WHY WE DO BUSINESS TO EARN PROFIT

SALE PRICE - COST = PROFIT SALE PRICE = COST + PROFIT

WE CAN INCREASE PROFIT BY a) REDUCING COST b) INCREASING SALE PRICE THE PRESENT ERA OF COMPITITION

COST

THE EXPENSES INCURRED FOR PRODUCING A PRODUCT OR FOR PROVIDING A SERVICE.

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Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

COST

Cost represents the source that has been or must be sacrificed to attain a particular objective. Tangible Machine, Materials Services Wages, Rent, Power Direct Cash Indirect Opportunity cost

COST ACCOUNTING WHY ?????

Effective Decisions : An effective decision accomplishes the goals that management seeks Efficient Decisions : An efficient decision consumes minimum amount of resources to achieve the desired goal

Management can not avoid making decision

A good management decision should be both effective and efficient. For this Data/Information is required.
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

COST CONTROL / CONSCIOUSNESS

1. TO INCREASE PROFIT

WHY ???????

2. TO AVOID UNNECESSARY EXPENSES 3. TO PROVIDE A STANDARD FOR CHECK 4. FOR EXISTENCE IN THE MARKET 5. IMPROVED EFFICIENCY AT LOW COST 6. BETTER UTILISATION OF RESOURCES 7. MINIMISATION OF WASTAGES 8. EFFECTIVE UTILISATION OF CAPACITY 9. TO IMPROVE OVERALL IMAGE OF THE COMPANY
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

WH

Y?

CLASSIFICATION OF COST
Basis of Element
Material DM IDM Labour DL OH IDL

Basis of Time

Historical / Postmortem

Estimated / Future

Basis of Function
DOH IDOH Mfg. Or Product cost Dir. Matrl + Dir. Labour + Prdn. OH Administrative cost Indirect cost salary, training Selling & Distribution Advertisement R&D cost Indirect cost
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

Basis of Method
Unit Job Process

Cost

Preproduction Expenses.

cost-

Preliminary 4

CLASSIFICATION OF COST

Basis of variability
Fixed Variable SV

Other Cost
Conversion cost conversion of WIP to FG Common cost Stationary Traceable cost Direct cost Joint cost - Common cost Normal cost

Basis of Control
Controllable Uncontrollable

Avoidable and unavoidable cost Total cost sum of the all cost

Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

CLASSIFICATION OF COST
Basis of Managerial decisions

Marginal cost aggregate direct cost/ prime cost Out of pocket cost Cash outlay Wages, depreciation no cash outlay Incremental cost added cost for a new unit Uniform cost incurred on different cc of an undertaking using similar method of costing- FIFO, LIFO Opportunity cost Replacement cost cost for replacement Imputed cost Hypothecated cost, no cash outlay, Interest on owners capital Sunk cost - Historical cost not related to the decision.
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Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

AREAS WHICH ARE CLOSELY RELATED TO THE COST I. AREAS RELATED TO THE MAN POWER - COST OF RECRUITMENT - COST OF TRAINING & DEVELOPMENT - FIXED EXPENSES RELATED TO THE MAN POWER - COST RELATED TO THE EMPLOYEE WELFARE ACTIVITIES - COST OF IDLE TIME, ETC. II. AREAS RELATED TO THE MACHINE : - COST OF MAINTENANCE - COST OF LUBRICATION - COST OF IDLE TIME - OPPORTUNITY COST - COST OF RUNNING - POWER CUNSUMPTION - COST OF SAFETY MEASURES, ETC.
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

AREAS WHICH ARE CLOSELY RELATED TO THE COST III. OTHER AREAS : - PRODUCTIVITY - COST OF BUILDING MAINTENANCE - OTHER OVERHEADS EXPENSES - COST OF QUALITY - COST OF INVENTORY, ETC.

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Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

COST ACCOUNTING Cost accountancy is a subject that provides knowledge to take effective and efficient decision for cost control, ascertainment of profitability and internal and external reporting. Decision may be of three types: 1) Profit decision 2) Investment decision 3) Dividend decision

Cost Accountancy is a comprehensive terms. It is used to describe the principles, convention, techniques and systems that are employed in a business to plan and control the utilisation of its resources. The application of costing, cost accounting principles, method and techniques to the science, art and practice of cost control and ascertainment of profitability as well as presentation of information for the purpose of decision making.
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

Why science: Constantly determining the relationship between reasons and consequences. Why an art of a Cost Accountant: Knowledge, skill, ability, imagination & innovation quality.

Functional Activities of Cost Accounting Cost Book Keeping Cost Control Cost Analysis Cost Comparison
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

Cost Planning Cost Reporting Cost Finding Cost Reduction

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Cost Accounting, Financial Accounting and Management Accounting:

Financial accounting
preparation of financial statements which summaries the results of operations for selected period of time and show the financial position of the company at a particular date.

Cost accounting
determination of cost of something (product, service, operation, and process) according to the costing objective of the management. A cost accountant is primarily charged with the responsibility of providing cost data for whatever purposes they may be required.

Mgt. accounting application of appropriate techniques and concepts, which help management in establishing a plan for reasonable economic activities and making rational decisions for accomplishment of these objectives. Any technique whether it is drawn from financial accounting,cost accounting, economics, mathematics, and statistics can be used in management 11 accounting.

Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

IMPORTANCE
1. 2. 3. General: Determination of the profitable and non profitable product. Fixation of the selling price of the product under different situation Cost ascertainment and comparison with past for trend purpose Relate cost data e.g. input output ratio, scrap, wastage, idle time, etc. Designing standard formats for cost control purposes, e.g. inventory related, job card, wage analysis sheet, etc. Presentation of monthly P&L a/c process or product wise Proper valuation of closing stock Cost Control and Cost Reduction: Variance analysis with the help of standard Division of Cost in fixed and variable part for cost control Continuous effort to minimise cost and reduce standard cost also Decision Making: Managerial decisions Allocation of resources Technical decisions Inventory control, Plant scheduling Non Routine Decisions Make or Buy decisions
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Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

Cost Accounting Costing Systems

Unit Costing Batch Costing Process Costing Contract Costing Operating Costing Marginal Costing CVP Analysis Budgetory Control Standard Costing

Tools & Techniques For Cost Control

Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

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Thorough study of the organisation and its process also objective

Designing Costing For an Organisation:

Selection of suitable costing system Division of total cost into direct and indirect category

Cost Center:

Types: 1) Impersonal Location, Equipments 2) Personal Persons, Group of peoples 3) Process Cost Center Chemical Industries 4) Cost centers related to area, location, sales, depo etc. 5) Production cc Machine shop, welding shop, assembly shop, etc. Direct costs are directly allocable to the cost centers. But indirect costs are not directly allocable. e.g. service cost centers Powerhouse, maintenance, personnel, canteen, etc.
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

Allocation of persons or equipment or group of this for which the cost is to be ascertained. The basic purpose is cost control. For the purpose of Responsibility Accounting

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Cost Unit:

A unit of quantity of output in relation to which costs are ascertained or expressed i.e. unit of output

Sugar Tonne Steel Tonne Power KW Hour Bricks 1000 numbers Chemical Litre, KG, Gallon, Tonne Limitation of Cost Accounting : 1. Not an exact science and involves inherent element of judgement 2. Cost varies with purpose 3. It is not solution but helps in getting solution.
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

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Cost sheet showing the cost of --------Particulars Cost of raw material consumed Cost of labour Cost of Direct Factory OH PRIME COST Indirect Factory OH MFG. COST/ WORKS COST / FACTORY COST Admn. OH COST OF PRODUCTION S&D OH COST OF GOODS SOLD
Dr. Ratnesh Chaturvedi, ACMA, Session 2-3

Rs. 0 0 0 0 0 0 0 0 0 0

Rs.

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