Introduction to Cost and management Accounting

Cost Accounting:
Cost Accounting is a quantitative method that accumulates, classifies, summarizes and interprets
financial and non-financial information.
Cost accounting means determining the cost of producing specific products or services.
Previously cost accounting was considered as a technique for the ascertainment of cost of
products or services. Due to the competitive nature of the market or business, ascertaining of
cost is not so important or material than controlling cost. i.e. in this stage , cost accounting
means determining the product cost and control them. But due to the technological
developments in all fields, cost reduction has also come within the ambit of cost accounting.

According to Horngren, Cost accounting is a quantitative method that accumulates, classifies,

summarizes and interprets information for the following three major purposes:

 Ascertainment of cost of a product or service

 Operational planning and control and
 Decision making.
So cost accounting is concerned with recording, classifying and summarizing cost for
determination of cost of products or services, planning, controlling and reducing such costs and
furnishing of information to management for decision making.

Objectives of Cost Accounting:

i. Determination of Cost
ii. Planning of Cost
iii. Analysis of Cost
The Role of Cost Accounting
Cost accounting furnishes management with the necessary accounting tolls for planning and
controlling activities. Specifically, the collection, presentation, and analysis of cost data should
help management accomplish the following tasks:
1. Creating and executing plans and budgets for operating under expected competitive and
economic conditions.
2. Establishing costing methods and procedures that permit control and, if possible,
reductions or improvements of costs.
3. Creating inventory values for costing and pricing purposes and, at times, controlling
physical quantities.
4. Determining company costs and profit for and annual accounting period.
5. Choosing from among two or more alternatives which might increase revenues or
decrease costs.

Financial Accounting vs. Cost Accounting

Financial accounting is concerned with providing information to external users. But cost
accounting is prepared for the internal users. Financial accounting is oriented towards the
preparation of financial statements which summarize the results of operations for selected

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periods of time and show the financial position of the business at particular dates. Cost
accounting often provides detailed information about manufacturing or rendering particular
product or service. Financial accounting prepares report according to GAAP as a mandatory
obligation.
[Definition; Actual and Estimated; Valuation of Stock; User; GAAP ; Flexibility; Total and
Segmented profit; Using data and Preparation time]

Methods of Costing:
The major methods are:
i) Job costing
ii) Process costing and
iii) Farm costing
Techniques of Costing:
The major Techniques are:
i) Absorption costing
ii) Standard costing
iii) Variable/Marginal costing
iv) Uniform costing
v) Target costing

Classification of Cost : General

Manufacturing Costs

Direct Materials Direct Labor Manufacturing overhead

Prime Cost Conversion Cost

Non-Manufacturing Costs
.

Marketing or Selling Costs Administrative Costs

Direct materials:
Those materials that become an integral part of a finished product and can be
conveniently traced into it.
Direct Labor:

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Those factory labor costs that can be easily traced to individual units of product.
Manufacturing Overhead:
All costs associated with manufacturing except direct materials and direct labor.
Marketing or Selling Costs:
All costs necessary to secure customer orders and get the finished product or service into
the hands of the customer.
Administrative Costs:
All executive, organizational and clerical costs associated with the general management
of an organization rather than with manufacturing, marketing or selling.

Product costs versus period costs:

Product Cost:
All costs that are involved in the purchase or manufacture of goods.
Period costs:
Those costs that are taken directly to the income statement as expense in the period in which
they are incurred or accrued such costs consist of selling (Marketing) and administrative
expenses.
1) Cost Classifications for Predicting Cost Behavior:
i. Variable cost
ii. Fixed cost
Variable Cost:
Variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity.
Fixed Cost:
Fixed cost is a cost that remains constant, in total, regardless of changes in the level of activities
within the relevant range.
2) Cost classifications for assigning costs to cost objective:
i. Direct cost.
ii. Indirect cost.
Direct Cost:
Direct cost is a cost that can be easily and conveniently traced to the particular cost
object-under consideration.
Indirect Cost:
A cost that can not be easily and conveniently traced to the particular cost object under
consideration.

3) Cost Classifications for Decision Making:

i. Opportunity cost
ii. Sunk cost.

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Opportunity Cost:
The potential benefit that is given up when one alternative is selected over another.
Sunk Cost:
Any cost that has already been incurred and that can not be charged by any decision make now
or in the future.
Responsibility Center
Cost Center:
A cost center incurs costs but does not directly generate revenues.
Profit center:
A Profit center incurs costs and also generates revenues.
Investment center:
An investment center incurs costs and generates revenues and has control over the investment
funds available for use.

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 Specimen of Cost Sheet
Cost Sheet for the period of -----------
Production of -----------Units

Tk. Tk.
Direct Materials:
Opening Stock of raw materials
Add. Purchases
Add. Carriage inward
Less Return to suppliers
Less. Scrap/ abnormal loss of raw materials
Materials available for use
Less. Closing stock
Less Indirect materials iused
Direct material consumed Xxx
Direct Wages Xxx
Direct Expense Xxx
Prime Cost XXX
Add. Factory overheads:
Indirect materials
Loose tools
Indirect wages
Rent and rates (Factory)
Lighting and heating
Power and fuel
Repairs and maintenance
Cleaning
Drawing office expenses
Cost of research and experiments
Depreciation of factory plant
Works stationary
Welfare services expenses
Insurance expenses
Insurance-Fixed assets etc.
Insurance-Stock and finished goods
Works manager’s salaries/payroll
General factory overhead
Total factory overhead ****
Total manufacturing cost XXX
Add. Opening Work-in process
Less. sale of scraps
Less. Closing work-in process
Cost of goods manufactured/ Factory/ Works cost XXX
Add. Office and Administrative Overheads:
Rent and rates (office)
Salaries (office)
Lighting and heating
Insurance of office building and equipment etc.
Telephone and postages

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 Printing and stationary
Depreciation of furniture and office equipment buildings
Legal expenses
Audit fees
Bank charges
Cost of Production XXX
Add. Opening finished goods
Cost of goods available for sale
Less. Closing finished goods
Cost of goods sold
Add. Selling and Distribution Overheads
Showroom rent and rates
Lighting and heating
Salesmen’s salaries
Commissions
Traveling expenses of salesman
Sales printing stationary
Advertising
Bad debts
Postage
Depreciation and expenses
Carriage freight outwards
Samples and other free gifts
Cost of Sales XXX
Net Profit XXX
Sales Price

Example 1.
From the following particulars prepare a statement showing (a) Cost of materials used, (b) Prime
cost, (c) Works cost, (d) Total cost of goods sold and (e) Profit for the year ended 31 st December
2001:
Tk.
Stock of Raw Materials on 01-01-07 5,000
Stock of Finished Goods 01-01-07 9,000
Purchase of Raw Material s (less discount) 26,000
Direct Expenses 3,000
Direct Labor 18,500
Finished Goods Sold (less discount) 80,000
Stock of Raw Materials 31-12-07 3,500
Stock of Finished Goods 31-12-07 6,000
Factory Overhead-20% on Direct Labor cost
Administrative and Selling Overhead-10% each on works
Example 2.

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The Records of the Sunshine Corporation show the following information for the six months
ended 30th June, 2008:
Raw materials used in production 18,000
Productive labor 11,000
Unproductive factory labor 5,000
Factory supplies 900
Sales salaries 3,000
Administrative salaries 6,000
Other factory expenses 2,600
Miscellaneous selling expenses 2,000
Sundry administrative expenses 1,500
Depreciation (75% Manufacturing, 15%
Administrative and 10% Selling expenses) 10,000
Goods completed and sold during the period 5,000 units. Sales price per unit tk. 16.
Required :
(1) A statement showing the total cost of goods manufactured and profit earned.
(2) The sale price per unit for earning the same percentage of profit on sales for the same
volume of production in the Next six months if the production cost is increased by 10%
and the selling expenses are reduced by 15%.
3. Information relating to production and sale of ‘CAREX’ is as follows:

Taka Taka
Direct materials 58,200 Depreciation of Plant 8,400
Direct expenses 3,200 Misc. factory expenses 9,600
Indirect materials 6,700 Office stationary 1,500
Direct wages 44,700 Sales commission 4,500
Power 4,900 Misc. office expenses 5,300
Wages of foremen 20,600 Misc. selling expenses 3,800
Salaries 24,900 Sales 2,10,000
Salaries are to be apportioned at 30% works, 50% office and the balance as sales.
Calculate cost of production, cost of goods sold and net profit.
4. The following information is obtained from a manufacturing concern for a year ended
31st December 2017
1st January 31st December
Inventories: Taka Taka
Raw materials 11,200 9,200
Work-in-progress 4,300 5,200
Finished Stock 7,400 9,100

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 Purchase of raw materials Tk. 1,24,000
Direct wages:
Department A-32,000 hours @Tk. 4
Department B-24,000 hours @Tk. 5
Factory overhead :
Fixed-Tk. 76,000
Variable-Tk. 1.75 per direct labor hour
Administrative expenses-7.5% of works cost
Selling expenses-60% of administrative expenses.
Net profit -20% of sales
Ascertain works cost, cost of goods finished, total cost of goods sold and sales.
5. The following cost and inventory data for the just completed year are taken from the
accounting records of Ruhan Company:
Advertising expense tk. 100,000
Sales discount tk.1,000
Purchase return tk.2,000
Return inwards tk. 1,500
Purchase discount tk.3,000
Bad debts tk.4,000
Insurance tk.10,000
Income tax tk.6,000
Fuel and power tk.14,000
Heat and light tk,3,200
Bond interest tk. 5,000
Direct Labor cost tk. 80,000
Rent factory building tk. 70,000
Purchase of raw materials tk. 130,000
Indirect Labor tk. 50,000
Interest on working capital tk 5,000
Sales Commission tk. 35,000
Utilities, factory tk. 9,000
Maintenance, factory equipment tk. 24,000
Supplies factory tk. 800
Depreciation, office equipment tk. 9,000
Depreciation, factory equipment tk. 40,000
Selling and administration exp. tk. 20,000
Total sales for the year tk. 10,00,000
Inventories: Beginning of year End of year
Raw materials tk. 7,000 Tk. 8,000

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 Work-in-process tk. 6,000 tk. 10,000
Finished goods tk. 30,000 tk. 15,000
Insurance cost should be considered for factory, office & administration and selling &
distribution 40%; 30% and 30% respectively. Required :
Prepare a cost statement and Income statement

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