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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