COST ACCOUNTING

MEANING: It is concerned with recording, classifying and summarizing cost for determination of costs of products or services; planning, controlling and reducing such costs and furnishing of information to management for decision making. DEFINITION: According to Chartered Institute of Management Accountants (CIMA), London Cost Accountancy is the process of accounting for costs from the point at which the expenditure is incurred or committed to the establishment of its ultimate relationship with cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of the activities carried out or planned. COST ACCOUNTING ACTIVITIES: 1) 2) 3) 4) Cost Determination Cost Recording Cost Analysing Cost Reporting

OBJECTIVES: 1) 2) 3) 4) 5) 6) 7) Ascertainment of Cost Estimation of Cost Cost Control Cost Reduction Determining Selling Price Facilitating Preparation of Financial & other statements Providing basis for Operating Policy i) Determination of Cost-Volume-Profit relationship ii) Shutting down or operating at a loss iii) Making or buying from outside suppliers iv) Continuing with the existing plant & machinery or replacing by improved & economical models

COST ACCOUNTING V/S FINANCIAL ACCOUNTING

S.No. 1) 2) Financial Accounting Cost Accounting To prepare P&L A/C & B/S for To provide detailed cost reporting to external users & information to mgmt. i.e. owners. internal users. Statutory Have to be prepared under It is voluntary except in Requirements Companies Act & Income Tax certain industries, where it has Act. been made obligatory to keep cost records under the companies act. Analysis of Cost It doesnt show the figures of It shows the same. & Profit cost & profit for individual products, deptt. & processes. Periodicity of Prepared periodically, usually It is a continuous process & Reporting on annual basis. may be daily, weekly & so on. Control It doesnt emphasis on control Provides detailed system of aspect. control. Historical & It is concerned almost It is concerned not only with Predetermined exclusively with historical historical cost but also with Cost records. predetermined cost. Format of It has a single uniform format It has varied formats of Presenting of presenting information i.e. presenting cost information Information P&L, B/S, FFS, CFS etc. which are tailored to meet the needs of mgmt. Types of It records only external It records external, internal or Transactions transactions like sales, inter-departmental Recorded purchases, receipts etc. with transactions. outside parties. Basis Objectives

3) 4) 5) 6) 7)

8)

COST ACCOUNTING V/S MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING: It involves collecting, analyzing, interpreting & presenting all accounting information which is useful to the management. It is closely associated with the management control which comprises planning, executing, measuring & evaluating the performance of an organisation. The difference between these two is that Management Accounting has wider scope, as it deals with cost as well as the revenue.

ADVANTAGES OF COST ACCOUNTING: 1) 2) 3) 4) 5) 6) To Management To Owners To Workers To Government To Consumers / Public To Lenders / Creditors

LIMITATIONS: 1) 2) 3) 4) 5) Duplication of Efforts Expensive It is not the only factor for Decision Making Limited Applicability Not Reliable (based on estimates)

SCOPE OF COST ACCOUNTANCY: 1) Cost Ascertainment 2) Cost Accounting 3) Cost Control

BASIC COST CONCEPT

COST, EXPENSES AND LOSSES COST: Cost is that which is given or sacrificed to obtain something. It is the amount of resources given up in exchange for some goods or services. EXPENSES: These are costs which have been applied against revenue of particular accounting period. For example, salaries. LOSSES: It represents diminution in ownership equity other than from withdrawal of capital.

ELEMENTS OF COST

Material

Labour

Expenses

Overheads

Direct

Indirect

Direct

Indirect

Direct

Indirect

Factory Overhead

Office & Admn. Overhead

Selling & Distribution Overhead

Indirect Material

Indirect Material

Indirect Material

Indirect Labour

Indirect Labour

Indirect Labour

Indirect Expenses

Indirect Expenses

Indirect Expenses

SOME IMPORTANT TERMS

COST UNIT The quantity upon which cost can be conveniently allocated. For example, Textile mills per meter / per K.g. of cloth manufactured Electricity company per unit of electricity generated COST CENTRE A location, a person or item of equipment for which costs may be ascertained & used for the purpose of cost control. The smallest segment of activity or area or responsibility for which costs are accumulated. For example, department, store yard or sales area, a machine or delivery vehicle etc. Types of Cost Centre: 1) Personal & Impersonal 2) Operation & Process 3) Product & Service PROFIT CENTRE It is that segment of activity of a business which is responsible for both revenue & expenses & discloses the profit of a particular segment of activity. COST CENTRE V/S PROFIT CENTRE S. No. 1 2 Cost Centre It is responsible for cost. It focuses on cost reduction, but no cost targets. Profit Centre It is responsible for both cost & revenue. It has profit targets.

COST ESTIMATION & COST ASCERTAINMENT Cost Estimation is pre-determining the cost of a certain product, job or order. Cost Ascertainment is determining cost on the basis of actual data.

COST ALLOCATION & COST APPORTIONMENT Cost Allocation refers to the allotment of whole items of cost to cost centres or cost units. Cost Apportionment refers to the allotment of proportions of items of cost to cost centres or cost units. COST OBJECTIVE & COST ACCUMULATION Cost objective any activity for which a separate measurement of cost is desired. It may be in the form of cost centres or cost units. Cost Accumulation is the collection of data in an organized manner through an accounting system. It is basically concerned with routine compilation of historical data in a regular & orderly manner. COST REDUCTION & COST CONTROL S.NO. COST CONTROL 1 It aims at maintaining the costs in accordance with established standards. 2 3 4 It seeks to attain lowest possible cost under existing conditions. It emphasizes on past & present. It is a preventive function. COST REDUCTION It is concerned with reducing cost. It challenges all standards & endeavors to better them continuously. It recognizes no condition as permanent since a change will result in lower cost. It emphasizes on present & future. It is a corrective function.

NORMAL LOSS Particular type of loss which is expected by an organization and for which provision is usually made in the budgeting process of the organization. ABNORMAL LOSS Abnormal loss is spoilage beyond the normal spoilage rate. It is controllable because it is a result of inefficiency. The loss arising from a manufacturing or chemical process through abnormal waste, shrinkage, seepage, or spoilage in excess of the normal loss.

CLASSIFICATION OF COSTS: 1) Fixed, Variable, Semi-variable Cost a. Fixed Cost i. Committed Cost ii. Policy & Managed Cost iii. Discretionary Cost iv. Step Cost 2) Production Cost & Period Cost 3) Direct Cost & Indirect Cost 4) Decision-making Cost & Accounting Cost 5) Relevant Cost & Irrelevant Cost 6) Shutdown Cost & Sunk Cost 7) Controllable & Uncontrollable Cost 8) Avoidable / Escapable Cost & Unavoidable / Inescapable Cost 9) Imputed / Hypothetical Cost 10) Differential, Incremental / Decremental Costs 11) Out of Pocket Cost (Explicit & implicit Cost) 12) Opportunity Cost 13) Traceable, Untraceable or Common Cost 14) Joint Cost & Common Cost 15) Conversion Cost 16) Production, Administration, Selling & Distribution Cost, Research & Development Cost

METHODS OF COSTING

Process Specific Costing

NonProcess Specific

Others

Job Costing

Batch Costing

Unit Costing

Operation Costing

Multiple / Composit e Costing

Departme ntal Costing

Contract Costing

Cost Plus Costing

Process Costing

Operating or Service Costing

Uniform Costing

TECHNIQUES TECHNIQUES OF OF COSTING COSTING

Marginal Marginal Costing Costing COST SHEET:

Absorption Absorption Costing Costing

Direct Direct Costing Costing

It a document which provides for the assembly of the estimated detailed cost in respect of a cost center or a cost unit. Types: 1) Historical Cost Sheet 2) Estimated Cost Sheet

Prime Cost = Direct Material + Direct Labour + Direct Expenses

Works / Factory Cost = Prime Cost + Factory Overhead Cost of Production = Works Cost + Office Overhead Total Cost = Cost of Production + Selling & Distribution Overhead Selling Price = Total Cost + Profit Format of Cost Sheet Amt. (Rs.) Direct Material Opening Stock Add: Purchases Less: Closing Stock Direct Labour Direct Expenses Add: Factory Overheads Gross Factory Cost Add: Opening W.I.P. inventory Less: Closing W.I.P. inventory Factory Cost Add: Office/Administration Overhead Cost of Production Add: Opening stock of finished goods Less: Closing stock of finished goods Cost of Goods Sold Add: Selling & Distribution Overheads Cost of Sales/Total Cost Add: Profit Selling Price xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Prime Cost xxx xxx xxx xxx xxx xxx xxx Total Amt. (Rs.)

xxx xxx xxx xxx