Cost

The amount of expenditure incurred on, or attributable to, a specified thing or activity.

The amount, measured in money, of the expenditure to obtain goods and services.

It is the amount of money that must be paid to take ownership of something; expense or purchase price.

Cost Accounting

It is a branch of accounting concerned with the classification, recording, analysis and interpretation of
expenditures associated with the production and distribution of goods and services.

The application of accounting and costing principles, methods and techniques in the ascertainment of
costs and the analysis of savings and/ or excesses as compared with previous experience or with
standards.

Is a managerial accounting activity designed to help managers identify, measure, and control operating
costs?

MANAGEMENT ACCOUNTING is the process of identification, measurement,

accumulation, analysis, preparation, interpretation, and communication of financial information
used by management to plan, evaluate, and control within an organization and to assure
appropriate use of and accountability for its resources. Management accounting also comprises
the preparation of financial reports for non-management groups such as shareholders, creditors,
regulatory agencies, and tax authorities.
Uses of Cost Data

1- Planning profit by means of budgets.

2- Controlling costs via responsibility accounting

i. Fixing Responsibility for Control.

ii. Limiting the individual’s control effort to controllable costs
iii. Reporting the performance of the individual

3- Measuring annual or periodic profit, including inventory costing.

4- Assisting in establishing selling prices and a pricing policy.

5- Furnishing relevant cost data for analytical processes for decision making.
Classifications of Costs

1- By the nature of the item.

2- With respect to the accounting period to which they apply.

3- By their tendency to vary with volume or activity.

4- By their relation to the product.

5- By their relation to manufacturing departments.

6- According to their nature as common and/ or joint costs.

7- For planning and control.

8- For analytical processes.

1- BY THE NATURE OF THE ITEM.

Total Costs i.e. All Costs from Sale Revenue before Income Tax

Analysis of Total Operating Cost

Direct Materials + Direct Labor = Prime Cost

Indirect Materials + Indirect Labor + Other Indirect Costs = Factory Overhead

Manufacturing Cost

Marketing Expenses + Administrative Expenses = Commercial Expenses

Sale Salaries Administrative Salaries

Advertising Legal Expenses =

Travel Expenses Auditing Expenses Total Operating Cost

2- With respect to the accounting period to which they apply.

a. Capital Expenditures
b. Revenue Expenditures

3- By their tendency to vary with volume or activity.

a. Variable

A variable cost changes in total in direct proportion to changes in activity or out put. A
decrease in activity brings a proportional decrease in total variable cost, and vise versa.
Like Direct Materials and Direct Labor Costs

b. Fixed
A fixed cost is constant in total amount regardless of changes in activity level. Like Plant
Manager’s Salary, Rent, Insurance and Property Tax etc.

c. Semi Variable

A semi Variable changes but not in direct proportion to changes in output.

COSTS BEHAVIOR
 4- By their relation to the product.

Direct Material +Direct Labor = Prime Cost

Direct Labor + Factory Overhead = Conversion Cost

(I.e. converting Direct Material into Product)

Direct Material

All materials that form an integral part of finished product and that can be included directly in
calculating the cost of product

Lumber to make furniture

Steel to make automobile bodies

Crude Oil to make gasoline

Direct Labor

Direct Labor is labor applied directly to the materials comprising the finished product. The cost of wages
paid to skilled or unskilled workers and assignable to the particular unit produced is termed direct labor.

Factory Overhead- also called manufacturing overhead, or factory burden

It may be defined as the cost of Indirect material, Indirect labor and all other manufacturing costs that
can not conveniently be charged to specific units, jobs, or products. In other words all manufacturing
costs except direct materials and direct labor.

Indirect Materials are those needs for the completion of the product but whose consumption with
regard to the product is either small or so complex that it would be futile to treat them as direct
materials like glue and nails etc.

Factory Supplies as form of indirect material consist of items such as lubricants, oils, grease, cleaning
and brushes need to maintain the area and machinery in workable and safe condition.

Indirect Labor may be defined as that labor which does not directly affect the construction or the
composition of the finished product like cost of supervisors and general helpers etc.
5- By their relation to manufacturing departments.

Producing Departments like machining, mixing, refining and assembling departments.

Services Departments like store, timekeeping, payroll, cafeteria and maintenance etc.

6- According to their nature as common and/ or joint costs.

Common costs are consist of costs of facilities or services employed in two or more
accounting periods, operations, commodities or services.

Joint costs occur when the production of one product may be possible only if one or
more other products are manufactured at the same time like oil and gas industry and
refineries etc.

6- For planning and control.

Budgets

Standard Costs- Predetermined cost of Direct Material, Direct Labor and Factory
Overhead.
A.B.C & Co.

Cost of Goods Sold Statement

For the Year

Direct Material Consumed xxxxxx

Direct Labor xxxxxx

Factory Overhead xxxxxx

------------

Total Manufacturing Cost xxxxxxxx

Add opening Work in process xxxxxxx

Less closing work in process xxxxxxx

------------

Cost of goods manufactured xxxxxxx

Add finished goods Inventory xxxxxxx

------------

Cost of goods available for sale xxxxxxxx

Less finished goods Inventory xxxxxxxx

--------------

Cost of goods sold xxxxxxxxx

=========
 The XYZ Manufacturing Company

Cost of Good Sold Statement

For Year Ended December 31, 19--

1 Direct Materials:

Material s inventory, January 1, 19-- 1,572,400

Purchases 8,420,000

Less Purchases returns and allowance 4,200 8,378,000

Material available for use 9,950,400

Less Material Inventory, December 31, 19-- 1,270,600

Direct materials consumed 8,679,800

2 Direct Labor 7,346,400

3 Factory overheads:

Indirect labor 1,329,300

Salaries 97,200

payroll taxes 489,000

Power 112,000

Heat 69,200

Light 44,300

factory supplies 50,000

Depreciation---factory building 68,300

Depriciation---machinary 403,000
 Repair and maintenance 145,800

Patent amortization 33,200

tools and dies used 178,600

insurance on building and machinery 21,200

Total factory overhead 3,915,900

Total manufacturing cost 19,942,100

4 Add work in process inventory, January 1, 19-- 2,338,000

22,280,100

Less work in process inventory , December 1, 19-- 1,303,200

Cost of good manufactured 20,976,900

5 Add finished goods inventory, January 1, 19-- 966,100

cost of good available for sale 21,943,000

less finished goods inventory, December 31, 19-- 658,000

Cost of good sold 21,285,000