Cost Accounting

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
BBA (G)
(Second Semester)
COST ACCOUNTING

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COST ACCOUNTING – MEANING
Cost accounting is concerned with recording, classifying and summarizing
costs for determination of costs of products or services, planning, controlling
and reducing such costs and furnishing of information to management for
decision making

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OBJECTIVES OF COST ACCOUNTING
 Ascertainment of costs
 Estimation of costs
 Cost control
 Cost reduction
 Determining selling price
 Facilitating preparation of financial and other statement
 Providing basis for operating policy

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COST TERMINOLOGY
COST: Cost means the amount of expenditure incurred on a particular thing.
COSTING: Costing means the process of ascertainment of costs.
COST ACCOUNTING: The application of cost control methods and the
ascertainment of the profitability of activities carried out or planned”.
COST CONTROL: Cost control means the control of costs by management.
Following are the aspects or stages of cost control.
JOB COSTING: It helps in finding out the cost of production of every order and
thus helps in ascertaining profit or loss made out on its execution. The management
can judge the profitability of each job and decide its future courses of action.
BATCH COSTING: Batch costing production is done in batches and each batch
consists of a number of units, the determination of optimum quantity to constitute an
economical batch is all the more important.

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ELEMENTS OF COST
Element of cost
Materials Labour Expenses
Direct Indirect Direct Indirect Direct Indirect

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MATERIAL: The substance from which the finished product is made is
known as material
LABOUR: The human effort required to convert the materials into finished
product is called labour
OTHER EXPENSES: are those expenses other than materials and labour.

.
COST CLASSIFICATION
Classification On basis of :
Nature
Function
Direct & indirect
Variability
Controllability
Normality
Financial accounting classification
Time
Planning and control
Managerial decision making

.
ON THE BASIS OF NATURE
Materials
 Labor
Expenses
ON THE BASIS OF FUNCTION
 Manufacturing costs
 Commercial costs – ADM and S&D Costs
ON THE BASIS OF DIRECT AND INDIRECT
Direct costs
Indirect costs
ON THE BASIS OF VARIABILITY
Fixed costs
 Variable costs
 Semi variable costs

.
ON THE BASIS OF FINANCIAL ACCOUNTS
Capital costs
 Revenue costs
Deferred revenue costs
ON THE BASIS OF TIME
 Historical costs
 Pre determined costs
ON THE BASIS OF PLANNING AND CONTROL:
 Budgeted costs
 Standard costs

.
ON THE BASIS OF MANAGERIAL DECISION MAKING
 Marginal costs
 Out of pocket costs
 Sunk costs
 Imputed costs
 Opportunity costs
 Replacement costs
 Avoidable costs
 Unavoidable costs
 Relevant and irrelevant costs
 Differential costs

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BASIC COST SHEET
DIRECT MATERIAL ………………………………..
DIRECT LABOUR ………………………………
DIRECT EXPENSES …………………………………
PRIME COST ………………………………….
FACTORY OVERHEADS …………………………………..
FACTORY COST
OFFICE OVERHEADS
COST OF PRODUCTION
SELL & DIST OVERHEADS
COST OF SALES ………………………………
PROFIT ……………………………….
SALES

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TERMS IN COST ACCOUNTING
 Cost unit
 Cost centre
 Cost estimation
 Cost ascertainment
 Cost allocation
 Cost apportionment
 Cost reduction
 Cost control
METHODS OF COSTING
 Job costing
 Contract costing
 Batch costing
 Process costing
 Unit costing
 Operating costing
 Operation costing
 Multiple costing

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Accounting for Material
As inventory is usually purchased at different rates (or manufactured at different
costs) over an accounting period, there is a need to determine what cost needs to
be assigned to inventory. For instance, if a company purchased inventory three
times in a year at SAR 50, SAR 60 and SAR 70, what cost must be attributed to
inventory at the year end. Inventory (stock) valuation
A good estimate of closing stock is provided by three methods of stock
valuation:
 First-In-First-Out (FIFO) Method
 Last-In-First-Out (LIFO) Method
 Average Cost (AVCO) Method

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First-In-First-Out (FIFO) Method
In this method we assume that the first set of inventory received is the first to leave the
warehouse. The resulting ending inventory will be valued at current prices Last-In-
First-Out (LIFO) Method
In this method we assume that the last set of inventory received is the first to leave the
warehouse. The resulting ending inventory will be valued at older prices.
Average Cost (AVCO) Method
In this method, each time goods are purchased we calculate a new average cost of
inventory. The average cost is calculated using the equation
Average cost of inventory=
Total value of goods on hand ÷ Quantity of goods on hand
The resulting ending inventory will be valued at the last calculated average.

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INTRODUCTION
Labour cost is a second major element of cost .
Proper control and accounting for labour cost is one of the most important problems of
the business enterprise.
The human element in labour makes difficult the control of labour cost whereas
materials , being inanimate in nature, could be subjected to a rigid control. Labour once
lost cannot be recoupled and is bound to increase the cost of production.

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TYPES OF LABOUR
DIRECT LABOUR INDIRECT LABOUR

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DIRECT LABOUR
Direct labour is that labour which is directly engaged in the production of goods
or services and which can be conveniently allocated to the job ,process or
commodity unit. For example , labour engaged in making the bricked in a kiln is
direct labour charges paid for making 1000 bricks can be conveniently allocated
to the cost of 1000 bricks.

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LABOUR COST
It represent the various items of expenditure incurred on workers by the employer
and would include the following
A) MONETARY BENEFITS :
1. basic wages
2. Dearness Allowance
3. Employer’s Contribution to Provident Fund
4. Profit bonus
5. Old age Pension
6. Production bonus
7. Retirement gratuity

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B)FRINGE BENEFITS OR LABOUR RELATED COSTS :
1. Subsidised Food
2. Subsidised Housing
3. Subsidised Education
4. Medical Facilities
5. Holidays Pay
6. Recreational Facilities

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CONTROL OVER LABOUR COSTS
It is an important objective of management .
From functional point of view , control of labour costs is effected in a large
Industrial concern by the co ordinated efforts of the following departments:
1. Personnel department
2. Engineering department
3. Rate or time and motion study department
4. Time keeping department
5. Pay roll department
6. Cost accounting department

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PERSONNEL DEPARTMENT
With the help of various departments supervisors and heads is responsible for the execution
of policies regarding the recruitement , discharge classification of employees and
wages which have been laid down by the Board of Directors or a committee of
executives .
MAIN FUNCTIONS ARE:
1. To recruit workers
2. Train them and
3. Place them to the jobs they are best fitted. The submission of various reports to the
top management such as Weekly reports, Labour turnover, Labour productivity
,accidents , disciplinary action ,idle time ,overtime ,casual workers etc is also
considered to be the most important function of personnel department.

. Labour turnover
Labour turnover denotes the percentage change in the labour force of an organisation .High
percentage denotes that labour is not stable and there are frequent changes . The definitions
of labour turnover are given below :
Labour turnover according to separation method :
= Number of Employees left during a period x 100
Average number of employees during a period
2. Labour turnover according to flux method
= Number of additions + separations during a period x 100
3. Labour turnover = No. of additions + separations / 2 x 100
Average number of employees
4. Labour turnover according to replacement method
= No. of workers replaced during a period x 100

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INCENTIVES PLANS
Straight Piecework Plan : According to this plan, workers get or organization
pays wages above the base rate for production above the standards.
100% Bonus Plan :The main focus of this plan on the time instead of price per
piece. The worker is paid for the standard time at the hourly rate if the job or unit is
completed in standard time or less.
Group Bonus Plan : This plans, like those designed for individual incentive,
are intended to encourage production at rates above a minimum standard

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Rate or Time and motions studied department
This department works in close harmony with the personnel , engineering and cost
departments.
This department performs the following functions :
1. Making of time and motions studies of labour and plant operations.
2. Making job analysis
3. Setting piece rates

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Pay roll department
The important activities of the pay roll department in controlling and accounting
for labour costs are as follows:
1. To maintain a record of the job classification, department ,and wage rate for
each worker.
2. To erify and to summarise the time of each worker as shown in time cards .
3. To calculate the wages of each worker.
4. To prepare the pay roll or wages sheet for each department .
5. To maintain a permanent payroll record for each employee to distribute
wages and salaries.

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Process costing
Process costing is adopted when there is mass production through a sequence of
several processes
Example include chemical, flour and glass manufacturing
It computes the average cost per unit by dividing the costs or production for a
particular period by the number of units produced during the period

.
27
Process 1
Process 2
Process 3
Direct material
Direct labour
overheads
Finished goods Cost of goods sold
Direct material
Direct labour
overheads
Direct material
Direct labour
overheads

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Accounting for Process Costing
Costs are accumulated by each process
Each process maintains its process account
The process account is debited with the costs incurred and credited with
goods completed and transferred to other process account
When the goods are completed, they will be transferred to finished goods
account
When the goods are sold, the amount will be transferred to the cost of
goods sold account

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Accounting for losses in process costing
In a production process, losses are inherent and unavoidable
Nature of losses
Normal loss
Abnormal loss

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Transactions Accounting treatment Accounting entries
Normal loss Losses within expected level
Not assigned cost
No entry
Abnormal loss Excess loss over the expected level
Assigned cost
Dr. Abnormal loss
Cr. Process account
Abnormal gain Gain resulted when the actual loss
is less than the normal or expected
loss
Dr. Process account
Cr. Abnormal gain

.
Scrap value of normal loss Reducing material cost Dr. Scrap
Cr. Process account
Scrap value of abnormal loss Reduce cost of abnormal loss Dr. Scrap
Cr. Abnormal loss
Loss of scrap value due to
abnormal gain
The actual units sold as scrap will
be less than the scrap value of
normal loss
Dr. Abnormal gain
Cr. Scrap

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Actual cash received from
the sale of scrap
Reducing material cost Dr. Cash
Cr. Scrap

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Equivalent units of production
If there is no opening or closing work in progress (WIP) the unit cost
of products can be obtained as follows
Unit Cost = Sum of production costs
Production quantity
However, If there is opening or closing work in progress, the partly
completed production will have a lower cost than the fully completed
production
We have to converted the work in progress into finished equivalent units of
production (EUP)

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Nature of losses
Normal loss
Normal loss are the losses within the expectation during the production
Reasons:
Low quality materials and workers are engaged
There may be an inherent problem in production process
Abnormal loss The lost units that is out of expectation

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Continuous loss
Continuous losses occur evenly throughout the production process
For example, the weight loss in making mild powder
Discrete loss
Discrete losses occur at the specific point
A firm will not be aware of discrete losses unless the products are inspected at the
inspection point.

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Types and natures EUP calculation
Continuous normal loss Excluding the lost units
Continuous and abnormal loss Including the lost units
Discrete and normal loss Including the lost units
Discrete and abnormal loss Including the lost units

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Types and natures Treatments for losses and costs
Continuous normal loss Losses are included as product costs
Costs are not assigned to the lost units
Continuous and abnormal loss Losses are charged as period cost
Costs are assigned to the lost units
Abnormal loss will be written off to the profit
and loss

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Types and natures Treatments for losses and costs
Discrete and abnormal loss Loss are charged as period cost
Cost are assigned to lost units
Abnormal losses will be written off to the
profit and loss account

 CONTRACT COSTING
• Meaning:
Contract costing is that method of costing in cost accounting which
is used to collect and identify all the expenses relating to a specific
contract. For this purpose, Contractor has to maintain contract
ledger in which he has to show contract account.

 CONTRACT COSTS
Material Cost
Labor Cost
Direct Expenses
Overheads
Sub-Contract Cost
Extra Work Cost

 SOME TERMS USED IN CONTRACT COSTING:
1) WORK CERTIFIED
 Value which is receivable on finishing a contract or part of
contract after certifying it with authority or architect’s certificate.
 It will be credited to Contract Account.
2) WORK UNCERTIFIED
 It will also credited to Contract Account. Completed but not
certified.
 The work that is not certified by the contractor.

3) MATERIAL AT SITE
It will be the material which is rest after using in construction at
the end of year. It is just like closing stock and will be credited in
contract account.
4) NOTIONAL PROFIT
Credit Side of Contract Account – Debit Side of Contract
Account

 OPERATING COSTING
• Meaning:
Operating costing is an extension and refined form of process
costing. It is also more or less very similar to single or output
costing. The operating costing gives more emphasis on providing
services rather than the cost of manufacturing an article. The
services provided may be for sale to the general public or they may
be provided within an organization.

 FEATURES OF OPERATING COSTING:
The following are the features of Operating Costing:
1) Uniform service is provided to all the customers.
2) The costs are classified into fixed and variable.
3) The fixed and variable cost classification is necessary to ascertain the cost of
service and the unit cost of service.
4) There is no physical stock of article if an undertaking renders a service.
5) If a cost center is operating for an undertaking, there is no sale of service
but render the service. In other words, if a cost center is operating for public, it
sells its service to the public.
6) The cost unit may be simple in certain cases or composite or compound in
other cases like transport undertakings.
7) Total costs are averaged over the total amount of service rendered.

 Application of Operating Costing
Operating costing is applied by an organization, which provides
service to the public as a whole instead of manufacturing an article,
and sells the same. For example, Transport undertaking electricity,
theatre, hospitals, schools and the like. Similarly, the same type of
an organization or cost center renders service to production
departments. For example, Electricity, powerhouse, canteen and the
like.

Nature of Service Undertaking Cost Unit
Goods Transport service (Lorry, goods train, air
transport of goods, trucks etc.
Per tone km.
Passenger Transport service (Bus, Mini Bus, Train, Boat,
Passenger train, air trans rt etc.
Per Passenger km.
Hos itals Per bed, per patient, per day
Electricity Supply Kwh, Horse power
Canteen Service Man-men/cup of tea or coffee
Boiler House Cubic centimeters
Road Maintenance Per Km
Private Transport (private car, private aeroplane etc) Running Hour, Trip Km
Hotel Per room, per bed
Street lighting Per point, per lamp
Gas Cubit meters, Kg
Water Supply Gallons, Liters
Cinema theatres Per man show
• The following table gives a clear picture on the cost unit along with the nature of service of
the undertaking.

 OBJECTIVES OF OPERATING COSTING
The objectives of operating costing are listed below:
1. To supply the information through which the efficiency in rendering
service is improved.
2. To provide a basis for fixing accurate quotation and fare.
3. To ensure that the services are provided in proper time.
4. To control the fuel consumption and its expenses.
5. To ensure that the service equipments are properly maintained.
6. To provide cost comparison between own service and alternative service
i.e. hiring.
7. To compare the cost of one service center with another.
8. To determine the apportionment cost if the services are provided within
an organization.

ILLUSTRATION: From the following information relating to a hotel, calculate the room
rent to be charged to give a profit of 25% on cost excluding interest charged on loan for
the year ended 31st March, 2008:
1. Salaries of office staff Rs 50,000 per month.
2. Wages of the room attendant: Rs 20 per day per room when the room is occupied.
3. Light, heating and power: a) The normal lighting expenses for a room for the full
month is Rs 500, when occupied. b) Power is used only in winter and charges are Rs
200 for a room, when occupied.
4. Repair to bed and other furniture: Rs 30,000 per annum.
5. Repair to Hotel building: Rs 50,000 per annum.
6. License fees: Rs 12,400 per annum.
7. Sundries: Rs 10,000 per annum.
8. Interior decoration and furniture: Rs 1, 00,000 per annum.
9. Depreciation @ 5% p.a. is to be charged on building costing Rs 20,000 and @ 10%
p.a. on equipments.
10. There are 200 rooms in the Hotel, 80% of the rooms are generally occupied in
summer, 60% in winter, 30% in rainy season. The period of summer, winter and
rainy season may be considered to be of 4 months in each case.
A month may be assumed as 30 days of an average.

Cost Accounting

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