cost accounting

1. Mrs.Kiruthiga Shankaranand
Assistant Professor
Department of Accounting
ISSM B-School,
Kiruthiga.shankaranand@gmail.com

2. COST ACCOUNTING
Contents
Introduction : Definition & meaning of cost accounting, cost terminology,
classification of costs and calculation of various cost.
Job Costing: Concept, Job costing systems, Job costing in manufacturing,
actual v/s normal costing, job costing systems in manufacturing.
Activity Based Costing: Simple v/s Activity based costing system, cost
hierarchy, cost products or services using activity based costing, ABC v/s ABM
Process Costing: Process Costing methods, job order costing and spoilage,
job costing & rework and accounting for scrap.
Cost Allocation: Joint Products v/s By Products, approaches to allocating
joint costs and accounting for by-products.
Total

5. UNIT - 4
1. Definition & meaning of cost accounting
2. Cost terminology
3. Classification of costs and calculation of
various cost.
4. Model Paper
5. Quiz

6. INTRODUCTION
COST ACCOUNTING

7. COST - MEANING
Cost means the amount of expenditure (
actual or notional) incurred on, or
attributable to, a given thing.

8. INTRODUCTION
1. Cost Accounting is one of the major accounting
information bearing on the problems of internal
managerial control.
2. Financial accounts are unable to meet
informational needs about the cost information
required for internal decision making and
control.
3. It is very important to develop an accounting
system by which cost information may be
developed

9. Cost accounting is concerned with recording, classifying
and summarizing costs for determination of costs of
products or services, planning, controlling and reducing
such costs and furnishing of information to management
for decision making
COST ACCOUNTING -
MEANING

10. COST ACCOUNTING - INTRODUCTION
 COST ACCOUNTING: The Institute of Cost and Management
Accountant, England (ICMA) has defined Cost Accounting as – “the
process of accounting for the costs from the point at which
expenditure incurred, to the establishment of its ultimate relationship
with cost centers and cost units. In its widest sense, it embraces the
preparation of statistical data, the application of cost control
methods and the ascertainment of the profitability of activities
carried out or planned”.
Cost Accounting = Costing + Cost Reporting + Cost Control.
Accounting for determination and control of costs.

11. OBJECTIVES OF COST ACCOUNTING
 Ascertainment of costs
 Estimation of costs
 Cost control
 Cost reduction
 Determining selling price
 Facilitating preparation of financial and other statement
 Providing basis for operating policy

12. OBJECTIVES OF COST ACCOUNTING
 To aid in the development of long range plans by
providing cost data that acts as a basis for projecting
data for planning.
 To ensure efficient cost control by communicating
essential data costs at regular intervals and thus
minimize the cost of manufacturing.
 Determine cost of products or activities, which is
useful in the determination of selling price or
quotation.
 To identify profitability of each product, process,
department etc of the business
 To provide management with information in

13. ADVANTAGES OF COST
ACCOUNTING
1. It aids in effective decision making
2. It helps in cost reduction
3. It is helpful in fixation of selling price
4. It leads to effective inventory control
5. It helps in the reduction of wastage

14. 14
Cost and management accounting
Vs.
Financial accounting

15. 15
Management
(cost)accounting
Financial accounting
Nature Records material,
labour and overhead
costs in product or
job
Reports produced
are for internal
management and
contol
Records company
transaction events
External financial
statements are
produced
Accounting
system
Not based on the
double entry system
Follows the double
entry system

16. 16
Management
(cost)accounting
Financial accounting
Accounting
principles
No need to use
accounting principles
Adopt any
accounting techniques
that generates useful
accounting
information
Use Generally
Accepted Accounting
Principles for recording
transactions
Users of
information
Used by different
levels of management
or departments
responsible for
respective activities
Used by external
parties: shareholders,
creditors, government,
etc

17. 17
Management
(cost)accounting
Financial accounting
Operation
guidelines
or
standards
Based on
management
instructions and
requirements
Conforms to company
Ordinances, stock
exchange rules,
HKSSAPs
Time span Reports are
prepared whenever
needed
They may be
prepared on a
weekly or daily basis
Reports are prepared
for a definite period,
usually yearly and half
yearly

18. 18
Management
(cost)accounting
Financial accounting
Time focus Future orientation:
forecasts, estimates
and historic data for
management
actions
Past orientation: use
of historic data for
reporting and
evaluation
Perspective Detailed analysis of
parts of the entity,
products, regions,
etc
Financial summary of
the whole orgainisation

19. 19
Cost accounting
vs.
Management accounting

20. 20
Management
accounting
Cost accounting
Objective To provide
information for
planning and
decision making by
the management
To ascertain and
control cost
Basic of
recording
Concerned with
transactions related
to the future
Based on both present
and future transactions
for cost ascertainment

21. 21
Management
accounting
Cost accounting
Coverage Covers a wider
area: financial
accounts, cost
accounts, taxation,
etc.
Covers matters
relating to
ascertainment and
control of cost of
product or service
Utility Only the needs of
internal
management
The needs of both
internal and external
interested groups

22. COST TERMINOLOGY:
 COST: Cost means the amount of expenditure incurred on a particular thing.
 COSTING: Costing means the process of ascertainment of costs.
 COST ACCOUNTING: The application of cost control methods and the ascertainment of
the profitability of activities carried out or planned”.
 COST CONTROL: Cost control means the control of costs by management. Following are the
aspects or stages of cost control.
 JOB COSTING: It helps in finding out the cost of production of every order and thus helps in
ascertaining profit or loss made out on its execution. The management can judge the profitability of
each job and decide its future courses of action.
 BATCH COSTING: Batch costing production is done in batches and each batch consists of a
number of units, the determination of optimum quantity to constitute an economical batch is all the
more important.

23. 23
Element of cost
 Cost object
 Cost
 Cost unit
 Cost centre
 Profit centre

24. 24
Cost object
 It is an activity or item or operation for which a
separate measurement of costs is desired
 E.g. the cost of operating the personnel
department of a company, the cost of a repair fob,
and the cost for control

25. 25
Cost
 It is the amount of expenditure incurred on a
specific cost object
 Total cost = quantity used * cost per unit (unit
cost)

26. 26
Element of cost
 Cost object
 Cost
 Cost unit
 Cost centre
 Profit centre

27. 27
Cost object
 It is an activity or item or operation for which a
separate measurement of costs is desired
 E.g. the cost of operating the personnel
department of a company, the cost of a repair fob,
and the cost for control

28. 28
Cost
 It is the amount of expenditure incurred on a
specific cost object
 Total cost = quantity used * cost per unit (unit
cost)

29. 29
Cost centre
 It is a location or function of an organisation in
respect of which costs are ascertained
 E.g. the rent, rates and maintenance of buildings;
the wages and salaries of strorekeepers.
 According to CIMA:
“a location,person or item of equipment for
which costs may be ascertained and used for
the purpose of cost control”
 Types:
1. Productive cost centres,unproductive,mixed
cost centres
2. Personal and impersonal cost centres

30. Types of Cost centre:
 Productive cost centres:
They are engaged in making the products
 Unproductive cost centres:
They helps the production centres
 mixed cost centres;
They are engaged in making the products
They helps the production centres

31. Personal cost centre
 It is one which consists of group or person

32. Impersonal cost centre:
 It is one which consisys of department,plant
or item of equipment

33. Operation cost centre
 All machines or operators performing the same
operation are brought under one centre

34. Process cost centre
 The cost is analysed and related to the series of
operations in sequence.
 Eg:Oil refineries,chemical industries

35. 35
Profit centre
 It is location or function where managers are
accountable for sales revenues and expenses
 E.g. division of a company that is responsible for
the sales of products

36. ELEMENTS OF COST
Element of cost
Materials Labour Expenses
Direct Indirect Direct Indirect Direct Indirect

37. MATERIAL: The substance from which the
finished product is made is known as
material.
(a) DIRECT MATERIAL: is one which can
be directly or easily identified in the
product Eg: Timber in furniture, Cloth in
dress, etc.
(b) INDIRECT MATERIAL: one which cannot
be easily identified in the product.

38. EXAMPLES OF INDIRECT MATERIAL
At factory level – lubricants, oil,
consumables, etc.
At office level – Printing & stationery,
Brooms, Dusters, etc.
At selling & dist. level – Packing
materials, printing & stationery, etc.

39. LABOUR: The human effort required to
convert the materials into finished
product is called labour.
(a) DIRECT LABOUR: is one which can be
conveniently identified or attributed wholly to a
particular job, product or process.
Eg:wages paid to carpenter, fees paid to
tailor,etc.
(b) INDIRECT LABOUR: is one which cannot be
conveniently identified or attributed wholly to a
particular job, product or process.

40. EXAMPLES OF INDIRECT LABOUR
At factory level – foremen’s salary,
works manager’s salary, gate
keeper’s salary,etc
At office level – Accountant’s salary,
GM’s salary, Manager’s salary, etc.
At selling and dist.level – salesmen
salaries, Logistics manager salary,
etc.

41. OTHER EXPENSES: are those expenses other
than materials and labour.
DIRECT EXPENSES: are those expenses which
can be directly allocated to particular job,
process or product. Eg : Excise duty, royalty,
special hire charges,etc.
INDIRECT EXPENSES: are those expenses
which cannot be directly allocated to
particular job, process or product.

42. Examples of other expenses
At factory level – factory rent, factory insurance,
lighting, etc.
At office level – office rent, office insurance, office
lighting, etc.
At sales & dist.level – advertising, show room
expenses like rent, insurance, etc.

43. OVERHEADS
The term includes :
1. Indirect material
2. Indirect labour
3. Indirect expenses
A manfacturing organizations can be broadly
classifies to 3 divisons:
1.Factory or Works-Where production is done
2.Office and Administartion-Where routine as well
as policy matters are decided
3.Selling & Distribution –Where products are sold
and Finally despatched to the customer

44. Factory Overheads
 Indirect Material:
used in the factory such as Lubricants,oil,and
consumables stores
 Indirect labour:
Gatekeepers salary,Time-keepers salary,Work
managers salary
 Indirect Expenses:
Factory rent,Factory Insurance,Factory lighting

45. Office and Administrative
overheads
 Indirect Material:
At office level – Printing & stationery, Brooms,
Dusters, etc.
 Indirect labour:
At office level – Accountant’s salary, GM’s
salary, Manager’s salary, etc.
 Indirect Expenses:
At office level – office rent, office insurance, office
lighting, etc.

46. Selling & Distribution
 Indirect Material:
At selling & dist. level – Packing materials,
printing & stationery, etc.
 Indirect labour:
At selling and dist.level – salesmen salaries,
Logistics manager salary, etc.
 Indirect Expenses:
At sales & dist.level – advertising, show room
expenses like rent, insurance, etc.

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

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

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

50. SEMINAR
1. COST CLASSIFICATION – ON THE BASIS
OF-SEMINAR(PAGE NO:2.41-2.50)-
PRINTHIYA
2. METHODS OF COSTING(Seminar)-PAGE
NO:2.53-2.55)-HEPZHIBHA
3. TYPES OF COSTING/TYPES OF COSTING-
SEMINAR-(PAGENO:2.55-2.57)-BHARATHI

51. COST CLASSIFICATION – ON THE BASIS
OF-SEMINAR(PAGE NO:2.41-2.50)
 Nature
 Function
 Direct & indirect
 Variability
 Controllability
 Normality
 Financial accounting classification
Time
 Planning and control
 Managerial decision making

52. ON THE BASIS OF NATURE
 Materials
 Labour
 Expenses

53. ON THE BASIS OF FUNCTION
Manufacturing costs
Commercial costs – ADM and S&D Costs
ON THE BASIS OF DIRECT AND INDIRECT
Direct costs
Indirect costs

54. ON THE BASIS OF VARIABILITY
 Fixed costs
 Variable costs
 Semi variable costs

55. ON THE BASIS OF CONTROLLABILITY
 Controllable costs
 Uncontrollable costs
ON THE BASIS OF NORMALITY
Normal costs
Abnormal costs

56. ON THE BASIS OF FINANCIAL
ACCOUNTS:
 Capital costs
 Revenue costs
 Deferred revenue costs

57. ON THE BASIS OF TIME:
 Historical costs
 Pre determined costs
ON THE BASIS OF PLANNING AND CONTROL:
Budgeted costs
Standard costs

58. ON THE BASIS OF MANAGERIAL DECISION
MAKING
 Marginal costs
 Out of pocket costs
 Sunk costs
 Imputed costs
 Opportunity costs
 Replacement costs
 Avoidable costs
 Unavoidable costs
 Relevant and irrelevant costs
 Differential costs

59. TERMS IN COST ACCOUNTING
 Cost unit
 Cost centre
 Cost estimation
 Cost ascertainment
 Cost allocation
 Cost apportionment
 Cost reduction
 Cost control

60. METHODS OF COSTING(Seminar)-PAGE
NO:2.53-2.55
 Job costing
 Contract costing
Cost plus costing
Departmental costing
 Batch costing
 Process costing
 Unit costing
 Operating costing
 Operation costing
 Multiple costing

61. TYPES OF COSTING/TYPES OF
COSTING-SEMINAR-PAGENO:2.55-2.57
Uniform costing
Marginal costing
Standard costing
Historical costing
Direct costing
Absorption costing

62. Calculation of various cost
Direct Materials
Opening stock of materials
Add Purchases of materials
Less Closing stock of materials
(a) Materials consumed
Direct Wages
Direct Expenses ------ ------
PRIME COST
Add Factory Overheads
Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs
Salaries of Works Manager etc. Indirect Materials
Drawing office and works office expenses Depreciation on factory land and building Less Scrap value
Defective work
Add Work in progress (opening)
Less Work in progress (closing) ------
WORKS COST
Add Office/Administration overheads
Office rent, insurance, lighting, cleaning
Office salaries, telephone, law and audit expenses
General Manager’s salary
Printing and stationery
Maintenance, repairs, upkeep of office bldg
Bank charges and miscellaneous expenses ------
COST OF PRODUCTION
Add Opening stock of finished goods
Less Closing stock of finished goods ------
COST OF GOODS SOLD
Add Selling and Distribution Overheads
Showroom expenses, salesmen’s salaries
& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.
COST OF SALES
Add Net Profit or deduct net loss: ------ SALES ------

63. Home Assignment
1. What is Cost Accounting? How it is different from Management
Accounting?
2. Explain the various types of Cost?