COST ACCOUNTING

Learning Objectives

Cost Methods & Cost Techniques

Costing Systems/Methods

Cost Classification

Cost Sheet
 MEANING OF COST
The term cost has a wide variety of meanings. Different
people use this term in different senses for different
purposes.

For e.g. while buying a book, you generally ask, ”how

much does it cost”? Here the word cost means price.
 WHAT IS COSTING?
Costing is the technique & process of ascertaining
costs. It consists of the principles & rules which are
used for ascertaining the costs of products & service.

Costing is the classifying & appropriate allocation of

expenditure for the determination of cost of products or
services & for the presentation of suitably arranged data
for purposes of control & guidance of the management.
 COST ACCOUNTING
Cost Accounting as “the process of accounting for cost
from the point at which expenditure is incurred or
committed to the establishment or its ultimate
relationship with cost centers & cost units. In its widest
usage, it embraces the preparation of statistical data, the
application of cost control methods & the ascertainment
of the profitability of activities carried out or planned.
 OBJECTS & FUNCTIONS
Analysis & Ascertainment of costs.

Presentation of costs for cost reduction & cost control.

Planning & decision making.

 ADVANTAGES
Cost Accounting as an Aid to management.

Advantages to employees.

Advantages to the creditors, investors & bankers.

Advantages to the government & the Society.

 IMPORTANCE
Cost accounting provides reliable cost data.
In regard to materials, labour, overhead & other
expenses.
It helps in price fixation.
It provides information on which estimates & tenders
are based.
It helps in channelsing production on right lines.
It guides future production policies & thus helps in
planning.
It helps in determining profitable & unprofitable
activities.
Cost accounting increases efficiency & reduces
wastages & costs.
Cost accounting helps management in periods of trade
depression & competition by determining actual cost
of the product.
It provides cost data for comparison inn different
periods.
Costing aids in inventory control.
It is a useful tool of managerial control & helps in
cost reduction & cost control.
 Cost Methods & Cost Techniques

 Cost Accounting Methods  Cost Control Techniques

 1. Uniform or Unit Costing  1. Cost Volume

 2.Job Costing
Profit(CVP) Analysis
 2. Standard Costing
 3. Contract
 3. Budgetary Control
 4. Batch
 4. ABC
 5.Process( continuous)
 5. Relevant Costing
 6. Service( Operating)
 6. Target Costing
 Costing Systems/Methods

Historical
Absorption
Direct
Marginal
Standard
Uniform
 COST CLASSIFICATION

 Elements
 Behaviour
 Functions
 Normality
 Control
 Decision Making
 1. Elements

MATERIAL

LABOUR

EXPENSES
 Direct Material: The materials which directly
contribute to the production of the product and
are easily identifiable in the finished product are
called direct materials. Cloth in shirt, paper in
books, wood in furniture are examples of direct
materials.
 - Indirect Material: Other material which is
ancillary in the production of any finished
product and cannot be conveniently assigned to
specific physical units is called indirect material.
For example, printing in stationery, scissors used
in cutting cloth for shirt, nails in shoes or
furniture, Fuel, lubricating oil etc for operating &
maintenance of machine , Small tools, Materials
used for repairs & maintenance

 LABOUR

Inspectors
Supervisors
Internal transport staff
Storekeeper, maintenance staff
 Direct Labour: Labour which takes an active and
direct part in the production of a particular
commodity and can be directly co-related to any
specific activity of production is termed as direct
labour. Process labour, productive labour,
operating labour, manufacturing labour, direct
wages etc are used synonymously with direct
labour.
 - Indirect Labour: Employees who do not directly
take part in the manufacturing process and whose
cost cannot be identified with the individual cost
centre are included under indirect labour. Such
labour does not alter the construction,
composition or condition of the product. Salary of
foreman, salesmen and director are some
examples of indirect labour.
-Direct Expenses: These are expenses which
can be directly, conveniently and wholly
allocated to specific cost centres or cost
units. Direct expenses are sometimes also
described as ―chargeable expenses.
- Indirect Expenses: All expenses other than
direct expenses are indirect in nature.
 OVERHEADS

 Generally the terms overheads and indirect expenses are

used synonymously. But, it needs to be understood that
―overheads‖ has a wider meaning than the term ―indirect
expenses‖. Overheads include the cost of indirect material,
indirect labour besides indirect expenses.
 Indirect expenses may be classified under the following
three categories:
 Factory (Manufacturing, works or production)
Overheads: All expenses incurred in the factory
for its smooth functioning including production
management expenses are included here.
Examples: Rent, rates, insurance, power etc. of
factory.
 - Office and Administrative Overheads include
expenses pertaining to the management and
administration of business. Example: Rent of
office, lighting, heating, printing, stationery, etc.
Selling and Distribution Overheads: These
are expenses incurred for marketing of a
commodity, for securing orders for the
articles, dispatching goods sold, and for
making efforts to find and retain customers
 2. Behaviour

Fixed
in short run & long run

Variable
Varies with volume and constant per unit

Semi-variable
A cost could be variable for one level of activity whereas it could
be fixed for another.

Not inherently fixed or variable

Many costs are semi-variable in nature
 Fixed Cost

 Committed Fixed Costs consists largely of those fixed costs that arise
from the possession of planti, equipment and a basic organizational
structure. For example, once a building is constructed and plant is
installed, nothing much can be done to reduce the costs such as
depreciation, property taxes, insurance and salaries of the key personnel,
etc., without impairing the organization's competence to meet the long-
term goals.
 Discretionary Fixed Costs : set at fixed amount, for specific time
periods by the management, in the budgeting process. These costs
directly reflect top management policies and have no particular
relationship with volume of output. These costs can therefore be reduced
or eliminated entirely, if the circumstances so require. Examples of such
costs are: research and development costs, advertising and sales
promotion costs, donations, management consulting fees, etc. these costs
are also termed as managed or programmed costs.
 3.Functions

Production Cost
Administration Cost
Selling Cost
Distribution Cost
 4.Normality

Normal
Abnormal
 Planning & Control

Budgeted Cost: estimate of expenditure for different

business operations

Standard Cost: for prescribed set of operating

conditions, labour, material and overheads are
predetermined; budget translated into actual
operation through standard costs
 5. Control

Controllable
&
Uncontrollable
 6.Decision Making

Marginal vs. Absorption Costing

(with fixed cost and without FC)
Sunk - irrelevant
Committed – pre committed
Opportunity
Incremental / Differential
Avoidable & Unavoidable
controllable / uncontrollable
 Relevance

Relevant
Irrelevant
 Cont…..

 Irrelevant cost: not relevant for decision

making
 Example: Sunk costs: Sunk cost is the cost of
abandoned plant less salvage value. Not relevant for
decision making.
 Imputed (Notional cost): Actually not incurred
(interest on own capital, rent on owned building, etc.)
Taken into account in capital budgeting decisions.
 Replacement cost: Cost of replacing at current
market price.
 Cont…..

Avoidable and unavoidable cost: Cost that

can be avoided by eliminating a product or
department is avoidable and that which cannot
be, is unavoidable.

Ex. – Rent of factory is unavoidable if a product

is discontinued.
 Other costs:

 Future costs: cost to be incurred in future

 Programmed cost: Cost incurred as per policy of top
management. Ex.- Donation to charity.
 Joint cost: cost of joint or by-products incurred before
separation, which cannot be traced to particular products.
 Conversion cost: cost of converting raw material to
finished goods = Production cost- direct material.
 Discretionary cost: not essential for decision on hand.
Ex.- Training expenses of workers, R&D cost.
 Committed cost: Costs incurred due to past decisions and
are not within control in the short run at present. Ex.-
Depreciation on Plant, Rent, etc.
 INVENTORIABLE COSTS AND PERIOD
COSTS
 Inventorial cost/ product cost is that cost which is regarded
as asset when incurred, but becomes a part of cost of goods
sold when the product is sold. For MUL, all manufacturing
cost is inventorial cost. (Raw material to WIP to Finished
goods) For a service sector unit, absence of inventory
means all are period costs.

 Period costs (non-product cost): all costs in P&L account

except cost of goods sold. So, in a mfg. sector unit, all non-
manufacturing costs are period costs. (Ex. Distribution
cost, design cost, R&D costs, Marketing costs, customer-
service costs, etc.)