Cost accounting:

Cost accounting refers to the process of determining the cost of some particular product or activities. Cost
accounting is the science, art and practice of cost accountant.
Cost accounting may be described as being that part of the accounting procedure of the enterprise which
deals with the task of determining, reporting, analyzing and controlling the cost of particular process, job,
service unit or department of a company.
Cost and management an account of England has been defined as the techniques and process of ascertaining
costs.

Objectives of cost accounting: Cost accounting aims primarily (primarily objective of Cost accounting is to
serve the information needs of management for planning, control and decision making.) to serve the
information needs of management for planning, control and decision making. Cost accounting has three
important objectives:
(i) to determine product costs; (ii) to facilitate planning and control of regular business activities; (iii) to
supply information for short and long run decisions.

Cost: Cost is a sacrifice of resources to obtain a benefit or any other resource. For example in production of
a car, we sacrifice material, electricity, the value of machine's life (depreciation), and labor wages etc. Thus
these are our costs.

Basis of classification :
1) Natural/ General Classifications of costs/Elements of cost
• Material
• Labour
• Expenses
2) Degree of Traceability to product
• Direct cost: (D. Material, D. Labour and D. Expenses)
• Indirect cost: ( Ind. Material, Ind. Labour and Ind. Expenses)
3) Cost behavior (In relation to changes in output, activity or volume)
• Fixed cost
• Variable cost: (D. Material, D. Labour and D. Expenses)
• Mixed cost (semi-variable and semi-fixed cost)
4) Functional Classification of Costs
• Manufacturing/Production cost
• Selling and distribution cost
• Administrative cost
5) Costs for decision Making and Planning
• Opportunity Cost, Sunk cost, Relevant cost, Standard Cost ,Budgeted Cost, Differential cost,
Marginal cost.

1. Natural/ General Classifications of costs/Elements of cost

• Material Cost: This is the cost of material or the commodity used by the organisation for its
production purpose. Material is the substance, from which a product is made. Thus, it may be in a
raw or a manufactured state. It can be direct or indirect.

Direct Material Cost forms an integral part of the finished product and is identified with the
individual cost centre. It is also described as process material, stores material, production material,
etc. Example: Raw materials purchased or purchased primary packing material, etc.
 Indirect Material: Cost is used for ancillary purposes of the business and cannot be conveniently
identified with the individual cost centre. Example: Consumable stores, oil and waste, printing and
stationery material etc.

Labour Cost: This is the cost, incurred in the form of remuneration paid to the employees or labours
of the organisation. The workforce required to convert material into finished product is called labour.
It can be direct or indirect.

Direct Labour Cost is the cost incurred on those employees who directly take part in the
manufacturing process and easily identified with the individual cost centre.

Indirect Labour Cost is the cost incurred on those employees who do not directly take part in the
manufacturing process and cannot identified with the individual cost centre. Example: salary of
foreman, salesmen, director’s salary, etc.
Direct materials: Represents the cost of the materials that can be identified directly with the product
at reasonable cost. For example, cost of paper in newspaper printing, cost.

Direct labor: Represents the cost of the labor time spent on that product, for example cost of the time
spent by a petroleum engineer on an oil rig, etc.

Expenses: Expenses are the costs of services provided to the organization. It can be direct or direct.

Direct Expenses are the expenses which can be directly identified with the individual cost centers.
Example: hire charges of machinery, cost of defective work for a particular job or contract etc.

Indirect Expenses are the expenses which cannot be directly identified with the individual cost
centres. Example: rent, lighting, telephone expenses, etc.

2. Degree of Traceability to product:

The product costs that can be specifically identified with each unit of a product are called direct product
costs. Whereas those which cannot be traced to a specific unit are indirect product costs. Thus direct
material cost and direct labor cost are direct product costs whereas manufacturing overhead cost is indirect
product cost.

1. Direct costs - those that can be traced directly to a particular object of costing such as a particular
product, department, or branch. Examples include materials and direct labor. Some operating expenses can
also be classified as direct costs, such as advertising cost for a particular product.

2. Indirect costs - those that cannot be traced to a particular object of costing. They are also called common
costs or joint costs. Indirect costs include factory overhead and operating costs that benefit more than one
product, department, or branch.

3. According to Behavior in Accordance with Activity

1. Variable costs - vary in total in proportion to changes in activity. Examples include direct materials,
direct labor, and sales commission based on sales. Variable costs are costs which change with a change in
the level of activity. Examples include direct materials, direct labor, etc.

2. Fixed costs - costs that remain constant regardless of the level of activity. Examples include rent,
insurance, and depreciation using the straight line method. Fixed costs are costs which remain constant
within a certain level of output or sales. This certain limit where fixed costs remain constant regardless of
the level of activity is called relevant range. For example, depreciation on fixed assets, etc.

3. Mixed costs - costs that vary in total but not in proportion to changes in activity. It basically includes a
fixed cost potion plus additional variable costs. An example would be electricity expense that consists of a
fixed amount plus variable charges based on usage.

Manufacturing overhead: Represents all production costs except those for direct labor and direct materials,
for example the cost of an accountant's time in an organization, depreciation on equipment, electricity, fuel,
etc.

4. Functional Classification of Costs;

All costs of a manufacturing organization may be divided into manufacturing, marketing and administrative
defined as follows:

Manufacturing/ Production cost- manufacturing, costs are related to the production of an item. They are
the sum of direct materials, direct labor, and factory overhead costs. This is the cost of the sequence of
operations which begins with supplying material, labour and services and ends with packing of the product.

Prime costs are the sum of all direct costs such as direct materials, direct labor and any other direct costs.

Conversion costs are all costs incurred to convert the raw materials to finished products and they equal the
sum of direct labor, other direct costs (other than materials) and manufacturing overheads.

Selling/Marketing- marketing costs are costs incurred in promoting a product or service.

Administrative -administrative costs are cost incurred in directing, controlling, and

operating a company and include salaries paid to management and staff.

5. According to Relevance to Decision Making

1. Relevant cost - cost that will differ under alternative courses of action. In other words, these costs refer to
those that will affect a decision.

Irrelevant costs are unaffected by management’s actions. Sunk costs are an example of irrelevant costs.
sunk costs are past costs that are now irrevocable, such as depreciation on machinery.

2. Standard cost - predetermined cost based on some reasonable basis such as past experiences, budgeted
amounts, industry standards, etc. The actual costs incurred are compared to standard costs.

3. Opportunity cost - benefit forgone or given up when an alternative is chosen over the other/s. Example:
If a business chooses to use its building for production rather than rent it out to tenants, the opportunity cost
would be the rent income that would be earned had the business chose to rent out.

4. Sunk costs - historical costs that will not make any difference in making a decision. Unlike relevant costs,
they do not have an impact on the matter at hand. It is irrelevant to future making financial decisions.

5. Out of pocket Cost: Out of pocket costs in managerial accounting are expenses that could be incurred or
avoided depending on management’s decisions. In other words, an out-of-pocket cost is a potential future
outlay of cash that management needs to decide whether or not to make. A good example of an out of pocket
cost is the purchase of new equipment. Company management plans for new equipment purchases well into
the future, sometimes even years into the future.
6. Controllable costs - refer to costs that can be influenced or controlled by the manager. Segment
managers should be evaluated based on costs that they can control.

7. Standard costs are those that should be incurred in a particular production process under
normal conditions. Standard costing is usually concerned with per-unit costs for direct materials, direct
labor, and factory overhead; it serves the same purpose as a budget

Cost and Expenses:

A cost might be an expenses or it might be an asset. An expense is a cost that has expired or was necessary
in order to earn revenues. We hope the following three examples will illustrate the difference between a cost
and an expense.

Cost statement:
Cost statement is a statement which is prepared usually to present the details cost of total output during the
period in question. It provides information relating to cost per unit at different stage of the total cost of
production.

Specimen of Cost statement:

Items /Particulars Amount
Direct/Raw material used: xx
Opening Stock of Raw/Direct Materials
Add: Purchases of Raw/Direct Materials
Less: Closing Stock of Raw/Direct Materials 135,000
Direct labour/Wages 75500+2500 xx 75,000
Direct expenses xx 00
Prime cost/ Variable cost/ Total Direct costs 210,000
Add: factory overhead 75000*80% 60,000
Production cost/Manufacturing cost/ Works Cost 270,000
Add: opening stock of work in process --
Less: closing stock of work in process --
Cost of goods finished/ Cost of Finished Product 5000 270000
Add: Opening stock of finished goods --
Goods Available for Sale --
Less: Closing stock of finished goods --
Cost of goods sold/ Cost of Sales 270000
Add: Administrative and office expenses 20000
Add: Selling and distribution expenses 11300
Total cost of goods sold 301300
Add: Profit 65700
Sales 367000
Notes:
Direct Material Used: Factory Overhead:
Opening Stock of Raw/Direct Materials Factory rent
Factory insurance
Add: Purchases of Raw/Direct Materials Factory Depreciation
Less: Closing Stock of Raw/Direct Materials Indirect materials
Indirect Labour/wages
Factory Supervision

Cost of Goods Sold:

opening stock of finished goods
Add: Cost of goods finished/ Cost of Finished Product
Goods Available for Sales
Less: Closing stock of finished goods
Working process: Working process represent the accumulated cost on goods that are in the production area,
but have not yet been completed.

Q.1. From the following particulars prepare a statement of cost:

Raw materials used TK 34000, Direct wages 1400 hours @ TK 2 per hour
Direct expenses TK 4000, Factory rent TK 1000
Factory insurance TK 2000, Indirect materials TK 5800
Sales Managers salary TK 5000, Selling Expenses TK 2000
Administrative Expenses TK 3000, Profit 20% on total cost of goods sold

Q.2. From the following information prepare a statement of cost:

Inventories Opening (Tk) Closing (Tk)
Raw Materials 10000 9000
Finished goods 12500 8500
Raw materials purchased Tk 250500. Direct labour cost Tk 120000. Factory overhead was 60% of direct
labour cost. Administrative cost 10% of work cost. Selling expenses Tk 25500. Profit 25% on total sales.

Q.3. The following data are related to the manufacture of a standard product during the month of January
2018. Raw materials consumed Tk.150000. Direct wages Tk.180,000. Factory overhead was Tk.120000.
Administrative overhead was Tk 45000. Selling overheads were Tk35000. Profit 20% on total cost of goods
sold. During the month the company produced and sold 5000 units.
The company plans to sell 6000 units next month. Material prices and wages rate and are expected to
increase by 10% and 15% respectively. 40% of factory overhead is variable. Other costs will remain
unchanged. Profit 25% on total cost of goods sold. You are required to prepare a statement of cost for the
month February 2018.

Q.4. The following data are related to the manufacture of a standard product during the month of December
2008. Raw materials consumed Tk.450000. Direct wage Tk.350000. Factory overhead was 75% of direct
wages. Administrative overhead 20% of works cost. Selling overheads were Tk5000. Profit 20% on total
cost of goods sold. During the month 5000 units were produced and sales were 4000 units.
The company plans to sell 6000 units next month. Wages rates and material prices are expected to increase
by 20% and 10% respectively. Factory overhead is applied on the basis of direct wages (Factory overhead
rate will remain unchanged). Other costs will remain unchanged. Profit 20% on total cost of goods sold. You
are required to prepare a statement of cost from the above.

Q.5.
The records of the Sunlight Company show the following information for the year ended 31st Dec. 2010:
Raw Materials used in Production Tk 20000 Other Factory expenses Tk 4600
 Productive labour Tk 13000 Miscellaneous expenses Tk 4000
Unproductive factory labour Tk 7000 Sundry Administrative Expenses Tk 3500
Factory Supplies Tk 2900 Depreciation Tk 1200
Sales Salaries Tk 5000 (75% Manufacturing, 15% Administrative and 10%
Administrative Salaries Tk 8000 Selling)
Goods completed and sold during the period was 5000 units and sales price per unit was Tk 18.
Required: Prepare a statement showing the total cost of goods manufactured and profit earned.

Q.6.The following data are related to the manufacture of a standard product during the month of December
2010. Raw materials consumed Tk.85000. Direct wage Tk.120,000. Factory overhead was 60% of direct
wages. Administrative overhead was Tk 15000. Selling overheads were Tk5000. Profit 20% on total cost of
goods sold. During the month production and sales were 4000 units.
The company plans to sell 5000 units in the next month. Wages rates and material prices are expected to
increase by 20% and 10% respectively. Factory overhead is applied on the basis of direct wages cost. Other
costs will remain unchanged. Profit 20% on total cost of goods sold. You are required to prepare a statement
of cost from the above.

Q. 7. From the following information prepare a statement of cost:

Opening Stock of Raw Materials Tk. 25000 Closing Stock of Raw Materials Tk. 30000
Opening Stock of Finished Goods Tk. 30000 Closing Stock of Finished Goods Tk. 35000
Opening Stock of Work in Process Tk. 20000 Closing Stock of Work in Process Tk. 10000

Raw materials purchased Tk. 455000. Direct labour cost Tk. 320000. Factory overhead was 75% of direct
labour cost. Administrative expenses Tk. 45000 and selling expenses Tk. 25000. Profit 30% on total sales.

Q.8. Cost analysis of Electro Ltd. showed that cost of materials was Tk. 80000 and direct labour cost
accounted for 60% of prime cost. Factory overhead was applied at 75% of direct labour cost. During the
period, 2900 units were produced of which 2500 units were sold @ rate of Tk. 200 per unit. Administrative
and selling expenses were Tk. 35000 Tk. 25000 respectively. Prepare a statement of cost showing total cost
of goods sold and profit