cost accounting

1. Cost Accounting
Meaning of Cost:-
The word “cost” is used very often in our day-to-day
affairs. The Committee on terminology, American Institute of
Certified Public Accountants defined cost as:
“Cost is the amount , measured in money, of cash expended or
other property transferred, capital stock issued, services
performed, or liability incurred, in consideration of goods or
services received or to be received”.
Cost represent the resources that have been or must be
sacrificed to attain a particular objective.

2. COSTING
Costing is the technique and process of ascertaining cost. The
technique means product or services.
COST ACCOUNTING:-
The Institute of Cost and works Accountants of India
defines: Cost Accounting is the technique and process of
ascertainment of costs. Cost Accounting is the process of
accounting for costs, which begins with recording of
expenses or the bases on which they are calculated and ends
with preparation of statistical data”.

3. OBJECTIVES OF COST ACCOUNTING:
Cost accounting is a mechanism of accounting by means of costs of services or products are
ascertained and controlled in a manufacturing firm for different purposes.
The main objectives or purposes are as follows:
ASCERTAINMENT OF COST:
It enables the management to ascertain the cost of product, job, contract, service or
unit of production so as to develop cost standard.
FIXATION OF SELLING PRICE:
Cost data are useful in the determination of selling price or quotations. Apart from cost
ascertainment, the cost accountant analyses the total cost into fixed and variable costs.
COST CONTROL:
The object is to minimise the cost of manufacturing. Comparison of actual cost with standards
reveals the discrepancies -varieties. If the variances are adverse, the management enters into
investigation so as to adopt corrective action immediately.
MATCHING COLST WITH REVENUE:
The determination of profitability of each product, process, department etc. is the important
object of costing.
SPECIAL COST STUDEIS AND INVESTIGATION:
It undertakes special cost studies and investigation and these are the basis for the management
in decision making or policies.
PREPARATION OF FINANCIAL STATEMENTS, P&L A/C, BALANCE SHEET:
A good system of costing facilitates the preparation of the statements, as the figures are easily
available, they can be prepared monthly or even weekly.

4. ADVANTAGES OF COST ACCOUNTING
To the To the Employees Creditors Government Public
Management
• Guide in reducing Sound Wage policy
Prices #Higher bonus plans
• Measuring efficiency #Distinction between
• Action against unprofitable Efficient and
Activities Inefficient workers
• Facilitates Decision making #Security of job
• Assists in fixing prices
 Improves efficiency
 Facilitates cost control
 Establishes standard cost
 Inventory control
 Prevents Fraud
 Tool of Management control
 Measuring Rods
 Future Prospects
 #Budgeting
 Check on Accuracy

5. COST CLASSIFICATION
NATURE FUNCTION OF VARIABILITY CONTROL DIRECT AND CAPITAL AND NORMAL
COMPANIES INDIRECT REVENUE
#Materials #Production cost #Fixed cost #Controllable #Direct # Capital #Normal
#Labour #Administration #Variable cost #non-controllable #Indirect #Revenue #Abnormal
#Direct #Selling cost #Semi-variable
#Distribution cost

6. ELEMENTS OF COST
Material Labour Other expenses
Direct Indirect Direct Indirect Direct Indirect
Factory Administration Sales Distribution

7. COST SHEET OF…FOR THE MONTH OF JULY,…
PARTICULARS TOTAL COST(RS) COST PER UNIT(RS)
Opening stock of material ***
Add: Purchases of raw material ***
______
***
Less: Closing of raw material ***
_____ Cost
of raw material consumed ***
*** ***
Direct labour
Direct expenses
***
***
***
***
PRIME COST
Add: Works overhead
***
***
***
***
WORKS(OR) FACTORY COST
Add: General or administration overhead
***
***
***
***

8. SPECIMEN OF COST SHEET
Direct material consumed
opening stock
Add: Purchases
Less: Closing stock
Cost of drawings
Direct expenses
Primary packing materials
PRIME COST
Add: Works/factory overheads
Indirect expenses
Indirect wages
Factory rent and rates
Factory lighting and heating
Power and fuel
Repairs and maintenance
Drawing office equipment
Research and experiment cost
FACTORY COST/WORK COST
TOTAL COST
RS.
COST PER
UNIT RS.

9. TOTAL COST
RS.
COST PER
UNIT RS.
Add: Office and administration cost
Office salaries
Office rent and rates
Lighting and heating
Cleaning
Telephone and posting
Printing and stationery
Depreciation of office furniture
Depreciation of office equipment
Insurance
Legal expenses
COST OF PRODUCTION
Add: Selling and distribution overheads
Advertising
Salesmen salaries
Samples and free gifts
Sales office rent
Commission
Travelling expenses
Showroom rent and rates
Carriage frieght outwards etc.,
COST OF SALES

10. MATERIAL-PURCHASE CONTROL
Material control:
Material control can be defined as “a systematic control over purchasing, storing and
consumption of material, so as to maintain a regular and timely supply of materials, at the
same time avoiding over- stocking”.
Objectives of Material Controls:
1. To make available all types of materials and stores of right quality.
2. To make purchases of materials of required quality according to the standard fixed.
3. To make purchases of materials at reasonably low cost.
4. Maximum stock level should be fixed.
5.To avoid abnormal wastage, leakage, etc. of the materials, store-keepers must be trained
to minimise the loss of stores.
6.To avoid obsolescence of materials by adopting better method of issue of materials.
7.To provide the management with information of raw materials – cost, availability etc.
8.To ensure proper storage and utilisation of materials.

11. ESSENTIALS OF MATERIAL CONTROL
1.There should be co-operation and co-ordination among the departments dealing with
materials.
2.Purchasing of materials should be centralised under expert personnel.
3.All items in the store should be codified, classified and standartised.
4.Proper forms should be used for dealings of store items.
5.Material storage should be carefully planned to avoid losses from theft, etc.
6.Store control measures, like ABC analysis and stock verification, should be introduced.
7.Stock at different levels should be fixed to ensure that there is no shortage and over
stocking of material.
8.Purchasing quantity should be fixed to reduce the ordering cost and carrying cost.
9.Materials and supplies should be properly stored.
10.Requisitions and stock must be priced on a suitable basis in order to ensure reliable
Costs.
11.Receiving and inspection procedure must be chalked out.
12.Regular reports on materials purchased, issued, obsolete, spoiled, defective etc. are to be
submitted to the management.

12. Advantages of Material control:
a)Elimination of waste in the use of materials.
b)Reduction of risk of loss on account of theft, loss, fraud, etc.
c)Availability of the right quality of material in time.
d)Avoidance of overstocking.
e)Possibility of economic buying.
f)Reviewing and revising of product design and savings in material.
g)Quick and accurate availability of data relating to stores.
h)Preventions of production delays.
PURCHASE CONTROL:
An effective material control requires a good amount of attention to the purchasing
procedure of materials as to its cost, quality, volume, timely delivery, etc.

13. PURCHASE DEPARTMENT:
 Posses a good knowledge of the requirements of the firm and know the quality and grade
required.
 know the source of supply of needed store-items.
 Posses administrative and organisational ability.
 Have a good knowledge of market trends.
 Be conversant with the mercantile law, contract act, sale of goods act, Insurance act etc.,
 Be a man of high integrity and honesty.
 Facilitate continuous flow of material from store to the production department.
 Develop alternate supply, if the regular supplier fails to supply.
 Be quick in taking decisions.
 Be able to obtain maximum value for every rupee spent by him.

14. CENTRALISED Vs DECENTRALISED PURCHASING
 Centralised purchase means that all the purchases are made by the specialised department.
 Decentralised purchase means that all the purchases are made by the individual departments.
 The centralised purchasing system has many advantages and is preferred.
MERITS AND DEMERITS OF CENTRALISED PURCHASE:
MERITS:
1.Bulk purchase can be made at a cheaper rate.
2.Quality of the materials can be maintained through the specialised knowledge of
personnel.
3.Capital investment in stock is reduced.
DEMERITS:
1.It involves high initial cost.
2.It is possible that materials of wrong quality may be issued.

15. FUNCTIONS OF THE PURCHASING DEPARTMENT:
A)Bill of materials(specification of materials)
B)Purchase requisition (Indent for materials)
C)Selection of supplier
D)Purchase order
E)Goods received note and Inspection of materials.
F)Passing the bill
COSTING OF INCOMING MATERIALS:
From the point of view of proper cost accounting, expenses incurred in purchasing, receiving
and storing the materials should be treated as cost of materials purchased.
Cost of materials received at the store is decided by taking the following consideration:
a)Invoice Price: Invoice price of the materials purchased is the net price after deducting trade
discount.
b)Freight: Materials are to be brought to the store.
c)Taxes: It is usual that the supplier charges sales tax, excise duty, customs duty, etc., in the
invoice.
d)Containers: The cost of the containers may be of three types:

16. Three types of containers:
1)Returnable 2)Non-returnable 3)Returnable at a reduced rate..
1)The cost of the containers is added to the cost of the materials.
2)The cost of the containers should not be added to the cost of the materials.
3)The difference between the full value and the reduced value should be added to the cost of
materials.
e)Discounts: Discounts may be trade discount, cash discount and quantity discount.