Basic Cost Concepts

• Objectives
• Introduction
• Meaning of Cost Accounting
• Elements of Cost
• Classification of Cost
• Cost Ascertainment

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 IA&AD Bengaluru
welcomes

Direct Recruited Officials

Batch: 2021
 Objectives
• Prepare Cost Sheet

• Identify the Elements of Cost

• Make Classification of Cost

• Define Cost Ascertainment

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 Introduction
• Cost Accounting is the classification, recording and
appropriate allocation of expenditure for the
determination of the products or services, and the
suitable presentation of data for the purpose of
control and management.

• It normally illustrates the following components of the

cost aspect of the organization for Eg. Production
Administration, selling, and distribution.

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 Meaning of Cost Accounting

• It is the process of classification, recording and

appropriate allocation of expenditure for the
determination of the products or services through the
presentation of data for the purpose to take decision
and and the suitable presentation of guide the
business organization.

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 Difference Between Cost and Management
Accounting
Point of Difference Cost Accounting Managements Accounting

Objectives Determine the cost and To take decisions through

control
Scope Deals with only cost and
related aspects
Utilization of Data Use quantitative
information pertaining to
transaction
presentation of accounting
information
Deals with cost and
revenue both
Both qualitative and
quantitative information for
decision making

Nature Deals with past and present Deals with future policy
data and course of action
Utility Ends at the presentation of Starts with cost information
information

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 Preparation of Cost Sheet
• It is a document that provides of the assembly of an
estimated detail cost in respect of cost center and cost
units.
• It may be prepared on the basis of actual data or on
the basis of estimated data.
• To find out the unit cost of the product, the statement
of cost place pivotal role in determining the cost of
production, cost of good sold, cost of sales and selling
price of the product at every stage.

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 Classification of Cost
1) Direct Cost Classification
>> Direct Material
>> Direct Labour
>> Direct Expenses
Direct Materials + Direct Labor + Direct Expenses = Prime cost

2) Indirect Cost Classification

>> Factory Overhead
>> Work Overhead
Factory cost = Prime cost + Factory overhead

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 Direct Material
• Direct: traceable to one particular process, job or product
– identified with each unit of product
• Example: manufacturing an apparel
• Cloth, collar, buttons, cufflinks, thread
• Primary packing material (e.g., carton, wrapping,
cardboard, boxes, etc.)
• Fuel, lubricating oil etc for operating & maintenance of
machine
• Small tools
• Materials used for repairs & maintenance

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 Direct Labour

• Inspectors
• Supervisors
• Internal transport staff
• Storekeeper, maintenance staff

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 Direct Expense
• Expenses leading to a job or contract
• Traveling expenses for negotiation
• Special pattern, design

• Special tools for executing the contract

• Rent
• Insurance
• Canteen, hospital, power , lighting, maintenance

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 Indirect Cost Classification
Manufacturing Overhead (OH)
All of costs of manufacturing excluding direct materials and
direct labor
a. Indirect Materials (IM) – Materials, used in the
manufacturing of products, which are difficult to trace to
particular products in an economical way
• Glue, nails, cleaning supplies
b. Indirect Labor (IL) – Labor, used in the manufacturing of
products, which is difficult to trace to particular products
in an economical way
• Wages for maintenance workers, factory supervisor’s
salary, idle time
c. All other types of manufacturing overhead
• Depreciation on machinery, depreciation on factory
building, factory insurance, utilities for factory
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 Stock of Raw Material
Particulars Amount

Opening Stock of raw Material XXXXX

(+) Purchases of Raw Material XXXXX

XXXXX

(-) Closing stock of Raw Material XXXXX

Cost of Material Consumed XXXXX

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Stock of Semi Finished goods
Particulars Amount

Prime Cost XXXXX

(+) Factory Overhead XXXXX

(+) Opening work in progress XXXXX

(-) Closing work in progress XXXXX

Factory Cost / Cost of production XXXXX

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 Stock of Finished goods
Particulars Amount

Cost of Production XXXXX

(+) Opening stock of finished goods XXXXX

(-) Closing stock of finished goods XXXXX

Cost of goods sold XXXXX

(+) Selling overheads XXXXX

Cost of Sales XXXXX

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 Elements of Cost
a) Material

b) Labour

c) Expenses

d) Overheads

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 Classification of cost
1) General Classification

 Product v/s period Cost

 Direct v/s Indirect Cost
 Manufacturing v/s non manufacturing cost

2) Technical Classification

 By function
 By Variability
 By controllability
 By normality
 By time
 For Planning and control
 For managerial decision 17
 PRODUCT COSTS AND PERIOD COSTS
• Product cost is that cost which is regarded as asset when
incurred, but becomes a part of cost of goods sold when
the product is sold. For MUL, all manufacturing cost is
Product cost. (Raw material to WIP to Finished goods)
For a service sector unit, absence of inventory means all
are period costs.

• Period costs (non-product cost): all costs in P&L account

except cost of goods sold. So, in a mfg. sector unit, all
non-manufacturing costs are period costs. (Ex.
Distribution cost, design cost, R&D costs, Marketing
costs, customer-service costs, etc.)

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 Function

• Production Cost
• Administration Cost
• Selling Cost
• Distribution Cost

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 Normality

• Normal Cost
• Abnormal Cost

Variability

• Fixed Cost
• Variable Cost
• Semi Variable Cost

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 Controllability

• Controllable Cost
• Uncontrollable Cost

Time

• Historical Cost
• Pre determined Cost

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 For Planning an Control

• Standard Cost
• Budget Cost

For Managerial Decision

• Marginal Cost
• Sunk Cost

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 Cost Ascertainment

• Product Centre
• Service Centre
• Profit Centre

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 Classifying Costs for Financial Statements

• Matching Concept: The costs

incurred to generate
particular revenue should be
recognized as expenses in
the same period that the
revenue is recognized.
• Period costs: Those costs
that are matched against
revenues on a time period
basis
• Product costs:Those costs
that are matched against
revenues on a product basis.
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 Classifying Costs for Uptown Ice Cream Shop

Unit Price of an Ice Cream

Ice cream (cream, sugar, milk, and milk solids) $0.65
Cone 0.05
Product Rent 0.61
Cost Wages 0.25
Payroll taxes 0.25
Sales taxes 0.23
Business taxes 0.08
Debt service 0.23
Period Supplies 0.09
Cost Utilities 0.08
Other (insurance, advertising,professional fees) 0.05
Profit 0.13
$2.50

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Cost Flows and Classifications in a Mfg. Co.

Cost of
revenue = Cost
of goods sold
• Raw materials
inventory
• Work-in-
process
inventory
• Finished goods
inventory
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 Cost Classification for Predicting Cost
Behavior
• Volume index
• Cost Behaviors
Fixed costs
Variable costs
Mixed costs
• Average unit costs

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 Volume Index
• Def: The unit measure
used to define
“volume”
• Examples:
– Automobile – “miles”
driven
– Generating plant –
“kWh” produced
– Stamping machine –
“parts” stamped

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 Fixed Costs
• Def: The costs of
providing a company’s
basic operating
capacity
• Cost behavior: Remain
constant over the
relevant range

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 Variable Costs
• Def: Costs that vary
depending on the level
of production or sales
• Cost behavior:
Increase or decrease
proportionally
according to the level
of volume

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 Average Unit Cost
• Def: activity cost per
unit basis
• Cost Behaviors:
– Fixed cost per unit
varies with changes in
volume.
– Variable cost per unit
of volume is a
constant.

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 Differential (Incremental) Costs
• Def: Costs that
represent the
differences in total
costs, which results
from selecting one
alternative instead of
other

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 Opportunity Costs
• Def: The potential benefit
that is given up as you
seek an alternative course
of action
• Example: When you
decide to pursue a college
degree, your opportunity
cost would include the 4-
year’s potential earnings
foregone.

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 Sunk Costs
• Def:Cost that has already
been incurred by past
actions
• Economic Implications:
Not relevant to future
decisions
• Example: $500 spent to
replace tires last year—
not relevant in making
selling decision in the
future
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 Marginal Costs

• Def: Added costs that

result from increasing
rates of outputs,
usually by single unit
• Example: Cost of
electricity—
decreasing marginal
rate

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