Cost Accounting

 Cost : CIMA London defines

“ the amount of expenditure incurred on to a

specified thing or activity”.
 The Process or technique of ascertaining cost of
activities , processes, products or services is
termed as costing.
Cost Accounting :
 is a formal mechanism by means of which
costs of products or services are ascertained
and controlled .
 It provides information to the management
for taking all sorts of managerial decisions.
 Objectives of Cost Accounting

 To record ,analyze and classify the costs of

products- Cost Per unit of each element – to
determine the selling price of such products.
 Cost minimization by facilitating cost control
through standard costing which measures the
efficiency of the organization.
 To provide information to Mgmt to make tactical
decisions.

(closing down/continuance/product mix/make or

buy)
 To enable management to have frequent review
of production, sales and operating by supplying
information at shorter intervals.
 Functions of Cost accounting

 To ascertain the cost per unit of product,

service or department
 To Present and interpret data fro
managerial decision making and control and
suggest criteria fro choosing among
alternatives.
Advantages of Cost accounting

 It is an aid to management
(effective control over inventory, max
efficiency, minimize wastages and losses)
 Aid to Creditors (Costing records –
profitability and future of the firm)
 Aid to employees (incentives , bonus
plan, rate system)
 Aid to nation (Cost reduction, cost
control and elimination of wastes)
 Cost Unit

• A unit of quantity of product ,service or

time in relation to which costs are
ascertained or expressed.

Industry Cost Unit

Automobile No of Vehicles
Brick works Per 1000 bricks made
Bridge construction Each Contract
Chemical Litre,Gallon,Kilogram,tonne
Cement, sugar ,steel Tonnes
Power Kilowatt hour
 Cost Center

 It is the smallest organizational subunit

for which separate cost collection is
attempted.
 For Example, oil milling Industry –
Production dept- distinct parts- crushing,
refining and finishing.
 Each of these production lines or process
forms one cost Center.
Costs are divided in to

 Marginal Cost: total of variable cost

 Out of pocket costs: Costs which involve the
cash outflow due to a particular management
decision.
 Differential Costs: The change in costs due to
change in level of activity or method of
production.
 If change increases costs – Incremental cost
 If change decreases costs – Decrement Cost
 Sunk Costs : is an irrecoverable cost and is
caused by complete abandonment of a plant.
 Replacement Cost : It is the cost at which the
asset or material identical to that is being
replaced .
 Elements of cost

 The cost of making and selling a product mainly

consists of 3 elements.
 Material Cost

 Labour Cost and

 Expenses
 Material cost

 The cost that is incurred on purchase of raw

material
 Direct Material Cost – Which can be
conveniently identified with and allocated to
cost units.
Examples : clay in bricks,
Leather in shoes
Steel in machines
Cloth in garments
Timber in furniture.
 Indirect Material Cost : Those materials
which cannot be conveniently identified with
individual cost units
 They are minor in importance

 Small and relatively inexpensive items

 Aid in as a part of finished product.

 Examples are : Nuts, pins ,Screws

bolts ,threads etc.
 Labour cost

 The cost of remuneration of the employees of an

undertaking.
 (wages,salaries,commissions,bonuses etc)
 Direct Labour :
 It consists of wages paid to workers directly
engaged in converting raw materials in to
finished products.
 These wages can be conveniently identified
with a particular product, job or process.
 Wages paid to a machine operator is called
direct Wages.
Example : Machine operator, Shoe maker,
Carpenter , Weaver, Tailor
 Indirect Labour :
 Cannot be conveniently be identified with
a particular cost unit.
 Not directly engaged in the production
operations but only to assist or help in
production operations.
 Examples : Supervisor, Inspector, Cleaner
Clerk, Peon,Watchman
 Expenses

 All costs other than material and labour are termed as

expenses.
 Direct Expenses : Expenses which are directly involved
with a particular job or cost unit.
 Examples : Hire of special plant , Cost of designs and
layouts, carriage inwards, Freight etc.
 Indirect expenses: All indirect costs ,other than
indirect materials and indirect labour costs are termed
as indirect expenses.
 Examples : Rent and taxes, Depreciation, Advertising,
Insurance, Repairs etc.
 Cost sheet
 For determination of total cost of production a
statement showing the various elements of cost is
prepared. This statement is called as a statement
of cost or cost sheet.
 Cost sheet is a statement which provides assembly
of the detailed cost of a cost center or a cost unit.
 It brings out the composition of total cost in a
logical order under proper classifications & sub-
divisions. Separate columns are provided to show
total cost, cost per-unit etc .
 Purpose of Cost sheet

 It gives the break up of total cost under different

elements.
 It shows total cost as well as cost per unit.
 It helps in comparison with previous years.
 It facilities preparation of tenders or quotations.
 It enables the management to fix up selling price.
 It controls cost.
 Prime Cost

 Refers to aggregate of direct material cost,

direct labour cost and direct expenses.

Prime Cost
 = Direct Material +Direct Labour +Direct
Expenses.
 Overheads

 Refers to aggregate of Indirect material cost,

Indirect labour cost and Indirect expenses.

Overheads =
 Indirect material cost+ Indirect labour cost +
Indirect expenses.
 Overheads can be divided in to

Office Overheads : Selling & Distribution

Factory Overheads : • Office rent, insurance, Overheads :
• Factory rent, rates lighting • Showroom expenses ,
taxes •Office salaries ,telephone •salesmen's salaries
•Fuel-power and water •Law and audit expenses •Commission
•Lighting and Heating •Director’s Remuneration •Bad debts
•Indirect wages •General Manager’s Salary •Discounts
•Depreciation ,Repairs •Printing and stationery •Warehouse rent
•Salaries of works •Maintenance and repairs •Carriage outwards
manager •Bank Charges •Advertising
•Indirect materials •Miscellaneous Expenses •Delivery Expenses
•Works office expenses •Samples and
•Depreciation on •Free gifts etc.
factory building
 Cost sheet Proforma

Direct Material

Direct Wages

Direct Expenses = Prime Cost

Factory Overheads = Factory Cost

Factory Cost + Office overheads = Cost of production

Cost of production + Selling and Distribution

Overheads = Cost of goods sold

Cost of goods sold + Profit = sales.