Introduction to cost accounting

It provide information to students to know about the basic concepts of cost accounting

1. COST ACCOUNTING

2. CONTENT Definition and Objective of Cost Accounting Functions, significance, advantages and limitations Concept, elements, components of cost accounting and classification of cost sheet Cost unit vs cost center, cost estimation vs cost ascertainment Cost allocation vs cost apportionment and cost reduction vs cost control . Application of concepts cost components, cost apportionment and absorption for problem solving

3. Definitions

4. COST: ICMA, London: “ The amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing ” Thus cost is refers to something that must be sacrificed to obtain a particular thing

5. COSTING: ICMA , London: "The technique and process of ascertaining cost ". It consists of principles and rules for ascertaining cost. In the words of Harold J. Wheldon : "Costing is the classifying, recording and appropriate allocation of expenditure for the determination of the cost of products or services and for presentation of suitably arranged data for the purpose of control and guidance of the management".

6. COST ACCOUNTING CIMA , UK: "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 centers and cost units“ According to C. Gilleapic : "Cost accounting is a set of procedure for determining the cost of a product and various activities involved in its manufacture and sales and for planning and measuring performance"

7. Objectives & Functions of Cost Accounting Ascertainment of cost, Determination of selling price, Cost control and cost reduction, Ascertaining the profit of each activity, Assisting management in decision-making.

8. Significance & Advantages of Cost Accounting Control of material cost Control of labor cost Control of overheads Measuring efficiency Budgeting Price determination Curtailment of loss during the off-season Expansion Arriving at decisions

9. Limitations of Cost Accounting Based on estimates Lack of uniformity Many conventions Expensive Result requires reconciliation Dependent Does not include all items of expense and income Not an exact science

10. COST CONCEPTS Opportunity Cost Explicit & Implicit cost Marginal Cost Historical & Replacement Cost Short Run & Long Run Cost Private & Social Cost Fixed & Variable Cost Semi-variable or Semi-fixed Cost

11. ELEMENTS OF COST DIRECT MATERIAL INDIRECT MATERIAL DIRECT EXPENSES INDIRECT LABOUR DIRECT LABOUR MATERIAL LABOUR FACTORY OVERHEAD INDIRECT EXPENSES OVERHEADS ADMINISTRATION OVERHEAD OTHER EXPENNSES SELLING & DISTRIBUTION OVEHEAD

12. Components of Cost Prime Cost Works Cost Cost of Production (Administration & Office Cost) Total Cost

13. Cost Sheet It is statement showing the details of the total cost of the job, order or operations , different components of the total cost and cost per unit

14. Cost Sheet of _______ Companies Ltd. For the period ending _____ Particulars Total Cost (Rs.) Cost Per Unit (Rs.) Direct Materials XXX Opening stock of Raw material XXX Add: Purchase of Raw Material XXX Carriage on Purchases XXX Octroi on Purchases XXX Import Duty or Customs Duty XXX XXX Less: Closing stock of Raw material (XXX) Raw Material Consumed XXX xxx Direct Expenses Chargeable Expenses XXX Productive Wages /Direct Labor XXX PRIME COST XXX Xxx Add: Factory Overheads Factory Manufacturing Cost XXX Add: Opening stock of work-in-progress XXX Less: Closing stock of work-in-progress (XXX) Factory or Works Cost XXX Xxx Add: Administrative & Office Overheads All expenses related to office & administration XXX Cost of Production XXX Xxx Add: Opening stock of Finished Goods XXX Less: Closing stock of Finished Goods (XXX) Cost of Goods Sold XXX Xxx Add: Selling & Distribution Ovearheads All expenses related to selling and distribution XXX Cost of sales or Total Cost XXX Xxx Profit/Loss (balancing figure) XXX Xxx Sales XXX xxx

15. 1. ABC Ltd., a manufacturing company, incurred the following expenses during a certain period. You are required to prepare a statement showing the subdivision of total cost.   Rs.   Rs. Materials used on jobs Wages traceable to jobs Wages paid to men for maintenance work Salaries of sales men Directors’ fees Carriage inwards on raw materials Carriage outwards Factory rent and rates Works salaries Hire of crane for job no, 132 Consumable stores 1,20,540 86,650   1,26,00   15,100 10,000 860 2,800 8,300 20,400 1,300 340 Depreciation of plant Depreciation of delivery vans Insurance on finished goods Lubrication oil Bad debts Commission to salesmen Cost of idle time in factory Auditors fees Dividends paid Lighting of showroom Office salaries and expenses Income tax 3,800 1,600 2,500 250 300 2,850 510 3,800 6,800 1,500 7,000 8,600

16. Cost Sheet of ABC Ltd. For the period ending _____ Direct materials Add: carriage inwards Direct wages Direct expenses (hire of crane for job no. 132) Prime cost Works overhead Wages paid to men on maintenance work Factory rent and rates Works salaries Consumable stores Depreciation of plant Lubricating oil Cost of idle time in factory Works cost Administration overhead Directory fees Auditors fees Office salaries and expenses Cost of production Selling and distribution overhead Salaries of salesmen Carriage outwards Depreciation of delivery vans Insurance of finished goods Commission to sales men Lighting of showroom Bad debts Total cost 1,20,540 860     1,21,400 86,650 1,300         12,600 8,300 20,400 340 3,800 250 510 2,09,350               46,200     10,000 3,800 7,000 2,55,550       20,800   15,100 2,800 1,600 2,500 2,850 1,500 300 2,76,350               26,650   3,03,000

17. Cost unit vs cost center Cost Unit : It is an unit of product, service or time (or combination of these) in relation to which costs may be ascertained or expressed. We may for instance determine the cost per tone of steel, per tone kilometer of a transport service or cost per machine hour. Cost Centre: It is defined as a location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control.

18. Cost Estimation Vs Cost Ascertainment Cost estimation is the process of pre-determining the cost of a certain product job or order. Such pre-determination may be required for several purposes. Some of the purposes are as follows:         Budgeting    Measurement of performance efficiency          Preparation of financial statements (valuation of stocks etc.)          Make or buy decisions          Fixation of the sale prices of products Cost ascertainment is the process of determining costs on the basis of actual data. Hence, the computation of historical cost is cost ascertainment while the computation of future costs is cost estimation. Both cost estimation and cost ascertainment are interrelated and are of immense use to the management. Moreover, the ascertained cost may be compared with the pre-determined costs on a continuing basis and proper and timely steps be taken for controlling costs and maximizing profits.

19. Cost allocation vs cost apportionment Cost allocation occurs when overheads and expenses are charged directly to the cost center. For example , if an air conditioning unit is used separately by one department, the entire cost of using the air conditioner will be allocated to that specific department. Cost apportionment occurs when a specific cost cannot be directly identified with one specific cost center. Any cost that does not belong to one department and is shared by a number of departments will be divided among these departments using apportionment. For example , if an air conditioning unit is used for three departments, the entire cost of using the air conditioner will be apportioned to the three department on floor area occupied by each department.

20. Cost reduction vs cost control Cost Control is a technique which provides the necessary information to the management that actual costs are aligned with the budgeted costs or not. Cost Reduction is a technique used to save the unit cost of the product without compromising its quality.

21. Absorption Costing A method of costing a product in which all fixed and variable costs are apportioned to cost centers where they are accounted for using absorption rates. This method ensures that all incurred costs are recovered from the selling price of a good or service. Also called full absorption costing.