Cost

Accounting
Cost Accounting
Process of determining & accumulating
cost of product.
Measures operating efficiency of
enterprise.
Aims at providing :-
◦ Cost data
◦ Statements
◦ Reports
Cost Accounting
Costing involves :-
◦ Classifying
◦ Recording
◦ Allocation of expenditure
To determine the cost of product.
To ascertain profitability.
Objectives of Cost Accounting
Determining selling price
◦ Total product cost & cost per unit of product
are important.
Controlling cost
◦ Increases the efficiency of enterprise.
Ascertaining costing profit
◦ Determine costing profit or loss on any
activity
◦ By matching cost with revenue of activity.
Objectives of Cost Accounting
Providing information for decision making
◦ Determination of cost volume profit relationship.
◦ Make or buy a component.
◦ Shut down or continue operations at loss.
◦ Continuing with existing machinery or not.
Preparation of Financial statements
◦ Information regarding stock of,
 Raw material
 Semi-finished goods
 Finished goods
Elements of Costs
Material
◦ Substance from which product is made.
◦ Raw or manufactured state.
◦ Becomes an internal part of finished product.
◦ Two types of materials :-
 Direct Material
 Easily identified & related with specific product.
 For e.g., timber for furniture, sugarcane for making sugar.
 Indirect Material
 Cannot be easily identified & related with specific product.
 Used in factory, office, selling & distribution department.
 For e.g., printing & stationary.
Elements of Costs
Labour
◦ Main factor of production.
◦ Main element of cost in product.
◦ Two types of labour :-
 Direct Labour
 Takes direct & active part in production of commodity.
 Can be easily identified & related with specific product.
 For e.g., wages paid to carpenter for making furniture.
 Indirect Labour
 Labour not directly engaged in converting raw material into
finished product.
 For e.g., wages of store keeper.
Elements of Costs
Expenses
◦ All cost incurred in production other than,
 Material cost
 Labour cost
◦ Two types of expenses.
 Direct Expenses
 Directly, easily & wholly allocated to specific cost centre.
 For e.g., fees paid to architects, consultants.
 Indirect Expenses
 Cannot be directly, easily & wholly allocated to specific cost
centre.
 Treated as part of overheads.
 For e.g., Insurance & depreciation of fixed assets.
Overheads
Indirect
cost are referred to as overheads.
Overheads includes :-
◦ Indirect Material.
◦ Indirect Labour.
◦ Indirect Expenses.
Types of Overheads
Factory/ Works/ Production Overhead
◦ Indirect cost incurred in the factory.
◦ Concerned with the running of factory.
◦ Indirect material
 Consumable stores, factory printing & stationary.
◦ Indirect Labour
 Salary of factory manager, store keeper.
◦ Indirect Expenses
 Rent & insurance of factory building, Municipal
taxes.
Types of Overheads
Office & Administrative Overheads
◦ Expenses related to management &
administration of business.
◦ For e.g.,
 Office printing & stationary.
 Postage & stamp.
 Salary of cost accountant.
 Salary of legal advisor.
 Depreciation & repair of office building.
 Legal charges, bank charges, etc.
Types of Overheads
Selling & Distribution Overheads
◦ Incurred for :-
 Marketing of commodity.
 Securing orders.
 Dispatching goods sold.
◦ These overheads have 2 aspects:-
 Procuring orders – Selling overheads.
 Executing orders – Distributing overheads.
Types of Overheads
Selling & Distribution Overheads
◦ Selling Overheads
 Indirect Material
 Catalogues, postage & stamps.
 Printing & Stationary, Cost of sample.
 Indirect Lobour
 Salary of sales manager, clerk.
 Salary & commission of salesmen.
 Indirect Expenses
 Advertising, travelling expenses.
 Rent & insurance of showroom.
Types of Overheads
Selling & Distribution Overheads
◦ Distribution Overheads
 Indirect Material
 Cost of packing material.
 Indirect Labour
 Salary of go down employees.
 Wages of driver of delivery van.
 Indirect Expenses
 Packing expenses.
 Insurance in transit.
 Freight or carriage.
Classification of Cost
Fixed Cost
◦ Remains constant within given period of time.
◦ Inverse relation between fixed cost per unit &
production units.
◦ Production increases – fixed cost per unit
decreases.
◦ Production decreases – fixed cost per unit
increases.
◦ For e.g.,
 Rent & insurance of building,
 Depreciation on plant & machinery.
Classification of Cost
Output Total Fixed Cost Fixed Cost Per Unit
(in Units) (in Rs.) (in Rs.)
0 10000 10000

100 10000 100

1000 10000 10

2000 10000 5

5000 10000 2

10000 10000 1
Classification of Cost
Variable Cost
◦ Cost vary directly in proportion to change in
volume of production.
◦ Direct relation between total variable cost &
no. of output.
◦ However,
 Variable cost per unit remains same & dose not
change if the total no. of output increases or
decreases.
Classification of Cost
Output Total Variable Cost Variable Cost Per Unit
(in Units) (in Rs.) (in Rs.)

0 0 0

100 1000 10

1000 10000 10

2000 20000 10

5000 50000 10

10000 100000 10
Classification of Cost
Semi – Variable Cost
◦ Cost contains both fixed & variable
component .
◦ Affected by fluctuations in the level of
production.
◦ Some part of cost remains fixed at given level
of production.
◦ Other part varies with the change in volume of
production.
Classification of Cost
Semi – Variable Cost

◦ Semi–Variable = Fixed Cost + Variable Cost

Cost

◦ Variable Cost per unit = Change in Cost

Change in Output
Classification of Cost
Semi – Variable Cost
◦ For e.g., Semi-variable cost of Rs.1, 50, 000/-
is constant up to 70% capacity (7, 000 units).
But increases by 10% over 70% but up to 80%
& then increases by 20% over 80% but up to
100% capacity.
Classification of Cost
Capacity Output Semi-Variable Semi-Variable
(in Units) Cost Cost Per Unit (in
(in Rs.) Rs.)
50% 5000 150000 30

60% 6000 150000 25

70% 7000 150000 21.43

80% 8000 165000 20.62

90% 9000 195000 21.67

100% 100000 195000 19.50

Classification of Cost
Product Cost
◦ Cost which are charged & identified with the
product.
◦ Cost of manufacturing a product.
◦ Includes :-
 Direct Material Cost
 Direct Labour Cost
 Direct Expenses Cost
 Manufacturing Overheads
Classification of Cost
Period Cost
◦ Cost charged to product but written off as
expenses against revenue.
◦ Includes :-
 Fixed cost
 Administration cost
 Selling cost
 Distribution cost
Classification of Cost
Direct Cost
◦ All traceable cost.
◦ For e.g.,
 Wages paid to labour.
 Purchase of raw material.
Indirect Cost
◦ Expenses incurred on those items which are
not directly charged to single product.
◦ For e.g., salary of supervisor, rent &
depreciation.
Distinction between Cost Accounting &
Financial Accounting
Coverage
Parties involved
Actual basis / Estimates
Results
Final Statement
Valuation of Stock
Purpose
Distinction between Cost Accounting
& Management Accounting
Deals with
Base
Role
Status
Outlook
Tools & Techniques
Scope