Cost Acconting Lectures

COST ACCCOUNTING

MBA (UOS) Lecture 1

MBA (UOS) Lecture 1

Tracing the roots of Cost & Management Accounting

Economics Study of Individuals & Nations economic behaviour

according to any school of thought.An Arial View

Accounting Process of systematic record keeping.

Financial Accounting. Art of systematic record keeping for a specific individual or Business entity An on ground view.

Cost Accounting. A step forward in financial Accounting, dealing with individual items and their cost. A telescopic view.

Managerial Accounting. Use of data of financial and Cost accounting for decision making and forecasting A Microscopic view

MBA (UOS) Lecture 1

Main Branches of Accounting

o Governmental Accounting

o Financial Accounting,

o Cost Accounting,

o Managerial Accounting,

o Tax Accounting.

o Auditing.

Difference in Government & Commercial Accounting.

1. Purpose.2. Expenses or Income starting Point.3. Types of Accounts.4. Statements.5. Audit.

MBA (UOS) Lecture 1

Cost Accounting.

Cost Accounting is the art of ;1. Recording Collection2. Classifying Processing and 3. Appropriate allocation of

Expenditures for the determination of the Cost of products or services produced

and for the presentation of suitable arranged date for the purpose of;

1. Control2. Guidance of Management.

MBA (UOS) Lecture 1

Managerial Accounting

Use of financial and cost accounting data in the form of;

1. Establishment of Budgets,2. Standard costs,3. Actual cost of operations, processes and activities or products,

For analyzing,

Variances, Profitability, And social use of funds.

MBA (UOS) Lecture 1

History of Cost & Management Accounting.

Ever since the use money replaced barter, people have been concerned with costs.

Industrial Revolution of 1780s a starting point of industrial mass production and concern about selling point.

Mass production of war equipments in 1st world war on cost plus profit basis.

Increase in Corporate Culture, Globalization & Competition fueling the managerial accounting.

MBA (UOS) Lecture 1

Costing Terms Cost.

o Replacement value of any product or service in terms of money.

Expense.o Expiration of cost either by sale of by use.

Expenditure.o Amount spent on the purchase of capital assets.

Revenue.o Total Sale proceed of a product or service received in

terms of money. Profit or Income.

o Excess of Revenue over its corresponding expense of cost.

Loss.o Excess of expense of cost over resulting revenue.

MBA (UOS) Lecture 1

Difference in Cost & Financial Accounting

Financial Accounting1. External Users.2. General Purpose

Statements.3. Must confirm to GAAPs.4. Data in Monetary terms.5. Statements on annual or

half yearly basis.6. Emphasis of Recording

aspect.7. Aggregate Results.8. Relates to commercial

transactions including cost, admn an marketing

9. Deals mainly with actual facts and figures.

10. Stocks are valued on LCM.11. Positive Science.

Cost Accounting1. Internal Users2. Specific Purpose statements3. Must confirm to information needs4. Data in Monetary and Unitary form5. Statement on daily and weekly

basis.6. Emphasis on Control aspect.7. Individual items.8. Relates mainly to cost transactions.9. Deals with actual and estimated

facts and figures.10. Stocks are valued on Cost.11. Positive & Normative Science.

MBA (UOS) Lecture 1

Benefits of Cost & Management Accounting.

1. Analysis of Costs.2. Correct Analysis.3. Disclosure of Inefficiencies.4. Price determination.5. Effective Control.6. Cost Comparison.7. Make or buy decision.8. Departmental & Product line efficiency.9. Basis of Budgeting.10. Forecasting,11. Shut down decision.12. Supply of relevant information to management.

CHAPTER 2

MBA (UOS) Lecture 1

MBA(UOS) Lecture 2

Classification of Costs1. By Nature or Elements.

Direct Material Costs. Direct Labour Costs. Factory Over Head Costs. i.e. Factory

supplies ,Lubricants, supervision, inspection, defective work, Rent, insurance, depreciation, Maintenance and Repair, Power , Light and Head,

Prime Cost = Direct Labour + Direct Material

Conversion Cost = Direct Labour+ FOH Flat Cost or Total Factory Cost.=

DM+DL+FOH

MBA(UOS) Lecture 2

2. By Functions: Production, Administration, Selling &

Distribution Production costs. Materials,

Labour, Factory over head. Administration Expenses: admin *

office Salary, payroll taxes, rent, depreciation, property tax, auditing expenses, Legal expenses, Postage etc.

Selling & Distribution expenses: Sales Salaries, sales Commission, advertising, Samples, carriage out etc.

Classification of Costs

MBA(UOS) Lecture 2

3. Direct & Indirect Costs. Direct Cost are those which can easily and

conveniently be identified in a unit of cost. Direct Material, Labour & FOH.

Indirect costs are those which can not be easily traced in the unit of cost. Depreciation, Rent etc.

4. According to Variability. Fixed Costs

In Total Remains Fixed. Per Unit decrease with increase in production. Control rests with top management. Assigned by managerial decision.


MBA(UOS) Lecture 2

Variable Costs In Total Increase with production level.Per Unit remains constant.Control rests with departmental head.Can be easily and accurately assigned by

departmental head.Semi Variable Costs

A Combination of both fixed & Variable.Not zero even the production is zero. Increases with increase in production.


MBA(UOS) Lecture 2

5. According to Controllability. Controllable Costs: Which are some how

controllable by management. Un Controllable Costs: Which are beyond the

control of management.

6. Capital or Revenue Costs. Capital costs are those which are for purchase of

fixed assets. Revenue costs are those which are for purchase

of current assets.


MBA(UOS) Lecture 2

7. Normality. Normal costs are those which incurred at a

given level of out put. Abnormal Costs are those which do not incurred

at a given level of out put.

8. Classification by time. Historical Cost : The costs which are

ascertained after being incurrence. Predetermined costs. Estimated in advance.


MBA(UOS) Lecture 2

9. Product & Period Costs. Product Costs are those which are directly related with

product. Period Costs are those which are not directly related

with product and are associated with time period.10. Classification for managerial Decisions.

Marginal Cost. Is the total of Direct Material, Direct Labour and Variable Factory over Head.

Differential Cost: Change in costs due to change in level of output.

Opportunity Cost. The cost of 2nd best alternative.

Replacement Cost. Cost of replacement of an existing asset or facility.


MBA(UOS) Lecture 2

Sunk Cost. Which have already been incurred and are not relevant for decision making.

Out of Pocket Costs: which involve payment of cash on the other hand there are expenses like depreciation etc.

Imputed or notional Costs: which are used for decision making only like rent of own building and interest on capital.

Avoidable & Un avoidable Costs. Avoidable cost are those which can be avoid by eliminating a department of facility.


CHAPTER 3

MBA (UOS) Lecture 1

MBA(UOS) Lecture 3

Flow of Cost in a Manufacturing Enterprise.

Cash Depreciable AssetsAccounts Payable

Accruals

Cost of Materials Purchased

Material Inventory

Other Manufacturing

Costs.Direct Laobur

FOH

Work in ProcessDirect MaterialDirect Labour

FOH

Cost of Goods Completed

Finished Goods

Inventory Cost of Goods Sold

MBA(UOS) Lecture 3

Entries for Material Costing.

1. When Material is purchased. (Direct or Indirect).

Material Control Dr.Voucher Payable Cr.

2. When Material is Returned (Direct or Indirect).Voucher Payable Dr.

Material Control Cr.3. When Material is returned after the payment

has been made. (Direct or Indirect).Supplier’s Persona Dr.

Material Control Cr.4. When Payment is made for purchase of

material.Voucher payable. Dr.

Bank Cr.

Cost Accounting Cycle

MBA(UOS) Lecture 3

Cost Accounting Cycle Entries for material Costing.

5. When direct material is issued to production.(a) if one work in process account is maintained.Work in process Control Dr.

Material ControlCr.(b) If Separate work in process accounts are maintained.Work in process Control Dr.

Material Control. Cr.6. When direct material is returned to store rooms.

(a) If one work in process account is maintained.Material Control Dr.

Work in process control Cr.(b) If separate work in process accounts are maintained.Material Control Dr.

Work in process MaterialCr.

MBA(UOS) Lecture 3

Entries for Material Costing.7. When indirect material is issued to production.

F.O.H Control Dr.Material control Cr.

8. When indirect material is returned to store room.

Material Control. Dr.F.O.H. Control Cr.

ENTRIES FOR LABOUR COSTING.1. When direct labour is charged to production.

(a) If one work in process account is maintained.

Work in process control. Dr.Payroll control. Cr.


MBA(UOS) Lecture 3

ENTRIES FOR LABOUR COSTING.

1. When direct labour is charged to production.

(a) If separate work in process account is maintained.

Work in process Labour. Dr.Payroll control. Cr.

2. When Indirect Labour is charged to production.F.O.H Control Dr.

Payroll control Cr.


MBA(UOS) Lecture 3

Entries for Labour Costing.3. When total payroll is recorded and deductions

are made.Payroll control. Dr.

Income tax with held Cr.Insurance fund Cr.Provident fund Cr.any other deduction Cr.Accrued Payroll Cr.

4. When Accrued payroll is approved for payment.Accrued Payroll. Dr.

Voucher payable. Cr.5. When wages and salaries are paid.

Voucher payable Dr.Bank/Cash Cr.


MBA(UOS) Lecture 3

6. When total payroll is distributed among appropriate heads.Work in process Control Dr.FoH Control Dr.Selling Expenses Control Dr.Administrative Expenses Control Dr.

Pay roll control Cr.7. When Employer’s contribution for provident fund

is recorded.F.O.H Control Dr.Selling Expenses Control. Dr.Administrative Expenses Control Dr.

Provident Fund Cr.Group Insurance Cr.


MBA(UOS) Lecture 3

Entries for F.O.H Costing.1. When F.O.H is applied to production .

(a) When FOH is applied to production.Work in process Control. Dr.

F.O.H. Applied. Cr.

(b) If Separate work in process accounts are maintained.Work in Process F.O.H. Dr.

F.O.H. Applied. Cr.

2. When F.O.H Applied is transferred to F.O.H Control Account.

F.O.H Applied. Dr.F.O.H Control Cr.


MBA(UOS) Lecture 3

Entries for F.O.H Costing.3. When Actual Cash F.O.H Expenses are recorded.

F.O.H Control Dr.Voucher Payable Cr.

4. when Depreciation and Insurance expenses etc are recorded.

F.O.H Control. Dr.Accumulated Depreciation/Asset Cr.Prepaid Insurance Cr.

5. For Disposing off the Under Applied F.O.H Balance Work in process Control Dr.

Finished Goods Dr.Cost of Goods Sold. Dr.

Factory over head Control Cr.


MBA(UOS) Lecture 3

Entries for Completion of Goods.(a) Under one Work in process.

Finished goods Control Dr.Work in process Control. Cr.

(b) Under separate works in process.Finished goods Dr.

Work in process Material Cr.Work in process Labour Cr.Work in process F.O.H Cr.

Entries for Sale of Finished Goods.1. For recording cost of goods sold.

Cost of Goods Sold Dr.Finished Goods. Cr.


MBA(UOS) Lecture 3

Entries for Sale of Finished Goods.2. For Recording Sales.Cash/ bank/ Accounts Receivable Dr.

Sales Cr. Entries for Marketing & Administrative

Expenses.Marketing overhead control. Dr.Admn Overhead control Dr.

Sundry Accounts. Cr. Closing of Accounts to Income Summery.

1. Closing of sales.Sales Dr.

Income Summery Cr.


MBA(UOS) Lecture 3

Closing of Accounts to Income Summery.2. Transfer of Costs.

Income Summery. Dr.Cost of Goods Sold. Cr.Marketing Overhead Cr.Admn, Overhead. Cr.


MBA(UOS) Lecture 3

o On may1, the trial balance of a Company shows:Cash 25800Accounts Receivables. 47700Allowance for Dobutfull accounts. 2825Finished Goods 78700Work in process 85400Material 44880Building 120000Accumulated Depreciation Building 48000Equipment 237240Accumulated Depreciation Equipment 115210Accrued Payroll 6600Account Payable 54270Common Stock 80000Retained Earining . 332855Total 639760 639760

Cost Accounting CycleExercise.

MBA(UOS) Lecture 3

• During May, these transactions took place;1. Material Purchased 400002. Direct Material Issued 650003. Indirect Material issued 35004. Material Returned to suppliers 9005. Total Direct Payroll 800006. Total Indirect Labour 95007. Wages 750008. Sundry Manufacturing expenses 420009. Marketing & Admin Expenses incurred 850010. Account receivable collected. 30000011. Accounts payable paid 13500012. Depreciation to be provided for may at the rate of 2% per annum on

building; 105 per annum on equipment.13. Factory overhead applied to production at 60% of Direct labour cost.14. Work in process , May 31 7500015. Cost of Goods Sold 20500016. Sales on Account. 285000Required: Journal entries for the above transactions.


CHAPTER 4

MBA (UOS) Lecture 1

MBA(UOS) Lecture-4

Systems of Cost Accumulation.

o What is a Casting System. A Cost Accumulation system is a costing system which

is designed to suit the way goods are processed or manufactured or the way that services are provided.

Each firm will have a costing method which has unique features.

There will be common features of the costing systems of firms who are broadly in the sale line of business.

Firms employing substantially different manufacturing methods will have distinctly different costing methods.What ever costing systems is employed the basic costing principles relating to analysis, allocation and apportionment will be used.

MBA(UOS) Lecture-4

Cost Accounting Information System

• Main themes of cost systems.

– Needed for effective Cost Control.– Check on each cast center.– Effective Chart of Accounts.– Manual Records.– Proper Statements.– Electronic Data Processing.

MBA(UOS) Lecture-4

• Characteristics of an ideal costing system1. Suitability to the business.2. Simplicity.3. Flexibility.4. Economical.5. Comparability.6. Capability of presenting information at the desired

time.7. Minimum changes in the existing setup.8. Uniformity of forms.9. Minimum clerical work.10. Efficient system of material control.11. Adequate wage procedure.12. Departmentalization of expenses.13. Reconciliation of cost and financial accounts.


MBA(UOS) Lecture-4

• Installation of a costing system

– Fundamental factors to be considered.

• Existing organization should be disturbed as little as possible.

• There should be a gradual and smooth introduction of the system.

• While over elaboration of records should be avoided it would be false economy to prune out essentials and impair efficiency.


MBA(UOS) Lecture-4

• Steps for installation of costing system.

1. Objective identification (costing or management).2. Studying the existing organization and routine.3. Deciding the structure of cost accounts.4. Determine the cost rates.5. Introducing the system.6. Organizing the cost office.

• Store accounts.• Labour Accounts.• Cost accounts.• Cost Control.

7. Relationship of cost office to other departments.


MBA(UOS) Lecture-4

• Practical difficulties in installing a costing system.

1. Lack of support form top management.2. Resistance from the existing accounting staff.3. Non cooperation at other levels of organization.4. Shortage of trained staff.5. Heavy cost of operating the system.

• Steps to overcome practical difficulties.1. Support from the top management.2. Utility of system to existing staff.3. Workers confidence for cooperation.4. Training of existing accounting staff.5. Cost system according to specific requirement of the

concern.6. Proper supervision.


MBA(UOS) Lecture-4

• Cost Unit.1. It is a device for the purpose of breaking up or

separating cost into smaller sub divisions attributable to products or services.

2. It is the unit of product, service or time in relation to which costs may be ascertained, e.g. tonne in case of coal.

3. It must be clearly defined and selected before the process of cost finding can be started.

4. It must not be too big or small.5. It must be so selected that expenditure can be

associated with it.6. Must be appropriate to the needs of business.


MBA(UOS) Lecture-4

Methods of Costing.

– Methods to be used for the ascertainment of cost of production differ from industry to industry.

– It primarily depends on the manufacturing process and also on the methods of measuring the departmental and finished products.

Basically there are two methods of costing;

1. Specific order costing or job/terminal costing.

2. Operation costing or process or period costing.


MBA(UOS) Lecture-4

1. Specific Order Costing :is the category of basic costing methods applicable where the work consists of separate jobs, batches or contracts each of which is authorized by a specific order or contract. In this category are included job costing, batch costing and contract costing.

2. Operation Costing:Is the category of basic costing methods applicable where standardized goods or services result from a sequence of repetitive and more or less continuous operations or process to which costs are charged before being averaged over units produced during the period.


MBA(UOS) Lecture-4

1. Job Costing:– costs are collected and accumulated for each

job, work order or project separately.– Each job can be separately identified; so it

becomes essential to analyze the cost according to each job.

– A Job card is prepared for each job for cost accumulation.

– This method is applicable to printers, machine tool manufacturers, foundries and general engineering workshops.

• Requisites for job costing:– A sound system of production control.– Comprehensive works documents.– An appropriate time booking system.– A well organized basis to the costing system with

clearly defined cost centers.


MBA(UOS) Lecture-4

2. Contract Costing:

– Used for big jobs which are spread over long periods of time.

– A separate account is kept for each individual contract.

– Mostly used for construction contracts.– This method is used by builders, civil engineering

contractors, constructional and mechanical engineering firms etc.


MBA(UOS) Lecture-4

3. Batch Costing.

– Extension of job costing.– A batch may represent a number of small orders

passed through the factory in a batch.– Each batch is treated as a unit of cost and separately

costed.– The cost per unit is determined by dividing the cost of

the batch by the number of units produced in a batch.– This method is mainly applied in biscuits manufacture,

garments manufacture and spare parts and components manufacture.


MBA(UOS) Lecture-4

4. Process Costing:– Suitable for industries where production is

continuous.– Manufacturing is carried on by distinct and well

defined processes.– The finished product of one process becomes the raw

material of the subsequent process,– Different products with or without by-products are

produced simultaneously.– Products produced during a particular process are

exactly identical. – Unit and total cost of each department are

ascertained.– A separate account is opened for each process to

which all expenditure incurred thereon is charged.– Examples are textile industries, Chemical Industries,

Tanneries, Paper Manufacture etc.


MBA(UOS) Lecture-4

5. Operation (0ne) Costing.– Suitable for industries where manufacture is

continuous and Units are identical.– There is natural or standard unit of cost.– Object of this method is to ascertain the cost per unit

of out and cost of each item of such cost.– Cost per unit is determined by dividing the total

expenditure incurred during a given period by the number of units produced during that period.

– This method is applied in industries like mines, quarries, oil drilling, breweries, cement works, brick works.


MBA(UOS) Lecture-4

6. Service Costing.– Suitable for industries which render services as distinct

from those which manufacture goods.– Is used to ascertain the cost of services rendered.– Usually there is a compound unit in such undertaking.– Is applied in transport undertaking, power supply

companies, municipal services, hospitals, hotels.


MBA(UOS) Lecture-4

7. Operation (Multiple) Costing.– Consists of a number of distinct operations.– It refers to conversion costs.– It takes into consideration the rejections in each

operation for calculating input units and cost.– The different operations in machine screw are

stamps, knurl, thread and trim.– The cost per unit is determined with reference to final

output.


MBA(UOS) Lecture-4

8. Multiple Costing.– It represents the application of more than one method

of costing in respect of same product.– This is suitable for industries where a number of

component parts are separately produced and subsequently assembled into a final product.

– In such industries each component differ from the other as to price, material used and process of manufacture undergone.

– Necessary to ascertain the cost of each component (Process costing may be used for this purpose)

– To ascertain final product cost batch costing may be applied

– Used in factories manufacturing cycles, automobiles, engines, radios, typewriters, aero planes and other complex products.


MBA(UOS) Lecture-4

Following are the main types of costing for ascertaining costs.

1. Uniform Costing: It is the use of same costing principles and/or practices by several undertakings for common control or comparison of costs.

2. Marginal Costing: It is the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain the effect of changes in volume or type of out on profit.

3. Standard Costing: A comparison is made of the actual cost with a pre arranged standard and the cost of any deviation is analysed by causes.

4. Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations, processes or products. This differ from marginal costing where fixed costs are excluded.

Types of Costing

MBA(UOS) Lecture-4

Job order costing– Many jobs are worked

during the period.– Costs are accumulated

by individual jobs.– Job cost sheet is the

key document.– Unit cost computed by

job.

Job order costing– Many jobs are worked

during the period.– Costs are accumulated

by individual jobs.– Job cost sheet is the

key document.– Unit cost computed by

job.

Process costing– A single product is

produced for a long period of time.

– Costs are accumulated by departments.

– Department production report is key document.

– Unit costs are computed by department.

Process costing– A single product is

produced for a long period of time.

– Costs are accumulated by departments.

– Department production report is key document.

– Unit costs are computed by department.

Differences Between Job-Order and Process Costing

CHAPTER 5

MBA (UOS) Lecture 1

MBA(UOS) Lecture 5 55

Financial Statements for Manufacturing Concerns

Financial Statements are the final product of an accounting entity/system. A typical set of financial statements include;

1. Income statement.2. Balance Sheet.3. Statement of Cash Flows.

In manufacturing concerns the following are the main final statements.

1. Cost of Goods Sold Statement( a part of Income Statement)

2. Income Statement.3. Balance Sheet


Income StatementName of ConcernIncome Statement

For the Period Ended on----

DescriptionSalesLess cost of goods soldGross Profit

Less Commercial Expenses. Marketing Expenses Administrative Expenses

Income from operationsLess provision for income taxNet Income

Rs. Rs.

000000

Rs.000000000

000

000000000


Cost of Goods Sold Statement

Description Rs. Rs. Rs.

1. Direct Material:Opening Raw material Inventory.Add: Purchase of Raw material.Less: Purchase Discount. 000 Return & Allowances. 000Gross PurchasesAdd: Carriage In 000 Freight, cartage etc. 000Net Purchases

000

000000

000

000

000000

Name of ConcernCost of Goods Sold Statement

For the period ended on


Cost of Goods Sold StatementName of Concern

Cost of Goods Sold StatementFor the period ended on


Cost of Material available for sale.Less: ending Raw material inventoryCost of Material Used

2. Add: Direct Labour Cost3. Add: Applied F.O.HTotal Factory Cost.

000000000

000000000




Add: Opening Work in Process inventoryCost of Goods to be Manufactured.Less: Ending Work in Process inventory.Cost of Goods Manufactured

000000000000







Description Rs.

Rs. Rs.

5. Add: Opening Finished Goods inventoryCost of goods available for sale.Less: Ending Finished Goods InventoryCost of goods sold (at Normal)Add/Less: (Under/Over applied) FOHCost of Goods Sold at Actual

000000000000000

000


• Generally FOH can not be estimated exactly at the time of manufacture of goods. It is calculated and distributed to goods manufactured at the end of year. In order to complete the cost of goods an estimated amount of factory over head is charged to the cost of goods manufactured and sold statement and it is known a s applied FOH.

• When Cost of goods sold is calculated by taking applied FOH the cost of goods sold is called Cost of Goods sold at normal.

• If the applied FOH is more than actual FOH it is called over applied FOH.

• If the applied FOH is less than Actual FOH it is called Under Applied FOH.



• Over applied FOH is deducted from cost of goods sold at normal.

• Under applied FOH is added in Cost of goods sold at normal.

• After the adjustment of Over or under applied F.O.H cost of goods sold at actual is calculated.

• When the amounts of Total payroll and Direct Payroll is given the difference between Total and Direct payroll is not always indirect labour only. It may be marketing and Admin payroll as well.

• Entire production consists of : Cost of Goods Sold, Finished goods ending inventory, Work in process ending inventory.



• Ending stock is considered as a source of income, Greater the ending stock in relation to purchases greater will be the gross profit.

• Increase in inventory is deducted from relevant cost.• Decrease in inventory is added in the cost.• Unit cost of material, labour and FOH can be ascertained as

follows:Material Labour FOH

Consumed 000 000 000Add opening WIP 000 000 000Available for Use 000 000 000Less Ending WIP 000 000 000Net in Process 000 000 000Cost per Unit= Net in process (Material or Labour or FOH)

# of Units manufactured

Unit Cost of Manufactured: Cost of Goods Manufactured # of Units Manufactured



Balance SheetName of Concern

Balance SheetAs on

Assets & Properties Rs.

Liabilities & Equities Rs

CashMarketable SecuritiesAccounts receivablesInventories: Finished Goods Work in process MaterialsProperty Plant & EquipmentLess DepreciationTotal Assets

Current LiabilitiesLong term LiabilitiesCommon StockRetained Earnings

Total Liabilities & Equities

Documents

Cost Acconting Lectures