Prof.

Shyamala
Professor Department of Management WIMS

Bengaluru

COST ACCOUNTING MEANING

Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making

COST ACCOUNTING - INTRODUCTION

Accounting for determination and control of costs.
COST ACCOUNTING: The Institute of Cost and Management Accountant,

England (ICMA) has defined Cost Accounting as the process of accounting for the costs from the point at which expenditure incurred, to the establishment of its ultimate relationship with cost centers and cost

units. In its widest sense, it embraces the preparation of statistical data,

the application of cost control methods and the ascertainment of the profitability of activities carried out or planned.

Cost Accounting = Costing + Cost Reporting + Cost Control.

COST - MEANING
Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing.

OBJECTIVES OF COST ACCOUNTING

Ascertainment of costs Estimation of costs Cost control

Cost reduction
Determining selling price Facilitating preparation of financial and other statement Providing basis for operating policy

COST TERMINOLOGY:
COST: Cost means the amount of expenditure incurred on a particular thing. COSTING: Costing means the process of ascertainment of costs. COST ACCOUNTING: The application of cost control methods and the
ascertainment of the profitability of activities carried out or planned.

COST CONTROL: Cost control means the control of costs by management. Following
are the aspects or stages of cost control.

JOB COSTING: It helps in finding out the cost of production of every order and thus
helps in ascertaining profit or loss made out on its execution. The management can judge

the profitability of each job and decide its future courses of action.

BATCH COSTING: Batch costing production is done in batches and each batch
consists of a number of units, the determination of optimum quantity to constitute an economical batch is all the more important.

ELEMENTS OF COST
Element of cost

Materials Direct Indirect

Labour

Expenses

Direct

Indirect Direct

Indirect

MATERIAL: The substance from which the

finished product is made is known as material. (a) DIRECT MATERIAL: is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc.
(b) INDIRECT MATERIAL: one which cannot

be easily identified in the product.

EXAMPLES OF INDIRECT MATERIAL

At factory level lubricants, oil, consumables, etc. At office level Printing & stationery, Brooms, Dusters, etc. At selling & dist. level Packing materials, printing & stationery, etc.

LABOUR: The

human effort required to convert the materials into finished product is called labour.
(a) DIRECT LABOUR: is one which can be conveniently
identified or attributed wholly to a particular job, product or process. Eg:wages paid to carpenter, fees paid to tailor,etc.
(b) INDIRECT LABOUR: is one which cannot be

conveniently identified or attributed wholly to a particular job, product or process.

EXAMPLES OF INDIRECT LABOUR

At factory level foremens salary, works managers salary, gate keepers salary,etc At office level Accountants salary, GMs salary, Managers salary, etc. At selling and dist.level salesmen salaries, Logistics manager salary, etc.

OTHER EXPENSES: are those expenses other

than materials and labour.

DIRECT EXPENSES: are those expenses which

can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc.
INDIRECT EXPENSES: are those expenses

which cannot be directly allocated to particular job, process or product.

Examples of other expenses

At factory level factory rent, factory insurance, lighting, etc. At office level office rent, office insurance, office lighting, etc. At sales & dist.level advertising, show room expenses like rent, insurance, etc.

COST SHEET
DIRECT MATERIAL DIRECT LABOUR DIRECT EXPENSES

PRIME COST FACTORY OVERHEADS

FACTORY COST OFFICE OVERHEADS

COST OF PRODUCTION SELL & DIST OVERHEADS

COST OF SALES PROFIT

SALES

COST SHEET - ADVANCED

OPENING STOCK OF RAW MATERIALS +PURCHASES +CARRIAGE INWARDS -CLOSING STOCK OF RAW MATERIALS VALUE OF MATERIALS CONSUMED +DIRECT WAGES +DIRECT EXPENSES

PRIME COST +FACTORY OVERHEADS +OPENING STOCK OF WIP -CLOSING STOCK OF WIP
FACTORY COST (CONT.)

FACTORY COST +ADMINISTRATIVE OVERHEADS

COST OF PRODUCTION +OPENING STOCK OF FINISHED GOODS -CLOSING STOCK OF FINISHED GOODS
COST OF GOODS SOLD +SELL. & DIST. OVERHEADS COST OF SALES +PROFIT

SALES

COST CLASSIFICATION ON THE BASIS OF

Nature Function Direct & indirect Variability Controllability Normality Financial accounting classification

Time Planning and control Managerial decision making

ON THE BASIS OF NATURE

Materials Labour

Expenses

ON THE BASIS OF FUNCTION

Manufacturing costs
Commercial costs ADM and S&D Costs

ON THE BASIS OF DIRECT AND INDIRECT Direct costs

Indirect costs

ON THE BASIS OF VARIABILITY

Fixed costs Variable costs

Semi variable costs

ON THE BASIS OF CONTROLLABILITY

Controllable costs Uncontrollable costs

ON THE BASIS OF NORMALITY Normal costs

Abnormal costs

ON THE BASIS OF FINANCIAL ACCOUNTS:

Capital costs

Revenue costs

Deferred revenue costs

ON THE BASIS OF TIME:

Historical costs Pre determined costs

ON THE BASIS OF PLANNING AND CONTROL: Budgeted costs

Standard costs

ON THE BASIS OF MANAGERIAL DECISION MAKING

Marginal costs

Out of pocket costs

Sunk costs Imputed costs

Opportunity costs
Replacement costs Avoidable costs

Unavoidable costs
Relevant and irrelevant costs Differential costs

TERMS IN COST ACCOUNTING

Cost unit Cost centre Cost estimation Cost ascertainment Cost allocation Cost apportionment Cost reduction Cost control

METHODS OF COSTING
Job costing Contract costing Batch costing Process costing Unit costing Operating costing Operation costing

Multiple costing

TYPES OF COSTING
Uniform costing Marginal costing Standard costing Historical costing Direct costing Absorption costing

Calculation of various cost

Direct Materials Opening stock of materials Add Purchases of materials Less Closing stock of materials (a) Materials consumed Direct Wages Direct Expenses

------

------

PRIME COST
Add Factory Overheads Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs Salaries of Works Manager etc. Indirect Materials Drawing office and works office expenses Depreciation on factory land and building Less Scrap value Defective work Add Work in progress (opening) Less Work in progress (closing) ------

WORKS COST
Add Office/Administration overheads Office rent, insurance, lighting, cleaning Office salaries, telephone, law and audit expenses General Managers salary Printing and stationery Maintenance, repairs, upkeep of office bldg Bank charges and miscellaneous expenses

------

COST OF PRODUCTION
Add Opening stock of finished goods Less Closing stock of finished goods ------

COST OF GOODS SOLD

Add Selling and Distribution Overheads Showroom expenses, salesmens salaries & commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.

COST OF SALES
Add Net Profit or deduct net loss: ------ SALES ------

Costing Principles

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Cost and management accounting

Provides management with costs for products,

inventories, operations or functions and compares actual to predetermined data It also provides a variety of data for many day-today decision as well as essential information for long-range decisions

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Functions of managerial accounting

Determining the cost

Providing relevant information for better decision-

making Providing information for planning, control, decision-making and application

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Planning
Deals with the estimation of product costs, setting

up of costing system to record cost data, preparation of cost standards and budgets, planning of materials and manpower resources, analysing cost behavior with changes in levels of activity

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Control
Deals with the maintenance of product costing

record, comparison of actual performance with standards or budgets, anlaysis of variances, recommendation of corrective actions, controlling cost to ensure operational efficiency and effectiveness

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Decision-making
Deals with whether it is more profitable to make

or buy a component, determine the economic order quantity and production batch size, replace fixed asset, add or drop products, decide pricing

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Application
Cost accounting has extended from

manufacturing operations to a variety of service industries such as hotels, bands, airline, etc Cost accounting system should be flexible and adaptable to meet the new business environment and the changing nature of the company

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Element of cost
Cost object

Cost
Cost unit Cost centre Profit centre

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Cost object
It is an activity or item or operation for which a

separate measurement of costs is desired E.g. the cost of operating the personnel department of a company, the cost of a repair fob, and the cost for control

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Cost
It is the amount of expenditure incurred on a

specific cost object Total cost = quantity used * cost per unit (unit cost)

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Cost unit
It is a quantitative unit of product or service in

which costs are ascertained, e.g. cost per table made, cost per metre of cloth

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Cost centre
It is a location or function of an organisation in

respect of which costs are ascertained E.g. the rent, rates and maintenance of buildings; the wages and salaries of strorekeepers

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Profit centre
It is location or function where managers are

accountable for sales revenues and expenses E.g. division of a company that is responsible for the sales of products

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Cost classification
Direct cost

Indirect cost (overhead)

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Direct cost
Cost that can be identified specifically with or

traced to a given cost object The direct costs consist of the following three elements:
Direct materials

Direct labour
Direct expenses

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Direct materials
The cost of materials the cost of materials used

entering into and becoming the elements of a product or service E.g. fabrics in garments

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Direct labour
The cost of remuneration for working time

E.g. assembly workers wages in toy assembly

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Direct expenses
Other costs which are incurred for a specific

product or service E.g. royalties

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Indirect cost (overhead)

Cost that cannot be identified specifically with or

traced to a given cost object They are identified with cost centres as overheads
Indirect materials Indirect labour Indirect expenses

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Indirect materials
Such as stationery, consumable supplies, spare

parts for machine that assist to the production of final products

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Indirect labour
Such as salaries of factory supervision and office

staff that do not directly involve in production of the final product

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Indirect expenses
Such as rent, rates, depreciation, maintenance

expenses that do not have instant relationships with the manufacturing processes

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Cost accumulation
Prime cost = direct materials + direct labour + direct expenses
Production cost = Prime cost + factory overhead OR = Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw materials into finished product

Total cost = Prime cost + Overheads (admin, selling,distribution cost) OR = Production cost + period cost (administrative, selling,
distribution and finance cost) Period cost is treated as expenses and matched against sales for calculating profit, e.g. office rental 51

Cost coding
A code is a system of symbols designed to be

applied to a classified set of items to give a brief, accurate reference, facilitating entry, collation and analysis Coding is important in modern computerised accounting systems for catergories various composite accounting items

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Reasons
To reducing error owing to descriptions

Enable easy recalling

Reduce computer file size as a code

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Cost behaviour
Costs can be classified into variable, fixed, semi-

variable, or step-costs according to how they behave with respect of changes in activity levels

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Variable cost
It increases or decreases in direct proportion to

levels of activity, but the unit variable cost remains constant E.g. cost of food served in a restaurant

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Fixed cost
Total fixed cost remains constant over a relevant

range of activity level but unit fixed cost falls with an increase in activity volume

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Semi-variable cost
It processes characteristics of both fixed and

variable cost It increases or decreases with activity level but not in direct proportion

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Step cost
It remains constant for a range of activity levels,

then, on further increase in activity, the cost jumps to a new level and remains constant over a certain range until the next jump occurs

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Cost for stock valuation

Unexpired and expired cost

Product and period cost

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Unexpired cost
Unexpired costs are the resources that have

been acquired and are expected to contribute to the future revenue They will be recorded as assets in current period They will be charged as expenses when they have been consumed in the generation of revenue

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Expired costs
Expired costs are the expenses attributable to the

generation of revenue in the current period

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Product cost
Product cost are related to the goods

purchased or produced for resale If the products are sold, the product cost will be included in the cost of goods sold and recorded as expenses in current period If the products are unsold, the product costs will be included in the closing stock and recorded as assets in the balance sheet

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Period cost
Period cost related to the operation of a business

They are treated as fixed cost and charged as

expenses when they are incurred They should not be included in the stock valuation

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Comparison of cost, management and financial accounting

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Meanings
Financial accounting

Cost accounting
Management accounting

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Financial accounting
Provides information to users who are external to

the business It reports on past transactions to draw up financial statements The format are governed by law and accounting standards established by the professional accounting policies

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Cost accounting
Is concerned with internal users of accounting

information, such as operation managers The generated reports are specific to the requirement of the management The reporting can be in any format which suits the user

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Management accounting
Comprises all cost accounting functions

The accounting for product and service costs,

management accounting extends to use various internal accounting reports for planning, control and decision making

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Cost and management accounting Vs. Financial accounting

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Management (cost)accounting
Nature

Financial accounting

Records material, Records company labour and overhead transaction events costs in product or External financial job statements are Reports produced produced are for internal management and contol

Accounting Not based on the Follows the double double entry system entry system system

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Management (cost)accounting Accounting No need to use principles accounting principles

Financial accounting

Use Generally Accepted Accounting Principles for recording Adopt any accounting techniques transactions that generates useful accounting information

Used by different Used by external Users of information levels of management parties: shareholders,

or departments responsible for respective activities

creditors, government, etc

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Management (cost)accounting
Operation guidelines or standards Time span
Based on management instructions and requirements

Financial accounting
Conforms to company Ordinances, stock exchange rules, HKSSAPs

Reports are Reports are prepared prepared whenever for a definite period, needed usually yearly and half yearly They may be prepared on a weekly or daily basis

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Management (cost)accounting
Time focus

Financial accounting

Future orientation: Past orientation: use forecasts, estimates of historic data for and historic data for reporting and management evaluation actions

Perspective Detailed analysis of

parts of the entity, products, regions, etc

Financial summary of the whole orgainisation

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Cost accounting vs. Management accounting

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Management accounting
Objective
To provide information for planning and decision making by the management

Cost accounting
To ascertain and control cost

Basic of recording

Concerned with transactions related to the future

Based on both present and future transactions for cost ascertainment

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Management accounting
Coverage
Covers a wider area: financial accounts, cost accounts, taxation, etc.

Cost accounting
Covers matters relating to ascertainment and control of cost of product or service

Utility

Only the needs of internal management

The needs of both internal and external interested groups

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Management accounting
Deals with both Types of transactions monetary any non-

Cost accounting
Deals only with monetary transactions, covering only quantitative aspect

monetary transactions, covering both quantitative and qualitative aspects

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Thank You