1. Cost and Management Accounting Class Discussion
Cost :What?, Why? and How?
What is Cost?
· Cost is the expenses incurred, actual or notional, in producing and selling a
product or service.
· Expenses: All revenue expenses. For example: material cost, salaries, rent,
electricity, commission, advertisement, bad debts, discounts, depreciation etc.
· Actual expenses involve actual outflow of cash.
· Notional expenses do not involve any outflow of cash. Opportunity cost is
considered to be an example of notional expenses.
Why Cost?
Information about cost is required for the following purposes:
· Inventory valuation for the purpose of financial accounting
· Managerial decision making: Pricing, make or buy, ects.
· Performance evaluation of the division/manager
· Determination of managerial remuneration.
How is Cost Determined?
There is no specific format for preparing the cost sheet.
Cost Classification
One of the ways to understand the cost is to classify it. Each classification answers
questions relating to the cost or the components of cost.
a) Element wise classification: Total cost = Material Cost (MC) + Labour
Cost (LC) + Expenses (E)
b) Classification on the basis of Identification: Cost can be divided into two
broad categories: Direct and Indirect Cost
· Direct Cost: Expenses directly identified with product
· Indirect Cost: Expenses which are not directly identified with
product. Sometimes, expenses which are not significant are also
clubbed under the indirect cost
· TC = DC +IDC
·
Let us combine the above two classifications:
· Material Cost = Direct + Indirect
· Labour Cost = Direct + Indirect
· Expenses = Direct + Indirect
· Overheads = Indirect Material + Indirect Labour+ Indirect
Expenses
· So Total Cost = DM +DL+DE + Overheads
c) Classification on the basis of behaviour of expenses: Shows the behaviour
of expenses with respect to the volume
· TC = Fixed Cost + Variable Cost

2. Cost and Management Accounting Class Discussion
· Fixed cost also known as period cost. FC remain fixed for a
particular period
· Total fixed cost (TFC) remains constant during a particular
period or for a particular capacity
· Average fixed cost (AFC) changes. AFC increases with the
decrease in production and decrease with the increase in
production
· Variable Cost: is also known as the product cost.
· Total variable cost (TVC) varies with the volume of production
and Average variable cost (AVC) remains constant.
· TC = TFC + TVC
· AVC = AFC + AVC
Output TVC TFC TC AVC AFC AC
10 100 5000 5100 10 500 510
100 1000 5000 6000 10 50 60
500 5000 5000 10000 10 10 20
5000 50000 5000 55000 10 1 11
d) Fuctional Classification: Overheads can also be classified on the basis of
function as follows:
· Factory/Production/works overheads
· Administration overheads
· Distribution overheads
· Sales overheads
Cost Sheet
Cost sheet shows the cost flow and also the functional nature of the overheads.
Example-I
Following information is provided by ABC
· Production: 1000 units
· Material cost 50 per unit
· Labour: 20 per unit
· Direct expenses: 10 per unit
· Factory overheads: 20,000
· Administration overheads: 25000
· Sales and Distribution overheads: 50000
Required;
a) Cost Sheet, when all units are sold at Rs 200 per unit
b) Cost sheet, when 80% of the units were sold

3. Cost and Management Accounting Class Discussion
Example-I
Following information is provided by ABC
Raw material
· Opening Stock: 1000 units @ 5
· Purchases: 5000 units @ 6
· Closing Stock: 2000 units
Direct Labour: 20,000
Direct Expenses: 18,000
Factor overheads
· Factory depreciation/electricity etc: 20,000
Work in progress
· Opening WIP: 1000units@ 12
· Closing WiP: 500unit
Production: 4500 units
Administration overheads: 35000
Sales and Distribution overheads: 50000
· Opening Stock: 1500 @ 22
· Closing stock: 1000
Required;
c) Cost Sheet, when all units are sold at Rs 200 per unit