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Elements , Nature & Scope of Cost Accounting

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Meaning Definition Scope Objectives Advantages Limitations Elements of cost - Material, Labour, Overhead

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

Definition

Definition: According to Wheldon, Cost accounting is the application of accounting and costing principles, methods and techniques in the ascertainment of costs and analysis of saving or excess cost incurred as compared with pervious expenses or with standards.

Scope
It deals primarily with cost data It involves classification, accumulation, assignment and control of costs. It establishes budgets and standards. Right information to the Right person at the Right time. It records Income and Expenditure.

Objectives
Ascertainment of cost Control of cost Guide to business policy Determination of selling price Measuring and improving performance

Advantages
Advantages to Management 1. Reveals profits and un profitable activities 2. Helps in cost concepts: 3. Helps in decision making 4. Guides in fixing selling prices: 5. Helps in inventory control: 6.Aid in formulating policies. 7. Helps in cost reduction 8. Reveals idle capacity 9. Checks the accuracy of financial accounts 10. Prevents frauds and manipulation

Advantage to works Advantage to society Advantages to government agencies and others

Limitations
It is unnecessary It is expensive It is inapplicable It is a failure

Elements of cost
Elements of cost Other Expenses

Material

Labour

Direct

Indirect

Direct

Indirect

Direct

Indirect

Prime cost

Over Head

Prime cost

Over Head

Prime cost

Over Head

Material cost
The cost of commodities supplied to an undertaking Direct material is a part of finished product eg: cotton used in a textile mill ,clay in bricks etc. Indirect material is one which cannot be easily identified in the product. eg: pins, screws, nuts etc.

Labour Cost

The human effort required to convert the materials into finished product. Direct Labour cost consists of wages paid to a workers directly engaged in eh converting raw material into finished product. eg: wages paid to carpenter, fees paid to tailor etc.

Indirect labour is of general character and cannot be conveniently identified with a particular cost unit. eg: Supervisor, Inspector, cleaner, clerk etc

Expenses
The cost of services provided to an undertaking and the notional cost of the use of owned asset. Direct expenses are those expenses which can be directly allocated to particular job, process or product.

Eg: Cost of patent rights, experimental cost etc.

Indirect expenses are those expenses which cannot be directly allocated to particular job, process or product.
eg: Rent and rates , depreciation, advertisement, insurance etc.

Over Head
Prime cost = Direct material + Direct labour + Direct expenses Over head = Indirect material + Indirect labour + Indirect expenses

Over head

Production

Office & Administration

Selling & distribution

Production Overhead
It is also known as factory overhead, works overhead, manufacturing overhead. It convert with the production function It includes direct material, direct wages and direct expenses producing goods and services.

Eg: Coal, oil, grease, factory rent, depreciation of plant, maintenance of plant etc.

Office and Administration


The indirect expenses incurred in general administration function Have no direct contact with production or sales activities. eg: postage, Salary of office staff, rent of office building, legal expenses, telephone expences

Selling and distribution

Selling is the cost of promotion sales and retaining customers.


eg: Advertisement, samples and free gifts, salaries of salesmen etc.

Distribution cost includes all expenses incurred from the time the production is complete until it reaches its destination. eg: Carriage outwards, insurance of goods in transit, warehousing etc.

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