Cost Accounting unit 1.pptxbbbhyyyyyyyyy

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1. Cost Accounting Unit -1 meaning and scope of cost accounting material control Unit – 2 Labour cost Overheads Unit -3 Cost sheet Process costing Unit 4 Contract costing

2. Meaning of cost Accounting Cost accounting is the branch of accounting, it is younger than financial accounting. It is the technique and process of ascertaining cost.

3. Objectives of cost accoun ting 1 . Ascertainment of cost and profit : Primary objective of cost accounting Cost and profit of each unit of production, job, or process is ascertained. Not only actual cost but predetermined cost are also ascertained for various purposes. 2. cost control and cost reduction : Cost accounting aims at improving profitability by controlling and reducing costs. various techniques are used like standard costing, budgetary control, inventory control etc.

4. 3. Guide to business policy : Cost accounting aims at serving the needs of the management in conducting the business with efficiency. Cost data provides guidelines for various decisions related to buying, selling below cost, introduction of a new product , etc. 4 . Determination of selling price : cost accounting provides cost information on the basis of which selling prices of the product and services can be fixed.

5. Scope of cost accounting Costing Cost book keeping Cost analysis Cost control Cost reports Cost audit

6. Cost center For the purpose of ascertaining the cost, whole organization is divided into small parts or sections. Each small section is treated as a cost center of which cost is ascertained. “ A location, person or item of equipment for which cost maybe ascertained and used for the purpose of control.” Thus, a cost Centre refers to a section of the business to which cost can be charged. It may be a location ( a department, a sales area) , an item of equipment ( a machine, a delivery van) , a person ( a salesman, a machine operator) or a group of these.

7. Types of cost Centre Personal cost Centre – which consists of a person or group of person Impersonal cost Centre – which consists of a location or an item of equipment or group of these. From functional point of view : Production cost Centre – these are those cost centers where actual production work takes place. examples are melting shop in a steel mill , cane crushing shop in a sugar mill. Service cost Centre – These are those cost center which render services to production cost center. Example - warehouse, toolroom, canteen repair shop.

8. Cost unit A cost unit means breaking up the cost into smaller subdivisions, there by helping in acertain in the cost of saleable products or services. “Cost unit is a form of measurement of volume of production or service. This unit is generally adopted on the basis of convenience and practice in the industry concern.” EXAMPLE : cost per tonne of sugar, cost per meter of cloth

9. Types of cost units Units of production : A tonne of steel, a metre of cable etc. 2. Units of service : cinema seats, consulting hours etc.

10. Difference between Financial accounting & cost accounting FINANCIAL ACCOUNTING COST ACCOUNTING 1. Purpose To prepare profit and loss account and balance sheet for reporting to owners or shareholders and other outside agency that is external users . To provide detailed cost information to management, that is internal users 2. Analysis of cost and profit Financial accounts reveal the profit or loss of the business as a whole for a particular period. it does not show the figures of cost and profit for individual products ,departments and processing Cost account show the detail cost and profit Data for each product line, Department, process etc, 3. Periodicity of reporting Financial reports are prepared periodically , usually on annual basis. Cost reporting is a continuous process and maybe daily, weekly, monthly etc. 4. Control aspect It lays emphasis on recording financial transaction and does not attach any importance to control aspect it provides for details system of controls with the help of certain special techniques standard costing and inventory control

11. financial accounting cost accounting 5. Historical and predetermined cost it is concerned with historical records It is concerned not only with historical costs also with predetermined cost. It extends to plans and policies to improve performance in the future 6. Types of transactions recorded Financial accounting records only external transactions like sales, purchases, receipts etc.. With outside parties. cost accounting records not only external transactions but also internal or interdepartmental transactions like issue of materials by storekeeper to production Department. 7. Types of statement prepared Prepares general purpose statements like profit & loss account and balance sheet generate special purpose statements and reports like report on loss of materials ,ideal time report, etc

12. Classification of cost 1 . classification into direct and indirect cost

13. 2. Classification on the basis of variability. Fixed cost Variable cost Semi- variable cost

14. But the fixed cost ‘per unit’ decreases when the production increases and vice versa. No. of units produced Total fixed cost Fixed cost per unit 1 2 20 200 2000 20000 20000 20000 20000 20000 20000 10000 1000 100 10

15. 3. According to controllability CONTROLLABLE UNCONROLLABLE COST

16. All variable cost are controllable costs.

17. UNCONTROLLABLE COST Cost that cannot be influenced by the action of a specified member of an undertaking All uncontrollable cost are fixed costs. E.g. Salaries, rent etc.

18. 4. ACCORDING TO NORMALITY NORMAL COST ABNORMAL COST

19. 5. CLASSIFICATION OF FIXED COST ON THE BASIS OF DEGREE COMMITTED COST DISCRETIONARY COST

20. COMMITTED COST &DISCRETIONARY COSTS These are those costs that are incurred in maintaining physical facilities and managerial set up. Such cost are committed in the sense that once the decision to incur them has been made, they are unavoidable in the short run. Example : salary of manager if committed to pay unless the firm liquidates, depreciation. These are doors cost that can be avoided by management decisions. Such cost are not permanent. E.g. Advertising , research , development.

21. 6. Classification into product & period cost. PRODUCT COST : T hese are those cost which are necessary for production and which will not be incurred if there is no production. these consist of direct material, direct labor and some other factory overhead These cost are attached to the units produced These are called inventoriable cost because they are included in the cost of product as work in progress, finish goods. PERIOD COST : These are those cost which are incurred even if there is no production. Example : showroom rent, travel expenses etc.

22. 7. Historical costs and Pre determined costs HISTORICAL COST : These are those cost which are ascertained after these have been incurred . These are nothing but the ACTUAL COSTS. PREDETERMINED COST : These are future cost which are ascertained in advance of production on the basis of a specification of all factors affecting the cost. Used for planning and controlling

23. Special costs for management decision – making Relevant & irrelevant cost Sunk costs Differential (or incremental ) cost Marginal cost Imputed cost Opportunity cost replacement cost Explicit and implicit cost Future cost Conversion cost

24. All irrelevant costs are sunk costs but not all sunk costs are irrelevant.

25. MARGINAL COST Marginal cost is the additional cost of producing one additional unit. Marginal cost is same as variable cost. It helps in decisions like make or buy, pricing of products

26. OPPORTUNITY COST : opportunity cost is the sacrifice involved in accepting an alternative under consideration . When the management adopts one course of action, it may have to give up an alternative course. The benefits which might accure from the alternative would be regarded as the opportunity cost of choosing the particular course . REPLACEMENT COST : This is the cost at which there could be purchased an asset identical to that which is being replaced. it’s the current market cost of replacing an asset. Management has to keep in mind the replacing cost while replacing the asset.

27. Out of pocket cost ( Explicit & implicit cost) There are certain cost which require cash payment to be made such as wages, rent where does many cost do not require cash outlay such as depreciation. Out of pocket cost also known as explicit costs, are those cost that involve cash outlay or require the utilization of current resources Example : material, insurance, power cost etc. Depreciation of machinery is an implicit cost because it does not involve any immediate cash out lay.

28. Future cost : Pre determined cost are known as future cost. These are the only relevant cost for decision making.