Cost Accounting

COST

 For an average man , cost means what he actually

pays to obtain the desired article i.e. the price paid
for something.
 In management terminology, it refers to expenditure
and not the price.
 Cost is the cash or equivalent value sacrificed to
obtain some goods or services.
 Cash equivalent means the non cash assets can be
exchanged for the desired goods or services
 The Official Terminology of Management
Accounting published by the Institute of Cost
and Management Accounting (ICMA) London
in 1982 defines the term cost as “the amount
of expenditure (actual or notional) incurred
on ,or attributable to a specified thing or
activity”
 According to this definition, cost may be the
actual expenditure or notional charges.
Notional charges are those which do not
involve cash outlays. They are not entered in
the books of account . But they are important
for decision-making.
 Examples-cost of land, capital and other
resources owned and supplied free of charge
by the proprietor of the business.
 Expenses- the term cost, expenses and loss
are often used interchangeably. These words
should be used at the right place to convey
the exact idea. Expenses are costs which
have been applied against the revenue of a
particular period. It includes all expired costs
which are deductible from revenues. Losses
are reduction in firms equity for which no
compensating value has been received.
CLASSIFICATION OF COST

 Traditional Classification
1. Direct Material
2. Direct Labour
3. Direct expenses
4. Factory overhead
5. Administrative
6. Selling and distribution overhead
 Classification in relation to Changes in
Output, Activity or Volume-
1. Fixed cost
2. Variable cost
3. Semi-variable cost
 According to degree of trace ability to the
product-
1. Direct cost

2. Indirect cost
 According to the degree of association with
the product-
1. Product cost
2. Period cost
 Functional classification of costs-
1. Manufacturing cost
2. Selling and distribution cost
3. Administrative cost
 Costs for decision making and planning
1. Opportunity cost
2. Sunk cost
3. Relevant cost
4. Differential cost
5. Imputed cost
6. Out of pocket cost
7. Shutdown cost
8. Direct and indirect cost
 Costs for control-
1. Controllable cost and uncontrollable cost
2. Standard cost
3. Fixed, variable and mixed cost
Traditional classification

COST

MATERIAL LABOUR EXPENSES

DIRECT INDIRECT DIRECT INDIRECT DIRECT INDIRECT

Fixed cost- fixed cost is a cost which does not
change in total for a given time period despite by
fluctuation of output or volume of activity
Example- rent,electricity bill, managers salary,
auditors fees
variable cost- cost that vary in total amount directly
and proportionately with the level of output.
Eg- workers, material, direct expenses
 Mixed costs- costs made up of fixed and
variable elements. They are the combination
of semi- fixed and semi- variable cost.
 Example- incentive payments, electricity bill
Direct cost-the costs that are clearly identifiable and
traceable to a costing object or a product called
direct cost
Eg- direct material; direct labour and expenses
Indirect cost- the costs that are not clearly traceable
with a product called as indirect cost
Eg- rent, salaries, postage and stationary
 Product cost- costs which are identified with
the product includes- direct material, direct
labour, direct expenses and manufacturing
overheads
 Period cost-costs that are not directly
related to product .they are treated as
expenses in the period in which the costs are
incurred
 Opportunity costs-An opportunity cost is
the benefit given up or sacrificed when
alternative is chosen over another.
Opportunity cost is the income foregone by
selecting another alternative. Opportunity
costs are important in decision making and
evaluating alternatives.
 Sunk cost-A sunk cost is the cost that has
already been incurred .It is a past or
committed cost, cost gone forever. thus, any
historical cost called sunk cost.
 Relevant cost- are those future cost which
differ between alternatives. Relevant cost
may also be defined as the costs which are
affected and changed by a decision. If a cost
increases, decreases, appears or disappears
as different alternatives are compared, it is a
relevant cost.
 Differential cost- Differential costs are also
known as incremental costs. Decision is taken after
evaluating all the alternatives and the most profitable
is selected may be because of profitability or least
costly. Differential cost is the difference in total costs
between any two alternatives.
 Differential cost = additional variable expenses
incurred in respect of the additional output plus
the increase in fixed costs, if any
 Imputed cost- Cost do not enter into traditional
accounting systems. But they being related with
economic reality, help in making better decisions
 The cost incurred by proprietor for rendering his own
services
 Paying interest on capital contributed by owner
 Paid rent on land owned by owner
 Shut down cost- Shut down cost are those costs
which have to be incurred under all situations in the
case of stopping manufacture of a product or closing
down a department or a division. Shut down cost are
always fixed costs. If the manufacture of the product
is stopped, variable cost like direct materials, direct
labour, direct expenses, variable factory overhead
will not be incurred but fixed expenses will be
incurred such as – rent, salaries, poperty taxes etc.
 Out of pocket cost- While imputed cost do not
involve cash outlays, out of pocket cost signify the
cash associated with an activity,on cash such as
depreciation are not included in out of pocket cost.
 This concept is significant for management in
deciding whether or not a particular project will at
least return the cash expenditures associated with
the project selected by management
 Controllable cost- variable cost
 Uncontrollable cost- fixed cost
 Direct cost  Indirect cost
 Variable cost  Fixed cost
 Product cost  Period cost
 Controllable cost  Uncontrollable cost
 Marginal cost
Cost sheet

 Prime cost

 Factory cost / work cost

 Administration cost / office cost

 Selling and distribution cost

Calculation of Prime cost

 Opening stock
(+)Purchases- purchase return
(-)Closing stock
=Material consumed
(+)direct labour
(+)direct expenses
=PRIME COST
 PRIME COST
(+)Factory overheads
depreciation on machinery
Foreman salary
Depreciation on factory furniture
Factory rent
Factory taxes and insurance
Factory heat and power
=FACTORY OR WORK COST
ADMINISTRATION COST OR OFFICE
COST

FACTORY COST
(+) office cost
Managers salary
Rent (office)
Auditors fees
Electricity bill
Computer operations cost
Depreciation on furniture
Depreciation on building
Taxes
Selling and distribution cost

OFFICE COST
(+) Selling and distribution expenses-
Advertisement
Promotional expenses
Vans expenses
Warehouse expenses
Traveling exp.
Commission to sales person
Date Particulars Total Cost Cost p.u.
Cost sheet
PRIME COST *

FACTORY COST **

OFFICE COST ***

S&D COST ****

PROFIT MARGIN *

SALES(S.P) *****