Presented by Ms Sophie A.D

Final yearMHAJNMC

Cost Accounting

Basic Cost Concepts

04/27/232

Cost is the cash or cash-equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization.

Opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another.An expense is an expired cost or a cost used up in the production of revenues.

Ms.Sophie A.D

Costs and Activities

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A cost object is any item for which costs are measured and assigned.

An activity is a basic unit of work performed within an organization.

Ms.Sophie A.D

Origins

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Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.

Ms.Sophie A.D

Standard Cost Accounting

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In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production.

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This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles).

Ms.Sophie A.D

GAAP (Generally Accepted Accounting Principles).

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Generally Accepted Accounting Principles (GAAP) is the term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction.

GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

Ms.Sophie A.D

Introduction

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Management cannot avoid making decisions, even if the decisions is to do nothing in a particular situations. decision- making is focused towards specific goals and without data about these goals decision will lack purpose and effectiveness.

An efficient decision consumes minimum amount of resources to achieve the desired goal.

Cost accounting is a subject that provides knowledge to take effective and efficient decisions for cost control, ascertainment of profitability and internal and external reporting.

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Cost Accountancy: It is a comprehensive term . It is used to describe the principles , conventions, techniques and systems that are employed in a business to plan and control the utilization of its resources.

Ms.Sophie A.D

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Cost accounting: it is the process of accounting for cost . This process begins with recording of income and expenditure and ends with preparation of statistical data .

Ms.Sophie A.D

OBJECTIVE

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The primary objectives of cost accounting include controlling cost, stimulating cost-consciousness, ascertaining product unit cost and determining profit and loss for various products and services and inventory valuation.

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Functional activities include under the general term of cost accounting:

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A. Cost book –keeping : It involves recording of cost.

B. Cost Control: The determination of whether the current costs

represent what is regarded as satisfactory cost performance(cost collection, cost analysis, cost presentation, and cost interpretation).

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C. Cost analysis: It involves determination of why costs are

out of line and fixation of responsibility for the same.

It deals with determination of different relationships between cost and various determinants of costs.

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D. Cost comparison: the comparison of the cost of alternatives products , activities, methods or areas in the field of production or distribution.

E. Cost planning: involved in accounting for cost.

F. Cost finding: measurement or estimation of cost of individual products, departments, or other segments of the firm’s operations.

Ms.Sophie A.D

Types of cost

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Historical costs: Are collected after they have been incurred.

Future costs: Are costs expected to be incurred at a later date.

Replacement costs: is cost of replacement in the current market.

Standard cost: is scientifically pre determined cost which is arrived at assuming a particular level of efficiency in utilization of material, labour and indirect services.

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Estimated cost: Is an approximate assessment of what the cost will be. It is based on fast averages adjusted to anticipate feature changes.

Product cost: is the cost of finished product built up from its cost elements .

Production cost: Represents prime cost plus absorbed production overhead.

Ms.Sophie A.D

04/27/2317

Direct cost: Is a cost which can be economically identified with a specific saleable cost unit.

Prime cost: Is the aggregate of direct material cost and direct labour cost

Indirect cost : Is the cost that cannot be directly identified to the unit of output

Fixed cost : is the cost which is incurred for a period and which within certain output and turnover limits tends to be unaffected by fluctuations in the levels of activity

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Variable cost : is the cost which tends to vary with the level of activity

Joint cost : is the cost of process which results in more than one main product

Ms.Sophie A.D

HISTORICAL COSTS

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The use of the term cost in financial accounting invariably means historical or actual cost.

A historical cost may be an expired cost or an unexpired cost.

Expired cost, is the monetary value of the resources that have already been used in producing revenue; it does not have a future revenue- producing potential.

Expense: When the revenue producing potential of an expired cost has been used up in producing revenue, it is called an expense.

Ms.Sophie A.D

Cost, Expense and loss

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A cost may sometimes expire without generating any revenue to the firm, and such expired cost is the loss.

The expired costs – expenses and losses – are reported in the profit and loss account (income statement).

Unexpired cost, is the one which still has the potential of generating revenue in future; it represents the monetary value of an unused resource.

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Expenditure

Cost Deferred cost or unexpired

cost

Balance sheet

Expired Cost

Expenses Loss

Profit and loss account

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Advantages

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Cost accounting 1.Helps in optimum utilization of mean,

material and machines.2.Identifies the areas requiring corrective

action.3.Helps management in formulation of

policies.4.Helps management in making short-term

decisions by use of techniques like marginal costing.

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5. Provides useful data for final accounts by giving cost of closing stock of raw materials, work -in –progress and finished products.

6. Provides a data- base for reference by government, wage Tribunals and Trade unions etc.,

7. Helps in formation of cost centre's and responsibility centre's to exercise control.

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8. Helps to face increasing difficulties in setting prices and improving efficiency.

9. Facilities use of specialized techniques like cost reduction , value analysis, operations research and management by exception,etc.,

10. Focuses attention on the profitability of each product and services unlike financial accounting, which presents profitability for company as a whole.

Ms.Sophie A.D

LIMITATIONS

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1. It is not an exact science and involves inherent element of judgment.

2. Cost varies with purpose .Therefore cost collected for one purpose will not be suitable for another purpose.

3. Most of the cost accounting techniques are based on some pre-assumed notions.

4. Different views are held by different cost accountants about the item to be included in cost.

Ms.Sophie A.D

04/27/2326 Ms.Sophie A.D