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Cost accounting

Introduction

COST - MEANING
Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing.

COST ACCOUNTING MEANING


Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making

ELEMENTS OF
COST

COST

MATERIALS

OTHER EXPENSES

LABOUR

DIRECT

INDIRECT DIRECT

INDIRECT

DIRECT

INDIRECT

OVERHEADS
DOH

FOH

AOH

SOH

MATERIAL: The substance from which the finished product is made is known as material.
Direct material is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc.

Indirect material is one which cannot be easily identified in the product.

Examples of Indirect material


At factory level lubricants, oil, consumables, etc. At office level Printing & stationery, Brooms, Dusters, etc. At selling & dist. level Packing materials, printing & stationery, etc.

LABOUR: The human effort required to convert the materials into finished product is called labour. DIRECT LABOUR is one which can be conveniently identified or attributed wholly to a particular job, product or process. Eg:wages paid to carpenter, fees paid to tailor,etc.
INDIRECT LABOUR is one which cannot be conveniently identified or attributed wholly to a particular job, product or process.

Examples of Indirect labour


At factory level foremens salary, works managers salary, gate keepers salary,etc At office level Accountants salary, GMs salary, Managers salary, etc. At selling and dist.level salesmen salaries, Logistics manager salary, etc.

OTHER EXPENSES are those expenses other than materials and labour. DIRECT EXPENSES are those expenses which can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc.
INDIRECT EXPENSES are those expenses which cannot be directly allocated to particular job, process or product.

Examples of other expenses


At factory level factory rent, factory insurance, lighting, etc. At office level office rent, office insurance, office lighting, etc. At sales & dist.level advertising, show room expenses like rent, insurance, etc.

How to treat the following?


Carriage Packaging expenses

COST SHEET
DIRECT MATERIAL DIRECT LABOUR DIRECT EXPENSES

PRIME COST FACTORY OVERHEADS

FACTORY COST OFFICE OVERHEADS

COST OF PRODUCTION SELL & DIST OVERHEADS

COST OF SALES PROFIT

SALES

COST SHEET - ADVANCED


OPENING STOCK OF RAW MATERIALS +PURCHASES +CARRIAGE INWARDS -CLOSING STOCK OF RAW MATERIALS VALUE OF MATERIALS CONSUMED +DIRECT WAGES +DIRECT EXPENSES PRIME COST +FACTORY OVERHEADS +OPENING STOCK OF WIP -CLOSING STOCK OF WIP FACTORY COST (CONT.)

FACTORY COST
+ADMINISTRATIVE OVERHEADS COST OF PRODUCTION +OPENING STOCK OF FINISHED GOODS -CLOSING STOCK OF FINISHED GOODS COST OF GOODS SOLD +SELL. & DIST. OVERHEADS COST OF SALES +PROFIT

SALES

Schedule of Cost of Goods Manufactured


Comet Computer Corporation Schedule of Cost of Goods Manufactured Raw material used Direct labor Total manufacturing overhead Total manufacturing costs Add: Work-in-process inventory, January 1 Subtotal Deduct: Work-in-process inventory, December 31 Cost of goods manufactured $ $ $ $ 134,980 50,000 230,000 414,980 120 415,100 100 415,000

Exh. 2-7

Exh. 2-7

Raw-material inventory, January 1 Add: Purchases of raw materials

Raw material available for use Deduct: Raw material inventory, December 31 Raw material used

Schedule of Cost of Goods Manufactured


Computation of Cost of Raw Material Used $

6,000 134,000 140,000 5,020

Comet Computer Corporation

$ 134,980

Schedule of Cost of Goods Manufactured Raw material used Direct labor Total manufacturing overhead Total manufacturing costs Add: Work-in-process inventory, January 1 Subtotal Deduct: Work-in-process inventory, December 31 Cost of goods manufactured $ $ $ $ 134,980 50,000 230,000 414,980 120 415,100 100 415,000

Exh. 2-7

Schedule of Cost of Goods Manufactured Include all direct labor costs


incurred during the current period.Corporation Comet Computer
Schedule of Cost of Goods Manufactured Raw material used Direct labor Total manufacturing overhead Total manufacturing costs Add: Work-in-process inventory, January 1 Subtotal Deduct: Work-in-process inventory, December 31 Cost of goods manufactured $ $ $ $ 134,980 50,000 230,000 414,980 120 415,100 100 415,000

Schedule of Cost of Goods Manufactured


Computation of Total Manufacturing Overhead Indirect material Indirect labor Depreciation on factory Depreciation on equipment $ 10,000 40,000 90,000 70,000

Exh. 2-7

Utilities 15,000 Comet Computer Corporation Insuranceof Cost of Goods Manufactured 5,000 Schedule Total manufacturing overhead $ 230,000

Raw material used Direct labor Total manufacturing overhead Total manufacturing costs Add: Work-in-process inventory, January 1 Subtotal Deduct: Work-in-process inventory, December 31 Cost of goods manufactured

134,980 50,000 230,000

$ $ $

414,980 120 415,100 100 415,000

Exh. 2-9

Schedule of Cost of Goods Manufactured Beginning work-in-process


inventory is carried over from the prior period. Comet Computer Corporation
Schedule of Cost of Goods Manufactured Raw material used Direct labor Total manufacturing overhead Total manufacturing costs Add: Work-in-process inventory, January 1 Subtotal Deduct: Work-in-process inventory, December 31 Cost of goods manufactured $ $ $ $ 134,980 50,000 230,000 414,980 120 415,100 100 415,000

Exh. 2-9

Schedule of Cost of Goods Manufactured Ending work-in-process inventory


contains the cost of unfinished goods, and is reported inCorporation the current assets section of Comet Computer the balance sheet. Schedule of Cost of Goods Manufactured
Raw material used Direct labor Total manufacturing overhead Total manufacturing costs Add: Work-in-process inventory, January 1 Subtotal Deduct: Work-in-process inventory, December 31 Cost of goods manufactured $ $ $ $ 134,980 50,000 230,000 414,980 120 415,100 100 415,000

Exh. 2-7

Income Statement for a Manufacturer


Comet Computer Corporation Income Statement For the Year Ended December 31, 20X2 Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Income before taxes Income tax expense Net income $ $ $ $ 700,000 415,010 284,990 174,490 110,500 30,000 80,500

Income Statement for a Manufacturer


Comet Computer Corporation Schedule of Cost of Goods Sold For the Year Ended December 31, 20X2 Finished-goods inventory, Jan. 1 Add: Cost of goods manufactured $ 200 415,000 415,200 190

Exh. 2-7

Cost of goods available for sale Comet Computer Corporation Deduct Finished-goods inventory, Dec. 31 Cost of goods sold

Income Statement $ 415,010 For the Year Ended December 31, 20X2 $ $ $ $

Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Income before taxes Income tax expense Net income

700,000 415,010 284,990 174,490 110,500 30,000 80,500

COST CLASSIFICATION ON THE BASIS OF


Nature Function Direct & indirect Variability Controllability Normality Financial accounting classification Time Planning and control Managerial decision making

ON THE BASIS OF NATURE


MATERIALS
LABOUR EXPENSES

ON THE BASIS OF FUNCTION


MANUFACTURING COSTS
COMMERCIAL COSTS ADM AND S&D COSTS

ON THE BASIS OF DIRECT AND INDIRECT


DIRECT COSTS
INDIRECT COSTS

ON THE BASIS OF VARIABILITY


FIXED COSTS
VARIABLE COSTS SEMI VARIABLE COSTS

ON THE BASIS OF CONTROLLABILITY


CONTROLLABLE COSTS
UNCONTROLLABLE COSTS

ON THE BASIS OF NORMALITY


NORMAL COSTS
ABNORMAL COSTS

ON THE BASIS OF FIN. ACC


CAPITAL COSTS
REVENUE COSTS DEFERRED REVENUE COSTS

ON THE BASIS OF TIME


HISTORICAL COSTS
PRE DETERMINED COSTS

ON THE BASIS OF PLANNING AND CONTROL


BUDGETED COSTS STANDARD COSTS

ON THE BASIS OF MANAGERIAL DECISION MAKING


MARGINAL COSTS OUT OF POCKET COSTS SUNK COSTS IMPUTED COSTS OPPORTUNITY COSTS REPLACEMENT COSTS AVOIDABLE COSTS UNAVOIDABLE COSTS RELEVANT AND IRRELEVANT COSTS DIFFERENTIAL COSTS

Terms / Jargons used in Cost Accounting

COST UNIT ICMA defines cost unit as A unit of quantity of product, service or time related to which costs may be ascertained or expressed. For e.g. Brick works per 1,000 bricks Steel co.s per tonne of steel Transport co.s per pass km

COST CENTRE

ACCORDING TO ICMA, Cost centre means A location, person or item of equipment for which costs may be ascertained and used for the purpose of cost control.

COST ESTIMATION Cost estimation is the process of pre determining the costs of a certain product, job or order.

COST ASCERTAINMENT
Cost ascertainment is the process of determining costs on the basis of actual data.

COST ALLOCATION
Cost allocation refers to the allotment of whole items of costs to cost centres or cost units.Eg: salary of foreman, power, etc.

COST APPORTIONMENT
Cost apportionment refers to the allotment of proportions of items of cost to cost centres or cost units. Eg : Salary of GM is apportioned to various departments on the basis of time devoted by him.

COST CONTROL AND COST REDUCTION


Cost control aims at maintaining the costs in accordance with established standards while cost reduction is concerned with reducing costs. The objective of cost control is to achieve the cost target while the that of cost reduction is to improve the targets themselves.

COST CONTROL AND COST REDUCTION CONTD.


Cost control ends when targets are achieved while cost reduction has no visible end. Cost control is a preventive function while cost reduction is a corrective function.

Conclusion

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