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MBA503 - Session 6 - Cost Accounting
MBA503 - Session 6 - Cost Accounting
MBA503 - Session 6 - Cost Accounting
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Session Contents
• Cost Management:
Concept and elements of cost
Classification of costs
Preparation of Cost sheet
• Cost Accounting systems:
Job costing
Process costing
Contract costing
Service costing
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Learning Objectives
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
The Management Process
1. Planning
2. Controlling
3. Decision making
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©M.
Faculty
S. Ramaiah
of Management
University
andofCommerce
Applied Sciences ©Ramaiah University of Applied Sciences
The Management Process (contd.)
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©M.
Faculty
S. Ramaiah
of Management
University
andofCommerce
Applied Sciences ©Ramaiah University of Applied Sciences
The Management Process (contd.)
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
The Management Process (contd.)
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©M.
Faculty
S. Ramaiah
of Management
University
andofCommerce
Applied Sciences ©Ramaiah University of Applied Sciences
Management Accounting Information
Systems
Users
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©M.
Faculty
S. Ramaiah
of Management
University
andofCommerce
Applied Sciences ©Ramaiah University of Applied Sciences
Expired versus Unexpired Costs
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Costing
• Cost:
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Cost Accounting
Cost Accounting
The process of accounting for cost which begins with the recording of
income and expenditure or the bases on which they are calculated
and ends with the preparation of periodical statements and reports
for ascertaining and controlling costs."
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Cost Accountancy
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Scope of Cost Accounting
Analyse profitability of individual product
Analyse profitability of different department
Analyse cost behavior of various item of expenditure
Analyse differences between actual result and expected
results
To assist in setting the prices
Effect on profit of increase and decrease in output of a
product line or department will be analysed
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©M.
Faculty
S. Ramaiah
of Management
University
andofCommerce
Applied Sciences ©Ramaiah University of Applied Sciences
Objectives of Cost Accounting
• Ascertainment of cost
• Determination of Selling Price
• Cost Control
• Cost Reduction
• Ascertaining the profit of each activity
• Assisting management in decision making
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Cost Control Vs Cost Reduction
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Advantages of Cost Accounting
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Advantages of Cost Accounting (Contd..)
• Cost Comparison and Benchmarking
• Compliances with Statutory requirement
• Identification of optimum utilisation of capacity
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Limitations of Cost Accounting
• Expensive
• Requirement of Reconciliation
• Duplication Work
• Inefficiency
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Financial Accounting Vs Cost Accounting
Financial Accounting Cost Accounting
Gives information about the financial It provides information of ascertainment
performance of cost
It classifies records, presents and It classifies cost in to material, labour
interprets transactions and overheads
It records Historical data. It uses both the historical costs and pre-
Financial statements are used by all determined costs
stakeholders of the company helpful for internal management
Shows profit or loss of the organization It provides the details of cost and profit
Financial Statements are prepared usually of each product, process, job etc.
for a year in set standard format Reports are prepared as and when
required unstandardised form
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Terms in Costing
• Cost unit
• Cost centre
• Cost estimation
• Cost ascertainment
• Cost allocation
• Cost apportionment
• Cost reduction
• Cost control
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Cost Unit
• The unit cost is the cost incurred by a company to produce, store
and sell one unit of a particular product.
• Cost units are usually the units of physical measurement like
number, weight, area, volume, length, time and value
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Cost Centers
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost Centers
• Production Cost Centre:
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Importance of Cost Accounting
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost contd…
1. Private cost is a cost that is both incurred (or caused) and borne by the
same entity.
2. Social cost is a cost that is incurred (or caused) by an entity but which is
not borne by that entity.
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost contd…
3. Sunk cost is a past cost, or a cost for which an outlay has
already been made.
Example: Cost of the Balancing Equipment already acquired.
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost – contd…
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost – contd…
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost – contd…
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Types of Cost – contd…
Rs Rs
Relevant Range
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Semi-Variable cost / Step Cost Function
Semi Variable Cost
Cost
Narrow Width
Activity /Output
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Classification of Costs
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Grouping of Cost
• Production Cost (Prime Cost & Overhead)
– Material Cost – Direct & Indirect = Variable
– Labour Cost – Direct & Indirect = Variable or Fixed or Semi-
Variable
– Production Expenses – Direct (Variable) & Indirect = Semi-Variable
or Fixed
• Administration Cost = Fixed
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Elements of Cost – Indirect Material
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Elements of Cost - Labour
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Elements of Cost – Indirect Labour
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Elements of Cost – Other Expenses
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Cost sheet
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Add:- Works over heads
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
1. Job costing
2. Process costing
3. Batch costing
4. Contract costing
5. Unit costing/Operating costing/Single output costing
6. Operation costing/Service Costing
7. Multiple costing
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
1. Job costing
ICMA London defines as “that form of specific order costing,
which applies where work is undertaken to customer’s special
requirements”
Job costing is concerned with the finding of the cost of each
job or work order.
This method is followed by these concerns when work is
carried on by the customers request, such as printer general
engineering work shop etc. Under this system a job cost sheet
is required to be prepared to find out profit or losses for each
job or work order.
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
2. Process costing
This method is applied in the factories where raw material is
processed in different stages to get a final product
Costs are determined separately for each process, where the
output of one process becomes the raw materials of another
process until final product is obtained.
This type of costing is generally used in industries like textile,
chemical paper, oil refining etc.
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
3. Batch costing
A batch contains a number of small orders passed in batches
through the factory (a group of identical products)
Under batch costing a batch of similar products is treated as a
separate unit for the purpose of ascertaining cost
ICMA defines batch costing as “that form of specific order
costing, which applies where similar articles are manufactured in
batches either for sale or for use within the undertaking”
In most cases, the batch costing is similar to job costing
The total costs of a batch is divided by the total number of units
in a batch to arrive at the costs per unit
This type of costing is generally used in industries like bakery, toy
manufacturing etc
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
4. Contract costing
Contract costing is applied for contract work like construction
of dam building civil engineering contract etc.
Each contract or job is treated as separate cost unit for the cost
ascertainment and control
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Difference between Operating and Operation
Costing
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Methods of Costing
7. Multiple costing
Combination of two or more of the above methods
This system is adopted in the manufacturing concerns, which
produces the parts of a product separately and assemble it for
a final product (as in case of motor car)
Costs have to be ascertained for each component as well as for
the finished product for different components, different
methods of costing may be used
It is also known as composite costing. This type of costing is
applicable to industries producing motor vehicle, airplane
radio, T.V. Etc.
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Exercise - Select the appropriate costing method
A. Construction of an apartment
B. Production of tablets
C. Manufacture of Nano car
D. Construction of housing colony
E. Production of spare parts for Nano car
F. Manufacture of Volvo bus
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Techniques of Costing
Uniform Costing
Marginal Costing
Standard Costing and Variance Analysis
Historical Costing
Direct Costing
Absorption Costing
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Techniques of Costing (Contd..)
Uniform Costing
• When a number of firms in an industry agree to follow the same
system of costing in detail, adopting common terminology for
various items and processes
Advantages :
A comparison of the performance of each of the firms can be made
It is also possible to determine the cost of production of goods
which is true for the industry as a whole
It is found useful when tax-relief or protection is sought from the
Government
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Techniques of Costing (Contd..)
Marginal Costing:
• It is differentiating between fixed and variable costs
• It is used to ascertain effect of changes in volume or type of output
Standard Costing and Variance Analysis profit :
• standard costs are pre- determined and subsequently compared with the
recorded actual costs
• Technique of cost ascertainment and cost control
• This technique may be used in conjunction with any method of costing
• Suitable where the manufacturing method involves production of standardised
goods of repetitive nature
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Techniques of Costing (Contd..)
• Historical Costing:
Ascertainment of costs after they have been incurred. This type of costing
has limited utility
• Direct Costing:
Practice of charging all costs, both variable and fixed to operations, processes
or products
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Summary
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences