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1
Definition
2
Cost Accounting
3
Cost Accounting
4
Financial Accounting
5
An Introduction to Cost Terms
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Costs and Cost Objects
Cost
• a resource sacrificed or foregone to achieve a specific
objective
Cost Object
• any product, machine, service or process for which
cost information is accumulated
• cost objects can vary in size from an entire company,
to a division or program within the company, or down
to a single product or service
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Direct and Indirect Costs
Direct Cost
• a cost which is related to a particular cost objective and
can be traced to it in an economically feasible way
Indirect Cost
• a cost which is related a particular cost objective but
cannot be traced to it in an economically feasible way
• indirect costs are allocated to cost objectives
Direct Trace
Cost Cost
Object
Indirect
Allocate
Cost
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Cost Drivers and Cost Management
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Variable and Fixed Costs
Variable Cost
• a cost which is constant per unit but R
s
changes in total in proportion to
changes in the output
• materials (parts), fuel costs for a
trucking company
Volume
Fixed Cost R
• a cost which does not change in total s
as volume changes but changes on a
per-unit basis as the cost driver
increases and decreases
• amortization, insurance Volume
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Total Costs and Unit Costs
Average cost
= Total manufacturing costs / Number of units produced
= Rs980,000 / 10,000
= Rs98 per unit
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Types of Inventory
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Period and Product Costs
Period Costs
• are expensed on the income statement as they are
incurred
• also called operating costs (excluding cost of goods
sold)
• examples: selling, general and administrative costs
Product Costs
• are inventoried on the balance sheet and expensed
only when the product or service is sold
• also called inventoriable costs
• Examples: materials and labour (manufacturing)
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Costing System Terminology
Cost Object
• anything for which a separate measurement of costs
is desired
Cost Pool
• a grouping of individual cost items
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Alternative Classifications of Costs
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Costs in a Manufacturing Company
Balance Sheet
Direct Income Statement
Materials
Material
Inventory
Purchases
Revenue
Direct Work in Finished
Labour Process Goods Cost of Goods Sold
Inventory Inventory
Indirect
Manufacturing
Gross Margin
Costs
Job-Costing Process-Costing
System System
• Costs are assigned to a • Costs are assigned to a
distinct unit or batch mass of similar units
• Resources are • Resources are used to
expended to bring a mass-produce a product
distinct product or or service and not for
service to market for a any specific customer
specific customer
• Postal delivery, oil
• advertising campaign, refining
audit, aircraft assembly
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Job Costing Approach
1. Identify the cost object(s)
2. Identify the direct costs for the cost object(s)
3. Select cost-allocation bases to use in allocating the
indirect costs to the cost object(s)
4. Identify the indirect costs associated with each cost-
allocation base
5. Compute the rate per unit of each cost-allocation base to
allocate indirect costs to the cost object(s)
6. Compute the indirect costs allocated to the cost object(s)
7. Determine the cost of the cost object(s) by adding the
direct and indirect costs
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Job Costing Overview
Cost Object:
Direct Material
Direct + Indirect Costs
Direct Labour
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Job Costing System in Manufacturing
Buy
Materials
Incur Labour
Costs
Incur Overhead
Costs
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Cost Sheet
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Cost Sheet
It is a statement designed to show the output of a
particular accounting period along with
breakup of cost.
• It is a memorandum statement
• It does not form part of double entry cost
accounting records.
• It discloses the total cost and cost per unit.
• It helps
To fix Selling Price.
To submit quotation price.
To Control cost.
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• COST SHEET
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Elements of Cost
Direct Material :-
Identify in the product
Easily measure & directly charge to the product
e.g. Timber in furniture making
Categories
• raw material
• Specifically purchased for specific job or process
• Parts or components purchased.
e.g. tyres for cycles
• Primary Packing material
to protect finished product
for easy handling inside the factory.
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Direct Labour :-
Labour engaged in
• converting raw material into finished goods
• Altering the construction
• Actual Production
• Composition of Product
i.e labour which can be attributed to a particular job,product
or process
Exception :- Where the cost is not significant like
wages of trainees- their labour though directly
spent on product is not treated as direct Labour
Test:-
• Easily Identify
• Feasible to Identify
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Overheads :- It may be defined as the aggregate of the cost of
indirect materials, indirect labour and such other expenses
including services as can’t conveniently be charged direct
to specific cost unit.
Categories:-
• Manufacturing Overheads
• Administration of machines
• Selling & distribution of machines
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Standard Costing
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Why is Standard Costing Used?
A standard is a preestablished
benchmark for desirable performance.
A standard is a preestablished
benchmark for desirable performance.
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. Standard cost is the Predetermined cost
based on a technical estimate for material, labor and
overhead for a selected period of time
and for a specified set of working conditions.
Quantity used
Price paid
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Ideal versus Practical Standards
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The Standard Costing Process
Compare actual
Determine if
performance to
corrective action
standard and prepare
is needed.
performance reports.
Determine which
Take corrective action.
variances to investigate.
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Problems With Standard Costing
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Comparison of Cost Systems
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Analysis of Variance
Analysis of Variance may be done in
respect of each element of cost and sales:
1.Direct Material Variance
2.Direct Labor Variance
3.Overhead Variance
4.Sales Variance
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Material Variances
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Direct Materials Variances
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Material Mix Variances
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Material Mix Variances
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Material Variances
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Labor Variances
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Labor Cost Variance
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Labor Variances
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Labor Variances
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Labor Variances
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Labor Variances
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Labor Variances
Standard Rate
(Actual Yield –Revised
Standard Yield)
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Overhead cost variance can be
defined as the difference between
the Standard cost allowed for the
actual output achieved and the
actual overhead cost incurred.
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Overhead :- According to terminology of
cost Accountancy (ICWA London)
Overhead is defined as “ The aggregate of
indirect material cost, indirect wages
(indirect Labor Cost) and indirect
expenses.”
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Overhead Costs
Variable Overhead
• Recall that variable overhead is allocated to
products and services using a budgeted variable
overhead rate
Fixed Overhead
• Recall that fixed overhead is allocated to products
and services using a budgeted fixed overhead rate
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Overhead Cost Variances
How the
Rs Rs
Cost is
Planned
and
Controlled
Volume Volume
How Costs Rs Rs
are
Allocated
to
Products
Volume Volume
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Overhead cost Variance:-
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Overhead Cost Variance :-
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Overhead Cost Variances
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Variable Overhead Variance
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Variable Overhead Variances
.
2. Variable Overhead Efficiency variance
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(A) Variable overhead (spending) expenditure
variance
= (Actual hours worked x standard variable
overhead rate) – Actual variable overheads
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1. Fixed overhead variance
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a) Capacity variance= standard rate( Revised
Budgeted units – Budgeted units)
c) Calendar variance
= (Decrease or increase in number of units
produced due to the difference of budgeted and
actual days x standard rate per unit)
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Using Standard Cost Variances
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Marginal Costing
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Marginal Costing:-
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Features of Marginal Costing:
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Costs
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Revenue
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Profit
Profit = TR – TC
• Normal Profit – the minimum amount
required to keep a business in a
particular line of production
• Abnormal/Supernormal Profit – the amount
over and above the amount needed to
keep a business in its current line of
production
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Marginal Cost Equation
Therefore,
Contribution = S.P. – V.C. or
Contribution = Fixed Cost + Profit
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Cost-Volume-Profit
(CVP) Analysis
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Cost volume Profit Analysis
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Cost-Volume-Profit Assumptions
and Terminology
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Abbreviations
SP = Selling price
VCU = Variable cost per unit
CMU = Contribution margin per unit
CM% = Contribution margin percentage
FC = Fixed costs
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Abbreviations
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Breakeven Point
Variable Fixed
Sales – expenses = expenses
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Break Even
Fixed Costs
• Break-Even Point = ---------------
Contribution
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Cost-Volume-Profit Assumptions
and Terminology
• Break even point ( Rs ) =Fixed Cost / P/V ratio
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Cost-Volume-Profit Assumptions
and Terminology
•Variable Cost = Sales – (sales x P/V ratio)
•Margin of safety =
(Rs) = Profit/ P/V ratio or
= Actual sales – Break Even Sales
(Units) = Profit / Contribution per unit
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
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Equation Method
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Contribution Margin Method
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Graph Method
Breakeven
378
336
294 nu e
eve
252 R sts
$(000)
210 a l co
Tot
168
126
84 Fixed costs
42
0
0 1000 2000 3000 4000 5000
Units
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Target Operating Income
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Target Operating Income
Proof:
Revenues: 4,822 × Rs70 Rs337,540
Variable costs: 4,822 × Rs42 202,524
Contribution margin Rs135,016
Fixed costs 84,000
Operating income 51,016
Income taxes: Rs51,016 × 30% 15,305
Net income Rs 35,711
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Alternative Fixed/Variable Cost
Structures Example
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Alternative Fixed/Variable Cost Structures
Example
102
Application Of Marginal Costing
2. Cost Control
3. Profit planning
4. Evaluation of performance
5. Decision Making
• Fixation of selling Price
• Key or limiting factors
• Make or Buy Decision
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Application Of Marginal Costing
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Typical Relevant Costing Decisions
• Opportunity Costs
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One-Time-Only Special Order
Without With
Order Order Difference
Relevant costs:
Variable
manufacturing (225,000) (262,500) (37,500)
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Outsourcing and Make/Buy Decisions
Incremental difference
In favour of making Rs10,000
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Outsourcing and Opportunity Costs
Make Buy
Snowmobile Boat
Engine Engine
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Customer Profitability Analysis
Keep Drop
Account Account Difference
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