COST ACCOUNTINGCOST ACCOUNTING

Meaning of Costing and Cost Accounting:Meaning of Costing and Cost Accounting:

The Charted Institute of Management The Charted Institute of Management Accountants defined costing as “ the techniques Accountants defined costing as “ the techniques and processes of ascertaining costs”and processes of ascertaining costs”

Costing simply means cost finding by technique.Costing simply means cost finding by technique.

Cost accounting is a formal system of accounting Cost accounting is a formal system of accounting for costs in the books of account, by mean of for costs in the books of account, by mean of which cost of product and services are which cost of product and services are ascertained and controlled.ascertained and controlled.

WHAT IS COSTING WHAT IS COSTING

Costing is the technique and process of Costing is the technique and process of ascertaining costs. It is referred to as ascertaining costs. It is referred to as classifying recording and appropriate classifying recording and appropriate allocation of expenditure for the allocation of expenditure for the determination of costs of products or determination of costs of products or services.services.

What is cost AccountingWhat is cost Accounting

Cost accounting is the formal mechanism Cost accounting is the formal mechanism by means of which costs of product or by means of which costs of product or services ascertained and controlled. services ascertained and controlled.

WeldonWeldon Defines Cost accounting as “ the Defines Cost accounting as “ the classifying, recording and appropriate classifying, recording and appropriate allocation of expenditure for the allocation of expenditure for the determination of costs of products or determination of costs of products or services, the relation of these costs to services, the relation of these costs to sales value and the ascertainment of sales value and the ascertainment of profitability”profitability”

Characteristics Characteristics

Cost Recording- posting of the cost Cost Recording- posting of the cost transactionstransactions

Cost Classification- grouping of the cost into Cost Classification- grouping of the cost into a common group like material , labour etca common group like material , labour etc

Cost Allocation- allotment of cost to various Cost Allocation- allotment of cost to various departmentdepartment

Cost ControlCost Control Cost Reporting- furnishing of data on a Cost Reporting- furnishing of data on a

regular basisregular basis Cost Ascertainment – cost of goodsCost Ascertainment – cost of goods

Objectives and Functions of Cost Accounting:Objectives and Functions of Cost Accounting:

1) Ascertainment of Cost:1) Ascertainment of Cost:

2) Cost control and Cost Reduction:2) Cost control and Cost Reduction:

3) Guide to Business Policy:3) Guide to Business Policy:

4) Determination of Selling Price:4) Determination of Selling Price:

5) Fixing profit per products.5) Fixing profit per products.

Importance of Cost AccountingImportance of Cost Accounting

Detailed Cost informationDetailed Cost information Help in price fixationHelp in price fixation Reveals profitable or non profitable Reveals profitable or non profitable

activityactivity Reveals idle capacityReveals idle capacity Helps in decision makingHelps in decision making Helps in controlling costsHelps in controlling costs Cost comparisonCost comparison Helps in inventory controlHelps in inventory control

Methods of costingMethods of costing 1) 1) Job order costingJob order costing: Costs are collected for each : Costs are collected for each

job/ work/ project separately. Where production is job/ work/ project separately. Where production is not repetitive.not repetitive.

Example: Printing, machine tool manufacturing.Example: Printing, machine tool manufacturing. 2) 2) Contract costingContract costing: A contract is a big job and is : A contract is a big job and is

spread over a period of time. This costing spread over a period of time. This costing applicable to builders. Dams, bridges and roads.applicable to builders. Dams, bridges and roads.

3) 3) Batch costing:Batch costing: it is extension of job costing. A it is extension of job costing. A batch consists of number of similar products. the batch consists of number of similar products. the cost of group of products constituting the batchcost of group of products constituting the batch

Example: drugs, cigrates, clothing, medicines Example: drugs, cigrates, clothing, medicines etc.. etc..

4) 4) Process costing: Process costing: this method is used in mass this method is used in mass production industries manufacturing standard production industries manufacturing standard products in continues process of manufacturing. products in continues process of manufacturing. To arrive cost per unit, the total cost of a process To arrive cost per unit, the total cost of a process is divided by no of units produced.is divided by no of units produced.

Example: car manufacturing, refineries, sugar Example: car manufacturing, refineries, sugar manufacturing etc.manufacturing etc.

5) 5) Operational costing:Operational costing: it is nothing but it is nothing but refinement and more detailed application of refinement and more detailed application of process costing. It involves ascertainment for process costing. It involves ascertainment for each operation instead of process.each operation instead of process.

Example: mines, steel production etc.Example: mines, steel production etc. 6)_Service costing: 6)_Service costing: where services are being where services are being

provided rather than goods manufactured. provided rather than goods manufactured.

Example: hospital, hotel , education industries etc Example: hospital, hotel , education industries etc

7) 7) Single, or output or unit costing: Single, or output or unit costing: used when used when production is uniform and consists of a single or production is uniform and consists of a single or two or more varieties of same products. Where two or more varieties of same products. Where product is produced in different grade.product is produced in different grade.

Example: car manufacturing, steel production.Example: car manufacturing, steel production. 8) 8) Service costing: Service costing: it is used in undertaking which it is used in undertaking which

provide services instead of manufacturing provide services instead of manufacturing products. Example: transport co, electricity co.products. Example: transport co, electricity co.

9) 9) Multiple or Composite costingMultiple or Composite costing: this method : this method used in industries where a number of components used in industries where a number of components are separately manufactured and then assembled are separately manufactured and then assembled into final product.into final product.

Example: television set manufacturing Example: television set manufacturing

Techniques of costingTechniques of costing

1) 1) Standard costingStandard costing: This is a very valuable : This is a very valuable technique of controlling cost. Standard cost is technique of controlling cost. Standard cost is pre-determined as target of performance, and pre-determined as target of performance, and different between actual cost incurred and different between actual cost incurred and standard cost analyze.standard cost analyze.

2) 2) Budgetary costing:Budgetary costing: 3) 3) Marginal costing:Marginal costing: In this technique, separation In this technique, separation

of costs in to two parts: fixed and variable costs. of costs in to two parts: fixed and variable costs. Marginal costing regards only variable costs as Marginal costing regards only variable costs as the cost of the products. This technique is used to the cost of the products. This technique is used to study the effect on profit of changes in volume or study the effect on profit of changes in volume or type of output.type of output.

4) 4) Total absorption costingTotal absorption costing: it is a : it is a traditional method of costing where by traditional method of costing where by total costs( fixed and variable) are total costs( fixed and variable) are charged to products. This is in complete charged to products. This is in complete contrast to marginal costing where only contrast to marginal costing where only variable cost are charged for products.variable cost are charged for products.

5) 5) Uniform costing:Uniform costing: it simply denotes a it simply denotes a situation in which a number of firms adopt situation in which a number of firms adopt a uniform set of costing principles.a uniform set of costing principles.

Classification of costClassification of cost

A) Classification into Direct and Indirect A) Classification into Direct and Indirect Costs:Costs:

direct costs: these are those costs which direct costs: these are those costs which are incurred for and identified with a are incurred for and identified with a particular cost unit.particular cost unit.

Indirect costs: these costs cannot be Indirect costs: these costs cannot be identified with the particular cost unit.identified with the particular cost unit.

B) Classified into fixed and variable costs:B) Classified into fixed and variable costs: fixed cost:fixed cost: variable cost:variable cost: semi variable or semi fixed costs:semi variable or semi fixed costs:

C) classification into committed and C) classification into committed and

Dis-cretionary costs:Dis-cretionary costs: committed:committed:

Example: salary of manager, and Example: salary of manager, and depreciation.depreciation.

Discretionary costs: costs which can be Discretionary costs: costs which can be avoided by the management decisions. avoided by the management decisions. Such cost are not permanent.Such cost are not permanent.

Example: research and development.Example: research and development.

D) classification into product costs and D) classification into product costs and period costs:period costs:

product costs: these are those costs which product costs: these are those costs which are necessary for production and which will are necessary for production and which will not be incurred if there is no production.not be incurred if there is no production.

Period costs: these costs are not necessary Period costs: these costs are not necessary for production but incurred even if there is for production but incurred even if there is no production.no production.

Example: showroom rent, salary of Example: showroom rent, salary of supervisor.supervisor.

E) classification into controllable and non- E) classification into controllable and non- controllable costs:controllable costs:

controllable cots:controllable cots: non-controllable costs:non-controllable costs:

F) Classification into historical and pre-determined F) Classification into historical and pre-determined costs:costs:

historical costs: these are the costs which are historical costs: these are the costs which are ascertained after these have been incurred. ascertained after these have been incurred. Historical costs are thus, nothing but actual costs.Historical costs are thus, nothing but actual costs.

pre-determined costs: these are future costs which pre-determined costs: these are future costs which are ascertained in advance of production on the are ascertained in advance of production on the basis of specification of all the factors affecting cost. basis of specification of all the factors affecting cost.

Special costs for Management Decision makingSpecial costs for Management Decision making

Relevant cost: Not all costs are relevant for Relevant cost: Not all costs are relevant for decision making. A relevant cost is a cost decision making. A relevant cost is a cost whose magnitude will be effected by a whose magnitude will be effected by a decision being made. ( future cost and decision being made. ( future cost and revenue)revenue)

Irrelevant cost: These are those costs that will Irrelevant cost: These are those costs that will not be affected by a decision.not be affected by a decision.

Sunk costs: a sunk cost is an expenditure Sunk costs: a sunk cost is an expenditure made in the past that cannot be changed and made in the past that cannot be changed and over which management has no longer has over which management has no longer has control.control.

Differential costs: is the increase or decrease in Differential costs: is the increase or decrease in total cost that result from an alternative course of total cost that result from an alternative course of action.action.

Marginal cost: is the additional cost of producing Marginal cost: is the additional cost of producing one additional unit. Marginal cost is the same thing one additional unit. Marginal cost is the same thing as variable cost.as variable cost.

Im-puted cost: these are hypothetical costs which Im-puted cost: these are hypothetical costs which are specially computed outside the accounting are specially computed outside the accounting system for the purpose of the decision making.system for the purpose of the decision making.

Example: interest on capital …not included in the Example: interest on capital …not included in the cost.cost.

Opportunity cost: Sacrifice of benefits or return by Opportunity cost: Sacrifice of benefits or return by not choosing the next best alternative.not choosing the next best alternative.

Replacement cost: current market value of Replacement cost: current market value of replacing assets.replacing assets.

Elements of costElements of cost

Cost divided in to 3 parts. Cost divided in to 3 parts. 1) material.1) material. 2) labour.2) labour. 3) expenses.3) expenses. 1) Material cost: divided into 2 parts.1) Material cost: divided into 2 parts. a) direct material: cost is that which can be a) direct material: cost is that which can be

conveniently identified with and allocated to conveniently identified with and allocated to cost units. Direct material generally become cost units. Direct material generally become a part of the finished products.a part of the finished products.

Example: leather in shoes, steel in Example: leather in shoes, steel in machines.machines.

B) indirect material: are those materials which B) indirect material: are those materials which cannot be conveniently identified with individual cannot be conveniently identified with individual cost units.cost units.

Example: lubricant oil, small tools, nuts and bolts.Example: lubricant oil, small tools, nuts and bolts.2) Labour cost:2) Labour cost: a) direct labour cost:a) direct labour cost: b) indirect labour costb) indirect labour cost example: supervisor, clerk, watchmen.example: supervisor, clerk, watchmen.3) Expenses cost:3) Expenses cost: a) direct expenses:a) direct expenses: b) indirect expenses:b) indirect expenses:Example: rent, depreciation, advertising. Example: rent, depreciation, advertising.

COST

MATERIALS LABOUR

OTHER EXPENSES

DIRECTDIRECT DIRECT

INDIRECTINDIRECT

INDIRECT

OVERHEADS

FOH AOH SOH DOH

ELEMENTS

OF

COST

Overhead costOverhead cost

1) factory overhead.1) factory overhead. a) indirect material+ indirect labour + a) indirect material+ indirect labour +

indirect expenses of factory.indirect expenses of factory. 2) office overhead.2) office overhead.

b) indirect material+ indirect labour + b) indirect material+ indirect labour + indirect expenses of office.indirect expenses of office.

3) selling and distribution overhead.3) selling and distribution overhead.

c) indirect material+ indirect labour + c) indirect material+ indirect labour + indirect expenses of selling.indirect expenses of selling.

Examples of Indirect materialExamples of Indirect material

At factory level – lubricants, oil, At factory level – lubricants, oil, etc.etc.

At office level – Printing & At office level – Printing & stationery, Dusters, etc.stationery, Dusters, etc.

At selling & dist. level – Packing At selling & dist. level – Packing materials, printing & stationery, materials, printing & stationery, etc.etc.

Examples of Indirect labourExamples of Indirect labour

At factory level – foremen’s At factory level – foremen’s salary, works manager’s salary, salary, works manager’s salary, gate keeper’s salary,etcgate keeper’s salary,etc

At office level – Accountant’s At office level – Accountant’s salary, GM’s salary, Manager’s salary, GM’s salary, Manager’s salary, etc.salary, etc.

At selling and dist.level – At selling and dist.level – salesmen salaries, Logistics salesmen salaries, Logistics manager salary, etc.manager salary, etc.

Examples of Indirect expensesExamples of Indirect expenses

At factory level – factory rent, At factory level – factory rent, factory insurance, lighting, etc.factory insurance, lighting, etc.

At office level – office rent, office At office level – office rent, office insurance, office lighting, etc.insurance, office lighting, etc.

At sales & dist.level – advertising, At sales & dist.level – advertising, show room expenses like rent, show room expenses like rent, insurance, etc.insurance, etc.

Particulars Total cost cost per unit

Direct Material    

opening stock of raw materials    

Add: Purchases    

Add: Carriage inward/importduty    

Less: Closing Stock of raw material    

Prime Cost    

Add:Factory or works overheads    

Indirect material    

Indirect wages    

Factory rent    

Factory lighting    

Factory insurance    

Drawing office expenses    

Power and fuel    

Depreciation repairs    

Maintaince of Plant    

Factory manager Salary    

cost of sale of scrap    

Less: sale of Scrap    

Factory cost or work cost    

Add: Office And Administration Overheads    

Office rent    

Office Salaries    

Director's Fees    

Office Lighting    

Establishment charges    

audit fees    

Legal Charges    

Bank Charges    

General Office Expenses    

Cost of Production    

Add:Opening stock of finished goods    

Less: Closing Stock of finished Goods    

Cost of Goods Sold    

Add: Selling and distribution Expenses    

showroom expenses    

salesman Salaries    

trvelling Expenses    

advertisement    

Market research    

Bad debts    

Cost of free samples    

Cost of Sales or total Cost    

Add: Profit    

Sales    

Limitation of Cost AccountingLimitation of Cost Accounting

ExpensiveExpensive UnnecessaryUnnecessary InapplicableInapplicable FailureFailure Not reliableNot reliable