CHAPTER 1 INTRODUCTION TO COST ACCOUNTING.pdf

BBA

1. COST ACCOUNTING
CHAPTER-1
INTRODUCTION TO COST ACCOUNTING

2. COST -MEANING
Cost means the amount of expenditure ( actual or
notional) incurred on, or attributable to, a given
thing.

3. COST ACCOUNTING -MEANING
CostAccountingistheprocessofaccountingfor
costs.

4. COST ACCOUNTING -DEFINITION
AccordingtoWheldon,Costaccountingis“the
processofclassifying,recordingandappropriate
allocationofexpenditureforthedeterminationofthe
costsofproductsorservices,therelationofthese
coststosalesvaluesandtheascertainmentof
profitability”.

5. OBJECTIVES OF COST ACCOUNTING
➢Ascertainment of costs
➢Determining selling price
➢Measuring and increasing efficiency
➢Cost control and cost reduction
➢Ascertaining profit
➢Providing basis for managerial decision making

6. SL No Financial Accounting Cost Accounting
1
Records financial data of the organization. So it records all relevant
monetary data
Records and summarizes cost information and data. This includes
information about labour, materials and various overheads of the
manufacturing process.
2
Financial accounting only deals in historical costs (only actual costs
and figures)
Cost accounting uses both historical and pre-determined costs
(standard costs, estimates etc.)
3
The users of the information provided by financial accounting are
both internal and external users
Information provided by cost accounting is only meant for people
within the firm like management, employees etc.
4
Financial accounting is mandatory for all firms. Every organization
has to keep some record of its financial transactions
Cost accounting is only done by manufacturing firms. And in most
cases, it is not mandatory.
5
The emphasis here is on recording the transactions/data and
presenting it in the given format.
Other than recording data it also provides a system of cost control of
labour, material, overhead costs
6
Financial accounts deal with the business in its entirety. So it
provides us with profit or loss for the whole concern
Costing will enable us to get the profit or loss for individual products,
process, job etc.
7
In financial accounting, there is no aspect of forecasting. It is simply
a record of the financial position of the firm
In Cost accounting, forecasting is possible using some of the budgeting
techniques
Differences between Financial Accounting and Cost Accounting

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

8. 1. MATERIAL
The substance from which the finished product is
made is known as material.
(a) DIRECT MATERIAL: is one which can be directly or
easily identified in the product Eg: Timber in
furniture, Cloth in dress, etc.
(b) INDIRECT MATERIAL: one which cannot be easily
identified in the product.

9. EXAMPLES OF INDIRECT MATERIAL
At factory level – lubricants, oil, consumables, etc.
At office level – Printing & stationery,
Postage,Telegrams etc.
At selling & dist. level – Packing materials, printing
& stationery, etc.

10. LABOUR
The human effort required to convert the materials
into finished product is called labour.
(a) DIRECT LABOUR: is one which can be conveniently
identified or attributed wholly to a particular job,
product or process.
Eg:wages paid to carpenter, fees paid to tailor,etc.
(b) INDIRECT LABOUR: is one which cannot be conveniently
identified or attributed wholly to a particular job,
product or process.

11. EXAMPLES OF INDIRECT LABOUR
At factory level – foremen’s salary, works manager’s
salary, gate keeper’s salary,etc
At office level – Accountant’s salary, GM’s salary,
Manager’s salary, etc.
At selling and dist.level – salesmen salaries,
Logistics manager salary, etc.

12. EXPENSES
Those expenses other than materials and labour.
DIRECT EXPENSES: are those expenses which can be
directly allocated to particular job, process or product.
Eg : Excise duty, royalty, special hire charges,etc.
INDIRECT EXPENSES: are those expenses which cannot be
directly allocated to particular job, process or product.

13. Examples of other expenses
At factory level : factory rent, factory insurance,
lighting, etc.
At office level : office rent, office insurance, office
lighting, etc.
At sales & dist.level : advertising, show room
expenses like rent, insurance, etc.

14. CLASSIFICATION OF COST
Classification On basis of :
Nature
 Function
 Variability
 Controllability
 Normality
 Time
 In relation to the Product
 Managerial decision making

15. ON THE BASIS OF NATURE
Material
Labour
Expenses

16. ON THE BASIS OF FUNCTION
ON THE BASIS
OF FUNCTION
PRODUCTION COST
ADMINISTRATION
COST
SELLING COST
DISTRIBUTION
COST

17. ON THE BASIS OF VARIABILITY
Fixed cost
Variable cost
Semi Variable
cost

18. ON THE BASIS OF
CONTROLLABILITY
➢ Controllable costs
➢ Uncontrollable costs
ON THE BASIS OF NORMALITY
➢Normal costs

➢Abnormal costs

19. ON THE BASIS OF TIME:
➢ Historical costs
➢ Pre determined costs
ON THE BASIS OF RELATION TO THE PRODUCT
✓Direct cost
✓Indirect cost

20. ON THE BASIS OF COST ANALYSIS FOR DECISION
MAKING
▪Marginal cost
▪Opportunity cost

21. Meaning of Cost Centre:
CIMA defines Cost Centre as“a production or
service, function, activity or item of equipment
whose costs may be attributed to cost units. A
cost centre is the smallest organizational sub-unit
for which separate cost allocation is attempted.”

22. Example of Cost centre
❖A machine can be a cost centre by charging all costs relate to it.
Those costs may be depreciation, maintenance, power,
consumable, share of rent and establishment expenses, heating
and lighting etc.
❖A sales person can be treated as cost centre by charging all costs
relating to him like salary, commission, travel expenses, postage
and telephone, samples, entertainment expenses etc.

23. Cost unit
A cost unit is defined as “a unit of quantity of product, service
or time (or a combination of these) in relation to which costs
may be ascertained or expressed”.
In other words, a cost unit is a standard or unit of measurement
of the goods manufactured or service rendered.
Cost unit may be in terms of number, length, area, weight,
volume, time and value.

24. The following are examples of Cost
Unit:
Brick Industries Cost Unit per 1000 bricks.
Coal Mines Cost Unit per quintal.
Cotton Mills Cost Unit per meter.
Electric Company Cost Unit per unit.
Transport Companies Cost Unit per kilometre.
Steel Companies Cost Unit per tonne.
Water Supply Cost Unit per 1000 litres
Furniture Industries Cost Unit per number
Oil Companies Cost Unit per litre.

25. THANK YOU