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Basic Concepts of Cost Accounting

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All the basic concepts of costing / cost accounting, including with simple and best presentation.

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Basic Concepts of Cost Accounting

  1. 1. 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
  2. 2. COSTING
  3. 3. COST ACCOUNT
  4. 4. It is the application of costing , cost accounting principles , methods , techniques to the science , art & practice of cost control & the ascertainment of profitability .
  5. 5. It includes the presentation of information derived there from for purpose of analysis & managerial decision making.
  6. 6. Meaning of cost information INFORMATION FINANCIAL OTHERS RELATED TO BUSINESS RELATED TO COST RELATED TO OTHERS NON- FINANCIAL
  7. 7. 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 ]
  8. 8. 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.
  9. 9. In the world war I & II , the important of cost accounting Grew with Growth of expenditures of defense of the all countries.
  10. 10. 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.
  11. 11. 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
  12. 12. ( when )
  13. 13. 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
  14. 14. 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.
  15. 15.  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
  16. 16. 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.
  17. 17. What is the… Cost control? Cost reduction? Cost cutting? Cost benefit?
  18. 18. It means controlling the cost up to the pre- determined level of cost i.e. well established standard.
  19. 19. It is the process of reducing the cost , permanently, without affecting the quality of goods.
  20. 20. Its aimed at , to reduce the cost of unit , as well as possible , even its spoil or affecting the quality of goods.
  21. 21. It is the result of any circumstance , i.e. temporary in nature, the benefit of which , derived for short span of time.
  22. 22. 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.
  23. 23. 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
  24. 24. 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.
  25. 25. 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.
  26. 26. 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.
  27. 27. 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.
  28. 28. 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.
  29. 29. 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
  30. 30. Personal Impersonal
  31. 31. Organization Department Activity level ACTIVITY BASED COSTING
  32. 32. 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
  33. 33. Organizational level Total hours =30 Production =581700 units Work done by all workers = 10 hours per worker
  34. 34. 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
  35. 35. 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
  36. 36. 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.
  37. 37. Cost incurred Cost unit ∴ Cost incurred Cost unit Cost center Stage 1 Stage 2 Marginal costing Absorption costing
  38. 38. 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.
  39. 39. 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 .
  40. 40. 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
  41. 41.  ‘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.
  42. 42. Cost Center Profit center Investment center
  43. 43. 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 )
  44. 44. Reliance group of company ltd responsible to generate ‘ROI’ to its all stakeholders.
  45. 45. Reliance industry Reliance capital Reliance infrastructure Reliance money Reliance entertainment Reliance power
  46. 46. Production center Service center Re- apportionment apportionment Center responsible to provide final production output Center responsible to provide service to the production department
  47. 47. 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
  48. 48. 1. Nature of elements Material Labour Other expenses Direct Direct DirectIndirect indirect indirect Prime costFOH AOH S&D R&D
  49. 49. 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
  50. 50. 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.
  51. 51. 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.
  52. 52. 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
  53. 53. 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
  54. 54. A. B. C. D. joint cost E. step / batch cost units Total cost
  55. 55. 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 )
  56. 56. units units Total cost Cost per unit Units produced per period Total cost Per unit Adverse relationship
  57. 57. RR1 RR2 RR3 Total cost Where ,
  58. 58. B. Variable cost
  59. 59. units units Total cost Cost Per unit Units produce per period Total cost Per unit Positive Relationship
  60. 60. C. Semi – variable cost v.c. F.C. Total cost Level of activity
  61. 61. 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
  62. 62. 5500 7500 10000 100 500 1000 F.C. 5000 i.e. F.C. = 5000 & V.C. = 5 Rs. Per unit
  63. 63. 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
  64. 64. 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
  65. 65. 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
  66. 66. + 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
  67. 67. D. Joint cost
  68. 68. E.g. :- Telephone bill , light bill of office cost unit cost unit
  69. 69. E. Step cost / batch cost
  70. 70. students batches Total cost 29 1 500 31 2 1000 59 2 1000 61 3 1500
  71. 71. 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
  72. 72. No of units produced per batch Per unit Total cost (30) (1) (16.67) (500) adverse Note :-
  73. 73. cost fixed variable Semi - variable Total cost Per unit fixed variable variable fixed variable variable
  74. 74. 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 .
  75. 75. 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
  76. 76. 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.
  77. 77. 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
  78. 78. 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 }
  79. 79. 9. Decision making
  80. 80. 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 .
  81. 81. 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
  82. 82. 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}
  83. 83. 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
  84. 84. 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 .
  85. 85. 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 .
  86. 86. 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 ]
  87. 87. 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 .
  88. 88. 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
  89. 89. 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
  90. 90. 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 ***********
  91. 91. 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
  92. 92. 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
  93. 93. 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 .
  94. 94. Approaches Relevant Differential Gain Inflow Incremental revenue Reduction in outflow Decremental Cost loss Reduction in inflow Decremental Revenue Outflow Incremental cost
  95. 95. 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
  96. 96. P1 = 1080 Rs P2 = 1210 Rs P3 = 1260 Rs Decision :- P1 = 1080 950 1000 1050 1100 1150 1200 1250 1300 P1 P2 P3
  97. 97. 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
  98. 98. 0 130 180 950 1000 1050 1100 1150 1200 1250 1300 P1 P2 P3 LOSS BASE
  99. 99. 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
  100. 100. 1080 1210 1080 1210 1260 1260 950 1000 1050 1100 1150 1200 1250 1300 P1 & P2 P2 & P3 P1 & P3 Series 1 Series 2
  101. 101. Standardization principles & practices of costing are used by a number of different industries . Same costing system in the same industry .
  102. 102. 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]
  103. 103. Particulars Amt Sales …. - Variable costs … Contribution … -Fixed cost [OHs] …. Profit ***** Particulars Amt Sales …. - Direct costs ….. Contribution …. -Indirect cost [OHs] ….. profit ******
  104. 104. 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 ××××××
  105. 105. 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.
  106. 106. 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.
  107. 107. 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
  108. 108. 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
  109. 109. TREASURY & CASH MANAGEMENT :- Optimum cash balance :- Where , A = Annual Requirement T = transaction cost I = holding cost T I T.C.
  110. 110. 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 .
  111. 111. 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 .
  112. 112. Operating costing is the cost of providing service. - By ICMA ENGLAND E.g. :- transportation , hotel , school , electricity , etc.
  113. 113. 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
  114. 114. 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 .
  115. 115. 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 .
  116. 116. 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.
  117. 117.  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 .
  118. 118. 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 .
  119. 119. 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..
  120. 120. 4. Coding system Cost coding Composite codes 146.326 1 = Raw material 4 = Electronic component 6 = Direct cost 3 = Location 2 = Department 6 = Description
  121. 121. Thank You CA. Vijay R. Talsaniya Contact - +91 8671866086

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