COST ACCOUNTING

Contents
Unit 1 : Introduction to Cost Accounting
 What is Accounting & Its Types

 Introduction to Cost Accounting

 Cost Accounting vs Financial Accounting & Cost Accounting vs Management

Accounting

 Basic Cost Concept

 Objectives / Scope / Importance / Limitations of Cost Accounting

 Classification of Cost

 Cost Sheet

 Tender Quotations
Accounting & Its Types:-
Accounting is the art of recording, measuring and communicating information about the financial
transaction for a particular year. In other words the accounting is basically the business language
through which we can understand the working of any business entity.
Accounting & Its Types:-

Financial Concerned with financial transaction and

preparing financial statement.

Accounting Cost Concerned with basically the cost of product

and making decision making.

Management Concerned with management decision making.

Cost Accounting vs Financial Accounting
Basis of Cost Accounting Financial Accounting
Difference
Nature
It classifies, costs records, present, It classifies records, present and
and interprets it in a significant interprets transactions in monetary
manner terms.
Objectives
Ascertainment of cost for
the It provides information about the
purpose of cost control and decision financial performance of an entity.
making.
Recording of
Data It makes use of both historical and It records Historical data.
pre-determined costs.

Rules &
Regulations It follows certain principles and It uses Accounting Standard and
procedures for recording costs of Laws Framed by Statutory
different products. Authority
Cost Accounting vs Management Accounting
Basis of Cost Accounting Management Accounting
Difference
Nature
It classifies, costs records, present, It records both qualitative and
and interprets it in a significant quantitative aspect.
manner
Objectives
Ascertainment of cost for the purpose It provides information to
of cost control and decision making. management for planning and co-
ordination.
Recording of
Data It makes use of both historical and It is focused with the
pre-determined costs. projection of figures for future.

Rules &
Regulations It follows certain principles and It does not follow any specific
procedures for recording costs of rules and regulations.
different products.
 Introduction To Cost Accounting
After passing your 12th examination, if you set up a small manufacturing unit, say

manufacturing of PEN, a problem will arise what price of each PEN you should quote to

the buyer.

Many factors are considered while fixing the price of a product/item such as competitors

price etc. One of the basic factors is the cost of its production.

Cost is essential not only to fix price but also to ascertain the margin of profit.

Knowledge of the cost determination is also necessary to keep a check on the cost of

product/control on wastages etc.

The accounting used to study the various aspects of cost is known as cost accounting. In

this lesson, you will learn about meaning, importance, limitations etc. of cost accounting.
To understand the meaning of Cost Accounting, there is need of explaining certain related terms
also:-
Cost
• The amount of expenditure incurred or attributed on a given thing. For ex. Cost of Mobile is Rs.
8,000/-

Costing
• The technique and process of ascertaining cost. Techniques like process costing, marginal costing,
batch costing etc.

Cost Accounting
• Cost accounting is accumulation, classification, analysis and interpretation of cost data for -
Ascertainment of cost, Operational planning and control, Decision-making

Cost Accountancy
• The application of costing and Cost Accounting principles, methods and techniques for
ascertainment of profit.

Cost Control
• The guidance and regulation by executive action of costs of operating on undertaking. Cost control
is’ exercised through a number of techniques such as Standard Costing and Budgetary Control.

Cost Audit
• It the verification of cost accounts and a check on the adherence to the cost accounting plan by
independent expert of the cost accounts.’ 8
Objectives of Cost Accounting:-

To Calculate
Cost

To
Cost
Determine
Reduction
Profit

To Ascertain
Cost Control
Selling Price

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 FEATURES / CHARACTERISTIC:-

Suitability to the Business Economical

Simplicity Comparability

Flexibility Uniformity of Forms

Capability of Presenting Efficient System of Material

Information at the Desired Time Control

Minimum Changes in the Existing

Set Up Departmentalization of Expenses

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 Scope of Cost Accounting
Cost books of accounts is maintained
Cost book- on double entry system.
keeping

The main function of cost accounting is

Cost to ascertainment of cost and helps in
ascertainment
decision.

Systems and procedures adopted for

Cost system
proper cost accounting.

Comparing Cost of our product with

SCOPE
Cost
cost of competitor for same product.
comparisons

Standard and actual cost is compared

Cost analysis and analyze and measures taken for if
variation found.

Utilization of cost information and

Cost control
control the cost.

On the basis of cost accounting cost

Cost report
reports are prepared and presented to
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management for decision making.
 Importance of Cost Accounting
Importance /
Advantages
To ascertain cost
To determine profit

To To fix selling price

Management To know the BEP

Efficiency level increases as wages is linked with productivity

Employees are distinguishes between efficient and inefficient
To Employees Efficient worker will get more wages.
Job satisfaction.

Make decision whether to continue the trading with concern or not

To Creditor Whether their interest and payment is better protected.
and Lender
Whether the entity is sound in cost system.

Can levy indirect taxes like GST etc.

To It will approve the tender whose cost is low.
Government It will help in preparing fiscal budget and allocate cost.

More and more production will increase GDP of economy.

Standard of living will also increase.
To Society Can compare cost of same product selling by different business.
Limitations of Cost Accounting

Time
Consuming

Duplication
Limitations Expensive
of work

Not useful
for decision
making

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 Classification of Cost

Classification of Cost
On the basis of On the basis of On the basis of On the basis of On the basis of On the basis of
Nature Variability Component Controllability Managerial Function

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 Classification of Cost on the Basis of Nature

Directly Attributable to Product

Direct or Services For E.g. Steel is
Cost required for Manufacturing Cars.

On the
Basis of
Nature
Indirect Not Directly Attributable to
Cost Product or Services For E.g. teel
is required for Manufacturing
Cars.

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Classification of Cost on the Basis of Variability

Variable
Cost

On the
Basis
Variability
Semi
Fixed
Variable
Cost
Cost

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Classification of Cost on the Basis of Component

On the Basis of Component

Overhead
Material Cost Labour Cost
Cost/Expenses

*Direct Material *Direct Labour

*Direct Exp/Cost
*Indirect Material *Indirect Labour
*Indirect Exp / Cost

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Material Cost
Direct Material Indirect Material

 Direct material cost is that which can be conveniently  Indirect Materials are those materials which cannot be
identified with and allocated to cost units. conveniently identified with individual cost units.

 It generally become a part of the finished product.  These are minor in importance, such as:-
 For example, cotton used in a textile mill is a direct (i) Small and relatively inexpensive items which may
material. become a part of the finished product ; e.g., pins,
screws, nuts and bolts, thread, etc.
 However, in many cases, though a material forms a
part of the finished product , yet, it is not treated as (ii) Those items which do not physically become a part
direct material; e.g., nails used in furniture, thread used of the finished products; e.g.. coal, lubricating oil and
in stitching garments, etc. grease, sand paper used in polishing, soap, etc.

 This is because value of such materials is so small

that it is quite difficult and futile to measure it. Such
materials are treated as indirect materials.

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Labour Cost
Direct Labour Indirect Labour

 Direct labour cost consists of wages paid to  It is of general character and cannot be
workers directly engaged in converting raw conveniently identified with a particular cost
materials into finished products. unit.
 These wages can be conveniently identified with In other words, indirect labour is not directly
a particular product, job or process. Wages paid engaged in the production operations but only
to a machine operator is a case of direct wages. to assist or help in production operations.

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 Expenses
It is defined as “the cost of services provided to an undertaking and the notional cost of the use
of owned assets.” (CIMA).
Direct expenses:- Indirect expenses:-

According to CIMA, UK, “direct expenses are those All indirect costs, other than indirect materials and indirect
expenses which can be identified with and allocated to labour costs, are termed as indirect expenses.
cost centres or units.”

These are those expenses which are specifically incurred in These cannot be conveniently identified with a particular
connection with a particular job or cost unit . job, process or work order and are common to cost units
or cost centres.

Direct expenses are also known as chargeable expenses.

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Indirect expenses:-

Expenses incurred in Office like depreciation on plant &

machinery, repair & maintances , salary, printing stationery etc

Office and Selling Expenses incurred

administration for selling the product or
Expenses incurred in
overheads for sales promotion and
factory like depreciation Selling and relating customer.
Factory
on plant & machinery, distribution Distribution expenses are
overheads
repair & maintances etc expenses incurred for the distribution
of product to its destination

Indirect
expenses
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Classification of Cost on the Basis of Controllability

On the Basis of
Controllability

Uncontrollable
Controllable Cost
Cost

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Classification of Cost on the Basis of Managerial Decision
Making
Types Meaning

Relevant Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only
Cost when making specific business decisions

Sunk Cost Historical costs incurred in the past are known as sunk costs. They play no role in decision making in
the current period. For example, in the case of a decision relating to the replacement of a machine,
the written down value of the existing machine is a sunk cost and therefore, not considered.

Differential It represents the change (increase or decrease) in total cost (variable as well as fixed) due to change
Cost in activity level, technology, process or method of production, etc. For example, if any change is
proposed in the existing level or in the existing method of production, the increase or decrease in
total cost or in specific elements of cost as a result of this decision will be known as incremental cost
or decremental cost.

Opportunity This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an
Cost alternative course of action. For example, a firm financing its expansion plan by withdrawing money
from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost
for carrying out the expansion plan.

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Classification of Cost on the Basis of Managerial Decision
Making

Types Meaning

Out of Pocket Cost It is that portion of total cost, which involves cash outflow. This cost concept is a short-
run concept and is used in decisions relating to fixation of selling price in recession, make
or buy, etc. Out–of–pocket costs can be avoided or saved if a particular proposal under
consideration is not accepted.

Product Cost These are the costs which are associated with the purchase and sale of goods

Period Cost These are the costs, which are not assigned to the products but are charged as expenses
against the revenue of the period in which they are incurred. All non-manufacturing costs
such as general & administrative expenses, selling and distribution expenses are
recognized as period costs.

Imputed Cost These costs are notional costs which do not involve any cash outlay. Interest on capital,
the payment for which is not actually made, is an example of imputed cost. These costs
are similar to opportunity costs.

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Classification of Cost on the Basis of Functions (Elements
of Cost Sheet)

Prime Cost

Factory Cost

Cost of Production

Cost of Goods Sold (COGS)

Cost of Sales

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 Cost Sheet

A Cost Sheet is a statement which shows the

break- up and build - up of costs. It is a document
which provides for the assembly of the detailed
cost of a cost center or a cost unit. Further cost
sheet document can be prepared either by using
historical cost or by referring to estimated costs. A
historical cost sheet is prepared based on the
actual cost incurred for a product. An estimated
cost sheet, on the other hand, is prepared based on
estimated cost just before the production begins.

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 Cost Sheet Format (Basic Cost Sheet)
PARTICULAR AMOUNT AMOUNT

DIRECT MATERIAL xxxxx

DIRECT LABOUR xxxxx

DIRECT EXPENSES xxxxx

PRIME COST xxxxx

FACTORY OVERHEADS BASIC COST SHEET xxxxx

FACTORY COST xxxxx

OFFICE OVERHEADS xxxxx

COST OF PRODUCTION xxxxx

SELLING & DIST OVERHEADS xxxxx

COST OF SALES xxxxx

PROFIT xxxxx

SALES xxxxx

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 Cost Sheet Format (Standard Cost Sheet)
PARTICULAR AMOUNT AMOUNT
Direct Material Consumed (Op. Stock of R/M + Purchase – Cl. Stock of R/M) xxxxx
Direct Labour xxxxx
Direct Expenses xxxxx
PRIME COST xxxxx
Add:- Factory Overhead
Factory Rent, Power & Fuel , Indirect Material, Depreciation on Machinery, Oil & Water Charges Etc xxxx
Total Factory Overhead xxxx
Add:- Opening Stock of WIP
BASIC COST SHEET xxxx
Less:- Closing Stock of WIP xxxx
WORKS COST/ FACTORY COST xxxxx
Add:- Office & Admin O/H’s
Audit Fees, Directors fees, Legal Fees, Depreciation of furniture Etc xxxx
COST OF PRODUCTION xxxx
Add:- Opening Stock of FG xxxx
Less:- Closing Stock of FG xxxx
COST OF GOODS SOLD xxxxx
Add:- Selling & Distribution Exp.
TD, CD, Commission, Brokerage, Advertisement, Bad debts, After Sale Services etc xxxx
COST OF SALES / TOTAL COST xxxxx
PROFIT xxxxx
SALES xxxxx
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 Items Excluded from Cost Sheet

• (a) Profit on sale of Fixed Assets

• (b) Profit on sale of investments
• (c) Interest Income
Incomes • (d) Dividend Income
• (e) Rental Income
• (f) Transfer fees

• (a) Loss on sale of fixed assets

• (b) Loss on sale of Investments
• (c) Interest on mortgage and loans
• (d) Preliminary expenses written off
Expenditures
• (e) Goodwill written off
• (f) Underwriting commission and debenture discount written off
• (g) Fines and penalties

• (a) Income tax

• (b) Dividend Distribution tax
Appropriations • (c) Transfer to General Reserves
• (d) Transfer to Special Reserves like Dividend Equalisation Reserve etc.

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 Classification of Cost on the Basis of Functions

Prime Cost:-

Direct
Direct Direct
Material Prime Cost
Labour Expenses
Consumed

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 Classification of Cost on the Basis of Functions

Factory Cost or Works Cost:- Factory cost is the summation of prime cost and
factory overheads that includes indirect material, indirect labour and indirect expenses of factory. It is also
know as work cost, manufacturing cost or production cost.

The following expenses should be taken under the head factory expenses/works
expenses-
Prime Cost
i. Fuel and power, ii. Factory rent, Add:- + Factory
iii. Foremen’s wages, iv. Lighting, Opening Cost
Stock of
v. Heating, vi. Tools used Consumable stores, WIP
vii. Repairs to buildings, viii. Indirect materials,
Less:-
ix. Indirect wages, x. Leave wages, Closing
Stock of
xi. Insurance, xii. Overtime wages, WIP
xiii. Supervision, xiv. Works stationery,
xv. Canteen and welfare expenses, xvi. Works salaries,
xvii. Depreciation of plant and machinery, xviii. Works expenses ,
xix. Gas & water, xx. Technical director’s fee,
xxi. Laboratory expenses, xxii. Works telephone expenses ,
xxiii. Internal transport expenses (Haulage) etc.
Works Cost / Factory Cost
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 Classification of Cost on the Basis of Functions

Cost of Production:-
The following expenses should be taken under office and
administration expenses-
i. Office salaries, ii. Bank charges,
Factory Cost /
iii. Legal expenses, iv. Office rent,
Works Cost
v. Director’s fee, vi. Printing and stationery,
vii. Office expenses, viii. Depreciation of office furniture,
ix. Subscription to trade journals,
x. Office lighting, xi. Establishment charges, Cost of Production
xii. Director’s traveling expenses ,
xiii. Postage, xiv. Audit fee,
xv. Depreciation & repairs of office equipment's.
Office &
Administratio
n Exp

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 Classification of Cost on the Basis of Functions

Cost of Goods Sold (COGS):-

Opening Closing
Cost of Stock of Stock of
COGS
Production Finish Finish
Goods Goods

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 Classification of Cost on the Basis of Functions

Cost of Sales:-

The following expenses should be taken under

selling and distribution overheads- COGS
I. Travelers commission,
ii. Advertising Show room expenses,
iii. Bad debts Salesmen salaries & expenses,
iv. Packing expenses,
v. Carriage outwards
Cost of
vi. Collection charges Sales
vii. Cost of catalog Expenses of sales branch
establishment etc.
Selling &
Distributio
n
Expenses

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 Tender / Quotations

The price quoted for future production is called Quotation Price or Tender Price. This price is
ascertained on the basis of previous cost sheet. Tender sheet is also a kind of cost sheet.
Sometimes a manufacturer is required to give quotation for order. The competitive quotation
price needs to be submitted in advance for getting new work or order.

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Different types of Cost Statement for Tender / Quotations

Where Where When

When
there is a tender is change in
production Depends
No Change change in based on estimated When
capacity is upon the
in Cost & cost of overhead % cost of changes in
different in determinati
Profit % Material & of past material expenses is
one period on of
over the Labour but period & labour & indicated in
from other capacity
past period profit % definite overheads %
& tender cost
remains profit is is to
price
same required consider

Different types of Cost Statement for Tender / Quotations

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THANK YOU

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