Cost Accounting

Lecture 1

Cost Accounting

Cost accounting measures, analyses and reports the

cost of acquiring and using resources in an
organization.
Cost is a resource sacrificed
Expense is when the cost is incurred and benefit is
derived
Cost accounting is different from Financial
accounting-purpose, flexibility, details, use of
standards, forward looking ,legal requirements,
report formats
Important functions of cost accounting: Cost
ascertainment, cost analysis, cost control

Why cost accounting?

Calculation of cost of different cost objects

products, services

Obtaining information for planning & control

and performance evaluation

Analysing the relevant information for

making decisions

Important terminologies

Cost object: any activity or item for which a

separate cost measurement is desired. This
can be product, service, customer, project,
activity, department , location
For eg: For Honda , different cars like Accord,
City can be cost objects

Cost unit- It is a quantative unit or product

pertaining to the cost object in relation to
which the costs are ascertained: units
manufactured, amount spent per month

Important terminologies
contd

Cost Center: accumulation of costs for a similar

nature; useful for measuring costs spent for a
particular purpose

Profit center responsible for costs and

revenues, strategic business unit

Investment centre responsible for revenues,

costs and investments . Here not only revenues
are measured but utilization of assets and
alternative use of assets is also tracked

Important terminologies
contd

Cost driver- a variable that impacts total costs

incurred
For eg: units manufactured, hours worked etc

Relevant Range the expected range of

volume over which fixed costs remain fixed
and variable costs vary with volume
proportionately. Beyond this, fixed costs may
increase or variable costs may reduce due to
discounts

Important terminologies
contd
Cost classification
On the basis of function
Production, Marketing, Design, Customer Service,
Distribution

On the basis of traceability to cost object

Direct cost- costs that can be clearly identified to the
cost object . These are generally under the control of
the manager of the cost object
Indirect costs All costs other than direct costs

Solve example what happens when the cost

object changes?

Important terminologies
contd

On the basis of behaviour

Fixed cost- total amount spent does not change
Variable cost cost per unit does not change

On the basis of aggregate or average

o Total cost/full cost
o Average cost total cost divided by number of
units (be careful of this measure on a/c of fixed
costs)

Important terminologies
contd

On the basis of decision making

opportunity costs-value of alternative that are given up in
order to use the resource in the manner the organization
has chosen
o Sunk costs - costs which are already incurred and cannot
be reversed. These have no relevance to future decisions to
be made
o Joint costs costs that are incurred for treating different
types of patients. These costs would be incurred unless the
organization stops treating all those types of patients
o Marginal cost/Differential cost change in the cost due to
change in level of activity (need not be one unit). These can
include variable costs and Fixed costs because the volume
change is beyond the relevant range for fixed costs

Important terminologies
contd

Inventoriable costs are applicable only for Merchandising

or Manufacturing companies ,not for service companies
Selling & Distribution costs are always period costs for all
types of companies

on the basis of type

Inventoriable costs /Product costs- costs that can be assigned
to inventory (part of balance sheet current assets ) and
hence charged to income statement only when sold
Period costs - costs which are not assigned to inventoryexpensed in the income statement and has no relation to the
units sold or the timing when the inventory was sold ,or not
expected to benefit future periods. For eg: Selling & Marketing
overheads

Cost sheet
Refer cost sheet circulated
Items to be excluded from cost sheet
1. Purely Financial Charges

Loss on sale of investments, Fixed assets

Fines & penalties
Interest on debentures , bank loan
Obsolescence loss of machinery before its life
ends

Damages payable to court of law

Cost sheet(items
excluded)

2. Purely Financial Incomes

Interest received on Bank deposits

Rent/Interest/Dividend receivable
Profit on sale of investments, Fixed assets
Damages received from court of law

3. Appropriation of profits

Writing off of goodwill , preliminary expenses,

capital raising expenses, discount on issue of
shares, debentures

Dividend on shares

Transfer to reserves

Cost sheet(items
excluded)

4. Abnormal gains/Losses
o
o

Charitable donations
Abnormal loss of materials, labour

Reference Books

Horngreen & Datar

M N Arora

Khan & Jain

Thank You