WHY WE DO BUSINESS -

TO EARN PROFIT Cost represents the source that has been or must be sacrificed to attain a
COST
particular objective.

Tangible – Machine, Materials Services – Wages, Rent, Power

SALE PRICE - COST = PROFIT
SALE PRICE = COST + PROFIT
WE CAN INCREASE PROFIT BY -
a) REDUCING COST
b) INCREASING SALE PRICE
THE PRESENT ERA OF COMPITITION
THE EXPENSES INCURRED FOR PRODUCING A
COST
PRODUCT OR FOR PROVIDING A SERVICE.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Direct – Cash Indirect – Opportunity cost
COST ACCOUNTING –
WHY ?????
Effective Decisions : An effective decision
accomplishes the goals that management seeks
Management can not
avoid making decision Efficient Decisions : An efficient decision
consumes minimum amount of resources to
achieve the desired goal
A good management decision should be both effective and
efficient. For this Data/Information is required.
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3

CLASSIFICATION OF COST
COST CONTROL / WHY ??????? Basis of Element Basis of Time
CONSCIOUSNESS
Material Labour OH Historical / Estimated /
1. TO INCREASE PROFIT
2. TO AVOID UNNECESSARY EXPENSES Postmortem Future
DM IDM DL IDL
3. TO PROVIDE A STANDARD FOR CHECK
Basis of Function
4. FOR EXISTENCE IN THE MARKET
DOH IDOH Mfg. Or Product cost – Dir. Matrl + Dir.
5. IMPROVED EFFICIENCY AT LOW COST Labour + Prdn. OH
6. BETTER UTILISATION OF RESOURCES Administrative cost – Indirect cost –
7. MINIMISATION OF WASTAGES Basis of Method salary, training

8. EFFECTIVE UTILISATION OF CAPACITY Selling & Distribution Cost –

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9. TO IMPROVE OVERALL IMAGE OF THE Unit Job Process
R&D cost – Indirect cost
COMPANY
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Preproduction cost- Preliminary
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Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Expenses.

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 CLASSIFICATION OF COST CLASSIFICATION OF COST
Basis of Managerial decisions
Basis of variability Other Cost Marginal cost – aggregate direct cost/ prime cost

Conversion cost – conversion of WIP to FG Out of pocket cost – depreciation – no cash outlay
Fixed Variable SV
Common cost – Stationary Increamental cost – added cost for a new unit
Traceable cost – Direct cost
Uniform cost – incurred on different cc of an undertaking using similar
Joint cost - Common cost method of costing- FIFO, LIFO
Normal cost
Opportunity cost
Basis of Control Avoidable and unavoidable cost
Replacement cost – cost for replacement
Total cost – sum of the all cost
Controllable Uncontrollable Inputed cost – Hypothecated cost, no cash outlay, Interest on owner’s
capital
Sunk cost - Historical cost not related to the decision.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3

AREAS WHICH ARE CLOSELY RELATED TO THE COST AREAS WHICH ARE CLOSELY RELATED TO THE COST
I. AREAS RELATED TO THE MAN POWER
III. OTHER AREAS :
- COST OF RECRUITMENT
- COST OF TRAINING & DEVELOPMENT
- PRODUCTIVITY
- FIXED EXPENSES RELATED TO THE MAN POWER - COST OF BUILDING MAINTENANCE
- COST RELATED TO THE EMPLOYEE WELFARE ACTIVITIES - OTHER OVERHEADS EXPENSES
- COST OF IDLE TIME, ETC. - COST OF QUALITY
II. AREAS RELATED TO THE MACHINE : - COST OF INVENTORY, ETC.
- COST OF MAINTENANCE
- COST OF LUBRICATION
- COST OF IDLE TIME
- OPPORTUNITY COST
- COST OF RUNNING
- POWER CUNSUMPTION
- COST OF SAFETY MEASURES, ETC. 7 8
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3

2
 COST ACCOUNTING Why science: Constantly determining the relationship between reasons and
consequences.
Cost accountancy is a subject that provides knowledge to take Why an art of a Cost Accountant: Knowledge, skill, ability, imagination &
effective and efficient decision for cost control, ascertainment of innovation quality.
profitability and internal and external reporting.

Decision may be of three types: 1) Profit decision

Functional Activities of Cost Accounting
2) Investment decision
3) Dividend decision Cost Book Keeping Cost Planning
Cost Accountancy is a comprehensive terms. It is used to describe the Cost Reporting
Cost Control
principles, convention, techniques and systems that are employed in a business to
plan and control the utilisation of its resources.
Cost Analysis Cost Finding
The application of costing, cost accounting principles, method and techniques
to the science, art and practice of cost control and ascertainment of profitability Cost Reduction
Cost Comparison
as well as presentation of information for the purpose of decision making.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3

IMPORTANCE
Cost Accounting, Financial Accounting and Management Accounting:
1. General:
Mgt. accounting - Determination of the profitable and non profitable product.
Financial accounting Cost accounting - Fixation of the selling price of the product under different situation
application of appropriate - Cost ascertainment and comparison with past for trend purpose
preparation of financial determination of cost of techniques and concepts, - Relate cost data e.g. input output ratio, scrap, wastage, idle time, etc.
something (product, - Designing standard formats for cost control purposes, e.g. inventory related, job card,
statements which which help management in wage analysis sheet, etc.
summaries the results service, operation, and establishing a plan for - Presentation of monthly P&L a/c process or product wise
of operations for process) according to the reasonable economic - Proper valuation of closing stock
selected period of time costing objective of the
activities and making
and show the financial management. A cost 2. Cost Control and Cost Reduction:
accountant is primarily rational decisions for
position of the - Variance analysis with the help of standard
charged with the accomplishment of these - Division of Cost in fixed and variable part for cost control
company at a particular
date. responsibility of objectives. Any technique - Continuous effort to minimise cost and reduce standard cost also
providing cost data for whether it is drawn from
whatever purposes they financial accounting,cost 3. Decision Making:
may be required. - Managerial decisions – Allocation of resources
accounting, economics, - Technical decisions – Inventory control, Plant scheduling
mathematics, and statistics - Non Routine Decisions – Make or Buy decisions
can be used in management
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Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3
accounting. Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3

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Thorough study of the organisation
Unit Costing and it’s process also objective
Cost Accounting Designing Costing For an

Selection of suitable costing system
Batch Costing Organisation:
Costing Systems Process Costing
Division of total cost into direct and
indirect category
Contract Costing
Operating Costing Allocation of persons or equipment or group of this for
Cost Center: which the cost is to be ascertained. The basic purpose is
cost control. For the purpose of Responsibility Accounting

Marginal Costing Types:
Tools & 1) Impersonal – Location, Equipment’s

CVP Analysis
Techniques For 2) Personal – Persons, Group of peoples
Cost Control
Budgetory Control 3) Process Cost Center – Chemical Industries

Standard Costing 4) Cost centers related to area, location, sales, depo etc.
5) Production cc – Machine shop, welding shop, assembly shop, etc.
Direct costs are directly allocable to the cost centers. But indirect costs are not directly
allocable. e.g. service cost centers – Powerhouse, maintenance, personnel, canteen, etc.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3

A unit of quantity of output in relation to which costs

Cost Unit: are ascertained or expressed i.e. unit of output Cost sheet showing the cost of ---------
Sugar – Tonne Particulars Rs. Rs.
Steel – Tonne Cost of raw material consumed 0
Cost of labour 0
Power – KW Hour
Cost of Direct Factory OH 0
Bricks – 1000 numbers PRIME COST 0
Chemical – Litre, KG, Gallon, Tonne Indirect Factory OH 0
Limitation of Cost Accounting : MFG. COST/ WORKS COST / FACTORY COST 0
Admn. OH 0
1. Not an exact science and involves inherent element of
judgement COST OF PRODUCTION 0
2. Cost varies with purpose S&D OH 0
COST OF GOODS SOLD 0
3. It is not solution but helps in getting solution.
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Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3 Dr. Ratnesh Chaturvedi, ACMA, Session – 2-3