COST ACCOUNTING.

Introduction
Costs are measured in units of nominal currency by convention. Cost
accounting can be viewed as translating the Supply Chain (the series
of events in the production process that, in concert, result in a
product) into financial values.

Cost:-
Cost is the amount of expenses incurred on a thing or activity.

Cost Accounting:-
These costs are needed for several purposes. For example, the costs
of products and services produced and sold are needed for both tax
and external financial statements. In other words, tax and financial
accounting depend on cost accounting to provide cost information.
Information about costs is also needed for a variety of management
decisions. For example, cost estimates are needed to determine
whether or not a product or service can be produced and sold at a
profit. Unit costs of a product (or service) are also needed for
product pricing and product discontinuance decisions. In addition,
accurate cost information is required to determine whether or not a
company should make (produce) or buy the raw materials, parts and
subassemblies that become part of its major products and services.
From this perspective, cost accounting is perhaps underrated as a
discipline since none of the other disciplines including tax
accounting, financial accounting or managerial accounting could
exist without cost accounting
Objectives of Cost Accounting:-
(1). Ascertainment of cost.

(2). Determination of selling price.

(3). Cost control and cost reduction.

(4). Ascertaining the profit of each activity.

(5). Assisting management in decision making.

(6). To frame various budgets.

Importance of Cost Accounting:-

(1). Control of material cost.

(2). Control of labour cost.

(3). Control of overheads.

(4). Measuring efficiency.

(5). Budgeting.

(6). Price determination.

(7). Curtailment of loss during the off season.

(8). Expansion.

(9). Arriving at decisions.

Advantages of Cost Accounting:-

(1). Cost reduction.

(2). Profit improvement.

(3). Helps in arriving at decisions.

Various Decisions that a Cost and Management Accountant

has to Furnish to the Management:-
I. Choosing the best budget when there are limiting factors
restricting production or sales.

II. Make or buy decisions.

III. Accepting or rejecting an order.

IV. Extra shift decisions.

V. Cost indifferent point.

 VI. Profit planning

VII. Differential cost analysis.

Adding or deleting departments (or products).

II. Exploring foreign markets.

X. Plant replacement decisions.

X. Shutdown decisions.

XI. Preventive maintenance v/s breakdown maintenance.

XII. Further processing of joint products.

Methods of Costing:-
There are various methods of costing depended upon the type of
output and nature of production.

1. Job Costing:- In respect of each job undertaken, the

companies producing goods against orders use this type of
method to ascertain the cost and profit or loss.
2. Process Costing:- This type of method is used where there is
a continuous operation costing mostly in industries like oil,
textiles, paints, food processors, etc.
3. Farm Costing:- It is extension of utilization of costing
principles to the farms where the land is used for agricultural
production like paddy, potato, mustard, onion, etc.

Techniques of Costing:-
In each of the costing methods, the following techniques may be
used to ascertain costs:-

1. Absorption Costing:- In this technique fixed as well as

variable costs are allotted to cast units.

2. Standard Costing:- It uses standard costs and standard

revenues for the purpose of control through variance analysis.

3. Marginal Costing:- In this technique variable costs are

charged to cost units and the fixed cost attributable to the
relevant period is written off in full against the contribution for
that period.
4. Uniform Costing:- It is not a separate method of costing. It is
using of the same costing principles or practices by several
undertakings.
 Classification of
Costs:-

The term cost is defined in a variety of ways. Its simple meaning is

‘total expense’.

Cost can be classified in a number of ways:-

1. Direct Costs.
2. Indirect Costs.
3. Fixed Costs.
4. Variable Costs.
5. Semi-Variable Costs.

Direct Cost:-
Direct cost are those cost which can be conveniently associated
wholly with a particular unit of final product.Direct costs can be
directly identified with and allocated to cost centers or cost units.

*Example:-*

1. Raw material charges.

2. Workers wages.
3. Carriage expenses on raw material
4. Wages payable to worker who is directly involved in
production carpenters wages in a firm manufacturing furniture

INDirect Cost:-
 Cost which cannot be associated or connected with a particular
unit of final product is termed as indirect costs*.

*E.g.:-

1. Advertisement expenses.

2. Office rents.

3. Depreciation on furniture

4. Legal expenses.

5. Telephone expenses.

6. Rent and rates.

7. Packing expenses.

8. Rent & rates

Overheads:-
Overheads mean indirect costs. Overheads are an aggregate of
indirect materials, indirect labour and indirect expenses.

(a). Factory overheads,

(b). Administrative overheads, and

(c). Selling and Distribution overheads

Factory Overheads:-
Factory overhead is defined as the cost of indirect materials,
indirect labour and indirect expenses.

1. Indirect Materials:- It refers to materials that are needed for

the completion of the product but whose consumption with regard
to the product is so small that it cannot be assumed as direct
materials.

2. Indirect Labour:- It refers to the labour cost of production

related activities that cannot be conveniently traced to specific
products via physical observation.

3.Indirect Expenses:- It means that it covers all expenditure

incurred by manufacturing enterprise from the time production has
commenced to its completion and its transfer to the finished goods
store.

Administrative Overheads:-
They are the cost of indirect materials, indirect labour and indirect
expense. It include all costs which can’t be charged either to
production department or sales department.

(a). Indirect Materials:- It refers to the materials that are needed

for office and administrative activities.

(b). Indirect Labour:- Indirect labour is the labour cost incurred

towards office staffs.

(c) Indirect Expenses:- It refers to all expenditure incurred by

office.

Selling and Distribution Overheads:-

Selling and distribution overheads includes cost of all indirect
materials,indirect labour and indirect expenses incurred in sales
and delivering goods from warehouse to customers. Selling and
distribution overheads includes:

*Selling cost refers to the cost incurred in securing orders.

 *Publicity cost repsents the cost incurred in advertising and
promotion.

*Distribution cost refers to the cost incurred in warehousing

saleable products and in delivering products to customers.

(a) Indirect material refers to all materials that are required for
selling and distribution activities.

Eg:-

.Wooden boxes

.Catalogues

(b) indirect labour is the labour cost related to selling &

distribution activities.

Eg:-

. Delivery staff

. Salary to sales manager.

(C) indirect expenses cover all expenditure incurred by selling

and distribution department.

Eg:-

*add in radio,T.V, internet etc.

*depreciation of delivery vehicles.

Fixed Costs.
. If a production volume based measure is used as the activity, a cost
that changes for some reason other than a change in production
activity is considered fixed. This simply means that the cost is driven
by a non-production volume related phenomenon. All costs tend to
be variable in the long run.

Variable Costs.
. Variable costs tend to increase at various rates that generate linear
(straight line) or a variety of non-linear cost functions when the costs
are plotted on a graph. The major activity that affects manufacturing
costs is production volume, i.e., producing output. Production volume
is frequently measured in terms of units produced, direct labor hours
used, machine hours used, materials costs or some other production
volume related measure.

Semi-Variable and Semi-Fixed Costs

The point where the cost function intersects the vertical axis
represents the fixed portion of the cost. There are also semi-fixed
costs that do not change continuously as the level of activity
changes, but do increase in steps as activity increases beyond
various levels. These costs are sometimes referred to as step cost
and step functions.

Types of costs:-
(1) Total costs:- Total coat at a given volume of output under
consideration is called total cost.

(2)Relevant cost:- Future managenment decisions which are taken

are relevant to this cost.

(3) Irrelevant cost:-If there is no change in the future fixed cost it

becomes irrelevant for taking managenment decisions.

(4) Sunk cost:- the cost which is already been incurred in the cost is
sunk cost
(5) Marginal cost:-it is a cost of producing one unit of a product or
services

(6) Historical cost:-it is the cost which can never be recovered and
which is allredy been incurred in the sheet earlier.

(7) Replacement cost:-when there is a replacement of an asset is

done this cost is incurred.

(8) Opportunity cost:-such cost are incurred for the purpose of

comparision.

(9) Standard cost:-this cost is predetermined.which calculates how

much the cost should be ynder specific condition.