CHP 2 - CC

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Chapter 2

Cost Concepts

7/28/2019 CHP 2 - CC


Concept of Cost Accounts

• The basic approach to cost accounting is

distinct from financial accounting.

• It is oriented to relating the expenditures to

products in addition to analyzing the

expenditures on the basis of natural

classification of material, labour, etc.

• The cost of a product is taken as the final

outcome of manufacturing activities.

Management AccountingBy Paresh Shah

Oxford University Press

7/28/2019 CHP 2 - CC


Cost of Product

• The fundamental element of cost accounting system iscost which is defined as the amount of expenditure(actual or notional) incurred on or attributable to aproduced item or a service unit

• The term ‘cost’ connotes different meanings todifferent people, but in cost accounting, it is used in aspecial sense. Cost represents an expenditure made tosecure an economic benefit, generally on the uses of resources that promise to produce revenue.

• The resources may have tangible substance (e.g.manpower, material, machine, etc.), or they may takethe form of services (e.g. wages, rent, power, etc.).



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Cost, Expense, and Loss

• The term ‘cost’ is denoted by expense which is

incurred after deriving the benefit.

• Expenses are defined as ‘all explicit costs

which are deductible from revenue.’

• When the cost is incurred before deriving the

benefit, it is termed as deferred cost,

• When no benefit is derived by the incurrence

of cost, it is termed as loss,



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Cost Object

• Cost object is an entity or a part of an entity

• The cost object changes according to decision

needs of the management.

• Costing objective represents the overall

objective for which cost collection, cost

analysis, and cost control is being attempted.

• Cost objective is different from expenditure

objective.



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Cost Unit and Cost centre

• Cost unit is defined as a quantitative unit of aproduct, a service, or an item, in relation to whichcosts are measured.

• A cost unit, simply stated, is a unit of finishedproduct, service or time, or a combination of these in relation to which cost is ascertained andexpressed.

• A cost centre is a location, a person, or an item of

equipment (or a group of these) for which costsmay be ascertained and used for the purpose of cost control.



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Types of Cost Centres

• Personal and impersonal cost centre

• Operation and process cost centre

• Production, service and staff cost centre

•Whatever may be the type of cost centre, it isdetermined by taking into consideration thefollowing factors: – the value of the work to be performed,

–

the extent of cost control that can be exercised, – responsibilities to be identified, and

– the uses of cost centre wise data by the costingdepartment, etc.



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Classification of Costs

• Nature or element – Material cost

– Labour cost

– Expenses

•Function – Production cost or Manufacturing cost

– Administration cost

– Selling cost

– Distribution cost

– Finance cost – Research cost

– Development cost

– Pre-production cost



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• Conversion – Conversion cost

• Variability or Behaviour –

Fixed or Constant costs – Variable costs

– Stepped Fixed cost

– Semi-Variable costs

•

Controllability – Controllable

– Uncomtrollable



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• Normality

– Normal

– Abnormal

• Capital and Revenue• Time or Periodicity

– Historical

– Future

• Expiry

• Relationship

Management Accounting

By Paresh Shah


7/28/2019 CHP 2 - CC



• Product or Period – Products

– Period

• Planning and Control – Marginal

–

Out-of-pocket – Differential

– Imputed or Notional

– Discretionary

– Sunk

– Opportunity

–Replacement

– Avoidable and unavoidable

– Programmed

– Joint

– Committed


By Paresh Shah


7/28/2019 CHP 2 - CC


Costing Principles

• Relation of the causes

• Abnormal costs to be excluded

•

Past costs not to be charged• Future costs not to be charged

• Expenses and incomes excluded from cost

accounts


By Paresh Shah


7/28/2019 CHP 2 - CC


7/28/2019 CHP 2 - CC


Types of Costing Systems

• Uniform

• Marginal

•

Standard• Historical

• Direct

• Absorption


By Paresh Shah


7/28/2019 CHP 2 - CC


Methods of Costing

• Job

• Batch

•

Contract• Single or Output

• Process

• Operating or Service• Multiple


By Paresh Shah


7/28/2019 CHP 2 - CC


Characteristics of Cost Information

• Cost Tracing

– Assigns costs on the basis of their cause

• Cost Allocation

– The allotment of costs to cost objectives

• Cost Apportionment

– Allotment of proportion of cost to cost objectives


By Paresh Shah


7/28/2019 CHP 2 - CC


Statement of Cost or Cost Sheet

• A cost sheet is a statement which shows the details regarding thetotal cost of a cost object, i.e. for the company as a whole, for aproduct or a job.

• A cost sheet not only shows the total cost but also the variouscomponents of total cost.

• It serves the following purposes: – It discloses the various elements of cost which make up the total cost.

– It discloses the cost per unit as well as the total cost of output.

– It facilitates for preparation of tender price, and/or selling price inadvance.

– It facilitates the comparison of current year’s total cost with theestimated cost and with the previous year’s cost, and thereby helpsthe management in locating inefficiency in activities of anorganization.


By Paresh Shah


7/28/2019 CHP 2 - CC


Statement of Cost or Cost Sheet

Cost per Unit = Total

Number of Units

Manufacturing cost per unit =

Total Manufacturing Cost

Number of Units Manufactured


By Paresh Shah


CHP 2 - CC

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