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INTRODUCTION
COST ACCOUNTING
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Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making
COST ACCOUNTING - MEANING
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COST ACCOUNTING - INTRODUCTION
COST ACCOUNTING: The Institute of Cost and Management
Accountant, England (ICMA) has defined Cost Accounting as –
“the process of accounting for the costs from the point at which
expenditure incurred, to the establishment of its ultimate
relationship with cost centers and cost units. In its widest sense,
it embraces the preparation of statistical data, the application of
cost control methods and the ascertainment of the profitability of
activities carried out or planned”.
Cost Accounting = Costing + Cost Reporting + Cost Control.
Accounting for determination and control of costs.
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COST - MEANING
Cost means the amount of expenditure (actual or notional) incurred on, or attributable to, a given thing.
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OBJECTIVES OF COST ACCOUNTING
Ascertainment of costs
Estimation of costs
Cost control
Cost reduction
Determining selling price
Facilitating preparation of financial and other
statement
Providing basis for operating policy
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COST TERMINOLOGY:
C
OST: Cost means the amount of expenditure incurred on a particular thing.
C
OSTING: Costing means the process of ascertainment of costs.
C
OST ACCOUNTING: The application of cost control methods and the ascertainment of the
profitability of activities carried out or planned”.
C
OST CONTROL: Cost control means the control of costs by management. Following are the aspects or
stages of cost control.
J
OB COSTING: It helps in finding out the cost of production of every order and thus helps in
ascertaining profit or loss made out on its execution. The management can judge the profitability of each
job and decide its future courses of action.
B
ATCH COSTING: Batch costing production is done in batches and each batch consists of a number of
units, the determination of optimum quantity to constitute an economical batch is all the more important. ahsanullah.mohsen
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ELEMENTS OF COST
Element of cost
Materials Labour Expenses
Direct Indirect Direct Indirect Direct Indirect
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MATERIAL: The substance from which the finished product is made is known as material. (a) DIRECT MATERIAL: is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc.
(b) INDIRECT MATERIAL: one which cannot be easily identified in the product.
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EXAMPLES OF INDIRECT MATERIAL
At factory level – lubricants, oil, consumables, etc.
At office level – Printing & stationery, Brooms, Dusters, etc.
At selling & dist. level – Packing materials, printing & stationery, etc.
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LABOUR: The human effort required to convert the materials into finished product is called labour.
(a) DIRECT LABOUR: is one which can be conveniently identified or attributed wholly to a particular job, product or process.Eg:wages paid to carpenter, fees paid to tailor,etc.
(b) INDIRECT LABOUR: is one which cannot be conveniently identified or attributed wholly to a particular job, product or process.
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EXAMPLES OF INDIRECT LABOURA
t 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.
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OTHER EXPENSES: are those expenses other than materials and labour.
DIRECT EXPENSES: are those expenses which can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc.
INDIRECT EXPENSES: are those expenses which cannot be directly allocated to particular job, process or product.
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Examples of other expensesA
t 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.
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COST SHEET DIRECT MATERIALDIRECT LABOURDIRECT EXPENSES
PRIME COSTFACTORY OVERHEADS
FACTORY COSTOFFICE OVERHEADS
COST OF PRODUCTIONSELL & DIST OVERHEADS
COST OF SALESPROFIT
SALES
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COST SHEET - ADVANCED OPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDS-CLOSING STOCK OF RAW MATERIALS VALUE OF MATERIALS CONSUMED+DIRECT WAGES+DIRECT EXPENSES PRIME COST+FACTORY OVERHEADS+OPENING STOCK OF WIP-CLOSING STOCK OF WIP FACTORY COST (CONT.)
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FACTORY COST +ADMINISTRATIVE OVERHEADS COST OF PRODUCTION+OPENING STOCK OF FINISHED GOODS-CLOSING STOCK OF FINISHED GOODS COST OF GOODS SOLD+SELL. & DIST. OVERHEADS COST OF SALES+PROFIT SALES
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The concept of cost•O
ut lay cost
•O
pportunity cost
•C
ost and expenses
•E
xpenses
•O
perating cost
•P
roduct cost
•P
eriod cost
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COST CLASSIFICATION – ON THE BASIS OF
1) Nature2) Function3) Direct & indirect4) Variability5) Controllability6) Normality7) Financial accounting classification8) Time9) Planning and control10) Managerial decision making
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ON THE BASIS OF NATURE
Materials
Labour
Expenses
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ON THE BASIS OF FUNCTION
Manufacturing costs
Commercial costs –S&D Costs
ON THE BASIS OF DIRECT AND INDIRECT
Direct costs
Indirect costs
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ON THE BASIS OF VARIABILITY
Fixed costs
Variable costs
Semi variable costs
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ON THE BASIS OF CONTROLLABILITY
Controllable costs(power)
Uncontrollable costs( power cost per unit)
ON THE BASIS OF NORMALITY
Normal costs
A
bnormal costsahsanullah.mohsen
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ON THE BASIS OF FINANCIAL ACCOUNTS:
Capital costs
Revenue costs(all direct costs)
Deferred revenue costs(unearned revenue)
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ON THE BASIS OF TIME:
Historical costs
Pre determined costs
ON THE BASIS OF PLANNING AND CONTROL:
Budgeted costs
Standard costs
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ON THE BASIS OF MANAGERIAL DECISION MAKING
Marginal costs Out of pocket costs(cash out flow) Sunk costs(one time payment like on software) Imputed costs(alternative for implied cost),e.g. not
paying rent on self owned property. Opportunity costs Replacement costs Avoidable costs Unavoidable costs Relevant and irrelevant costs(making a building for
1.5b) Differential costs(automated and manual production)
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TERMS IN COST ACCOUNTING
Cost unit
Cost center( research and development)
Cost estimation
Cost ascertainment(from existing data)
Cost allocation(assigning of a common cost to several cost objects)
Cost apportionment
Cost reduction
Cost control
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METHODS OF COSTING1. Job costing2. Contract costing3. Batch costing4. Process costing5. Unit costing6. Operating costing(uses for services)7. Operation costing(hybrid of job-order
and process costing)8. Multiple costing
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TYPES OF COSTING
1. Uniform costing(number of firms in an industry)
2. Marginal costing3. Standard costing4. Historical costing(It is the ascertainment
of costs after they have been incurred. This type of costing has limited utility.)
5. Absorption costing( both variable and fixed to operations, processes or product)
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Direct MaterialsOpening stock of materialsAdd Purchases of materialsLess Closing stock of materials(a) Materials consumedDirect WagesDirect Expenses ------ ------PRIME COSTAdd Factory OverheadsFactory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, RepairsSalaries of Works Manager etc. Indirect MaterialsDrawing office and works office expenses Depreciation on factory land and building Less Scrap valueDefective workAdd Work in progress (opening)Less Work in progress (closing) ------WORKS COSTAdd Office/Administration overheadsOffice rent, insurance, lighting, cleaningOffice salaries, telephone, law and audit expenses
General Manager’s salaryPrinting and stationeryMaintenance, repairs, upkeep of office bldgBank charges and miscellaneous expenses ------COST OF PRODUCTIONAdd Opening stock of finished goodsLess Closing stock of finished goods ------COST OF GOODS SOLDAdd Selling and Distribution OverheadsShowroom expenses, salesmen’s salaries& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.COST OF SALESAdd Net Profit or deduct net loss: ------ SALES ------
Calculation of various cost
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Costs in financial statement•C
ost of goods sold
•D
irect materials
•M
anufacture overheads
•W
ork in process
•F
inished goodsahsanullah.mohsen