Fundamentals of cost accounting

1. COST
ACCOUNTING
D R . S . B E L L A R M I N D I A N A
A S S I S T A N T P R O F E S S O R
D E P A R T M E N T O F M A N A G E M E N T S T U D I E S
B O N S E C O U R S C O L L E G E F O R W O M E N , T H A N J A V U R

2. CONTENT
INTRODUCTION TO COST ACCOUNTING
 MEANING OF COST AND COST ACCOUNTING
 TERMINOLOGY OF COST
 OBJECTIVES OF COST ACCOUNTING
 ELEMENTS OF COST
 CLASSIFICATION OF COST
 METHODS OF COSTING

3. MEANING OF COST
Cost means the amount of expenditure incurred on a
given thing.
Example: The cost of making a chair includes, the
amount spent on materials like timber, nail, wages
paid to carpenter and etc.,

4. MEANING OF COST ACCOUNTING
Cost accounting is the process of classifying, recording,
allocating and reporting the various costs incurred in
the operation of an enterprise.

5. OBJECTIVES OF COST ACCOUNTING
• Ascertainment total cost and cost per unit
• Discloser of proportion of different l elements of cost
• Providing necessary data for fixing selling price
• Ascertainment of profitability
• Aiding in the preparation of tender and quotation
• Identification of sources of wastages and losses
• Facilitate formulation of incentive and bonus plan
• Cost control and cost reduction
• Providing basis for operating policies

6. TERMINOLOGY OF COST
Costing
It means the technique and process of ascertaining
cost.
Technique- refers to the body of principles and rules.
Process – refers to the procedure.
The process and technique of costing depend on the
nature of industry and type of product and the method

7. COST UNIT
It refers to a unit of product, service or time in relation to which
costs may be ascertained or expressed.
Example:
Industry cost unit
Sugar per quintal
Cement, steel, coal per tonne
Textile per meter
Passenger transport per passenger Km
Goods transport per tonne Km

8. COST CENTRE
It is a location, person or item of equipment or group of this
in relation to which cost can be ascertained. It is a sub-
division of the organization to which costs can be charged.
Example:
Location – works department, welding shop etc.,
Person – supervisor, salesman
Item of equipment – delivery van and other equipment

9. ELEMENTS OF COST
Element of cost
Material Labour Expenses
Direct Indirect Direct Indirect Direct Indirect
Overheads
Factory overhead Administrative overheads Selling & Distribution overheads

10. DIVISIONS OF COST
Prime cost = Direct material + Direct labour + Direct expenses
Factory cost = Prime cost + Factory overhead
Cost of Production = Factory cost + Administrative overheads
Cost of sales = Cost of production + Selling and Distribution
overheads

11. CLASSIFICATION OF COST
According to nature or elements According to function According to variability
Material cost
Labour cost
Overheads
Production cost
Administrative cost
Selling & Distribution
overhead
Fixed cost
Variable cost
Semi – variable cost
According to Normality According to controllability According to Time
Normal cost
Abnormal cost
Controllable cost
Uncontrollable cost
Historical cost
Pre-determined cost

12. CLASSIFICATION OF COST
According to Managerial decision According to capital & revenue
According to association with
products
Marginal cost
Differential cost
Imputed cost
Replacement cost
Opportunity cost
Sunk cost
Shut down cost
Conversion cost
Avoidable cost
Unavoidable cost
Capital cost
Revenue cost
Product cost
Period cost

13. FACTORY OVERHEAD – Indirect Expenses incurred from the stage of raw
materials to finished goods.
ADMINISTRATIVE OVERHEAD – Expenses incurred for running the
administrative office.
SELLING OVERHEAD – Expenses incurred for actual sales and promotion of
sales
DISTRIBUTION OVERHEAD – Expenses concerned with the packaging and
delivery of goods to the goods.
FIXED COST – cost remain fixed irrespective of the level of output
VARIABLE COST – cost varies with the volume of output
SEMI-VARIABLE COST – cost which is partly fixed and partly variable

14. NORMAL COST – cost which is incurred at a given level of output under
normal condition
ABNORMAL COST - cost which is incurred at a given level of output
under abnormal condition
CONTROLLABLE COST – cost which can be minimized by the executive
actions
UNCONTROLLABLE COST - cost which can not be minimized by the
executive actions
HISTORICAL COST – cost which are ascertained after they have been

15. PRE-DERTERMINED COST – cost which are determined even before
they are actually incurred
MARGINAL COST – Only variable costs are taken in to account for
determining the costs of the products
DIFFERENTIAL COST – Cost arises as a result of change in the level of
output
IMPUTED COST – Imaginary costs which do not involve payment in cash
REPLACEMENT COST – cost of replacement of an asset at the current
market price.
OPPORTUNITY COST – It is value of benefit sacrificed in favour of an
alternative course of action
SUNK COST- Irrecoverable cost which is caused by the complete
abandonment of a particular plant.
SHUT DOWN COST – cost which continue to occur even if there is
temporary stoppage of production activities

16. METHODS OF COSTING
JOB COSTING
CONTRACT COSTING
BATCH COSTING
PROCESS COSTING
UNIT COSTING
OPERATING COSTING
OPERATION COSTING
MULTIPLE COSTING

17. BASIC COST SHEET
DIRECT MATERIAL XXXX
DIRECT LABOUR XXXX
DIRECT EXPENSES XXXX
PRIME COST XXXX
FACTORY OVERHEADS XXXX
FACTORY COST XXXX
OFFICE OVERHEADS XXXX
COST OF PRODUCTION XXXX
SELL & DIST OVERHEADS XXXX
COST OF SALES XXXX
PROFIT XXXX
SALES XXXX

18. COST SHEET - ADVANCED
OPENING STOCK OF RAW MATERIALS XXXX
+PURCHASES XXXX
+CARRIAGE INWARDS XXXX
-CLOSING STOCK OF RAW MATERIALS XXXX
VALUE OF MATERIALS CONSUMED XXXX
+DIRECT WAGES XXXX
+DIRECT EXPENSES XXXX
PRIME COST XXXX
+FACTORY OVERHEADS XXXX
+OPENING STOCK OF WIP XXXX
-CLOSING STOCK OF WIP XXXX
FACTORY COST XXXX
(CONT.)

19. COST SHEET - ADVANCED
FACTORY COST XXXX
+ADMINISTRATIVE OVERHEADS XXXX
COST OF PRODUCTION XXXX
+OPENING STOCK OF FINISHED GOODS XXXX
-CLOSING STOCK OF FINISHED GOODS XXXX
COST OF GOODS SOLD XXXX
+SELL. & DIST. OVERHEADS XXXX
COST OF SALES XXXX
+PROFIT XXXX
SALES XXXX

20. THANK YOU
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