Cost Concept

Smitha Ramachandran
 Module 1
• Introduction
• Meaning of Cost
• Meaning of Costing
• Classification of Cost
• Techniques for separation of cost
• Cost
– The total expenses incurred for producing one unit
of finished articles or for rendering one unit of
service
– The term ‘Cost’ means the amount of expenses
incurred or attributable to specified thing or activity
– As per ICWA(India), cost is a measurement in
monetary terms of the amount of resources used for
he purpose of production of goods or rendering
services
• Costing
– The techniques and processes of ascertaining costs
• Cost centre
– A location, person or item of equipment (or
group of these) for which costs may be
ascertained and used for the purpose of cost control.

• Profit centre
– A profit centre is that segment of activity of a
business which is responsible for both revenue and
expenses and discloses the profit of a particular
segment of activity. Profit centre's are created to
delegate responsibility to individuals and measure
their performance
• Cost Unit
– The Chartered Institute of Management Accountants,
London, defines a unit of cost as “a unit of quantity
of product, service or time in relation to which
costs may be ascertained or expressed”.
– Automobile Numbers
– Brick works per 1000 bricks
– Cement per Tonne
– Chemicals Litre, gallon, kilogram, ton
– Steel Tonne
– Sugar Tonne
– Transport Passenger- kilometre,
 Costing and Cost Accounting
• Often used interchangeably
• Cost is commonly defined as ‘Sacrificed Resource’ for a
particular thing. Cost can be any term that is
measurable in terms of money
• Costing is a process of determining the cost, it may be
called a technique for ascertaining cost of production of
any product or service in the business organisation
• Cost accounting is basically the next step to costing
• Involves preparation of various budgets for an
organisation, determining standard costs based on
technical estimates, find and comparing with actual
cost
•Classification of cost Behaviour •Elements of Cost
• Fixed • Material
• Variable • Labour
• Semi-variable • Other Expenses

Classification of
Cost

•Exercising Control over Cost •Functional wise Classification

• Controllable cost • Production
• Uncontrollable cost • Administration
• Selling & Distribution
• R&D
 Techniques of Separation of Cost
• The methods used to separate cost into
fixed cost and variable cost
High-Low method
Scatter-graph method
Method of Least Squares (Regression
Analysis)
 High-Low Method
• The highest point and the lowest point are
used to create the cost formula
• The highest point is defined as the point with
the highest activity
• The Low point is defined as the point with the
lowest activity
• Total cost = variable cost per unit * units of
production + Fixed cost
 Scatter-Graph Method
• Estimating the fixed and variable elements of a
mixed cost visually on a graph
• The scatter graph method requires that all
recent, normal data observations be plotted on
Cost Y axis Versus Activity X axis graph
• The vertical axis of the graph represents the
total costs and the horizontal axis shows the
volume of related activity
 Method of Least Squares
• The most robust method of separating cost is the
least square regression method
• This method requires the use of 30 or more past
data observations
• This method is the most sophisticated and provides
the user with a measure of the goodness of fit
• Assuming that the cost varies along Y axis & activity
level along X axis
• Y = a+bX
• Unit variable cost = b =(n∑XY - ∑X ∑Y)/(n∑X2-(∑X)2)
• Total Fixed Cost = a = (∑Y-b∑X)/n
Refer
• Preparation of a Cost Sheet….Format sent
• Problems and Assignment 1
• Notes
 Usha engineering works Ltd manufactured and sold
1000 sewing machines in 2018. Following are the
particulars obtained from the records of the company

Particulars Amount (₹)

Cost of Materials 80,000
Wages paid 1,20,000
Manufacturing Expenses 50,000
Salaries of managerial staff 60,000
Rent, rates and insurance 10,000
Selling Expenses 30,000
General Expenses 20,000
Sales 4,00,000
The company plans to manufacture 1200 sewing
machines in 2019. you are required to submit a
statement showing the price at which machines
would be sold so as to show a profit of 10% on the
selling price. The following additional information is
supplied to you:
a) The price of materials will rise by 20 percent over the
previous years’ level
b) Wages rate will rise by 5 per cent
c) Manufacturing expenses per unit will rise in production
to the combined cost of materials and wages
d) Selling expenses per unit will remain unchanged
e) Other expenses will remain unaffected by the rise in
output