Cost accounting introduction

1. Cost Accounting

2. Definition (According to Harley)
• Costing is a study of the expenses incurred in manufacturing a product and
conducting a business in such a manner that the expenses are analysed and
classified so as to enable the actual cost of any particular process or unit of
production to be determined with a minimum of errors.

3. • Cost accounting include all costs that start from production to the selling and
distribution of products:-
• 1. Material
• 2. Labour
• 3. Overheads

4. Characteristics of Cost accounting
• Part of General Accounting – Just like Double entry system
• Art and science Both – Art (based on certain objectives), Science
– Certain Rules on how to achieve those objectives
• Entry of all types of expenses
• Scientific Method – in the form of cost sheet (Just like entries are
done in Financial Accounting

5. Characteristics of Cost accounting…… (Contd…)
• Determination of Total Cost – To set the selling price
• Cost of work-in-progress – Like Contracts (Road Construction,
Shipping, Building and Bridges construction)
• Cost per unit
• Wider scope- statistical data can also be prepared and profit per
unit can also be calculated

6. Objectives of Cost Accounting
Besides calculating cost of production of goods and to know the profit to be
earned from products
• To make arrangement for cost calculation
• To fix tender price
• To decide make / buy decision (make it or but it from outside party)
• To standardised cost to reduce the cost

7. Objectives / importance / functions of Cost
Accounting
• Broadly ,
1. Ascertainment of Cost
2. Control of Cost
3. Determination of selling price
4. Determination and controlling efficiency
5. Ascertainment of profitability
6. Guidance for policies and decisions -For calculating standard cost of production
7. Compliance with legal formalities

8. Advantages of Cost accounting
1. To Managers, produces
• Profitable and non-profitable activities (Loss making) are disclosed
• Ascertainment of Tender price
• Ascertainment of selling price
• Check on stores and material
• Check on labour and machines (Optimal utilisation, knowing underperformers)
• Future production policies
• Helps in increasing profits

9. 2. Advantage to employees- give them work as per their expertise
3. Advantages to consumer
4. Advantages to creditors and Investors – through cost accounting investors or
creditors come to know the future of organisation
5. Advantages to nation / society

10. Objectives against cost accounting and their
removal
• Expensive systemt
• Harmful if not used rationally and intellectually
• Uninteresting work – continually doing the same work leads to boredom
• Results are not reliable
• Under price increases

11. Characteristics of Ideal System of Cost system
• Simple
• Suitable according to nature of business
• Able to provide quick information
• Economical
• Flexible
• Comparative approach
• Accuracy
• Knowledge of cost per unit and total cost

12. Types of Costing
1. Methods of Costing
A. Job Costing
• Contract Costing Method-work done outside the party-Buying from outside party
• Factory Job Costing Method- inside the factory, tailor made products, short duration
like printing work, painting work
• Batch Costing Method-Batch / Lot size based example : chips packets etc
• Target Costing Method – big contracts – Tender for a specific work
• Cost Plus Method-cost plus some profits

13. B. Process Costing- where good passes through various production stages-Oil
Industry, Chemical Industry, Furniture Industry, Automobile Industry, Paper,
1. Unit costing method-used in continuous production type organization-coal
mines, stone mines, wine factories, milk, processing factories.
2. Departmental Costing Method: where organization is divided into various
departments.
3. Operating Cost System: where objective is to provide service not
production like Railways, Road transport, electricity.
4. Multiple or composite costing method: Automobile , cycle industry- where
different parts are produced and later on these are assembled.

14. Techniques of Costing
• Standard Costing
• Marginal Costing
• Uniform Costing- when different firms in one type of business using same costing
method, such situation is termed as uniform costing. Only then comparison is
possible.
• Historical Costing: when all expenses are made in past
• Direct Costing: To include all direct expenses in production cost and write off all
indirect expenses for a particular period – like Marginal Costing.
• Absorption Costing: Total Cost without making any demarcation / difference
between Fixed Cost and Variable Cost.

15. Factors to be consider while installing Cost
Accounting
• Organisational Structure – to pass on necessary information
• Flexible – if size of organsiation increase or decreases
• Capable Cost Accountant
• Use of Prescribed Norms / formats
• Standardisation – for comparison
• Determination of Labour Ploicies – wage rate ?? As per norms or not or any
variation.

16. Steps in Installing Cost accounting
• Objectives of Cost system
• Studying structure of Organsiation
• Implementing Cost Books – Material, Labour, Overheads
• Determination of Matter related to Material Issue –Material Cost, Storage Cost, Overhead
• Determination of Matter related to Labour Issue - Wages, wage payments method, ideal
time valuation, Labour turnover
• Process for Cost Analysis
• Reporting System (Follow-ups)