ahsanullah.mohsen

INTRODUCTION

COST ACCOUNTING

ahsanullah.mohsen

Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making

COST ACCOUNTING - MEANING

ahsanullah.mohsen

COST ACCOUNTING - INTRODUCTION

COST ACCOUNTING: The Institute of Cost and Management

Accountant, England (ICMA) has defined Cost Accounting as –

“the process of accounting for the costs from the point at which

expenditure incurred, to the establishment of its ultimate

relationship with cost centers and cost units. In its widest sense,

it embraces the preparation of statistical data, the application of

cost control methods and the ascertainment of the profitability of

activities carried out or planned”.

Cost Accounting = Costing + Cost Reporting + Cost Control.

Accounting for determination and control of costs.

ahsanullah.mohsen

COST - MEANING

Cost means the amount of expenditure (actual or notional) incurred on, or attributable to, a given thing.

ahsanullah.mohsen

OBJECTIVES OF COST ACCOUNTING

Ascertainment of costs

Estimation of costs

Cost control

Cost reduction

Determining selling price

Facilitating preparation of financial and other

statement

Providing basis for operating policy

ahsanullah.mohsen

COST TERMINOLOGY:

C

OST: Cost means the amount of expenditure incurred on a particular thing.

C

OSTING: Costing means the process of ascertainment of costs.

C

OST ACCOUNTING: The application of cost control methods and the ascertainment of the

profitability of activities carried out or planned”.

C

OST CONTROL: Cost control means the control of costs by management. Following are the aspects or

stages of cost control.

J

OB COSTING: It helps in finding out the cost of production of every order and thus helps in

ascertaining profit or loss made out on its execution. The management can judge the profitability of each

job and decide its future courses of action.

B

ATCH COSTING: Batch costing production is done in batches and each batch consists of a number of

units, the determination of optimum quantity to constitute an economical batch is all the more important. ahsanullah.mohsen

ELEMENTS OF COST

Element of cost

Materials Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

ahsanullah.mohsen

MATERIAL: The substance from which the finished product is made is known as material. (a) DIRECT MATERIAL: is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc.

(b) INDIRECT MATERIAL: one which cannot be easily identified in the product.

ahsanullah.mohsen

EXAMPLES OF INDIRECT MATERIAL

At factory level – lubricants, oil, consumables, etc.

At office level – Printing & stationery, Brooms, Dusters, etc.

At selling & dist. level – Packing materials, printing & stationery, etc.

ahsanullah.mohsen

LABOUR: The human effort required to convert the materials into finished product is called labour.

(a) DIRECT LABOUR: is one which can be conveniently identified or attributed wholly to a particular job, product or process.Eg:wages paid to carpenter, fees paid to tailor,etc.

(b) INDIRECT LABOUR: is one which cannot be conveniently identified or attributed wholly to a particular job, product or process.

ahsanullah.mohsen

EXAMPLES OF INDIRECT LABOURA

t factory level – foremen’s salary, works manager’s salary, gate keeper’s salary,etc

At office level – Accountant’s salary, GM’s salary, Manager’s salary, etc.

At selling and dist.level – salesmen salaries, Logistics manager salary, etc.

ahsanullah.mohsen

OTHER EXPENSES: are those expenses other than materials and labour.

DIRECT EXPENSES: are those expenses which can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc.

INDIRECT EXPENSES: are those expenses which cannot be directly allocated to particular job, process or product.

ahsanullah.mohsen

Examples of other expensesA

t factory level – factory rent, factory insurance, lighting, etc.

At office level – office rent, office insurance, office lighting, etc.

At sales & dist.level – advertising, show room expenses like rent, insurance, etc.

ahsanullah.mohsen

COST SHEET DIRECT MATERIALDIRECT LABOURDIRECT EXPENSES 

PRIME COSTFACTORY OVERHEADS 

FACTORY COSTOFFICE OVERHEADS 

COST OF PRODUCTIONSELL & DIST OVERHEADS 

COST OF SALESPROFIT 

SALES

ahsanullah.mohsen

COST SHEET - ADVANCED OPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDS-CLOSING STOCK OF RAW MATERIALS VALUE OF MATERIALS CONSUMED+DIRECT WAGES+DIRECT EXPENSES PRIME COST+FACTORY OVERHEADS+OPENING STOCK OF WIP-CLOSING STOCK OF WIP FACTORY COST (CONT.)   

ahsanullah.mohsen

FACTORY COST +ADMINISTRATIVE OVERHEADS COST OF PRODUCTION+OPENING STOCK OF FINISHED GOODS-CLOSING STOCK OF FINISHED GOODS COST OF GOODS SOLD+SELL. & DIST. OVERHEADS COST OF SALES+PROFIT SALES    

ahsanullah.mohsen

The concept of cost•O

ut lay cost

•O

pportunity cost

•C

ost and expenses

•E

xpenses

•O

perating cost

•P

roduct cost

•P

eriod cost

ahsanullah.mohsen

COST CLASSIFICATION – ON THE BASIS OF

1) Nature2) Function3) Direct & indirect4) Variability5) Controllability6) Normality7) Financial accounting classification8) Time9) Planning and control10) Managerial decision making

ahsanullah.mohsen

ON THE BASIS OF NATURE

Materials

Labour

Expenses

ahsanullah.mohsen

ON THE BASIS OF FUNCTION

Manufacturing costs

Commercial costs –S&D Costs

ON THE BASIS OF DIRECT AND INDIRECT

Direct costs

Indirect costs

ahsanullah.mohsen

ON THE BASIS OF VARIABILITY

Fixed costs

Variable costs

Semi variable costs

ahsanullah.mohsen

ON THE BASIS OF CONTROLLABILITY

Controllable costs(power)

Uncontrollable costs( power cost per unit)

ON THE BASIS OF NORMALITY

Normal costs

A

bnormal costsahsanullah.mohsen

ON THE BASIS OF FINANCIAL ACCOUNTS:

Capital costs

Revenue costs(all direct costs)

Deferred revenue costs(unearned revenue)

ahsanullah.mohsen

ON THE BASIS OF TIME:

Historical costs

Pre determined costs

ON THE BASIS OF PLANNING AND CONTROL:

Budgeted costs

Standard costs

ahsanullah.mohsen

ON THE BASIS OF MANAGERIAL DECISION MAKING

Marginal costs Out of pocket costs(cash out flow) Sunk costs(one time payment like on software) Imputed costs(alternative for implied cost),e.g. not

paying rent on self owned property. Opportunity costs Replacement costs Avoidable costs Unavoidable costs Relevant and irrelevant costs(making a building for

1.5b) Differential costs(automated and manual production)

ahsanullah.mohsen

TERMS IN COST ACCOUNTING

Cost unit

Cost center( research and development)

Cost estimation

Cost ascertainment(from existing data)

Cost allocation(assigning of a common cost to several cost objects)

Cost apportionment

Cost reduction

Cost control

ahsanullah.mohsen

METHODS OF COSTING1. Job costing2. Contract costing3. Batch costing4. Process costing5. Unit costing6. Operating costing(uses for services)7. Operation costing(hybrid of job-order

and process costing)8. Multiple costing

ahsanullah.mohsen

TYPES OF COSTING

1. Uniform costing(number of firms in an industry)

2. Marginal costing3. Standard costing4. Historical costing(It is the ascertainment

of costs after they have been incurred. This type of costing has limited utility.)

5. Absorption costing( both variable and fixed to operations, processes or product)

ahsanullah.mohsen

Direct MaterialsOpening stock of materialsAdd Purchases of materialsLess Closing stock of materials(a) Materials consumedDirect WagesDirect Expenses ------ ------PRIME COSTAdd Factory OverheadsFactory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, RepairsSalaries of Works Manager etc. Indirect MaterialsDrawing office and works office expenses Depreciation on factory land and building Less Scrap valueDefective workAdd Work in progress (opening)Less Work in progress (closing) ------WORKS COSTAdd Office/Administration overheadsOffice rent, insurance, lighting, cleaningOffice salaries, telephone, law and audit expenses

General Manager’s salaryPrinting and stationeryMaintenance, repairs, upkeep of office bldgBank charges and miscellaneous expenses ------COST OF PRODUCTIONAdd Opening stock of finished goodsLess Closing stock of finished goods ------COST OF GOODS SOLDAdd Selling and Distribution OverheadsShowroom expenses, salesmen’s salaries& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.COST OF SALESAdd Net Profit or deduct net loss: ------ SALES ------

Calculation of various cost

Costs in financial statement•C

ost of goods sold

•D

irect materials

•M

anufacture overheads

•W

ork in process

•F

inished goodsahsanullah.mohsen