Cost Accounting
Sem-3
UNIT -1
Introduction to Cost & Cost Accounting
20% weightage
By Ms. Lekhani Agrawal
Syllabus
• Various Cost Concepts
• Classification of Costs
• Methods and Techniques of Costing
• Meaning of Cost centre and its types
Cost Concept
Cost: It can be defined as the
amount of expenditure (actual or
notional) incurred on or
attributable to a specified article,
product, or activity.
Cost Driver: It is any factor that
affects cost. E.g. Total No. of EXPENSE: These are costs which
units produced is a cost driver of have been applied against
Total cost. Similary other revenue of particular accounting
examples are No. of customers, period. E.g. Salary, rent.
No. of salesman, no. of
advertisement etc.
COST CENTRE: It is unit or
LOSS: It is cost lost. It denotes
subdivision of the business
sacrifice for which there is no
enterprise to which cost is
return. Eg. Fixed asset sold at a
attributable. Eg. A business is
value less than book value, will be
divided into 3 departments, so
treated as loss.
each dept. is the cost centre.
COST UNIT: It is a device to break
up or segregate costs into smaller
subdivisions attributable to
products or services. E.g. meter of 3
cloth, tonne of coal, etc.
Practice Question
• Q1. Cost unit of dairy industry is –
• A. Per Kilo
• B. Per Litre
• C. Per barrel
• D. Per ton
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Practice Question
• Q1. Cost unit of dairy industry is –
• A. Per Kilo
• B. Per Litre
• C. Per barrel
• D. Per ton
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Practice Question
• Q2. Which Cost unit is used for the Transport Company?
• A. Passenger-Km/ Ton-Km
• B. Gallon/Litre
• C. Unit/No.
• D. Ton/Kg
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Practice Question
• Q2. Which Cost unit is used for the Transport Company?
• A. Passenger-Km/ Ton-Km
• B. Gallon/Litre
• C. Unit/No.
• D. Ton/Kg
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Practice Question
• Q3. In Cement Industry, Cost unit is -
• A. Barrel
• B. Cube meter
• C. Job
• D. Tonne
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Practice Question
• Q3. In Cement Industry, Cost unit is -
• A. Barrel
• B. Cube meter
• C. Job
• D. Tonne
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Classification of the Cost
On the Basis
of
Elements Functions Behaviour Time Period Managerial Decision
Making
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A. Direct Cost: Those expenses which are directly incurred for the
production or can be directly identified with a particular job or unit of
product are known as direct cost. Example: Direct material, Direct Labour
and other direct expenses. – Wood – Furniture, Yarn – weaving cloth, etc.
On the
basis of
Elements
B. Indirect Cost: Indirect expenses are those expenses that cannot be
charged directly to a cost unit. They are also known as common costs.
They are incurred for the whole business unit. Example: Factory Rent,
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Direct Costs
A. Direct materials: Direct material is all the material used to manufacture
the product, so they are charged directly to specific cost unit.
B. Direct Labour or employee cost : It is the labour that is used for the
manufacture of specific product, process or job. Example: wages paid to
carpenter making furniture. Wages paid to shoe maker.
C. Other direct expenses : It includes any expenditure other than direct
material or direct labour incurred on a specific cost unit.
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Indirect Costs
A. Indirect materials : Materials which do not normally form part of the
finished product (cost object)are known as indirect materials. Stores used for
maintaining machines and buildings (lubricants,cotton waste, bricks etc.)
B. Indirect Labour or employee cost : Employee costs which cannot be
allocated but can be apportioned to or absorbed by cost units or cost centres
is known as indirect employee. Salary paid to foreman and supervisor, Salary
paid toadministration staff etc.
C. Other Indirect expenses : Expenses other than direct expenses are known
as indirect expenses, which cannot be directly, conveniently and wholly
allocated to cost centres. Rates & taxes,insurance,depreciation, advertisement
expenses, etc.
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A. Factory overhead: It is also known as Manufacturing or Production or
Works Overheads. These are indirect expenses of operating the
manufacturing divisions of an enterprise. Examples: Depreciation &
Insurance of Plant & Machineries, Repairs & Maintenance of Plant &
Machineries,
On the
basis of B. Administration or Office Overhead: These are expenses incurred on
Function the management and administration of an enterprise. Example: Salaries
of office staff, Office rent and rates, Depreciation of office building ,
Audit fees, legal charges, Director’s fees, printing and stationary etc.
C. Selling & Distribution overhead: These are expenses incurred in
connection with the selling function, which includes the delivery of goods
to the customers. Example: Advertising, Bad debts, Salaries, commission
of Salesmen, Showroom expenses, etc. 14
3. On the basis of Behaviour of the Cost:
A. Fixed Cost: These are commonly described as those costs which remain fixed in
total amount. Fixed cost per unit decreases as production increases. Examples –
rent, insurance, depreciation, advertising, training, etc.
B. Variable: These are those costs which vary with production volume. If the
production increases, total variable cost also increases and vice versa. Per
unit variable cost is always fixed. Example – raw material, labour, etc
C. Semi-variable: These costs are partly fixed and partly variable. Example –
telephone bills, electricity bills, etc.
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A. Historical Cost: It is the Actual cost incurred on production. It can be
known only after the production is completed. Example: If a company buys a
machine for ₹5 lakh, it will be shown in the accounts as ₹5 lakh, even if its
market value becomes ₹8 lakh later.
On the
basis of
Time:
B. Predetermined cost: These are estimated costs that are fixed before
production starts. They are also known as standard cost. They are used to
compare with actual cost to find the variance.
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A. Period Cost: Period cost is the cost a business spends during a time
period to run the business, not directly to make products. example:
Administration cost, selling and distribution cost.
On the basis of
Measurement :
B. Product cost: Product cost are those cost incurred for the production
of the product. It includes costs of direct material, direct labour, direct
expenses and factory overhead.
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A. Marginal Cost: Marginal cost is the extra cost a business has to pay to
produce one more unit of a product. It includes only variable cost, not fixed
cost.
On the basis
of Decision
making:
B. Differential cost: Differential cost is the difference in total cost between
two alternatives or options. Example:
A company has two options:
Option A: Produce 1,000 units → Total cost = ₹50,000
Option B: Produce 1,500 units → Total cost = ₹70,000
Then, Differential Cost=₹70,000−₹50,000=₹20,000
So, producing 500 more units increases the cost by ₹20,000.
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C. Relevant cost: Relevant cost is the cost that matters when making a
specific business decision. It should be considered when choosing between
alternatives. Example, If a company closes down a branch, then staff
salaries, wages, electricity etc. are not to be paid. Then they are relevant
cost while taking the decision of closing down the branch.
On the
basis of D. Opportunity cost: Opportunity cost is the benefit you give up when you
Decision choose one option over another.
making: Example,
You have ₹1 lakh to invest:
Option A: Invest in business → Expected profit = ₹15,000
Option B: Keep in bank → Interest earned = ₹8,000
If you choose Option A, the opportunity cost is ₹8,000 (benefit you give up
from not choosing the bank option).
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Q4 Which of the following material is called
indirect material?
A. Yarn used in weaving industry
B. Wood used in making wooden furniture
C. Oil used in running machinery
D. Sugarcane used in making sugar
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Q4 Which of the following material is called
indirect material?
A. Yarn used in weaving industry
B. Wood used in making wooden furniture
C. Oil used in running machinery
D. Sugarcane used in making sugar
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Q5 Telephone Bill is included in which of the
following expenses?
A. Fixed expenses
B. Variable expenses
C. Semi-variable expenses
D. None of the above
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Q5 Telephone Bill is included in which of the
following expenses?
A. Fixed expenses
B. Variable expenses
C. Semi-variable expenses
D. None of the above
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Q6 Which one of the following is a “Product
cost”?
A. Indirect Materials
B. Administration staff
C. Salesman commission
D. Interest on Bank Loan
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Q6 Which one of the following is a “Product
cost”?
A. Indirect Materials
B. Administration staff
C. Salesman commission
D. Interest on Bank Loan
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Q7 Which one of the following is a “Period
cost”?
A. Plant Depreciation
B. Canteen Expenses
C. Office Rent
D. Direct Labour
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Q7Which one of the following is a “Period
cost”?
A. Plant Depreciation
B. Canteen Expenses
C. Office Rent
D. Direct Labour
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Q8 Which of the following expenses is included
in cost accounts?
A. Loss on the sale of assets
B. Written off preliminary expenses
C. Stationery and printing
D. Bad debts reserve
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Q8 Which of the following expenses is included
in cost accounts?
A. Loss on the sale of assets
B. Written off preliminary expenses
C. Stationery and printing
D. Bad debts reserve
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