Basic Concepts of Cost Accounting

Noun Verb
The amount of
expenditure incurred
& more.
i.e. opportunity cost,
notional cost
To ascertain
the cost of
given thing
i.e. cost for
cost unit

It is the application of costing ,
cost accounting principles ,
methods , techniques to the
science , art & practice of cost
control & the ascertainment of
profitability .

It includes the
presentation of
information derived
there from for purpose
of analysis & managerial
decision making.

Meaning of cost information
INFORMATION
FINANCIAL
OTHERS
RELATED TO
BUSINESS
RELATED TO
COST
RELATED TO
OTHERS
NON-
FINANCIAL

Financial a/c
Language of the business
Reporter
Daily food
Statutory
Many user
[i.e. all stakeholders ]
Management a/c
Tool of analysis
Analyst
Medicine
Voluntary
Single user
[i.e. management only ]

Prior to the industrial revaluation ,
business were small & characterized by
simple market & not emphasize on cost
account but accurate BOA required.
In the 17th century , in the france , the
royal wallpaper manufactory had a cost
account system.
In 18th century , in the UK , some iron
master & potters began to produce cost
information, before industrial revaluation.

In the world war I & II ,
the important
of cost accounting Grew
with
Growth of expenditures
of defense
of the all countries.

At that time , government placed the
cost-plus contract.
In the prevailing time ,yet , GOVT has
come out with the cost-plus contract for
some such type of contract.

In the earlier time ,
Total cost = variable/direct cost
i.e. nobody had emphasized a fixed cost
,which has inevitable effect on the total cost,
so that some decision taken out, that might
be wrong .
However, the span of time ,people come
to know the importance of fixed cost ,
Which , now-a-days ,consider more
important than the variable cost.
Total cost = variable cost + fixed cost

1.pre-costing
 It is the process of
costing for cost unit
before cost incurred,
On the prediction base
 Its refers to the concept
of budgeting

2.Current costing
It the process of costing, where
cost has recorded as & when
cost incurred.
This involves careful estimates ,
being prepared of overheads &
others.

 Its aimed at collecting
information about cost, as &
when the activity take place ,
so that, as soon as, a job would
be completed & the cost of
completion would be known.
For this purpose costing must
be

3.Post costing
It means analysis of actual cost
information , as recorded in the
financial books.
Its accurate & useful in the case
of cost-plus contract, where the
price is determined , finally, on
the basis of actual cost.

What is the…
Cost control?
Cost reduction?
Cost cutting?
Cost benefit?

It means controlling the
cost up to the pre-
determined level of cost
i.e. well established
standard.

It is the process of
reducing the cost ,
permanently, without
affecting the quality of
goods.

Its aimed at , to reduce
the cost of unit , as well
as possible , even its spoil
or affecting the quality of
goods.

It is the result of any
circumstance , i.e.
temporary in nature, the
benefit of which , derived
for short span of time.

E.g.:- when any vendor
bankrupted ,in the
exhibition, raw material
received at the lower
price, then ever before ,
that’s way cost per unit is
reduce.

effects Cost
control
Cost
reduction
Cost
cutting
Cost
benefit
Cost
reduced Yes/no yes yes yes
Quality
remain yes yes no yes
Change
permanently yes yes yes no

units units
cost
cost
Std
cost
Std
cost
1. Its aimed at
maintain the costs in
accordance with the
established standard.
1. Its concerned with
reducing the cost , as
well as possible.

2. It seeks to attain
lowest possible cost
under existing
condition.
3. It recognizes no
condition as
permanent, since , a
change will resulted in
the lower cost.
3. Emphasize on
past & present.
3. Emphasize on
present & future.
i.e. std should be
maintained in the
present.
i.e. any change
resulted lower
cost in the future.

4. It’s the preventive
function.
4. It’s the corrective
function.
5. The process of cost
control ends when
the targets are
achieved.
5. The process of
cost reduction
has no visible
ends.

It is a location , person,
or an item of
equipment
( or group of these )
For which the cost may
be ascertained &
Used for the purpose
of cost center
Ex.
Allocated to
the cost units
Ex.
Ex.
Ex.Ex.
Ex.
Ex.
Ex.
Ex.

Any unit of Cost Accounting selected
with a view to accumulating all cost
under that unit.
The unit may be …
This may also be a budget center.

Personal Impersonal
In this a person
or group of
person consider
as cost center
In this a location or
an item of
equipment or
group of these
consider as cost
center

Organization Department Activity
level
ACTIVITY
BASED
COSTING

worker Dep. A Dep. B Dep. C Org. Depa. Difference
p 10 1000 - - - - 193900 1000 192900
Q 5 500 5 50000 - - 193900 50500 143400
R 2 200 3 30000 5
5
laces
193900 530200 (336300)
total 17 1700 8 80000 5
5
laces
581700 581700 Nil

Organizational level
Total hours =30
Production =581700 units
Work done by all workers = 10 hours
per worker

Departmental level
Total hours = 30
Total production = 581700
Work done by ….
worker Dep.A Dep.B Dep.C total
P 10 - - 10
Q 5 5 - 10
R 2 3 5 10
total 17 8 5 -
Total
produc-
tion
1700 80000 500000 581700

Production per hour in dep. A = 1700 ÷ 17 = 100 p.h.
Production per hour in dep. B = 80000 ÷ 8 = 10000 p.h.
Production per hour in dep. C = 500000 ÷ 5 = 100000 p.h.
∴ production per worker :-
P = 10 × 100 =1000
Q = (5×100)+(5×10000) =50500
R = (2×100)+(3×10000)+(5×100000) =530200
∴ Cross subsidization :-
P = 192900 units
Q = 143400 units
R = (336300) units

Activity level
Where any activity of organization ,
which is essential for the conduct of
business, can be considered as a cost
center.
E.g. :- In JK shah classis , the activity
of teaching can be considered as cost
center &
All teachers as cost units.

Cost incurred
Cost unit
∴
Cost incurred
Cost unit
Cost center
Stage 1
Stage 2
Marginal costing Absorption costing

Cost Unit
It is a unit of
production/ service /time
( or combination of these ) ,
in relation to which cost may
be ascertained or expressed &
on which the cost of
production being charged.

Cost units are usually the unit
of physical measurement.
E.g. :-
industry Cost unit
Automobile Number
Cement Tonne / per bag
power Kilo watt / unit
Hotel Room per day / hrs
hospital Patient day /bed day
i.e. no. ,weight , area , time , length .

CACS CWA
CPT IPCC FINAL
Students Students Students
Cost
Object
Cost
center
Cost
unit
E.g.
(30)
(10) (15) (5)
(6) (5) (4)
No.
Per student
1000 250 80
600 2000 5000
In the lacs

 ‘Responsibility center define
as an activity center of the
business organization
entrusted with a special
task.’
 Under the modern budget &
control , financial
executives tend to develop
responsibility center for the
purpose of control.

Cost
Center
Profit
center
Investment
center

Cost center :-
activity center , which is
responsible for incurrence of the cost.
Profit center :-
activity center , which is
responsible for generating &
maximizing the profits.
Investment center :-
activity center ,
which is responsible for generating
‘ROI’( i.e. return on investment )

Reliance group of company
ltd responsible to generate
‘ROI’ to its all stakeholders.

Reliance industry
Reliance capital
Reliance infrastructure
Reliance money
Reliance entertainment
Reliance power

Production center Service center
Re- apportionment
apportionment
Center responsible
to provide final
production output
Center responsible
to provide service
to the production
department

Basis for classification
1.Nature of elements
2.Traceability to object
3.Cost sheet
4.Functions
5.Variability
6.Controllability
7.Normality
8.Cash outflow
9.Decision making

1. Nature of elements
Material Labour Other expenses
Direct Direct DirectIndirect indirect indirect
Prime
costFOH AOH S&D R&D

2. Traceability to object
DIRECT COST INDIRECT COST
WHICH CAN BE
DIRECTLY ALLOCATED
or ATRIBUTEBLE TO
THE PRODUCT
WHICH CAN’T
DIRECTLY ALLOCATED
or ATRIBUTEBLE TO
THE PRODUCT
PRODUCTION COST PRODUCTION COST
Uncertain

3.COST SHEET
COST MEANING
PRIME
COST
Cost of prime important
Without it , production can’t possible
WORK
COST
Cost of work done during the period , whether
completed or not or to complete the incomplete
work .
This is purely ,the cost of current period.
FECTORY
COST
Cost up to the factory of those goods ,which are
completed during the current period , whether
begun during the current or last period.

COST MEANING
COST
OF
PROD.
Total cost of production , means the cost of
goods which are ready to use / sale , which
are completed during the current period.
COST OF
GOODS
SOLD
Cost of production , of those goods which are
sold during the current period .
TOTAL
COST
I.E. COS
Cost of goods sold , which included the
additional cost required for sale of goods.

4. function
cost meaning Example
Prodtn.
Cost
Total cost of whole process of
production
DM , DL &
OHs
AOH Cost of formulating policy ,
controlling the organization , i.e.
cost doesn’t directly related to
production.
Research
cost
SOH Cost for creating demand of the
product produced .
Advertisem
ent
DOH Cost starting from packing of
product till reconditioning of
empty products.
Freight &
Transportat
ion staff
salary

cost meaning Example
COC Cost of transforming
RM finish goods
LOUBRE
& OHs
DEVELO
PMENT
COST
Development cost for trail run LOUBRE
& OHs
PRE-
PRODT.
Costs starting with
implementation of decision
&ending with the commencement
of the production process.
DM & DL
PRODCT
COST
Cost necessary for production ALL

A.
B.
C.
D. joint cost
E. step / batch cost
units
Total
cost

A. fixed cost
These are costs , which are
incurred for a period & which
within certain output or
turnover limits , tends to be
unaffected by fluctuations in the
levels of activity
(i.e. output or turnover )

units units
Total
cost
Cost
per
unit
Units produced per period Total cost Per unit
Adverse
relationship

RR1 RR2 RR3
Total
cost
Where ,

units units
Total
cost
Cost
Per
unit
Units produce per period Total cost Per unit
Positive
Relationship

C. Semi – variable cost
v.c.
F.C.
Total
cost
Level of activity

1.Graphical method
2.Comparison by period or level of activity
method
3.High point & low point method
4.Analytical method
5.Least squared method ( liner equation )
i.e….
Level of activity Costs
100 5500
500 7500
1000 10000
E.g…..
units rupees

5500
7500
10000
100 500 1000
F.C.
5000
i.e. F.C. = 5000
&
V.C. = 5 Rs. Per unit

Units
100
500
Cost
5500
7500
400 2000
change in the amount of expense
Formula =
Change in level of activity
2000
400
=
= 5 Rs per unitV.C.
F.C. = T.C. – V.C.
= 5500 – ( 100 * 5 )
= 5500 – 500
F.C. = 5000

Units
100
1000
Cost
5500
10000
900 4500
( high – low ) of cost
Formula =
( high – low ) of units
4500
900
=
= 5 Rs per unitV.C.
F.C. = T.C – V.C.
= 10000 – ( 1000 * 5 )
= 10000 – 5000
= 5000

E.g. :- if the experienced variable would be 50 % of
total cost
than total cost = 10000 ,
where as V.C. = 50000 & F.C. = 50000 at 1000 units,
therefore , V.C. = 5 per unit

+ 500V = 7500
+ 1000V = 10000
F
F
- - -
- 500V = - 2500
V = - 2500
- 500
V = 5
per unit
F + 500V = 7500
F + (500 * 5) = 7500
F = 7500 – 2500
F = 5000

E.g. :-
Telephone bill , light bill of office
cost
unit
cost
unit

students batches Total cost
29 1 500
31 2 1000
59 2 1000
61 3 1500

500
1000
1500
1 2 3
500
30 60 90 120
32.25
16.67
No of batch produced Total cost Per unit
(3)
(1)
(1500)
(500)
positive

No of units produced
per batch
Per unit Total cost
(30)
(1)
(16.67)
(500)
adverse
Note :-

cost
fixed
variable
Semi - variable
Total cost Per unit
fixed variable
variable fixed
variable variable

6. controllability
the cost , which can be
influenced by the action of a specific member of
undertaking & which can be controlled by one .
E.g. :- RM , labour , other cost etc.
the cost , which can’t
controlled by any of the action , taken over by
a specific member of undertaking.
E.g. :- fixed or period cost .

7. Normality
normal cost , which is expected
to be incurred at a given level of activity & which
is acceptable by the customer of goods .
Normal = expectable + acceptable
Note :-
only normal cost can be charged to
the product & finally on the customer of
goods .
i.e. Costs brought to the WIP a/c

Abnormal cost is the cost , which
isn’t expected to be incurred ,at certain level of
output . Its incurred due to abnormal reason,
which is unacceptable by the customer of goods to
charge on the goods.
E.g. :-
due to , the mistake of worker , 10 liter milk
spoiled in AMUL company ,in the annad , so that
price of other milk can’t rice the amul company
,with such abnormal reason.
Note :- abnormal lost always charged to the P & L A/c.

E.g. :- E.g. :-
RM + LABOUR + OTHERS EXP. 1. COST OF WASTAGE
2. ABNORMAL IDLE TIME
3. ABNORMAL OT PREMIUM
ABNORMAL
GAIN ALSO
CHARGED TO
THE P & L A/C

8. Cash outflow
these cost are involve immediate
payment of cash & also known as “ out of pocket
cost” .
i.e. salary , wages , postage , credit purchase etc.
these cost aren’t involve the
immediate payment of cash & also know as “
economic cost “.
i.e. any experienced & well trained manager of
company retired & vacate the company post .
{ never recorded in the BOA }

A. Relevant cost :-
cost which are relevant &
useful for decision making.
i.e. marginal cost, differential cost,
opportunity cost , out of pocket cost
B. Irrelevant cost :-
cost which are not
relevant & useful for decision making .
i.e. sunk cost , committed cost & fixed cost .

A.Pre-determined :-
A cost which is computed
in advance before production or operation
stared , on the basis of specification of all
factors affecting cost , is known as pre-
determined cost .
That covers 3 costs , so far..
C. budgeted
cost
B. Estimated
cost
D. Standard
cost

B. Budgeted cost :-
The expected cost of manufacturing or
acquisition , often in term of a unit of production computed on
the basis of information available in advance of actual
production / purchase .
- by kohler.
It is the prospective costs since they refers to
the prediction cost .
C. Budgeted cost :-
pre- determined cost based on
Past experience
Present condition
Future expectations.
{i.e. what the cost is expected to be}

D. Standard cost :-
scientifically determined costs by mgt .
i.e. expected standard of efficient operation & relevant
necessary expenditure .
Used for price fixing & cost control through “ variance
analysis”.
{ i.e. what the cost should be }
Macro not possible
Micro Not physiable

E. Pre-production cost :-
These costs form the part of
development cost , incurred in making a trial
production run , & preliminary to formal production .
 Incurred when new factory or project in the process
of establishment & there is no formal production on
which we can charge such costs.
 Such costs normally treated as deferred revenue
expenditure i.e. miscellaneous expenses .
 It is type of capitalized cost .

F. Capitalized cost :-
These are the cost which are
Initially recorded as asset & than subsequently treated as
expenses .
i.e. deferred revenue expenditure or miscellaneous
expenditure or fictitious assets.
G. Training cost :-
These cost comprises of the trainees or learners’ all
expenses .
i.e. any expenses incurred for providing training to trainees .
H. Marginal cost :-
The amount , at any given volume of output , by
which aggregate costs are changed , if the volume of output is
increased by one unit .

I. Differential cost :-
[ i.e. incremental & decremental cost ]
It refers to the change in total cost
due to the change in
- level of activity
- technology
- process or method of production
or any decision related to these .
J. Imputed cost or notional cost :-
The cost do not involve any cash outlay .
[ it may similar to the implicit cost , sometime ]

K. Opportunity cost :-
This cost refers to the value of sacrifice made or
benefit of opportunity foregone in accepting an alternative
course of action .
[ i.e. next best alternative ]
L. Sunk cost :-
Historical costs incurred in the past are known as
sunk cost .
they paly no role I decision making in current period .
It is irrecoverable cost .
M. Shutdown cost :-
These costs , which continue to be incurred ,even
when a plant is temporarily shutdown.
i.e. rent , rates , depreciation etc.
which can’t be avoided during temporary closure of a plant .

N. Product costs :-
i. For merchandise inventory :-
cost associated with the purchase & sale
of goods .
ii. For production scenario :-
cost associated with the acquisition &
conversion of raw material & with sale of FG.
O. Absolute cost :-
these cost refer to the cost of any product ,
process or unit in its totality .
Depicted in absolute amount = absolute cost

P. Discretionary cost
 Costs , that are not tied to
a clear cause & effect
relationship between
inputs & outputs .
 Usually arise from
periodical decision .
 e.g. :-
advertisement
public relation
executive training etc.
 Costs , that are tied to a
clear cause & effect
relationship between
inputs & outputs
 Relationship is personally
observable .
 e.g. :-
DM , DL ,OHs.
{ INPUTS }
CAR , COMPUTERS etc.
{ outputs }
Q. Engineered cost

1. India opinion 2. Foreign opinion
Will be charged to
final product
i.e. on COP .
Will be charged to
sold product
i.e. on COS.
FC ******
+ AOH *******
COP ***********
COGS ******
+ AOH
+ S&D
*******
COP ***********

Difference arise between two , due to , only ,
valuation of FG
i.e. based on COP
1. India opinion is being used in the cost a/cing .
whereas ,
2. Foreign opinion is being used in the
financial a/cing .
i.e. AOHs charged to the P&L a/c .
Note :-
1. AOHs & S&D , given together than both
charged on COGS .
2. AOHs & S&D , given separately than ….
AOHs charged on COP
S&D charged on COGS

Control system is a system use for the purpose of
control the cost .
It is , generally , based on the budget or well
established standard .
Process of it , as given ….
YARDSTICK PERFORMANCE
VARIANCE
ANALYSIS

total data & effects of
alternative compare & finally decision have been
taken out .
[ i.e. relevant + irrelevant ]
here , only relevant data
have been considered , so that , no need compare
the data & finally , decision taken out .
[ i.e. relevant only ]
here , decision have been
taken out by the way of incremental &
decremental cost / revenue .

Approaches Relevant Differential
Gain
Inflow
Incremental
revenue
Reduction in
outflow
Decremental
Cost
loss
Reduction in
inflow
Decremental
Revenue
Outflow
Incremental
cost

Example :-
Particulars P1 P2 P3
DM :-
X 50 50 60
Y 40 50 60
DL :-
A 100 110 110
B 90 90 90
C 80 100 120
OHs :-
FOHs 600 600 600
AOHs 110 190 190
S&D 10 20 30

P1 = 1080 Rs
P2 = 1210 Rs
P3 = 1260 Rs
Decision :- P1 = 1080
950
1000
1050
1100
1150
1200
1250
1300
P1 P2 P3

Statement of net relevant gain or loss
[ based on P1 ; compared with P2 & P3 ]
Particulars P2 P3
DM :-
X - 10
Y 10 20
DM :-
A 10 10
B - -
C 20 40
OHs :-
FOHs - -
AOHs 80 80
S & D 10 20
Net Relevant Loss 130 180

0
130
180
950
1000
1050
1100
1150
1200
1250
1300
P1 P2 P3
LOSS
BASE

PARTICULARS
Differential cost between
P1 & P2 P1 & P3 P2 & P3
DM :-
X - 10 10
Y 10 20 10
DL :-
A 10 10 -
B - - -
C 20 40 20
OHs :-
FOHs - - -
AOHs 80 80 -
S & D 10 20 10
Incremental cost 130 180 50

1080
1210
1080
1210
1260 1260
950
1000
1050
1100
1150
1200
1250
1300
P1 & P2 P2 & P3 P1 & P3
Series 1 Series 2

Standardization principles
& practices of costing are
used by a number of
different industries .
Same costing system in the
same industry .

Where costs are recorded after
they have incurred .
[ i.e. post costing ]
Well established standards
i.e. standard costs are compared
with actual costs , to determine
variances.[i.e. variance analysis]

Particulars Amt
Sales ….
- Variable costs …
Contribution …
-Fixed cost [OHs] ….
Profit *****
Particulars Amt
Sales ….
- Direct costs …..
Contribution ….
-Indirect cost [OHs] …..
profit ******

All costs are charged to the product
or process .
[ i.e. variable + fixed costs ]
Particulars Amount
Sales ******
- COS :-
DM *****
DL *****
OHs :-
Absorbed …….
+/- Under/over abs. ..…... ****** (×××××)
Net profit ××××××

Here , the cost of a product is
ascertained
i.e. for single unit of output
Here , the cost are collected &
accumulated according to the jobs ,
contract , work orders etc.

This is a form of a job costing .
Here , cost ascertained for
a specific no. of articles
i.e. A LOT
Like , bricks & invitation cards are
always produced in a lot of 100 / 200
etc.

In the batch costing the
most important problem is the
determination of optimum size of the
batch .
{ i.e. how much units to be produced at
lowest cost in the single batch }
It involves two types of costs :-
1. set up / preparation cost
2. carrying cost

Formula =
2 𝐷𝑆
𝐶𝑖
Where ,
D = annual demand of product
S = setting up cost per batch
Ci = carrying cost per unit of product
EOQ = 2 𝐴 𝐶𝑎
𝐶𝑖
T.C. = 2 𝐴 𝐶𝑎 𝐶𝑖

TREASURY & CASH MANAGEMENT :-
Optimum cash balance :-
Where ,
A = Annual Requirement
T = transaction cost
I = holding cost
T
I
T.C.

Job costing Batch costing
1. It is a method of
ascertainment of cost
for the specific order
or job to be done as
per customer’s
requirement .
1. It is a method of
ascertainment of
cost for a batch in
which units
produced are
identical .
{ i.e. fixed }
Ex. :-
In a classes of CA ,
class is of the students
have 80% or more .
Ex. :-
in the classes of CA ,
class is of 30 students
i.e. fixed .

2. Each job is assigned
a job no.
2. Each batch is
assigned a serial
batch no.
3. Job = cost center &
different no. of cost
unit for a cost center .
3. Batch = cost center
& same no. of cost
unit for a cost center.
4. Work is started only
after receiving an order
from customer .
4. Production is
carried on the basis
of anticipation of
demand .
5. Sometimes , job
work is to be done at
site .
5. Batch work is
always done in the
factory premises .

Operating costing is the cost of
providing service.
- By ICMA ENGLAND
E.g. :-
transportation , hotel , school ,
electricity , etc.

Similar to the job costing , but in the
contract the job is larger than job costing.
That form of specific order costing
which applies where work is
undertaken as per customer’s
requirements & each order is of long
duration , the work is usually of
construction in nature .
- By ICAM ENGLAND

1. Contract deed come
into existence
under INDIAN
CONTRACT ACT , 1872.
1. NO act applied so
far , written agreement
may be carried out as
per terms & conditions
between parties .
2. Amount of an
indirect cost is very
small proportion with
total cost of contract .
2. Amount of indirect
cost is in huge
proportion with total
cost of contract.
3. Each contract is a cost
center & cost unit .
3. An order , a batch , a
lot or a job is a cost
center & cost unit may
differ .

4. Required more time
for completion of
contract .
4. Completion period of
the job is smaller .
5. Contract price is
generally higher .
6. Contract work is
always carried out at site.
7. For construction
contract , AS – 7 shall be
applied .
5. The value of job
would be small .
6. Job work is mostly
done at premises or at
the factory shade .
7. No AS shall be
applied to the job
costing .

Here , the cost of completion is ascertain ,
for each stage of work done .
Ex. :-
1st cost of making – pulp from wood .
2nd cost of making – paper from pulp .
Process costing is widely used in
industries of …
colors, chemicals , cloths , rubber,
soap – detergent , leather products & etc.

 It is the refinement of process costing .
It is concerned with determination of
the cost of each operation rather than
the process.
 It is used where
the long process is carried out
by the way of
various operations .

Combination
of two or more methods
of costing being used ,
where the nature of products is
complex & the method can not be
ascertained ,
is know as the multiple costing .

Coding system
4.
A system of symbols designed to be
applied to a classified set of items to
give a brief account reference ,
facilitation entry collection & analysis .
Cost can be classified on the bases of cost coding .
Like :-
Cost Codes
DIRECT MATERIAL :-
X
Y
A1
A2
DIRECT LABOUR B..
OVERHEADS C..

4.
Coding system
Cost
coding
Composite
codes
146.326
1 = Raw material
4 = Electronic component
6 = Direct cost
3 = Location
2 = Department
6 = Description

Thank You
CA. Vijay R. Talsaniya
Contact - +91 8671866086

Basic Concepts of Cost Accounting

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Basic Concepts of Cost Accounting