COST ACCOUNTING

Dr. (Mrs.) Prashanta Athma

Professor in Commerce, Principal,

University College for Women, Koti, Hyderabad, Telangana State.

ISO 9001:2008 CERTIFIED

[As per New CBCS Syllabus for Fifth Semester, B.Com. of All Universities in Andhra Pradesh w.e.f. 2015-2016]

© Author No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publisher.

First Edition: 2017

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Dedicated to my Dad

PREFACE

The book on “Cost Accounting” is tailor-made to meet the requirements of contents of the new syllabi of B.Com., Vth Semester of all the Universities in Andhra Pradesh and lays particular emphasis on the fundamentals of Cost Accounting, Elements of Cost, Methods and Techniques of Costing.

An earnest and sincere attempt is made to present the information in a non-technical, simple and lucid manner so as to enable the reader to understand the subject with ease.

The book contains sufficiently a large number of illustrations for a better grasp in the subject matter. Wherever necessary, working notes and explanations have been provided. At the end of each Chapter, questions and problems are given for practice.

Suggestions for improvement of the book are solicited.

I express my heartfelt gratitude to my husband Mr. S. Chandra Babu, HR and Legal Professional, who was a constant source of inspiration, support and encouragement throughout the completion of the book.

I also thank the publishers for the timely publication and my special thanks to Mr. Anil Kumar and Mr. Rajkumar for the keen interest taken by them in bringing out this book.

Prof. (Mrs.) Prashanta Athma

SYLLABUS

DSC – 1F 5.2 Cost Accounting Unit-I: Introduction: Distinguish between Financial Accounting, Cost Accounting and Management Accounting – Cost Concepts and Classification – Cost Centre and Cost Unit – Preparation of Cost Sheet. Unit-II: Elements of Cost: Materials: Material control – Selective Control, ABC Technique – Methods of Pricing Issues – FIFO, LIFO, Weighted Average, Base Stock Methods, Choice of Method (including problems). Unit-III: Labour and Overheads: Labour: Control of Labour Costs – Time Keeping and Time Booking – Idle Time – Methods of Remuneration – Labour Incentives Schemes – Overheads: Allocation and Apportionment of Overheads – Machine Hour Rate. Unit-IV: Methods of Costing: Job costing – Process costing – Treatment of Normal and Abnormal Process Losses – Preparation of Process Cost Accounts – Treatment of Waste and Scrap (including problems). Unit-V: Costing Techniques: Marginal Costing – Cost Classification – Differences between Marginal Costing and Absorption Costing – Marginal Cost Equation – Contribution – p/v Ratio-Margin of Safety – BEP Analysis – Standard Costing – Variance Analysis – Material Variance only (including problems).

CONTENTS UNIT I: INTRODUCTION 1. Introduction: 1 - 36 Need for Cost Accounting – Objectives of Cost Accounting – Cost Accounting vs. Financial

Accounting – Management Accounting vs. Financial Accounting – Cost Accounting vs. Management Accounting – Cost Concepts: Cost, Costing, Cost Accounting, Cost Accountancy, Cost Unit, Cost Centre – Cost Classification – Preparation of Cost Sheet – Summary – Glossary – Questions

UNIT II: ELEMENTS OF COST 2. Materials Cost: 37 - 57 Introduction – Objectives of Material Control – Inventory Control Techniques: Stock Levels,

Maximum Level, Minimum Level, Re Order Level, Average Stock Level, Danger Level – Economic Order Quantity – Always Better Control – Perpetual Inventory Control – Stock Turnover Ratios – Purchase Control – Just in Time – Summary – Glossary – Questions

3. Pricing of Material Issues: 58 - 79 Introduction – Methods of Pricing Issues – Conditions for selecting a method – Actual Cost

Methods: First In, First Out (FIFO), Last In, Last Out (LIFO), Highest In, First Out (HIFO), Next In, First Out (NIFO), Specific Price Method, Base Stock Method – Average Cost Methods: Simple Average Method, Weighted Average Method – Notional Price Methods: Standard Price Method, Market Price Method, Inflated Price Method – Choice of Method – Pricing of Material Returned to Stores – Summary – Glossary – Questions

UNIT III: LABOUR AND OVERHEADS 4. Labour Cost: 80 - 101 Introduction – Direct and Indirect Labour – Organization for Labour Control: Personnel

Department, Engineering Department, Time Keeping Department, Pay Roll Department, Cost Accounting Department – Summary – Glossary – Questions

5. Methods of Remunerating Labour: 102 - 120 Introduction – Features of Wage System – Methods of Remuneration – Labour Incentive

Schemes – Time Based System – Payment by Results – Combination of Time and Piece Rate – Premium Bonus Method – Group System – Summary – Glossary – Questions

6. Overheads: 121 - 135 Introduction – Classification of Overheads: According to Functions, According to Elements,

According to Behavior – Codification of Overheads – Distribution of Overheads: Collection of Overheads, Departmentalization of Overheads, Allocation of Overheads, Apportionment of Overheads – Summary – Glossary – Questions

7. Re-Apportionment and Absorption of Overheads: 136 - 160 Introduction – Re-apportionment of Service Department Costs: Step Ladder Method, Repeated

Distribution Method, Simultaneous Equation Method, Trial and Error Method – Absorption of Overheads: Units of Output Method. Direct Material Cost Method, Direct Wages Cost Method, Prime Cost Method, Labor Hour Method, Machine Hour Method – Under or Over Absorption of Overheads: Application of Supplementary Rate, Write off to Costing Profit and Loss Account, Carry Over to Next Year’s Method – Accounting Treatment of Administration Overheads – Accounting Treatment of Selling and Distribution Overheads – Summary – Glossary – Questions

UNIT IV: METHODS OF COSTING 8. Job Costing: 161 - 176 Meaning of Job Costing – Procedure of Job Order Cost Sheet – Suitability of Job Cost

Accounting – Advantages of Job Costing System – Limitations of Job Costing System – Summary – Glossary – Questions

9. Contract Costing: 177 - 197 Introduction – Features of Contract Costing – Important Costs in Contracts (Recording of

Costs): Materials; Labor/Wages; Expenses; Plant and Machinery – Sub Contracts – Extra work – Contract Costing vs. Job Costing – Certificate of work done – Profit on Incomplete Contracts – Work-in-progress – Cost Plus Contract – Summary – Glossary – Questions

10. Process Costing: 198 - 223 Introduction – Meaning of Process Costing – Features of Process Costing – Applicability of

Process Costing – Comparison between Unit Costing and Process Costing – Job Costing vs. Process Costing – Advantages of Process Costing – Disadvantages of Process Costing – Elements of Production Cost – Normal Loss and Abnormal Loss – Abnormal Gain – Joint Products and By-Products: Average Unit Cost Method, Physical Measurement Method, Weighted Average Method, Standard Cost Method, Contribution or Gross Margin Method, Market Value Method, At the Point of Separation, Market Value after Further Processing – Summary – Glossary – Questions

UNIT V: COSTING TECHNIQUES 11. Marginal Costing: 224 - 259 Introduction – Meaning of Marginal Cost – Features of Marginal Costing – Marginal Costing vs.

Absorption Costing – Break Even (or Cost Volume Profit) Analysis – Assumptions Underlying Break Even Analysis – Decision Making: Pricing Decisions, Make or Buy Decisions, Product/Sales Mix Decisions, Key or Limiting Factor, Shut Down or Continue Decision, Alternative Methods of Production, Accept or Reject an Offer – Summary – Glossary – Questions

12. Standard Costing : 260 - 268 Introduction – Need for Standard Costing – Concepts: Standard Cost, Standard Costing – Pre-

requisites to Standard Costing – Types of Standards – Advantages of Standard Costing – Disadvantages of Standard Costing – Establishment of Standards – Standard Hour – Standard Cost Card – Variance Analysis – Revision of Standards – Summary – Glossary – Questions

13. Material Variances: 269 - 286 Introduction – Material Variances – Material Cost Variance – Material Price Variance –

Material Usage Variance – Material Mix Variance – Material Yield Variance – Material Sub Usage Variance – Summary – Glossary – Questions

14. Labour Variances: 287 - 303 Introduction – Labour Variances – Labour Cost Variance – Labour Rate Variance – Labour

Time Variance – Idle Time Variance – Labour Mix Variance – Labour Revised Efficiency Variance – Labour Yield Variance – Summary – Glossary – Questions

15. Overhead Variances: 304 - 319 Introduction – Overhead Cost Variance – Variable Overhead Variance – Variable Overhead

Expenditure / Price / Budget Variance – Variable Overhead Efficiency Variance – Fixed Overhead Cost Variance – Expenditure or Budget or Spending Variance – Volume Variance – Capacity Variance – Calendar Variance – Efficiency Variance – Summary – Glossary – Questions

16. Sales Variances and Control Ratios: 320 - 336 Introduction – Sales Variance – Turnover / Value Method – Margin / Profit Method – Reporting of

Variances – Disposition of Variances – Cost Control Ratios – Summary – Glossary – Questions

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