2. Cost
◦“Cost is the amount of resource given up in
exchange for some goods and services. The resource
given up are money and money’s equivalent
expressed in monetary units
3. Cost Accounting
◦Cost accounting is the formal system of accounting by
mean which cost are ascertained for the product and
services and record in the books of accounts.
◦Cost accounting is concerned with recording, classifying
and summarizing cost for determination of cost of products
or services, planning, controlling and reducing such costs
and furnishing of information to management for decision
making
4. Cost Accountancy
◦Cost accountancy” as the application of costing and cost
accounting principles, method and techniques to the science,
art and practice of cost control and the ascertainment of
profitability.
◦ Cost accountancy is concerned with the formulation of
principles, methods and techniques to be applied for
ascertaining cost and profit.
◦.
5. Objectives of Cost Accounting
• Ascertainment of cost
• Cost Control
• Guide to business policy such as make or buy, introduction of new
product
• Determination of Cost
• Decision Making
• To compare the actual figure of cost with estimates figures
6. COST CONCEPT
Cost Unit –It is a unit of product, service or time in terms of which costs
are ascertained or expressed. It is a unit of measurement. It is unit of
measurement of cost.
Responsibility Centers – is the unit or function of an organization under
the control of a manager who has direct responsibility for its
performance. E.g.Cost Center, Revenue Center, Profit Center, Investment
Center.
Cost Object – any product, service, process or activity for which aseparate
measurement of cost is required. For e.g. Car, Taxi service, weaving
process,purchasing raw material etc.
7. COST CONCEPT
Cost Center – Is alocation, person or item of equipment for which costs may be
ascertained and usedfor the purposesof cost control.
Cost Centre is defined as a function or department within a
company which is not directly going to generate revenues and profits
to the company but is still incurring expenses to the company for its
operations. It is very much, unlike a profit centre, whose actions will
directly result in the profits to the company
8. Types of Cost Centre
◦ Personal CostCenter – person or group of persons
◦ Impersonal CostCenter – location or equipment
◦ Production CostCenter – where actual production takesplace
◦ Service CostCenter – departments which render service to other cost centers
10. LIMITATIONS OF COST ACCOUNTING
• Cost Accounting is Unnecessary
• Cost Accounting System cannot be adopted by Small Business Concerns
• Cost Accounting System is Very Costly
• Costing Results are Misleading
• Reduces flexibility and process improvement in a company.
• Restriction on innovation.
• Requirement of skillful personnel to set standards.
• Lack of Uniformity
11. FINANCIALACCOUNTING
◦ Financial Accounting: It is “the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events, which are in
part at least, of afinancial characterand interpreting the resultsthereof”
The information supplied by financial accounting is summarized in the following
statements, generallyat the end of anyear:
◦ P& LAccount BalanceSheet
◦ CashFlowStatement
12. LIMITATIONS OF FINANCIAL
ACCOUNTING
1. Historicalinnature
2. Only highlight the overall performance
3. Noperformanceappraisal
4. Nomaterial controlsystem
5. Nolabour costcontrol
6. Noproper classificationofcosts
7. No Analysisof Losses
8. Inadequateinformation of price fixation
9. Nocostcomparison
10. Fails to provide usefuldatatomanagement
13. LIMITATIONS OF FINANCIAL
ACCOUNTING
1. Shows only overallperformance
2. Historical innature
3. Noperformanceappraisal
4. Nomaterial controlsystem
5. Nolabour costcontrol
6. Noproper classification ofcosts
7. Noanalysisof losses
8. Inadequateinformation of pricefixation
9. Nocostcomparison
10. Failsto provide useful data tomanagement
14. Importance of Cost Accounting
◦ 1. Controlling costs: Cost accounting helps the management foresee the cost price
and selling price of a product or a service, which helps them formulate business
policies. With cost value as a reference, the management can come up with techniques
to control costs with an aim to achieve maximum profitability.
◦ 2. Determining the total per-unit cost: Cost accounting techniques help in
determining the total per-unit cost of a product or a service, so that the business can
fix the selling price for it.
◦ 3. Showing profitable and non-profitable activities: This information helps the
management put an end to non-profitable activities while developing and expanding
the profitable ones.
◦ 4. Comparing costs over time
15. Installing Cost Accounting System
◦ Steps of Cost Accounting system
1. Objectives to be Achieved
2. Study the Product
3. Study the Organization
4. Deciding the Structure of Cost Accounts 5. Selecting
the Cost Rates
6. Introduction of the System
7. A Follow-up.
16. Elements of COST
◦ In order to interpret the term cost correctly and to ascertain the costwith respect to the costcenters, the
costattached with the manufacturingprocess maybesubdivided,known as elementofCost.
(A) Material
(B) Labour
(C) Expenses
17. Elements of Cost
Material
Direct Indirect
Labour
Direct Indirect
Expenses
Direct Indirect
Selling
&Distribution
Overheads
Administration
Overheads
Factory/ Works
Overheads
18. Material Cost
The cost of commodities and materials used by the organization. It includes cost of
procurement, freight inwards, taxes,insuranceetc.
DirectMaterial Cost–
all raw materials, either purchased from outside or manufactured in house, that can be
conveniently identified with andallocated to costunits.
It generally becomes part of the finished product. However in many cases a material
becomes part of finished product but not considered asdirect material because the value of
such material is so small that it is quite difficult and futile to measure it. e.g. nails in
furniture, thread in garmentsetc.
e.g. Cotton used in a textile firm, Clay in bricks, leather in shoes Cloth in garments, Timber
in furnitureetc.
19. Indirect Material
◦ Indirect materials are materials used in the production process,
but which cannot be linked to a specific product or job. ... Thus,
they are consumed as part of the production process, but are not
integrated in substantial amounts into a product or job. Examples of
indirect materials are: Cleaning supplies.
20. Direct Labour Cost
◦
Direct labor cost is wages that are incurred in order to produce goods or
provide services to customers. ... Direct labor costs are most commonly
associated with products in a job costing environment, where the
production staff is expected to record the time they spend working on
various jobs
21. Indirect labor
◦ Indirect labor is the cost of any labor that supports the production
process, but which is not directly involved in the active conversion of
materials into finished products. Examples of indirect labor positions are:
Production supervisor. Purchasing staff.
22. Expenses
◦ Direct expense is an expense incurred that varies directly with changes in
the volume of a cost object. A cost object is any item for which you are
measuring expenses, such as products, product lines, services, sales regions,
employees, and customers. ... The materials used to construct a product for
sale.
23. ◦Indirect Expenses
Indirect expenses are those expenses that are incurred to
operate a business as a whole or a segment of a business,
and so cannot be directly associated with a cost object, such
as a product, service, or customer. ... Examples of indirect
expenses are: Accounting, audit, and legal fees
24. Cost sheet
◦Cost sheet statement is used to determine the total cost of
goods produced in a specific Period and per unit cost
◦Cost incurred at various stages from manufacturing of
products to the stage of making it saleable are shown.
◦It is prepared for short period say for three and six months
while production continuous
25. ◦It shows costing data in analytical manner
◦It present the costing data on unit basis
◦It is used for the purpose of cost determination, cost
comparison, Pricing, Cost control and cost estimation
26. Cost Account
◦ Cost Account is ledger account maintained in the cost ledger on the
principle of double entry
◦ Cost accounting are kept accounting period as whole and prepared when
the production is complete
◦ Cost account present the cost without analysis
◦ Cost account does not depict per unit cost
◦ cost account maintain the record of actual cost incurred for the purpose
of preparing costing Profit and Loss account
27. Cost sheet and Statement of Cost
◦ Cost sheet or Statement of Cost presenting the cost analysis on per unit
basis and total cost figures and both terms used interchangeably.
