Cost_Accounting (1).pdf

CLASSIFICATION OF COST
Manju Tyagi (B.Ed, MBA, M.Com, MA, Net Qualified)

COST
 “the amount of expenditure incurred on or
attributable to a given thing”.
COSTING
 Costing is the technique and process of
ascertaining costs.
 In simple words costing is a systematic procedure
of determining the unit cost of product/service.

OBJECTIVE OF COST ACCOUNTING
➢Analysis and Ascertainment of costs
➢Presentation of costs for cost reduction and cost
control.
➢Planning and decision making

CLASSIFICATION OF COSTS
The main objective of costing is to ascertain cost of
each product, process, department, service or
operation.
Costs can be classified into different
categories depending upon the purpose of their
classification.
1. Classification by nature or element.
2. Functional classification.
3. Classification on the basis of behaviour.
4. Classification on the basis of managerial
decision making and control.

Classification on the basis of nature or
element:-
(a) Direct Costs.
(b) Indirect Costs.

CLASSIFICATION BY NATURE
ELEMENTSOF COSTS
INDIRECT COSTS
DIRECT COSTS
MATERIAL
LABOUR
EXPENSE

➢Direct Cost:-
These are costs directly attributable to producing a product.
The following comes under the Direct Cost:-
• Direct Material Cost:- It is the cost of material which
can be directly allocated to a cost centre.
Example:-
Raw material consumed for production of a product.
• Direct Labour Cost:- It is the cost of wages of those
workers who are readily identified or link with cost centre.
• Direct Expense:- These are the expenses other
than direct material or direct labour which can be
identified with cost centre.

➢Indirect Costs:- These are the costs which can
not be assign to any particular cost unit, i.e job
product or process.
•Indirect Material:- Material which cannot be
directly allocated to a particular cost centre.
•Indirect Labour:- These are the wages of
employees which are not directly allocable to a
particular cost centre.
•Indirect Expense:- These are the expense other
than the nature of material or labour and cannot
be directly attributable to a particular cost centre.

FUNCTIONALCLASSIFICATIONS
 PRIME COST
= Direct Material +Direct Labour + Direct Expense.
 FACTORY COST
Prime cost + Factory Overheads+ Opening stock of work- in-
progress- closing stockof work- in- progress.
 COST OF PRODUCTION: Factory cost+ Office and
Administration overhead + R&D overheads.

• COST OF GOOD SOLD= : Cost of Production+ Opening stock for
finished goods. - closing stock of finished goods
• TOTAL COST= Cost of good sold + Selling & distribution
overhead.

CLASSIFICATIONON THEBASISOF BEHAVIOUR
➢Fixed costs: Costs which do not vary with the level
of production are known as fixed costs.
➢Variable Cost:- Costs that vary in direct
proportion to the volume of production.
➢Semi-variable costs:- Costs which contain both
fixed and variable components are called semi -
variable costs

CLASSIFICATIONON THE BASISOF MANAGERIAL
DECISIONMAKING& control
➢ Marginal costs: Costs of producing one additional unit. It
is useful for price fixation.
➢Opportunity costs: It refers to the value of sacrifice made
for benefit of opportunity foregone in accepting an
alternative course of action.
➢Normal & Abnormal costs: Normal costs are normally
incurred at a given level of output, while Abnormal cost is an
unusual or unexpectedand due to some abnormal situation
of the production.

➢ Sunk Costs: It is a cost which has been already incurred
or sunk in the past. It is not relevant for decision making.
➢Imputed cost: The cost which do not involve any
expenditure in real sense. They included in cost accounts
only for taking managerial decisions.

FORMAT OF COST SHEET

Note:
➢ Direct wages, Productive Wages, Manufacturing
wages, Wages paid to labour means the same.
➢Chargeable expenses treated as Direct expenses.
➢Consumable Stores treated as Factory Expenses it
means factory oil, Grease, Cotton etc.
➢ If Depreciation is given but question does not
specify its relation to asset pertaining to factory
office etc, then we consider it to be factory
overhead.
➢ Some time Cost sheet divided in to two parts:
•Up to cost of Production- Cost Sheet
•Cost of production to Sales – Statement of Profit

Items not including in Cost Sheet
➢Interest on Bank Loan, Debenture, Mortgages etc.
➢Loss on sale of fixed Assets.
➢Expenses on transfer of Company`s Office.
➢Damage Payable.
➢Penalties and Fine.
➢Remuneration paid to the Proprietor in excess of a
fair reward for service rendered.
➢Loss to business property on account of theft, fire
or other natural calamities.

➢Interest received on Investment and on Bank
Deposit.
➢Profit on sale of Fixed Assets.
➢Transfer fees received.
➢Any Income Received i.e. rent received, Dividend
received etc.
➢Brokerage, Discount, Commission etc received.

➢ Appropriation to sinking food.
➢Dividend paid.
➢Taxes on income and Profit.
➢Transfer to General Reserve.
➢Excess provision for Depreciation on Building, Plant
etc. and for Bad Debts.
➢Amount Written off on Goodwill, Preliminary
Expenses, Underwriting Commission, Discount on
Debentures Issue, Expenses on Issue of Shares.
➢Charitable Donation.

Particulars Total Cost Per unit Cost
Direct Material 20,000
Direct Labour 8,000
Prime Cost 28,000 28.00
Add:- Factory Overheads
Indirect Labour 2,500
Supervision Cost 1,000
Factory Rent 1,600
Factory Lighting 600
Oil for Machine 100
Depreciation of Machines 500 6,300 6.30
Work Cost 34,300 34.30

Add:- Office and Administration Expenses
Office Overheads 8,000
Office Salary 2,000
Misc. Expenses 1,000 11,000 11.00
Cost of Production 45,300 45.30
Add:- Selling & Distribution Overheads 6,000 6.00
Total Cost 51,300 51.30
Profit 10,260 10.26
Sales 61,560 61.56

Answer:
Prime cost = 92,300
Work Cost = 99,800
Cost of Production = 1,06,300
Cost of Sales = 1,09,000

NATUREOF COST ACCOUNTING
(I)Cost accounting is an organized body of knowledge.
(II)These certain principles to which the technique of costing
should be applied.
(III) These principles and rules have been developed over a period
of time by experience.
(IV)Besides being a science, cost accounting is an art also. Its
principles, rules and techniques are not static but dynamic.

(V)Although it is an organized body of knowledge, its principles
can not be verified and proved by experiments. Hence, it is not
an exact science. Since it is operated by human beings, so it is a
behavioral science.
(VI)Old principles and techniques are replaced by new. It not only
lays down the rules but also shows the way of achieving the
objectives for which it is installed.

Scope of CostAccounting
• 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 accountantwill use any
method of costing like specific order costing, operation
costing, and direct costing technique.

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.

3. Cost Control
This is the end boundary of cost accounting scope. In this division,
cost accountantused 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 accountantuses budgetary control, standard costing,
break even point analysis and many other techniques for
controlling the cost.

ADVANTAGES OF COST ACCCOUNTING
• Cost accounting is not only helpful to provide cost information for
internal use by management but it also helps management in
setting objectives and programme of operation in comparing
actual performance with expected performance.

BENEFITS
• Provide data and cost information
• Disclose operating efficiency
• Helpful in decision making
• Maximum utilization of resources
• Help financial accounting
• Helpful in avoiding losses

RELATIONSHIP BETWEEN COST AND
MANAGENENT ACCOUNTING

THE FOLLOWING ARETHE MAINPOINTSOF RELATIONBETWEENCOST
AND MANAGEMENT ACCOUNTING:-
• 1)OBJECT : The object of cost accounting is to record the cost
of producing a product or providing a service. The cost is
recorded product wise or unit wise. Besides recording, it deals
with cost control, matching of cost with revenue and decision-
making. The purpose of management accounting is to provide
information to the management for planning and co-ordinating
the activities of the business.

2.SCOPE : The scope of management accounting is very wide. It
includes financial accounting, Cost accounting, budgeting, tax
planning, reporting to management and interpretationof
financial data.
• On the other hand , cost accounting deals primarily with cost
ascertainment.
3.NATURE : Management accounting is generally concerned with
the projection of figures for future. The policies and plans are
prepared for providing future guidelines.
• Cost accounting uses both past and present figures.

4.DATAUSED : In cost accounting only those transactions are
taken which can be expressed in figures only quantitative aspect
is recorded in cost accounting. Management accounting uses both
quantitative and qualitative information.
5.DEVELOPMENT : The development of cost accounting is related
to industrial revolution. Financial accounting could not satisfy
information need of management.
• Cost accounting was thus evolved as supplementary accounting
methods. Cost accounting was able to provide information not
only about cost structure but also for planning and decision-
making.
• Management accounting has developed only in the last 30 years.
• Management accounting and cost accounting are both
complementary subjects.

6.PRINCIPLE FOLLOWED : Certain principles and procedures are
followed for recording cost of different products. The same rules
are applicable at different times too .
• No specific rules and procedures are followed in reporting
management accounting.
• The information is prepared and presented as is required by
the management.

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