INTRODUCTION COST ACCOUNTING

COST

CIMA, London defines Cost as

“The amount of expenditure (actual or notional) incurred or attributable to a specified thing or activity.”

Cost From Different Perception

 For a Consumer cost means “Price”

 For Management cost means “Expenditure incurred” for producing a particular product or rendering a particular
services

Cost may be expired or unexpired. It is not the same thing as Expense, Loss and Asset which are explained here below.

Expense is that portion of the cost which has been consumed during the current accounting period
Expense and which contributed to t e revenue. It is also called expired cost. It is shown on the debit side of
Income Statement. For example, depreciation on a machine, commission on sales.

Loss is that portion of the cost which has been consumed during the current accounting period and
Loss which did not contribute to the revenue. It is shown on the debit side of Income Statement. For
example. Loss of uninsured asset due to fire.

Asset is that portion of the cost which has not been consumed during the current accounting period.
Asset It is also called unexpired cost. It is shown on the assets side of the Balance Sheet. For example,
depreciated value of a machine (i.e. Cost - Depreciation till date).

MEANING OF COSTING

CIMA, London, defines Cost as

“Costing is the technique and process of ascertaining costs”

Costing means determining the cost by any technique or process formal records based on double entry system. It consists of
principles and rules which are used for determining:

 The cost of producing a product. E.g. computer, car

 The cost of providing a service. E.g. hotel, hospital, transport.
 The cost of performing an activity. E.g. placing purchase orders, receiving deliveries of materials.

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MEANING OF COST ACCOUNTING
Cost Accounting is the process of accounting for cost which begins with the incurrence of cost and ends with the control of
cost. In other words, it is a formal system of accounting by means of which costs of products, services or activities are
ascertained and controlled.

Wheldon, defines Cost Accounting as

“Classifying, recording and appropriate allocation of expenditure for determination cost of products or services and for the
presentation of suitably arranged data for purpose of control and guidance of management.”

It holds

 Collecting, classifying, recording, allocating and analyzing the costs

 Preparation of periodical statements and reports for ascertaining and controlling costs
 Application of Cost Control Methods
 Ascertainment of profitability of activities carried out or planned.

DIFFERENCE BETWEEN COSTING & COST ACCOUNTING

COSTING COST ACCOUNTING

It means determining the cost of products or services It is a formal system of accounting by means of which
by any technique or process like formal records based costs of products or services are ascertained and
on double entry system. controlled

OBJECTIVES OF COST ACCOUNTING

The basic objective of cost accounting is to ascertain the cost of a cost centre (i.e, a
To Ascertain Cost location, person or item of equipment or group of these). Cost ascertainment is the
process of determining costs after they have been incurred.

It aims at controlling costs by using various techniques such as Budgetary Control.

To Control Cost
Standard Costing, Inventory Control etc.

It aims at providing information for various managerial decisions like

To Provide
Information for  Whether to make or buy a component
Decision- Making  Whether to retain or replace an existing machine
 Whether to process further or not
 Whether to shut down or continue operations
It provides cost information to determine the selling Price of products or services.
To Determine
During the period of depression, it guides the management to decide 'How much
Selling Price
reduction In selling price may be made to meet the situation?

To Ascertain It aims at ascertaining the costing profit or loss of any activity on an objective basis by
Costing Profit matching cost with revenue of that activity

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 DIFFERENCE BETWEEN FINANCIAL ACCOUNTING & COST ACCOUNTING

FINANCIAL ACCOUNTING COST ACCOUNTING

Its objective is to provide Its objective is to ascertain cost, to

Information about overall financial control cost and to provide
Objective
performance and financial position Information for decision-making.
of the business

It shows the over al l profit/loss of it shows the detailed cost and profits
Analysis of Costs and Profit the entire organization for each product, process, job,
contract, etc

Its emphasis is on reporting and not Its emphasis is on control on material

Control/Reporting
on control cost, labour cost and overheads

Financial accounts are of limited use Cost accounts are basically designed
in decision making to facilitate decision making in the
Decision Making
areas of production, purchase, sales
etc.

Its focus is on historical data Its focus is on present and future

data. It makes use of both the
Focus on Present/Future
historical costs and predetermined
costs

Financial accounts of companies Preparation of cost records is

have to meet requirements of the voluntary, except in a few cases
Legal Requirements
Companies Act and the Income Tax where the law makes it mandatory
Authorities

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Elements of Cost

Any product that is manufactured is the result of consumption of some resources. The management, for its
planning and controlling functions, must know the cost of using these resources. The essential elements of cost
are broadly classified into three distinct elements:

 Direct Material Cost

 Direct Labour Cost
 Other Production Cost
o Direct Cost
o Indirect
Elements of cost

Direct Cost
It is a cost can be identified or traced in full to the product or services for which cost is being determine.

 Direct Material Costs

Those are the specific costs of material that are known to have been used in producing and selling a
product or rendering services.

 Direct Labour
Those are the specific costs of the workforce used to produce a product or rendering a service.

 Direct Expenses
Those expenses that have been incurred in full as a direct consequence of producing a product, or
rendering a service.

Indirect /Overhead Cost

CIMA, London, defines Overhead Cost as

“The aggregate of indirect material cost, indirect wages and indirect expenses”

 Indirect Material
Material cost which cannot be allocated or identified, but which are to be absorbed by the units
produced.

Examples

 Stores used for maintaining machines such as lubricant oil, grease, and cotton waste etc.
 Stores used by service department like power and boiler houses

 Indirect Labour
Indirect labour is that labour which cannot be readily identified with a specific job. It includes all labour
not directly engaged in converting raw-materials into finished goods.

Examples

 Labour employed in Human Resource Department

 Labour employed in Selling Department
 Labour employed in Repairs & Maintenance Department

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  Indirect Expenses
All indirect costs other than indirect material and labour costs are termed as indirect expenses

Examples

 Rent, Rate and Taxes of Building

 Repairs, Insurance and Depreciation of building ,plant and machinery
 Lighting, heating and cleaning expenses

Classification of Costs by its Variability or Behavior

Basically the cost of production has two behaviors:

 Fixed Cost
 Variable Cost
Fixed Cost

It is a cost which tends to be constant by increases or decreases in the activity level.

Examples

 Rent, Insurance premium of Building

 Salary of the production manager (monthly or annual)
 Depreciation on straight line method

Variable Cost

It is a cost which tends to vary directly with change in activity level. The variable cost per unit is the same amount
for each unit produced whereas total variable cost increases as volume of output increases.

Examples

 Rent, Insurance premium of Building

 Salary of the production manager (monthly or annual)
 Depreciation on straight line method

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 SPECIMEN
ABC COMPANY LIMITED
STATEMENT OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED----------
Direct Raw Material Consumed (Used) Rs Rs Rs
Opening Inventory of Raw Material XXX
Add: Raw Material Purchased XXX
Carriage in XXX
Less: Purchase Return & Allowance (XXX)
Purchase Discount (XXX) (XXX)
NET PURCHASES XXX
Raw Material available for use XXX
Less: Closing Inventory of Raw Material (XXX)
Direct Raw Material Consumed (Used) XXX
Add: Direct Labour XXX
Add: Direct Expenses XXX
PRIME COST XXX
Add: Factory Overheads
Indirect Material XXX
Indirect Labour XXX
Indirect Expenses XXX
TOTAL FOH XXX
Manufacturing Cost for the period XXX
Add: Opening Inventory of Work in Process XXX
Total Cost of Work in Process XXX
Less: Closing Inventory of Work in Process (XXX)
Cost of Goods Manufactured/Product Cost XXX

ABC COMPANY LIMITED

INCOME STATEMENT
FOR THE YEAR ENDED----------
Sales XXX
Less: Sales Return & Allowance (XXX)
Sales Discount (XXX) (XXX)
Net Sales XXX
Less: Cost of Goods Sold
Opening Inventory of Finished Goods XXX
Add: Cost of Goods Manufactured XXX
Less: Closing Inventory of Finished Goods (XXX)
Cost of Goods Sold (XXX)
GROSS PROFIT XXX
Less: Operating Expenses
Selling and Distribution Expenses (XXX)
Admin and General Expenses (XXX)
Total Operating Expenses (XXX)
NET INCOME XXX

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