Slides for class of cost accounting

1. COST ACCOUNTING

2. What is a COST
Cost means the amount of expenditure
incurred on or attributable to the given
thing.

3. WHAT IS COSTING
Costing is the technique and process of
ascertaining costs. It is referred to as classifying
recording and appropriate allocation of
expenditure for the determination of costs of
products or services.

4. What is cost Accounting
Cost accounting is the formal mechanism by
means of which costs of product or services
ascertained and controlled.
Weldon Defines Cost accounting as “ the
classifying, recording and appropriate allocation
of expenditure for the determination of costs of
products or services, the relation of these costs
to sales value and the ascertainment of
profitability”

5. Characteristics
Cost Recording- posting of the cost transactions
Cost Classification- grouping of the cost into a
common group like material , labour etc
Cost Allocation- allotment of cost to various
department
Cost Control
Cost Reporting- furnishing of data on a regular
basis
Cost Ascertainment – cost of goods

6. COST ACCOUNTANCY
The Instt. of Cost of Mgmt Accountancy,
London- Defines Cost Accountancy as “ it
is an application of costing and cost
accounting principles, methods and
techniques to the science, art and practice
of cost control and ascertainment of
profitability as well as presentation of
information for the purpose of managerial
decision making”

7. BASIS COST
ACCOUNTANCY
COSTING COST
ACCOUNTING
SCOPE Broadest Broader Narrow
FUNCTION Formulation of
costing principles
methods and
technique
Ascertainment of
cost
Recording of cost
PERIODICITY
OF
FUNCTION
Stating point Begins where
accountancy ends
It begins where
costing ends
PERSONS
INVOLVED
Expert in the field
of Cost
Accountancy
Cost accountant Cost clerks

8. Purpose or Objectives of Cost Accounting
Ascertainment of Cost.
Determination of Selling Price.
Cost control.
Facilitates preparation of Financial
statement.
Data base operating policy.

9. COST ACCOUNTING VS FINANCIAL ACCOUNTING
BASIS COST ACCOUNTING FINANCIAL
ACCOUNTING
DISTINCTION Transactions are
identified with cost
units.
Transactions are
recorded for a definite
period.
COVERAGE OF
TRANSACTIONS
Only a part of
transaction
Covers transaction of
the whole business.
PURPOSE It aims to guide the
mgmt for proper
planning, control and
decision making
It is prepared to show
the final results during
a particular period to
various parties.
EFFICIENCY Profitability and losses
of product of each
Deptt
Overall result of
business.
MATERIAL
CONTROL
Good inventory control Does not tell inventory
handling
INDEPENDENT
ENTITY
Depends upon financial
accounting
Independent

10. RECONCILITION OF
RESULTS
Needs reconcialtion of
profit with financial
records
No such needs.
WASTAGES Abnormal and normal
wastages
No such wastages
TRANSACTIONS Internal External
STOCK At cost At cost or market price
LEGAL
REQUIREMENT
Requirement of mgmt Required by various
external parties

11. Importance of Cost Accounting
Detailed Cost information
Help in price fixation
Reveals profitable or non profitable activity
Reveals idle capacity
Helps in decision making
Helps in controlling costs
Cost comparison
Helps in inventory control

12. Limitation of Cost Accounting
Expensive
Unnecessary
Inapplicable
Failure
Not reliable

13. System of costing
A cost system is an aspect of accounting
system designed specifically to provide
information concerning cost and efficiency.
Historical system
Estimated cost system
Standard cost system

14. Method of costing
There are 2 methods of costing
A- Specific order costing
B- Process Costing

15. Specific order costing
Job costing
Batch costing
Contract costing

16. Process costing
Single or output costing
Process costing
Operating costing
Composite costing

17. Technique of costing
Historical costing
Standard costing
Marginal costing
Uniform costing
Absorption costing
Activity based costing
Life cycle costing

18. Cost Unit
A cost unit is a unit of a product, service or
time in terms of which costs are
ascertained or expressed.
Cost units are of 2 types
Units of production – per 10 gram of gold
Units of service – passenger km

19. Cost Centre
A cost centre is a location , person or item
of equipment for which cost may be
ascertained and used for the purpose of
cost control.
Purpose of cost centre is to control the
cost and fix the responsibility of the person
in charge of a cost centre of cost of that
centre.

20. Type of Cost centre
Personal cost centre – it consists of a
group of persons such as Machine
operator, foreman
Impersonal cost centre- it is a location like
factory .

21. Cost object
Cost object may be defined as anything for
which a separate measurement of costs is
required. It may be a product, service,
activity or process etc.
Like – product – mobile phone
Service – hotel service
Process- spinning process
Activity- placing purchase order

22. Responsibility Centre
Responsibility Centre is unit or function of an
organization under the control of a manager who has
direct responsibility for its performance.
There are 5 categories of it .
1. Cost centre
2. Revenue centre- like sales centre
3. Profit centre - Responsibility Centre which is
responsible for both costs and revenue. Like SBU
4. Contribution centre - Responsibility Centre for which
variable costs and revenue are accumulated
5. Investing Centre- Responsibility Centre for which cost,
revenue and investment in assets are accumulated

23. Cost Ascertainment & Cost
Estimation
It is a process of determining actual costs after
these have been incurred.
Cost Estimation – it is the process of
determining future costs in advance, before
production starts, on the basis of actual pasts
costs of adjusted for anticipated future changes.
These costs are not recorded in the books of
accounts, but they are used in preparation of
budget, making prices quotations and controlling
costs.

24. Cost allocation &Cost
Apportionment
Allocation of cost is the process of
charging the full amount of an individual
item of cost directly to a cost centre for
which each item of cost was incurred.
Apportionment of costs is the process of
charging the proportion of common items
of cost to two or more cost centers on
some equitable basis.

25. CLASSIFICATION OF COSTS
On the basis of function
On the basis of Traceability to the cost unit
On the basis of Variability
On the basis of Controllability
On the basis of Time
On the basis of Decision making
On the basis of Others

26. On the basis of function
Production cost
Administration cost
Selling cost
Distribution cost
Research and development cost

27. On the basis of Cost unit
Direct Cost
Indirect cost

28. On the basis of variability
Fixed cost
Variable cost
Semi- variable cost
Step costs- cost remains fixed over a
range of activity and then jumps to a
higher level when activity level increases
beyond a certain point.

29. On the basis of controllability
Controllable cost
Uncontrollable cost

30. On the basis of time
Historical cost
Pre- determined costs

31. On the basis of decision making
Relevant costs- All those costs which
influences a particular decision and are
influenced by the decision are relevant
cost
1. Marginal cost
2. Differential cost
3. Opportunity cost
4. Imputed cost
Irrelevant costs- example is Sunk Cost

32. Other costs
Shut down cost
Conversion cost
Joint cost
Normal and abnormal costs
Replacement cost

33. Elements of costs
Material
Labour
Expenses
All the three above mentioned has two
parts direct and indirect .

34. Expenses excluded from cost
accounting
Financial incomes
Financial charges
Appropriation of profits
Abnormal expenses or losses

35. Determination of the total cost
Prime cost = Direct Material + Direct Labor+
Direct expenses
Works cost or factory cost= Prime cost + Works
overhead
Cost of production= Works cost or factory cost+
Office and administration Expenses
Total cost or cost of sales= Cost of production+
Selling & Distribution expenses
Sales Price= Total cost or cost of sales+ Profit

36. Particulars Total cost cost per unit
Direct Material
opening stock of raw materials
Add: Purchases
Add: Carriage inward/importduty
Less: Closing Stock of raw material
Prime Cost
Add:Factory or works overheads
Indirect material
Indirect wages
Factory rent
Factory lighting
Factory insurance
Drawing office expenses
Power and fuel
Depreciation repairs
Maintaince of Plant
Factory manager Salary
cost of sale of scrap
Less: sale of Scrap
Factory cost or work cost

37. Add: Office And Administration Overheads
Office rent
Office Salaries
Director's Fees
Office Lighting
Establishment charges
audit fees
Legal Charges
Bank Charges
General Office Expenses
Cost of Production
Add:Opening stock of finished goods
Less: Closing Stock of finished Goods
Cost of Goods Sold
Add:Selling and distribution Expenses
showroom expenses
salesman Salaries
trvelling Expenses
advertisement
Market research
Bad debts
Cost of free samples
Cost of Sales or total Cost
Add: Profit