Cost Accounting

COST ACCOUNTING
MODULE I
SYLLABUS
Introduction, Objectives of Cost Accounting, Material, Employee and overhead

costing, Cost Accounting System, Activity Based Costing, Cost Sheet.
INTRODUCTION
Cost Accounting is a branch of accounting and has been developed due to the
limitations of financial accounting. Financial accounting is primarily concerned
with record keeping directed towards the preparation of Profit and Loss Account
and Balance Sheet. It provides information regarding the profit and loss that the
business enterprise is making and also its financial position on a particular date.
The financial accounting reports help the management to control in a general way
the various functions of the business but it fails to give detailed reports on the
efficiency of various divisions.
The limitations of Financial Accounting are:
No clear idea of operating efficiency
Weakness not spotted out by collective results
Does not help in fixing the price
No classification of expenses and accounts
No data for comparison and decision making
No control on cost:
Does not provide standards to assess the performance
Provides only historical information
Cost Accounting : Cost Accounting may be defined as “Accounting for costs

classification and analysis of expenditure as will enable the total cost of any
particular unit of production to be ascertained with reasonable degree of accuracy
and at the same time to disclose exactly how such total cost is constituted”. Thus
Cost Accounting is classifying, recording an appropriate allocation of expenditure
for the determination of the costs of products or services, and for the presentation
of suitably arranged data for the purpose of control and guidance of management.
FEATURES
1. Accounting for costs
2. It involves classification and analysis of expenditure and income of
particular unit of production of goods and services.
3. It disclose exactly how such total cost is constituted
4. It helps Cost ascertainment, cost reduction, cost control
Cost Accounting can be explained as follows :-
Cost Accounting is the process of accounting for cost which begins with recording
of income and expenditure and ends with the preparation of statistical data.
It is the formal mechanism by means of which cost of products or services are
ascertained and controlled.
Cost Accounting provides analysis and classification of expenditure as will enable
the total cost of any particular unit of product / service to be ascertained with
reasonable degree of accuracy and at the same time to disclose exactly how such
total cost is constituted. For example it is not sufficient to know that the cost of one
pen is ` 25/- but the management is also interested to know the cost of material
used, the amount of labourand other expenses incurred so as to control and reduce
its cost.
It establishes budgets and standard costs and actual cost of operations, processes,
departments or products and the analysis of variances, profitability and social use
of funds.
Thus Cost Accounting is a quantitative method that collects, classifies, summarises
and interprets information for product costing, operation planning and control and
decision making.
Costing : Costing is defined as the technique and process of ascertaining costs.
The technique in costing consists of the body of principles and rules for
ascertaining the costs of products and services. The technique is dynamic and
changes with the change of time. The process of costing is the day to day routine of
ascertaining costs. It is popularly known as an arithmetic process.
Basis Costing Cost Accounting
Nature It is a technique and process of It is regarded as a specialized
ascertaining cost branch of accounting
Scope The costing consists of the body It involves classification,
of principles and rules for accumulation, assignment and
ascertaining the costs of products control of cost
and services
Process The process of costing consists It involves establishment of
of routines of ascertaining cost budgets, standard costs, or actual
by historical or conventional costs regarding classification,
costing, standard costing or accumulation, assignment of
marginal costing expenditure.
Objectives of Cost Accounting
The following are the main objectives of Cost Accounting:-

(a) To ascertain the Costs under different situations using different techniques and
systems of costing
(b) To determine the selling prices under different circumstances
(c) To determine and control efficiency by setting standards for Materials,
Labour and Overheads ( Cost Control)
(d) To determine the value of closing inventory for preparing financial statements
of the concern
(e) To Reduce Costs, by deciding whether to close or operate at a loss, whether to
manufacture or buy from market, whether to continue the existing method of
production or to replace it by a more improved method of production....etc
Cost accounting aims at systematic recording of expenses and analysis of the same
so as toascertain the cost of each product manufactured or service rendered by an
organization. Information regarding cost of each product or service would enable
the management to know where to economize on costs, how to fix prices, how to
maximize profits and so on. Thus, the main objectives of cost accounting are the
following.
1. To analyse and classify all expenditure with reference to the cost of products
andoperations.
2. To arrive at the cost of production of every unit, job, operation, process,
department orservice and to develop cost standard.
3. To indicate to the management any inefficiencies and the extent of various
forms of waste,whether of materials, time, expenses or in the use of machinery,
equipment and tools.Analysis of the causes of unsatisfactory results may indicate
remedial measures.
4. To provide data for periodical profit and loss accounts and balance sheets at
such intervals,e.g. weekly, monthly or quarterly as may be desired by the
management during the financialyear, not only for the whole business but also by
departments or individual products. Also,to explain in detail the exact reasons for
profit or loss revealed in total in the profit and loss
accounts.
5. To reveal sources of economies in production having regard to methods, types
ofequipment, design, output and layout. Daily, Weekly, Monthly or Quarterly
informationmay be necessary to ensure prompt constructive action.
6. To provide actual figures of costs for comparison with estimates and to serve as
a guide forfuture estimates or quotations and to assist the management in their
price fixing policy.
7. To show, where Standard Costs are prepared, what the cost of production ought
to be andwith which the actual costs which are eventually recorded may be
compared.
8. To present comparative cost data for different periods and various volume of
output and toprovide guidance in the development of business. This is also helpful
in budgetary control.
9. To record the relative production results of each unit of plant and machinery in
use as abasis for examining its efficiency. A comparison with the performance of
other types of
machines may suggest the necessity for replacement.
10. To provide a perpetual inventory of stores and other materials so that interim
Profit andLoss Account and Balance Sheet can be prepared without stock taking
and checks on storesand adjustments are made at frequent intervals. Also to
provide the basis for productionplanning and for avoiding unnecessary wastages or
losses of materials and stores.
Last but not the least, to provide information to enable management to make short
termdecisions of various types, such as quotation of price to special customers or
during a slump, make or buy decision, assigning priorities to various products, etc.
Cost Accounting and Financial Accounting-
Both financial accounting and cost accounting are concerned with systematic
recording andpresentation of financial data. Financial accounting reveals profits
and losses of the business as awhole during a particular period, while cost
accounting shows, by analysis and localization, the unit costs and profits and losses
of different product lines. The main difference between financialaccounting and
cost accounting are summarized below.
1. Financial accounting aims at safeguarding the interests of the business and its
proprietorsand others connected with it. This is done by providing suitable
information to variousparties, such as shareholders or partners, present or
prospective creditors etc. Costaccounting on the other hand, renders information
for the guidance of the management forproper planning, operation, control and
decision making.
2. Financial accounts are kept in such a way as to meet the requirements of the
CompaniesAct, Income Tax Act and other statues. On the other hand cost accounts
are generally keptvoluntarily to meet the requirements of the management. But
now the Companies Act hasmade it obligatory to keep cost records in some
manufacturing industries.
3. Financial accounting emphasizes the measurement of profitability, while cost
accountingaims at ascertainment of costs and accumulates data for this very
purpose.
4. Financial Accounting is mainly concerned with requirements of creditors,
shareholders, government, prospective investors and persons outside the
management. Financial Accounting is mostly concerned with external reporting.
Cost Accounting, as the name implies, is primarily concerned with determination
of cost of something, which may be a product, service, a process or an operation
according to costing objective of management. A Cost Accountant is primarily
charged with the responsibility of providing cost data for whatever purposes they
may be required for.
COST OBJECT, COST CENTERS AND COST UNIT – ELEMENTS OF COST

Cost: Cost is a measurement, in monetary terms, of the amount of resources
used for the purpose of production of goods or rendering services.
Cost in simple, words, means the total of all expenses. Cost is also defined as the
amount of expenditure (actual or notional) incurred on or attributable to a given
thing or to ascertain the cost of a given thing. Thus it is that which is given or in
sacrificed to obtain something. The cost of an article consists of actual outgoings
or ascertained charges incurred in its production and sale. Cost is a generic term
and it is always advisable to qualify the word cost to show exactly what it meant,
e.g., prime cost, factory cost, etc. Cost is also different from value as cost is
measured in terms of money whereas value in terms of usefulness or utility of an
article.
Elements of Cost
Elements of Cost
Material
 Direct Material
 Indirect Material
Labour
 Direct Labour
 Indirect Labour
Expenses
 Direct Expenses
 Indirect Expenses
 Direct Material + Direct Labour + Direct Expenses = Prime Cost

 Indirect Material+ Indirect Labour + Indirect Expenses = Overheads
 Works or factory cost = Prime Cost+ Works or factory overheads
 Cost of production= Works or factory cost + administration overheads
 Total cost or Cost of sales= Cost of production+ selling and distribution
expenses.
Direct Material Cost

Direct material cost can be defined as ‘The Cost of material which can be
attributed to a cost object in an economically feasible way’. Direct materials are
those materials which can be identified in the product and can be conveniently
measured and directly charged to the product. Thus, these
furniture making, cloth in dress making, bricks in building a house. The following
are normally classified as direct materials :-
(i) All raw materials, like jute in the manufacture of gunny bags, pig iron in
foundry and fruits in canning industry.
(ii) Materials specifically purchased for a specific job, process or order, like glue
for book binding, starch powder for dressing yarn.
(iii) Parts or components purchased or produced, like batteries for transistor-radios.
(iv) Primary packing materials like cartons, wrappings, card-board boxes, etc.
Indirect Material Cost
Materials, the costs of which cannot be directly attributed to a particular cost
object. Indirect materials are those materials which do not normally form a part of
the finished product. It has been defined as “materials which cannot be allocated
but which can apportioned to or absorbed by cost centres or cost units”. These are:
(i) Stores used in maintenance of machinery, buildings, etc., like lubricants, cotton
waste, bricks and cements.
(ii) Stores used by the service departments, i.e., non-productive departments like
Power House, Boiler House and Canteen, etc., and
(iii) Materials which due to their cost being small, are not considered worthwhile
to be treated as direct materials.
Direct Labour / Employee Cost /wages
The cost of employees which can be attributed to a cost object in an economically
feasible way. In simple words, it is that labour which can be conveniently
identified or attributed wholly to a particular job, product or process or expended
in converting raw materials into finished goods. Wages of such labour are known
as direct wages. Thus it includes payment made to the following groups of labour:
(i) Labour engaged on the actual production of the product or in carrying out of an
operation or process.
(ii) Labour engaged in adding the manufacture by way of supervision,
maintenance, tool setting, transportation of material etc.
(iii) Inspectors, analysts etc., specially required for such production.
Indirect Labour/ Employee Cost
The labour / employee cost which cannot be directly attributed to a particular cost
object. The wages of that labour which cannot be allocated but which can be
apportioned to or absorbed by cost centres or cost units is known as Indirect
Labour. In other words paid to labour which are employed other than on
production constitute indirect labour costs. Example of such labour are: charge-
hands and supervisors; maintenance workers; men employed in service
departments, material handling and internal transport; apprentices, trainees and
instructors; clerical staff and labour employed in time office and security office.
Direct or Chargeable Expenses
Direct expenses are expenses relating to manufacture of a product or rendering a
service which can be identified or linked with the cost object other than direct
material cost and direct employee cost. Direct expenses include all expenditure
other than direct material or direct labour that is specifically incurred for a
particular product or process. Such expenses are charged directly to the particular
cost account concerned as part of the prime cost. Examples of direct expenses are:
(i) Excise duty; (ii) Royalty; (iii) Architect or Supervisor’s fees; (iv) Cost of
rectifying defective work; (v) Travelling expenses to the city; (vi) Experimental
expenses of pilot projects; (vii) Expenses of designing or drawings of patterns or
models; (viii) Repairs and maintenance of plant obtained on hire; and (ix) Hire of
special equipment obtained for a contract.
Overhead
Overheads comprise of indirect materials, indirect employee cost and indirect
expenses which are not directly identifiable or allocable to a cost object.
Overheads may defined as the aggregate of the cost of indirect material, indirect
labour and such other expenses including services as cannot conveniently be
charged directly to specific cost units. Thus overheads are all expenses other than
direct expenses. In general terms, overheads comprise all expenses incurred for or
in connection with, the general organization of the whole or part of the
undertaking, i.e., the cost of operating supplies and services used by the
undertaking and includes the maintenance of capital assets.
Prime Cost
The aggregate of Direct Material, Direct Labour and Direct Expenses. Generally it
constitutes 50% to 80% of the total cost of the product, as such, as it is primary to
the cost of the product and called Prime Cost.
Cost Object
Cost object is the technical name for a product or a service, a project, a department
or any activity to which a cost relates. Therefore the term cost should always be
linked with a cost object to be more meaningful. Establishing a relevant cost object
is very crucial for a sound costing system. The Cost object could be defined
broadly or narrowly. At a broader level a cost object may be named as a Cost
Centre, where as at a lowermost level it may be called as a Cost Unit.
Find the Prime Cost, Works Cost, Cost of production, total Cost and profit
from the following:- Direct Materials Rs.20000; Direct LabourRs. 10000;
Factory Expenses Rs. 7000; Administration Expenses Rs. 5000; Selling
Expenses Rs. 7000 and Sales Rs.60,000.
PRIME COST=D.M+D.L+D.E=20000+10000=30000
WORKS OR FACTORY COST = Prime Cost+ Works or factory
overheads=30000+7000=37000
COST OF PRODUCTION= Works or factory cost+ Administration
Expenses=37000+5000=42000
TOTAL COST=Cost of production + SE=42000+7000=49000
Profit=sales – total cost=60000-49000=11000
Cost sheet or Statement of Cost: When costing information is set out in the form
of a statement, it is called “Cost Sheet”. It is usually adopted when there is only
one main product and all costs almost are incurred for that product only. The
information incorporated in a cost sheet would depend upon the requirement of
management for the purpose of control.
Specimen of Cost Sheet or Statement of Cost
Total Cost Cost per Unit
+Direct Materials xxx xxx
+Direct Labour xxx xxx
Prime cost xxx xxx
Add: Works Overheads xxx xxx
Works Cost xxx xxx
Add: Administrative Overheads xxx xxx
Cost of Production xxx xxx
Add: Selling and Distribution Overheads xxx xxx
Total Cost or Cost of Sales xxx xxx
Calculate Prime Cost, Factory Cost, Cost of Production, Cost of Sales and
profit
from the following particulars:
Direct Materials 1,00,000 Consumable stores 2,500
Direct Wages 30,000 Manager’s Salary 5,000
Wages of Foreman 2,500 Directors’ fees 1,250
Electric power 500 Office Stationery 500
Lighting: Factory 1,500 Telephone Charges 125
Office 500 Postage and Telegrams 250
Storekeeper’s wages 1,000 Salesmen’s salary 1,250
Oil and water 500 Travelling expenses 500
Rent: Factory 5,000 Advertising 1,250
Office 2,500 Warehouse charges 500
Repairs and Renewals 3500: Sales 1,89,500
Carriage outward 375
Transfer to Reserves 1,000 Dividend 2,000
Discount on shares written off 500
Depreciation: Factory Plant 500
Office Premises 1,250
STATEMENT OF COST SHEET
PARTICULARS AMOUNT
Direct Materials 1,00,000 100000
Direct Wages 30,000 30000
PRIME COST 130000
ADD Factory Overheads

Consumable stores 2,500
Wages of Foreman 2,500
Electric power 500
Lighting: Factory 1,500
Storekeeper’s wages 1,000
Oil and water 500
Rent: Factory 5,000
Repairs and Renewals 3500
Depreciation: Factory Plant 500 17500
FACTORY COST 147500
Add Administration Overheads
Manager’s Salary 5,000
Directors’ fees 1,250
Office Stationery 500
Telephone Charges 125
Office 500
Postage and Telegrams 250
Office 2,500
Office Premises 1,250 11375
COST OF PRODUCTION 158875

Add Selling and Distribution OH
Salesmen’s salary 1,250
Travelling expenses 500
Advertising 1,250
Warehouse charges 500
Carriage outward 375 3875
COST OF SALES 162750
PROFIT 26750
Sales 1,89,500 189500
The following is the costing information of a product for the year ending
Purchase of Raw 120000 Stock 31.12.2020
material Raw material 22240
Works overheads 48000 Stock 31.12.2020 32000
Finished product
Direct wages 100000 Work in Progress 4800
on 01.06.2020
Stock 1.06.2020 20000 Work in Progress 16000
Raw material on 31.12.2020
Stock 1.06.2020 16000 Sales: Finished 300000
Finished goods goods
Selling and distribution OH is 15000 Prepare Cost sheet
The accounts of Z manufacturing company give the following information:
Factory office salaries 6500 Travelling Expenses 2100
General Office salaries 12600 Travellers salaries& 7700
commission
Carriage outward 4300 Productive wages 126000
Carriage on purchases 7150 Depreciation on plant 6500
Bad debts 6500 Depreciation on furniture 300
Repairs of plant 4450 Directors fees 6000
Factory rent 8500 Factory water and gas 1200
Office rent 2000 Office water and gas 400
Sales 461100 Office mangers salary 2500
Opening stock of raw 62800 Factory mangers salary 7500
material
Closing stock of raw 48000 General expenses 3400
material
Materials Purchased 185000 Income tax 1500
Prepare Cost sheet and find the profit:
Answers: Prime cost 332950, factory cost 367600, COP
394800,COS415400,PROFIT 45700
Cost Centre
CIMA defines a cost ,centre as “a location, a person, or an item of equipment (or a
group of them) in or connected with an undertaking, in relation to which costs
ascertained and used for the purpose of cost control”. The determination of
suitable cost centres as well as analysis of cost under cost centres is very helpful
for periodical comparison and control of cost. In order to obtain the cost of product
or service, expenses should be suitably segregated to cost centre. The manager of a
cost centre is held responsible for control of cost of his cost centre. The selection
of suitable cost centres or cost units for which costs are to be ascertained in an
undertaking depends upon a number of factors such as organization of a factory,
condition of incidence of cost, availability of information, requirements of costing
and management policy regarding selecting a method from various choices. Cost
centre may be production cost centres operating cost centres or process cost centres
depending upon the situation and classification.
Cost centres are of two types-Personal and Impersonal Cost Centre. A personal
cost centre consists of person or group of persons. An impersonal cost centre
consists of a location or item of equipment or group of equipments.
In a manufacturing concern, the cost centres generally follow the pattern or layout
of the departments or sections of the factory and accordingly, there are two main
types of cost centres as below :-
(i) Production Cost Centre: These centres are engaged in production work i.e
engaged in converting the raw material into finished product, for example
Machine shop, welding shops...etc
(ii) Service Cost Centre: These centres are ancillary to and render service to
production cost centres, for example Plant Maintenance, Administration...etc
 The number of cost centres and the size of each vary from one undertaking
to another and are dependent upon the expenditure involved and the
requirements of the management for the purpose of control.
Profit centre– A profit centre is that segment of activity of a business which is
responsible forboth revenue and expenses and discloses the profit of a particular
segment of activity. Profit centres are created to delegate responsibility to
individuals and measure their performance.
Difference between Profit centre and Cost centre
 The various points of difference between Profit centre and cost centre are as
follows. Cost centre is the smallest unit of activity or area of responsibility
for which costs are collected whereas a profit centre is that segment of
activity of a business which is responsible for both revenue and expenses.
 (i) Cost centres are created for accounting conveniences of costs and their
controlwhereas as a profit centre is created because of decentralization of
operations i.e., todelegate responsibility to individuals who have greater
knowledge of local conditions
 (ii) Cost centers are not autonomous whereas profit centres are autonomous.
 (iii) A cost centre does not have target cost but efforts are made to minimize
costs, buteach profit centre has a profit target and enjoys authority to adopt
such policies as are necessary to achieve its targets.
 (iv) There may be a number of cost centres in a profit centre in a profit
centre asproduction or service cost centres or personal or impersonal but a
profit centre may be a subsidiary company within a group or division in a
company.
Cost units- The Chartered Institute of Management Accountants, London, defines
a unit of cost as “a unit of quantity of product, service or time in relation to which
costs may be ascertained orexpressed”. The forms of measurement used as cost
units are usually the units of physical measurements like number, weight, area,
length, value, time etc. Following are some examples of cost unit.
Industry/product Cost unit basis
 Brick works per 1000 bricks
 Cement per Tonne
 Chemicals Litre, gallon, kilogram, ton
Cost classification
 Costs can be classified or grouped according to their common
characteristics. Proper
classification of costs is very important for identifying the costs with the cost
centers or cost units. The same costs are classified according to different ways
of costing depending upon the purpose to be achieved and requirements of a
particular concern. The important ways of classification are:
As per Cost Accounting Standard 1 (CAS-1), the basis for cost classification is as
follows:
(a) Nature of expense
(b) Relation to Object – Traceability
(c) Functions / Activities
(d) Behaviour – Fixed, Semi-variable or Variable
(e) Management decision making
(f) Production Process
(g) Time Period
(a) Classification by Nature of Expense

Costs should be gathered together in their natural grouping such as Material,
Labour and Other Direct expenses. Items of costs differ on the basis of their nature.
The elements of cost can be classified in the following three categories. 1. Material
2. Labour 3. Expenses
(b) Classification by Relation to Cost Centre or Cost Unit:

If expenditure can be allocated to a cost centre or cost object in an economically
feasible way then it is called direct otherwise the cost component will be termed as
indirect. According to this criteria for classification, material cost is divided into
direct material cost and indirect material cost, Labour cost is divided into direct
labour and indirect labour cost and expenses into direct expenses and indirect
expenses. Indirect cost is also known as overhead.
(c) Classification by Functions:

A business enterprise performs a number of functions like manufacturing, selling,
research...etc.
Costs may be required to be determined for each of these functions and on this
basis functional costs may be classified into the following types:-
(i) Production or Manufacturing Costs
(ii) Administration Costs
(iii) Selling & Distribution cost
(iv) Research & Development costs
(d) Classification based on Behaviour – Fixed, Semi-variable or Variable

Costs are classified based on behaviour as fixed cost, variable cost and semi-
variable cost depending upon response to the changes in the activity levels. These
costs are not affected by temporary fluctuation in activity of an enterprise. These
are also known as period costs. Example: Rent, Depreciation...etc.
Variable Cost: Variable cost is the cost of elements which tends to directly vary
with the volume of activity. Variable cost has two parts (i) Variable direct cost (ii)
Variable indirect costs. Variable indirect costs are termed as variable overheads.
Example: Direct labour, Outward Freight...etc.
Semi-Variable Costs: Semi variable costs contain both fixed and variable
elements. They are partly affected by fluctuation in the level of activity. These are
partly fixed and partly variable costs and vice versa. Example: Factory supervision,
Maintenance...etc.
(e) Classification based on Costs for Management Decision Making
Ascertainment of cost is essential for making managerial decisions. On this basis
costing may be classified into the following types.
Marginal Costing: Marginal Cost is the aggregate of variable costs, i.e. prime cost
plus variable overhead. Marginal cost per unit is the change in the amount at any
given volume of output by which the aggregate cost changes if the volume of
output is increased or decreased by one unit. Marginal Costing system is based on
the system of classification of costs into fixed and variable. The fixed costs are
excluded and only the marginal costs, i.e. the variable costs are taken into
consideration for determining the cost of products and the inventory of work-in-
progress and completed products.
Differential Cost: Differential cost is the change in the cost due to change in
activity from one level to another.
Opportunity Cost: Opportunity cost is the value of alternatives foregone by
adopting a particular strategy or employing resources in specific manner. It is the
return expected from an investment other than the present one. These refer to costs
which result from the use or application of material, labour or other facilities in a
particular manner which has been foregone due to not using the facilities in the
manner originally planned. Resources (or input) like men, materials, plant and
machinery, finance etc., when utilized in one particulars way, yield a particular
return (or output). If the same input is utilized in another way, yielding the same or
a different return, the original return on the forsaken alternative that is no longer
obtainable is the opportunity cost. For example, if fixed deposits in the bank are
proposed to be withdrawn for financing project, the opportunity cost would be the
loss of interest on the deposits. Similarly when a building leased out on rent to a
party is got vacated for own purpose or a vacant space is not leased out but used
internally, say, for expansion of the production programme, the rent so forgone is
the opportunity cost.
Replacement Cost: Replacement cost is the cost of an asset in the current market
for the purpose of replacement. Replacement cost is used for determining the
optimum time of replacement of an equipment or machine in consideration of
maintenance cost of the existing one and its productive capacity. This is the cost in
the current market of replacing an asset. For example, when replacement cost of
material or an asset is being considered, it means that the cost that would be
incurred if the material or the asset was to be purchased at the current market price
and not the cost, at which it was actually purchased earlier, should be take into
account.
Relevant Costs: Relevant costs are costs which are relevant for a specific purpose
or situation. In the context of decision making, only those costs are relevant which
are pertinent to the decision at hand. Since we are concerned with future costs only
while making a decision, historical costs, unless they remain unchanged in the
future period are irrelevant to the decision making process.
Imputed Costs: Imputed costs are hypothetical or notional costs, not involving
cash outlay computed only for the purpose of decision making. In this respect,
imputed costs are similar to opportunity costs. Interest on funds generated
internally, payment for which is not actually made is an example of imputed cost.
When alternative capital investment projects are being considered out of which one
or more are to be financed from internal funds, it is necessary to take into account
the imputed interest on own funds before a decision is arrived at.
Sunk Costs: Sunk costs are historical costs which are incurred i.e. sunk in the past
and are not relevant to the particular decision making problem being considered.
Sunk costs are those that have been incurred for a project and which will not be
recovered if the project is terminated. While considering the replacement of a
plant, the depreciated book value of the old asset is irrelevant as the amount is sunk
cost which is to be written-off at the time of replacement.
Normal Cost & Abnormal Cost: Normal Cost is a cost that is normally incurred
at a given level of output in the conditions in which that level of output is achieved.
Abnormal Cost is an unusual and typical cost whose occurrence is usually irregular
and unexpected and due to some abnormal situation of the production.
Avoidable Costs & Unavoidable Costs: Avoidable Costs are those which under
given conditions of performance efficiency should not have been incurred.
Unavoidable Costs which are inescapable costs, which are essentially to be
incurred, within the limits or norms provided for. It is the cost that must be
incurred under a programme of business restriction. It is fixed in nature and
inescapable.
Uniform Costing: This is not a distinct system of costing. The term applies to the
costing principles and procedures which are adopted in common by a number of
undertakings which desire to have the benefits of a uniform system. The methods
of Uniform Costing may be extended so as to be useful in inter-firm comparison.
Engineered Cost: Engineered Cost relates to an item where the input has an
explicit physical relationship with the output. For instance in the manufacture of a
product, there is a definite relationship between the units of raw material and
labour time consumed and the amount of variable manufacturing overhead on the
one hand and units of the products produced on the other. The input-output
relationship can be established the form of standards by engineering analysis or by
an analysis of the historical data. It should be noted that the variable costs are not
engineered cost but some administration and selling expenses may be categorized
as engineered cost.
Out-of-Pocket Cost: This is the portion of the cost associated with an activity that
involve cash payment to other parties, as opposed to costs which do not require any
cash outlay, such as depreciation and certain allocated costs. Out-of-Pocket Costs
are very much relevant in the consideration of price fixation during trade recession
or when a make-or-buy decision is to be made.
Managed Cost: Managed (Programmed or Discretionary) Costs all opposed to
engineering costs, relate to such items where no accurate relationship between the
amount spent on input and the output can be established and sometimes it is
difficult to measure the output. Examples are advertisement cost, research and
development costs, etc.,
Common Costs: These are costs which are incurred collectively for a number of
cost centers and are required to be suitably apportioned for determining the cost of
individual cost centers. Examples are: Combined purchase cost of several materials
in one consignment, and overhead expenses incurred for the factory as a whole.
Controllable and Non-Controllable Costs: Controllable Cost is that cost which is
subject to direct control at some level of managerial supervision. Non-controllable
Cost is the cost which is not subject to control at any level of managerial
supervision.
Classification by nature of Production or Process: OR METHODS
Batch Costing: Batch Costing is the aggregate cost related to a cost unit which
consists of a group of similar articles which maintains its identity throughout one
or more stages of production. In this method, the cost of a group of products is
ascertained. The unit cost is a batch or group of identical products instead of a
single job, order, or contract. This method is applicable to general engineering
factories which produces components in convenient economical batches.
Process Costing: When the production process is such that goods are produced
from a sequence of continuous or repetitive operations or processes, the cost
incurred during a period is considered as Process Cost. The process cost per unit is
derived by dividing the process cost by number of units produced in the process
during the period. Process Costing is employed in industries where a continuous
process of manufacturing is carried out. Costs are ascertained for a specified period
of time by departments or process. Chemical industries, refineries, gas and
electricity generating concerns may be quoted as examples of undertakings that
employ process costing.
Operation Cost: Operation Cost is the cost of a specific operation involved in a
production process or business activity. The cost unit in this method is the
operation, instead of process. When the manufacturing method consists of a
number of distinct operations, operation costing is suitable.
Operating Cost: Operating cost is the cost incurred in conducting a business
activity. Operating cost refer to the cost of undertakings which do not manufacture
any product but which provide services. Industries and establishments like power
house, transport and travel agencies, hospitals, and schools, which undertake
services rather than the manufacture of products, ascertain operating costs. The
cost units used are Kilo Watt Hour (KWH), Passenger Kilometer and Bed in the
hospital....etc.
Contract Costing: Contract cost is the cost of contract with some terms and
conditions between contractee and contractor. This method is used in undertakings,
carrying out, building or constructional contracts like constructional engineering
concerns, civil engineering contractors. The cost unit here is a contract, which may
continue over more than one financial year.
Joint Costs: Joint costs are the common cost of facilities or services employed in
the output of two or more simultaneously produced or otherwise closely related
operations, commodities or services. When a production process is such that from
a set of same input two or more distinguishably different products are produced
together, products of greater importance are termed as Joint Products and products
of minor importance are termed as By-products and the costs incurred prior to the
point of separation are called Joint Costs. For example in petroleum industry
petrol, diesel, kerosene, naphtha, tar is produced jointly in the refinery process.
By-product Cost: By-product Cost is the cost assigned to by-products till the
split-off point.
Classification by Time:
Historical Costs: Historical Costs are the actual costs of acquiring assets or
producing goods or services. They are post-mortem costs ascertained after they
have been incurred and they represent the cost of actual operational performance.
Historical Costing follows a system of accounting to which all values is based on
costs actually incurred as relevant from time to time.
Predetermined Costs: Pre-determined Costs for a product are computed in
advance of production process, on the basis of a specification of all the factors
affecting cost and cost data. Predetermined Costs may be either standard or
estimated.
Standard Costs: A predetermined norm applies as a scale of reference for
assessing actual cost, whether these are more or less. The Standard Cost serves as a
basis of cost control and as a measure of productive efficiency, when ultimately
posed with an actual cost. It provides management with a medium by which the
effectiveness of current results is measured and responsibility of deviation placed.
Standard Costs are used to compare the actual costs with the standard cost with a
view to determine the variances, if any, and analyse the causes of variances and
take proper measure to control them.
Estimated Costs: Estimated Costs of a product are prepared in advance prior to
the performance of operations or even before the acceptance of sale orders.
Estimated Cost is found with specific reference to product in question, and the
activity levels of the plant. It has no link with actual and hence it is assumed to be
less accurate than the Standard Cost.
Techniques of Costing:
A. Marginal Costing
B. Standard Costing
C. Budgetary Control
D. Uniform Costing
A. Marginal costing
Marginal Costing is the ascertainment of marginal costs and of the effect on profit
of changes in volume or type of output by differentiating between fixed costs and
variable costs. Several other terms in use like Direct Costing, Contributory
Costing, Variable Costing, Comparative Costing, Differential Costing and
Incremental Costing are used more or less synonymously with Marginal Costing.
Standard Costing
Standard Costing is defined as the preparation and use of standard cost, their
comparison with actual costs and the measurement and analysis of variances to
their causes and points of incidence. Standard Cost is a predetermined cost unit
that is calculated from the management’s standards of efficient operation and the
relevant necessary expenditure. Standard Costs are useful for the cost estimation
and price quotation and for indicating the suitable cost allowances for products,
process and operations but they are effective tools for cost control only when
compared with the actual costs of operation.
Budgetary Control
Budgetary Control involves mainly establishment of budgets, continuous
compassion of actual with budgets for achievement of targets, revision of budgets
in the light of changed circumstances.
Uniform Costing
Uniform Costing may be defined as the application and use of the same costing
principles and procedures by different Organizations under the same management
or on a common understanding between members of an association. It is thus not a
separate technique or method. It simply denotes a situation in which a number of
organizations may use the same costing principles in such a way as to produce
costs which are of the maximum comparability.
Activity Based-Costing Method
1. Identify the activities that consume resources and assign costs to those
activities. Purchasing materials would be an activity, for example.
2. Identify the cost drivers associated with each activity. A cost driver is an
activity or transaction that causes costs to be incurred. For the purchasing
materials activity, the cost drivers could be the number of orders placed or the
number of items ordered. Each activity could have multiple cost drivers.
3. Compute a cost rate per cost driver unit. The cost driver rate could be the cost
per purchase order, for example.
4. Assign costs to products by multiplying the cost driver rate times the volume
of cost driver units consumed by the product.
Activity-based costing example
Assume High Challenge Company makes two products, touring bicycles and
mountain bicycles. The touring bicycles product line is a high-volume line,
while the mountain bicycle is a low-volume, specialized product.
In using activity-based costing, the company identified four activities that
were important cost drivers and a cost driver used to allocate overhead.
These activities were (1) purchasing materials, (2) setting up machines when
a new product was started, (3) inspecting products, and (4) operating
machines.
Prepare cost sheet and find out cost of production per unit,profit per unit,
and profit for the period.
Raw materials consumed 15000
Direct Wages 9000
Machine hours worked 900
Machine hour rate 5
Administrative OH 20%On Works Cost
Selling OH 0.50 per unit
Units produced 17100
Units Sold 16000 for 4 per unit
Cost Sheet
Particulars Per unit cost Total cost Units
produced
Cost of RM Consumed 15000
Add Direct Wages 9000
PRIME COST 24000
Add Factory OH 900*5=4500 4500
WORKS COST 28500
Add Administration OH 5700
20/100*28500
COST OF PRODUCTION 2(34200/17100) 34200 17100
Add Selling OH 0.5 5800
COST OF SALES 2.5 40000 16000
SALES 4 64000 16000
PROFIT 1.5 24000 16000
cost of production per unit=2, profit per unit=1.5, and profit for the
period24000
MODULE 2
PROCESS COSTING
Process costing is the method of costing applied in the industries engaged in
continuous or
mass production. Process costing is a method of costing used to ascertain the cost
of a product at
each process or stage of manufacturing.
According to ICMA terminology, “Process Costing is that form of operation
costing which
applies where standardized goods are produced”.
So it is a basic method to ascertain the cost at each stage of manufacturing.
Separate
accounts are maintained at each process to which expenditure incurred. At the end
of each process the cost per unit is determined by dividing the total cost by the
number of units produced at each stage. Hence, this costing is also called as
“Average Costing” or “Continuous Costing”. Process Costing is used in the
industries like manufacturing industries, chemical industries, mining works and
public utility undertakings.
Characteristics of Process Costing
1. Production is continuous
2. Products pass through two or more distinct processes of completion.
3. Products are standardized and homogeneous.
4. Products are not distinguishable in processing stage.
5. The finished product of one process becomes the raw material of the subsequent
process.
6. Cost of material, labour and overheads are collected for each process and
charged accordingly.
Advantages of Process Costing
1. It is easy to compute average cost because the products are homogeneous in
Process Costing.
2. It is possible to ascertain the process costs at short intervals.
3. Process Costing is simple and less expensive in relation o job costing.
4. By evaluating the performance of each process effective managerial control is
possible.
Disadvantages of Process Costing
1. Valuation of work in progress is difficult.
2. It is not easy to value losses, wastes, scraps etc.
3. The apportionment of total cost among joint products and by-products is
difficult.
4. Process cost are not accurate, they are only average costs
5. Process costs are only historical.
Principles of Process Costing
The following points are considered while determining the cost under Process
Costing.
1. Production activity should be divided into different processes or departments.
2. A separate account is opened for each process.
3. Both direct and indirect costs are collected for each process.
4. The quantity of output and costs are recorded in the respective process accounts.
5. The cost per unit is determined by dividing the total cost at the end of each
process by the
number of output of each process.
6. Normal loss and abnormal loss are credited in the process account
7. The accumulated cost of each process is transferred to subsequent process along
with
output. The output of the last process along with cost is transferred to the finished
goods
account.
8. In case of by-products and joint products their share in joint cost should be
estimated and
credited to the main process.
9. When there is work in progress at the end of the period the computation of
inventory is
made in terms of complete units.
Difference between Process Costing and Job Costing
Process Costing
1. Production is continuous
2. Production is for stock
3. All units produced are identical or homogeneous
4. There is regular transfer of cost of one process to subsequent processes
5. Work in progress always exists
Job Costing
1. Production is according to customers’ orders
2. Production is not for stock
3. Each job is different from the other
4. There is no regular transfer of cost from one job to another
5. Work in progress may or may not exist
Procedure for Process Costing
1. Each process is separately identified. Separate process account is opened for
each process.
2. Along with ‘Particulars Column’, two columns are provided on both sides of the
process
account – units (quantity) and amount (Rupees).
3. All the expenses are debited in the respective process account.
4. Wastage, sale of scrap, by-products etc are reordered on the credit side 0f the
process
account.
5. The difference between debit and credit side shows the cost of production and
output of that
particular process which is transferred to the next process.
6. The cost per unit in every process is calculated by dividing the net cost by the
output.
7. The output of last process is transferred to the Finished Stock Account.
8. Incomplete units at the end of the each period every process s converted in terms
of
completed units.
Specimen of Process Account
Process Account
To Direct materials By sale of Scrap
To Direct Wages By Loss in weight(Normal Loss)

To Direct Expenses
To Indirect expenses
To Other Expenses (if any)
Preparation of Process Accounts
The preparation of Process Account depends upon the following situations
1. Simple Process Account
2. Process costing with normal process loss
3. Process costing with abnormal process loss
4. Process costing with abnormal process gains
5. Inter – process profits.
Simple Process Account
Under this case it is very easy to prepare process account. A separate account is
opened for
each process. All costs are debited to the process account. The total cost of the
process is
transferred to the next process. At the end of each process the cost per unit is
obtained by dividing the total cost by the number of units.
Illustration 1: Product A requires three distinct processes and after the third
process the product is transferred to finished stock. Prepare various process
accounts from the following information.
Particulars TOTAL PROCESS 1 PROCESS 2 PROCESS 3

Direct 5000 4000 600 400
Materials
Direct 4000 1500 1600 900
Labor or
Wages
Direct 800 500 300
Expenses
Production 6000 150/100*1500= 150/100*1600=2400 150/100*900=1350
overheads 2250
Production overheads to be allocated to different processes on the basis of 150% of
direct
wages. Production during the period was 200 units. Assume there is no opening or
closing stock.
PROCESS ACCOUNTS 1
PARTICULAR UNIT AMOUNT PARTICULARS UNIT AMOUNT
S
Direct Materials 200 4000 By Process 2 200 8250
Direct Labor or 1500
Wages
Direct Expenses 500
Production 2250
overheads
TOTAL 200 8250 TOTAL 200 8250
PROCESS ACCOUNTS 2
PARTICULAR UNI AMOUN PARTICULARS UNI AMOUNT
S T T T
TO Process I 200 8250
Bal
To Direct 600 By Process III 200 13150
Materials (Transfer)
To Direct Labor 1600 Cost Per
or Wages unit=13150/200=65.7
5
To Direct 300
Expenses
To Production 2400
overheads
TOTAL 200 13150 TOTAL 200 13150
PROCESS ACCOUNTS 3
PARTICULAR UNIT AMOUNT PARTICULARS UNIT AMOUNT
S
TO Process 2 200 13150
Bal
To Direct 400 By Finished 200 15800
Materials product(Transfer)
To Direct Labor 900 Cost Per
or Wages unit=15800/200=79
To Direct
Expenses
To Production 1350
overheads
TOTAL 200 15800 TOTAL 200 15800
Process losses
The process loss is classified into two- normal process loss and abnormal process
loss.
Normal process loss
This is the loss which is unavoidable on account of inherent nature of production
process. It
arises under normal conditions. It is usually calculated as a certain percentage of
input. Normal
process loss includes either waste or scrap both. Waste is unsalable and has no
value. Loss in
weight is an example of waste. Loss in weight should be credited to the concerned
process account.
It should be recorded only in terms of quantity.
Loss in weight = Opening Stock + output from the preceding process – (output of
the
Concerned process + closing stock)
ABNORMAL LOSS
Avoidable,
Due to substandard materials, carelessness of workers, machinery breakdown
Abnormal Loss=Expected Output-Actual Output
Expected output=Input-Normal Loss
Illustration 2: From the following figures, show the cost of three processes of
manufacture. The
production of each process is passed on to the next process immediately on
completion.
PARTICULARS PROCESS PROCESS PROCESS3

1 2
Wages and Materials 30400 12000 29250
Works Overhead 5600 5250 6000
Production in units 36000 37500 48000
Stock on 1 July 2012 (units from 4000 16500 units
preceding
process)
Stock on 31 July 2012 (units from 1000 5500
preceding
process)
PROCESS 2
PARTICULARS UNITS AMOUNT PARTICULARS UNITS AMOUNT
Wages and 36000 30400 By Process 2 36000 36000
Materials
Works OH 5600 Cost per unit

36000/36000=1
Total 36000 36000 Total 36000 36000
PROCESS 2
PARTICULAR UNITS AMOUNT PARTICULARS UNITS AMOUNT
S
To O/Stock 4000 4000 By Closing Stock 1000 1000
To Process 1 36000 36000 By Normal 1500
Loss40000-1000-
37500
TO Material 12000 By Process 3 37500 56250
TO Works OH 5250 Cost Per unit
56250/37500=1.5
40 000 57250
PROCESS 3
PARTICULAR UNITS AMOUN PARTICULARS UNITS AMOUNT
S T
TO Opening 16500 24750 By Closing Stock 5500 8250
Stock16500*1.5 5500*1.5
TO Process 2 37500 56250 By Process 48000 108000
Transfer Fini3(Transfer)
To Direct 29250 By Normal loss in 500
Mat&Wages weight=
To Works OH 6000 Cost Per unit=
108000/48000=2.2
5 per unit
54000 116250 54000 116250
Illustration 2: From the following figures, show the cost of processes of
manufacture. The
production of each process is passed on to the next process immediately on
completion.
PARTICULARS PROCESS PROCESS

1 2
Wages and Materials 7000 3000
Direct expenses 3000 2000
Works Overhead 2000 1000
Stock on 1 July 2012 (units from 1000@20
preceding
process)
Actual production 900 units 800 units
Scrap realized 6 Per unit 5 per unit
PROCESS 1
To Opening 1000 20000 By Normal Loss 100 600
Stock
Wages and 7000 By Process 2 900 31400
Materials
Direct expenses 3000
Works Overhead 2000
TOTAL 1000 32000 TOTAL 1000 32000
PROCESS 1
S
stock1000*20 1000-900
To Direct 7000 By Process II 900 31400
Materials& (Transfer)
Wages
To Direct 3000
expenses
To Works OH 2000 Cost Per
unit=31400/900=
34.89per unit
TOTAL 1000 32000 TOTAL 1000 32000
PROCESS 2
S
To process I 900 31400 By Normal Loss 100 500
900-800
Materials& product(Transfer)
Wages
To Direct 2000
expenses
unit=36900/800=
46.12per unit
TOTAL 900 37400 TOTAL 900 37400
From the following figures, show the cost of processes of manufacture. The
Production of each process is passed on to the next process immediately on
completion.

1 2
Wages and Materials 6000 4000
Direct expenses 2000 3000
Works Overhead 2400 3710
preceding
process)
Scrap realized 4 per unit 5 per unit
Normal Waste 10% 10%
PROCESS 1
S
stock1000*17 10/100*/1000 100*4
To Direct 6000 By Process II 900 27000
Materials& (Transfer)
Wages
To Direct 2000
expenses
unit=27000/900=
30per unit
TOTAL 1000 27400 TOTAL 1000 32000
PROCESS 2
TO process 1 900 27000 By Normal Loss 90 450
900*10/100 90*5
To Direct 4000 By Abnormal 10 460
Materials& Loss
810-800
expenses product
To Works OH 3710
TOTAL 900 37710
Cost Of Abnormal Loss=Normal cost of Normal Output/Normal Output*units
of abnormal loss
Normal Cost=37710-450=37260
Normal Output=900-90=810
Abnormal loss cost=10*37260/810=460

S
To Process I 900 27000 By Normal Loss 90 450
10/100*/900 90*5
To Direct 4000 By Abnormal 10 460
Materials& Loss
Wages
expenses product(Transfer)
To Works OH 3710 Cost Per unit=
36800/800=46per
unit
TOTAL 900 37710 TOTAL 900 37710
NORMAL LOSS ACCOUNT

To Process I 100 400 By Cash 190 850
100*4
To Process II 90 450
90*5
TOTAL 190 850 TOTAL 190 850
ABNORMAL LOSS ACCOUNT
To Process II 10 460 By Cash 10 460
TOTAL 10 460 TOTAL 10 460
Expected output=Input-Normal Loss

EO = 900-90=810
Abnormal Loss Units =Expected Output-Actual Output
AL = 810-800=10 Units

of abnormal loss
Cost of 810 units=37710-450=37260
Cost of Abnormal Loss=37260/810*10=460
completion.
Prepare Process Account, Normal Loss account, Abnormal Loss account
PARTICULARS PROCESS
X
Wages and Materials 1980
Works Overhead 100%of
Direct
Expenses
preceding
process)
Actual production 840 units
Scrap realized 4 per unit
Normal Waste 10%
PROCESS X
S
To opening 950 9500 By Normal Loss in 95 95*4
Stock 380
Wages and 1980 By Abnormal Loss 15 300
Materials 855-840
Direct expenses 3000 By Finshed Product 840 16800
Works OH 3000 Cost per
unit=16800/840=20
TOTAL 950 17480 TOTAL 950 17480

of abnormal loss
Cost of 855 units=17480-380=17100
Cost of Abnormal Loss=17100/855*15=300
NORMAL LOSS ACCOUNT

To Process X 95 380 By Cash 95 380

ABNORMAL LOSS ACCOUNT
To Process X 15 300 By Cash 15 15*4=60
By P/L 240
completion.
Prepare Process Account, Normal Loss account, Abnormal Loss account
PARTICULARS PROCESS
X
Wages and Materials 40000
Works Overhead 27000
Actual production 4550 Units
Scrap realized 2 per unit
Normal Waste 5%
Units introduced 5000
92437 for 4550 units
completion.
PARTICULARS PROCESS PROCESS PROCESS

1 2 3
Wages and Materials 40000 20000 10000
Direct expenses 6000 4000 1000
Works Overhead 10000 10000 15000
Stock on 1 July 2012 (units from 10000 units
preceding
process)
Actual production 9750 units 9400 units 8000 units
Normal Waste 2% 5% 10%
completion.
Par Unit Amt Par Unit Amt
To Material 10 000 40000 By Normal 200 -
Loss
2/100*10000
Direct 6000 By 50 286
expenses Abnormal
Loss 9800-
9750
Works OH 10000 By Process 2 9750 55714
total 10000 56000 TOTAL 10000 56000
Cost of Abnormal Loss = 56000/9800*50=286

TO Process 9750 55714
1
To Material 20000 By Normal 488
Loss
5/100*9750
Direct 4000
expenses
Works OH 10000 By Process 9400 91051
3
To 138 1337
abnormal
gain 9400-
9262
total 9888 91051 TOTAL 9888 91051
Normal Cost=55714+20000+4000+10000=89714
Normal Output=9750-488=9262
Abnormal Cost=89714/9262*138=1337

1 2
Raw materials used 7500@ 60
Wages 1 35 750 1 29 250
Direct expenses 60% of 65% of
Wages Wages
Works Overhead 20% of 15%of
Wages Wages

Scrap realized 12.5 per 37.5 per
unit unit
Normal Waste 5% 10%
6000 units of finished goods were sold at a profit of 15% on cost. Assume that
there is Opening stock.
Particulars Units Amount Particulars Units Amount
To Raw 7500 4 50 000 By Normal 375 4 687
materials Loss
5/100*7500
TO Wages 1 35 750 By 75 7 260
Abnormal
Loss
To 81 450 By Process 7050 6 82 403
Expenses II
To Works 27 150 Per Unit
OH 96.79
TOTAL 7500 6 94 350
Cost of Abnormal Loss =6 94 350- 4 687/7500-375*75
=689663/7125*75= 96.79*75=7 260//
Particulars Units Amount Particulars Units Amount
To Raw 7050 6 82 403 By Normal 705 705*37.5
materials Loss 26437.5
10/100*7050
TO Wages 1 29 250
To 84 012.5 By Finished 6 525 9 13 824.5
Expenses Pro 140.05
To Works 19 387.5
OH
To 180 25 209
Abnormal
gain 6345-
6525
TOTAL 7230 940262 TOTAL 7230 940262
Normal Cost of Normal output= 9 15 053-26 437.5=8 88 615.5

Cost of Abnormal Loss = 888 615.5/6345*180=25 209
Finished goods stock account
To Process 6525 9 13 824 By Cost of 6000 8 40 300
II Sale 140.05
By Balance 525 73524
C/d
Home work
completion.
PARTICULARS PROCESS PROCESS PROCESS

1 2 3
Materials 2600 1980 2962
Direct wages 2000 3000 4000
Works Overhead 9000 100% of 100% of 100% of
Wages Wages Wages
Stock on 1 July 2012 (units from 1000
preceding units@ 3
process)
Actual production 950 units 840 units 750 units
Value of scrap 2 4 5
750 units @28500
Abnormal Loss Account

To Process 15 300 By Cash 15 60
2 Sale of
Scrap 15*4
By P/L 240
Total 15 300 Total 15 300
Abnormal Gain
To Normal 36 180 By Process 3 36 1368
Loss
( Shortfall
in sale36*5
TO P/L 1188
Total 36 1368 Total 36 1368
Normal Loss Account

To Process 50 100 By 36 180
1 Abnormal
Gain
TO Process 95 380 By Cash 235 930
2
TO Process 126 630
3
HOMEWORK
Prepare process accounts
PARTICULARS PROCESS 1 PROCESS PROCESS
2 3
Materials 120000 40000 40000
Direct wages 80000 60000 60000
Production expenses 40000 40000 28000
Stock on (units from preceding 40000@320000
process)
Actual production 38000 34600 32000
Value of scrap 70 paise 80 paise 1 rs
Process 1
To O/S 40000 320000 Normal Loss 2000 1400
5/100*40000=2000
To 120000
Material
To Wages 80000 By Process 2 38000 558600
TO 40000
Expenses
Total 40000 560000
32000@828700
Prepare process accounts for purchase of 500 tonnes @200000

PARTICULARS Crushing Refining Finishing
Cost of Labour 2500 1000 1500
Power 600 360 240
Materials 100 2000 -
Repairs to plant 280 330 140
Steam 600 450 450
Factory expenses 1320 660 220
Cost of casks 7500
175 tonnes of Copra residue sold 11000
Loss in weight in crushing 25 tonnes
45 tonnes by product was obtained from refining process @ 6750
Sale of Copra Sacks 400
Prepare process account
Copra Crushing Process Account
Particulars Tonnes Amount Particulars Tonnes Amount

To Copra 500 200 000 By Sale of 175 11000
O/S Copra
Cost of 2500 By Loss in 25
Labour Weight
Power 600 By Sale of 400
Sacks
Materials 100 By Balance 300 194000
C/d
Repairs to 280 Per Tonne Cost
plant 194000/300=647
Steam 600
Factory 1320
expenses
TOTal 500 205400 TOTal 500 205400
Copra Refining Process Account

To Copra 300 194000 By Sale of by 45 6750
Crushing product
Cost of 1000 By Loss in 5 -
Labour Weight
Power 360
Materials 2000 By Balance C/d 250 192050
plant 192050/250=768.2
Steam 450
Factory 660
expenses
TOTal 300 198800 TOTal 300 198800
Finishing Process Account
To Copra 250 192050
refining
Cost of 1500 By Loss in 2 -
Labour weight
Power 240
Materials - By Balance C/d 248 202100
plant =202100/248=81
5
Steam 450
Factory 220
expenses
Cost of 7500
Cask
TOTal 250 202100 TOTal 250 202100
Prepare process accounts for purchase of 5000 tonnes @2 per tonne

PARTICULARS 1 2 3
Cost of Labour 3000 5000 8000
Expenses 9750 9910 15560
Overhead 32000 chargeable as -
percentage of wages
Scrap value 1 5 6
Normal Loss in percentage 5 10 5
Prepare process account and abnormal gain/loss account
4050-89100
To O/S 5000 10 000 By Normal 250 250
loss
To Wages 3000 By 50 300
Abnormal
Loss
To 9750 By Process 4700 28200
Expense 2
To O H 6000
3/16*32000
Total 5000 28750 Total 5000 28750
Abnormal Loss=28500/4750*50=300
To Process 4700 28200 By Normal 470 2350

1 loss
To Wages 5000
To 9910 By Process 4300 51600
Expense 2
To O H 10000
5/16*32000
TO 70 840
Abnormal
Gain
Total 4770 53950 Total 4770
Abnormal Loss=53110-2350/4700-470=50760/4230*70
To Process 4300 51600 By Normal 215 1290
2 loss 5%@6
To Wages 8000 By 35 770
Abnormal
Loss
To 15560 By 4050
Expense Finished
stock
To O H 16000
8/16*32000
Total 53950 Total

Abnormal Gain A/c
To Normal 70 350 By Process 70 840
Loss 2
Shortfall
To p&l
Normal Loss 865-3540

Abnormal Loss A/c 810
Prepare process accounts for purchase of 10000 tonnes @100 per tonne
PARTICULARS 1 2 3
Cost of Labour 36000 98150 99200
Material 10000 15000 5000
Selling price per tone 120 165 250
Weight loss
Scrap value 2 5 10
Normal Loss in percentage 5 15 20
Actual output 9300 5400 2100
Management expenses 17500, selling expenses 10000 interest 4000. 2/3 of
process 1 and ½ of process 2 are passed to next process and balance is sold
Prepare process account and abnormal gain/loss account
Process Account1
O/S 10000 10 00 000 By Normal 500 1000
Loss
Cost of 36000 By Abnormal 200 22000
Labour Loss200*110
Material 10000 By Sale 3100 372000
3100*120
To Profit 3100 31000 By Process 6200 682000
3100*10 2/3*9300
Total 10000 1046000 Total

Cost per unit=1046000-1000/9500=110
Profit=120-110=10
Process Account1
O/S 600 1 80 000 By Loss in 60 -
weight
Cost of 40 800 By Normal 30 1500
Labour Loss
TO 255 255*70=17850 By Sale 255 255*500=127500
Profit on
Sale
tonnes
50per
tone
By 255 109650
Process1/2*510
220800-1500/600-30-60=219300/510=430
Sales=500-430=70
Process 3
TO Process 2 255 109650 By Loss in 51 -
weight
TO 10710 By Normal 51 2550
Manufacturin Loss 51*50
g
Cost per unit=496800/2160=230*60
JOINT PRODUCTS
Two or more products separated in the course of same processing operation,

usually requiring further processing, each product being in such proportion
that no single product can be designated as a major product.
All cost incurred prior to split off point is called joint cost
The products are not identifiable as different individual products until a

certain stage of production known as split off point.
A factory produces 3 Products A, B, C of equal value from same
manufacturing Process. Their joint cost before split off point is 19600. Show
apportion of Joint cost of manufacture.
Particulars A B C
Material 1500 1300 1000
Labour 200 150 100
OH 800 550 400
Selling Price 30 000 24 000 20 000
Estimated Profit 30% 25% 20%
on selling price
Produc Sales Profit Estimate Cost Cost Actual Cost
t 1 2 d after at Apportioned
Cost3=1- Split Split3
2 4 -4
A 30 9000 21 000 2500 18500 18500/49000*1960 7400
000 0
B 24 6000 18 000 2000 16000 16000/49000*1960 6400
000 0
C 20 4000 16 000 1500 14500 5800
000
Total 74000 19000 55000 6000 49000 1960
0
Particulars A B C
Material 100 75 25
Labor 200 125 50
OH 150 125 75
Selling Price 6000 4000 2500
Estimated Profit 30% 25% 15%
on selling price
By Products Costing
Is a Product which is recovered incidentally from the material used in the
manufacture of main products having realizable or saleable value which is
relatively low in comparison with main product.
In a certain period 500 units of main product are produced and 400 units are
sold @ 50 per unit. The byproduct emerging from main product is sold at
1000. The total cost of production of 500 units is 15000. Calculate G/P after
crediting By product value a) cost of production and b) cost of sales
a) When By product is credited to cost of production and
Sales 400@ 50 20 000
Cost of Production 15000
500@30
Less value of By 1000
product
Cost of Production( per 14000
unit=14000/500=28
Less Closing stock 2800 11200
100*28
G/p 88 00
B) When By product is credited to cost of Sales
Sales 400@ 50 20 000
Cost of Production 15000
500@30
Less C/S 100*30 3000
Less Byproduct 1000 11000
G/P 9000
MODULE 3
JOB AND BATCH COSTING
Job Costing
Meaning of Job Costing
Job: A Job refers to any specific assignment, contract or work order wherein work
is executed as per customer's specific requirements. The output of the job
generally consists of one unit or a manageable number of units. Ascertainment of
cost of each Job is called Job Costing. 2. Examples: Job Costing is applied in -
Printing Press, Furniture, Hardware, Ship-Building, Heavy Machinery, Interior
Decoration, Repairs and other similar work.
Situations when Job Costing is used Job–

1. When jobs are executed for different customers according to their
specifications
2. When no two orders are alike in all respects and each order/job needs
special treatment.
3. Where WIP differs from period to period on the basis of the number of
jobs in hand at different stages of completion.
Advantages of Job Costing
Advantages
1. Helps in Cost Ascertainment, and ensures Profit in determining Selling Price
as Cost + Profit. 2. Aids Production Planning and Control. 3. Easy to
implement Budgetary Control and Standard Costing. 4. Provides details of
Direct and Indirect Costs by type (Material, Labour, Expenses, etc.) 5. Easy
to handle spoilage, defectives, etc.
Disadvantages
1. Time consuming, costly and laborious clerical process. 2. Higher
possibilities of errors in Job Cost Estimates. 3. Not suitable for long term
work, or in inflationary situations. 4. Not suitable for inclusion in
Accounting System, since Actual Direct Costs and Estimated Indirect
Costs are used, leading to absorption differences.
Batch Costing
Meaning of Batch Costing
Batch: Where the output of the job consists of homogeneous (similar) units, a lot
(or) collection of similar units may be used as a cost unit for ascertaining cost.
Such lot or collection of units is called as a Batch.
Batch Costing: It is a form of Job Costing, wherein cost is ascertained for a

collection / lot of units called a batch. Separate Cost Sheets are maintained for
each batch of products by assigning a batch number. Cost per unit = Total Costs
for the Batch Number of items produced in the Batch 3.
Examples: Batch Costing is applied in - (a) Pharmaceutical or medicine industries,
(b) Radio / TV / Computer manufacturing industries, etc.
Situations when Batch Costing is used Batch Costing may be used in the
following circumstances –
1. When the output of a job consists of a number of units and it is not economical
to ascertain cost of every unit of output independently, e.g. printing of Visiting
Cards.
2. When customer's annual requirement is to be supplied in uniform quantities
over the year.
3. When certain features like size, colour, taste, quality etc. are required
uniformly over a collection of units, e.g. garments of the same size,
pharmaceuticals, etc.
4. When an internal manufacturing order is made out for production of
components / subparts, e.g. component parts of automobiles, radio sets,
watches, etc.
Batch Cost Ascertainment Batch Costing is an extension of Job Costing. Hence cost
is ascertained in the same manner as for jobs. Typically, cost of each batch is
ascertained as under –
1. Materials: Material Requisitions are priced in the cost department. Material
Cost is thus allocated to the relevant batch for which they are issued.
2. Labour: Time Sheets or Job tickets are prepared to determine the amount of
time spent on each batch. Direct Wages are charged to batch by multiplying the
time spent at the appropriate wage rate.
3. OH: OH are absorbed on appropriate basis, e.g. Percentage of Direct Labour,
Labour Hour Rate, etc.
Economic Batch Quantity

1. Meaning: Economic Batch Quantity (EBQ) represents the optimum size for
batch production, at which the total of Set- Up Costs per annum, and Inventory
Carrying Costs per annum, are minimum.
2. Costs: The determination of EBQ involves two types of costs.
These are - (a) Set-up Cost (or Preparation Cost): The processing of a particular
batch gives rise to clerical and machine set up costs followed by machine
disassembly costs on completion of the batch. These costs are incurred in
connection with each batch processed, and are independent of the size of the
batch. (b) Carrying Cost (or Holding Cost): The larger the batch size, the greater
will be number of units in inventory. Hence the costs associated with
holding/carrying the inventory like space-occupancy, interest, etc. will also be
higher. These are Carrying Costs.
3. EBQ: If Batch Size increases, there is an increase in the carrying cost but the set
up cost per unit of product is reduced, this situation is reversed when the batch
size decreases. Thus there is one particular batch size for which the total of set up
and carrying costs are minimum. This size is known as Economic or Optimum
Batch Quantity.
4. Formula: EBQ can be determined with the help of the following formula - EBQ =
√ 2AS /C , where A = Annual Demand for Finished Product (in units). S = Set-Up
Cost per batch. C = Carrying Cost per unit of Finished Product per annum.
Job costing vs Batch Costing
Job Costing
Job refers to any specific assignment, contract or work order wherein work is
executed as per customer's specific requirements.
Cost Ascertainment Cost is ascertained for the job, which may consist of one unit
or service
Batch Costing :
Batch refers to a collection / lot of similar units under a Job.
Cost is ascertained for the batch as a whole and then expressed by dividing total
cost by Batch Quantity
A Company needs supply of 10000 cones per day . He can produce 25000 cones
per day. Cost of holding for one year is 2 paise for 1 year. Setting up cost is 18 rs
for an year. Calculate EBQ and Frequency of Production?
EBQ= √ 2AS /C
A= 10 000 cones *365=36 50 000
S=18
C=0.2
√131400000/0.2= √ 6 5 7000 000=25632
Frequency of Production=25632/10000=2.5 days
A Company needs demand of 2000 Annually.. Cost of holding for one year is 10
for 1 year. Setting up cost is 100 for an year. Calculate EBQ and Frequency of
Production?
2*2000*100/10=200 units
Frequency=200/2000*365=36.5 days
A Company needs demand of 24000Annually.. Cost of holding for one year is 0.36
for 1 year. Setting up cost is 120 for an year. Calculate EBQ and Frequency of
Production?
2*24000*120/0.36=4000 unit4000/24000*365=61 days
A Company needs demand of 25 units PM Cost of holding is 50 paise per unit per
month .Setting up cost is 30 for an year. Calculate EBQ and Frequency of
Production?
2*25*12*30/.50*12
55/300*365=66 Days
55/25*30=66 Days
A Company needs demand of 24000Annually.. Cost of holding for one year is 10

paise per month . Setting up cost is 324 for an year. Calculate EBQ and Frequency
of Production?
JOB AND BATCH COSTING EXCERISE
The given information is taken from the engineering works in respect of

Job N O 404
Material 4010
Wages Department A 60 hours @3 per hour
Wages Department B 40 hours @2 per hour
Wages Department C 20 hours @5 per hour
O H Department A Rs 5000 for 5000 labor hour
O H Department B RS 3000 for 1500 labor hour
O H Department C Rs 2000 for 500 labor hour
Fixed 20000 for 10000 working hours
Calculate the cost of JOB NO 404 and S. price of job to give a profit of 25
% on sales=25/100*SALES=1/4*sales=1/3*Cost
JOB COST SHEET ( JOB NO 404)
PARTICULARS AMOUNT AMOUNT
Material 4010
Wages Department A 60*3=180
Wages Department B 40*2=80
Wages Department C 20*5=100 360
PRIME COST 4370
O H Department A 60
O H Department B 80
O H Department C 80 220
Fixed OH 240
TOTAL COST 4830
Profit 1/3*4830 1610
SELLING PRICE 6440
1/3*sales=1/2*cost
1/4*sales=1/3*Cost
1/5* Sales=1/4*Cost
100-25=75%=4830
25%=4830*25/75=1610//
WN
O H per hour=O H Department A 5000/5000=1*60=60
O H Department B 3000/1500=2*40=80
O H Department C 2000/500=4*20=80
Fixed OH=20000/10000=2*(60+40+20)=240
Job N O 405
Material 5010
Wages Department A 90 hours @3 per hour
Wages Department B 60 hours @2 per hour
Wages Department C 40 hours @5 per hour
O H Department A Rs 5000 for 5000 labor hour
O H Department B RS 3000 for 1500 labor hour
O H Department C Rs 2000 for 500 labor hour
Fixed 20000 for 10000 working hours
Job N O 406
Material 90000
Wages Department A 75000
Selling O H 52500
Administration Oh 42000
Factory Oh 45000
Profit 60900
During the year 2011, Factory receives order for number of Jobs. It is
estimated that Materials required would be 1 20 000 and wages 75000.
What would be the price for the job, if factory intends to earn same profit
assuming that selling and distribution OH have gone up by 15%?
The factory recovers Factory OH as a percentage of Wages and

administration and selling and distribution OH as a percentage of Works
Cost ,
Calculate the cost of JOB NO 406
Prime Cost = 1 65 000, Works Cost= 210 000, Cost of Production= 2 52000
Cost of Sales=304500 Selling Price=365400
Profit % on Cost= 60900/304500*100=20%=1/5
Profit % on Sales=60900/365400*100=16.66=1/6
Estimated Job Cost Sheet for the year 2011
Material 1 20 000
Wages 75 000
PRIME COST 1 95 000
Factory O H (60/100*75000) 45 000
WORKS COST 2 40 000
Administration O H(20/100*240000) 48 000
COST OF PRODUCTION 2 88 000
Selling & Distri O H( 28.75%* 240000) 69 000
Cost of Sales 357 000
Profit= 1/5*357000 71400
Selling Price 4 28 400
Factory OH as a percentage of Wages=45000/75000*100=60%
Administration OH as a percentage of Works Cost=42000/210000*100=20%
Selling OH as a percentage of Works Cost 52500+ (15/100*52500)=60 375
% = 60 375/2 10 000*100= 28.75%
The following is the information for 31.03.2021

PARTICULARS COMPLETED JOB W.I.P
Raw material supplied 90 000 30 000
Wages 1 00 000 40 000
Chargeable exp 10 000 4000
Material transferred to 2000 2000
WIP
Material returned to 1000
store
Factory OH was 80% of Wages and Office O H is 25% of Factory Cost. The
price of executed Job during the year is 4 10 000
Prepare Job Cost Sheet.
COMPLETED JOB
Job Cost Sheet
Particulars Amount
Raw material supplied 90 000
Less : Material transferred to WIP 2000
Less: Material returned to store 1000 87000
Wages 1 00 000
Chargeable exp 10 000
PRIME COST 1 97 000
Factory OH 80000
WORKS COST/FACTORY COST 2 77000
Office O H 69 250
COST OF PRODUCTION 346 250
PROFIT 63750
SALES 410000
Calculate cost and profit of JOB 111

Raw material supplied 8000
Wages 10000
Chargeable exp 2000
Factory O h 50% of Wages
Office O H 20% of Factory cost
Profit 25% of Sales1/4*Sales=1/3*Cost
25/75*30000
The following is the information for 31.12.2021

PARTICULARS COMPLETED JOB W.I.P
Raw material supplied 50 000 10000
Wages 35000 7000
Chargeable exp 7500 500
Material returned to 500

store
Work expenses was 60% of Prime cost and Office O H is 30% of works Cost.
The price of executed Job during the year is 2 50 000
Prepare Job Cost Sheet.
COMPLETED JOB
Job Cost Sheet
Particulars Amount
Direct Material 50000 49 500
Less returns to store 500
Wages 35 000
Direct Exp 7500
PRIME COST 92 000
Work Expenses 55 200
WORKS COST 147 200
Office O H 44160
COST OF PRODUCTION 191360
PROFIT 58640
SALES 250000
MODULE 4
Basics of cost audit
COST AUDIT
Cost audit involves an examination of cost books, cost accounts, cost statements
and subsidiary and prime documents with a view to satisfying the auditor that
these represent true and fair view of the cost of production. This includes the
examination of the appropriateness of cost accounting system.
According to Chartered Institute of Management Accountants, London (CIMA),

cost audit is “the verification of the correctness of cost accounts and of the
adherence to the cost accounting plan”. in other words, cost audit is the
verification of the cost of production of any product, service or activity on the
basis of accounts maintained by an enterprise in accordance with the accepted
principles of cost accounting. This definition of Cost Audit is relevant to the
voluntary cost audit without any statutory backing. The Institute of Cost
Accountants of India on the other hand, defines cost audit as “a system of audit
introduced by the government of india for the review, examination and appraisal
of the cost accounting records and attendant information, required to be
maintained by specified industries.” Thus the concept and scope of cost audit as
defined in India is more specific and lays emphasis on the evaluation of the
efficiency of operations and the propriety of management actions as introduced
by the Government of India for specified industries. In this sense, cost audit in
India appears to be synonymous with efficiency audit mainly as a guide for
management policy and decision making besides being a barometer of actual
performance.
Objectives of cost audit

Cost audit has both general and social objectives.
The general objectives can be described to include the following :
 Verification of cost accounts with a view to ascertaining that these have been
properly maintained and compiled according to the cost accounting system
followed by the enterprise.
 Ensuring that the prescribed procedures of cost accounting records rules are
duly adhered to.
 Detection of errors and fraud.
 Verification of the cost of each “cost unit” and “cost center” to ensure that
these have been properly ascertained.
 determination of inventory valuation.
 Facilitating the fixation of prices of goods and services.
 Periodical reconciliation between cost accounts and financial accounts.
 Ensuring optimum utilization of human, physical and financial resources of the
enterprise.
 detection and correction of abnormal loss of material and time.
 inculcation of cost consciousness.
 Advising management, on the basis of inter-firm comparison of cost records, as
regards the areas where performance calls for improvement.
 Promoting corporate governance through various operational disclosures to
the directors.
Among the social objectives of cost audit, the following deserve special mention :
 Facilitation in fixation of reasonable prices of goods and services produced by
the enterprise.
 Improvement in productivity of human, physical and financial resources of the
enterprise.
 Channelising of the enterprise resources to most optimum, productive and
profitable areas.
 Availability of audited cost data as regards contracts containing escalation
clauses.
 Facilitation in settlement of bills in the case of cost-plus contracts entered into
by the government.
 Pinpointing areas of inefficiency and mismanagement, if any for the benefit of
shareholders, consumers, etc., such that necessary corrective action could be
taken in time.
Maintenance of cost Records and cost audit are governed by the provisions of
companies act, 2013.
 Section 2(13) of Companies Act, 2013, defines the ‘books of accounts’ to be
maintained by the Companies. it includes “the items of cost as may be prescribed
under section 148 in the case of a company which belongs to any class of
companies specified under that section ;”
 section 128 of companies act, 2013, talks about the “Books of account, etc., to
be kept by company”,
 section 148 of companies act, 2013, empowers the “central government to
specify audit of items of cost in respect of certain companies” and
 sub-sections (2) to (5) of section 147 of companies act, 2013 contain the
provision of “Punishment for contravention”
 section 469 which empowers central government to make Rules .
ADVANTAGES
Cost information enables the organization to structure the cost, understand it and use it for
communicating with the stakeholders
 costing is an important tool in assessing organizational performance in terms of shareholder and
stakeholder value. It informs how profits and value are created, and how efficiently and effectively
operational processes transform input into output. it contributes to the data input on economy level
parameters like resources efficiency, waste management, resources allocation policies etc.
 costing includes product, process, and resource-related information covering the functions of the
organization and its value chain. costing information can be used to appraise actual performance in the
context of implemented strategies.
good practice in costing should support a range of both regular and non-routine decisions when
designing products and services to : • meet customer expectations and profitability targets; • assist in
continuous improvements in resources utilisation; and • guide product mix and investment decisions.
 Working from a common data source (or a single set of sources) also helps to e nsure that output
reports for different audiences are reconcilable with each other.
 Integrating databases and information systems can help to provide useful costing information more
efficiently as well as reducing source data manipulation.
Which rules govern maintenance of cost accounting records and cost audit as
per Section 148 of the Companies act, 2013?
The Central Government issued Companies (Cost Records and Audit) Rules,
2014 on June 30, 2014. subsequently, it issued companies (cost Records and
audit) amendment Rules, 2014 on december 31, 2014. The Amendment Rules
has introduced certain changes to the original Rules issued on June 30, 2014.
The companies (cost Records and audit) Rules, 2014 read with the
amendment Rules 2014 are now applicable and governs the maintenance of
cost accounting records and cost audit as per section 148 of the companies act,
2013.
1.2 What is the applicability of the Companies (Cost records and audit) rules,
2014 and what is the date on which it becomes effective and applicable?
(a) The Rules have classified sectors/industries under Regulated and Non-
Regulated sectors. The sectors/ industries covered under Table A of the Rules
are under the Regulated Sector and sectors/industries covered under Table B
are under the Non-Regulated Sector.
(b)Every company, including foreign companies defined in clause (42) of

section 2 of the Act, engaged in the production of the goods or providing
services, specified in Tables A and B, having an overall turnover from
all its products and services of rupees thirty five crore or more during
the immediately preceding financial year, shall be required to maintain
cost accounting records. However, foreign companies having only
liaison office in India and engaged in production, import and supply or
trading of medical devices listed in Sl. 33 of Table B are exempted.
(c) Further, companies which are classified as a micro enterprise or a small
enterprise including as per the turnover criteria under sub-section (9) of
section 7 of the Micro, Small and Medium Enterprises Development
Act, 2006 (27 of 2006) are also excluded from the purview of the Rules.
(c) the Rules are effective from april 1, 2014 in respect of certain class of
companies and for the others it is effective from April 1, 2015 as
detailed below:
1. telecommunication services made available to not applicable

users by means of any transmission or reception of
signs, signals, writing, images and sounds or
intelligence of any nature (other than broadcasting
services) and regulated by the telecom Regulatory
authority of india under the telecom Regulatory
authority of india act, 1997 (24 of 1997);
What constitutes the cost records under rule 2(e)? As per Rule 2(e) the Companies (Cost
Records and Audit) Rules, 2014
“cost records” means ‘books of account relating to utilization of materials, labour and other
items of cost as applicable to the production of goods or provision of services as provided in
section 148 of the act and these Rules’. there cannot be any exhaustive list of cost accounting
records. Any transaction - statistical, quantitative or other details - that has a bearing on the cost
of the product/activity is important and form part of the cost accounting records. Cost records
are to be kept on regular basis to make it possible to “calculate per unit cost of production/
operations, cost of sales and margin for each of its products for every financial year on
monthly/quarterly/ half-yearly/annual basis“. What is required is to maintain such records and
details in a structured manner on a regular basis so that accumulation is possible on a periodical
basis.
Who can be appointed as a cost auditor?

Only a Cost Accountant, as defined under section 2(28) of the Companies Act, 2013, can be
appointed as a cost auditor. Clause (b) of sub-section (1) of section 2 of the Cost and Works
Accountants Act, 1959 defines “Cost Accountant”. It means a Cost Accountant who holds a valid
certificate of practice under sub-section (1) of section 6 of the Cost and Works Accountants Act,
1959 and is in whole-time practice. Cost Accountant includes a Firm of Cost Accountants and a
LLP of cost accountants

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COST ACCOUNTING

Introduction, Objectives of Cost Accounting, Material, Employee and overhead

Cost Accounting : Cost Accounting may be defined as “Accounting for costs

Objectives of Cost Accounting

The following are the main objectives of Cost Accounting:-

COST OBJECT, COST CENTERS AND COST UNIT – ELEMENTS OF COST

 Direct Material + Direct Labour + Direct Expenses = Prime Cost

Direct Material Cost

ADD Factory Overheads

COST OF PRODUCTION 158875

(a) Classification by Nature of Expense

(b) Classification by Relation to Cost Centre or Cost Unit:

(c) Classification by Functions:

(d) Classification based on Behaviour – Fixed, Semi-variable or Variable

Classification by nature of Production or Process: OR METHODS

Activity-based costing example

To Direct Wages By Loss in weight(Normal Loss)

Particulars TOTAL PROCESS 1 PROCESS 2 PROCESS 3

PARTICULARS PROCESS PROCESS PROCESS3

Works OH 5600 Cost per unit

PARTICULARS PROCESS PROCESS

PARTICULARS PROCESS PROCESS

PARTICULAR UNITS AMOUNT PARTICULARS UNITS AMOUNT

PARTICULARS UNITS AMOUNT PARTICULARS UNITS AMOUNT

Expected output=Input-Normal Loss

Cost Of Abnormal Loss=Normal cost of Normal Output/Normal Output*units

TOTAL 950 17480 TOTAL 950 17480

PARTICULARS UNITS AMOUNT PARTICULARS UNITS AMOUNT

TOTAL 95 380 TOTAL 95 380

PARTICULARS PROCESS PROCESS PROCESS

Cost of Abnormal Loss = 56000/9800*50=286

PARTICULARS PROCESS PROCESS

Actual production 7050 units 6525 units

Normal Cost of Normal output= 9 15 053-26 437.5=8 88 615.5

PARTICULARS PROCESS PROCESS PROCESS

750 units @28500

Abnormal Loss Account

Normal Loss Account

Prepare process accounts for purchase of 500 tonnes @200000

Particulars Tonnes Amount Particulars Tonnes Amount

Particulars Tonnes Amount Particulars Tonnes Amount

Prepare process accounts for purchase of 5000 tonnes @2 per tonne

To Process 4700 28200 By Normal 470 2350

Total 53950 Total

Normal Loss 865-3540

Total 10000 1046000 Total

Cost per unit=496800/2160=230*60

Two or more products separated in the course of same processing operation,

The products are not identifiable as different individual products until a

Situations when Job Costing is used Job–

Batch Costing: It is a form of Job Costing, wherein cost is ascertained for a

Economic Batch Quantity

A Company needs demand of 24000Annually.. Cost of holding for one year is 10

JOB AND BATCH COSTING EXCERISE

The given information is taken from the engineering works in respect of

The factory recovers Factory OH as a percentage of Wages and

The following is the information for 31.03.2021

Calculate cost and profit of JOB 111

The following is the information for 31.12.2021

Material returned to 500

Basics of cost audit

According to Chartered Institute of Management Accountants, London (CIMA),

Objectives of cost audit

(b)Every company, including foreign companies defined in clause (42) of