Cost Accounting

1. Cost Accounting
Karthikeyan R
Assistant Professor
Department of Commerce with Computer Applications
Dr. N.G.P. ARTS AND SCIENCE COLLEGE
(An Autonomous Institution, Affiliated to Bharathiar University, Coimbatore)
Approved by Government of Tamil Nadu and Accredited by NAAC with A++ Grade (3nd Cycle – 3.64 CGPA)
Dr. N.G.P.- Kalapatti Road, Coimbatore-641048, Tamil Nadu, India
Web: www.drngpasc.ac.in | Email: info@drngpasc.ac.in | Phone: +91-422-2369100

2. Meaning
• Cost: It means the total of all expenditures incurred on the production of an article.
• Costing: It is the techniques and process of ascertaining costs. It enable the
management to know the total cost and each elements of cost of a product. It has been
defined by Weldon as, “the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and the
presentation of suitably arranged data for purposes of control and guidance of
management.
• Cost Accounting: It is the accounting system set up for recording costs. It begins with
the recording of income and expenditure and ends with the preparation of statements and
reports of costs.
Dr. NGPASC
COIMBATORE | INDIA

3. Definition
• A systematic set of procedures for recording and reporting
measurements of the cost of manufacturing goods and
performing services in the aggregate and in detail. It includes
methods for recognizing, classifying, allocating, aggregating
and reporting such costs and comparing them with standard
costs.
Dr. NGPASC
COIMBATORE | INDIA

4. Definition
• The Chartered Institute of Management Accountants in England
(CIMA) has defined Cost Accounting as, ‘the process of accounting
for cost from the point at which expenditure is incurred or
committed to establishment of its ultimate relationship with cost
centres and cost units. In its widest usage, it embraces the
preparations of statistical data, the application of cost control
methods and the ascertainment of the profitability of activities
carried or planned’. It is a formal mechanism by means of which
costs of products or services are ascertained and controlled.
Dr. NGPASC
COIMBATORE | INDIA

5. Scope of Cost Accounting
1. Cost book-keeping
2. Cost system
3. Cost ascertainment
4. Cost Analysis
5. Cost comparisons
6. Cost Control
7. Cost Reports
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COIMBATORE | INDIA

6. Importance of Cost Accounting
1. Classification of Costs
2. Cost Control
3. Price Determination
4. Fixing of Standards
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COIMBATORE | INDIA

7. Objectives of Cost Accounting
Thus, the following are the main objectives of cost accounting:
• Ascertainment of the cost per unit of the different products that a business concern
manufacturers.
• To correctly analyze the cost of both the process and operations.
• Disclosure of sources for wastage of material, time, expenses or in the use of the equipment
and the preparation of reports which may be necessary to control such wastage.
• Provide requisite data and help in fixing the price of products manufactured or services
rendered.
• Determination of the profitability of each of the products and help management in the
maximization of these profits.
• Exercise effective control of stocks of raw material, work-in-progress, consumable stores, and
finished goods so as to minimize the capital invested in them.
Dr. NGPASC
COIMBATORE | INDIA

8. Objectives of Cost Accounting
• Present and interpret data for management planning, decision-making, and control.
• Help in the preparation of budgets and implementation of budgetary control.
• Aid management in the formulation and implementation of incentive bonus plans
on the basis of productivity and cost savings.
• Organization of cost reduction programmes with the help of different departmental
managers.
• To provide specialized services for cost audit in order to prevent errors and frauds.
• To facilitate prompt and reliable information to management.
• Determination of costing profit or loss by linking the revenues to costs of those
products or services by selling which the revenues have arisen.
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COIMBATORE | INDIA

9. Advantages of Cost Accounting
1. To the Management
2. To the Employee
3. To the Creditors
4. To the Government
5. To the Public
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COIMBATORE | INDIA

10. Advantages of Cost Accounting
1. To the Management
– Effective decision making
– Measuring efficiency
– Cost reduction
– Fixation of selling price
– Effective cost control
– Increase in efficiency
– Effective inventory control
– Reduction of wastage
– Effective utilization of
resources
– Helps in effective budgeting
Dr. NGPASC
COIMBATORE | INDIA

11. Advantages of Cost Accounting
2. To the Employees
– Stability of tenure
– Fair wage policy
– Rewards for higher efficiency through incentive schemes
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COIMBATORE | INDIA

12. Advantages of Cost Accounting
3. To the Creditors
– Understanding the progress & profitability of the firm & future
prospects of the firm.
Dr. NGPASC
COIMBATORE | INDIA

13. Advantages of Cost Accounting
4. To the Government
– Granting of subsidies
– Planning of resources
– Utilization of scarce resources
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COIMBATORE | INDIA

14. Advantages of Cost Accounting
5. To the Public
– Removal of wastage
– Fair price for products
– Employment opportunities
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COIMBATORE | INDIA

15. Disadvantages of Cost Accounting
1. Lack of uniformity
2. Second hand data
3. Conventions
4. Uncertainty
5. Costly
6. Applicability
7. Cost & Incomes
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COIMBATORE | INDIA

16. Differences between Financial & Cost Accounting
1. Objective
2. Legal requirement
3. Classifications of requirement
4. Stock valuation
5. Analysis of Profit & Cost
6. Accounting period
7. Emphasis
8. Nature
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COIMBATORE | INDIA

17. Cost Concept
What Is Cost Concept of Accounting?
The cost concept of accounting states that all acquisition
of items (such as assets or things needed for expending) should
be recorded and retained in books at cost. Thus, if a balance sheet
shows an asset at a certain value it should be assumed that this is
its cost unless it is categorically stated otherwise.
Dr. NGPASC
COIMBATORE | INDIA

18. Costing an aid to Management
It means that cost accounting helps the management in carrying out
most of its functions. It provides basic cost data and performs cost functions
that provide the management will all the information they require. A good cost
account system helps the management in the following ways,
1. Classification of Costs
2. Control of Costs
3. Budgeting
4. Price Determination
5. Expansion Plans
Dr. NGPASC
COIMBATORE | INDIA

19. Principles of Cost Accounting
1. Cause-effect relationship
2. Charging of cost subsequent to incurrence
3. Convention of prudence is ignored
4. Past costs not to form part of future cost
5. Inclusion of normal costs only in cost accounts
6. Double entry for cost ledgers
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COIMBATORE | INDIA

20. Classifications of Cost
1. According to Elements
2. According to Functions
3. According to Nature of Behavior
4. According to Controllability
5. According to Normality
6. According to Relevance to decision making & Control
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COIMBATORE | INDIA

21. Classifications of Cost
1. According to Elements
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22. Classifications of Cost
2. According to Functions
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Functions
Production Cost
Administration Cost
Selling Cost
Distribution Cost

23. Classifications of Cost
3. According to Nature of Costs
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Nature
Fixed Cost
Variable Cost
Semi-Variable Cost

24. Classifications of Cost
4. According to Controllability
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COIMBATORE | INDIA
Controllability
Controllable
Uncontrollable

25. Classifications of Cost
5. According to Normality
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COIMBATORE | INDIA
Normality
Normal
Abnormal

26. Classifications of Cost
1. Shutdown cost
2. Sunk cost
3. Opportunity cost
4. Imputed cost
5. Out-of-Pocket cost
6. Replacement cost
7. Conversion cost
8. Product cost
9. Period cost
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COIMBATORE | INDIA
6. According to Relevance to Decision Making & Control

27. Methods of Costing
1. Job Costing
2. Contract Costing
3. Batch Costing
4. Process Costing
5. Operating Costing
6. Operation Costing
7. Unit Costing
8. Multiple Costing
9. Activity based Costing
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COIMBATORE | INDIA

28. Methods of Costing
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Particulars
Total Cost
(Rs.)
Cost Per Unit
(Rs.)
Direct material Consumed:
Opening stock of raw materials
(Add): Purchases
(Less): Closing Stock
Cost of Drawings
Direct Expenses
Primary Packing Materials
***
***
***
***
***
***
Prime Cost
(Add): Works /Factory overheads:
Indirect Materials
Indirect wages
Factory Rent and Rates
Factory Lighting and Heating
Power and fuel
Repairs and Maintenance
Drawing Office Expenses
Research and Experiment Cost
Depreciation of Factory Plant
Works Stationery
Insurance of Factory
Works Manager’s Salary
***
***
***
***
***
***
***
***
***
***
***
***
***
***
Work Cost / Factory Cost/ Manufacturing Cost
(Add): Office and Administrative Overheads:
Office Salaries
Office Rent and Rates
Lighting and Heating
Cleaning
Telephone and Postages
Printing and Stationery
Depreciation of Office Furniture
Insurance
Legal Expenses
***
***
***
***
***
***
***
***
***
***
***
Cost of Production
(Add): Selling and Distribution Overheads:
*** ***

29. Prime cost
This is also called direct cost. It is the aggregate of direct materials, direct labours and direct
expenses which are easily identifiable with the product.
Works Cost
It consists of the total of all items expenses incurred in the manufacturing of a product. Prime
cost plus factory expenses. It is also known as factory cost or manufacturing cost.
Cost of sales
It represents the cost of production plus selling and distribution cost incurred. Thus, the cost of
sales is the aggregate of all the direct and indirect costs connected to the goods sold.
When profit is added to the cost of sales it ensures that all the costs are recovered and
any desired profit is also obtained.
Dr. NGPASC
COIMBATORE | INDIA

30. Tenders
Frequently the manufacturers of consumers durables and capital
goods are asked to quote the price at which they can supply their output. The
price at which the items of output are offered for sale is known as tender.
In order to prepare the tender the following items are to be analysed.
Dr. NGPASC
COIMBATORE | INDIA
• Raw materials
• Direct labour
• Chargeable expenses
• Work overhead
• Office overhead
• Selling overhead
• Estimated profit

31. Norms on Elements of Cost
• Direct materials & direct labour costs are generally estimated
on the basis of cost per unit of proceeding period, subjected to
fluctuations in the market price of materials and labour rates.
Dr. NGPASC
COIMBATORE | INDIA

32. Norms on Elements of Cost
• Overhead;
– Percentage of factory overhead to direct wages
= Factory overhead / Direct wages x 100
– Percentage of office overhead to work cost
= office overhead / work cost x 100
– Percentage of selling overhead to work cost
= selling overhead / work cost x 100 (or)
The percentage may be calculated on cost of production
= selling overhead / cost of production x 100
Dr. NGPASC
COIMBATORE | INDIA

33. Norms on Elements of Cost
• Estimation of profit
– Profit = cost of sales x percentage of profit / 100
– Profit = cost of sales x rate of profit on sales / 100 – rate percentage on sales
Reference Book : T.S. Reddy and Hari prasad Reddy
Cost Accounting, Margham Publications
Dr. NGPASC
COIMBATORE | INDIA