Introduction to Costing

Kailashinie Thiranagama
B Sc Accounting Sp (First Class Honors)- University of Sri Jayewardenepura
Passed Finalist (Institute of Chartered Accountants of Sri Lanka )
 Cost Accounting
Cost accounting is concerned with and
recording, classifying summarizing
costs for determination of costs of
products or services, planning, controlling
and reducing such costs and furnishing of
information to management for decision
making
 Key Terms
Cost - Cost means the amount of expenditure
(actual or notional) incurred on, or attributable to,
a given thing
Cost Objects – Any activity or thing for which a
separate measurement of cost required
Responsibility Centers – An organization unit
headed by a manager who is responsible for the
activities of the unit
Cost Centers – A unit or department for which
cost is ascertained before attributing to a specific
cost unit
 Classification of Cost
1.Cost classification for inventory
valuation and profit measurement
purpose
(i) Direct Cost and Indirect Cost
(ii) Manufacturing and Non Manufacturing
Cost
(iii) Product Cost and Period Cost
(iv) Job Costs and Process Cost
 Classification of Cost
2. Cost classification for decision Making
(i) Fixed, Variable, Semi Fixed, Semi
Variable Cost
(ii) Relevant and Irrelevant Cost
(iii) Sunk Cost
(iv) Opportunity Cost
(v) Marginal Cost
 Classification of Cost
3.Cost classification for control
(i) Controllable Cost
(ii) Uncontrollable Cost
1.Cost classification for inventory valuation
and profit measurement purpose
(i) Direct Cost and Indirect Cost
Direct Cost
Cost that can be specifically and
exclusively identified with a specific cost
object/unit in an effective manner
(a) Direct Material Cost
(b) Direct Labour Cost
(c) Direct Expenses
1.Cost classification for inventory valuation
and profit measurement purpose
(i) Direct Cost and Indirect Cost
Indirect Cost
Costs that cannot be specifically or
exclusively, identified with a cost object in
an effective manner
(a) Indirect Material Cost
(b) Indirect Labour Cost
(c) Indirect Expences
1.Cost classification for inventory valuation
and profit measurement purpose
(ii) Manufacturing Cost and Non Manufacturing
Cost
Manufacturing Cost
Costs incurred for manufacturing a product
Direct Material Cost xxx
Direct Labour Cost xxx
Direct Expenses xxx
Prime Costs xxx
Manufacturing overhead cost xxx
Total Manufacturing cost xxx
1.Cost classification for inventory valuation
and profit measurement purpose
Non Manufacturing Cost
Costs incurred for the activities other than
manufacturing of a product
 1.Cost classification for inventory
valuation and profit measurement purpose
(iii) Product Cost and Period Cost
Product Cost
Costs that are identified with goods
purchased or produced for resale
Period Costs
Costs which are attached to a specific
period
 1.Cost classification for inventory
valuation and profit measurement purpose
(iv) Job Cost and Process Cost
Job Cost
Costs which are attached to a specific job
Process Costs
Costs which are attached to a manufacturing
process
 2.Cost classification for decision making
(i) Fixed, Variable, semi fixed, semi
variable cost
Variable Cost
Costs that are vary in direct proportion to
the level of activity (production volume)
Total Variable Cost Variable Cost/Unit
TVC Cost
TVC
VC

Activity Level Activity Level

2.Cost classification for decision making
Fixed Costs
Costs that remains constant over wide
ranges of activity for a specific time period
Fixed Cost/unit Total Fixed Cost
Cost Cost

Activity Level Activity Level

2.Cost classification for decision making

Semi – Fixed cost

Costs that jump in to different fixed levels at
critical [points of activity within short run

Cost
Semi FC

Activity Level
2.Cost classification for decision making

Semi Variable Costs

Costs that consists of both variable and
fixed component
Cost
Semi Variable Cost

Activity Level
2.Cost classification for decision making

(ii) Relevant Cost and Irrelevant Cost

Relevant Cost
Costs that differ among alternative
courses of action
Irrelevant Costs
Costs that do not differ among alternative
courses of action
2.Cost classification for decision making

(v) Sunk Cost

Cost that have already been incurred for the
acquired assets
(iv) Opportunity Costs
Expected benefits of the opportunity that is lost
or scarified when choice of one course of the
action. This cost is relevant for the decision
(vi) Marginal Cost
Additional cost of one extra unit of output
 3.Cost classification for control

(i) Controllable Cost

Cost that are reasonably subject to regulation by
the manager and he can influenced on cost
(ii) Uncontrollable Cost
Costs that are not reasonably subject to
regulation made by the manager with whose
responsibility those cost are being identified.
Exercises