Cost Accounting

Introduction of cost accounting

Lecture-1

By

Main Ahmad Farhan (ACA)

Accounting

It is a language about financial information (which is measurable in

terms of money) commonly used in business.

Branches Of Accounting

Accounting

Financial AccountingCost Accounting Management Accounting

For external reporting

For internal reporting

Fed by financial and

cost accounting

User Group

User Group

Financial Accounting Cost & Management Accounting

Directors

Managers

Employees

Management

Lenders

Suppliers

Govt Agencies

Investors

Branches Of Accounting

Financial Accounting is an art of recording (Journal), classifying (Ledger), summarizing (Trial balance), reporting (Profit & Loss A/c & Balance Sheet) and analysis (Interpretation) the financial information.

Cost Accounting deals with ascertainment, measurement, accumulation, budgeting and evaluating cost structure of the entity.

Management Accounting deals with decisions relating to the generation and effective utilization of the financial resources of an entity.

Cost Accounting

So Cost accounting is a specialized branch of accounting which provide processed set of information / statements to the management which assist them in decision making.

In cost accounting cost of product or a process is; Ascertained Measured Accumulated

Management Accounting

Management is central coordinating body in an entity Management is concerned with the maximization of

wealth through

Minimization of cost Maximization of profit

For this purpose information provided by cost accounting is analyzed by the management for decision making and management control function.

Management Accounting

Reports generated through management accounting are used internally.

Major function of management accounting:

• Planning & Forecasting

• Controlling

• Decision making

Pricing

Make or Buy

Shut down or Continued operation

Equipment Replacement

Purpose Of Cost Accounting

Provides information relating to cost of production. Determines the appropriate selling price. Discloses profitable products, areas and activity

level. Helps in make or buy decision. Budgeting relating to production function. Controls production variances. Provides information to financial accountant.

Classification Of Cost

Cost Classification

Direct Cost Indirect Cost

Direct Material Direct Labor Factory Overhead Other Direct

Expenses

Direct Cost

Cost that can be traced in full to the product or

services is direct cost

Types Of Direct Cost

Direct material costs are those cost of material that are traceable in full in the cost of a product or services

Direct labor cost is specific cost of the worker in producing a product or service

For example wood in manufacturing of table

For example labor involved in cutting wood

Types Of Direct Cost

Other Direct Expenses These are expenses other than direct material and direct labor which have been incurred in full as direct consequences of producing product or services

Royalty on production, Cost of jigs / moulds

Indirect Cost The cost that is incurred in producing product or services but

which can not be traced in full

FOH means all expenses of factory other than direct material, direct labor and other direct production expenses.

Factory overhead (FOH)

Indirect material Indirect Labor

Deprecation of machineryFactory utility bills

Cost classification

Direct Material + Direct Labor + Other Direct Cost = Prime cost

Direct Labor + Other Direct Cost + FOH = Conversion cost

Prime Cost + FOH = Total factory cost

Summary

Material cost Labor cost Other production Total production cost cost

Indirect

Prime cost Direct Direct Direct

Indirect Indirect FOH cost

=

=

Total Total Total = Total FactoryCost

Cost classification

Direct material Rs 12,000Direct labor 8,000Other direct cost 2000

Prime cost 22,000FOHIndirect material 3000Indirect labor 2000Electricity bill 1500Rent of factory 3500Depreciation 1000 11000Total factory cost 33000

Behavior Of Cost

Fixed cost

Variable cost

Step fixed cost

Semi variable cost

Fixed cost

Fixed cost is a cost that do not vary with the level of production. Simple means the variation in production has no impact on fixed cost. For example rent of building and accountant salary etc

No. of units

Fixed cost

1000

2000

3000

300200100

Fixed Cost Per Unit Reaction Fixed cost per unit decreases as the number of units produced increases and vice versa

For example rent of building is Rs. 10,000 and number of units produced is 5000.

If the number of units produced increases to 10000

Per unit fixed cost = 10000 / 5000 = 2 per unit

Per unit fixed cost = 10000 / 10000 = 1 per unit

Step Fixed Cost

Costs which are constant for a relevant range of activity and rise to new constant level once that range exceeded.For example rent.

No. of units

Fixed cost

Variable Cost

The expenses that vary in direct proportion to volume of product. For example Prime cost.

No. of units

Variable cost

Variable Cost Per Unit Reaction

Variable cost per unit remain constant

Units of Labor Total wagesPer labor wage rate

10 10,000 1,000

20 20,000 1,000

Semi Variable Cost

The cost that is partly fixed and partly variable cost. For example electricity bills, salesman salary.

No. of units

Semi variable cost

1000

2000

3000

300200100

Summary If the production volume increases

Fixed cost

Variable cost

Total cost

Per unit Total

Decreases

IncreasesDecreases

Increases

Constant

Constant

Summary If the production volume decreases

Fixed cost

Variable cost

Total cost

Per unit Total

Constant

Constant

Increases

Increases

Decreases

Decreases

Total cost

Total cost include both fixed cost and variable cost

No. of units

Total cost

Fixed cost

Total cost

Variable cost

1000

2000

3000

300200100

As VC added in FC shifts upward