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Course Title: Cost & Management Accounting Course Code:ACC 205
Course Title: Cost & Management Accounting Course Code:ACC 205
Learning Outcomes:
Meaning and Definition of Cost Accounting
Scope and Uses of Cost Accounting
Difference between Financial Accounting and
Cost Accounting
Role of Cost Accounting in Decision Making
Elements of Cost
Classification of Cost
What is Accounting?
The importance of accounting for the successful
running of business has been long recognized.
The two basic objectives of accounting system in
any business organization are:
1. Basically, it is used to classify and record
business transactions .
2. To provide financial information regarding the
activities of an enterprise to a diverse group of
people such as managers, creditors, debtors, tax
authorities, bankers, Government etc.
Branches of Accounting
Financial Accounting
Cost Accounting
Management Accounting
Cost
According to Oxford Dictionary, cost means,
“the price paid for something.”
ICWA of India
Cost Accounting
Cost accounting is the classifying, recording and appropriate
allocation of expenditure for the determination of the costs of
products and services, and for the presentation of suitably arranged
data for the purpose of control and guidance of management.
Technique and
Budgetary
Process of
Control
Costing
• The two systems rest on the same principles concerning debit and
credit and have the same sources of recording the transactions.
4.Control This does not attach any It provide for a detailed system of
aspect importance to control aspect. control with the help of certain
special techniques.
Difference between Financial
and Cost accounting
Basis Financial Accounting Cost accounting
5. Profit & Financial accounting discloses Cost accounting shows the profit for
Loss profit/loss for the entire each product, process or operation.
business as a whole.
8. Facts and Financial accounting deals Cost accounting deals partly with
Figures mainly with actual facts and facts and figures and partly with
figures. estimates.
Role of Cost Accounting in Decision
Making
The cost accounting plays an important role in the following
decisions making:
1. Determination and Analysis of Cost: The main object of cost
accountaning is to determine cost per unit or per job or per
contract.
2. Cost Control and Cost Reduction: Cost control and cost
reduction is an important factor to be considered to know the
best result obtained by each department. For this purpose, the
standards are fixed and in case the efficiency of each department
is more than the anticipated standard, the result will be
considered as favourable and vice-versa.
3. Planning and Decision-making: This is possible when policies
that are framed are properly implemented.
Role of Cost Accounting in Decision
Making
A good system of costing will be of varied benefits to the
management:
Profitable and unprofitable activities can be disclosed by taking
necessary steps periodically.
Costing enables a concern to measure the efficiency maintained
and prove it.
Costing provides such information upon which estimates and
tenders are based.
Costing guides future production policies.
An efficient check is provided on stores and materials.
An efficient check on labour and machines is also possible by
providing incentives to workers.
Role of Cost Accounting in Decision
Making
It helps increase profits.
It enables a periodical determination of profits or
losses without resort to stock taking.
It furnishes reliable data for comparing costs in
different periods for different volumes of output.
The fixation of price cannot be properly done unless
proper figures of costs are available.
The exact cause of increase or decrease in profit or
loss can be detected.
Some Important Cost Concepts
Cost Units
“Cost unit is a form of measurement of volume of production or
service. This unit is generally adopted on the basis of convenience and
practice in the industry concerned.” CAS-I*
As defined by the ICMA “a quantitative unit of product or service in
relation to which costs are ascertained”.
Basically, a cost unit is a device used for the purpose of splitting total
cost into smaller sub-divisions attributable to products or service.
Simply stated it is a unit of finished product, service of these in
relation to which cost is ascertained and expressed.
Example -
1. Power Industry
• Electricity - Per kilo-watt hour
2. Cement Industry
Cost Centre
A cost centre is defined as a “ location, person or item of equipment (or
group of these), for which costs may be ascertained and used for the
purpose of control”.
OTHER EXPENSES
MATERIALS LABOUR
DIRECT INDIRECT
DIRECT INDIRECT INDIRECT
DIRECT
OVERHEADS
MATERIAL: The substance from which
the finished product is made is known as
material.
(a) Materials
(b) Labour
(c) Expenses
2. By Functions:
(i) Committed Costs an investment that a business entity has already made
(iii) Step Costs fixed cost within certain boundaries, outside of which it will change.
5. By Controllability:
8. By Time:
(b) Out Of Pocket Costs: These costs require cash payments to be done. Also
known as explicit cost. Example: wages, material cost - either fixed or variable
(c) Differential Costs: It is the increase or decrease in total cost that results from
an alternative course of action.
(d) Sunk Costs: Historical expense
(e)Imputed costs/Notional Costs/Opportunity Cost/Implicit Cost: Computed
outside the accounting system
(f) Replacement Cost
(g) Avoidable and Unavoidable Costs
PREPARATION OF COST
SHEET
Meaning
Cost sheet is a statement of cost. In other words,
when costing information are set out in the form
of a statement, it is called 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’.
ELEMENTS
• Material consumed.
• Direct expenses.
• Work overhead.
• Administration overhead.
• Cost of production.
• Selling overhead.
• Distribution overhead.
• Miscellaneous income.
•
PREPARATION OF COST SHEET
• Calculation of Materials Consumed:
Materials Consumed = (Opening stock of raw materials + Purchase of raw
material + carriage inward) - (closing stock of raw material).
• Calculation of Prime Cost:
Prime Cost = Materials consumed + direct wages + direct expenses.
• Calculation of Factory cost:
Factory Cost = Prime cost + sum of all factory overheads.
• Calculation of Production Cost
Cost of Production = Factory cost + office and administration overheads.
• Calculation of Sales Cost or Total Cost
Total Cost = Cost of production + selling and distribution overheads.
• Calculation of Total Sales
Total Sales = Total cost + net profit.
FORMAT OF COST SHEET
Particulars Amount Amount