Cost accounting is concerned with recording, classifying, and summarizing costs to determine the costs of products or services, plan and control costs, and provide information to management for decision making. It involves ascertaining costs through cost finding techniques, applying cost control methods, and calculating the profitability of activities. The objectives of cost accounting are to ascertain, estimate, control, and reduce costs, determine selling prices, facilitate financial reporting, and provide a basis for operational policies.

1. ahsanullah.mohsen

2. COST ACCOUNTING
INTRODUCTION
ahsanullah.mohsen

3. COST ACCOUNTING - MEANING
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
ahsanullah.mohsen

4. COST ACCOUNTING - INTRODUCTION
Accounting for determination and control of costs.
 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.
ahsanullah.mohsen

5. COST - MEANING
Cost means the amount of expenditure
(actual or notional) incurred on, or
attributable to, a given thing.
ahsanullah.mohsen

6. 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
ahsanullah.mohsen

7. COST TERMINOLOGY:
OST:
Cost means the amount of expenditure incurred on a particular thing.
OSTING:
Costing means the process of ascertainment of costs.
OST ACCOUNTING:
The application of cost control methods and the ascertainment of the
profitability of activities carried out or planned”.
OST CONTROL: Cost control means the control of costs by management. Following are the
aspects or stages of cost control.
OB COSTING: It helps in finding out the cost of production of every order and thus helps in
ahsanullah.mohsen
ascertaining profit or loss made out on its execution. The management can judge the profitability

8. ELEMENTS OF COST
Element of cost
Materials
Direct
Indirect
Labour
Direct
ahsanullah.mohsen
Expenses
Indirect Direct
Indirect

9. 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.
ahsanullah.mohsen

10. EXAMPLES OF INDIRECT MATERIAL
t factory level – lubricants, oil,
consumables, etc.
t office level – Printing & stationery,
Brooms, Dusters, etc.
t selling & dist. level – Packing materials,
printing & stationery, etc.
ahsanullah.mohsen

11. 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.
ahsanullah.mohsen

12. EXAMPLES OF INDIRECT LABOUR
t factory level – foremen’s salary, works
manager’s salary, gate keeper’s salary,etc
t office level – Accountant’s salary, GM’s
salary, Manager’s salary, etc.
t selling and dist.level – salesmen salaries,
Logistics manager salary, etc.
ahsanullah.mohsen

13. 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.
ahsanullah.mohsen

14. Examples of other expenses
t factory level – factory rent, factory insurance, lighting, etc.
t office level – office rent, office insurance, office lighting, etc.
t sales & dist.level – advertising, show room expenses like rent,
insurance, etc.
ahsanullah.mohsen

15. COST SHEET
DIRECT MATERIAL
DIRECT LABOUR
DIRECT EXPENSES
PRIME COST
FACTORY OVERHEADS
FACTORY COST
OFFICE OVERHEADS
COST OF PRODUCTION
SELL & DIST OVERHEADS
COST OF SALES
PROFIT
SALES
ahsanullah.mohsen

16. 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.)
ahsanullah.mohsen

17. 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
ahsanullah.mohsen

18. The concept of cost
ut lay cost
pportunity cost
ost and expenses
xpenses
ahsanullah.mohsen

19. COST CLASSIFICATION – ON THE BASIS OF
1) Nature
2) Function
3) Direct & indirect
4) Variability
5) Controllability
6) Normality
7) Financial accounting classification
8) Time
9) Planning and control
10) Managerial decision making
ahsanullah.mohsen

20. ON THE BASIS OF NATURE
Materials
Labour
Expenses
ahsanullah.mohsen

21. ON THE BASIS OF FUNCTION
anufacturing costs
ommercial costs –S&D Costs
N THE BASIS OF DIRECT AND INDIRECT
irect costs
ahsanullah.mohsen

22. ON THE BASIS OF VARIABILITY
Fixed costs
Variable costs
Semi variable costs
ahsanullah.mohsen

23. ON THE BASIS OF CONTROLLABILITY
Controllable costs(power)
Uncontrollable costs( power cost per unit)
N THE BASIS OF NORMALITY
ormal costs
bnormal costs
ahsanullah.mohsen

24. ON THE BASIS OF FINANCIAL ACCOUNTS:
Capital costs
Revenue costs(all direct costs)
Deferred revenue costs(unearned revenue)
ahsanullah.mohsen

25. ON THE BASIS OF TIME:
Historical costs
Pre determined costs
N THE BASIS OF PLANNING AND CONTROL:
udgeted costs
ahsanullah.mohsen

26. 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)
ahsanullah.mohsen

27. 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)
ahsanullah.mohsen

28. METHODS OF COSTING
1.
2.
3.
4.
5.
6.
7.
Job costing
Contract costing
Batch costing
Process costing
Unit costing
Operating costing(uses for services)
Operation costing(hybrid of job-order and
process costing)
8. Multiple costing
ahsanullah.mohsen

29. TYPES OF COSTING
1. Uniform costing(number of firms in an
industry)
2. Marginal costing
3. Standard costing
4. 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)
ahsanullah.mohsen

30. Direct Materials
Opening stock of materials
Add Purchases of materials
Less Closing stock of materials
(a) Materials consumed
Direct Wages
Direct Expenses
Calculation of various cost
------
------
PRIME COST
Add Factory Overheads
Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs
Salaries of Works Manager etc. Indirect Materials
Drawing office and works office expenses Depreciation on factory land and building Less Scrap value
Defective work
Add Work in progress (opening)
Less Work in progress (closing)
------
WORKS COST
Add Office/Administration overheads
Office rent, insurance, lighting, cleaning
Office salaries, telephone, law and audit expenses
General Manager’s salary
Printing and stationery
Maintenance, repairs, upkeep of office bldg
Bank charges and miscellaneous expenses
------
COST OF PRODUCTION
Add Opening stock of finished goods
Less Closing stock of finished goods
------
COST OF GOODS SOLD
Add Selling and Distribution Overheads
Showroom expenses, salesmen’s salaries
& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples
and free gifts etc.
COST OF SALES
Add Net Profit or deduct net loss:
------ SALES
------

31. Costs in financial statement
ost of goods sold
irect materials
anufacture overheads
ahsanullah.mohsen