introduction to costing

1. Content:
 Cost Accounting
 Meaning, Objectives , Scope
and Importance,
 Concepts of Costs
 Classification of Cost
 Elements of Cost
 Cost Center and Cost Unit
 Methods of Costing
 Techniques of Costing
 Role of Accountant in Decision
Making.
Module 1:
Introduction to
Cost &
Management
Accounting

2. Reason for failure
Pricing Problems
Poor Localization
Excise Duty
Design
Import of Engine
Uncertainty of JV
Background
Sales forecast
Financial Impact

3. Meaning of Costing
 CIMA, London defines costing as, “the
techniques and processes of ascertaining
costs.”
 It consists of principles and rules which are
used for determining;
 The cost of manufacturing a product Eg; motor
car, furniture, chemical, paper etc.
 The cost of providing a service Eg: electricity,
transport, education etc.

4. Meaning of Cost Accounting
 CIMA, London defines Cost Accounting as
“it is the process of accounting for costs from
the point of which expenditure is incurred or
committed to the establishment of its ultimate
relationship with cost centers and cost units.”
Difference between Costing and Cost
Accounting:
Costing is basically finding out cost of products
or services by any technique or method.
Cost Accounting is application of double entry
system for recording costs.

5. Main Objectives of Cost
Accounting
 To analyze and classify all expenditures with
reference to cost of products and operations
 To arrive at the Cost of Production of every unit,
job and to develop cost standard
 To indicate to the Management any inefficiencies
for remedial measures
 To provide periodical data for P&L, B/S
 To reveal sources of economies in production
having regard to methods, type of equipment,
design etc.
 To provide actual figures of cost for comparison
with estimates so as to help in price-fixing policy

6. Importance of Cost Accounting
 Costing as an Aid to Management
 Cost Accounting helps in periods of Trade
depression and Trade Competition
 Cost Accounting Aids Price Fixation
 Cost Accounting helps in making estimates
 CA helps in channelizing production on right
lines
 CA eliminates wastages
 CA makes comparison possible
 CA provide data for periodical P&L
 CA helps in inventory Control

7. Importance of Cost Accounting
 Costing as an Aid to Management
 Costing as an Aid to Creditors
 Costing as an Aid to Employees
 Costing as an Aid to National Economy

8. Scope of Cost Accounting
Cost Ascertainment
Control of Costs
Proper Matching of
Cost with Revenue
Aids to Management
Decision Making
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9. Concept of Cost
 Cost is “price paid for something”.
 The amount of expenditure incurred for production
of goods and services.
 Cost represents the resources that have been or
must be sacrificed to attain a particular objective.
 Resource may be tangible(money, materials,
machinery) or they may take form of
services(wages, rent, power).
 Cost is composed of three elements;
Material, Labour, Expenses

10. Classification of Costs

11. Classification of Costs
Elements
Behavior
Functions

12. Classification of Costs
Elements
Behavior
Functions
Material Labour
Expense
s
DM IM DL IL DE IE
Overhea
ds
Factory
OH
Administrative
OH
Selling
OH
Distributive
OH

13. Classification of Costs
Production Cost
or Works Cost or
Factory cost or
Manu. Cost.
Administrativ
e
Cost
Selling Costs
Distribution
Cost
Elements
Behavior
Functions

14. Classification of Costs
Variable Cost Fixed Costs
Semi-Variable or
Semi-Fixed Cost
Elements
Behavior
Functions

15. Elements of Cost
 Material Cost:
 Cost of commodities supplied to an undertaking.
 Material Cost includes;
 Cost of procurement, freight inwards, taxes, insurance etc.
 Direct Material Cost:
 DMC is that which can be conveniently identified with and allocated
to cost units. DMC becomes a part of finished product.
 Ex: Clay in bricks, Leather in shoes, Steel in machines, cloth in
garment, timber in furniture.
 Indirect Material Cost:
 Cost incurred on those materials which cannot be conveniently
identified with individual cost units.
 These are small and relatively inexpensive items which may or may
not physically become a part of finished product.
 Eg: pins, screws, nuts & blots, grease, lubricating oil etc.

16. Elements of Cost
 Labour Cost:
 This the “the cost of remuneration (wages, salaries, commission,
bonuses) of the employees of an undertaking.
 It includes all fringe benefits like: PF, Gratuity, ESI, overtime pay,
incentive bonus, wages for holiday, idle time.
 Direct Labour Cost:
 DLC consists of wages paid to workers directly engaged in
converting raw materials into finished product. DLC can be
identified with a particular product, job or process.
 Eg: Machine Operator, Shoe-maker, carpenter, weaver, Tailor.
 Indirect Labour Cost:
 Indirect labour is not directly engaged in the production operations
but only to assist or help in production operations.
 Ex: Supervisor, Inspector, Cleaner, Clerk, Peon, Watchmen.

17. Elements of Cost
 Expenses:
 All costs other than material and labour are termed as
Expenses.
 Expenses is defined as “the cost of services provided to an
undertaking and the notional cost of the use of owned assets”
 Direct Expenses/Chargeable Expenses:
 Direct Expenses are those expenses that can be identified
with and allocated to cost centers or units”
 These expenses are particularly incurred in connection with a
particular job or cost unit.
 Indirect Expenses:
 All Indirect costs other than indirect materials and indirect
labor costs are termed as Indirect Expenses.
 Expenses which cannot be directly identified with a particular
job, process or work order and are common to cost units or
cost centers.

18.  Direct Expenses
 Hire of special plant for a
particular job.
 Travelling expense in
securing a particular
contract.
 Cost of patent rights
 Experimental costs
 Cost of special drawings,
designs and layouts.
 Job processing charges
 Royalty paid in mining
 Depreciation or hire of a
plant used on a contract at
site.
 Indirect Expenses
 Rent and Rates
 Depreciation
 Lighting and Power
 Insurance
 Repairs

19. Classification of Cost based on
Function
 Production Cost/Factory Overhead/Works Overhead or
manufacturing Overhead
 These are the overheads which are concerned with the
production function.
 It includes indirect materials, Indirect labor and Indirect
expenses in producing goods and services.
 Indirect Materials: pins, screws, nuts & blots, grease, lubricating oil
etc.
 Indirect Labour: Supervisor, Inspector, Cleaner, Clerk, Peon,
Watchmen.
 Indirect Expense: Rent and Rates,Depreciation,Lighting and Power,
Insurance,Repairs

20.  Administrative Cost/Overhead
 It is the indirect expediture incurred in general administrative
function.
 These overhead are of general character and have no direct
connection with production or sales activities.
 Indirect Materials: Stationery used in general administrative office,
postage,, printing etc.
 Indirect Labour: Salary of office staff, managing director,
remuneration to directors etc.
 Indirect Expense: Rent of office building, office lighting and power,
telephone expenses, depreciation on office furniture etc.

21.  Selling and Distribution Cost/Overhead
 Selling overhead is the cost of promoting sales and retaining
customers.
 It is defined as “ the cost of seeking to create and stimulate
demand and of securing orders”
 Eg: Advertisements, samples and free gifts, salaries of
salesmen etc.
 Distribution cost includes all expenditure incurred from the
time the product is completed until it reaches its destination.
 Eg: Carriage outwards, insurance of goods in transit, upkeep
of delivery vans, warehousing etc.

22. Classification of Cost based on
Behavior
 Cost behave differently when level of production rise or falls.
 Certain costs changes with production level while other costs
remain unchanged.
 On basis of behavior or variabiltiy costs are classified into
 Fixed Cost
 Variable Cost
 Semi-Variable Cost

23. Fixed Cost
 These costs remain constant in total amount over a specific
range of activity for a specified period of time.
 Fixed cost do not increase or decrease when the volume of
production changes.
 Ex: Rent and lease, Managerial Salaries, Building Insurance,
Salaries & Wages of permanent Staff, Municipal Tax.
1 2 3 4 5
No. of Units Purchased 1 2 20 200 2000
Total Fixed Cost Rs. 20000 20000 20000 20000 20000
Fixed Cost per unit Rs. 20000 10000 1000 100 10
0
5000
10000
15000
20000
25000
Fixed
Cost
Per
Unit
Rs.
Fixed Cost

24. Variable Cost
 These costs tend to vary in direct proportion to the volume of
output.
 Variable Cost per unit remains fixed.
 Variable cost can be controlled by functional managers.
 Ex: Direct Materials, Wages, Power, Commission on Salesmen
etc.

25. Semi-Variable or Semi-Fixed costs
 These costs include both a fixed and a variable
component.
 These costs are partly fixed and partly variable.
 Semi-variable cost has a fixed element below which it
will not fall at any level of output.
 Variable element in semi-variable costs changes either
at a constant rate or in lumps.
 Ex: Introduction of an additional shift in the factory will
require additional supervisors.
 Telephone expense, Power etc.

26. Cost Centre
 Acc to ICMA (The chartered Institute of Management
Accountant), London define cost centre as “ a location,
person or item of equipment(or group of these) for which
costs may be ascertained and used for the purpose of
control.”
 IOW Cost centre refers to a section of the business to
which costs can be charged.
 The purpose of ascertaining the cost of cost centre is to
control cost.
 A cost centre is charged with all the costs that relate to it.
 Eg: If a cost centre is a machine, it will be charged with the
cost of power, light, depreciation and its share of rent etc.
 Types of Cost Centres:
 Personal Cost Centre
 Impersonal Cost Centre

27. Cost Unit
 Cost unit is the unit of measurement of cost.
 Cost unit is defined as a “unit of product or service in
relation to which costs are ascertained”
 Cost units are of two types:
 Units of Production: a tonne of steel, a metre of cable, a
ream of paper etc.
 Units of Service : Passenger miles, cinema seats,
consulting hours etc.

28. Factors influencing the Selection of
Cost Center or Cost units
 Organization of the factory
 Condition of incidence of cost
 Requirements of the costing system
 Availability of information
 Management policy regarding making a
particular choice from several alternatives

29. Method of Costing
 The principles in every method of costing are same but
the methods of analyzing and presenting the costs differ
with the nature of business.
 Job Costing
 Contract Costing
 Batch Costing
 Process Costing
 Operating Costing
 Unit Costing (Output Costing or Single Costing)
 Multiple Costing (Composite Costing)

30. Techniques of Costing
The following techniques of costing are used by
the management for controlling costs and
making managerial decisions.
 Historical (Conventional) Costing
 Standard Costing
 Marginal Costing
 Uniform Costing
 Direct Costing
 Absorption Costing
 Activity Based Costing

31. Role of Accountant in Decision
Making
 Cost Accountant Perform action as under:
 To Analyze material, labor and overhead
expenses
 To reconcile daily production with accounting
transactions
 To coordinate with R&D for production of new
items
 To assist the controller in developing cost
improvement opportunities
 To prepare new product costing to determine the
feasibility and profitability before it is launched.

32. Summary
 Cost Accounting
 Meaning, Objectives , Scope and Importance,
 Concepts of Costs
 Classification of Cost
 Elements of Cost
 Cost Center and Cost Unit
 Methods of Costing
 Techniques of Costing
 Role of Accountant in Decision Making.