Cost Accounts - Classification of manufacturing costs - Accounting for manufacturing costs. Cost Accounting Systems: Job order costing - Process costing- Activity Based Costing- Costing and the value chain- Target costing- Marginal costing including decision making- Budgetary Control & Variance Analysis - Standard cost system.

1. ACCOUNTING
FOR
MANAGEMENT
UNIT-IV
Semester: I
Course Code: BA5103
Dr.N.Ramesh Kumar

2. UNIT IV
COST ACCOUNTING
Cost Accounts - Classification of manufacturing
costs - Accounting for manufacturing costs. Cost
Accounting Systems: Job order costing - Process
costing- Activity Based Costing- Costing and the
value chain- Target costing- Marginal costing
including decision making- Budgetary Control &
Variance Analysis - Standard cost system.
.

4. COST ACCOUNTING – MEANING
• Cost Accounting is a business practice in
which we record, examine, summarize, and
study the company’s cost spent on any
process, service, product or anything else in
the organization.

5. Definition
• Cost Accounting is the process of accounting
for cost from the point at which expenditure is
incurred to the establishment of its ultimate
relationship with cost centres and cost units”.
– The Chartered Institute of Management Accountant
Cost Accounting = Costing + Cost Reporting + Cost Control.

6. COST TERMINOLOGY
• Cost: the amount of expenditure incurred
• Costing: the process of ascertainment of costs
• Cost Accounting: The application of cost control
methods
• Cost Control: the control of costs by management
• Job Costing: finding out the cost of production of
every order
• Batch Costing: Batch costing production is done
in batches

7. Scope of Cost Accounting
• Cost book-keeping
• Cost system
• Cost ascertainment
• Cost Analysis
• Cost comparisons
• Cost Control
• Cost Reports

8. Objectives of cost accounting
• Determining selling price,
• Controlling cost
• Providing information for decision-making
• Ascertaining costing profit
• Facilitating preparation of financial
statements.

9. Importance of Cost accounting
• Importance to Management
• Aids in Price fixation
• Helps in Cost reduction
• Elimination of wastage
• Helps in identifying unprofitable activities
• Helps in Inventory
• Helps in estimate
• Cost accounting and creditors

10. Elements of Cost

11. Manufacturing Costs
• Manufacturing costs are the costs incurred
during the production of a product.
• These costs include the costs of direct
material, direct labor, and manufacturing
overhead.
• The costs are typically presented in the income
statement as separate line items.
• An entity incurs these costs during the
production process.

12. Types
• Direct materials
• Direct labor
• Manufacturing overhead
– Indirect Materials
– Indirect Labor
– Others

13. Flow of Manufacturing cost

14. Elements of Manufacturing Cost
• Inventory valuation
• Cost of goods sold valuation
• Constraint analysis
• Margin analysis
• Variance analysis
• Budgeting

15. Cost Sheet
Cost Sheet or a Cost Statement is "a document
which provides for the assembly of the estimated
detailed elements of cost in respect of Cost
Centre or a Cost Unit.“
The statement summarizes the cost of manufacturing a
particular list of product and discloses for a particular
period:
– Prime Cost;
– Works Cost (or) Factory Cost;
– Cost of Production;
– Total Cost (or) Cost of Sales

16. Objectives of Cost Sheet
• Cost ascertainment
• Fixation of selling price
• Help in cost control
• Facilitates managerial decisions

17. Cost Sheet – Format (Detailed)
Particulars Amount Amount
Opening Stock of Raw Material
Add: Purchase of Raw materials
Add: Purchase Expenses
Less: Closing stock of Raw Materials
Raw Materials Consumed
Add: Direct Wages (Labour)
Direct Charges
***
***
***
***
***
***
***
Prime cost (1) ***
Add :- Factory Over Heads:
Factory Rent
Factory Power
Indirect Material
Indirect Wages
Supervisor Salary
Drawing Office Salary
Factory Insurance
Factory Asset Depreciation
***
***
***
***
***
***
***
***
Works cost Incurred ***

18. Add: Opening Stock of WIP
Less: Closing Stock of WIP
***
***
Works cost / Factory Cost (2) ***
Add:- Administration Over Heads:-
Office Rent
Asset Depreciation
General Charges
Audit Fees
Bank Charges
Counting house Salary
Other Office Expenses
***
***
***
***
***
***
***
Cost of Production (3) ***
Add: Opening stock of Finished Goods
Less: Closing stock of Finished Goods
***
***
Cost of Goods Sold (4) ***

19. Add:- Selling and Distribution OH:-
Sales man Commission
Sales man salary
Traveling Expenses
Advertisement
Delivery man expenses
Sales Tax
Bad Debts
***
***
***
***
***
***
***
Cost of Sales (5) ***
Profit (balancing figure) ***
Sales ***

20. Cost Sheet – Format
(Simplest Method)
Particulars Amount Amount
Opening stock of raw materials xxxx
Add: Purchase of raw material xxxx
Less: Closing stock of raw material xxxx
Value of raw materials consumed xxxx
Wages xxxx
Prime cost (A) xxxx
Factory overheads xxxx
Add: Opening stock of Work In Progress xxxx
Less: Closing stock of Work In Progress xxxx
Factory cost (B) xxxx

21. Add: Administration overhead xxxx
Cost of production of goods manufactured (C) xxxx
Add: Opening stock of finished goods xxxx
Less: Closing stock of finished goods xxxx
Cost of production of goods sold (D) xxxx
Add: Selling and Distribution overheads xxxx
Cost of sales xxxx
Profit (Balancing Figure) xxxx
Sales xxxx

22. Cost Accounting System
A cost accounting system also called product
costing system or costing system is a
framework used by firms to estimate the cost of
their products for profitability analysis,
inventory valuation and cost control.

23. Essential Components

24. Job Order Costing
• Job order costing system is generally used by
companies that manufacture a number of
different products.
• It is a widely used costing system in
manufacturing as well as service industries.
• Manufacturing companies using job order
costing system usually receive orders for
customized products and services.

25. Job Order Costing
• Job order costing is a costing method which is used
to determine the cost of manufacturing each
product.
• This costing method is usually adopted when the
manufacturer produces a variety of products which
are different from one another and needs to
calculate the cost for doing an individual job.
• Job costing includes the direct labor, direct
materials, and manufacturing overhead for
that particular job.

26. Procedure for job order cost system
• Receiving an Enquiry
• Estimation of the Price of the Job
• Receiving of Order
• Production Order

27. Particulars
Dates and Ref.
No.
Total Amount (Rs.) Cost Per Unit
(Rs.)
Direct Materials:
Department A **** **** ****
Department B **** **** ****
Add: Direct Labour
Department A **** **** ****
Department B **** **** ****
Add: Overheads
Department A **** **** ****
Department B **** **** ****
Add: Fixed Expenses **** **** ****
Total Cost **** **** ****
Profit **** **** ****
Selling Price **** **** ****
Job Order Cost Sheet Format

28. Process Costing
• Process Costing is defined as a branch of operation
costing, that determines the cost of a product at
each stage, i.e. process of production.
• In simple words, process costing is a cost accounting
technique, in which the costs incurred during
production are charged to processes and averaged
over the total units manufactured.

29. Features of Process Costing
• The production is continuous.
• The product is homogeneous.
• The process is standardized.
• The output of one process becomes the raw material
of another process.
• The output of the last process is transferred to
finished stock.
• Costs are collected process-wise.
• Both direct and indirect costs are accumulated in
each process

30. Objectives of Process Costing
• To Ascertain the Cost of Each Process
• To Ascertain the Cost of Bye-Product
• To Know the Wastage in Each Process of
Production
• To Ascertain the Profit or Loss of Each
Process.
• Valuation of Opening and Closing Stock of
Each Next Process

31. Elements of Process Cost Accounting
• Materials
• Labour
• Direct Expenses
• Overheads

32. Manufacturing process of cement

33. Accounting Treatment
• Normal Process Loss: This is the loss which is un-
avoidable because of the nature of raw materials for
the production technique and is inherent in the
normal course of production.

34. Abnormal Process Loss
Any loss caused by unexpected or abnormal
conditions such as sub-standard materials,
carelessness, accident etc…

35. Abnormal Gain
If the quantum of loss is less than the determined
percentage of normal loss, the difference is
called abnormal gain or effectives.

36. Activity Based Costing
The activity-based costing (ABC) system is a
method of accounting you can use to find the
total cost of activities necessary to make a
product.
The ABC system assigns costs to each activity
that goes into production, such as workers testing
a product.

37. According to Cooper and Kalpan, ABC is
defined an, “ABC system calculates the cost of
individual activities and assigns cost to cost
objects such as product and services on the basis
of activities undertaken to produce each product
or services”.

38. Stages and Flow of Costs in ABC
• Identifying Activities
– Unit Level Activities or Primary Activities
– Batch Level Activities
– Product Level Activities
– Facility Level Activities
• Assigning Costs to Activity Cost Centres

39. • Selecting Appropriate Cost Drivers.
• Material Management
• Stores Management
• Production Management
• Quantity Control Management
• Personnel Management
• Sales Management
• Repairs and Maintenance
• Administration and
• Public Relations.
• Assigning the Cost of the Activities to
Products
Stages and Flow of Costs in ABC

40. Components of ABC

41. Objectives
• To identify value added activities in transactions.
• To focus high cost activities.
• To distribute overheads on the basis of activities.
• To identify the opportunities for improvements and
reduction of costs.
• To validate the success of the quality drive with ABC.
• To ensure accurate product costing for decision
making.
• To use information to improve product mix and
pricing decisions

42. Value Chain Analysis
• The term ‘Value Chain’ was used by Michael
Porter in his book “Competitive Advantage:
Creating and Sustaining Superior
Performance”
• The value chain analysis describes the activities
the organization performs and links them to the
organization competitive position.

43. Model of Porter’s Value

44. Problems
• Incorrect Allocation of Costs within the
Chain
• Long and Time Consuming Process
• Non Availability of Information

45. Functions
• Real Time Function
• Real Time Multidimensional Function
• Prediction Function
• Decision Making Function

46. Target Costing
• CIMA – “Target cost is a product cost estimate
derived from a competitive market price”.
• Target Cost = Anticipated selling price – Desired
profit
• Target cost per unit = Target Price – Target
operating income per unit.

48. Target Costing Process

49. Characteristics of Target Costing
• Identification of Opportunities
• Target Cost
• Integral Part of Design
• Target Price
• Cost Reduction Target

50. Stages in the Process of Target
Costing
• Define the Product
• Set the Target
• Achieve the Target
• Maintain Competitive Cost

51. Marginal Costing
• The term marginal cost implies the additional
cost involved in producing an extra unit of
output, which can be reckoned by total
variable cost assigned to one unit.
• Marginal Cost = Direct Material + Direct
Labor + Direct Expenses + Variable
Overheads

52. Advantages
• Constant in nature
• Effective cost control
• Treatment of overheads simplified
• Uniform and realistic valuation
• Helpful to management
• Helps in production planning
• Better results
• Fixation of selling price
• Helpful in budgetary control
• “Make or Buy” decision

53. Disadvantages
• Difficulty to analyse overhead
• Time element ignored
• Unrealistic assumption
• Difficulty in the fixation of price
• Significance lost
• Problem of variable overheads
• Sales-oriented
• Unreliable stock valuation

54. Characteristics

55. Break-Even Analysis
The break-even point (BEP) maybe defined as
that level of sales at which total revenues equal
total costs and the net income is equal to zero.
This is also known as no-profit no-loss point.

56. Components
• Fixed costs
– interest, taxes, salaries, rent, depreciation
costs, labour costs, energy costs etc.
• Variable costs
– cost of raw material, packaging cost, fuel and
other cost

57. Importance
• Manages the Size of Units to be Sold
• Budgeting and Setting Target
• Manage the Margin of Safety
• Monitors and Controls Cost
• Helps Design Pricing Strategy

58. Benefits
• Catch missing expenses
• Set revenue targets
• Make smarter decision
• Better pricing
• Cover fixed costs

59. Break-Even Chart (BEC)
• The Break-Even Chart is a graphical
representation between cost, volume and
profits.
• It has been defined as “a chart which shows the
profitability or otherwise of an undertaking at
various levels of activity and as a result indicates
the point at which neither profit nor loss is
made.”

61. Computation for CVP analysis
• Profit Volume ratio
• BEP
• Profit
• Margin of Safety
• Sales to earn a given level of profit
• Profit When the Sales are given

62. Profit Volume ratio
The Profit Volume (P/V) Ratio is the measurement of
the rate of change of profit due to change in volume of
sales.

63. Break Even Point

64. • B. BEP (in Rs.)
Contribution = Sales–Variable cost

65. Profit

66. Margin of Safety
The margin of safety is the difference between your
breakeven point and actual sales that have been
made

67. Sales to earn a given level of profit

68. Profit When the Sales are given

69. Budgeting
According to Brown and Howard of
Management Accountant "a budget is a
predetermined statement of managerial policy
during the given period which provides a
standard for comparison with the results actually
achieved."

70. Budgetary Control
• Brown and Howard defines budgetary control is
"a system of controlling costs which includes the
preparation of budgets, coordinating the
department and establishing responsibilities,
comparing actual performance with the budgeted
and acting upon results to achieve maximum
profitability."

71. Objectives
• Planning
• Co-ordination
• Control
• Increase in Efficiency
• Financial Planning

72. Benefits of Budgets And Budgetary
Control
• The budget assists planning
• The budget communicates and co-ordinates
• The budget helps with decision-making
• The budget can be used to monitor and
control
• The budget can be used to motivate

73. Limitations of Budgets and Budgetary
Control
• Uncertain Future
• Budgetary Revisions
• Discourage Efficient Employees
• Problems of Coordination's
• Inter-Department conflicts
• Support from Top Management

74. Organization for Budgetary Control
• Organisation Chart
• Budget Center
• Budget Officer
• Budget Committee
• Budget Manual
• Budget Period
• Key Factor

75. Steps