Coverage

y Parties involved

y Actual basis / Estimates

y Results

y Final Statement

y Valuation of Stock

y Purpose



Distinction between CostDistinction between Cost

Accounting & ManagementAccounting & Management

AccountingAccounting

y Deals with

y

Basey Role

y Status

y O

utlook y Tools & Techniques

y Scope

Chap1_CostAccounting_Lecture_ppt

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