The document discusses key concepts in cost accounting including meaning of costing, cost accounting, elements of cost (material, labor, expenses), classification of costs (fixed, variable, semi-variable), and scope of cost accounting which includes cost ascertainment, cost records, and cost control. It also defines concepts like prime cost, overhead, production overhead, administration overhead, selling and distribution overhead, and total cost. Life cycle costing is introduced as a technique that considers all costs over the lifetime of a product or asset.

1. Meaning and Scope of Cost Accounting
UNIT 1

2. Meaning of Costing :
 The chartered institute of management
accountants (CIMA) London has defined
costing as “the techniques and process
ascertaining costs”
 Wheldon has defined costing “the classifying
recording and appropriate allocation of
expenditure for determination of costs, the
relation of these costs to sales value and
ascertainment of of profitability.

3. Cost Accounting :
 Cost accounting-CIMA london defined as
follows “cost accounting is the process of
accounting for costs from the point at which
expenditure is incurred or committed to the
establishment of its ultimate relationship with
cost centers and cost units. In its widest
usage, it embraces the preparation of
statistical data, the application of cost control
methods and ascertainment of profitability of
activities carried out or planned”

4. Scope of cost accounting
 The scope of cost accounting is very wide.
There are lots of techniques, tools,
procedures, processes, programs are used
in cost accounting for calculating cost and its
control. But basically, we divide its scope
within three major parts.

5. Three parts
1.Cost Ascertainment
2. Cost Records
3. Cost Control

6. Scope of cost accounting
 1. Cost Ascertainment
In this region of cost accounting, cost
accounting collects product's material, labor and
overhead cost and try to calculate total and per
unit cost of product. This total cost calculation
will be based on historical or standard or
estimated basis. After this, cost accountant will
use any method of costing like specific order
costing, operation costing, and direct costing
technique. These techniques and methods may
be used for calculating different nature products
in same organization.

7. Scope of cost accounting
 2. Cost Records
In this part of cost accounting, cost
accountant maintains cost books, vouchers,
ledgers, reports and other cost related
documents for future comparison and
reference. It will also be under the scope of
cost accounting.

8. Scope of cost accounting
 3. Cost Control
This is the end boundary of cost accounting
scope. In this division, cost accountant used
different techniques and methods for controlling
the cost. Save One Rupees in the cost of
product means we have earned one rupees in
the production of goods. So, Cost accountant
uses budgetary control, standard costing, break
even point analysis and many other techniques
for controlling the cost.

9. ELEMENTS OF COST
 There are broadly three elements of cost - (1)
material, (2) labour and (3) expenses.:
 The substance from which the product is
made is known as material. It may be in a raw
state-raw material, e.g., timber for furniture
and leather for shoe, etc. It may also be in
manufactured state-components, e.g., battery
for car, speaker for radio, etc, Materials can
be direct and indirect.

10. Direct Material
 Direct Material: All materials which
become an integral part of the finished
product, the cost of which are directly
and completely assigned to the specific
physical units and charged to the prime
cost, are known as direct material. The
following are some of the materials that
fall under this category:

11. (a) Materials which are specifically
purchased; acquired or produced for a
particular job, order or process.
(b) Primary packing material (e.g. carton,
wrapping, cardboard, etc.)
(c) Materials passing from one process to
another as inputs.
In order to calculate the cost of material,
expenses such as import duties, dock
charges, transport cost of materials are
added to the invoice price.

12. Material considered direct at one time may
be indirect on other occasion.
Indirect Material: All materials, which
cannot be conveniently assigned to specific
physical units, are termed as 'indirect
material'. Such commodities do not form
part of the finished products. Consumable
stores, lubrication oil, stationery and spare
parts for the machinery,pins,screws, nuts
and bolts, thread etc are termed as indirect
materials

13. LABOUR
 Labour
 Human efforts used for conversion of
materials into finished products or doing
various jobs in the business are known
as labour. Payment made towards the
labour is called labour cost. It can also
be direct and indirect.

14. DIRECT
LABOUR
 Direct Labour: Direct labour is all labour
expended and directly involved in altering the
condition, composition or construction of the
product. The wages paid to skilled and unskilled
workers for manual work or mechanical work for
operating machinery, which can be specifically
allocated to a particular unit of production, is
known as direct wages or direct labour cost.
Hence, 'direct wage' may be defined as the
measure of direct labour in terms of money. It is
specifically and conveniently traceable to the
specific products Wages paid to the goldsmith
for making gold ornament is an example of
direct labour.

15. Example of direct labour
 Machine operator
 Shoe-maker
 Carpenter
 Weaver
 tailor

16. INDIRECT LABOUR
 Indirect Labour: Labour employed to
perform work incidental to production of
goods or those engaged for office work,
selling and distribution activities are
known as 'indirect labour'. The wages
paid to such workers are known as
'indirect wages' or indirect labour cost.
 Example: Salary paid to the driver of the
delivery van used for distribution of the
product.

17. Example of indirect labour
 Supervisor
 Inspector
 Cleaner
 Clerk
 Peon
 watchman

18. EXPENSES
 Expenses
 All expenditures other than material and
labour incurred for manufacturing a
product or rendering service are termed
as 'expenses'. Expenses may be direct
or indirect.

19. DIRECT EXPENSES
 Direct Expenses: Expenses which are
specifically incurred and can be directly and
wholly allocated to a particular product, job
or service are termed as 'direct expenses'.
 Examples of such expense are: hire
charges of special machinery hired for the
fob, carriage inward, royalty, cost of special
and specific drawings, cost of patent
rights,etc. These are also known as
'chargeable expenses'.

20. Indirect Expenses
 Indirect Expenses: All expenses excluding
indirect material and indirect labour, which
cannot be directly and wholly attributed to a
particular product, job or service, are termed as
'indirect expenses'.
 Some examples of such expenses are: repairs
to machinery, insurance, lighting and rent of the
buildings, advertising, depreciation.

21. CLASSIFICATION OF
COST
 Classification On the basis of behaviour
of cost :
 Fixed cost
 Variable cost
 Semi Variable cost

22. FIXED COST
 FIXED COST- THESE COSTS REMAIN
CONSTANT IN ‘TOTAL’ AMOUNT OVER A
SPECIFIC RANGE OF ACIVITY FOR A
SPECIFIC PERIOD OF TIME i.e THESE DO
NOT DECREASE OR INCREASE WHEN
VOLUME OF PRODUCTION CHANGES.
 e.g BUILDING RENT ,MANAGERIAL
SALARY

23. VARIABLE COSTS -
 THESE COST VERY IN DIRECT
PROPORTION TO THE VOLUME OF
OUTPUT.
 eg- DIRECT MATERIAL S,DIRECT WAGES
,POWER.

24. SEMI-VARIABLE COST
 THESE COSTS INCLUDE BOTH A
FIXED AND A VARIABLE COMPONENT
i.e THESE ARE PARTLY FIXED AND
PARTLY VARIABLE. eg LIGHT AND
POWER,MAINTENANCE AND REPAIRS.

25. SUNK COST
A SUNK COST IS AN
EXPENDITURE MADE IN
THE PAST THAT CAN
NOT BE CHANGED AND
OVER WHICH
MANAGEMENT NO
LONGER HAS CONTROL.

26. MARGINAL COST
MARGINAL COST IS THE
ADDITIONAL COST OF
PRODUCING ONE
ADDITIONL
UNIT.MARGINAL COST IS
THE SAME THING AS
VARIABLE COST .

27. OPPORTUNITY COST
 OPPORTUNITY COST IS THE SACRIFICE
INVOLVED IN ACCEPTING AN
ALTERNATIVE UNDER CONSIDERATION.IN
OTHER WORDS ,IT IS A COST THAT
MEASURES THE BENEFIT THAT IS LOST
OR SACRIFICEDWHEN THE CHOICEOF
ONE COURSE OF ACTION REQUIRES
THAT OTHER ALTERNATIVECOURSE OF
ACTION BE GIVEN UP.

28. Total Cost or cost of sales :
 The total cost of production of goods
sold plus selling and distribution
overheads is known as total cost or cost
of sales.

29. Cost sheet for the period
ending…
 Direct Material xxx
 Direct Labour xxx
 Direct expenses xxx
 Prime cost ……..
 Factory overhead xxx
 Factory overheads or works cost …..
 Admin overhead xxx
 Cost of production ……
 Selling & distribution overhead xxx
 Total cost or cost of sales …..

30. Prime cost
 This is the aggregate of direct material, direct
labour,direct expenses. Thus,
 Direct Material +Direct labour+Direct
expenses = Prime Cost
 Overhead- This is the aggregate of indirect
material cost,indirect labour,indirect
expenses. Thus,
 Indirect material+ indirect labour+indirect
expenses = overhead

31. Classification of overhead
 1-production overhead.
 2-office and administration overhead.
 3-selling and distribution overhead
 Production overhead- also known as
factory overhead, works overhead or
manufacturing overhead, these are those
overheads which are concerned with the
production function .
It includes indirect materials
,indirect wages, and indirect expenses in
producing goods or services.

32. EXAMPLES
 INDIRECT MATERIAL- coal, oil grease
etc. stationery in factory office. Cotton
waste,brush,etc.
 Indirect labour- works manager salary,
salary of factory office staff ,wages to
factory watch man,factory sweeper.
 Indirect expenses- Factory
rent,depreciation of plant,insurance of
factory building ,factory lighting and
power,internal transport expense.

33. Office and administration
overhead
 This is the indirect expenditure incurred in
general administrative function, i.e., in
formulating policies,planning and
controlling the functions, directing and
motivating the personnel of an organization
in the attainment of its objectives.
These overheads are of general character
and have no direct connection with
production of sales activities .this category
of overhead is also classified in to indirect
material ,indirect labour and indirect
expenses.

34. EXAMPLES
 INDIRECT MATERIAL- stationery used in
general administrative office, postage etc.
 Indirect labour – salary of office staff, salary
of managing director, Remuneration of
directors of the company.
 In direct expenses- Rent of office building,
legal expenses, office lighting and power,
telephone expenses,Dep. of office furniture
and equipments, sundry office expenses.

35. SELLING AND DISTRIBUTION
EXPENSES
 Selling overheads is the cost of
promoting sales and retained
customers.e.g., advertisement ,sample
for free gifts, salaries of sales man.
Distribution cost includes all expenditure
incurred from the time the product is
completed until it reaches its
destination.e.g., carriage outwards
,insurance of goods in transit, up-keep
of delivery vans , warehousing etc.

36. Selling & Distribution expenses
are also grouped in to
 1-indirect material-packing material,
stationery used in sales, cost of samples,
price list ,catalogues,oil,grease etc.
 2-indirect labour-salary of sales manager,
salary of sales staff, salary of warehouse
staff, salary of drivers of delivery van,etc.
 3-indirect expenses- Advertising, travelling
exp.,showroom exp.,carriage outwords,rent
of warehoue, bad debts,insurance of
goods in transit etc.

37. From the following information relating to pune industries ltd.for the
year ending 31st march 2011 you are required to prepare a statement
of cost showing (a) prime cost (b)Factory overhead (c)cost of
production (d) Total cost (e)profit or loss for the year.
Direct wages---------------------------------------------- 2,40,0000
Direct material purchased---------------------------- 3, 22,000
Purchase returns-------------------------------------- 13000
Drawing office salaries-------------------------------- 3100
Carriage on direct material----------------------------- 4200
Chargeable expenses--------------------------------------- 2800
Provision for bad debts------------------------------------- 2400
Office expenses-------------------------------------------- 6400 Factory rent
and rates------------------------------------14600
Depreciation on plant------------------------------------ 8600
Showroom rent------------------------------------- --------3000

38. Misc.selling expenses------------------------------------- 3,200
Lighting-------------------------------------------------------- 900
Coal and water---------------------------------------------- 3400
Power---------------------------------------------------------- 2800
Haulage hire------------------------------------------------- 2000
Travelling expenses---------------------------------------- 6000
Showroom telephone expenses------------------------ 1500
Labour welfare expenses-------------------------------- 4600
Sales of scrap----------------------------------------------- 450
Factory supervision---------------------------------------3500
Sales----------------------------------------------------------6,40,000

39. Life Cycle Costing :
 Procurement and production costing technique that
considers all life cycle costs. In procurement, it
aims to determine the lowest cost of ownership of
a fixed asset (purchase price, installation,
operation, maintenance and upgrading, disposal,
and other costs) during the asset's economic life.
In manufacturing (as an integral part of
technology), it aims to estimate not only the
production costs but also how much revenue a
product will generate and what expenses will be
incurred at each stage of the value chain during
the product's estimated life cycle duration.

40. Methodology of LCC
 Cost Breakdown Structure
 Cost Estimating
 Cost Discounting
 Other factors

41. References/Sources
 Accounting for Managers by Dr. Sakshi Vasudeva Galgotia Publishing
Company Chapter 22 Cost Accounting an introduction page no. 753
 Cost Accounting by S.P jain K.L Naran Part 1 Chapter 1 Nature and Scope of
Cost Accounting page no. 1.3

42. Thank you