Cost Accounting Notes

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Q1) What is cost accounting ? Explain briefly its objective and advantages.
Cost Accounting is a business practice in which we record, examine, summarize, and study the
company’s cost spent on any process, service, product or anything else in the organization. This
helps the organization in cost controlling and making strategic planning and decision on
improving cost efficiency. Such financial statements and ledgers give the management visibility on
their cost information. Management gets the idea where they have to control the cost and where
they have to increase more, which helps in creating a vision and future plan. There are different
types of cost accounting such as marginal costing, activity-based costing, standard cost
accounting, lean accounting. In this article, we will discuss more objectives, advantages, costing
and meaning of costs.
Features of Cost Accounting
• It is a sub-field in accounting. It is the process of accounting for costs
• Provides data to management for decision making and budgeting for the future
• It helps to establish certain standard costs and budgets.
• provides costing data that helps in fixing prices of goods and services
• Is also a great tool to figure out the efficiency of a unit or a process. It can disclose wastage
of time and resources
Types and Classification of Cost Accounting
• Activity Based Costing
• Lean Accounting
• Standard Accounting
• Marginal Costing
Standard Accounting
Standard costing is a technique where the firm compares the costs that were incurred for
the production of the goods and the costs that should have been incurred for the same.
Marginal Costing
This type of costing is based on the principle of dividing all costs into fixed cost and variable cost.
Fixed costs are unrelated to the levels of production. As the name suggests these costs remain
the same irrespective of the production quantities.
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Variable costs change in relation to production levels. They are directly proportionate. The
variable cost per unit, however, remains the same.
Importance and Objectives of Cost Accounting
• Classification of Cost
• Cost Control
• Price Determination
• Fixing of Standards
Advantages
• Measuring and Improving Efficiency
• Identification of Unprofitable Activities
• Fixing Prices
• Price Reduction
• Control over Stock
• Evaluates the Reasons for Losses
• Aids Future Planning
Meaning of Cost
How does one define with the cost of something? It is the amount to be paid for a good or service
or the resources given in exchange for such good or service.
In commercial terms, the cost is the monetary valuation of the effort, materials, risks and
opportunity costs all put together.
Cost is also defined as by the expenditure incurred to produce a give
n good or service. The cost will be the expenditure that is attributable to something.
Value is measured in terms of the usefulness of the product, the cost is measured strictly in
monetary terms.
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While cost is a very generic term, it can be classified further. All costs can be qualified as prime
cost, sunk cost, factory cost, direct cost, indirect cost, etc. It is advisable to classify costs as it
gives more information about it.
Meaning of Costing
Costing is essentially a technique via which we assign or costs to various elements of the
business. It is a system of ascertaining costs.
We follow certain rules and principles to guide us in this ascertaining of costs. Some such
methods of costing to ascertain these costs are historical costing, standard costing, etc.
• Assigning variable costs according to the activity levels is direct costing
• And assigning fixed costs irrespective of activity levels is known as absorption costing
Q2) What is a contract account ? what important points should be borne in the mind in
its preparation ?
Contract costing is defined as that form of specific order costing wherein work is carried out in
accordance with the customer’s special requirement and each order is of long duration.
Contract costing is generally applied by contractors who undertake constructional work and
engineering work like roads, dams, buildings, canals, railway lines, bridges, sewerage system
of a city or town, hospital, schools, or colleges buildings or private buildings, ship building etc.
Contract costing is also known as Terminal Costing because the work is terminated once it is
completed and contract A/c is closed. Most of the expenses on the contract are generally of the
direct nature and for the specific contract. Overheads related to central office or store are
apportioned among the various contracts on some suitable basis like, wages, or material or
period basis etc.
Contract costing is less detailed and simpler than job costing. In brief, the points are:
1. Contract take a longer time for completion.
2. The work is executed at customer’s site.
3. Generally a portion of the contract is given to a sub-contractor, when it is of a special

character- for example, floor polishing, colouring etc.
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4. Since the contracts take a number of years to complete, the problem of taking the profits
arises.
5. Since each contract is distinct from others, all expenses of a particular contract are directly
debited to it.
Contract Costing – Nature Explained

Contract costing is the form of specific order costing, generally applicable where work is
undertaken to customer’s special requirements and each order is of long duration, such as
building construction, ship building, structural for bridge, civil construction, etc. The work is
usually done outside the factory.
(i) Higher Proportion of Direct Cost:

There may many costs which are normally classified as indirect costs. These can be traced
specifically with a contract because of the self-contained nature of most site operations. Thus,
they can be charged directly, e.g., telephone installed at site, site power usage, site vehicles,
transportation, wage bill (of site labour), supervisory staff salary, cost of the plant (exclusively
purchased for a particular contract).
(ii) Low Indirect Costs:

The main item of indirect cost in most contracts is a charge for head office expenses. Other
indirect costs include wage of workers which cannot be identified with a particular contract, or
salary of supervisory staff looking after two or more contracts.
(iii) Difficulties of Cost Control:

Scale and size of the contract create major problems of cost control. These problems are
frequent and concerned with material usage and losses, pilferage, labour supervision and
utilization, damage to and loss of plant and tools.
Surplus Materials:
All materials purchased for a contract are charged directly to the contract. At the end of the
contract, the contract account is credited with the cost of materials not used, and if they were
transferred directly to another contract, the new contract account is debited. If they were not
needed immediately, the material is to be stored and the cost debited to a stock account.
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Contract Costing – Important Features

Following are the important features of contract costing:
i) The work is carried out away from contractor’s premises i.e., at the contractee’s work site.
ii) A contract is usually a big job of long-duration and may continue over more than one
accounting period.
iii) As the contracts are of large size, a contractor usually carries out a small number of
contracts in the course of a year.
iv) Contract work involves too much of risk and uncertainty.
v) A contract undertaken is treated as a cost unit.
vi) A separate account is prepared for each contract to ascertain profit or loss on each
contract.
vii) Apportionment of profit on contract to different accounting periods is very difficult.
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viii) In case the contract is undertaken of long-duration, a percentage of notional profit

depending upon the progress of physical work may be accounted for in each year.
ix) Most of the materials are specially purchased for each contract.
x) Expenses chargeable to contracts are direct in nature, e.g., electricity, telephone charges,
insurance etc.
xi) Allocation and apportionment of overhead costs is a simple task.
xii) Specialists sub-contractors may be employed for say, electrical fittings, welding works,
glass work, plumbing work etc.
xiii) Plant and equipment may be purchased or hired for the duration of the contract.
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Q3) What are process costing ? Why they are prepared ?

A process costing system accumulates the costs of a production process and assigns
them to the products that the business outputs. A production report has to be made
under the process costing system.
Process costing is applied to determine the cost of production in industries where

products pass through different phases of production before completion.
Under process costing, there is a finished product at each stage. This becomes the
raw material of the subsequent stage until the final stage of completion.
Process costing is generally used in industries that deal with chemicals, distilled
products, canned products, food products, oil refineries, edible oils, soap, paper,
textiles, and others.
Process costing refers to a type of costing procedure commonly adopted by

factories. In process costing, there is continuous or mass production and ongoing
costs, which are accumulated regularly.
The following five conditions are favorable for the use of process costing:
• Production of a single output in a plant.
• Division of a plant into different processes and departments. Each process is

responsible for the manufacture of a single product.
• Processing a single product for a scheduled time, followed by successive runs

of other products. Here, costs are calculated separately for each run.
• Production of several products that are produced simultaneously from the

same process.
• Division of a factory into separate operations, each performing standard

protocols and procedures.
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• Costs are calculated process-wise.
Characteristics of Process Costing

The main characteristics of process costing are:
• Continuous production.
• The end product is the result of a sequence of processes.
• Homogeneous products with identical and standardized features ensure

quality.
• The processing sequence is specific and predetermined.
• The finished products outputted from one process are used as the raw
materials for the next process, which happens until completion.
• Costs are calculated process-wise.
General Principles of Process Costing

The following are the general principles of process costing:
• All expenses—direct and indirect—are accumulated and classified according to

the process.
• Process-wise records are maintained, including those relating to the quantity of

production, scrap, wastage, etc.
• To determine the average cost per unit for the period, the total cost of each
process is divided by the total production.
• The cost of the process is transferred along with the transfer of the product to
another process.
• Production and inventories are computed in terms of completed products.

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• The cost of normal spoilage, wastage, etc. is included in product cost.
Features of Process Costing

The main features of process costing include:
• Production is divided into various stages (known as processes) and each

process is carried out by separate cost centers or departments.
• Production is continuous and the final product or end product is the result of a
sequence of processes or operations.
• The finished product of each process is treated as the raw material for the
subsequent process.
• The units of the commodity produced are homogeneous and identical in

nature.
• The cost of production per unit is the average cost, which is obtained by
dividing the total process cost by the total number of units manufactured.
Use of Process Costing

Industries that may benefit from the use of process costing are:
• Those producing a single product: These industries are those which are
engaged in producing electric power, gas, water, steam, cement, rubber, paper,
etc.
• Those producing a variety of products: These industries use the same

production facilities. Such industries include foundries, laundries, and flour
mills.
• Those producing a variety of products but using separate facilities: Instead

of using the same production facilities, such industries may be known as
extractive (e.g., mining).
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Q4) What are cost sheets ? What are their advantages ? discuss.
Definition: A cost sheet is a statement which represents the various costs incurred at
different stages of business operations, in a tabular format. It determines the total cost or
expenditure made by the organization, along with the cost incurred on each unit of a product
or service in a particular period.
The cost sheet of a business organization provides an insight into its performance and
efficiency. It helps in competitive analysis and improvement of the business operations
through cost reduction.
Components of Cost
An organization needs to bear multiple types of overheads while carrying out business
operations. In a cost sheet, the following overheads or expenditure are presented
systematically:
Prime Cost
The initial cost made for manufacturing a product, i.e., raw material, labour wages and other
production-related expenses, is termed as prime cost.
Following is the equation for computing the prime cost:
Where direct material is calculated with the help of the following formula:
Works Cost or Factory Cost
The works cost is calculated by summing up the prime cost with the factory overheads and
simultaneously adjusting the opening and closing stocks of work in progress. It can be
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denoted as:
The various indirect overheads incurred at the factory premises can be computed with the
help of the following formula:
Let us now go through each of the indirect overheads in detail below:
Indirect Material
The indirect material includes all the additional items used for manufacturing products, but
not directly contribute as a raw material for the finished goods. It can be anything like the oil,
fuel, coal, stationery items and other factory utilities.
Also, the items which are though directly used for making a product, but are inexpensive and
small, are considered as indirect material. These include thread, pins, cello tape, nails, nuts,
etc.
Indirect Labour
The labour or human resource engaged in all the activities other than manufacturing of goods
or services which are essential to carry out the business and assist the production operations
is called indirect labour.
It includes salary paid to managers, cleaning staff, security staff, drivers, etc.
Indirect Expenses
All the other overheads which are neither directly contributing to the production operations,
nor they can be termed as labour or material expense, are called indirect expenses.
These are the expenses made for running the business operations smoothly. These include
advertisements, depreciation, rent, electricity, insurance, taxes, repairs and maintenance, etc.
Cost of Production
The cost of production includes all the direct and indirect cost, including the material, labour
and other expenses, i.e., production cost, factory cost and office or administration cost.
The following formula denotes the computation of cost of production:
After making an adjustment of the opening finished goods and the closing finished goods to
the cost of production, we acquire the cost of production of goods sold.
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Further, to calculate the cost of production of goods sold, the opening and closing stocks of
finished products are adjusted with the cost of production. Its formula is:
Total Cost
The final value of a product or service can be determined after adding all the selling and
distribution expenses to the cost of production of goods sold. The formula to find out the total
cost or cost of sales is:
If the sales price of the products or service is known, the following method can be used to
determine the profit:
Q5) Discuss the Different methods of pricing of materials issued from stores for production.
Methods of Pricing Materials issued from Stores to Production
There are various methods in the use of pricing issues of materials from the store. The
selection of a suitable method is significant from the viewpoint of cost absorbed and
consequently on profit. Therefore, the method should be selected in the light of probable
effects on profit over a period of years.
The material is purchased specially for a job. The material issued is charged to the job at its
landed cost. Landed cost includes the invoice price, freight, cartage and insurance charges on
materials. An issue of such items cannot be linked with a particular ‘lot’ and therefore, exact
landed cost of the particular unit issued cannot be identified. If the purchase price for each lot
is different from that of the others, the question arises as to which purchase should be taken
into consideration for pricing material issues.
Some important and most used methods of pricing are as follows.
1. First in First Out (FIFO) Method – Under this method materials are issued out of stock
in the order in which they were first received into stock. This method of inventory
valuation is acceptable under standard accounting practice.
2. Last in First Out (LIFO) Method – Under this method most recent purchase will be the
first to be issued. It is a method of pricing the issue of material using the purchase
price of the latest unit in the stock.
3. Simple Average Method (SAM) – Under this method, all the materials received are
merged into existing stock of materials, their identity is lost.
4. Highest-in First-Out (HIFO) Method – Under this method, the materials with the highest
prices are issued first, irrespective of the date upon which they were purchased.
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Advantages: (a) It is easy to understand and simple to price the issues. (b) It is a good store
keeping practice which ensures that raw material leave the stores in a chronological order
based on their age.
(c) It is a straight forward method which involves less clerical cost than other methods of
pricing.
(d) This method of inventory valuation is acceptable under standard accounting practice.
(e) It is a consistent and realistic practice in valuation of inventory and finished stock.
(f) The inventory is valued at the most recent market prices and it is near to the valuation
based on replacement cost.
Disadvantages
a) There is no certainty that materials which have been in stock longest will be
used, if they are mixed up with other materials purchased at a later date at
different price.
b) If the price of the materials purchased fluctuates considerably, it involves more
clerical work and there is possibility of errors.
c) In a situation of rising prices, production cost is understated.
d) In inflationary market, there is a tendency to under-price material issues. In
deflationary market, there is a tendency to overprice such issues.
e) Usually more than one price has to be adopted for a single issue of materials.
f) The method makes cost comparison difficult of different jobs when they are
charged with varying prices for the same materials.
Q6) What do you understand by material control ? explain its objective.
Materials constitutes major portion of the total cost of the product. Supplies are also used for
the manufacture of product. Both materials and supplies are collectively called as stores. The
finished goods are termed as stock.
Commodities that are supplied to an undertaking to be utilized in the manufacturing process

or to be transformed into products are called “Materials”.
The terms materials and stores are sometimes used interchangeably, but they are not
identical. Stores is a wider term and covers items like sundry supplies, maintenance stores,
tools, jigs, equipment besides material consumed in production. The raw materials and
supplies are equivalent to cash. Hence, the management should exercise control over the
materials and stores.
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What is Materials Control?
Materials control refers to managerial activities relating to giving instructions or directions to
ensure maintaining adequate quality and quantity of materials for uninterrupted production
process with the objective of minimizing material cost per unit. Both materials control and
inventory control are not one and the same.
Materials control is a wider term, which includes inventory control. Moreover, cost of
production, planning of materials, purchase procedure, transportation and usage control are
parts of materials control.
Inventory control is confined to the techniques of maintaining stocks at desired levels whether
they are raw materials, work in progress or finished goods with the primary objective of
minimizing the cost.
Objectives of Materials Control

The main objectives of materials control are presented below:
1. Ensures adequate supply of materials as and when required for smooth production process.
2. Prevents over stocking and under stocking of materials.
3. Quick identification and supply of materials to the production department.
4. Prompt issue of materials.
5. Safeguarding of materials from loss of stock by theft and fire.
6. Protection of materials from unnecessary wastage of materials.
7. Protection of stores against pilferage.
8. Minimization of storage cost.
Advantages of Material Control

The following benefits are available to the company if the company exercises proper control on
the materials.
1. Materials control eliminates wastage in use of raw materials and supplies in course of
purchase, storage, handling and use.
2. It ensures uninterrupted flow of right quality and quantity of materials to the production
department.
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3. It reduces the risk of fraud and theft.
4. It facilitates the preparation of various monthly financial statements.
5. The valuation of materials is very easy.
6. It requires minimum amount of capital to buy materials.
7. It fixes the responsibility on the part of the employers who are handling the materials at the
maximum.
Q7)What are overheads ? how are they classified ?
Overheads are business costs that are related to the day-to-day running of the business.
Unlike operating expenses, overheads cannot be traced to a specific cost unit or business
activity. Instead, they support the overall revenue-generating activities of the business.
For example, a vehicle retail company pays a premium rent for business space in an area with
additional space to accommodate a showroom. The premium rent is one of the overhead costs
of the business. A business must pay its overhead costs on an ongoing basis, regardless of
whether its products are selling or not.
Types of Overheads
There are three main types of overhead that businesses incur. The overhead expenses vary
depending on the nature of the business and the industry it operates in.
1. Fixed overheads
Fixed overheads are costs that remain constant every month and do not change with changes
in business activity levels. Examples of fixed overheads include salaries, rent, property
taxes, depreciation of assets, and government licenses.
2. Variable overheads
Variable overheads are expenses that vary with business activity levels, and they can increase
or decrease with different levels of business activity. During high levels of business activity,
the expenses will increase, but with reduced business activities, the overheads will
substantially decline or even be eliminated.
Examples of variable overheads include shipping costs, office supplies, advertising and
marketing costs, consultancy service charges, legal expenses, as well as maintenance and
repair of equipment.
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3. Semi-variable overheads
Semi-variable overheads possess some of the characteristics of both fixed and variable costs. A
business may incur such costs at any time, even though the exact cost will fluctuate
depending on the business activity level. A semi-variable overhead may come with a base rate
that the company must pay at any activity level, plus a variable cost that is determined by the
level of usage.
Examples of semi-variable overheads include sales commissions, vehicle usage, and some
utilities such as power and water costs that have a fixed charge plus an additional cost based
on the usage.
Examples of Overhead Costs
Overhead costs are important in determining how much a company must charge for its
products or services in order to generate a profit. The most common overhead costs that any
business incur include:
1. Rent
Rent is the cost that a business pays for using its business premises. If the property is
purchased, then the business will book depreciation expense.
Rent is payable monthly, quarterly, or annually, as agreed in the tenant agreement with the
landlord. When the business is experiencing slow sales, it can reduce this cost by negotiating
the rental charges or by moving to less expensive premises.
2. Administrative costs
Administrative costs are costs related to the normal running of the business and may include
costs incurred in paying salaries to a receptionist, accountant, cleaner, etc. Such costs are
treated as overhead costs since they are not directly tied to a particular function of the
business and they do not directly result in profit generation. Rather, administrative costs
support the general running of the business.
Examples of administrative costs may include audit fees, legal fees, employee salaries, and
entertainment costs. A business can reduce administrative expenses by laying off some of its
employees, switching employees from full-time to part-time, hiring employees on a contract
basis, or by eliminating certain expenses, such as entertainment and office supplies.
3. Utilities
Utilities are the basic services that the business requires to support its main functions.
Examples of utilities include water, gas, electricity, internet, sewer, and phone service.
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A business may be able to reduce utility expenses by negotiating for lower rates from
suppliers.
4. Insurance
Insurance is a cost incurred by a business to protect itself from financial loss. There are
various types of insurance coverage, depending on the risk that may cause loss to the
business. For example, a business may purchase property insurance to protect its property or
business premises from certain risks such as flood, damage, or theft.
Another type of insurance is professional liability insurance that protects the business (such
as an accounting firm or law firm) from liability arising from malpractice. Other types of
insurance include health insurance, home insurance, renter’s insurance, flood insurance, life
insurance, disability insurance, etc.
5. Sales and marketing
Sales and marketing overheads are costs incurred in the marketing of a company’s products
or services to potential customers. Examples of sales and marketing overheads include
promotional materials, trade shows, paid advertisements, wages of salespeople, and
commissions for sales staff. The activities are geared toward making the company’s products
and services popular among customers and to compete with similar products in the market.
6. Repair and maintenance of motor vehicles and machinery
Rent and maintenance overheads are incurred in businesses that rely on motor vehicles and
equipment in their normal functions. Such businesses include distributors, parcel delivery
services, landscaping, transport services, and equipment leasing.
Q8) Distinguish between direct expense and indirect expense. what type of expense are
included in the former ?
What are Direct Expenses?

Direct expenses are the core expenses of the business. Without these expenses, your
business will not run. You need to account for these expenses no matter what the
business situation is. These expenses are related to the raw material of the business or
the purchase of the goods and services for the business. Direct expenses are expenses
that go into producing goods or providing services.
Direct expenses are needed in every company, be it a manufacturing business, an e-

commerce business, a service-related business. They are to be incurred. But the
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expenses that may be a direct expense for you may not be the same direct expense for
another business.
For example, there are two companies, one that manufacturers soaps and shampoos
and another that is a re-seller of the same products. For the manufacturer of the soaps
and shampoos, the raw material is his direct expense. However, for the re-seller, the raw
materials are not a direct expense but instead, the expenses related to the product’s
sales are a direct expense. In short, the expenses that are related to the main strategy or
the core of your business are the direct expenses for you. Every company may have
different direct expenses they are exposed to, but every company has direct expenses
that need to be accounted for.
List of Direct Expenses

As mentioned above, the list of direct expenses may not be the same for every type of
business and may differ from business to business such as manufacturing, selling,
production, e-commerce. However, we’ve listed down a few of the generic direct
expenses that a business may have to incur. This is not an exhaustive list and you should
look more in-depth at the direct expenses your business may be exposed to.
Direct Expenses can be:
• Factory, land or shop rent

• Raw materials of the goods or the core cost of the business you’re in
• Direct labour and wages for your business
• Manufacturing supplies such as factory or machines
What are Indirect Expenses?

The expenses that a business needs to encounter for operation purposes are indirect.
Just like how a business cannot function without indirect expenses, the same way a
business cannot function without indirect expenses. While direct expenses cover the
costs of the core materials for the business, indirect expenses are the overheads that
need to be incurred for additional services for the business.
Indirect expenses may not be the same every month and will differ based on the
revenue of the business and the nature of the business. While direct expenses are fixed,
indirect is not fixed and may vary from time to time. Indirect expenses are not added to
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the cost of the final product or service but are accounted for separately, based on
whenever they occur.
Just as direct expenses are different for different natures of business, the same way,
indirect expenses may be different for different businesses. For example, the indirect
expense for a raw material company may be the wages and salaries of far off
employees, but for a re-selling company, the wages and salaries may be direct
expenses for them.
List of Indirect Expenses:

Indirect expenses are general business costs that need to be incurred to keep the
business running. However, the general business cost may be different for all sorts of
businesses. You need to identify what are the indirect expenses to the nature of your
business. Also, not all indirect expenses will occur regularly and the same may vary or
come up unexpectedly. All this needs to be accounted for while figuring the expenses of
your business.
Indirect Expenses can be:
• Utilities
• General office supplies such as stationery, desk, chairs etc.
• Overhead expenses such as Electricity bill, water bill
• Pantry costs
• Re-sellers wages and salaries
• Unexpected expenses due to situations
Q9) What is unit output costing ? In which industries is it used ?
1. Meaning of Output Costing:

Unit or output costing is that method of costing in which cost are ascertained per unit of
a single product in a continuous manufacturing activity. Per unit cost is calculated by
dividing total production cost by number of units produced. This method is also known as
single costing. This method is known as ‘single costing’ as industries adopting this
method manufacture, in most cases, a single variety of product.
This method is also known as ‘unit costing’, as not only the cost of the total output, but
also the cost per unit of output is ascertained under this method. Under this method cost
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units are identical. This method is also called ‘output costing’, as cost is ascertained for
the total output of a product.
Definitions:
1. According to J.R. Batliboi, “Unit costing or output costing may be defined as single or
output cost system is used in business where a standard product is turned out and it is
desired to find out the cost of a basic unit of production.”
2. According to Walter W. Bigg, “Unit Costing Method is a method of costing applied to

ascertain the cost per unit of production where standard and identical products are
manufactured.”
3. According to Harold J. Wheldon, “Production Cost Accounting or Unit Cost Accounting

is such a method of cost ascertainment which is based on production unit. It is applicable
where the production work is done continuously and the units are of same types or
manufactured identical.”
4. The Institute of Cost and Management Accountants, London, “output costing is the
basic costing method applicable where goods or services result from a series of continuous
or repetitive operations or processes to which costs are charged before being av eraged
over the units produced during the period.”
2. Features of Output Costing:
Output costing has certain characteristics features.
The important features of output costing are:
(1) Output costing is the method of costing adopted in concerns where there is a
production of single product or a few grades of the same product differing only in size,
shape or quality by continuous process of manufacture. The units of production or output
are identical and the costs of units are physical and natural.
(2) Under this method, the cost per unit of output, say, per ton, per barrel, per kilogram,
per metre, per quintal, per bag, etc. is ascertained. The cost per unit of output is
ascertained by dividing the total cost incurred on a product during a given period of time
by output produced during the period.
Where the products manufactured are of different grades, first, the costs of products are
ascertained grade-wise, and then the total cost of each grade of the product is divided by
the number of units of that grade so as to ascertain the cost per unit of each grade of the
product.
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(3) Equality of cost is an important feature of this method. That is, under this method,
cost units, which are identical, will have identical cost.
(4) Under this method, the cost of product is ascertained at the end of the accounting
period.
(5) Under this method, the cost information relating to a product may be presented in the
form of either cost sheet or production account.
(6) This method is the simplest method of all the methods of costing; in the sense that the
cost collection and the cost ascertainment are quite simple.
(7) The cost per unit of output, determined under single. Costing enables the management
to make real comparison between different periods and between different firms within the
same industry, as the unit of output is a common factor between different periods and
between different firms within the same industry.
3. Objectives of Output Costing:
Output costing has the certain objectives.
(1) To ascertain the total cost of the output as well as the cost per unit of output.
(2) To ascertain the profit or loss on production.
(3) To analyse the expenditure by nature, classify them into element of cost and know the
extent to which each element of cost contributes to the total cost.
(4) To facilitate comparison of the cost of one period with the cost of another period to
know the efficiency or otherwise of the production.
(5) To facilitate the preparation of tender or quotation.
(6) To control the cost of the product through comparative study of the costs of any two
periods or through the comparison of the actual costs with the pre -determined standard
cost.
Q10) What do you mean by inter process profit ? How is actual profit calculated ?
MOB NO : 9798565610/9386683439
eaning of Process Costing-Inter Process Profits:
In process costing, the usual practice is to transfer the output of one process to another and
finally to finished stock at cost price. In this method of transfer, process accounts will not
reveal any profit or loss. But sometimes, the transfer is made at transfer price or market price.
This method is adopted in order to measure the efficiency or inefficiency of individual’s
process. When market price cannot be ascertained, certain percentage of profit margin is
added to the cost of processing in order to arrive at the transfer price. Consequently, each
process account reveals a profit and this profit is known as ‘inter process profit’.
Advantages of Accounting for Inter Process Profits:
(a) Inter process profits enable to measure the efficiency of each process.
(b) Comparison of costs with market price at each stage assist management to take ‘make or
buy’ decisions.
(c) The efficiency of or inefficiency of one process. In other words, each process can be
assessed separately on that account.
Adjustment for Inter Process Profits:
When the output of one process is transferred to another and finally to finished stock account
at transfer price (cost plus estimated profit margin), the closing inventories if any will be
valued at transfer price. Such inventories will include unrealized profits. Such profits should
be adjusted for purposes of year-end financial reporting.
Otherwise, it will amount to earning profit by trading within the organization. Hence,
necessary adjustments are made in the values of closing inventories by means of creating
reserves or provision for unrealized profits. Total profit less provision for unrealized profits
MOB NO : 9798565610/9386683439
would amount to profits earned on sale of finished stock. The closing inventories will be
shown in the balance sheet at cost i.e., values of inventory at transfer price less provision for
unrealized profits.
Computation of provision for unrealized profits:
Formula Cost of inventory = cost/total X Closing inventory
Provision for unrealized profits = Value of closing inventory – Cost

Cost Accounting Notes

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Cost Accounting Notes

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SPECIALIST FOR – I.com (11th ,12th ), B.

com, BBA, CA, CS, CMA

Features of Cost Accounting

• It is a sub-field in accounting. It is the process of accounting for costs

• It helps to establish certain standard costs and budgets.

Types and Classification of Cost Accounting

• Activity Based Costing

Importance and Objectives of Cost Accounting

• Measuring and Improving Efficiency

• Identification of Unprofitable Activities

• Control over Stock

• Evaluates the Reasons for Losses

• Aids Future Planning

Cost is also defined as by the expenditure incurred to produce a give

• Assigning variable costs according to the activity levels is direct costing

2. The work is executed at customer’s site.

3. Generally a portion of the contract is given to a sub-contractor, when it is of a special

Contract Costing – Nature Explained

(i) Higher Proportion of Direct Cost:

(ii) Low Indirect Costs:

(iii) Difficulties of Cost Control:

Contract Costing – Important Features

iv) Contract work involves too much of risk and uncertainty.

v) A contract undertaken is treated as a cost unit.

vii) Apportionment of profit on contract to different accounting periods is very difficult.

viii) In case the contract is undertaken of long-duration, a percentage of notional profit

xi) Allocation and apportionment of overhead costs is a simple task.

Q3) What are process costing ? Why they are prepared ?

Process costing is applied to determine the cost of production in industries where

Process costing refers to a type of costing procedure commonly adopted by

• Production of a single output in a plant.

• Division of a plant into different processes and departments. Each process is

• Processing a single product for a scheduled time, followed by successive runs

• Production of several products that are produced simultaneously from the

• Division of a factory into separate operations, each performing standard

• Costs are calculated process-wise.

Characteristics of Process Costing

• The end product is the result of a sequence of processes.

• Homogeneous products with identical and standardized features ensure

• The processing sequence is specific and predetermined.

• Costs are calculated process-wise.

General Principles of Process Costing

• All expenses—direct and indirect—are accumulated and classified according to

• Process-wise records are maintained, including those relating to the quantity of

• Production and inventories are computed in terms of completed products.

• The cost of normal spoilage, wastage, etc. is included in product cost.

Features of Process Costing

• Production is divided into various stages (known as processes) and each

• The units of the commodity produced are homogeneous and identical in

Use of Process Costing

• Those producing a variety of products: These industries use the same

• Those producing a variety of products but using separate facilities: Instead

Following is the equation for computing the prime cost:

Works Cost or Factory Cost

Let us now go through each of the indirect overheads in detail below:

The following formula denotes the computation of cost of production:

Methods of Pricing Materials issued from Stores to Production

Some important and most used methods of pricing are as follows.

Commodities that are supplied to an undertaking to be utilized in the manufacturing process

Objectives of Materials Control

2. Prevents over stocking and under stocking of materials.

3. Quick identification and supply of materials to the production department.

4. Prompt issue of materials.

5. Safeguarding of materials from loss of stock by theft and fire.