Cost Accounting Cost: Cost is the sum of the total of all the expenditure in producing and selling a product

t or in rendering a service or in performing a job. Cost accounting: costing is the process of recording the costs and preparation of statistical data for the purpose of finding out the cost, cost control, ascertainment of profitability and internal reporting for managerial decisions. Costing: the ICMA, London, has defined the term costing as the technique and process of ascertaining cost. Cost accountancy: Cost accountancy is defined as the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived therefore for the purpose of managerial decision making. Cost center: cost center is defined as a place, location, machine, a person or thing for which cost can be ascertained" it is segment of activity or area of responsibility for which cost are accumulated. Example: sale department, product management. Cost unit: cost unit is defined as a a unit of a product or service or combination of them in relation to which costs are ascertained or expressed. Cost object: cost object is defined by Charles T.Horngren as any activity for which a separate measurement of cost is desired. For e.g. a product or service or a project or a programma like family planning programme etc. Classification of cost: it is the process of grouping costs according to their common characteristics. In other worlds, it is the process under which similar items are placed or grouped together according to their common characteristics. Direct cost: direct costs are the costs which can be conveniently identified with and wholly allocated to a particular cost center or cost unit. Indirect costs: indirect costs are the costs which are incurred for the benefit of number of cost centers or cost units and which cannot be conveniently identified and allocated to any particular cost center or cost units. Objectives of cost accounting: the fore objective of cost accounting are: o Ascertainment of cost o Analysis of cost o Control of cost o Reduction of cost.

 Methods of costing: the methods of costing are: o specific order costing and o Operation costing. Types of costing: o Uniform costing, o Marginal costing, o standard costing, o historical costing, o direct costing, o aborption costing. Fixed costs: fixed costs are the costs which do not vary with the change in the level of activity or the volume of output. In other words, they are costs which change according to change in the level of activity. Variable costs: variable costs are the costs which vary or change in total in direct proportion in the volume of output. In other words, they are costs which change according to change in the level of activity. Semi-variable costs: semi-variable costs which vary or change in total in direct proportion in the volume of output and remain fixed for all volumes of production for a given period of time. Controllable costs: controllable costs are the costs which can be controlled by the action of a specified executive and so they are treated as controllable costs. Uncontrollable costs: uncontrollable costs are the costs which cannot be controlled by the specified executive in charge of the concerned cost centre. Normal costs: normal costs are the costs which are incurred at a given level of output because of abnormal conditions. Abnormal costs: abnormal costs are the costs which are incurred at a given level of output in the abnormal conditions. Sunk cost: sunk costs are the unrecoverable portion of the book value of an existing asset which is scrapped. I short; it is the capital loss which results from the scrapping of an existing asset.

 Uniform costing: uniform costing is the use of the same costing principles and or practices by several undertakings for common control or control or comparison of costs. Historical cost: a cost which has already been increased is called historical cost. It records the past expenses. Example expenses increased for constructing a building. Deferred cost: the normal revenue expenses the benefit if called historical cost. It records the past expenses. Example prepaid expenses like prepaid insurance. Contract costing: when the job is big and spread over long periods of time, the method of contract costing is used a separate account is kept for each individual contract. This method is used by builders, civil engineering contractors etc. Operation costing: operation costing is a system of costing suitable for industries where manufacture is continuous and units are identical. This method is applied in industries like mines, quarries, oil drilling etc. Multiple costing: multiple costing represent as the application of more than one method of costing in respect of the same product. This is suitable for industries where a number of component part are separately produced and subsequently assembled into a final product and this method is used in factories manufacturing cycles automobiles, engines radios etc. Types of cost centers: the types of cost centers are as follows: o Production cost centre, o Service cost centre, o Mixed cost centre. Advantages of cost accounting: o Advantages to the management, o Advantages to workers, o Advantages to government agencies and others. Principles of cost accounting: o Causes- effect relationship. o Change of cost only after its incurrence. o Cost accounting should ignore the convention of pendence. o Past cost should not form part of future costs.

o Exclusion of abnormal costs from cost a/cs. o Principles of double entry should be followed preferably. Limitations of financial accounting: o Weakness not spotted out by cost only after its incurrence. o Historical in nature o No material control system o Not helpful in the price fixation o No proper classification of costs o Inadequate information for report o No analysis of losses o No control on cost o Fails to provide useful information to the management o No standards to assess the performance Essentials of good cost accounting system: o Suitability o Specially designed system o Support of executives o Cost of the system o Clearly defined cost centers o Controllable costs o Integration with financial accounting o Prompt and accurate reports o Avoid unnecessary details o Training to staff Materials Cost Materials: material cost constitutes a major portion in the cost of production. It is used to refer raw materials, spare parts and components, consumable stores and packing materials used in the process of production. Classification of materials: direct materials, indirect materials.

 Direct materials: direct materials, generally refer to those materials which becomes the part and parcel of finished product and which can be conveniently identified and wholly allocated to a particular cost center or cost units. For example, timber used in wooden furniture, leather used in shoes etc. Indirect Materials: indirect materials refer to those materials which cannot be conveniently identified with any process, product or job. For example consumable stores, such as lubricants, cotton wastes. Material control: material control is the systematic control over the planning, purchase, storage, use and accounting of materials to ensure that there is a regular and adequate supply of materials and also wastage in using of materials is reduced to the minimum. Aspects of material control: o Purchase control o inventory control/stores control o Issues control Store keeping: it is the physical storage of stock items. In otherworlds, it is the safeguarding of the various items of stock. Objectives of stock keeping: o To facilitate speedy receipt of materials o To identify and locate the materials easily o To ensure most economical use of materials o To minimize the cost of storage o To protect the materials against direct, moisture Types of stores: o Centralized stores o Decentralize stores o Centralized stores with sub stores Technique of material control: o Classification and codification of materials o Fixation or setting up of stock levels

o ABC analysis o Perpetual inventory system Classification of materials: is refers to assigning codes, i.e. symbols, alphabets to the various items of materials in stores for their easy identification, proper store keeping and convenient handling. Codification of materials: it is the process of assigning codes, i.e symbol, alphabets to the various items of materials in the stores for their easy identification, proper store keeping and convenient handling. EOQ: it is the reordering quantity which results in more trade discount as a result reduces the transportation costs and reduction in ordering costs. Different methods of calculating EOQ: 1. Tabular method 2. Algebraic method. EOQ= FIFO: It is the method of material issues to production department under which, the materials are issued to production department in the order in which they are purchased i.e. materials are issued in the basis in first out. Advantages of FIFO method: 1. This method is useful when prices of materials are falling. 2. This method is simple to understand, easy to operate and not subject to manipulation. LIFO: this is the material issued to production department under which materials are issued to production in the reverse order of purchase i.e. materials are first issued from the previous lot i.e. on the basis of last in first out. Simple average price method: it is the method for the issue of materials to production department which materials are issued to production department in the simple average price which is calculated by dividing the total of unit prices of various lots of stock available by the number of lost of stock at the time of issue. Weighted average price method: this is the method for the issue of materials to production under which the materials are issued to production department at weighted average price which is obtained by dividing the total value of all the lots of materials in stock by completely eliminated.

 Normal loss: it is the loss which is likely to arise normally due to the inherent nature of the material. Usually, it is expected loss and cannot be avoided and cannot be completely eliminated. Abnormal loss: it is the loss which is in excess of normal loss i.e. expected loss and which arises due to abnormal causes, such as defective planning, inefficiency in operation theft, fire, accident, carless handling etc. Re-ordering level: re-ordering level is that level of materials in units at which a fresh replenishment order is initiated so that the materials are reviewed just before the stock level reaches the minimum level. Reorder level= maximum usage x maximum delivery period. Wastage: it is the part of basic raw materials lost in processing, having no recovery value. So, waste is a type of materials loss which arises in the course of production and has not value. Scrap: scrap refers to the residue of certain materials left from certain types of manufacture, having small value or low recovery value without further processing. For ex-chipping of wood, off-cuts of sheet metal, small pieces of cloth etc. Spoilage: it is that portion of production which so danged in the course of manufacture that cannot be rectified with further processing, and so, has to be disposed of as second or third quality goods without further processing. Purchase order: A formal request to the vendor to supply the required materials avoiding to the terms and conditions agreed in the quotation is called purchase order. Material requisition note: material requisition note is a printed for used to formally request the stores department to issue the required materials. The requisitioning department fills up this form and sends to the stores department. The store keeper makes necessary entry in the issue column of bin card and sends the materials to the requisitions department. Bill of materials: bill of materials is a documents sent to the stores by the requisitioning department giving the details of all the types of materials required for a specific job. This contains list of all the materials required to complete a specific job. Functions of a purchasing department: 1. Receiving purchase requisition. 2. Exploring the sources of supply and choosing the supplier. 3. Preparation and execution of purchase order. 4. Receiving materials. 5. Inspecting and testing materials.

6. Checking and passing of bills for payment. Objectives of materials control: No under stocking. No overstocking. Minimum wastage. Economy in purchase.

Advantages of ABC techniques: 1. Selective control helps in maintain high stock turnover rate. 2. Economy in state carrying costs. 3. It helps in maintaining enough safety stock. 1. 2. 3. 4. 5. 6. Purchase procedure: Preparation of purchase budget. Receiving of purchase requisition or indents. Determination of quality to be purchased. Calling for tenders or quotations. Selections of the suppliers. Placing of purchase order. Purchase requisition format: it is a formal request made in writing to the purchasing department to

buy the materials listed therein. Labour Cost

Direct Labour: direct labour refers to the labour force which is directly engaged in the production of finished goods and rendering services. Indirect labour: indirect labour refers to that labour which is not directly engaged in production of goods and services. On the other hands, indirect labour indirectly helps the direct labourers who are engaged in production. Eg. Mechanics, helper, sweepers, repairs. Contents of the term labour: 1.Monetary benefits. 2. Fringe benefits.

 Time keeping: time keeping is the recording of entry time and exit time of the workers. It helps to ascertain the actual time spent by an employee on work. Methods of time keeping: 1. Manual methods: A. Attendance registers. B. disc methods. 2. Mechanical methods: A. time recording clerk. B. dial time recorders. Idle time: idle time refers to the time for which wages is paid to the worker, but no production to the employer. It is the time the workers remain idle without any work but they will get the wages for that also. Overtime: it refers to the time worked by the worker over and above the normal time. In other words, when a worker spends on a job more than the normal time, the extra time spent is called overtime. Time booking: the recording of the work time of a worker i.e. the time spent by a worker on different jobs carried out by him during his stay in factory is called time booking. Different methods of recording labour time: manual methods include: 1. Attendance register or roaster method. 2. Disc method mechanical methods include. a. Dial time recorder. b. Card time recorder. c. Punching system. This includes. i. Card punching system. ii. Time booking. iii. Job card. iv. Time tickets. Features of sound remuneration system: It should be simple and easy to understand. It should be cost effective. It should be fair to both the employees and to the management. Different types of piece rate system: Straight piece rate.

 Piece rate guaranteed day wages. Differential piece rate. The following are the two differential piece rate Merrick differential piece rate Taylors differential piece rate. Motion study: motion study is known as methods study because it aims at finding out the best methods of completing the work. Labour turnover: labour turnover refers to an index denoting change in the labour force of an organization during a specified period. The causes of labour turnover may be o Resignation. o Discharge. Job analysis: job analysis is defined as the process of determining by observation and study and reporting pertinent information relating to the nature of a specific job. Job evaluation: job evaluation is a systematic which is used to determine the worth of a job. This technique is used for determining the relative worth of various jobs within an organization and for establishing an adequate wage structure. Ideal capacity: ideal capacity is the unused capacity of the plant equipment or department which cannot be utilized profitable. Various methods of time keeping 1. Manual method: A. attendance registers or roll method. B. disc, check, token or tally method 2. Mechanical methods: A. dial time recorder method. B. time record clock Methods of time booking: A. job ticket. B. combined time and job card. C. daily time sheet. D. weekly time sheet. E. piece work card. Methods of wage payment: 1. Time rate system 2. Piece rate system 3. Incentive schemes. Incentive schemes of wages payment: 1. Halsey premium plan bonus =50/100 x time saved x time rate earning =Time x time rate x 50/100 x time saved 2. Halsey-weir system 3.rowan premium plan bonus = time saved/std time x time taken x time rate earning =TT x TR + T/S(TT x TR) Overheads

 Overhead: it refers to the expenditure incurred over and above the prime cost. In other words it is the aggregate of indirect material cost, indirect labour cost and indirect expenses. Steps in overhead accounting: 1 Allocation of expenses to production and service department. 2. Appointment. 3. Re-appointment of service department overheads to production departments. 4absorption of the overhead of each department, over the jobs completed during the period. Classification of overhead: 1. Element 2. Function 3. Behavior 4. Controllability Factory overheads: it refers to all expenses other then direct materials cost, direct wages and direct expenses relating to production incurred within the factory. Administrative overhead: these refer to all expenses incurred in the direction, control, and administration of an undertaking. Examples of administrative overheads: office supplies such as paper, pencils, pens, ink etc. salaries of managing director, general manager, secretary etc. office lighting and heating. Rent and rates of office premises. Insurance of office building. Office telephone chargers. Directors fees. Bank charges. Selling overhead: these refer to all the expenses incurred in securing and retaining customers for the commodities dealt by a concern. In other words, they are the expenses incurred by the selling division of an undertaking for promoting sales and retaining the customers. Examples of selling overhead: salaries of sales manager and commission of salesmen, selling commission to distributers and agents, advertisements and publicity charges. Distribution overhead: these are the expenses incurred in handling the products for the time they are placed in the warehouse till they reach their destination i.e the consumer. Ex-cost of warehousing the products, packing charges loading expenses carriage outwards dispatch expenses, such as salaries of dispatch staff. Fixed overhead: these are the overheads which do not vary with the change in the volume of output but remain fixed within certain limits, for ex- postage, stationary, rent & rates, etc. Variable overheads: variable overheads are those overheads which vary directly with the variation in the volume of output. They increase when the volume of output increases and vice versa.

 Apportionment of overheads: certain items of cost cannot be identified with any of the particular cost centers or units. Such items cannot be allocated; rather, they have to be apportioned to the various cost centers by using some suitable basis. This process is called apportionment of overheads. Secondary distribution of overheads: the process of re-distributing the costs of service departments among various production departments is known as secondary distribution of overhead. Absorption of factory overheads: it is the process of charging the total overheads allotted to each production department or cost center to the various cost units. Machine hour rate: the costs or expenses incurred in running a machine for an hour. Ordinary machine hour rate: ordinary machine hour rate is calculated on the basis of common expenses, which are incurred commonly for more than one machine. The machine hour rate is calculated by apportioning the commonly incurred expenditure to the different machines. Composite machine hour rate: composite machine hour rate is calculated on the basis of common expenses, which are incurred commonly for more than one machine. The machine hour rate is calculated by apportioning the commonly incurred expenditure to the different machines. Cost allocation: cost allocation refers to charge of whole items of cost to identifiable cost centers or cost units. It refers to transferring or the whole items of direct cost to the cost centers or cost units. For ex- direct labour cost can be easily allocated. Principles of machine hour rate: 1. Principle of service or use 2. Principle of analysis or survey 3. Principle of ability to pay 4. Principle of efficiency or incentive Advantages of machine hour rate: o It gives an idea relating to the cost of operating different machine and the relative efficiencies of the machines. o The extent of idle time of the machine can also be ascertained. o It helps to decide how far the use of machine work is preferable to manual work.

 Direct labour rate: direct labour rate is a rate per hour and not a percentage rate. It is obtained by dividing the total production overhead by the total direct labours for the period. o Overhead rate=Production overhead Direct labour hours Blanket overhead rate: a blanket overhead rate is a single overhead rate for the entire factory. Blanket rate = _ total overheads for factor _ Total number of units of base for factory Methods for the absorption of factory overheads: 1. Rate per unit method = Overhead _ =overhead per units No. of units produced 2. As a percentage of material cost 3. As a percentage of direct labour cost 4. Prime cost percentage method 5. Labour hour rate method 6. Machine hour rate method Steps in the absorption of overheads: 1. Computation of overhead absorption rate Overhead absorption rate = Total overheads of cost center Total units of base used 2. Application of rate to cost units: Overhead to be absorbed = units of base in cost units x overhead rate. Overhead absorption rate may be based on actual figures or estimated figures. Actual rate Actual overhead rate= actual amount of overheads Actual base Pre-determined rate Pre-determined overhead rate = budgeted amount of overhead Budgeted base

 Blanket & multiple rate Blanket rate =total overheads of the factory. Total number of units of base for the factory. Reconciliation of cost and financial accounts Reconciliation statement: Reconciliation statement is a statement which is prepared to reconcile the profit as per cost accounts with the profit as per financial accounts by suitable treating the causes for the difference between the cost and financial profit. Need for Reconciliation: o Reconciliation of the result in necessary to check the arithmetical accuracy of the results of both the seat of accounts. o Reconciliation reveals the reasons for the variations in results and the information about the reasons for the variation in results facilitates internal control. Reasons for difference in cost and financial accounts: difference between cost and financial accounts may arise due to the following reasons. o Items shown only in financial accounts. o Items shown only in cost accounts. o Different bases of stock valuation. o Different methods of charging depreciation. Items which are shown only in financial accounts: o Purely financial charges. o Purely financial income. o Appropriation of profits. Memorandum Reconciliation statement: Memorandum Reconciliation statement is an alternative to the Reconciliation statement. The difference is that the information shown in the proforma Reconciliation statement is shown in the form of an account. The profit as per cost account is the starting point & shown on the credit side of the account. Expenses shown only in cost accounts: There are certain items which are shown in cost accounts and not in financial accounts. These are 1. Interest on capital employed but not actually paid 2. Change in lien of rent when premises are owned or national rent. Example of fictions assets: 1. Goodwill

2. Preliminary expenses 3. Discount on issue on of shares or debentures 4. Patents. Bases of stock valuation: 1. FIFO method (first in first out) 2. LIFO method (Lost in first out) Reason for disagreement between costing and financial profit: 1. Items shown only in financial accounting a. Purely financial charges b. Appropriation of profit c. Writing off intangible and fictitious assets d. Purely financial income 2. Items shown only in cost account 3. Over or under absorption of overheads 4. Di Terent bases of stock valuation 5. Different methods of charge depreciation 6. Abnormal gain and losses

Methods of cost ascertainment. Contract costing: Contract costing is that form of specific order costing which applies where the work is undertaken according to customer requirements and each order is of long during as compared to job costing. Contract price: it is the price at which the contractor agrees to do the work for the contractee. Parties to a contract: in every contract there are two parties i.e. contractor and contractee is the person who undertakes to do the construction work. The contractee is the person for whom the contract is undertaken. Cost plus contracts: a cost plus contract is a contract in which the contract price is determined by adding a specified amount of profit to the contract. In orherwords, it is a contract in which the contractor is paid the actual cost incurred by him on the contract plus a certain amount towards his profit.

 Work certified: the value of work completed by the contractor and certified as completed by the architect appointed by the contractee. Work uncertified: it is the value of work completed by the contractor but not certified as completed by the architect appointed by the contractee Retention money: a certain portion of the amount of work certified can be retained by the contractee for a specified period after the work is done. The sum retained by the contractee is called the Retention money. Process costing: the method of costing under which costs are accumulated for each process separately is known as process costing, as cost is ascertained process wise. Characteristic feature of process costing: the production of goods is continuous. The finished product is the result of two or more process or operation. Each process is a distinct and in pre-determined. The finished product and one process becomes the raw material for the succeeding or next product and one process become the raw materials for the succeeding or next process until completion. Costs are allocated process wise for a period. Normal loss or normal wastage: normal lo0ss is that loss or wastage which is inevitable in production. In orherwords, it is that loss or wastage which is unavoidable in a manufacturing process. It is called normal loss, as it expected at normal conditions. As the normal loss or wastage is natural and absorbed by good units produced in the process. Abnormal gain: sometimes, the actual (process) loss in any process may be less than the normal loss. When the actual loss is less than normal loss, there is said to be abnormal gain. Joint production: when two or more products of equal economic importance or commercial value are simultaneously production from the same basic raw materials in the course of the same processing operation, such products are known as joint products. By products: by products are products of relatively lesser economic importance or of lesser commercial value which are produced incidental to the products of greater economic importance or of greater commercial value. Features of contract costing: o Higher proportion of direct cost o Low indirect cost o Difficulties of cost control o Surplus materials