Study Material: Cost Accountin

Basics of Cost Accounting Unit 1 - Cost Accounting
1.1 Introduction:
Costing is a branch of accounting. It helps us to classify, record, and allocate the expenditure for the determination of costs of product. Expenditure involved in business has to be ascertained to fix the price of a product produced. The expenditure is to be understood in terms of material, labour and other direct and indirect expenses. The major purpose of such classification is to estimate the profit and to understand its relationship with costs and price. The three elements of a transaction i.e., cost, profit and price are necessary components of any business activity. Example: A Calculator factory introduces a new device. The factory incurs Rs. 400 for material, Rs.400 for la our and Rs.!00 for overhead on every Calculator produced and supplied in the mar"et. The total cost comes around Rs.#000. $f the price of the device is Rs. #%00, the profit per device is Rs. %00 &#%00'#000(.

The management requires all information as seen in the example for each product produced. The above estimation is done for the purpose of planning, cost control and decision ma!ing. The existing system of financial accounting does not provide the necessary information to do similar estimation. "uch deficiency of financial accounting has given rise to the need of cost accounting. 1. 2 Define cost accounting: The word #Costing$ refers to the technique and process of ascertaining costs. There have been certain rules and principles in the field of costing developed over years by our forefathers. These rules and principles help us to ascertain the cost of products produced. The term %Cost &ccounting$ refers to the recording of all incomes and expenditures and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.

Prepared By: Mahendra Patel, Faculty. Parul Institute of Business Administration


Costing is "ystem of computing cost of production or

Study Material: Cost Accountin
of running a business, by

allocating expenditure to various stages of production or to different operations of a firm. )efinitions of Cost Accountin*: Accordin* to the Terminolo*y used y the $nstitute of Cost and +ana*ement Accountants, ,Cost accountin* is the part of mana*ement accountin* which esta lishes ud*ets and standard costs and actual costs of operations, processes, departments or products and the analysis of variances, profita ility or social use of funds.-

2. Objective of Costing
1. Ascertainment of Cost: The first and foremost objective of cost accounting is to find out cost of a product, process or service. The other objectives which have been mentioned hereafter scan be achieved only when the costs have been ascertained. The primary objectives of the cost accounting are to ascertain cost of each product, process, job, operation or service rendered. 2. Ascertainment of Profitabi it!: Cost accounting determines the profitability of each product, process, job, operation or service rendered. The statement of profit or losses and 'alance "heet also submitted to the management periodically. ". C assification of Cost: Cost accounting classifies cost in to different elements such as materials, laborer and expenses. It has further been divided as direct cost and indirect cost for cost control and recording. #. Contro of Cost: Cost accounting aims at controlling cost by setting standards and compared with the actual, the deviation or variation between two is identified and necessary steps are ta!en to control them. $. %i&ation or 'e ing Prices or Determining 'e ing Price: Cost accounting guides management in regard to fixation of selling prices of the products. It is also helpful for preparing tender and quotations. (. )easuring and Increasing *fficienc! ( Cost accounting involvers a study of the various operations used in manufacturing a product or providing a services. The study facilitates measuring of the efficiency of the organisation as a whole as well as of the departments besides devising means of increasing the efficiency. +. Cost )anagement( The term #Cost )anagement$ includes the activities of managers in &s a matter of fact cost short run and long run planning and control of costs. Cost management has a broad focus. It includes both cost control and lost reduction. management is often invariably lin!ed with revenue and profit planning. *or instance, to enhance revenue and profits, the management often deliberately incurs additional costs for advertising and product modifications.

Prepared By: Mahendra Patel, Faculty. Parul Institute of Business Administration


determine the price of the article. 1ascertained costs provide a measure for estimates. expenses etc. Parul Institute of Business Administration " . to a great extent. The management should !now the actual cost of their products before embar!ing on any scheme of reducing the prices on giving tenders. #. and a control over current production2. cost to the producer does play an important part. ". such as time. (.es com0arison 0ossib e:. it becomes possible to choc! various forms of waste. 2e 0s in c1anne ing 0roduction on rig1t ines:. +. waste eliminated and efficiency increased. Provides data for 0eriodica 0rofit and oss accounts:.A dequate costing records supply to the management such data as may be necessary for preparation of profit and loss account and balance sheet. rating or losing in the execution of a contract due to under . or in the use of machine.Costing ma!es possible for the management to distinguish between profitable and non profitable activities profit can be maximi0ed by concentrating on profitable operations and eliminating non profitable ones. 3astages are e iminated:. +iii.If the costing records are regularly !ept. The management should !now where economies may be sought.&dequate costing records provide a reliable basis upon which tenders and estimates may be prepared. Thus.)a. &dequate costing facilitates this.. profit relationship. Decision . The producer can ta!e necessary guidance from his costing records. at such intervals as may be desired by the management. +ii. volume . "hutting down or operating at a loss. 2e 0s in estimate:. Providing Basis for )anageria following matters( +i. The business has to wage a wax for its survival.BBA SEM II . Prepared By: Mahendra ( Study Material: Cost Accountin Costs accounting helps the management in formulation operative policies. $. 2. The chances of losing a contract on account of over . Faculty. equipment and tools. comparative cost data for different periods and various volumes of production will be available.In periods of trade depression the business cannot afford to have lea!ages which pass unchec!ed. ". These policies may relate to any of the -etermination of cost . It will help the management in forming future lines of action. Advantage/ Im0ortance of Cost Accounting 1. 2e 0s in 0rice fi&ation:.Though economic law / supply and demand and activities of the competitors. Costing 1e 0s in 0eriods of trade de0ression and trade com0etition: .&s it is possible to !now the cost of the article at every stage. )a!ing or buying from outside supplies. Costing ma. rating can be minimi0ed. a guide to policy.

poor supervision etc.BBA SEM II Study Material: Cost Accountin It also explains in detail the sources of profit or loss revealed by the financial accounts thus helps in presentation of better information before the management. This is particularly important ion the present day context of global competition cost accounting has assumed special significance beyond cost control this way. 2e 0s in inventor! contro :.. The efficiency can be measured and costs controlled and through it various devices can be framed to increase the efficiency. Their role has attained a significant position. In case. . 11. the <overnment of India has notified Cost &ccounting =ecord =ules for more than >7 industries. Faculty. sales? depreciation.. 1. The role of a cost accountant can be understood from the following important functions to be performed by them. Assists in increasing 0roductivit!:. idle time of wor!ers.4roductivity of material and labour is required to be increased to have growth and more profitability in the organisation costing renders great assistance in measuring productivity and suggesting ways to improve it.+d. =econciliation of the results from these cost records should be made with those of financial accounts. The responsibility of discharging the cost accounting functions of the organi0ation lies on the cost accountants$ shoulders. 15.Costing furnishes control which management requires in respect of stoc! of materials. They specify the particulars that should be entered in the boo!s of accounts. %unction of Cost Accountant The cost accountant is an important person in an organi0ation5especially manufacturing organi0ation. Parul Institute of Business Administration # . wor! in progress and finished goods. will be disclosed if the various operations involved in manufacturing a product are studied by a cost accountant. Prepared By: Mahendra Patel. 4. )aintenance of records: The basic function is to maintain cost accounting records as per section 678+9. In pursuance of this provision. +This has been explained in detail under the chapter 1)aterials2. if the firms are not governed by the statutory provision. These records should be !ept in such a way so as to reveal the business operations and valuation of stoc!s are determined accurately. #. They are a part of senior management team. now.Costs can be reduced in the long run when alternatives are tried. These rules prescribe the manner in which cost accounting records have to be maintained.. 2e 0s in cost reduction:. "ome of the records are to be maintained under the following heads( "tores and raw materials? salaries and wages? overheads? wor! in progress? production +finished goods. Aids in determining and en1ancing efficienc! ( 3osses due to wastage of material. of the Companies &ct 98:.

)anufacturing quality goods and rendering prompt services at the minimum cost is the goal of any organi0ation. to quote a price. @ariances are analysed by causes and responsibility centres and communicated to appropriate level for corrective action. 6. and final compilation of the budget and master budget.BBA SEM II to the management for ta!ing decisions. Cost contro : Controlling the costs of business operations is the prime function of a cost accountant. Cost ascertainment: &scertainment of the cost of a product or service is another important function of a cost accountant. Communication: The cost accountant discloses the needed financial information to all needed centres. %inancia 0 anning: The cost accountant$s role in financial planning cannot be minimi0ed. The performance of the responsibility centre is evaluated constantly which enhances the efficiency of an organi0ation. Cost reduction: This is another important area in which a cost accountant$s role has gained much importance. )anagement decision: Ane more important function of a cost accountant is to adopt as well as adapt cost accounting tools and techniques for management decision analysis such as ma!e or buy. Faculty. ma!ing changes as and when necessary. 7. *or example. and variances are ascertained. Cost accountants have to exercise cost control by using a variety of techniques such as budgetary control. standard costing. to choose alternative proposal etc. The cost accountant aims at achieving reduction on the unit cost of goods produced or services rendered and at the same time maintaining quality. quality control. Product 0ricing: This is an important function to be performed by a cost accountant. *va uation of 0erformance: The cost accountant compares the actual results with the budget. 9. The cost accountant assists the management in pricing a product by providing valid information after analysing and interpreting various cost data relating to fixing the price of a product. and various problem solving situations. 3. purchase department. They have to assist the management by submitting periodical reports to facilitate cost control function. to continue or shut down operation. The cost accountant assists the line and staff managers in the preparation of budgets. Parul Institute of Business Administration $ . Their constant flow of cost information with production department. 8. personnel department. Study Material: Cost Accountin the cost accountant himself has to maintain records in such a way that they are useful 2. finance and accounts Prepared By: Mahendra Patel. to accept an order. ensuring consistency. 5. 10. 4. statement of inventory valuation with relevant ratios will help the management to appraise the level of stoc!. Coordinator: The cost accountants$ role of coordination with other departments cannot be underestimated.

'tatutor! These accounts have to comply with statutory requirements such as company act and income tax act. it facilitates the tax levying authorities to assess the tax without great difficulty.BBA SEM II Study Material: Cost Accountin department. certain industries have to meet the requirements of company act +only obligatory. Aim . They coordinate the activities of all the departments by way of exercising cost control and cost reduction. 6e iab e ta& basis: &s costs are ascertained precisely and profits shown in cost records are reliable and accurate. Af late. all proper re8uirement Prepared By: Mahendra Patel. Faculty. $. 6. aims at strengthening the management for operation. *m01asis This emphasi0es the measurement of profitability. $.inancial Accountin* *inancial business. 12. Cost Accountin* Cost accounting planning. Customer re ations1i0 management: C=) initiatives use technology to coordinate all customer facing activities +such as mar!eting. we shall loo! into the relationship between cost accounting and financial accounting. accounting proprietors aims and at strengthening the interests of the others associated with it. ". Parul Institute of Business Administration % .. and the design and production activities necessary to get products to customers. sales calls. 2. mar!eting department is essential for the successful functioning of an organi0ation. control and decision ma!ing. Botwithstanding the fact that both are concerned with systematic recording and presentation of data based on the same records and on the same principles of debit and credit rules. Cost accounts have to comply with the requirements of management. Cost accounting emphasi0es ascertainment of costs. Differences bet7een %inancia Accounting and Cost Accounting Basis 1.1. "o. they differ widely in the aspects shown in Table. Cost Accounting and Ot1er Branc1es of Accounting &ccounting is classified into( 9. *inancial accounting and )anagement accounting *irst. the role of the cost accountant gains greater responsibility. distribution and post sales support. 11.

Costs are bro!en into unit basis in cost accounting. C assification 1#. and *inancial accounts deal mainly with facts and figures only. job or service. 4. plant and machinery. though it extends information to outsiders. according to the purpose for the nature of expenditure..e. accurate as they are intended mainly for the management. which costs are incurred. in Study Material: Cost Accountin and This discloses profit made on each product. plant. Degree of *inancial statements are more accurac! 1". machinery etc. according to i. Parul Institute of Business Administration & . Information accurate as they are subject to scrutiny by statutory authorities.. which information on relative efficiency of wor!ers. they are classified properly and analysed perfectly. Transactions are recorded and recording transactions (. 4roper and adequate information on each and every aspect of business is provided to outsiders. of Transactions classified and are recorded. Cost accounts are concerned with internal transactions. . 9ature Profit This analyses accounts discloses the profit of the firm as a whole. "toc!s are valued at cost price. which do receipt of cash. estimates +. Faculty. In cost accounting. of re0ort 12. expenses etc.e. of Costs are reported in aggregate in re0ort of costs financial accounts. process. Cost accounting deals with facts and figures besides estimates.BBA SEM II #. of *inancial accounts are concerned with external transactions. %acts analysed a analysed in an objective manner. These most frequently. *inancial accounts do not classify accounts. Periodicit! *inancial statements are prepared and reported only at specified period. usually once in a year. 6e ative This does not provide information efficienc! 15. . form the basis of payment or not form the basis of payment or receipt of cash.. :a uation of "toc!s are valued at cost or stoc. 9ature mar!et price whichever is less. i.!0e on the relative efficiency of wor!ers. whenever management requires are comparatively less transactions and basis 11. Cost accounting provides subject manner. Prepared By: Mahendra Patel. 4roper and adequate information on each aspect of business is not provided to outsiders. Cost reports are prepared and reported it. ana !sis $.

'ut cost accounting and management accounting differ in certain areas. cost accountant is placed at a lower hierarchy level than management accountant. 6e evance and objectivit! accounting. Usage of too s and tec1ni8ues accounting are limited such as standard costing. effect aspects of costs. Tools and techniques used in cost $. A00roac1 Prepared By: Mahendra Patel. 'oth are internal to the organi0ation. Cost accounting data are generally derived by using management accounting techniques. brea! even analysis. Cost account is generally concerned with short term planning. =elevance and objectivity of data is higher than cost accounting. allocation. the impact +ii. In an organi0ation. Cost accounting is generally historical in its approach. Parul Institute of Business Administration ' . controlling and decision ma!ing. both assist management in its functions of planning.BBA SEM II Study Material: Cost Accountin $. It is generally approach. )anagement derived from accounting cost data are and +ana*ement Accountin* This is mainly concerned with +i. distribution and accounting aspects of costs. futuristic in its compared )anagement accountant is placed at a higher hierarchy level than cost accountant. *va uation of 0erformance in management functions and in the evaluation of performance. It projects the past.. It is concerned with both assisting management in its functions and in evaluating the performance of the management. =elevance and objectivity of data is not higher in to cost accounting management & wide range of tools and techniques are used such as ratio analysis. 'oth use more or less similar techniques such as marginal costing and budgetary control. 'oth have the same objectives5for instance.2. Cost Accounting and )anagement Accounting "ome accounting professionals are of the view that cost accounting is a branch of management accounting. 2ierarc1! eve ". Faculty. cash flow in addition to tools and techniques used in cost accounting. "uch a close relationship exists between the two categories of accounting. Difference bet7een Cost Accounting and )anagement Accounting Basis of Distinction Cost Accountin* Cost accounting is concerned with 1. Period of 0 anning . Accounting data accounts financial accounts. budgetary control. The main points of distinction between cost accounting and management accounting are shown in Table. It is mainly concerned with assisting +. )anagement account is concerned both with short term and with long term planning. #. Objective the ascertainment. 2. (.

It may also be defined as Cost is a foregoing. In general. are to be considered while decision ma!ing. *or instance. Cowever. costs which do not give rise to actual cash outlay. cost means the amount of resource used in exchange for goods or services. measured in monetary terms. Conditions: & cost has to be ascertained under different conditions also. 'ut if more than one product is produced. a specified thing or activity2. +iii. *or example. -ifferent conditions lead to different modes of valuation of cost. interest on capital invested by the owner in the firm in notional cost. purpose. Pur0ose: & cost has to be studied in relation to its purpose. the context in which it is used. cost is measured in terms of money. while dealing with inventory. different conditions and +iv. 1. accounting and Study Material: Cost Accountin It includes cost accounting as well as tax tax accounting. This is relatively easy if the organi0ation produces only a single product. Conce0ts of Cost It is difficult to define the term 1cost2. namely. Cence. or attributable to. 'ut if the purpose is valuation of inventories. the concept of cost varies according to the purpose. incurred on. Faculty. (. wor! in progress is valued at factory cost. Parul Institute of Business Administration ( . 'ut these are not available from accounting records5for instance. the purpose is fixation of selling price cost. imputed +actual. Cost accounting does not include financial accounting. The resources used shall be money or money$s worth. It differs from purpose to purpose and has different denotations. a manufacturing organi0ation is interested in !nowing the cost per unit of its product. 2. Inc usion of ot1er branc1es of accounting. whereas stoc! of finished goods is valued at production cost. whereas the organi0ations rendering services such as electricity and transport are interested in ascertaining the costs of services they undertoo!.BBA SEM II 4. *or example. which is usually expressed in monetary units. &ll items of expenditure relating to production. incurred or potentially to be incurred to achieve a specific objective. Prepared By: Mahendra Patel. 3. administration and selling will have to be included. only cost of production will have to be ta!en into account. & cost has to be loo!ed in relation to +i. or notional cost. the nature of business +ii. The terminology of CI)& defines cost as 1the amount of expenditure +actual or motional. The cost per unit can be easily ascertained by dividing the total expenditure by number of units produced or quantum of services rendered. Concept of cost varies thus. 9ature of business: & cost has to be studied in relation to its nature of business. The term 1cost2 is ambiguous and uncertain. other factors have to be considered for determining the cost. &s already said.

& cost centre is primarily identified in two major ways.1. Cost centres may be of the following types. 4roduction cost centre+for regular production in a shop.1. Accordin* to the committee on Cost Concepts and /tandards of the American Accountin* Association. labour. They are a. Concept of cost is not precise and cannot be pinpointed. iii.1. which jointly contribute to the total cost. Prepared By: Mahendra Patel. when the term is used specifically. product or service. 4ersonal cost centre( It consists of a person or a group of persons. incurred or potential to e incurred to achieve a specific o 0ectiveIt may be an actual cost or estimated expenditure. Define t1e term cost. &$. 4rocess cost centre +based on sequence of operation. Aperation cost centre+where various operations are involved in the production process. Identification and establishments of cost centres depend on the nature and type of industry. a given thing. variable cost. It has its own terminology. person or item of e1uipment &or *roup of these( for which costs may e ascertained and used for the purposes of cost control. It is ever widening. Faculty. Each such modification implies a certain attribute which is important in computing and measuring the cost. ii. fixed cost. A cost centre is a location. Impersonal cost centre( It consists of a location or an item of equipment or group of these. or attributable to. opportunity cost and sun! cost. different costs are to be used for different purposes (.Cost is fore*oin*. Parul Institute of Business Administration 1) . measured in monetary terms. The terms #Cost$ and #expenditure$ are used interchangeably to mention same thing in the field of business. Cost means the amount of expenditure incurred on. process. b. it is always modified with reference to the context costed by such descriptions as prime cost. i. It also indicates a direct or indirect expenditure. 2ondon( The entire organi0ation may be divided into specified cost centres.C. It is also related to job.BBA SEM II 4. factory overhead. (. Examples of costs are material. Study Material: Cost Accountin Conte&t: The term 1cost2 may not stand on its own and has to be qualified.+.A. It is a generic term. and selling and distribution overheads. . Cence. 3et us understand about cost centre. It is generally used to include all the various types of costs. administrative overheads. Cowever. Cost Centre Cost is generally ascertained by cost centres.

&.g. applying the techniques of control to chec! undue. &ccording to I. operating unit of service +e. ascertaining the centre wise costs. & large number of cost centres tend to be expensive but having too few cost centres defeat the very purpose of control. Thirdly. it should be easier to correlate expenses with cost units. v. cost of running a car per !ilometre. comparing the centre wise costs periodically. Cost units may be( i. cost per square foot of construction. cost per !ilogram of sugar. iv. iii.. & few more examples of cost units in various industries are given( Prepared By: Mahendra Patel. Faculty. finding out the major trends of variance. Cost units will normally be the quantity of a product for which price is quoted to the customers. Convenience is the first criterion.g.g. it should be according to the nature and practice of the business. "election of a cost unit must be appropriate.). ii.g. unit of weight +e. service or time in relation to which cost may e ascertained or expressedCost units are the #things$ that the business is setup to provide of which cost is ascertained.C. Cost Unit The cost centres help in ascertaining the costs by location.. "econdly. Identification and establishment of cost centres help us in i. unit of product +e. iv. cost of generating electricity per hour. The concept of costing by cost centres may be applied to almost any industry.g. ii. unit of measurement +e. 3ondon 1A cost unit is a unit of product.. Cost unit helps in brea!ing up the cost into smaller sub divisions.BBA SEM II Study Material: Cost Accountin iv. equipment or person.. undesirable or unexpected movements in costs. It also facilitates in ascertaining the cost of saleable product or services. cost per boo!. "ervice cost centre+for activities supporting the main production. (.. The number of cost centres and the si0e of each vary from one underta!ing to another. Cost unit is an extension of identification of cost centres. unit of time +e. iii. The main purpose of identification of cost centres is to fix responsibilities for every cost centres. Parul Institute of Business Administration 11 .1.2.

. direct labour and other direct expenses. * ements of Cost There are three elements of Cost Prepared By: Mahendra Patel. gallon etc 'ale Dilowatt hour =oom per day Tonne -o0en or gross Thousand copies 4air or do0en pairs Cubic foot 4assenger Dilometre (.ota Cost The total cost comprises of direct costs +also !nown as prime cost. Com0onents of .777 bric!s "quare yard 4er Car Tonne Tonne. )ec1anism of Cost Bui d U0 Prime < 3or.s < . Faculty. office overheads. and indirect costs +!nown as overheads. Averhead consists of factory overheads.ota < = Cost Cost of Production 'e ing And Distribution Over1ead = +. !ilogram.BBA SEM II Industr! &utomobile 'ric!s Carpets Cars Cement Chemicals Cotton Electricity Cotel )ines 4encils 4rinting 4ress "hoes Timber Transport Study Material: Cost Accountin Cost Unit Bumber 9. The prime cost consists of direct materials. litre.s < Cost Direct = Cost Prime = Cost Office And Administrative Over1ead )ateria Direct = Cost %actor! Over1ead >abour Direct *&0enses Cost of Production 3or.2. and selling and distribution overheads. Parul Institute of Business Administration 1! .

Cotton for textiles. The reward paid to them is called direct wages. Expenses can also be direct or indirect. components. ii. job or processes are termed as #direct expenses$. tyres for car are few examples of direct material. Indirect Expenses( &ll expenses other than indirect materials and labour which cannot be directly attributed to a particular product.BBA SEM II Study Material: Cost Accountin &. '. "uch involvement of wor!ers forms the word #labour$. spare parts for machinery are called as indirect materials. *&0enses :&ll expenditures other than material and labour are termed as #expenses$. which are incurred specifically for a particular product. which are used as raw materials. C. )aterials can be direct or indirect. Eages can be direct or indirect. Faculty. i. "ome examples are given below( Direct *&0enses Carriage Inwards 4roduction royalty Cire Charges of equipment Cost of special drawings special ii. job or service are termed as #indirect expenses$. "ome examples are given below( Prepared By: Mahendra Patel. i. or consumables for manufacturing product. Parul Institute of Business Administration 1" . Indirect 3abour( The wor!ers employed for carrying out tas!s incidental to production of goods or those engaged for office wor! and selling and distribution activities are !nown as #indirect labour$. -irect 3abour( The wor!ers who are directly involved in the production of goods are !nown as #direct labour$. It also includes pac!age material. The reward given to them is called indirect wages. -irect Expenses( Ather expenses. -irect materials( &ll materials used as raw materials or components for a finished product are !nown as #direct materials$. Indirect )aterials( Consumable li!e lubricating oil. )ateria s: The word 1)aterials2 refers to those commodities. i. ii. The reward given to them for their involvement is called #wages$. "uch commodities do not form part of the finished product. >abour : The wor!ers are involved in converting raw material into finished goods.

office +or administrative. It includes direct wages. Faculty. which cannot be identified as direct costs. ii. and iii. direct expenses and factory overheads. Conversion Cost: The cost of converting raw materials into finished goods is termed as #conversion cost$. overheads. E3E)EBT"A* A*CA"T CA"T E3E)EBT" )&TE=I&3 )&TE=I&3 -I=ECT -I=ECT IB-I=ECT IB-I=ECT -I=ECT -I=ECT 3&'AF= 3&'AF= IB-I=ECT IB-I=ECT EG4EB"E" EG4EB"E" -I=ECT -I=ECT *&CTA=H *&CTA=H IB-I=ECT IB-I=ECT *&CTA=H *&CTA=H A**ICE A**ICE *&CTA=H *&CTA=H A**ICE A**ICE "E33IB< "E33IB< -I"T=I'FTIAB -I"T=I'FTIAB A**ICE A**ICE "E33IB<-I"T=I'FTIAB -I"T=I'FTIAB "E33IB< "E33IB< "E33IB< -I"T=I'FTIAB -I"T=I'FTIAB A= Prepared By: Mahendra Patel. are termed as #indirect costs$. indirect labour and indirect expenses are collectively !nown as #Averheads$ or #An costs2.BBA SEM II Indirect *&0enses: =ent of building. The three elements of indirect costs namely indirect materials. factory +or manufacturing. overheads. selling and distribution overheads E. Averheads are grouped into three categories( i. Conce0t of Over1ead: &ll material. labour and expenses. =epair of )achinery 3ighting and heating Insurance Study Material: Cost Accountin -. Parul Institute of Business Administration 1# .

C assification based on functions: .1is is a traditional classification. Faculty.BBA SEM II Study Material: Cost Accountin Elements Elements ofcost cost of -I=ECT )&TE=I&3 -I=ECT )&TE=I&3 -I=ECT 3&'AF= -I=ECT 3&'AF= -I=ECT EG4EB"E" -I=ECT EG4EB"E" A@E=CE&-" A@E=CE&-" *&CTA=H A@E=CE&-" *&CTA=H A@E=CE&-" A**ICEA@E=CE&-" A@E=CE&-" A**ICE "E33IB< /-I"T=I'FTIAB -I"T=I'FTIAB "E33IB< / A@E=CE&-" A@E=CE&-" IB-I=ECT)&TE=I&3 )&TE=I&3 IB-I=ECT IB-I=ECT IB-I=ECT )&TE=I&3 )&TE=I&3 IB-I=ECT IB-I=ECT )&TE=I&3 )&TE=I&3 IB-I=ECT IB-I=ECT 3&'AF= 3&'AF= IB-I=ECT IB-I=ECT 3&'AF= 3&'AF= IB-I=ECT IB-I=ECT 3&'AF= 3&'AF= IB-I=ECT IB-I=ECT EG4EB"E" EG4EB"E" IB-I=ECT IB-I=ECT EG4EB"E" EG4EB"E" IB-I=ECT IB-I=ECT EG4EB"E" EG4EB"E" .C assification of Costs Costs have been classified according to various bases. selling. The cost may have to be ascertained according to the functions carried out by the organisation... )anufacturing Costs refer to all expenditure incurred in the course of production from purchasing of materials to pac!ing of the finished goods. The functions generally are manufacturing. administration. distribution and research.1. Parul Institute of Business Administration 1$ . . Prepared By: Mahendra Patel.

Administration Costs Accounts office expenses Legal charges Audit charges Office Rent Remuneration to Director Postage Expenses "elling Costs are incurred to create and stimulate the demand and to secure the demand Selling Costs Salaries Commission to Salesmen Advertising and promotion Expenses Samples Travelling Expenses -istribution Costs are incurred on dispatch of the finished goods to customer including transportation. Parul Institute of Business Administration 1% . Distri ution Costs Pac!aging costs "arehousing Costs Carriage out#ards $nsurance %p!eep of &ans Prepared By: Mahendra Patel. Faculty.actory Rent )epreciation 3ower 4 2i*htin* $nsurance Store Keeping Study Material: Cost Accountin &dministration Costs are incurred for general administration of the organisation and for the operational control.BBA SEM II +anufacturin* Costs +aterial 2a our .

cost of raw materials consumed comes to =s. costs are classified into fixed cost.. &aria le costs Direct )aterial Direct La our Po#er Commission of Salesmen Ro(alties 'emi-variab e Costs: Costs.777 +increase of 67I. Study Material: Cost Accountin C assification based on :ariabi it! or be1avior : Costs have a definite relationship with the volume of production.BBA SEM II . which remain unaffected by changes in volume of production. the cost of material will increase to =s. which increase or decrease with a change in volume of production but not in the same proportion as the change in the volume of production are called 1semi variable costs2. for 9777 units of output. the rent and manager$s salary will not change when you increase the units of production from 9777 to 9677. variable costs and semi variable +semi fixed. are called as 1fixed Costs2. *or example. 97. costs. Semi+varia le Costs Supervision Repairs )aintenance Telephone Charges Light and Po#er Depreciation Prepared By: Mahendra Patel. Parul Institute of Business Administration 1& . If the production is increased to 9677 units +67I.777.96. 'ixed Costs Rent lease Salar( to )anagers *uilding $nsurance Salar( and "ages Taxes to local authorit( :ariab e Cost: The cost that tends to vary in direct proportion to the volume of production is called 1variable cost2. They behave differently when volume of production rises or falls.. Faculty. %i&ed Cost: Costs. An this basis.2. *or example.

@ariable costs are generally controllable by department heads. C assification based on t1eir contro abi it! : Contro ab e Costs: These are the costs. *ew examples are( wages paid to night watchman. Product Costs: These are those costs..#. which can be directly identified with the product. Uncontro ab e Costs( Costs. which are necessary for production and which will not be incurred if there is no production.". job or process. These are general. . Faculty. are called uncontrollable costs. travelling expenses are some examples of period costs. *or example. salaries of company executives. =ent. which are not necessary for production and are written off as expenses in the period in which these are incurred are called period costs.. .$. which cannot be easily identified with a particular product. in case of materials used and labour employed we can easily ascertain as to which product or job or process they relate. Parul Institute of Business Administration 1' .. -irect material. Indirect Cost: It refers to those expenses. which are to be allocated to various products manufactured in the factory. direct wages and some of the factory overheads are examples of this !ind. which cannot be influenced by the action of a specified member of an organisation. salary to the production manager. C assification based on t1eir association 7it1 0roduct or 0eriod. Prepared By: Mahendra Patel. job or process. Study Material: Cost Accountin C assification according to t1eir identifiabi it! 7it1 Cost units: Costs are classified into direct and indirect based on their identifiability with cost units and jobs or processes( Direct Cost: It refers to expenses. which may be directly regulated at a given level of authority.BBA SEM II . common or collective nature. Period Costs: Costs. *actory rent is a good example.

Parul Institute of Business Administration 1( . &ccording to I. The contract wor! usually involves heavy expenditure. There is not standard set of rules and regulations of cost accounting applicable to all industries and even the firms in the same industry. where each job has its own specification. Contract Costing: This method is used in case of big jobs described as #contracts$. iii. "ince this is a variation of job costing. and +6. >imitations of Cost Accounting: Cost &ccounting suffers from certain inherent limitations. Prepared By: Mahendra Patel. but only by application in actual practice. )any methods have been designed to suit the needs of different industries. printing.). 15. i. Faculty. iv. )et1ods of Costing: The methods of costing refer to the techniques and processes employed in the ascertainment of costs.& 3ondon 1The method of 0o order costin* applies where wor" is underta"en to e a 0o or wor"It is suitable for industries li!e car repairs.BBA SEM II Study Material: Cost Accountin 4. the principles of job costing are in general applied. Job costing. 15. ?ob Costing: Fnder this method. There are widely recognised cost concepts but understood and applied differently by different concerns. ii. construction of premises. foundries. 4rocess Costing.C. roads and bridges are few examples suitable for contract costing. spreaded over a long period. painting and interior designing. 15. The cost accounting principles themselves !eep on changing. "hipbuilding. Cost accounting is not an exact science and its postulates cannot be verified by controlled experiment. costs are ascertained for each job separately. These methods can be summarised as follows( It should be noted that two basic methods of costing are +9.1.2. Each contract is treated as a separate unit for the purpose of cost ascertainment. The other methods discussed below are simply variants of these two methods.

)u ti0 e costing: This method is an application of more than one method of cost ascertainment in respect of the same product. shoes. toys. costs have to be ascertained for each component as well as for the finished product. It is also called #service costing$. costs are ascertained gradewise. 11. To arrive at the unit cost.".BBA SEM II Study Material: Cost Accountin 15. which provide services instead of manufacturing products.(. Process costing: & product passes through various stages of production called #processes in some industries. O0erating Costing: This method is used in underta!ings. sugar mills and food products may be cited as examples of industries which use this method. the total cost of the process is divided by the number of units. steel production. It is. typewriter etc. . This method is used in mines.. The types of costing also !nown as techniques of costing generally used are as follows( Prepared By: Mahendra Patel.+. Batc1 Costing: This is also another version of job costing. Parul Institute of Business Administration !) . 15. and in case of nursing home. The cost of batch or group of uniform products is ascertained under this method. bric! !ilns. 15. floor mills. The unit cost is a service unit e. the unit of cost is passenger !ilometer. Faculty. it is per bed per day. "ince the units of output are identical. etc.#. 15. therefore. The type of costing refers to the technique of analysing and presenting costs for the purpose of control and managerial decisions. etc. 15. Each batch of products is a unit of cost for which costs are accumulated. The output of one process is used as a raw material for the next process. 'ing e@ out0ut or unit costing: This method of cost ascertainment is used when production is uniform and consists of a single or two or three varieties of the same product. Textile mills. ba!ery. readymade garments.g.. chemical wor!s. Each process is different and well defined. bicycle parts. Ehere the product is produced in different grades. This may involve use of different methods of costing for different component.$. the cost per unit is found by dividing the total cost by the number of units produced. in case of buses.!0es of Costing )ethod of costing refers to the process and practice of ascertaining costs of product and services. Costs are accumulated for each process. It is generally used in industries li!e pharmaceuticals. Ehere a produce comprises many assembled parts as in case of motor car. called #multiple$ or #composite$ costing.

BBA SEM II Study Material: Cost Accountin 11.#. Atherwise the system may be a misfit and the organisation may not be able to derive full advantage from it. 11. are charged to products. Parul Institute of Business Administration !1 . Prepared By: Mahendra Patel. 11. The installation of a costing system requires a thorough study and understanding of all the aspects involved. Fnder marginal costing. 'tandard Costing: This technique connotes the setting up of definite standards of performance in advance.1. These standards are expressed in monetary terms. Insta ation of A Cost '!stem There cannot be a ready made costing system for every organisation. to production. a single system of costing cannot suit every business. is of special interest and importance. Faculty. It is also !nown as #variable costing$. This method allocates only variable costs +direct material.". In other words. direct labour. which can help its successful operations. 12.2. Absor0tion costing: It refers to the conventional technique of costing under which the total costs +fixed and variable. In view of growing si0e and variety of organisations. The differences are helping the management to initiate corrective actions. cost of a product is estimated with out considering fixed cost. it is only a properly designed system of costing suitable to the underta!ing. This technique is also believed to be another valuable aid in cost control and coordination.$. and variable overheads. &ctual performance is measured against these standards. 'udgetary control is a technique applied to the control of total expenditure on materials. wages and overhead by comparing actual performance with planned performance. The accounting is done in terms of actual costs and not in terms of predetermined costs. 11. Budgetar! Contro : & budget is an estimated results expressed in numerical numbers. direct expenses. It is widely applied by many organi0ations today. It is considered to have only a limited application today. )argina costing: "eparation of costs into fixed and variable +marginal. This is believed to be a valuable tool in cost control. 11. 2istorica Costing: It refers to a system of cost accounting under which costs are ascertained only after they have been incurred.

ii. Prepared By: Mahendra Patel. 12. =esistance to change from staff involved in the operation of the financial accounting. vi. 'te0s Invo ved in Insta ing a Costing '!stem( i. The following are some difficulties i. The benefit of establishing cost system must exceed the amount spent on it. Parul Institute of Business Administration !! . scope of authority. Faculty. vii. Abjective of the costing system Bature of business Kuality of the management "i0e and type of organisation. Prob em Areas: The organisation must be aware of the difficulties in introducing the system of costing. Ceavy costs involved in the process of installation. iv. iii.BBA SEM II Study Material: Cost Accountin The cost benefit analysis should be initiated to install a costing system. ii. The organisation structure should be studied to ascertain the scope of authority of each executive. %actors to be considered: The following factors should be considered before installation of a system of costing( i. )anagement conducts a preliminary investigation. *or example. iv. =esentment at other levels in view of the additional wor! expected due to the costing system. "hortage of trained and qualified staff to handle the new system. The system should be justified because of its value to management. 12. ii.". iii.2.1. v. the nature of product and methods of production will help them to identify the right cost system. v. Inadequate support from top management. sources of information and reports to be submitted Technical aspect of the business &ttitude and behaviour of the staff in extending co operation to the system and the organisation Impact of different operations on variable expenses 12.

Ehat are the limitations of cost accountingM 9. Ehat is cost centreM Cow is it identifiedM 3ist its uses. 9>. vi. Explain different methods of costing. changed as per the requirements. v. Compare cost accounting with management accounting.. -efine cost accounting."h( should there e costing in the field of usiness. issue and storage should be examined and )ethod of remuneration to the labour should be altered to the new system of remuneration. Costing system should be simple and easy to operate. 9N. vii. 6evie7 Auestions . ix. Cow will you classify costsM Explain 9L. viii. iv. 97. 6.BBA SEM II iii. Ehat are the preliminaries that are to be satisfied before installation of a cost systemM Prepared By: Mahendra Patel. &ccounting system should be designed in such a way to involve minimum clerical labour and expenditure. Faculty. Ehat is cost sheetM Explain the components of cost "heet with an example. Parul Institute of Business Administration !" .. 3ist the advantages of cost accounting. The system should be initiated gradually. Explain the components of total costM 96. Ehat are the difference between financial accounting and cost accountingM >.. The installation and operation of the system should be economical. . Ehat are ascertainment costsM Cow does it differ from cost estimationM 8. -escribe the types of costing. N. -efine the term cost. Study Material: Cost Accountin The system of material procurement. The layout of the factory should be studied. L. -efine cost control. 9O. O. -escribe about cost unit 99. Ehat are the steps to be followed in cost controlM Ehat are the advantages of cost controlM 9:. 'ring out the difference between financial and management accounting :.

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