Cost Accounting

1. Cost accounting
Meaning
• Cost accounting is concerned with recording,
classifying and summarizing cost for
determination of cost of products or services,
planning, controlling and reducing such cost
and functioning of information to
management for decision making.

2. Definition
• Charles. T. Horngren, “Cost Accounting a
quantitative method that accumulates,
classifies, summarizes and interprets
information for three major purpose.
Operational planning & control
Special decisions
Product decisions

3. Objectives of cost accounting
• Determining selling price
• Determining and controlling efficiency
• Facilitating preparation of financial and other
statement
• Providing basis for operating policies.

4. Elements of cost
• Materials
– Direct materials
– Indirect materials
• Labour
• Expenses
• Overheads

5. Materials
• All materials which become an integral part of
the finished part of which can be conveniently
assigned to specific physical unit is termed as
direct materials. It is also known as prime cost
material, production material, stores material,
constructional material, process material.
• All materials which is used for purposes ancillary
to the business and which cannot be conveniently
assigned to specific physical units is termed as
indirect material. It is also used in the factory.
Office or the selling and distribution divisions.

6. Labour
• It is classified into direct labour and indirect
labour.
• Labour which plays an active role and direct
part in the production of a particular
commodity is called as direct labour. It is
known as process labour, production labour
etc.,
• Labour employed for the purpose of carrying
task incidental to goods produced or services
provided is indirect labour.

7. Expenses
• The cost of services provided to an
undertaking and the notional cost of the use
of owned assets.
• Direct expense
• Indirect expense

8. Classification of overheads
• Factory overheads
• Office & administration overheads
• Selling & Distribution overheads

9. Indirect
material
Factory
overhead
Office &
administration
overhead
Selling &
distribution
overhead
overhead
Direct
expenses
Direct labour
Direct
material
Elements of
cost
Indirect
labour
Indirect
expenses
Indirect
expenses
Indirect
labour
Indirect
material
Indirect
expense
Indirect
labour
Indirect
material

10. Components of total cost
• Prime cost (all direct expenses)
• Factory cost (prime cost + factory or work
overheads)
• Office cost (Prime cost + Factory cost + office
and administration overheads)
• Total cost (add selling and distribution
overheads)

11. Cost sheet
• It is a document which provides for the
assembly of the estimated details cost in
respect of cost centers and cost units.
• It analyses and classifies in a tabular form the
expenses on different items for a particular
period. It can be of two types:
• Historical cost sheet (prepared with actual
data)
• Estimated cost sheet (production, estimation
of future).