UNIT-I INTRODUCTION

OVERVIEW ORIGIN AND GROWTH

MEANING

OBJECTIVES

ADVANTAGES

DIFFERENCE BETWEEN FINANCIAL, COST AND MANAGEMENT ACCOUNTING

COST CONCEPTS AND CLASSIFICATIONS

ROLE OF A COST ACCOUNTANT IN AN ORGANIZATION

COST SHEET

ORIGIN AND GROWTH

Beginning of the 20th Century and the First World War (1914-1918) made industrialists more cost conscious.

Reasons- Growing competition between manufacturers and increasing government control over pricing.

World war I: manufacturing was done on “cost plus” system

World war II: government placed a blanket control over prices

Need was felt to-

Improve quality of products

Trace costs accurately of each job or product

Control costs

Financial accounting failed in achieving the above stated objectives which made accountants to think of a new technique of accounting known as cost accounting.

MEANING Cost accounting is the process of collecting

information about the costs incurred by a

company’s activities, assigning selected costs to

products and services and other cost objects, and

evaluating the efficiency of cost usage.

Cost accounting is mostly concerned with

developing an understanding of where a

company earns and loses money, and providing

input into decisions to generate profits in the

future.

MEANING

objectives Ascertainment of cost

Primary objective

Different techniques and systems of costing are used in

different industries for cost ascertainment

Control and reduction of cost

Improved efficiency

Growing competition has increased the importance of this

objective

Guide to business policy

Serves the need of management in conducting

business with utmost efficiency

Determination of selling price

Provides relevant information to fix selling prices

of products and services

Measuring and improving performance

Measures efficiency by classifying and analysing cost

data

Suggest steps to improve performance and thus the

profitability

Advantages to Management

Reveals profitable and unprofitable activities

Management can use this information to reduce or

eliminate wastages and inefficiencies like idle time,

spoilage, under-utilisation of plant capacity, etc.

Helps in cost control

Through special techniques like standard costing and

budgetary control

Helps in decision making

Supplies suitable cost data and other related information

for decisions like make or buy, determining export prices,

introduction of a new product line, etc.

Advantages to Management

Guides in fixing selling prices

Guides management in fixation of selling prices

particularly during depression

Helps in inventory control

Through techniques like perpetual inventory system,

ABC Analysis, level setting , etc.

Aids in formulating policies

Provides information to management to formulate

production and pricing policies and preparing estimates of

contracts and tenders.

Advantages to Management Helps in cost reduction

Helps in introduction of a cost reduction programme and finding out new and improved ways to reduce costs

Reveals idle capacity

Helps in working out the cost of idle capacity

Checks the accuracy of financial accounts

Reconciles cost and financial accounting at the end of the accounting year

Prevents fraud and manipulation

Cost Audit System helps in preventing manipulation and frauds

Advantages to Workers

Introduction of incentive plans of wage payment

Higher productivity and higher earnings for workers

Advantages to Society

Lower prices of products and services due to cost

reduction and cost control

Advantages to Government Agencies and Others

Ready figures to help resolving issues of price fixation,

wage level fixation, settlement of industrial disputes, etc.

DIFFERENCE BETWEEN FINANCIAL AND COST ACCOUNTING

FINANCIAL

ACCOUNTING

COST ACCOUNTING

OBJECTIVE It provides information about financial performance and financial position of the business

It provides information of ascertainments of costs to control and for decision making about the costs.

NATURE It classifies records, presents and interprets transactions in terms of money.

It classifies, records, presents and interprets in a significant manner materials, labour and overhead costs.

RECORDING OF DATA

It records historical data. It records and presents estimated, budgeted data. It makes use of both historical costs and predetermined costs.

DIFFERENCE BETWEEN FINANCIAL AND COST ACCOUNTING

FINANCIAL

ACCOUNTING

COST ACCOUNTING

USERS OF INFORMATION

External users like shareholders, creditors, financial analysts, government and its agencies, etc.

Used by Internal management at different levels.

ANALYSIS OF COSTS AND PROFITS

It shows profit/loss of the organization.

It provides details of costs and profit of each product, process, job. etc.

TIME PERIOD They are prepared for a definite period, usually a year.

They are prepared as and when required.

PRESENTATION OF INFORMATION

A set format is used for presenting financial information.

There are no set formats for presenting coast information.

COST CONCEPTS Cost, Expense and Loss

Cost is “the amount of expenditure (actual or notional)

incurred or attributable to a given thing”. (CIMA, UK)

Expense is defined as “an expired cost resulting from a

productive usage of an asset”.

Loss is defined as “reduction in firm’s equity, other than from

withdrawals of capital for which no compensating value has

been received”.

Cost object

Cost object may be defined as “ anything for which a separate

measurement of cost may be desired”.

Example- Product for car, TV, Activity for Developing a

website on the internet, purchasing raw material, etc.

COST CONCEPTS

Cost Centre

A cost centre is defined by CIMA of UK as “a location, person, or

item of equipment (or group of these) for which costs may be

ascertained and used for the purpose of control”.

It refers to a section of the business to which costs can be charged.

It may be a location (department, sales area), an item of equipment

(machine, delivery van), a person (salesman, machine operator) or a

group of these.

Cost Unit

A cost unit is defined by CIMA as a “unit of product, service or time

in relation to which cost may be ascertained or expressed”

Examples- Ton for cement, kilowatt hour for electricity, etc.

CLASSIFICATION OF COSTS DIRECT AND INDIRECT COSTS

Direct costs

Costs which are incurred for and conveniently identified with a

particular cost unit, process or department.

Example, cost of steel used in manufacturing a machine

Indirect costs

General costs incurred for the benefit of a number of cost units,

processes or departments.

Cannot be conveniently identified with a particular cost unit or

cost centre.

Example, depreciation of machinery, insurance, lighting, power,

rent, etc.

CLASSIFICATION OF COSTS FIXED AND VARIABLE COSTS

Fixed Cost

Remain constant in “total” amount over a wide range of activity

for a specified period of time

Do not increase or decrease with the volume of production

Example, management salaries, building rent, etc.

CLASSIFICATION OF COSTS

Variable Cost

Costs tend to vary in direct proportion to the volume of output.

Example, direct wages, direct materials, power, royalties, etc.

CLASSIFICATION OF COSTS

Semi variable/ Semi fixed/ Mixed Costs

Partly fixed and partly variable

Example, supervision, maintenance and repairs, telephone

expenses, etc.

CLASSIFICATION OF COSTS

CONTROLLABLE AND NON-CONTROLLABLE COSTS

Controllable Costs

Directly regulated at a given level of management authority

Example, costs of raw material may be controlled by purchasing

in larger quantities.

Non Controllable Costs

Cannot be influenced by the action of a specified member of an

enterprise

Example, factory rent, management salaries, etc.

Misconception: variable costs are controllable and fixed costs are

non-controllable

CLASSIFICATION OF COSTS

HISTORICAL COSTS AND PRE-DETERMINED COSTS

Historical Costs

Past costs which are ascertained after these have been incurred

Pre-determined Costs

Future costs which are ascertained in advance of production on the basis of a specification of all the factors affecting cost

NORMAL AND ABNORMAL COSTS

Normal Cost

Costs normally incurred on expected lines at a given level of output.

Part of cost of production

Abnormal Cost

Not normally incurred at a given level of output

Charged to costing Profit and Loss Account

ELEMENTS OF COST

ROLE OF A COST ACCOUNTANT IN AN ORGANISATION

Establishment of Cost Accounting Department

A cost accountant establishes a cost accounting department and installs a costing system

according to the needs of the business.

Ascertain the requirement of cost information

Cost accountant decides the types of cost information to be produced by the costing system

and its utility for different levels of management.

He also ensures timely availability of information to managers.

Developing a cost manual

Cost accountant develops a cost manual which lays down the objectives and functions of

cost accounting department, the informational needs of various managers, makes cost

analysis, develops various formats in which information will be compiled and submitted to

mangers, etc.

COST SHEET A cost sheet is a statement of cost which is prepared to ascertain

the cost of products.

It shows element wise cost of products.

Proforma-

COST SHEET Problem 1.1 Calculate the Prime Cost, Works Cost, Total Cost of

Production and Cost of sales from the following particulars-

COST SHEET Step 1: Calculation of Prime Cost

COST SHEET Step 2: Calculation of Factory or Works Cost

COST SHEET Step 3: Calculation of Total Cost of Production

COST SHEET Step 4: Calculation of Cost of Sales

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