COST ACCOUNTING

Brief

1. The cost accounting is measuring, analyzing, and reporting financial and non-

financial information relating to the costs of acquiring or using resources in an
organization. A firm's cost accounting system primarily uses three major costs.
These costs are direct materials, direct labor, and manufacturing overhead. When
analyzed, these costs can provide a firm with a lot of information to help guide
decisions, such as pricing, performance, efficiencies, cost control, and more.

2. Direct materials are the materials that become an integral part of the finished
product and whose costs can be directly traced to the finished product in an
economically feasible way. Direct materials are variable costs. For example, the
wood used to build wooden chairs is direct material. Direct labor is the labor costs
that can be easily traced to a product in an economically feasible way. Direct labor
costs are variable costs. For example, the hourly production workers who assemble
the wooden chair are considered direct labor costs.
3. Manufacturing overhead costs are all manufacturing costs that can't be directly
traced to a product in an economically feasible way. Manufacturing overhead costs
can be fixed or variable. For example, the production manager's salary is a fixed
manufacturing overhead cost, whereas utilities related to the production facility have
variable characteristics.
4. A toy manufacturing unit procures plastic as a raw material. The cost of plastic is
direct material cost. The costs incurred in the packing and transportation of the same
is the indirect material cost. Similarly, the labour cost for the production of toys is the
direct labour cost whereas the salary of the production supervisor will be indirect
labour cost.

Objectives of Cost Accounting

5. There are direct relationship among information need in management, cost

accounting objectives, and techniques and tools used for analysing cost accounting.
The following are the three objectives: -

(a) To determine product costs.

(b) To facilitate planning and control of regular business activities.
(c) To supply information for short and long run decisions.

Different Types Of Costs

6. For analyzing the various costs it is imperative to first understand the types of
costs.

(a) Fixed Costs The costs that remain constant despite changes in production,
process or projects are referred to as fixed costs. For example, in a
manufacturing unit the salaries of the office staff will remain fixed
irrespective of the production. 

(b) Variable Costs These costs vary with the production, process or project
changes. For example, in an organization manufacturing toy the material
and labour cost will be dependent on the production.
 (c) Opportunity Cost The cost incurred in selecting one option over another is
called opportunity cost. For example, in a toy manufacturing unit with limited
labour hours and material, the decision to produce one particular toy say
‘Dancing Monkey’ will result in non-production of another toy say ‘Spinning
top’. So, while considering the profitability of toy ‘Dancing Monkey’ the
organization has to consider the profit of ‘Spinning top’ that it forgoes.

(d) Sunk Cost Certain costs are incurred and cannot be recovered these are
sunk costs. Continuing with our example of toy manufacturing unit, sunk
costs would refer to machinery cost that has been incurred.

Different Methods of Costing

7. Since each business is so varied from the other, the method of costing cannot be
uniform.  The different methods of costing used by different businesses are
summarized here under: -

Method Business
(a) Job Costing - Costs incurred for a particular job Advertising
can be easily identified.
(b) Contract costing - Similar to job costing but the Construction
duration of
assignment is longer.  
(c) Unit costing - The costs are incurred for a fixed Mining
quantity.
(d) Batch costing - The costs incurred for a fixed Manufacturing of Spare
number of units forming a batch. parts
(e) Process costing-The processes involved are Textile units
easily distinguished.
(f) Operating costing-The costs are incurred for Hospitals
services rendered.

8. The objective of determining the cost of products is of prime importance in cost

accounting. The total product cost and cost per unit of products are important in
making the inventory valuation, deciding price of the products. The product costing
covers the entire cycle of accumulating manufacturing and other costs and
subsequently assigning them to work in progress and finished goods

Cost Accounting in an Organisation

9. Cost is a very generic term; it needs to be classified to be of further use. Cost

accounting involves the recording and classification of such costs. For a standard
construction unit, the various costs involved can be segregated into the following: -

a) Material
b) Labour
c) Other expenses

10. A construction unit procures cement and steel as a raw material is the material
cost. Similarly, the cost for labour contracts and salary of supervisor will be labour
cost. Administrative expenses and selling expenses will be other expenses.
11. In a Construction Project material cost constitutes upto 70% of the budget.
Cost analysis includes the following factors: -

(a) Selection of right material based of quality certification, costs, warrantee and
quality reviews.
(b) Cost of packing, forwarding, loading, unloading, freight and transit insurance
etc.
(c) Cost of storage and wastage control.
(d) Cost of skilled, semi-skilled and unskilled work force.
(e) Project timeline

12. The cost of project has three basic parameters: -

a) Design/Quality of material Raw material can be identified for economy,

moderate and premium categories. For example, Ultratech cement 43
grade prices in Lucknow is Rs. 307/- per bag whereas Mycem Cement 43
grad price in Lucknow is Rs. 370/- per bag.

b) Quantity Quantity of material is derived considering permissible waste

and compliance of storage guidelines. Involvement of skilled labour and
wastage monitoring plays a significant role.

c) Rates Most manufacturers bid competitive price on bulk purchases and

relaxation on freight charges. Its important to negotiate fixed rate contract
with supplier and optimize with site storage capacity and delivery timeline.

13. Cost accounting helps companies identify areas where they may be able to
better control their costs, and also informs pricing decisions to ensure profitability.
Cost accounting figures are used only by a company's internal management team,
so collection methods can be customized according to company needs.

References: Text Book and Internet

COL CDS SAMBYAL,SM

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