COST ACCOUNTING

1) In management accounting, cost accounting establishes budget and actual cost of

operations, processes, departments or product and the analysis of variances, profitability
or social use of funds. Managers use cost accounting to support decision-making to cut a
company's costs and improve profitability.

2) cost accounting is very useful in recording business transactions which are related to
the cost. The cost accounting is different from the financial accounting and it does not
implement the General Accounting accepted principles. So there are different types of the
accounting which is used in the business like activity based costing and marginal costing.

Q :-What are main objective of cost accounting ?

Ans. The main objectives of cost accounting are as follows

(i) Ascertainment of cost

(ii) Determination of selling price .
(iii) Cost control and cost reduction
(iv) Ascertaining the profit of each activity
(v) Assisting management in decision making

Cost Accounting and Its Objectives

Cost accounting can be defined as system of accounting by means of which costs of

products and services of the company are determined. Here are some of the objectives of
the cost accounting –

1. The main objective of cost accounting is to ascertain the costs of the products produced
by the company so that can company can decide the price after adding margin to the cost
of the product and hence cost accounting helps in deciding the price of the product that
company should charge.

2. It also helps in improving the efficiency of the company by controlling the cost of the
product through various cost control measures.

3. It also provides the base for decision making such as make or buy, whether to stop the
production of the product if it’s in loss, or whether to continue with the existing plant and
machineries or replacing them with new machineries which are more effective and
efficient than them etc…..

4. It also helps in preparing the financial statements like profit and loss, balance sheet,
funds flow statement, trial balance and other financial statements and hence it can be said
to be the basis or foundation on which financial statements are prepared.

Difference between job order and process costing:

The differences between job order costing and process costing arise from two factors.
The first is that the flow of units in a process costing system is more or less continuous,
and the second is that these units are indistinguishable from one another. Under process
costing it makes no sense to try to identify materials, labor, and overhead costs with a
particular order from a customer ( as we do with job order costing ), since each order is
just one of many that are filled from a continuous flow of virtually identical units from
the production line. Under process costing, we accumulate costs by department rather
than by order, assign these costs uniformly to all units that pass through the department
during a period.
A further difference between the two costing systems is that the job cost sheet is not used
in process costing, since the focal point of process costing is on departments. Instead of
using job cost sheet a production report is prepared for each department in which work is
done on products. The production report serves several functions. It provides a summary
of number of units moving through a department during a period, and it also provides a
computation of unit costs. In addition it shows what costs were charged to the department
and what disposition was made on these costs. The department production report is a key
document in a process costing system.

JOB ORDER

1. Many different jobs are worked on during each period, with each job having
different production requirements.

2. Costs are accumulated by individual job.

3. Job cost sheet is the key document controlling the accumulation of costs by a job.

4. Unit costs are computed by job on the job cost sheet

PROCESS COSTING

1. A single product is produced either on continuous basis or for long periods. All
units of product are identical.

2. Costs are accumulated by departments.

3. The department production report is the key document showing the accumulation
and disposition of costs.

4. Unit costs are computed by department on the department production report.

Process Costing

Process costing applies production costs to products based on the process they go through
in the manufacturing process. Each process has a standard amount of overhead, labor and
materials that are applied to each batch run the individual manufacturing processes.
Reconciliations are used after batches are processed to ensure that all appropriate costs
are applied to the manufactured goods.

Uses

Process costing is primarily used in the production of homogeneous goods through

repeated manufacturing processes. Products that use process costing include beverages,
food, nails and screws. These items are processed through individual processes where
costs are applied to each batch of produced goods. Manufacturers must be careful in
streamlining their manufacturing process to ensure that each batch has production costs
applied in similar amounts.

Job-Order Costing
Job-order costing is a method where overhead, labor and material are applied to different
products, based on how much of each production material is used. Some items may use
more labor, while other products may require more raw materials. Costs are applied,
based on the cost of each portion of materials used, rather than through the production
process used to manufacture the good. Manufacturers who produce several different types
of goods will use job-order costing.
Uses

Products like clothing, repair shops and hospitals all use a form of job-order costing.
These companies have readily identifiable raw material costs that can be applied directly
to each unit produced or serviced. Labor is also identifiable to each product because of
the differences in the products produced. Most companies use job-order costing because
of the various products they produce and the different manufacturing processes needed
for each product.

What is Direct Material Cost?

Direct material cost is the cost of the raw materials and components used to create a
product. A company may buy direct materials from suppliers or create them on-site.

To determine the amount of direct materials cost in a product, work with the engineering
staff to create a bill of materials, which specifies the quantity of each raw material item
and component included in a product. Then assign a standard cost to each item, based on
recent prices paid for them (including freight and sales taxes), and add a reasonable
allowance for scrap and spoilage. The total is the direct material cost of the product.

What is Direct Labor Cost?

Direct labor cost is wages that are incurred in order to produce specific goods or provide
specific services to customers.

The total amount of direct labor cost is much more than wages paid. It also includes the
payroll taxes associated with those wages, plus the cost of company-paid medical
insurance, life insurance, workers' compensation insurance, and any company-matched
pension contributions.

Direct labor costs are most commonly associated with products in a job costing
environment, where the production staff is expected to record the time they spend
working on various jobs. This can be a substantial chore if employees work on a
multitude of different products.

In the services industries, such as auditing, tax preparation, and consulting, employees are
expected to track their hours by job, so their employer can bill customers based on direct
labor hours worked.

In a process costing environment, where the same product is created in very large
quantities, direct labor cost is included in a general pool of conversion costs, which are
then allocated equally to all of the products manufactured.

A strong case can be made in some production environments that direct labor does not
really exist, and should be categorized as indirect labor, because production employees
will not be sent home (and therefore not be paid) if one less unit of product is
manufactured - instead, direct labor hours tend to be incurred at the same steady rate,
irrespective of production volume levels, and so should be considered part of the general
overhead costs associated with running a production operation.

CONVERSION COST

It is the cost converting raw material into finished goods. It comprises direct labour and
manufacturing overheads.
Prime cost and CONVERSION COST

Prime cost = direct materials + direct labor while conversion cost = direct labor + factory
overhead( which includes indirect materials, indirect labor and other indirect costs.

Is direct labor cost part of a conversion or prime cost?

Both are correct.

Coversion cost = Direct Labour + Manufacturing Overhead

Prime cost = Direct Labour + Direct Material

FACTORY OVERHEAD

Factory Overhead is generally defined as indirect labor, Indirect material and all other
factory expenses that cannot conveniently be identified with nor charged directly to
specific job or products or final cost objectives, such as governemnent contracts. Other
terms used for factory overhead are factory burden, manufacturing expense,
manufacturing overhead, factory expense, and indirect manufacturing cost.

PRIME COST

Prime Costs: Prime costs are those costs which are prime importance for making any
product and include:

Prime Cost = Direct Material + Direct Labor

COST OF GOOD SOLD

Cost of goods sold refers to the inventory costs of those goods a business has sold during
a particular period. Costs are associated with particular goods using one of several
formulas, including specific identification, first-in first-out (FIFO), or average cost. Costs
include all costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Costs of goods made by the business
include material, labor, and allocated overhead. The costs of those goods not yet sold are
deferred as costs of inventory until the inventory is sold or written down in value.

Is the cost of goods sold equal to the cost of goods manufactured?

Cost of Goods Manufactured includes direct cost and factory over heads plus adjustments
for work-in progress.
Cost of goods sold includes COGM + factory expenses adjusted for change in stock of
finished goods.
How to Compute Cost of Goods Manufactured

The cost of goods manufactured can give you ideas about how your business can save
money.

The cost of goods manufactured is an important calculation for every business. The cost
of goods manufactured can give you an indication of where your money is going during
the manufacturing process and how you can save money for your business.

1. Open a blank spreadsheet. If you do not have a computer, use a piece of paper
divided into columns.

2. Calculate your cost of direct materials used. Add your raw inventory cost to any
inventory you have purchased during the specified time period. This gives you
your total raw materials available. Deduct the cost of raw inventory you have at
the end of the time period.

3. Calculate your labor cost to your business for the specified time period.

4. Calculate your overhead costs. Include everything from rent, if you lease space
for the business, to depreciation of your building if you own it and depreciation
costs of your equipment. Add taxes, insurance and indirect costs for the
manufacturing process of your product, such as water and electricity.

5. Compute the cost of your work in progress at the beginning of the specified time
period.

6. Add your cost of direct materials used, direct labor costs, overhead costs and
beginning inventory work in progress costs.

7. Deduct the cost of your work in progress at the end of the specified time period.
This final calculation is your cost of goods manufactured for that time period.