cost accounting notes accounting -1.pdf

Cost accounting notes

2. Cost accounting is a branch of accounting that
focuses on analyzing, recording, and reporting the
costs incurred by a company in its production
processes, operations, and activities.
It involves the collection, measurement,
assignment, control, and analysis of costs to help
management make informed decisions and improve
cost efficiency.
Cost accounting is related to cost of operations,
productions and other business expenses and
provide the management with the information of
business profitability.

3. Cost measurement and control: Cost accounting helps in
tracking and controlling costs at different stages of
production. It involves the identification and classification
of costs, determining cost drivers, and analyzing cost
behavior to understand the cost structure of the
organization.
Cost planning and budgeting: Cost accountants assist in
the formulation of budgets by providing cost estimates and
projections. They help management set cost targets, allocate
resources efficiently, and monitor actual costs against
budgeted amounts.

4. Product pricing and profitability analysis: Cost accounting
helps in determining the selling prices of products or services
by considering various factors such as production costs,
market conditions, and desired profit margins. It also enables
the analysis of profitability at the product, customer, or market
segment level.
Decision making: Cost accounting provides crucial
information for decision making, such as make-or-buy
decisions, pricing decisions, product mix decisions, and
investment decisions. By analyzing costs and their impact on
revenues, management can make informed choices to optimize
profitability and resource allocation.
Performance evaluation: Cost accounting plays a significant
role in evaluating the performance of different departments,
divisions, or business units within an organization. By
comparing actual costs against standard costs or budgets,
management can assess efficiency, identify areas of
improvement, and reward or incentivize performance.

5. Cost accounting is the application of
accounting and costing principles, methods,
and techniques in the ascertainment of costs
and the analysis of saving or excess cost
incurred as compared with previous
experience or with standards.
Cost accounting is a very wide term. It
means and includes the principles,
techniques and systems which are employed
in a business to plan and control the
utilization of its resources.

6. Excess cost.
Estimate less cost.
Material waste.
Search material available on lower price.


Material + labour + overhead/Expenses= Cost

7. Basis Financial accounting Cost accounting
Objective It provides information about the
financial performance and financial
position of the business.
It provides information of
ascertainment of cost to control cost
and for decision making about the
cost.
Nature It classifies records, presents and
interprets transaction in terms of
money.
It classifies, records, presents and
interprets in a significant manner the
material, labour and overheads cost.
Recording
of data
It records historical data. It also records and presents the
estimated/budgeted data. It makes
use of both the historical costs and
pre-determined costs.
Users of
information
The users of financial accounting
statements are shareholders,
creditors, financial analysts and
government and its agencies.
The cost accounting information is
used by internal management at
different levels.

8. Basis Financial accounting Cost accounting
Analysis of
costs and
profits
It shows the profit/loss of the
organisation.
It provides the details of cost
and profit of each product,
process, job, contracts etc.
Time period Financial statement are
prepared for a definite period
usually a year.
Its reports and statements are
prepared as and when
required.
Presentation of
information
A set format is used for
presenting financial
information.
There are not set formats for
presenting cost information.
Types of
transactions
recorded
Financial accounting records
only external transactions like
sales, purchases, receipts etc.
Cost accounting records not
only external transactions but
also internal or inter-
departmental transactions like
issue of materials by store
keeper to production
departments.

9. Material Costs: Material costs include the direct and
indirect expenses associated with acquiring and using
materials in the production process.
Direct material costs refer to the actual cost of raw
materials used in manufacturing a product.
Indirect material costs include consumable items or
supplies that are not directly identifiable with a
specific product but are necessary for production,
such as cleaning agents, or small tools.

10. Labor Costs: Labor costs are the expenses related
to the workforce involved in the production
process.
They include wages, salaries, benefits, and
incentives paid to direct and indirect labor.
Direct labor costs are associated with employees
directly involved in manufacturing or providing
services, such as machine operators or assembly
line workers.
Indirect labor costs include salaries or wages of
employees who support the production process
indirectly, such as supervisors, quality control
staff, or maintenance material.

11. Overhead Costs: Overhead costs, also
known as indirect costs, are expenses that
are not directly attributable to a specific
product or service but are incurred to support
the overall operations of a business. These
costs include rent, services, depreciation,
insurance, property taxes, maintenance, and
repairs. Overhead costs are typically
allocated to products or services using
various allocation methods, such as direct
labor hours or machine hours.

12. By Function:
Direct cost –Direct costs can be directly
traced to a specific product, service, or cost
object. They include direct materials and direct
labor costs.
Indirect cost – Indirect costs are not directly
recognizable with a specific product or cost
object. They are typically allocated to cost
objects using cost allocation methods. Exp.
Depreciation of machinery, insurance, lighting,
power, rent, managerial salaries etc.

13. By Behavior:
Fixed costs – These costs remain constant in
total amount over a specific range of activity
for a specified period of time i.e. these do not
increase or decrease when the volume of
production changes. For example building rent
and managerial salaries remain constant and
do not change with change in output level and
thus are fixed costs.
Rent and lease, managerial salaries, building
insurance, salaries, municipal taxes.

14. Fixed Cost: Fixed costs are expenses that remain constant
regardless of the level of production or sales. These costs do
not change in the short term, even if there are changes in the
volume of output or sales. Examples of fixed costs include:
a) Rent: The monthly rent paid for a retail store or office
space. .
b) Salaries: The fixed salaries of employees who receive a
fixed amount each month, regardless of the workload.
c) Insurance Premiums: A fixed monthly or annual
insurance premium for business coverage.
d) Property Taxes: The fixed amount of property taxes paid
on a business property each year.

15. Variable cost - A variable cost is a corporate
expense that changes in proportion to how
much a company produces or sells.
Variable costs increase or decrease depending
on a company's production or sales volume
they rise as production increases and fall as
production decreases.

Total cost = Fixed cost + Variable cost

16. Variable Cost: Variable costs are expenses that change
proportionally with the level of production or sales.
They vary as the volume of output or sales increases or
decreases. Examples of variable costs include:
a) Raw Materials: The cost of purchasing raw
materials to manufacture products.
b) Direct Labor: Wages paid to workers directly
involved in the production process.
c) Packaging Materials: The cost of materials used for
packaging products.
d) Sales Commissions: Commissions paid to
salespeople based on their sales performance.

17. Semi-variable cost - A semi-
variable cost, also known as a semi-
fixed cost or a mixed cost, is a cost
composed of a mixture of both fixed
and variable components.
Costs are fixed for a set level of
production or consumption, and
become variable after this production
level is exceeded. i.e. depreciation,
repair etc.

18. Semi-Variable Cost (Mixed Cost): Semi-variable costs,
also known as mixed costs, have both fixed and variable
components. They consist of a fixed portion that remains
constant and a variable portion that varies with the level of
production or sales. Examples of semi-variable costs
include:
a) Utilities: The electricity bill for a manufacturing facility
may have a fixed base charge plus a variable component
based on usage.
b) Telephone Bills: A monthly telephone bill that has a
fixed line rental fee and additional charges based on the
number of calls made.
c) Vehicle Costs: The cost of operating a company vehicle,
including a fixed monthly lease payment and variable fuel
expenses based on usage.
d) Internet Service: A monthly internet bill that has a fixed
subscription fee and additional charges based on data usage.

19. Product Cost – costs which become part of cost of
product rather than an expense of the period in which
they are incurred are called as product cost. i.e. cost
of raw material, direct wages etc.
Product costs refer to the expenses incurred in the
production or manufacturing of goods or services.
Period cost - cost which are not associated with
production are called period cost. They are treated as
an expense of the period in which they are incurred.
i.e. Administration cost, salesman salaries and
commission etc.
. These costs are related to the general operations of
the company and are expensed in the period in which
they are incurred.

20. Relevant costs and irrelevant costs are concepts
used in decision-making and cost analysis to
determine which costs are important and should
be considered when making decisions, and
which costs can be ignored as they do not
impact the decision at hand.
Relevant Cost are those cost which would be
change by managerial decision.
Irrelevant cost are those which would not be
affected by the decision.
Ex. Closing Down of Unprofitable retail shop.

21. These are the cost which may be directly
regulated at a given level of management
authority.
Controllable costs are those costs which are
subject to the decision of the manager and
hence can be kept within predefined limits.
For example cost of raw material may be
controlled by purchasing in larger quantities.

22. These are those costs which
cannot be influenced by the action
of specified member of an
enterprise.
For example it is very difficult to
control costs like factory rent,
managerial salaries.

23. During shutdown period though no work is
done yet certain fixed costs, such as rent
and insurance of building, depreciation for
entire plant will have to be incurred.
Such cost of the idle plant are known as
shutdown cost.
Exp. Rent, Insurance, Dep., repair
timeing.

24. These are the cost which have been
created by a decision that was made
in the past that cannot be changed by
any decision that will be made in
future.
Exp. Investment in plant &
Machinery, building etc.

25. The difference in total cost between two
alternative is termed as differential cost.
In case the choice of an alternative results
in increase in total costs such increase in
costs is known as incremental costs.
In case the choice results in decrease in
total costs, such decrease in total costs is
termed as Decremental cost.

26. There are three broad elements of cost:

ELEMENTS OF COST

MATERIAL LABOUR EXPENSES

27. Total cost
Direct
cost
Direct
material
Direct
labour
Direct
Expenses
Indirect
cost
Indirect
material
Indirect
labour
Indirect
expenses

28. The substance from which the product is made is known
as material. It may be in raw, semi-manufactured or a
manufactured state. It can be direct as well as indirect.

MATERIAL

DIRECT INDIRECT

29. All material which becomes an integral part of the
finished product and which can be conveniently
assigned to specific physical units is termed as Direct
Material.
Following are some examples of direct material:
All material or components specifically purchased,
produced or requisitioned from stores.
Primary packing material e.g. carton, wrapping,
cardboard boxes, etc.
Purchased or partly produced components.
Direct material is also described as process material,
prime cost material, production material, stores
material, constructional material, etc.

30. All material which is used for purpose ancilary to the
business and which cannot be conveniently assigned to
specific physical units is termed as Indirect Material.
Consumable stores, oil and waste, printing and
stationery material, small tools, nuts and bolts, gum etc.
are a few examples of Indirect material.
Indirect material may be used in the factory, the office
or the selling and distribution divisions.

31. For conversion of materials into finished goods, human
effort is needed, such human effort is called labour.

LABOUR

DIRECT INDIRECT

32. Labour which takes an active and direct part in the
production of a particular commodity is called direct
labour.
Direct labour costs are, therefore, specifically and
conveniently traceable to specific products.
Direct labour is also described as process labour,
productive labour, operating labour, machine operator,
shoe-maker, carpenter, etc.

33. Labour employed for the purpose of carrying out tasks
incidental to goods, or services provided, in indirect
labour.
Such labour does not alter the construction,
composition or condition of the product.
It cannot be practically traced to specific units of
output.
Wages of store-keeper, foremen, time-keepers, directors
fees, salaries of salesmen, supervisor, inspector,
cleaner, clerk, peon, watchman, etc. are all examples of
indirect labour costs.

34. Any other cost besides material and labor is termed as
expense.

EXPENSES

DIRECT INDIRECT

35. These are expenses which can be directly, conveniently
and wholly allocated to specific cost centres or cost units.
Examples of such expenses are: hire of some special
machinery required for a particular contract, cost of
defective work incurred in connection with a particular
job or contract, experimental costs, cost of patent
rights, royalty paid in mining, etc.

36. These are expenses which cannot be directly,
conveniently and wholly allocated to cost centres or
cost units.
The examples of indirect expenses are rent, rates,
insurance, salaries, lighting charges, depreciation,
advertising, repairs, etc.

37. Prime
cost
Direct
material
Direct
labour
Direct
expenses
Prime cost = direct material + direct labour + direct expenses

38. The term overhead includes indirect material, indirect
labour and indirect expenses. Thus all indirect costs are
overheads.
A manufacturing organisation can broadly be divided
into three divisions:
Factory or works where production is done.
Office and administration, where routine as well as
policy matters are decided
Selling and distribution where products are sold and
finally despatched to the customer.

39. Overhead may be incurred in the factory or office or
selling and distribution divisions.
OVERHEADS
1.Factory overheads.
2.Office & Administration overheads.
3.Selling & distribution overheads.

40. Indirect material used in the factory such as lubricants,
oil, consumable stores, etc.
Indirect labour such as gate-keepers salary, time-
keepers salary, works managers salay, etc.
Indirect expenses such as factory rent, factory
insurance, factory lighting, etc.

41. Indirect material used in the office such as printing and
stationery material, brooms and dusters, etc.
Indirect labour such as salaries payable to office
manager, office accountant, clerks, etc.
Indirect expenses such as rent, insurance, lighting of
the office.

42. Indirect material used such as packing material,
printing and stationery material, etc.
Indirect labour such as salaries of salesmen and sales
manager, etc.
Indirect expenses such as rent, insurance, advertising
expenses, etc.

44. /Factory overhead
Factory
cost/

50. METHODS
& TECHNIQUES OF
COSTING

51. The technique and process of ascertaining Cost.
In cost accounting, "cost" refers to the monetary value of
resources consumed or sacrificed to achieve a specific objective,
such as producing goods or providing services. It represents the
expenses incurred in the production or operation of a business.
Cost can be categorized into various types, such as direct costs,
indirect costs, fixed costs, variable costs, and so on.
"Costing" is the process of determining and allocating costs to
various activities, products, or services within an organization. It
involves analyzing the expenses associated with different cost
objects, such as products, services, departments, projects, or
activities. Costing aims to provide accurate and relevant
information about the costs incurred to help management make
informed decisions and control expenses effectively.

52. When production is not highly repetitive and in addition
consist of distinct jobs or lots so that material and labour
cost can be identified by order number, the method of job
costing is used.
Exp. Plant making specialised equipment.
Every time different types of product manufacturing.
Job costing is commonly used in industries such as
construction, custom manufacturing, consulting services,
and software development, where each project or order
has unique characteristics and cost requirements. It
enables businesses to have a detailed understanding of the
costs associated with each job, facilitating accurate
pricing, cost control, and profitability analysis.

53. A contract is a big job while a job is a small contract.
This method is used where at different sites large scale
contract are carried out.
Exp. Ship-Builders, printers, Building Contractors,
Highway, Dam. Etc.
Contract costing does not in principles differ from job
costing.
Job/contract costing is also termed as Terminal costing.
Contract costing is a method used in cost accounting to
determine the cost of completing a specific project or
contract. It is commonly used in industries like
construction, engineering, and manufacturing, where work
is performed on a project basis.

54. In contracts where besides cost an agreed sum or
percentage to cover overheads and profit is paid to
contractor, the method is termed as cost plus costing.
Generally used in case where government happens to
the contractee.
Cost + Sum(%)

55. Where order or jobs are arranged in different batches after
taking into account the convence of producing articles,
batch costing is employed.
Cost of group of product is ascertained.
Unit of cost is a batch/group of identical products, instead
of a single job order or contract.
Exp. Pharmaceutical industries.
Batch costing is a cost accounting method used to
determine the cost per batch or lot of products produced
together. It is commonly used in manufacturing
environments where products are produced in batches or
groups rather than individually.

56. If a product passes through different stages, each distinct
and well-defined, it is desired to know the cost of
production at each stage.
In order to ascertain the same, process costing is employed
under which separate account is opened for each process.
Suitable for chemial manufacture, paints, food, soap
making etc.
Raw Material + process P1 + process P2 + process P3 =
Finished Product
Process Costing: Process costing is employed when goods
or services are produced in a continuous flow or through a
series of continuous processes. Costs are accumulated for
each process or department rather than for individual jobs.
This method is commonly used in industries such as oil
refining, chemical production, and food processing.

57. In this method cost per unit of output/production is
ascertained and the amount of each element
establishing such cost is determined.
Where the products can be expressed in identical
quantitative units and where manufacture is continuous
this type of costing is applied.
Exp. Suitable in industries- Brick-making, paper mill,
Cement manufacturing etc.

58. This method is employed where expenses are incurred for
providing services such as those rendered by bus
companies, electricity companies or railway companies.
Total expenses regarding operation are divided by units as
may be appropriate.
Exp. Bus company- Total No. of passenger Km.
Operating costing, also known as service costing or
operating cost accounting, is a cost accounting method used
to determine the cost of providing a service. It is applicable
to businesses that primarily offer services rather than
manufacturing products. Operating costing helps in
understanding and managing the costs associated with
providing services.

59. Ascertainment of cost of output of each department
separately is the objective of departmental costing.
Where a factory is divided into a number of
department, this method is adopted.
Departmental costing is a cost accounting method used
to determine the cost of each department within a
company or organization. It involves allocating and
apportioning costs to individual departments, allowing
for better understanding and control of costs within
different areas of the business.

60. Life cycle costing is a method of economic analysis for all
costs related to product and services throughout the entire
life cycle.
It takes into account mainly investment, operation,
maintenance and end of life disposal costs.
Including the environmental impacts expressed in monetary
terms that may come from life cycle assessment.
Life cycle costing is a cost accounting method that
considers the total cost of a product or asset over its entire
life cycle, from inception to disposal. It takes into account
not only the initial acquisition cost but also all the costs
associated with owning, operating, maintaining, and
disposing of the product or asset. It provides a
comprehensive perspective on cost management and
decision-making by considering costs incurred throughout
the entire life cycle.

61. Life cycle costing or whole-life costing is the process
of estimating how much money will spend on an asset
over the course of its useful life.
Whole-life costing covers an assets costs from the time
you purchase it to the time you get rid of it.
Category of LCC capital assets:
Initial costs
Operating costs
Disposal costs

62. Capital + lifetime operating costs + lifetime
maintenance costs + disposal costs – scarp value
= VALUE LIFE CYCLE COSTING
Choose between two or more assets.
Determine the assets benefits.
Create accurate budgets.

63. In a business, there are different activities that happen,
like setting up machines, processing orders, or
providing customer support. These activities require
resources such as labor, utilities, or supplies, which cost
money.
Activity-based costing is a way to figure out how much
each activity costs and how those costs should be
distributed among the products or services that use
those activities. It helps us understand which activities
are using more resources and costing more money.

64. Activity-based costing helps businesses understand the
real costs involved in producing their products or
delivering their services. It helps them make better
decisions about reducing costs, improving processes,
setting prices, and allocating resources effectively.
ABC is especially useful in complex businesses where
different products or services use different activities
and resources.
Activity-based costing (ABC) is a cost accounting
method that assigns costs to specific activities or
processes based on their consumption of resources. It
provides a more accurate and detailed understanding of
the costs associated with producing goods or providing
services by linking costs to the activities that drive
them.

65. Costing techniques are used by management only for
controlling costs and making some important
managerial decisions.

66. It is a technique of costing in which allocation of
expenditure to production is restricted to those cost
which arise as a result of production. i.e. cost which
vary with production.
Fixed cost are excluded. Only variable cost included
Useful in manufacturing industries with varying level
of output.

67. The practice of charging all direct costs to operations,
processes of products, leaving all indirect costs to be
written off against profits in period in which they arise
is termed as direct costing.

68. The practice of charging all costs both variable and
fixed to operation, products or process is termed as
absorption costing.

69. A technique where standardized principles and methods
of cost accounting are employed by a number of
different companies and firms, is termed as uniform
costing.
This system thus facilitates inter-firm comparisons,
establishment of realistic pricing policies etc.