Cost Accounting

MMS- SemMMS-1 Sem-2

What is Cost ?


Definition of Cost: Amount of expenditure ,actual or notional , incurred on, or attributable to a specific thing or activity (Product or Service). ICWA (UK) Definition of Cost: Cost is a measurement in monetary terms of the amount of resources used or to be used for the purpose of production of goods or rendering services. ICWA (India)

Costing


Definition of Costing : Determination and ascertainment of cost of product or a service by any technique, method or process of formal accounting records. A Process of ascertaining or finding out cost of a product or service.

Cost Accounting


Cost Accounting is a formal system of accounting by means of which cost of products & services are ascertained or find out then controlled & presented for managerial decision making. Definition by Wheldon : Classifying, recording and appropriate allocation of expenditure for determination of costs of products or services and for the presentation of suitably arranged data for purposes of control and guidance of management.

 

Cost Accounting =

Costing + Application of Cost Control methods & ascertainment of profitability + Presentation of relevant information for managerial decision making

 Distinguish

between Financial Accounting & Cost Accounting.

Point of Financial Distinctions Accounting Coverage Accounts deals with entire Org. manufacturing & other activity Expenses Aggregate expenses are taken Parties involved Concerned with external parties & transactions.

Cost Accounting Deals with only expenses related to products Cost are analyzed & classified on the basis of unit of production Concerned more with internal departments & transactions.

Basis of record

Based on actual financial transaction

Result

No. of Final Statement

purpose

Based on actual fin. transaction as well assumptions & estimation of future. Result reveals Cost statement P&L for and reveals for each balance sheet of product & service entire org. only. Only one P&L Many cost A/c & Balance statement based sheet on each product can be prepared. Preparation of Useful information final accounts. to guide

Statutory Prepared for requirement provision of company act & laws. classificatio No fixed & variable direct & n indirect classification of costs Nature Concerned with historical cost & transactions

Voluntarily prepared except some industries. Proper analysis of classification allocation, apportionment absorption of costs Historical as well prepre-determined & notional cost

Limitation of Financial Accounting

          

It doesn t provide estimation about profitability in advance Based only on historical data Doesn t help in pricing Doesn t help in efficiency measurement of org. No help in deciding production & activity level planning No help in forecasting estimation & budget preparation No cost reduction & control No classification, allocation of expenses for analysis No comparative data No guidance in operation Lesson only from past. It can be said that it only deals with past transactions and expenditures which have already incurred and transaction recorded in books, however , cost accounting deals with past data of financial accounts as well uses the present and future estimates and assumption to guide further activities and production operations which make it more useful in decision making and helps & guide org. to improve or control future & present operations.

Advantages of Cost Accounting

           

Management: Quotation & tenders are prepared with application of cost accounting It s the first beneficiary & user of Cost Accounting. Helps mgmt. in deciding the optimum level of prod., plant capacity etc. Helping in price fixing of products & revising it. Control over inventory, loss minimization, finding out the efficiency in operation Facilitate the cost control and cost reduction via analysis Max. of profits via profit planning Better budgetary controls, estimations and quotations can be prepared Checks the accuracy of Financial accounts & affairs Prevents frauds & manipulation Helps in future decision making.

Additional benefits
  

Workers efficiency can be evaluated. Govt. can decide on pricing policies based on costing to regulate or control the markets. Consumer can get better quality at reduced cost & prices as cost accounting reduces inefficiency & wastages of prod. operation. Profitability can be measured in advance of activity so owners can rate the products & choose the better one with higher returns it also guide them through decision making.

Some criticism against cost accounting

    

Duplication of efforts Expensive Unnecessary Tentative decision making Limited applicability & failure of reconciliation Not reliable as it uses estimates & assumptions

Intro. to Cost Accounting terminology

Cost object: Any thing for which separate measurement of cost is required. E.g. Product : computer, T.V, Car etc Services :Hotel service, Hospital, Transport Process : Spinning, Dying, weaving Activity: Placement of purchase order, delivery of material, Inspection of material


      

Cost Centre : It is a location, person, item, for which cost may be ascertained Two types : Personal: consists of a person or group of persons, machine operators, salesmen etc. Impersonal : locations, items, equipments, processes. Factory, machine, delivery van process cost centre: Spinning, dying, weaving Production cost centre: dying dept. weaving Dept. spinning dept. Service cost centre: Store dept. Repairs & Maintenance dept. purchase dept. HR Dept.

Cost Unit
 

It is a unit of product, service of time in term of which cost is ascertained or expressed. It is basically a unit of measurement of cost. Cost unit of production: 1 tonne of Coal 10 grams of gold etc. Unit of Service: passenger/ Km., tonne/Km. Another unit of cost given :
Printing: per 1000 impression Pencils: per dozen Car : per car Fabric: per meter Milk : per litre T.V: per set Telephone : per call/Minute Power( Electricity) : per KwH Gas : per cubic meter Paper : per ream.

Process of costing
Cost Ascertainment

Cost Absorption 5 A s of Costing

Cost Analysis

Cost Apportionment

Cost allocation

Process of Cost Ascertainment



 

Cost Ascertainment : identifying and deciding the different expenditures & their heads, this info. is provided by past financial data. Cost Analysis : classification of expenses into various categories & elements like material, labor, direct or indirect expenses. Allocation of cost : to charge or send entire amount of a expenditure directly to a department, work or cost center like factory, office & admin. or selling & Distribution. Cost Apportionment : it is done when an expenditure or cost is not completely charged to a department exclusively & distributed among the different dept. or cost centers on appropriate basis. Cost absorption : After allocation & absorption of cost or expenditures to different cost centers or dept. then the aggregate cost is absorbed by or charged to particular/ single unit of product or service produced by measuring Unit Rate known as absorption .

Difference between Cost ascertainment & Estimation

Cost ascertainment Process of determination of actual cost after it has been incurred or transacted It is actually recorded in books of accounts ( Fin. A/c) Not used for preparation of budgets Not useful for quotation & tenders only helps in cost controlling function for comparison in excess of FA. Cost Estimation It is a process of determination of future costs in advance before production starts. It is just for guidance and quotation not recorded in Books/FA. Used for preparation of budgets This is useful for quotation tenders price fixation of a new product or service.

Essential of a good Costing system

               

Technically Sound Flexibility Integrated Accuracy Smooth flow of Data Continuous review Economical Comparability Uniformity Reconciliation Simplicity Tailor-made TailorManagement support Standardization Cost Manual & Cost centers preparation Aims at cost control, reduction & operational efficiency.

Broad Classification of Cost

Broad classification of Cost Indirect Cost Referred as Over Heads

Direct Cost

Direct Material Cost

Direct labor Cost

Direct Expense Cost

Indirect Material Cost/ Overheads

Indirect Labor Cost/overheads

Indirect Expenses Cost/overheads

Factory/Production Overheads

Factory/Production Overheads

Factory/Production Overheads

Administrative/Office Overheads

Administrative/Office Overheads

Administrative/Office Overheads

Selling & Dist. Overheads

Selling & Dist. Overheads

Selling & Dist. Overheads

Classification based on Behavior

Classification of Cost based on behavior

Variable Cost

Semi Variable Cost

Fixed Cost

Another types of Costs

           

Historical Cost Predetermined/ Future Cost R&D cost PrePre-production cost Controllable cost NonNon-controllable cost Relevant cost Irrelevant cost Sunk cost Shut down cost Out of pocket cost

           

Differential cost Opportunity cost Imputed cost Marginal cost Replacement cost Conversion cost Committed cost Discretionary cost Normal cost Abnormal cost Avoidable cost Unavoidable cost

Determination of Total Cost

Direct material + Direct labor + Direct expenses = Prime Cost Add: Factory overheads = Factory Cost Add: Office & Admin. Overheads = Cost of Production/Office Cost Add: Selling & Dist. overheads = Total Cost Add: Profit margin = Selling Price

Difference between Cost & Expenses, Loss, Assets

Cost
Cost is a measurement in monetary terms of the amount of resources used or to be used for the purpose of production of goods or rendering services.

Expense
It is an expired cost. It is that portion of the cost which has been consumed & utilized already during the production to contribute to the revenue .

Loss
It is that portion of the cost which has been consumed but didn t contribute to revenue and has wasted the resources and of no productive purpose .

Asset
It is that portion of cost which has not been consumed during the production but has been incurred, committed or paid already, will be utilized in future for purpose.