COST MANAGEMENT

BASIC CONCEPTS OF COST

 COST- Cost may be defined as the sacrifice of economic
resources to obtain an economic objective.

 COSTING- The technique and process of ascertaining costs.

 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.
 MAIN OBJECTIVES OF COST ACCOUNTING
1. To arrive at the cost of production
2. Determining selling price of products as selling price is influenced by cost.
3. To indicate management any inefficiencies
4. To provide actual figures of cost for inter & intra-firm comparison and to
assist the management in price fixation decision.
5. To present comparative cost data for different periods and various volumes
of output
6. To help in the preparation of budgets and implementation of budgetary
control.
7. To organize Cost reduction programme.
USERS OF COST ACCOUNTING
COST SHEET AND ITS ELEMENTS
3 concepts—
 Cost Object
 Cost Centre
 Cost Unit

COST HEADS IN A COST SHEET

Prime Cost
Cost of Production
Cost of Goods Sold
Cost of Sales
 COST SHEET/ STATEMENT
Specimen Format of Cost Sheet for a Manufacturing entity:
Particulars Total Cost (`) Cost per unit
(`)
1. Direct materials consumed:
Opening Stock of Raw Material xxx
Add: Additions/ Purchases xxx
Less: Closing stock of Raw Material xxx
xxx
2. Direct employee (labour) cost xxx
3. Direct expenses xxx
4. Prime Cost (1+2+3) xxx
5. Add: Works/ Factory Overheads xxx
6. Gross Works Cost (4+5) xxx
7. Add: Opening Work in Process xxx
8. Less: Closing Work in Process (xxx)
9. Works/ Factory Cost (6+7-8) xxx
10. Add: Quality Control Cost xxx
11. Add: Research and Development Cost xxx
12. Add: Administrative Overheads (relating to production activity) xxx

13. Less: Credit for Recoveries/Scrap/By-Products/ misc. income (xxx)

14. Add: Packing cost (primary) xxx

15. Cost of Production (9+10+11+12-13+14) xxx
16. Add: Opening stock of finished goods xxx
17. Less: Closing stock of finished goods (xxx)
18. Cost of Goods Sold (15+16-17) xxx
19. Add: Administrative Overheads (General) xxx
20. Add: Marketing Overheads :
Selling Overheads xxx
Distribution Overheads xxx
21. Cost of Sales (18+19+20) xxx
 ADVANTAGES OF A COST SHEET
1. It provides the total cost figure as well as cost per unit of production.
2. It helps in cost comparison.
3. It facilitates the preparation of cost estimates required for submitting
tenders.
4. It provides sufficient help in arriving at the figure of selling price.
5. It facilitates cost control by disclosing operational efficiency.
 COST ACCOUNTING TECHNIQUES
 MARGINAL COST & MARGINAL COSTING

MARGINAL COST – The incremental cost of production which arises due

to one-unit increase in the production quantity.

MARGINAL COSTING - It is a costing system where products or services

and inventories are valued at variable costs only.
COST- VOLUME-PROFIT (CVP) ANALYSIS

It is a managerial tool showing the relationship between various

ingredients of profit planning viz., cost, selling price and
volume of activity. As the name suggests, cost volume profit
(CVP) analysis is the analysis of three variables i.e. cost,
volume and profit.

Marginal Cost Equation

Marginal Cost Equation = S -V = C = F ± P Where,

S = Selling price per unit, V = Variable cost per unit, C =
Contribution,
F = Fixed Cost, P= Profit
 BREAK-EVEN ANALYSIS
Break-even analysis is a generally used method to study the CVP analysis. This
technique can be explained in two ways:

I. In narrow sense, it is concerned with computing the break-even point. At this

point of production level and sales there will be no profit and loss i.e. total
cost is equal to total sales revenue.

II. In broad sense, this technique is used to determine the possible profit/loss at
any given level of production or sales.
 PRACTICAL EXAMPLE FOR BEP ANALYSIS
Let us assume a manufacturing unit is producing & selling 251.47 MU of power
every month at an average NSR of Rs. 4.06/unit. The variable cost of production
of power is Rs. 2.80/unit and Fixed Cost for running the plant is Rs. 2000 Lakhs.

Then, Break even point in this case will be-

Total Fixed Cost = Rs. 2000 Lakhs= 158,730,159 units

Contribution/unit Rs. 1.26/Unit

Where Contribution/Unit = (NSR-Var.Cost)

= 4.06-2.80 =Rs.1.26/unit

With given NSR & Var. cost remaining same, any increase in Production beyond
BEP or reduction in Total Fixed Cost will result in increase in profitability to
that extent.
 PRACTICAL EXAMPLE FOR BEP ANALYSIS
Let us continue from the prev. example and suppose the Fixed Cost is Rs.
1800 lakhs.

Then, the revised BEP will be-

Total Fixed Cost = Rs. 1800 lakhs= 142,857,143 units

Contribution/unit Rs. 1.26/Unit

It is clear from above that reducing Fixed Cost will reduce the Break-even
point and thereby result in increased profitability.
 STANDARD COST & STANDARD COSTING
Standard cost is defined as “'the planned unit cost of the product, component
or service produced in a period. The standard cost may be determined on a
number of bases. The main use of standard costs is in performance
measurement, control, stock valuation and in the establishment of selling
prices.”

Standard costing is a method of cost and management accounting which

starts with setting of standards and ends with reporting of variances to
management for taking corrective actions.
Why Standard Costing is needed?
 Prediction of future cost for decision making
 Provide target to be achieved
 Used in budgeting and performance evaluation
 Interim profit measurement

TYPES OF VARIANCES
 Controllable and un-controllable variances
Controllable variances are those which can be controlled under the normal
operating conditions if a responsibility centre takes preventive measures and acts
prudently.
Uncontrollable variances are those which occur due to conditions which are
beyond the control of a responsibility centre and cannot be controlled even
though all preventive measures are in place.
 Favourable and Adverse variance
Favourable variances are those which are profitable for the company and Adverse
variances are those which cause loss to the company.

COMPUTATION OF VARIANCES
 Material Cost Variance

Material Cost Variance = [Standard Cost – Actual Cost]

Or
[(Std. Quantity × Std. Price) – (Actual Quantity × Actual Price)]
(The difference between the Standard Material Cost of the actual production
volume and the Actual Cost of Material)
1. Material Price Variance
Material Price Variance = [Standard Cost of Actual Quantity* – Actual Cost]
Or
Actual Quantity (AQ) × {Std. Price (SP) – Actual Price(A)}
Or
[(SP × AQ) – (AP × AQ)]
(The difference between the Standard Price and Actual Price for
the Actual Quantity Purchased)

2. Material Usage Variance

Material Usage Variance = [Standard Cost of Standard Quantity for Actual

Production – Standard Cost of Actual Quantity*] Or
Std. Price (SP)× {Std. Quantity (SQ) - Actual Quantity
(AQ)}
Or
[(SQ × SP) – (AQ × SP)]

(The difference between the Standard Quantity specified for actual

productionand the Actual Quantity used, at Standard Price)
 COSTING METHODOLOGY IN SAIL

COSTING SYSTEM IN BPSCL

 Process Costing
 Standard costs

COST STATEMENTS
 Standard Cost Statement

 Monthly and Cumulative Cost Statements

 Quarterly/Annual cost statement

 Element-wise cost

 Cost Variance Reports

 COST MANUAL
The Cost Manual prescribes treatment of various elements of cost like-
• Material
• Labour
• Stores & Spares
• Power, Fuel & Services
• Repairs & maintenance
• Other Expenses & Revenue
• Interest and Depreciation

The Cost Manual classifies certain expenditures as NON-COST Items like

Profit on sale of Assets, Liquidated damages etc. Such expenses are not
considered in calculation of cost.
 Sample format of a Cost Statement
Name of the Company
Name and address of the Plant
Name of the Utility
For the period

I Quantitative Information
Sno. Particulars Unit Current Previous
Year Year
A1 Installed capacity
2 Quantity produced
3 Capacity utilization %
4 Quantity re‐circulated
5 Quantity purchased, if any

6 Self‐consumption including other losses (to be

specified)
7 Net units consumed
B1 Gross fixed assets at the end of the year /period Rs./Lakh
2 Net fixed assets at the end of the year/period Rs./Lakh
3 Date of commissioning
 II Cost Information:
Sno. Particulars Quantity Rate (Rs. Amount Cost per unit (Rupees)
per unit) (Rupees)
Current Previous
Year Year

1 Materials consumed
(specify details)

a) Indigenous purchased
b) Imported
c) Self manufactured/produced
2 Utilities (specify)
3 Direct Employees Cost
4 Direct Expenses
5 Consumable Stores and Spares
6 Repairs and Maintenance
7 Depreciation
8 Other Overheads
9 Total
10 Less: Credits, if Any
11 Net total
Apportioned to cost centre or Basis Qty Amount
activity :

i.
ii. iii.
iv. etc.