“Profitability is the sovereign criterion of enterprise, and Cost Accounting greatly promotes it.” Peter F. Drucker

Cost Accounting

Programme:Master of Finance and Control[MFC]

Level:MasterTotal Lecture hour:36Internal Evaluation: 50 marksEvaluation: On going or continuous processFinal Examination: 50 Marks Class hour:1.5 LHAttendance: 80 % of LH to be qualified

Cost accounting

Cost accounting is a fast growing discipline. It developed mainly with the Industrial

Revolution from 1760 onwards. It has a major resource for gaining

competitiveness It is foundation of profitability. Cost accounting is a cost information

system It records ,measures and reports information about costs of some object.

Cost Accounting

Institute of Management Accountants,USA,Says “Cost accounting is the system within an organization that provides for the collection and assignment of costs to cost objects.”

Thus, it is a process which identifies,ascertains,records,classifies,allots,and present cost data.

Contd….

CIMA,London, “Cost accounting is defined as “ the application of costing and costing principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”.

Contd…….

Introduction to Cost AccountingCost accounting is defined as a technique or method for determining the cost of project, process or thing .This cost is determined by direct measurement, arbitrary assignment, or systematic and rational allocation.It provides information for two major purposes:1. Valuing ending inventories and determining

cost of goods sold for financial reporting purposes,

2. Costing products and services for management control purposes(planning, monitoring and controlling operations and performance evaluation

To ascertain cost of production of every unit,job,operation,process,department and service,and to develop cost standards.

To facilitate cost planning and control To disclose profitable and unprofitable activities. To facilitate decision making To evaluate performance of operations. To help determine cost and price of products. To provide data for comparison of costs within

the firm and also between similar firms.

Objectives of Cost Accounting

To indicate to the management any inefficiencies and the extent of various forms of waste, whether of material,time,expense or in the use of machinery, equipment and tools. Analysis of the causes of unsatisfactory results may indicate remedial action.

Contd…..

Price Determination strategies Help in cost control, cost reduction and inventory

control. Wastage control (wastage of labour,material and

other resources) Decision making Reveals profitable and unprofitable activities Cost information can be used as a basis for

budgetary control and standard costing that leads optimum efficiency.

Provides cost data to outside Agencies(Govt,wage tribunal, trade union etc).

Advantages

Importance to Management(busi. policy,bid,use of resources,st costing,budgetery control,)

Importance to Investors Importance to Consumers Importance to employees Importance to Government(Tax policy,Industrial

Policy, Export-import policy, settle of disputes) Functions of Cost Accounting Cost ascertainment Cost Analysis Cost Control

Roles/Importances of Cost Accounting

Financial Accounting is largely concerned with financial statements for external use by investors,creditors,labour unions, financial

analysts, government agencies, and other interest groups. It involves recording, classification and analysis of business

transactions in subjective manner so as to facilitate preparation of profit and loss account, balance sheet and cash flow statement for showing the results of the business operation as a whole.

Financial Accounting

Gary A. Porter and Curtis L Norton:“ Financial accounting is the branch of

accounting concerned with communication with outsiders through financial statements.”

Financial accounting is oriented towards the preparation of financial statements which summarize the result of operations for selected period of time and show the financial position of the business at particular dates.

Contd……

Contents:Income statement,Balance sheet and cashflow statement.

Accounting System:Techniques and procedures used by accountant in measuring,describing and communicating financial data to users.(Journal,ledgers,trial balance,financial statements are prepared using double entry accounting system)

Accounting Priciples : GAAP(methods,procedures and techniques).

Measurement Unit: Users of Financial accounting

Information

Scope and Nature of Financial Accounting

Systematic records of financial transactions are made in financial accounting with the following advantages.

Explains profit and loss of a business for a specified period Reasons leading to profit and loss can be located to take a

necessary action to increase profit Discloses the financial status of a business enterprise Regulates reminders for receivable amount to reduce bad

debts Arrangement for the amount payable to outsiders becomes

easier Preparation of a trial balance facilitates the checking of

errors toward maintaining an arithmetic accuracy of transactions

Discovers and facilitates preventing frauds Guidance for the purpose of taking decisions Evidence for making an assessment of income tax

Advantages

Does not provide detailed cost information

Does not segregate cost: Does not determine price: No provision for standards: Does not control cost Does not explain losses on account of

stoppage of production and idle plant capacity

Does not provide future information

Limitations

Management accounting is a branch of accounting concerned with providing internal users(Management) with information to facilitate planning ,control and decision making.

It is a system of collecting ,classifying,summarizing,analysing and reporting information that assists managers in their decision making and control activities.

Management Accounting

Institute of Cost and Management Accountants,UK,defines”Management Accounting is the application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking.”

Objectives: Assist in planning and formulation of future policies Help in Interpretation of financial Information Helps in controlling Performance. Help in organizing Help in the solution of strategic business problems Help in Decision Making

Definition

Costs can be defined as money or monetary value sacrificed to achieve goods or services. The sacrifice may be in terms of cash expenditure, property transfer, service rendering and promises to pay in future.

Cost refers the amount of expenses spent to generate product or services.

A manager of a manufacturing firm pays money for materials, labour, electricity, rent, repair, maintenance and so on. Payment of money or money’s worth to get something is very common and pervasive. This payment is called expense or expenditure or cost.

Cost Classification

Cost is the amount of resources given up in exchange for some goods or services.

– Horngren, Sundem and Stratton“Cost may be defined as the sacrifice or giving up

of resources for a particular purpose. Cost is frequently measured by monetary units that must be paid for goods and services. Costs are initially recorded in elementary from. Then these costs are grouped in different ways to help managers make decisions. To aid decisions managers want the cost of something. This something is called a cost object, which may be defined as any activity for which a separate measurement of cost is desired.”

Contd……

Direct Material: The cost of materials that is directly and conveniently

identifiable or traceable to each unit of product is defined as direct material. Direct material, also known as raw material, is the main ingredient of the finished product. Finished products are the refined or value–added forms of the direct material. A tangible product is almost impossible without the direct material.

Examples : Direct Material Wood , Raw cotton, Crude oil, Textile etc Process Finished Product Furniture, Textiles, Diesel, Garments

etc  

Cost Elements:According to Element

The labours that are paid with each piece of marginal product are direct labours. Direct labour costs can be directly traced to each unit of product without any apportionment basis. Direct labour is, therefore, defined as the employment of those workers who are physically engaged in the production of the output.

Examples of direct labour costs include the wages of operatives who assemble parts into finished products like sewing labour in a garment factory that is paid per piece or the time spent to make shirts, pants and trousers.

Direct Labour Cost

Any expenses other than the direct material cost and direct labour cost which are directly incurred on a particular product are direct expenses. They can be directly identified with each unit of product.

Examples of direct expenses are; cost of product designing, product model, handling from one process to the next process, cost of patent and royalties, and so on.

Direct Expenses

All those expenses which cannot be directly traced or identified with each unit of the products are overhead costs. In fact, overhead costs are indirect costs which cannot be directly charged to a particular unit of a product without allocating these on the basis of some appropriate methods.

All expenses other than prime costs are overhead costs or indirect costs.

Key elements of overhead costs are: Indirect Materials: Items of indirect materials cannot be identified with

any one product. Oil and grease used to clean the machine are indirect materials.

Indirect Labour: salary of a factory supervisor

Indirect Expenses: Rent, stationery, heat, light, power, repair and maintenance, depreciation

Overhead Costs

a. Variable costs b. Fixed costs c. Mixed costs.

Classification according to Behaviour of Costs

Manufacturing Cost General and administration cost Selling and Distribution Research and Development..Classification By Controllability..

Controllable costs Uncontrollable Costs

Clasification According to functions

Avoidable and Unavoidable costs Relevant and Irrelevant costs Product(Inventory) cost and Period costs Opportunity cost Sunk cost Differential cost Common Cost and joint cost Shut down cost Imputed cost Conversion Cost

Classification by Decision Making