Introduction

Cost Accountancy Basic Concepts and Principles

Cost Accountancy is a science,art and practice of Cost accountant. Science indicates the possession and the application of relevant systematic knowledge Art indicates the skill and ability of the Cost Accountant. Practice indicates a continuous effort on the part of the Cost accountant.

Objectives of Cost Accountancy

a) Ascertain of Cost Accountancy with the help of various

principles, methods and techniques. b) Cost Control: This indicates the process of controlling the costs of operating the business. This process ,in turn, involves the following stages. To plan the operations. Execute the plans. Measuring the actual performance. Comparison of planned and actual performance Computing the variations between planned and actual performance.

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Taking the decisions to maintain favourable variations or to remove unfavourable variations. c) Presentation of information to enable managerial decision making.

Concept of Cost
(1) Direct Cost and Indirect Cost: It indicates that cost which can be identified with the individual cost centre. It consists of direct material cost, direct labour and direct expenses. It is also termed as Prime Cost. (2) Fixed ,Variable and Semi-Variable/Semi-fixed cost: Fixed cost indicates that portion of total cost which remains constant at all levels of production irrespective of any change in the later. As the volume of production increases, per unit fixed cost may reduce, but not the total fixed cost. .

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Variable cost indicates that portion of the total cost which varies directly with the level of production.Higher the volume of production , higher the variable cost and vice versa though per unit variable cost remains constant at all the levels of production. Semi variable or semi fixed cost indicates that portion of the total cost which are partly fixed and partly variable in relation to the volume of production. ( 3) Controllable Cost and Uncontrollable Cost: Controllable cost indicates that cost which can be controllable by a specific number of person in the organjsation.

Cont. Uncontrollable cost indicates that cost which cannot be controlled by a specific number of person in the organisation. Eg. The costs relating to one responsibility centre cannot be controlled by a person who is incharge of another responsibility centre Normal cost and Abnormal cost: Normal cost indicates that cost which is normally incurred at a certain level of output under normal circumstances. Abnormal cost indicates that cost which is normally not incurred at a certain level of output under normal circumstances.

Special Types of Cost:

Opportunity cost: Opportunity cost is the cost of opportunity foregone. The resources like men, material, machine, money etc. may be having various alternative uses each one having some specific yield or return. Differential cost: Differential cost indicates increased or decreased cost due to the increased or decreased volume of operations. While assessing the acceptability of a proposed change, the differential costs are compared with differential revenues, and so long as differential revenues are more than the differential costs, the proposed change may be accepted.

 Sunk Cost: Sunk cost indicates historical cost which is incurred in past. This type of cost is normally not relevant in the decision making process Eg.While deciding about the replacement of a machine , the depreciated book value of the machine may not be relevant being in the form of sunk cost.

Elements of Costs

(a) Material: This is cost of commodities and materials used by the organization. It can be direct or indirect. Direct material indicates that material which can be identified with the individual cost centre and which becomes an integral part of the finished goods. It basically consists that of all raw material, either purchased from outside or manufactured in house. Indirect material indicates that material which cannot be identified with the individual cost centre.This material assists the manufacturing process and does not become an integral part of finished goods. The examples of this type of material may be consumable stores, cotton waste , oils and lubricants, stationary material etc.

Cont.. (b) Labour:This is cost of remuneration paid to the employees of the organization. It can be direct or indirect. Direct Labour Cost indicated that labour cost which can be identified with the individual cost centre and is incurred for these employees who are engaged in the manufacturing process
.

Indirect Labour cost indicates that labour cost which cannot be identified with the individual cost centre and is incurred for those employees for those employees who are not engaged in the manufacturing process but only assist the same .The examples of this type of cost are wages paid to foreman storekeeper, salary of works manager, Accounts/Personal department salaries etc.

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(c) Expenses : This is the cost of services provided to the organisation and the notional cost of assets owned. It can be direct or indirect. Direct Expenses are those expenses which can be identified with the individual cost centres. The examples of these expenses are hire charges of machinery/ equipment required for a particular job, cost of defective work for a particular job etc.

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Indirect Expenses are those expenses which cannot be indentified with the individual cost centres. The examples of these expenses are rent, telephone expenses, insurance, lighting etc. COST
MATERIAL LABOUR EXPENSES

DIRECT

INDIRECT

DIRECT

INDIRECT

DIRECT INDIRECT

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The aggregate of demand of a Direct Material cost, Labour Cost and Direct Expenses is termed as Prime Cost. The aggregate of Indirect Material Cost. Indirect Labour Cost and Indirect Expenses is termed as Overheads

 Overheads: Over heads are generally classified as below: (a) Factory Overheads( Production/works/ manufacturing overheads) (b) Office and administration Overheads (c) Selling and Distribution Overheads (a) Factory Overheads: These includes all overhead costs incurred from the stage of procurement of material till the stage of production of finished goods.They includes: Indirect Material such as consumable stores, cotton waste,oil and lubricants etc. Indirect Labour Cost such as wages paid to foreman/ storekeeper,works managers salary etc.

 Indirect Expenses such as carriage inward cost, factory lighting/ power expenses, rent/ insurance/ repairs for factory building/ machinery,depreciation on factory building or machinery etc. (b) Office and Administration Overheads: These overheads consist of all overheads costs incurred for the overall administration of the organization. They include Indirect Material such as stationary items office supplies etc.

 Indirect Labour cost such as salaries paid to accounts and administration staff, Directors remuneration etc. Indirect Expenses such as postage/ telephone, rent/insurance/repairs/depreciation on office building general lighting, legal/ audit charges,bank charges etc. (c) Selling and Distribution Overheads: These overheads consists of all overheads incurred from the Stage of final manufacturing of finished goods till the stage of goods in the market and collection of dues from the customers. They include:

 Indirect Material such as packing material,samples etc. Indirect Labour like salaries paid to sales personnel, commission paid to sales manager etc. Indirect expenses like carriage outwards,warehouse charges,advertisement. Bad debts,repairs and running of distribution van,discount offered to customers etc.

COST SHEET/ COST STATEMENT PROFORMA:

Direct Material Cost +Direct Labour Cost +Direct Expenses PRIME COST Add: Factory Overheads Factory/ Works cost Add:Office and Administration Overheads *** *** *** *** *** *** ***

TOTAL COST Add: Selling and Distribution Overheads COST OF SALES Add: Profit SALES

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