COST ACCOUNTING
Meaning of Costing and Cost Accounting:
The Charted Institute of Management Accountants
defined costing as “ the techniques and processes of
ascertaining costs”
Costing simply means cost finding by technique.
Cost accounting is a formal system of accounting for
costs in the books of account, by mean of which cost of
product and services are ascertained and controlled.
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.
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”
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
Objectives and Functions of Cost Accounting:
1) Ascertainment of Cost:
2) Cost control and Cost Reduction:
3) Guide to Business Policy:
4) Determination of Selling Price:
5) Fixing profit per products.
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
Methods of costing
1) Job order costing: Costs are collected for each job/
work/ project separately. Where production is not
repetitive.
Example: Printing, machine tool manufacturing.
2) Contract costing: A contract is a big job and is spread
over a period of time. This costing applicable to builders.
Dams, bridges and roads.
3) Batch costing: it is extension of job costing. A batch
consists of number of similar products. the cost of group
of products constituting the batch
Example: drugs, cigrates, clothing, medicines etc..
4) Process costing: this method is used in mass
production industries manufacturing standard products
in continues process of manufacturing. To arrive cost
per unit, the total cost of a process is divided by no of
units produced.
Example: car manufacturing, refineries, sugar
manufacturing etc.
5) Operational costing: it is nothing but refinement and
more detailed application of process costing. It involves
ascertainment for each operation instead of process.
Example: mines, steel production etc.
6)_Service costing: where services are being provided
rather than goods manufactured.
Example: hospital, hotel , education industries etc
7) Single, or output or unit costing: used when
production is uniform and consists of a single or two or
more varieties of same products. Where product is
produced in different grade.
Example: car manufacturing, steel production.
8) Service costing: it is used in undertaking which
provide services instead of manufacturing products.
Example: transport co, electricity co.
9) Multiple or Composite costing: this method used in
industries where a number of components are separately
manufactured and then assembled into final product.
Example: television set manufacturing
Techniques of costing
1) Standard costing: This is a very valuable technique of
controlling cost. Standard cost is pre-determined as
target of performance, and different between actual cost
incurred and standard cost analyze.
2) Budgetary costing:
3) Marginal costing: In this technique, separation of
costs in to two parts: fixed and variable costs. Marginal
costing regards only variable costs as the cost of the
products. This technique is used to study the effect on
profit of changes in volume or type of output.
4) Total absorption costing: it is a traditional
method of costing where by total costs( fixed
and variable) are charged to products. This is in
complete contrast to marginal costing where
only variable cost are charged for products.
5) Uniform costing: it simply denotes a situation
in which a number of firms adopt a uniform set
of costing principles.
Classification of cost
A) Classification into Direct and Indirect Costs:
direct costs: these are those costs which are
incurred for and identified with a particular cost
unit.
Indirect costs: these costs cannot be identified
with the particular cost unit.
B) Classified into fixed and variable costs:
fixed cost:
variable cost:
semi variable or semi fixed costs:
C) classification into committed and
Dis-cretionary costs:
committed:
Example: salary of manager, and depreciation.
Discretionary costs: costs which can be
avoided by the management decisions. Such
cost are not permanent.
Example: research and development.
D) classification into product costs and period
costs:
product costs: these are those costs which are
necessary for production and which will not be
incurred if there is no production.
Period costs: these costs are not necessary for
production but incurred even if there is no
production.
Example: showroom rent, salary of supervisor.
E) classification into controllable and non- controllable
costs:
controllable cots:
non-controllable costs:
F) Classification into historical and pre-determined costs:
historical costs: these are the costs which are
ascertained after these have been incurred. Historical
costs are thus, nothing but actual costs.
pre-determined costs: these are future costs which
are ascertained in advance of production on the basis of
specification of all the factors affecting cost.
Special costs for Management Decision making
Relevant cost: Not all costs are relevant for
decision making. A relevant cost is a cost whose
magnitude will be effected by a decision being
made. ( future cost and revenue)
Irrelevant cost: These are those costs that will
not be affected by a decision.
Sunk costs: a sunk cost is an expenditure made
in the past that cannot be changed and over
which management has no longer has control.
Differential costs: is the increase or decrease in total
cost that result from an alternative course of action.
Marginal cost: is the additional cost of producing one
additional unit. Marginal cost is the same thing as
variable cost.
Im-puted cost: these are hypothetical costs which are
specially computed outside the accounting system for
the purpose of the decision making.
Example: interest on capital …not included in the cost.
Opportunity cost: Sacrifice of benefits or return by not
choosing the next best alternative.
Replacement cost: current market value of replacing
assets.
Elements of cost
Cost divided in to 3 parts.
1) material.
2) labour.
3) expenses.
1) Material cost: divided into 2 parts.
a) direct material: cost is that which can be
conveniently identified with and allocated to cost
units. Direct material generally become a part of
the finished products.
Example: leather in shoes, steel in machines.
B) indirect material: are those materials which cannot be
conveniently identified with individual cost units.
Example: lubricant oil, small tools, nuts and bolts.
2) Labour cost:
a) direct labour cost:
b) indirect labour cost
example: supervisor, clerk, watchmen.
3) Expenses cost:
a) direct expenses:
b) indirect expenses:
Example: rent, depreciation, advertising.
ELEMENTS COST
OF
COST
OTHER EXPENSES
MATERIALS LABOUR
DIRECT INDIRECT
DIRECT INDIRECT INDIRECT
DIRECT
OVERHEADS
SOH DOH
FOH AOH
Overhead cost
1) factory overhead.
a) indirect material+ indirect labour + indirect
expenses of factory.
2) office overhead.
b) indirect material+ indirect labour + indirect
expenses of office.
3) selling and distribution overhead.
c) indirect material+ indirect labour + indirect
expenses of selling.
Examples of Indirect material
At factory level – lubricants, oil, etc.
At office level – Printing & stationery,
Dusters, etc.
At selling & dist. level – Packing
materials, printing & stationery, etc.
Examples of Indirect labour
At factory level – foremen’s salary,
works manager’s salary, gate
keeper’s salary,etc
At office level – Accountant’s salary,
GM’s salary, Manager’s salary, etc.
At selling and dist.level – salesmen
salaries, Logistics manager salary,
etc.
Examples of Indirect expenses
At factory level – factory rent, factory
insurance, lighting, etc.
At office level – office rent, office
insurance, office lighting, etc.
At sales & dist.level – advertising, show
room expenses like rent, insurance, etc.
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
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
Limitation of Cost Accounting
Expensive
Unnecessary
Inapplicable
Failure
Not reliable
