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Cost concepts


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Cost concepts

  1. 1. Differences betweenFinancial Accounting, CostAccounting & ManagementAccounting
  2. 2. Basis Financial Accounting Cost AccountingManagementAccountingAccountingmethodIt depending on doubleentry system.It is not depending ondouble entry system.It is not dependingon double entrysystem.AccountingstandardsAccounts should beprepared based onaccounting standardsissued by Institute ofCharted Accountantsof India.It is not bound by anyaccounting standards.It is not bound byany accountingstandards.Analysis of costand profitIt shows overview ofbusiness.It shows detailed costand profit data for eachproduct.It provides the info.relating to plants,departments,individual product,etc.Control AspectIt does not attachimportance to controlaspect.It provides detailedsystem like standardcosting & budgetarycontrol.It provides detailedinfo. for takingoptimum decisions.
  3. 3. BasisFinancialAccountingCost AccountingManagementAccountingExternal &Internal UsersIt is for externaluse.It is for internal use. It is for internal use.Format ofpresentinginformationStructured format(P&L a/c, BalanceSheet, etc.)There is no uniformformat. Format istailored to meet theneeds ofmanagement.There is no uniformformat. Format istailored to meet theneeds ofmanagement.Historical andpredeterminedcostIt is concernedhistorical records.It depends onhistorical data andextends plans toimprove performancein the future.It depends onhistorical data and itis future oriented.Periodicity ofreportingUsually on anannual basis.Depending onrequirements(weekly, monthly,etc.).Depending onrequirements(weekly, monthly,etc.).
  4. 4. BasisFinancialAccountingCost AccountingManagementAccountingPurposeTo know Profit &loss.To provide detailedcost info. to Mgt.To take decisions.StatutoryRequirementsAs per CompaniesAct & Income TaxAct.It is voluntary (it ismandatory for certainindustries as perCompanies Act)It is optional.Types ofstatementspreparedFor generalpurpose (P&La/c., BalanceSheet, etc.)For specific purpose(variance report, idletime report, etc.)For specific purpose(ex. Performancereport of salesmanager).Types oftransactionsrecordedIt records onlymonetarytransactions.It records external aswell as internaltransactions (issue ofmaterials toproduction dept.)It records externalas well as internaltransactions (sales,expenditure,product quality,etc.)
  5. 5. Role of AccountingInformation inPlanning and Control
  6. 6. Essentials of Good Information System• Proper Form (comprehensive form with suggestive title,heading, sub heading and number of paragraphs)• Contents (need to simple)• Promptness (preparation and submission of report at theproper time)• Accuracy• Comparability• Consistency (need to follow same methods)• Relevancy (Info. should be relevant and not to use unambiguousterms )
  7. 7. Types of InformationManagementInformationOral WrittenAccording toobjectsExternal InternalTo thetop mgtTo themiddlelevelMgt.To the Jr.LevelMgt.According toPeriodRoutine SpecialAccording toFunctionsOperatingControlVentureMgt.FinancialStatic Dynamic
  8. 8. Info. meant for Top Level Management• Info. on budgeted and actual profits• Info. on sales and production• Capital budgeting• Master budget• Periodical financial reports• Machine and labour utilization report• Info. on research and development activities• Project evaluation report• Overhead cost and efficiency reports• Info. on selling and distribution overheads.
  9. 9. • Purchase Manager– Info on material price and usage variance– Info on material carrying cost, loss of material in thestorage etc.– Info on trends in the pertaining of various items ofmaterials.• Materials Manager– Info on stock of raw-materials, work in progress andfinished goods– Info about materials wastage and loss– Info on level of materials stock at the stores– Info on surplus and deficiency reportsInfo. meant for Middle Level Management
  10. 10. • Production Manager– Info on budgeted and actual production– Info on overtime work and idle time– Info on labour utilization statement– Info on machine utilization statement• Sales Manager– Info on budget and actual sales– Info on sales trend– Info on orders received and orders executed– Info on cash sales and credit salesInfo. meant for Middle Level Management
  11. 11. • Info on labour efficiency variance• Info on idle time, overtime and machineutilization• Info on material usage variance• Info on credit collections and outstanding• Info on budgeted and actual production• Info on material spoilage• Info on cost of materials, labour etc.Info. meant for Jr. Level Management
  12. 12. Cost Concepts
  13. 13. Cost Methods1. Job order Costing: Cost ascertainment used in job orderindustries.2. Contract costing: Work is undertaken to customer’sspecial requirements and each order is of long duration.3. Batch costing: Where similar articles are manufacturedin batches either for sale or for use within theundertaking.4. Process costing: Sequence of continuous or repetitiveoperations or processes and products are identical andcannot be segregated.5. Service (Operating)
  14. 14. Techniques of Costing• Standard costing: It is predetermined as a target ofperformance and actual performance is measuredagainst the standard. The difference betweenstandard and actual costs are analysed to know thereasons for the difference so that corrective actionsmay be taken.• Budgetary control: It is a technique applied to thecontrol of total expenditure on materials, wages andoverheads by comparing actual performance withplanned performance.Contd …
  15. 15. Techniques of Costing• Marginal costing: In this technique, separation ofcosts into fixed and variable (marginal) is of specialinterest and importance. Marginal costing regardsonly variable costs as the cost of the products.• Absorption costing: Costing whereby total cost (fixedand variable costs)are charged to products.• Uniform costing: A situation in which a number offirms adopt a uniform set of costing principles.
  16. 16. Material Labour Other ExpensesDirectMaterialIndirectMaterialDirectLabourIndirectLabourDirectExpensesIndirectExpensesOverheadsDirectMaterialIndirectMaterialDirectLabourIndirectLabourPrime CostElements of Cost
  17. 17. Formulas• Prime cost + Production OH= Factory Cost• Factory cost + Administration OH= Cost of Production• Cost of Production + Selling & Dist. OH= Total Cost• Total cost + Desired Profit= Sales (Price)
  18. 18. Cost Classification
  19. 19. By Nature of Expenses–Material• Raw-materials• Semi finished goods &• Finished goods–Labour• Skilled• Semi skilled &• Unskilled–Expenses• Direct• Indirect
  20. 20. • Production or manufacturing cost• Administration cost• Selling and distribution cost and• Research and development costBy Nature of Function
  21. 21. By Variability• Fixed costs tend to remain unaffected by thevariation or change in the volume of output,such as supervisory salary, rent, taxes, etc.• Variable costs tend to vary directly withvolume of output, such as direct material,direct labour and direct expense.• Semi-fixed/semi-variable cost is partly fixedand partly variable, such as telephoneexpense, electricity charges, etc.
  22. 22. • Controllable cost can be influenced by theaction of a specified member of anundertaking.• Uncontrollable cost cannot be influenced bythe action of a specified member of anundertaking.By Controllability
  23. 23. By Normality• Normal cost refers to the cost, at a given levelof output in the conditions in which that level ofoutput is normally attained.• Abnormal cost is a cost which is not normallyincurred at a given level of output in theconditions in which that level of output isnormally attained.
  24. 24. On the basis of Time• Historical cost• Predetermined cost• Estimated cost and• Standard cost
  25. 25. Cost Analysis for Decision Making• Marginal vs. Absorption Costing(with fixed cost and without FC)• Sunk - irrelevant• Committed – pre committed• Opportunity• Incremental / Differential• Avoidable & Unavoidable• controllable / uncontrollable