The term ‘cost’ has a wide variety of meanings. Different people use this term in different senses for different purposes. For example, while buying a book, you generally ask, “how much does it cost”? Here the cost means price.
The costing terminology of the Institute of Cost and Works Accountants,London defines cost as “the amount of expenditure incurred on or attributable to a given thing”.
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.
2. COST ACCOUNTING
Costing is a specialised branch of
accounting. It has been developed because
of limitations of financial accounts.
In the present day it is absolutely necessary
that a business concern should operate its
activities with utmost efficiency and at the
lowest cost.
3. Meaning Of Cost, Costing And Cost Accounting
The term ‘cost’ has a wide variety of meanings.
Different people use this term in different
senses for different purposes. For example,
while buying a book, you generally ask, “how
much does it cost”? Here the cost means price.
The costing terminology of the Institute of Cost
and Works Accountants,London defines cost
as “the amount of expenditure incurred on or
attributable to a given thing”.
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.
4. OBJECTS AND MEANING OF COST ACCOUNTING
Analysis and Ascertainment of costs: The main
object of costing is to ascertain the cost of each
product, process, department, service or operation.
Presentation of costs for cost reduction and
cost control: Important function of costing is to
control and reduce costs.
Planning and decision making: It has now
developed as a tool in the hands of the
management for planning and taking crucial
decisions like pricing of product, introduction of
new product in the market, make or buy decisions.
5. CONCEPT OF COST
The “COST” refers to expenditure not the price
of any goods.
It’s the process of ascertaining cost(its
principles & rules).
6. DEFINITION OF COST A/C
.“The process of accounting for cost from the
point at which expenditure is incurred or
committed to the establishment of its
ultimate relationship with cost centre & cost
units.”(I.C.M.A,London)
2.The amount of expenditure incurred on or
attributable to given thing.”(I.C.W.A,London)
3.The is distinguish from from expenses &
losses.
7. 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.
8. 1. Classification on the basis of nature or
element:-
(a) Direct Costs.
(b) Indirect Costs.
10. (1)Direct Cost:- These are costs directly attributable to
producing a product.
The following comes under the Direct Cost:-
(i)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.
(ii)Direct Labour Cost:- It is the cost of wages of those
workers who are readily identified or link with cost
centre.
(iii)Direct Expense:- These are the expenses other than
direct material or direct labour which can be identified
with cost centre.
11. (2)Indirect Costs:- These are the costs which can not
be assign to any particular cost unit, i.e job product or
process.
(i) Indirect Material:- Material which cannot be directly
allocated to a particular cost centre.
(ii)Indirect Labour:- These are the wages of employees
which are not directly allocable to a particular cost
centre.
(iii)Indirect Expense:- These are the expense other
than the nature of material or labour and cannot be
directly attributable to a particular cost centre.
12. FUNCTIONAL CLASSIFICATIONS
PRIME COST = Direct Material +Direct Labour+
Direct Expense.
FACTORY COST: Prime cost + Factory Overheads+
Opening stock of work- in- progress- closing stock of
work- in- progress.
COST OF PRODUCTION: Factory cost+ Admin
overhead + R&D overheads.
COST OF GOODS AVAILABLE FOR SALE: Cost of
Production+ Opening stock for finished goods.
13. COST OF GOOD SOLD= Cost of good available-
closing stock of finished goods
TOTAL COST= Cost of good sold + Selling &
distribution overhead.
14. Classification on the basis of behaviour
(i)Fixed costs: Costs which do not vary with
the level of production are known as fixed
costs.
(ii)Variable Cost:- Costs that vary in direct
proportion to the volume of production.
(iii)Semi-variable costs:- Costs which contain
both fixed and variable components are
called semi -variable costs
15. Classification on the basis of Managerial decision
making & control
(I ) Marginal costs: Costs of producing one additional
unit. It is useful for price fixation.
(II)Opportunity costs: It refers to the value of sacrifice
made for benefit of opportunity foregone in
accepting an alternative course of action.
(III)Normal & Abnormal costs: Normal costs are
normally incurred at a given level of output, while
Abnormal cost is an unusual or unexpected and due
to some abnormal situation of the production.
16. .
(IV) Sunk Costs: It is a cost which has been already
incurred or sunk in the past. It is not relevant for
decision making.
(V)Imputed cost: The cost which do not involve any
expenditure in real sense. They included in cost
accounts only for taking managerial decisions.
17. Nature of 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.
18. (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.
19. 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.
20. 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.
21. 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.
22. 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.
23. BENEFITS
PROVIDE DATA AND COST INFORMATION
DISCLOSE OPERATING EFFICIENCY
HELPFUL IN DECISION MAKING
MAXIMUM UTILISATION OF RESOURCES
HELP FINANCIAL ACCOUNTING
HELPFUL IN AVOIDING LOSSES
25. THE FOLLOWING ARE THE MAIN POINTS OF
RELATION BETWEEN COST 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.
26. 2.SCOPE : The scope of management accounting is very
wide. It includes financial accounting, Cost accounting,
budgeting, tax planning, reporting to management and
interpretation of 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.
27. 4.DATA USED : 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.
28. 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.
30. Definition
That point of sales volume at which total revenue
is equal to total cost.
It is a point of no profit no loss
Break Even Total sales = Total Cost
31. The Break Even Point can be
computed in terms of:
a) Units of Sales Volume
b) Budget Total or in terms of Money
Value(Rupees)
32. Units of Sales Volume
Break even point in Units can be calculated in the following
ways:-
Or
Fixed Cost = Those cost which do not vary with changes in
volume of output.
Variable Cost – Those Cost which fluctuate to the volume of
output.
Contribution – It is the difference between sales and variable
cost. It may be defined as the excess of selling price over
variable cost.
B.E.P = Fixed Cost
Selling Price per unit - Variable Cost per Unit
B.E.P = Fixed Cost
Contribution per Unit
33. Budget Total or in terms of Money Value
Break even point in Rupees(Rs) can be calculated in
the following ways:-
B.E.P in Units = Fixed Cost / Sales- Variable Cost * Sales
B.E.P = Fixed Cost/Contribution * Sales
34. We can find Break Even Point with the help of
Profit Volume Ratio also by:-
Profit Volume Ratio (P.V. Ratio)= it is also called
Contribution Ratio or Marginal Ratio.
Express the relation of contribution to sales or it
shows the relation between the contribution and
sales.
As
B.E.P – Fixed Cost/Profit Volume Ratio
Profit Volume Ratio=Contribution/Sales