Costing Terms

7/28/2019 Costing Terms

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Costing Concepts & Terms

Prof. Nand Dhameja

17/9/12

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Financial Statements

Balance Sheet Total assets Rs 90 Crore

Profit & Loss A/c Sales Rs. 60 crore

Profit for the Year 20 cr

Profit Margin = 33%

Need for Costing ?

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Accounting Information-Needed

a).Score Keeping :

Historical, GAAP, Mandatory

b).Attention Directing

c).Problem Solving

Financial Accounting : is concerned Partlywith (a) above;

Management Accounting serves (b) & (c)

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Cost Accounting

A branch of accounting

A process of accounting for Costs

In broader terms covers:

Management Accounting & Budgeting

Financial Accounting : concerned with Costs

Cost accounting : Concerned with Break-up of

Costs

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Cost Accounting

Ascertainment of Costs

Accumulation of cost Elements

Material

Labour

Other Expenses

Concerned with Money as a Measure of

Economic Performance

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Cost Accounting: Purposes

Inventory Valuation & Pricing

Cost control & Cost Reduction

Decision Making

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Cost: Meaning

Cost refers to Sacrificeor Forbearance

Cost involves ExchangeProcess

Relates to a Purposeor ActivityorJ ob

Measured in Monetary Terms

Cost measured in monetary terms: Actual Cost- Cost IncurredA Historical Cost

Budgeted Costor forecasted cost

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Cost Accumulation & Cost Object

Cost Accumulation is the Collection of Cost Data in asystematic wayfor a purposeCost Object

Cost Objects : I llustrations

Paper cost : Magazine, A particular issue, A PublishingHouse, Macro-level use

Supervision : Magazine Issue, Publication Dept.,Publishing House

Rent of Premises:Magazine Issue, Publication Dept.Company

Canteen Expenses : for a batch of production, ProductionDept., Enterprise

Training Expenses : for a batch of production, training division. HR

Dept., Enterprise 8dhameja


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Financial Accounting VSManagement Accounting

Financial Accounting Management Accounting

Scope: Concerned with money Concerned with money as measureas economic resource of economic performance

Purpose: One purpose- exhibit More than one purpose- mgt. needsfinancial results of enterprise

Coverage: Entire Business One activity/dept./

Requirement: Statutory Optional

Time Span : Historical; Annual Forward Looking; periodical

Governing GAAP Objectives for which inf. neededFactor

Emphasis: Accuracy; Presentation Prompt & Analysis of data

Parties External Internal

Interested 9dhameja


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Cost Accounting : Principles

Costs should be Related as closely as possible totheir causes

Profit appropriationsare excluded from costs

Abnormal Costsare excluded from costs

Past costsare not charged to future period. Pastcosts are those from which no benefit isexpected

A Cost is not charged until it is incurred

Measuring Costs requires J udgement

Greater the proportion of prime costs in coststructure, more confident are managers about

cost accuracy 10dhameja


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Cost Accounting

Cost Elements:

Material

Labour

Other Expenses

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Cost Terms

Direct & Indirect Cost Traceability Total Costs & Unit Cost Units Fixes Costs &Variable Costs Level of Activity Product & Period Costs

Controllable & Uncontrollable Costslevel ofauthority

Actual & Budget Costs Prime cost & conversion costs Managed Cost & Engineered Costs Opportunity costs

Separate costs; Common Costs; Joint Costs; By-

Product Costs

Variable Cost; marginal costs; differential costs 12dhameja


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Cost Sheet

Direct CostDirect MaterialDirect Labour

Other Direct ExpensesIndirect Costs:

Factory OverheadsOffice OverheadsMarketing Overheads

ProfitsSelling Price

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Cost Sheet

A).Direct CostDirect Material }Direct Labour } Prime CostOther Direct Expenses

{ }B). Indirect Costs: }

B1. Factory Overheads } Works Cost orIndirect Materials Factory CostFactory Supervision } (A + B1))Factory rent, rate {Factory Depreciation } ]

]B2. Office Overheads } Office Cost or

Office Rent } Cost of ProductionDirectors Fees } } (A+B1+B2)

]B3. Marketing Overheads ]

Sales Staff expenses ]packing ] Cost of Sale orcarriage outward ]] Total CostAdvertising ]] ( A+B1+B2+B3)

[C). Profits ] (Selling Price)

(A=B1+B2+B3+C)14dhameja


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Cost Terms Direct Costs & Indirect Costs- Traceability

Direct Costs: Costs which can beTraced to cost OBJ ECTconveniently & economically

Indirect Costs: Costs which cannot be tracedconveniently &economically

Cost Object Direct Indirect

Magazine paper RentPublishing House rent

Factors Affecting Direct & Indirect Distinction:

Materiality: Larger the cost, easier to trace - Courier charge &

paper cost

Information gathering technology:Design of operations: exclusive use of specific cost

Rule: Broader the definition of Cost Object, higher %costs are Direct Costs & more confidence MGT has inaccuracy of cost estimation

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Cost Terms

Variable Costs & Fixed Costs- Variability in relation tospecific cost object & time period

Variable Cost changes in % to level of output

Fixed cost remains unchanged in total for a given

period. Fixed costs always focus on total costs

Cost Driver: level of activity affects costsVariable cost

Total Costs & Unit Costs: Total costs rather unit costsare more meaningful as fixed cost per unit changeswith change in level of output

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Cost Terms

Inventoriable costs & Period Costs

Inventory cost: all costs incurred to put the product inlocation & condition of sale

=prime cost + factory overhead Period Costs: costs not associated with inventories

Marketing & Office cost

Prime Costs & Conversion Costs:

Prime Costs =DM +ML + Other Direct Expenses Conversion Costs =Manufacturing costs other than DM

= DL + Other Direct Expenses +Factory O/H

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Cost Terms: Controllable & Non-

controllable Costs

Controllable and Non-controllable Costs: Controllable at a level of managerial authority & given

time period

Controllable Costs attributes: a) Vary in size at management discretion

b) manager responsible fo cost is identifiable

c) time period is appropriate for the costs

material quantity used is influenced by productionmanager

material purchased price influenced by productionmanager/market conditionss

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Cost Terms: Engineered & Managed Costs

Engineered Costs Managed Costs Effectively & objectively * Arise as result of management

measured judgment

Input-output relationship * No scientific way of decidingexits right amount

Right or proper amount * also called Discretionary cost

can be estimated

e.g. Qty of coal per ton of cement * e.g cost of legal dept.;

personnel dept;advertisement cost

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Cost Terms

Opportunity Costs:Benefit foregone on the immediatenext best alternative in a given situation

Situation of two or more alternatives-best alternative is

chosen & next best alternative foregone is the

opportunity cost

E.g. from timber we can manufacture two chairs or onetable; we decide for table & the opportunity cost is the

value of two chairs

A notional cost; is not actually incurred

E.g Two job alternatives: Rs. 8 lakh or Rs 7 lakh ?

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Cost Terms

Book cost & Out-of Pocket Cost

Allocated cost & * Apportioned Cost

Costs which can be directly *Costs which can not bebooked or traced to activity directly booked or

or division traced to activity/ division

e.g. Direct material, or direct *also called common costs

labour

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Cost Terms

Joint Cost and By-product cost:

When group of products are produced simultaneously fromthe same raw material- products are not identifiable untilsplit-off point Joint Products

Products having significant value are Joint Products &

products of less significant value are by-products

Costs prior to split-off point are called joint costs

Management Decision Petroleum Industry: Petrol, diesel, aviation fuel, kerosene

Sugar industry: sugar; baggasse & molasses

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Cost Terms

Standard- Budgeted- Actual Costs

Standard costs- what the costs should be

Budgeted cost- what costs would be Actual costs- what costs are or what cost has been

Standard Costs- ideal costs irrespective environment;

normally per unit

Budgeted Costs- in the prevailing environment forplanning; cost budgeted for an activity or dept.

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Cost Terms

Sunk Cost-

a) Purpose for which cost is incurred, is notto be served; & b) cost incurred isirrecoverable

Not relevant for decision - making

e.g. research cost, when decided that not tobe useful, becomes sunk cost, before suchdecision it is a development cost

Oil well exploration cost- development

cost; but when decided not to pursuefurther & well will not fructify, costincurred will not be recovered, it becomessunk cost

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Cost Terms

Marginal and Incremental Costs No difference in these concepts- basically mean cost of

extra production

Marginal Cost=> cost at margin; cost of one unit more

capital intensive products i.e. ship, airplane, turbineproduced in units & not in batches

Incremental cost=> cost of producing a batch ofadditional units

consumer/consumer durables- production in batches

For example: Output Total cost (Rs)

100 units X

101 units X + i.e. cost of one extra unit ismarginal cost

120 units X ++ i.e. cost of 20 more units isincremental cost25dhameja

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Costing Terms