ACT 203

Cost Accounting

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

 Accounting

Financial Cost Management

Accounting Accounting Accounting
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
 Financial Accounting

• Focusses on the preparation of annual financial statements:

1. Profit and Loss Account (Statement of Compressive Income)

2. Balance Sheet (Statement of Financial Position) (shows financial position of

the company)

3. Cash Flow Statement (Statement of Cash Flows)( shows cash generated)

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
 Cost Accounting (CA)
• CA is recent development as compared to financial accounting
• Modern CA was started in 19th century
• It started as branch of financial accounting but now it is independent

• Reason for starting CA is due to increasing complexity of modern industry

• It focusses on past, present and expected future cost of products manufactured or service supplied.
• It also supports in tactical business decisions and enhancing profitability

• Information supplied by CA act as management tool for:

Decision-making
Optimize the utilization of scarce resources
Controlling expenditures CA are future oriented approach

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

Management Accounting (MA)
• MA is the modern concept of accounts as a tool of management
• It provides information that is useful to management such as:
1. Decision making
2. Planning
3. controlling and etc.
• Modern cost accounting is often called management accounting
because cost accountants look at their organization through a
manager’s eyes

• So, mgt. accounting and cost accounting are inseparable

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
Limitations of Financial Accounting (Reasons
for development of Cost Accounting)
• Shows only overall performance
• Historical in nature
• No performance appraisal
• No material control system
• No labour cost control
• No proper classification of costs
• Fails to supply useful data to management
(Cost accounting by M.N. Arora)

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

Costing
The Chartered Institute of Management Accounting (CIMA), London has
defined costing as, “the techniques and processes of ascertaining costs”.
Cost means the amount of expenditure ( actual or notional) incurred on
a given thing.

Cost accounting
According to CIMA, “Cost Accounting is the process of accounting for
costs from the point at which expenditure is incurred or committed to
the establishment of its ultimate relationship with cost centres and cost
units. In its widest usage, it embraces the preparation of statistical data,
the application of cost control methods and ascertainment of
profitability of activities carried out or planned”.
Cost Accounting = Costing + Cost
04/05/2023 B ComReporting + Cost
(Finance/ Accounting), Control.
RTC, Thimphu.
 Scope of Cost Accounting
• Costing: ascertainment of cost of products, processes, jobs services, etc.
• Cost book keeping: Keeps records of all cost incurred
• Cost analysis: cost recorded are analyzed in direct, indirect, fixed, variable,
controllable, uncontrollable costs and etc.
• Cost control: Compare actual cost and standard cost
• Cost reports: weekly & monthly reports
• Cost audit: verification of cost accounts, as per the plan or not, efficiency of
performance

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

Advantages of Cost Accounting ( To
Management)

1. Helps in cost control

2. Helps in decision making
3. Guides in fixing selling price
4. Helps in inventory control
5. Aids in formulating policies.
6. Prevents in frauds and manipulation
(Cost accounting by M.N. Arora)

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

Application of Cost Accounting

Is costing applicable in manufacturing concerns?

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

Application of Cost Accounting
• Its applicable in wider range.
• All types of activities, manufacturing and non-manufacturing ( in
which monetary value is involved)

• Eg: Hospital, retail & wholesale business, schools, university, farming,

cinema house
(Cost accounting by M.N. Arora)

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

Objectives & Functions of Cost Accounting

 Ascertainment of costs

 Determining selling price

 Cost control

 Assisting in decision making

 Ascertainment of profit

 Formulating policies

 Basis of financial statement

04/05/2023 (Cost Accounting by Ravi M.Kishore)
B Com (Finance/ Accounting), RTC, Thimphu.
Difference between Financial and Cost
Accounting
Financial Accounting
1. The main purpose is to prepare P&L A/c, B/S, for
reporting to internal and external users.
2. The account have to be prepared as per Companies
Act and Income Tax Act.
3. It revels the profit or loss of the business as a whole
for a particular period.
4. Financial reports are prepared periodically (yearly)
5. It has a single uniform format of presenting
information (eg. P&L, B/S, Cash Flow Statement)
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
Cost Accounting
1. The main purpose is to provide detailed cost
information to management (internal users).
2. Maintenance of Account is voluntary except in
certain specified industries are compulsory to keep
cost records under Companies Act.
3. It shows the detailed cost and profit data for each
product line, department, process and etc.
4. Cost reporting is a continuous process (Daily,
Weekly, Monthly and etc.).
5. It has varied forms of presenting cost information
and no uniform format.
Cost Centre
• Cost Centre is ‘a location, person, or item of equipment for which
costs may be ascertained and used for the purpose of control’.
(Cost Accounting by M.N. Arora)
Cost Unit
• Cost unit is defined as ‘unit of product or service in relation to which
cost are ascertained’.
(Cost Accounting by M.N. Arora)

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

 Methods(Types) of Costing
• Methods of costing refers to the techniques and processes employed in the
ascertainment of costs. (Job & Process Costing)
• The methods of costing depends upon types and nature of manufacturing
activities:
1) Job Costing (job order costing) : where work is undertaken to customers
special requirements.
2) Contract Costing (Terminal Costing):
• It is variations of job costing and difference is job is ‘small’ &contract is ‘big
job’.
• Contract is of long duration and may continue over more than one year
financial year.(construction of bridge, road)
3) Batch Costing: The cost of a batch or group of identical products product is
ascertain(
04/05/2023 toys, shoes, tyres). B Com (Finance/ Accounting), RTC, Thimphu.
4) Process costing : used in mass production industries (which has more processes).
Eg. Juice factory

5) Operating Cost :
• It is a detailed application of process costing
• A process will have number of operations
• So operation costing will ascertain for each operations instead of a process

6) Unit Costing:
• It is used to find out cost when production is uniform and consists of a single or two or
three varieties of the same product.
• When product is produced in different grades, cost are ascertained grade wise.
• Cost per unit = Total cost/No. of units produced
• (eg. 04/05/2023
Applied in steel production, flour mills)
B Com (Finance/ Accounting), RTC, Thimphu.
 7) Service costing
• It is used in company which provides service
• Eg. Railways, airlines, hotels, hospitals and etc.

8) Multiple or composition costing

• It is an application of more than one method of cost ascertainment with resect
to the same product.
• It is used in a industries where number of components are separately
manufactured & assembled into a final products.
• Eg. Refrigerators, bike, cars, etc.
(Cost Accounting by M.N. Arora)

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

Cost Vs Expenses
Cost Expenses
A cost might be an expenses or an assets ( Not used + An expense is a cost that has expired or was necessary
Used) in order to earn revenues (already used)
Eg: Cost of Machine + Depreciation Eg: Depreciation
Eg: Total Raw-materials purchased ( Nu.600) Eg: Total Raw-materials used (600-200 =400)

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

 Cost

Expired Cost Unexpired Cost

Expense Loss Shown in balance

Sheet (Asset side)

Shown in Profit &

loss Account
(debit side)
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
Elements of Cost

Elements of cost

Materials Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

 Materials
• The substance from which the finished product is made is known as material.

a) Direct Material
• Is one which can be directly or easily identified in the product Eg: Timber in
furniture, Cloth in dress, etc.

b) Indirect Material:
• One which cannot be easily identified in the product (lubricants, oil).

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

 Labour
• The human effort required to convert the materials into finished
product is called labour.
a) Direct Labour
• Is one which can be conveniently identified or attributed wholly to a particular
job, product or process.
eg: wages paid to carpenter, fees paid to tailor, etc.

b) Indirect Labour
Is one which cannot be conveniently identified or attributed wholly to a particular
job, product or process.
Eg: Gate keeper’s salary, Accountant's
04/05/2023
salary, Manager’s salary, etc
B Com (Finance/ Accounting), RTC, Thimphu.
 Expenses
• Expenses are those expenses other than materials and labour.

a) Direct Expenses
• Are those expenses which can be directly allocated to particular job, process or
product. Eg : Excise duty, royalty, special hire charges,etc.

b) Indirect Expenses

• Are those expenses which cannot be directly allocated to particular job,

process or product.
Eg: Factory
04/05/2023
insurance, lighting, Boffice rent, office insurance, office lighting, etc.
Com (Finance/ Accounting), RTC, Thimphu.
 Classification of Cost
1) Direct Costs
• Those costs which are incurred for and can be identified with a particular unit,
process or department (wages of machine operator, cost of raw materials used).

2) Indirect Costs
• These the are general costs and are incurred for the benefit of a number of cost
units, processes or departments.
• Those costs cannot be identified with a particular cost unit or cost centre (nails used
in furniture, glue used in table).

3) Fixed costs
• Those cost remain constant over a specific range of activity for a specified period of
time( building rent, managerial Bsalary).
04/05/2023 Com (Finance/ Accounting), RTC, Thimphu.
4) Variable Costs
• Those cost tend to vary with the change in volume of output.

5) Semi-variable Costs
• Those costs includes both fixed and variable component.

6) Product Costs
Costs which are necessary for production & which will not be incurred if there is
no production (direct materials & direct labour).

7) Period Costs
Cost which are not necessary for production and are incurred even if there is no
production (showroom rent, administrative & selling expenses).
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
8) Controllable Costs
Those cost which can be controlled by the management ( Cost of raw materials can be
controlled by purchasing large quantity, ‘by getting discount’).

9) Non-controllable Costs
Which cannot be controlled by management (factory rent, managerial salaries).

10) Historical Cost

• The costs which are ascertained after this have been incurred.

11) Pre-determined Costs

• Costs which are ascertained in advance production

12) Sunk Costs

Is an expenditure made in the past that cannot be changed and over which management no
longer04/05/2023
has control (cost of land purchased in 2000).
B Com (Finance/ Accounting), RTC, Thimphu.
Installation of Costing system in an
organization
• No readymade costing system
• Need to develop best on the needs of the business
• Or else system may misfit

• To start with:
 It should make cost benefit analysis ( the benefits from the system must
exceed the cost)
 The management must feel the need and make full use of information from
the system.
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
 Steps in Installation of Costing System
1) Preliminary investigation : Types of costing system required based on nature of
product & production method.
2) The organization structure: Present organization should be disturbed minimum.
3) Method of purchased, storage & issue of material should be examined.
4) The existing method of remuneration ( introducing incentive plans).
5) Forms & accounting records( less labour requirement & expenditure).
6) Size of the factory.
7) System should be effective in cost control & cost reduction.
8) Cost system should be simple & easy operate.
9) Installation & operation must be economical.
10) System should be introduced gradually. (Cost Accounting by M.N. Arora)
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
 Essentials (basics) of Good Costing System
1) Suitability: The method of costing adopted should be suitable to the nature of
business.
2) Simplicity: Should be easy to understand and simple to operate.
3) Economical: Cost of installation must be less the benefit.
4) Flexibility : It should be flexible to adopt to the changing requirements of
business.
5) Accuracy: It should provide accurate information.
6) Promptness: It should provide prompt information at regular intervals.
7) Cost control: It should ensure cost controls over varies field.
8) Detailed Information: it should be able to provide detailed information and
avoid unnecessary details. (Cost Accounting by M.N. Arora)
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
 Methods of Costing: Unit Costing
What is a cost driver?
• A cost driver is the direct cause of a cost and its effect is on the total cost
incurred. For example, if you are to determine the amount of electricity
consumed in a particular period, the number of units consumed determines the
total bill for electricity. In such a scenario, the number of units of electricity
consumed is a cost driver. (corporatefinanceinstitute.com)
• Types of Drivers in Cost Accounting
• Number of set-ups.
• Number of machine hours.
• Number of processed orders.
• Number of orders completed.
• Number of labor hours.
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
What is a revenue driver?
• What a company/ industry does to earn revenue?
•  This term refers to something that generates revenue for the company/ industry.
• For example, revenue drivers for an outpatient clinic include the number of people
receiving services, the type of services delivered, and the amount charged for
delivering services. Cost drivers for the clinic include staff/labor costs,
administrative costs, and facility costs (www.psychcongress.com)

What are the factors affecting ‘revenue driver’?

• The factors affecting revenue drivers are:
connected products
customer centric
global marketing
 innovation
04/05/2023 and etc. B Com (Finance/ Accounting), RTC, Thimphu.
 Cost Sheet
• According to CIMA London Cost Sheet is ‘A statement which provides for the assembly
of the detailed cost of a centre or a cost unit’.
• Is also a periodical statement.

Purposes of Cost Sheet

(i)   It shows the total cost and cost per unit of the products manufactured during a
particular period.
(ii) It facilitates the comparative study of various elements of current cost with previous
results and estimated costs.
(iii)  It ‘helps to formulate a concrete production policy.
(iv)It helps in. fixing selling price.
(v) It 04/05/2023
guides the businessmen to minimize the cost
B Com (Finance/ Accounting), of production.
RTC, Thimphu.
 Calculation of various cost
Direct Materials
Opening stock of materials
Add Purchases of materials
Less Closing stock of materials
(a) Materials consumed
Direct Wages
Direct Expenses ------ ------
PRIME COST
Add Factory Overheads
Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs
Salaries of Works Manager etc. Indirect Materials
Drawing office and works office expenses Depreciation on factory land and building Less Scrap value
Defective work
Add Work in progress (opening)
Less Work in progress (closing) ------
WORKS COST
Add Office/Administration overheads
Office rent, insurance, lighting, cleaning
Office salaries, telephone, law and audit expenses

General Manager’s salary

Printing and stationery
Maintenance, repairs, upkeep of office blog
Bank charges and miscellaneous expenses ------
COST OF PRODUCTION
Add Opening stock of finished goods
Less Closing stock of finished goods ------
COST OF GOODS SOLD
Add Selling and Distribution Overheads
Showroom expenses, salesmen’s salaries
& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.
COST OF SALES
04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.
Add Net Profit or deduct net loss: ------ SALES ------
 Home Assignment

1. What is Cost Accounting? How it is different from Management

Accounting?

2. List down the benefits of applying cost accounting in an

organization.

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.

 Thank You

04/05/2023 B Com (Finance/ Accounting), RTC, Thimphu.