Cost and Management Accounting I Mohammed Hanif Full Chapter

Cost and Management Accounting-I
Mohammed Hanif
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Mohammed Hanif
Sr. Professor, Accounting & Finance
St. Xavier’s College (Autonomous), Kolkata
McGraw Hill Education (India) Private Limited

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Preface
In the last few years, there have been many changes in the field of Cost and Management Accounting. In
the past, the role of the cost and management accountants was very narrow. Nowadays, their job is not
only limited to report the past events to the management, but also they act as internal consultants. They
are actively involved in the decision-making process of the organisation. Hence, there is a dire need to
equip students with the skills required according to the dynamic requirements of the corporate world so
that they can pursue this profession with efficacy.
This book has been a modest approach in this direction. Cost and Management Accounting-I has
been structured as per the CBCS syllabus prescribed by the University of Calcutta w.e.f. 2017-18, for
the students of B. Com Semester II.
Thorough knowledge of the subject is of vital importance for the students, and hence, a sincere
effort has been made throughout this book to give students a clear view of the subject. Considering the
changing students’ need, a considerable restructuring of the book has been done, especially in terms of
pedagogical respect.
Previous years’ CU question papers with solutions have been provided in every chapter. The question
papers are further segregated into two categories: ‘for general course students’ and ‘for honours course
students’. The questions provided in the book will enable the students to assess the kind of questions
asked in the university examination and will also help them in evaluating their conceptual understanding.
An exclusive section named ‘special problems’ has been dedicated for advance learners. It includes
questions that are more challenging and are of higher order of difficulty.
A number of colleagues, friends and students helped in the preparation of this book. The author
thanks each and every one of them. Special thanks to Mr. S. Rangarajan for typesetting and formatting
the book.
Utmost care has been taken to make this book error-free, but still if any error comes up, it can be
addressed at pmhanif@gmail.com. All suggestions will be most welcomed.
M Hanif
Brief Contents
1. Introduction to Cost Accounting 1.1–1.10

2. Cost Terms, Concepts and Classifications 2.1–2.18
3. Accounting for Materials 3.1–3.126
4. Employee Cost and Incentive Systems 4.1–4.86
5. Accounting for Overheads 5.1–5.128
6. Cost Book-Keeping 6.1–6.80
7. Job Costing and Batch Costing 7.1–7.66
8. Contract Costing 8.1–8.68
9. Operating/Service Costing 9.1–9.36
10. Process Costing 10.1–10.108
Contents
Preface v
Brief Contents vii
Syllabus xxi
1. Introduction to Cost Accounting ........................................................................... 1.1–1.10

Definition of Cost Accounting 1.1
Role of Cost Accounting 1.2
Future Role of Cost Accounting 1.6
Installing a Cost Accounting System 1.6
Advantage of Cost Accounting System 1.7
Distinction between Financial Accounting and Cost Accounting 1.7
Meaning of Management Accounting 1.8
Distinction between Cost Accounting and Management Accounting 1.9
Theoretical Questions 1.10
2. Cost Terms, Concepts and Classifications ............................................................... 2.1–2.18

Introduction 2.1
Definition of Cost 2.1
Definition of Cost Object 2.1
Definition of Cost Unit 2.1
Composite Cost Units 2.2
Definition of Cost Centre 2.3
Distinction between Cost Centre and Cost Unit 2.3
Types of Cost 2.4
Classification of Costs 2.6
Basis of Classification 2.6
Classification on the Basis of Nature of Cost / Expense 2.6
Classification on the Basis of Relation to Cost Centre / Cost Object — Traceability 2.7
Summary of Analysis of Cost 2.8
Contents
x
Classification on the Basis of Functions / Activities 2.9

Classification on the Basis of Behaviour 2.10
Classification on the Basis of Management Decision-Making 2.14
Classification on the Basis of Product Costs and Period Costs 2.14
Practical Questions 2.17
Guide to Answers 2.18
3. Accounting for Materials ..................................................................................3.1–3.126

Section I : Purchasing, Receiving and Storing
Introduction 3.1
Materials Purchasing Procedures 3.1
Functions of the Purchasing Department 3.1
The Materials ‘Cycle’ 3.2
Qualifications of a Purchase Manager 3.3
The Purchase Requisition 3.3
The Purchase Order 3.4
Centralised vs. Decentralised Purchasing 3.5
Just-in-time Purchasing 3.6
Advantages of JIT Purchasing System 3.7
Materials Purchasing System and Changing Technology 3.7
Receiving of Materials 3.7
Functions of the Receiving Department 3.7
The Goods Received Note (or The Receiving Report) 3.8
Material Cost 3.9
Summary of Treatment of Different Items in the Determination of Purchase Cost 3.10
Treatment of Containers for Materials Purchased 3.10
Storing of Materials 3.14
Duties of Store-keeper 3.14
Organisation of Stores Department 3.15
Bin Card 3.16
Stores Ledger 3.17
Distinction between Bin Card and Stores Ledger 3.18
Justification of Maintaining Bin Cards 3.18
Section II : Control of Materials
Control of Material – Main Considerations 3.19
Tools and Techniques Used for Control of Materials 3.20
ABC Analysis 3.20
Advantages of ABC Analysis 3.22
Economic Order Quantity (EOQ) 3.22
Contents
xi
Computation of EOQ 3.23

Tabular Approach 3.23
Formula Approach 3.24
Graphical Approach 3.26
Assumption of EOQ Model 3.26
Limitations of EOQ Model 3.27
Discount on Bulk Purchase 3.31
Production Lot Size / Economic Batch Quantity 3.40
Formula for Determining Economic Lot Size 3.41
Re-order Level and Safety Stock 3.43
Computation of Re-order Level 3.43
Maximum Stock Level 3.43
Factors on which Maximum Stock Level are Dependent 3.44
Minimum Stock level 3.44
Factors on which Minimum Stock Level are Dependent 3.44
Average Stock Level 3.45
Perpetual Inventory System 3.51
Advantages of Perpetual Inventory System 3.51
Physical Inventory 3.51
Periodical Stock-Taking 3.52
Stock-Taking Procedure 3.52
Continuous Stock-Taking 3.53
Advantages of Continuous Stock-Taking 3.53
Reasons for Material Shortages and Overages 3.53
Treatment of Material Losses 3.54
Scrap 3.54
Spoilage 3.54
Defective 3.55
Waste 3.55
Previous Years’ C.U. Question Paper (with Solution) 3.56
For General Candidates 3.56
For Honours Candidates 3.60
Section III : Issuing Materials
Materials Requisition 3.71
Bill of Materials 3.72
Advantages of using Bill of Materials 3.72
Limitations of using Bill of Materials 3.72
Pricing the Issues of Materials 3.73
Factors for Selecting a Particular Method 3.73
FIFO (First in, First Out) Method 3.74
LIFO (Last in, First Out) Method 3.77
Contents
xii
Simple Average Method 3.83

Weighted Average Method 3.85
Specific Identification Method 3.87
Base Stock Method 3.87
Periodic Simple Average Method 3.90
Periodic Weighted Average Method 3.91
Standard Cost Method 3.92
Replacement Cost Method 3.94
Which Method of Pricing Issues to be Adopted? 3.94
Requirement of Cost Accounting Standard (CAS-6) 3.94
Return of Materials from Factory to Stores 3.95
Materials Return to Vendors (Suppliers) 3.95
4. Employee Cost and Incentive Systems .................................................................... 4.1–4.86

Section A: Personnel and Payroll
Introduction 4.1
The Personnel / Human Resource Department 4.1
Recording Labour Costs 4.3
The Time Keeping Department 4.3
Methods of Recording Hours Worked 4.3
Time Booking 4.5
The Payroll Department 4.6
Payroll Documents and Records 4.6
Computerised Payroll 4.7
The Cost Department 4.12
Section B: Remuneration and Incentives
Essential Features of a Successful Wages / Remuneration Payment Plan 4.13
Methods of Remuneration 4.13
Time–based Remuneration / Time Rates System 4.13
Advantages of Time-based Remuneration 4.15
Disadvantages of Time-based Remuneration 4.15
Treatment of Idle Time in Cost Accounting 4.15
Contents
xiii
Normal Idle Time 4.15

Abnormal Idle Time 4.15
Cost Accounting Treatment 4.15
Treatment of Overtime Premium 4.16
Control of Overtime 4.16
Piecework Remuneration / Piece Rates System 4.16
Straight Piece Rates 4.16
Piece Rates with Guaranteed Day Rate 4.17
Differential Piece Rates 4.19
Taylor Differential Piece Rate System 4.20
Merrick Differential Piece Rate System 4.21
Gantt Task and Bonus System 4.22
Premium Bonus Systems / Incentive Schemes 4.22
Main Principles / Desirable Characteristics of a Good Incentive System 4.23
The Halsey Premium Scheme (50 : 50) 4.23
The Halsey–Weir Premium Scheme (30 : 70) 4.24
The Rowan Premium Scheme 4.24
Emerson Efficiency System 4.25
Group Bonus Scheme 4.61
Situations to adopt Group Bonus Scheme 4.61
Advantage of Group Bonus Scheme 4.61
Labour Turnover 4.64
Causes of Labour Turnover 4.64
Effects of Labour Turnover on Cost of Production 4.65
Treatment of Labour Turnover Cost in Cost Accounting 4.65
Remedial Steps to Minimise Labour Turnover 4.65
Measurement of Labour Turnover 4.66
Job Evaluation 4.73
Objective of Job Evaluation 4.74
Methods of Job Evaluation 4.74
Merit Rating 4.74
Objectives of Merit Rating 4.75
Advantages of Merit Rating 4.75
Limitations of Merit Rating 4.75
Distinction between Job Evaluation and Merit Rating 4.75
Time Study 4.75
Time Study Procedures 4.76
Motion Study 4.76
Contents
xiv

5. Accounting for Overheads .................................................................................5.1–5.128

Section 1: Definition and Classification of Overheads
Definition 5.1
Indirect Materials Cost 5.1
Indirect Labours Cost / Employees Costs 5.1
Indirect Expenses 5.2
Classification of Overheads 5.2
(a) Classification on the Basis of Functions 5.2
(b) Classification on the Basis of Behaviour 5.4
Section 2: Accounting for Production/Operation/Manufacturing Overheads
Introduction 5.6
Collection of Production / Operation / Manufacturing Overheads 5.7
Standing Order Number and Cost Accounting Number 5.7
Distribution of Production / Operation / Manufacturing Overheads 5.7
Primary and Secondary Distribution 5.9
Manufacturing / Production Departments 5.9
Service Departments 5.9
Allocation of Production / Operation / Manufacturing Overheads 5.9
Apportionment of Production / Operation / Manufacturing Overheads 5.9
Distinction between Allocation and Apportionment of Expenses 5.10
Steps for Allocation and Apportionment of All Production / Operation / Manufacturing
Overheads to Production and Service Departments 5.11
Re-apportionment of Service Department Overheads to Production
Department 5.15
(i) When there is only One Service Department 5.15
(ii) When there are Two or More Service Departments with Non-reciprocal Service 5.17
(iii) When there are Two or More Service Departments with Reciprocal Service 5.22
Methods for Solving the Problem of Reciprocal Basis Service 5.22
1. Repeated / Continuous Distribution Method 5.22
2. Simultaneous Equation Method / Algebraic Method 5.23
3. Direct Method 5.28
4. Trial and Error Method 5.29
5. Specified Order of Closing Method 5.30
Secondary Distribution – Which Method? 5.33
Absorption of Production or Operation Overheads 5.34
Contents
xv
Selection of the Base 5.35

Choice Between Plantwide or a Departmental Rate 5.35
Different Bases Used for Overhead Absorption Rate Calculation 5.36
1. Direct Labour Cost 5.36
2. Direct Labour Hours 5.36
3. Machine Hours 5.37
4. Units of Production 5.38
5. Direct Materials Cost 5.38
6. Prime Cost 5.39
Pre–determined Versus Actual Absorption Rate 5.63
Over and Under Absorption Overhead 5.63
Disposal of Over / Under Absorption of Overheads 5.74
1. Transfer to Costing Profit and Loss Account 5.74
2. Use of Supplementary Rate 5.74
3. Carry Forward to Next Period 5.75
Absorption of Production Overheads and Production Capacity 5.78
Cost Center Machine Hour Rates 5.85
Standing Charges 5.85
Running Expenses 5.86
Computation of Machine Hour Rate 5.86
Pure Machine Hour Rate 5.86
Comprehensive Machine Hour Rate 5.86
Group Machine Hour Rate 5.87
Section 3: Administrative, Selling and Distribution Overheads
Administrative Overheads 5.101
Treatment of Administrative Overheads in Cost Accounts 5.101
Control of Administrative Overheads 5.101
Selling Overheads 5.102
Distribution Overheads 5.102
Assignment of Cost 5.102
Control of Selling and Distribution Overheads 5.103
Section 4: Treatment of Different Items in Cost Accounts
Contents
xvi
6. Cost Book-Keeping ........................................................................................... 6.1–6.80

Introduction 6.1
Integrated Accounting System 6.1
Rule 1: The Duality Rule 6.1
Rule 2: Debit and Credit Rule 6.1
Features of Integrated Accounting System 6.3
Advantages of Integrated Accounting System 6.3
Disadvantages of Integrated Accounting System 6.3
Control Accounts 6.4
Advantages of Using Control Accounts 6.5
Journal Entries under Integrated Accounting System 6.5
Interlocking (Non–integrated) Accounting System 6.19
Important Ledgers of Interlocking Accounting System 6.19
Financial Accounting Ledgers 6.19
Cost Accounting Ledgers 6.19
Important Control Accounts 6.20
Link Between Financial Accounting Ledger and Cost Accounting Ledger 6.21
Specimen Book–keeping Entries in the Cost Books 6.22
Some Important Items 6.25
1. Carriage Inwards 6.25
2. Special Order 6.25
3. Capital Order 6.25
4. Under / Over Absorption of Overheads 6.26
Reconciliation of Financial Accounts Profit and Cost Accounts Profit 6.47
Items Shown Only in the Financial Accounts 6.47
Items Shown Only in the Cost Accounts 6.48
Same Items Treated Differently in the Financial Accounts and the Cost Accounts 6.48
Preparation of Profit Reconciliation Statement 6.49
When Profit as per Cost Accounts is Given 6.49
When Profit as per Financial Accounts is Given 6.52
Preparation of Memorandum Reconciliation Account 6.53
Contents
xvii
7. Job Costing and Batch Costing............................................................................. 7.1–7.66

Introduction 7.1
Meaning of Job Costing 7.1
Features of Job Costing 7.1
Advantages of Job Costing 7.2
Limitations of Job Costing 7.2
Users of Job / Batch Costing 7.2
Job Order Number 7.3
Job Order Sheet 7.3
Elements of Cost 7.4
Cost Accounting Procedures 7.5
Cost Estimation and Determination of Quotation Price 7.23
Batch Costing 7.52
Features of Batch Costing 7.52
8. Contract Costing.............................................................................................. 8.1–8.68

Introduction 8.1
Characteristics of Contract Costing 8.1
Types of Contract 8.2
Fixed–price Contract 8.2
Cost–plus Contract 8.2
Advantages of Cost-plus Contract 8.2
Disadvantages of Cost-plus Contract 8.2
Important Terms Used in Contract Costing 8.3
Recording of Costs in a Contract 8.3
The Cost of Materials 8.3
The Cost of Labour 8.3
Direct Expenses 8.3
Plant and Machinery 8.4
The Cost of Overhead 8.4
The Cost of Sub–Contract Work 8.4
Ascertainment of Profit or Loss of a Short–term Contract 8.4
Ascertainment of Profit of a Long–term Contract 8.5
(1) When the contract is upto 25% complete 8.6
Contents
xviii
(2) When the contract is above 25% complete but not exceeding 50% complete 8.6
(3) When the contract is above 50% complete but not exceeding 75% complete 8.6
(4) When the contract is above 75% complete or nearing completion 8.6
(5) In case of a loss, the entire amount is transferred to the Profit and Loss Account
irrespective of the percentage of completion. 8.7
Calculation of Percentage of Completion of a Contract 8.7
Calculation of Work–in–Progress for Balancing Sheet Purpose 8.8
Escalation Clause 8.36
9. Operating/Service Costing .................................................................................. 9.1–9.36

Introduction 9.1
Meaning of Operating / Service Costing 9.1
Characteristics of Operating / Service Costing 9.1
Users of Operating / Service Costing Method 9.2
The Cost Unit 9.2
Transport Costing 9.2
Collection of Data 9.2
Log Sheet 9.3
Operating Cost Sheet 9.3
Treatment of Some Items 9.4
Performance Statement 9.4
Fare Calculation 9.15
Decision Making 9.21
10. Process Costing .........................................................................................10.1–10.108

Meaning of Process Costing 10.1
Illustrating Process Costing 10.1
Features of Process Costing 10.2
Some Industries where Process Costing is Used 10.2
Contents
xix
Process Costing Vs. Job Costing 10.2

Similarities Between Process Costing and Job Costing 10.2
Differences between Process Costing and Job Costing 10.4
Advantages of Process Costing 10.4
Limitations of Process Costing 10.4
Methods of Processing 10.5
Sequential Processing 10.5
Parallel Processing 10.5
Selective Processing 10.6
Process Cost Accounting Procedures 10.6
Elements of Cost 10.7
Materials 10.7
Labour 10.7
Direct Expenses 10.8
Production Overhead 10.8
Steps for Dealing with Process Costing When All Output is Fully Complete 10.8
Classifying Losses in Process 10.11
Normal Loss 10.11
Abnormal Loss 10.11
Abnormal Gain 10.11
Accounting for Normal Loss and Abnormal Loss 10.12
Accounting for Increase in Units 10.15
Accounting for the Sale of Scrap (Normal / Abnormal) 10.15
Accounting for Waste 10.15
Abnormal Gain 10.19
Defective Units and Rework Cost 10.22
Process Accounting When There is Work-in-Progress (WIP) 10.42
Methods of Calculating Equivalent Units of Production 10.43
FIFO Method 10.43
Preparation of Process Account 10.44
Elements of Cost with Different Degrees of Completion 10.44
Normal Losses and Equivalent Unit 10.47
Abnormal Losses and Equivalent Unit 10.47
Abnormal Gain and Equivalent Unit 10.53
Previous Process Cost 10.55
Weighted Average Method 10.59
Cost per Equivalent Unit is Calculated as follows: 10.60
Comparison of FIFO Method and Weighted Average Method 10.60
Selection of a Costing Method 10.61
Inter-Process Profit 10.69
Limitations of this system 10.69
Contents
xx
Preparation of Process Account 10.69

Steps for Preparing First Process Account 10.69
Steps for Preparing Second and Subsequent Processes 10.70
Syllabus
CC2.1Ch: Cost and Management Accounting–I

(As per CBCS Syllabus prescribed by University of Calcutta w.e.f. 2017–18)
Marks : 100
Internal Assessment 20 marks

Semester-end Examinations 80 marks
Total 100 marks
Marks shown against the units indicate marks for Semester-end Examinations
Chapters
Unit Topic Content Marks
in Book
1. Introduction ® Definition of Costing, Objectives of Cost Accounting; Management
Accounting and difference with Cost Accounting; Installing a Cost
Accounting System, Essentials of a good Cost Accounting System.
® Cost concepts, terms and classification of costs: Cost, Cost objects, Chapter-1
10
Cost units and Cost Centres, Types of costs, classification of costs Chapter-2
– Direct Indirect, Element-wise, Function-wise, Behaviour-wise,
Sunk Cost, Opportunity Cost, Costing Methods and Techniques
(introduction only).
2. Material Costs ® Purchase of materials: Organisation, purchase procedure,
documentation, determination of material purchase costs.
® Storage of materials: Need for storage, location and types, functions
of a storekeeper, requisition, receipt, issue and transfer of materials,
storage record, accounting for materials cost.
® Materials control: Organisation; Tools: Just-in-Time Purchase;
10 Chapter-3
Various stock levels, Economic Ordering Quantity and ABC Analysis;
Periodic Inventory, Perpetual Inventory, Physical Verification;
Discrepancies in stock and their treatment.
® Methods of Pricing Material Issues: FIFO, LIFO and Weighted
Average.
® Treatment of Normal and Abnormal Loss of Materials.
Syllabus
xxii
Chapters
Unit Topic Content Marks
in Book
3. Employee Cost ® Introduction, Recording Labour Cost: Attendance and Payroll
and Incentive procedure (Time-keeping, Time-Booking, Payroll procedure, Payment
Systems of Wages – Piece Rate, Different Piece Rate, Time Rate); Idle Time
(causes and treatment in Cost Accounting), Overtime (its effect and
treatment in Cost Accounting), Labour Turnover (Causes, Impact and
Methods of calculating Labour Turnover). 10 Chapter-4
® Main Principles for sound system of wage incentive schemes, labour
utilization, System of wage payment and incentives (Halsey, Halsey-
Weir, Rowan and Emerson).
® System of Incentive schemes for Indirect Workers; Component of
wages cost for costing purpose.
4. Overhead and Overhead
Cost Statement ® Introduction: Definition, Classification of Overhead – Functional and
Behavioural.
® Manufacturing Overheads: Allocation and apportionment of
Overhead; Absorption of Overhead; Various methods and their
20 Chapter-5
application; Treatment of under absorption / over absorption of
overheads.
® Administration and Selling & Distribution Overheads and their
charging: an introduction only.
® Preparation of Cost Sheet and estimation.
5. Cost Book- ® Non-Integrated System: Meaning & Features; Ledgers Maintained;
Keeping Accounts prepared; General / Cost Ledger Adjustment Accounts;
Meaning of Closing Balance in Various Accounts; Disadvantages. 10 Chapter-6
® Reconciliation: Need for reconciliation, Items causing differences
between Cost and Financial Profits and their reconciliation.
6. Costing ® Job Costing: (Job cost cards and databases, Collection direct costs
Methods of each job, Attributing overhead costs to jobs, Application of job
costing). Batch Costing.
® Contract Costing: Progress payments, Retention money, Escalation
clause, Contract Accounts, Accounting for material, Accounting for Chapter-7
plant used in a contract, Contract Profit and Balance Sheet entries.
Chapter-8
® Service Costing and Output Costing: Introduction; Motor Transport 20
Chapter-9
Costing only.
Chapter-10
® Process Costing: Meaning, Features, Process vs. Job Costing,
Principles of Cost ascertainment for Materials, Labour & Overhead;
Normal Loss, Abnormal Loss and Gain and Preparation of Process
Accounts. Inter-process profit (simple cases), Valuation of WIP and
equivalent units (excluding intermediary process).
TOTAL 80
Cost and Management Accounting - I 1.1
Chapter 1
Introduction to Cost Accounting

Definition of Cost Accounting
Kohler defines ‘cost accounting’ as a “… that branch of accounting dealing with the classification, recording,
allocation, summarisation and reporting of current and prospective costs. Included in the field of cost
accounting are the design and operation of cost systems and procedures; the determination of costs by
departments, functions, responsibilities, activities, products, territories, periods and other units of forecasted
future costs and standard or desired costs, as well as historical costs; the comparison of costs of different
periods, of actual with estimated or standard costs, and of alternative costs; the presentation and
interpretation of cost data as an aid to management in controlling current and future operations.”
Cost accounting is concerned with setting up budgets and actual cost of operations, processes, departments
or product and the analysis of variances, profitability or social use of funds. The managers, to support
decision-making to cut a company’s costs and improve profitability, use Cost Accounting. The information
produced by the cost accountants is for internal use of the business for taking future decisions and therefore,
not exposed to the outsiders. These reports need not follow accounting standards, because its primary use is
for internal managers, rather than outside users. Therefore, what to compute is decided pragmatically i.e.,
practicably, based on the need of the management.
To understand cost accounting and its role in an organisation, you have to learn why an organisation
should keep the accounts after all. Accounting is divided into two parts :
(i) Financial Accounting
(ii) Management Accounting
Financial accounting is concerned with preparing the financial reports like, the Balance Sheet, the Profit
and Loss Accounts, Cash Flow Statement, etc. based on transaction during the accounting period.
These reports works as the scorecards of the company and are prepared for the benefit of the shareholders/
owners, lenders, tax authorities, regulators and other interested parties, i.e., the external stakeholders of a
business.
Stakeholders are those who have a vested interest in the business and/or its products and services.
Generally, stakeholders of an organisation are :
� Customers
� Suppliers
� Employees
� Investors and
� Communities
Since the outsider use financial reports and they take important decisions like, investing money in the
organisation etc., based on this reports, there should be some common baseline on which the reports are
prepared, so that they are same and comparable with other organisations. Making of the financial reports have
to follow some norms and guidelines. These are called the generally accepted accounting principles or GAAP.
Recent trend is to follow a global protocol for keeping accounting records – IFRS. The financial reports or
accounts should be precise, correct and must follow the generally accepted accounting principles. Basically
financial accounting is mandatory for external reports.
1.2 Introduction to Cost Accounting
Management accounting, on the other hand, is concerned with providing the information to the managers.
This branch of accounting reports to the managers of the organisation and on the basis of these reports, the
managers perform their job of planning, directing, motivating, controlling and performance evaluation. When
we will discuss various aspects of management accounting with more details, you will understand that, it puts
emphasis on decision affecting the future of the organisation.
Cost accounting is an integral part of management accounting, which deals with budget and actual cost of
operation, different work processes, departments or products and the analysis of variances and ultimately the
profitability and expansion of the business organisation. You can well understand that a manager’s job would
naturally be to reduce cost and increase profitability. For this, the management needs to convert the different
events of the supply chain into financial values and cost accounting precisely does that for the business.
Role of Cost Accounting
The role of a cost accountant in an organisation is manifold. A cost accountant, though reports mainly to the
manager, also takes part in external reporting. In present days, the difference between cost accounting and
management accounting is reducing, as both involve the same plethora of activities. However, cost accounting
is more about calculation and analysis, whereas, management accounting is more involved in strategic decision-
making.
The most important tasks of a cost accountant are :
1. External reporting
2. Internal reporting
3. Scorekeeping
4. Budgeting
5. Cost reduction analysis
6. Pricing
7. System development and maintenance
8. Cost-benefit analysis
9. Internal consulting
10. Government billings
Let us discuss these traditional tasks of a cost accountant first, and then we will study the future role of a
cost accountant in the changing scenario.
1. External Reporting
Although cost accounting is a part of management accounting, which mostly deals with internal reporting, a
cost accountant, however, contributes a lot in making of external financial reports of the organisation. You must
understand the fact, that management accounting and cost accounting mainly reports to the internal users of
an organisation like the managers and financial accounting reports to the external users like shareholders,
bankers, customers etc. but, in many cases, cost accountants need to provide crucial information for these
external reports, too.
One such example case is, inventory valuation. Inventory valuation, in turn, affects the cost of goods sold.
Both these valuation, which is part of the financial report, requires involvement of a cost accountant in cost
layering technique. The cost accountant needs to ensure that the qualities and cost of the inventory is
accurate, as the financial reports demand accuracy. The cost accountant is also responsible for compiling
these data into suitable format, as needed for the external reporting.
Later on, you will see that management accounting reports are segmented on the departments, divisions,
products, customers and employee – according to the need and policy of the organisation. The financial
accountant calculates the profit of the past accounting period for the entire organisation. The cost accountant
provides the profitability levels for different product lines or profit levels by division. The cost accountant
may also contribute few footnotes to the financial statements.
2. Internal Reporting
This is the main role of a cost accountant in an organisation. Depending upon the rules, conventions and
requirements of an organisation, the cost accountant can follow any costing paradigm, i.e., any approaches for
preparing the informative reports to the management team. These approaches could be one of the following:
job costing, process costing, direct-cost costing, activity based costing, throughput costing and so on. We
will study the most prevalent approaches in detail in due time.
However, the cost accountant can follow different reporting structures, based on the need of the
management. The following structures are most commonly used :
Corporate level reports: These reports are for the senior-most level of management and contain only
information regarding critical success factors, bottom-line profits, forecasts at the product line level and
returns on investments, for each production facility or store.
Business unit level reports: These reports are basically about department-wise information on operational
issues like, inventory turnover, machine utilisation, profitability and cash flow projection. These reports need
thorough understanding and of financial as well as operational information and its compilation.
Function level reports: These are lower level functional reports, prepared, for example, on each machine
used. Generally, these reports are custom-designed turnover for every recipient. These reports culd be both
operational as well as financial. For example, an inventory turnover report prepared for a warehouse manager
would contain operational report, and a report on bad debts prepared for a sales manager will be a financial
report.
Project-specific reports: These reports are prepared on individual project and the cost and contain
information on cost and resource allocation on each project. These reports are prepared for :
� Comparing the budgeted cost and include cost at different stages of the project.
� Providing different operational statistics, percentage of completion, etc.
� Preparing various to-do lists.
Decision-specific reports: Many times cost accountants are called to report on a specific issue, for example,
reduction of wastage in a specific production process. The decision specific reports are prepared during such
occurrence and discarded thereafter.
The job of and role of a cost accountant spreads over every single nook and corner of the organisation. It’s
a challenging and highly interesting job. When you go to the corporate world, you will find that different
enormous range of issues might come under internal reporting.
3. Scorekeeping
Other than preparing the above-mention formal reports, a cost accountant issues numerous scorekeeping
record cards on different daily activities, for example, the graphs on machine utilisation.
4. Budgeting
Budgeting is one of the most important aspects of running a successful business organisation, where the
contribution of a cost accountant is quite prominent. A company makes its production budget for a year for
taking a business decision. Now, this production budget is combination of :
� Direct costs for each product
� Estimated overhead allocation
Cost accountants have worked with both these information throughout the previous accounting year. So
they are in best position to provide the information required for preparing the budget for the next accounting
year, which are :
� Sakes estimate
� Throughput capacity and constraints
� Other charges
Moreover, the cost accountants will know how much would be the direct labour costs, the department-wise
cost estimates, costs for maintenance and repairs, insurance and utilities. In fact, the cost accountants would
understand the entire cost structure involving the cost of resources and their rightful allocation, covering the
wide range of activities in the organisation.
5. Cost Reduction Analysis
There are two basic ways for a company to achieve better bottom-line performance:
� increase revenue, or
� reduce total costs
In today’s unpredictable marketplace, more stress is given on reducing costs. Cost accountants provide
both strategic and hands-on-assistance with cost reduction programmes of an organisation. They help the
business to reduce costs and eliminate supply chain waste to establish a competitive advantage.
Cost accountants study the cost incurred in every business process and sub-process in an organistaion,
whether in engineering, production or sales. Therefore, they take responsible position in cost reduction analysis.
6. Pricing
Pricing is one of the cardinal responsibilities of a cost accountant. Product price depends upon many things
like,
� cost of manufacturing the product
� market condition
� price set by the competitors
� need for the product
� innovativeness or technical advantage of the product
Responsibility of setting product price lies mainly with the sales and marketing department as they are the
people, who understand the market very well. However, they need to know the cost of each product manufactured,
so, that the business does not incur loss on every unit sold. It is the responsibility of the cost accountant to
compile these costs and provide it to the sales and marketing people.
It is very important to set a minimum price below which the product cannot be sold without incurring loss.
This price should be calculated, because, many times customer, particularly the retailers, offer to accept large
volume of product if the sales price per unit is lowered substantially. As cost accountants know the direct cost
as well as the overhead costs associated with the product, so, they are in a position to determine the price
below which the product cannot be sold.
When you will go deeper into the subject, you will find that, depending upon the size and the need of the
organisation, cost accountants of the organisation also take up the following cost and pricing related analysis
works :
� overall impact on project using throughput analysis
� separate analysis for each customer’s request
� profitability of individual customers, products, product lines, facilities
7. System Development and Maintenance
Before studying the role of a cost accountant in system development, you need to know what a business
system is.
By definition the business system means, “Methodical procedure or process, used as a delivery mechanism
for providing specific goods or services to customers in a well defined market.”
The business system follows a hierarchy with the business model at the top. The experts extract the value
chain from this topmost business model. The primary processing systems are derived from the value chain. The
processes are derived from each primary processing system. Finally each process is comprised of sub-processes,
tasks and sub-tasks.
You must have comprehended that creation of such a system requires collection of lots of data and its
summarisation into reports, which will be used for decision-making. The main concern of a cost accountant is
to collect a large enough quantity of data and convert it into information that could be used for various types
of costing analysis.
A little thought over the matter will tell you that even data collection also involves huge cost. So, the cost
account should also spend time exploring data collection automation to keep the cost low.
A very common activity in all businesses, is to divide the processes into sub-processes and then assign
cost to each of these sub-processes. For doing this, each process in the business system is assigned some cost
and should be scrutinized to check whether it is adding value to the system or not. If not, then, the cost incurred
is kind of a loss or wastage for the business system, so, the process should be discarded. Cost accountants are
involved in assigning cost to various entities, such as departments and product lines, and they review and
reassess this information.
Apart from cost allocations, the cost accountants also trace back each cost incurred by the organisation,
through the accounting system, all the way back to their original source. This is used for investigation of the
causes of costs or better allocation of costs.
8. Cost Benefit Analysis
Cost benefit analysis is usually done for decision-making during acquisitions or disposal of any asset or
equipment. This complex analysis involves gathering all the related cash flows and their reduction to net
present value with a discount factor.
9. Internal Consulting
A cost accountant often works as an internal consultant for various projects, for example:
� taking decision in outsourcing some part of the works
� whether shrinking inventory level would reduce working capital
� whether the alternative mode of transport of raw materials and finished products will be economical for
the organisation or not.
10. Government Billing
A significant part of purchases made by government follows a process known as cost plus contracts. These
cost-plus contracts are made when the government acquires some innovative and new equipment, which has
not been used before. For example, if a company makes a new defense equipment, which has not been used
before, or produces some technical equipment to be used during some natural calamity, which has not yet been
marketed, and sells these equipments to government, the government may buy it under cost-plus contracts. In
such cases, the companies do not want to quote a fixed price for such equipments, because, they do not know
whether they can manufacture these products and still make a profit. Therefore, the government offers them a
cost-plus contract under which the company is reimbursed all the cost for producing the equipment, plus a
percentage allowance for profit.
The cost accountants working for the company prepare these bills. This is an important role of cost
accountants. They have to learn the costing rules of the government and then create a cost accumulation
system for recording the costs. They also determine the allowable allocation of overhead costs to be applied to
the project costs and billed to the government.
Generally, the cost that are billed to government are drawn from different functional area, like research and
development, product planning and designing, production, administrative functions etc. and track down the
cost incurred in each of these areas, for calculating the total cost of the product. Moreover, the cost reimbursement
rules of any government are often complex and intricate and if the billing were somehow not supported by the
billing rules, the contracting officers would protest and refuse to pay. Therefore, the government billings
require cost accounting skills of maximum competence.
Future Role of Cost Accounting

A cost accountant’s job does not have a closely defined boundary. In contrast with a financial accountant,
whose job is primarily concerned with the accounting for external reporting, a cost accountant’s job extends to
every tiny part of the organisation. He has to understand the enterprise and its working thoroughly as he could
be assigned with any task, which relates to management information and decision-making. He is the most
reliable and trusted person from the enterprise’s point of view.
You have already observed the typical jobs of a cost accountant involving analysis, drawing conclusions
and making recommendations on various topics for making overall improvement and bringing cost effectiveness.
A cost accountant’s responsibility is huge because, his recommendations will have a direct impact in the
operations and profitability of the organisation.
In the present scenario, the decision made by an experienced cost accountant influences the corporate
strategy. The role of a cost accountant as a part of the decision maker is gaining more emphasis with the new
business environment. With the ability of a cost accountant to provide different costing information to the
planning process, they help in decision-making, alteration of business strategies and in turn increasing
profitability. They help in avoiding low profit yielding alternatives.
With the advent of information technology, most cost information and production volumes are kept in large
databases. Different stakeholders in the production system like the purchasing department, engineers, suppliers
etc., contribute to this information about change of cost at different production volume levels. With the
availability of such information, the role of a cost accountant becomes that of a strategy maker who can
determine the cost of production when changes are made in different variables like sale, volumes, etc., for
different product lines.
Newer methods of accounting like throughput accounting allow the corporate planners to determine the
bottleneck in production process in advance and shift the bottleneck to shift to another level in the production
process, where it can help in enhancement of profitability. In such a scenario, the cost accountant can use this
information to create a specific production planning for most effective use of all equipments.
Installing a Cost Accounting System
The following steps are followed for installing a cost accounting system :
1. Based on the nature of the organisation and expectations of the management, the objectives of install-
ing a cost accounting system should be identified first.
2. The area of focus of cost accounting system should be determined according to the need of the
management. For example, management may be interested to control production cost rather than
selling and distribution cost. In such a situation, the cost accounting system should be designed to
control costs of production.
3. A detailed study of the nature of business, product range, production methods and techniques are to be
made to find out the suitable method of cost accounting system (e.g., Job Costing, Process Costing,
etc.)
4. A detailed study of the organizational structure is to be made to fix the responsibilities at different levels.
5. Before installing a cost accounting system, the management should discuss the same with the employ-
ees and labour unions.
6. Details of record to be maintained and different reports to be prepared should be carefully worked out
taking costs and benefits into consideration.
7. Different forms (e.g., material requisition, job tickets, etc.) to be used by store-keeper, foreman, workers
should be standardised.
8. Necessary arrangements should be made for collection of data from different departments.
9. Before installing the cost accounting system, it is to determined that the cost records are to be main-
tained under integrated system or separate record to be maintained for financial accounting and cost
accounting.
10. The cost accounting should be designed in such a manner that it is easily understandable and not very
expensive or cumbersome.
Advantage of Cost Accounting System
The following are the advantages of installing cost accounting system :
1. Cost determination will be more reliable and scientific.
2. The management will be able to get necessary information quickly and easily.
3. The profitability of different products and operations will be revalued. The management will be able to
review them and to consider the elimination or modification of these to improve overall profitability.
4. A good cost accounting system will help to control cost in different areas of the organisation.
5. Reliable information will enable management to compare the profitability of different alternatives. For
example, whether it is more profitable to produce a component or to buy it from a manufacturer who
specialises in its production.
6. An efficient cost accounting system may help the organisation to claim extra amount from customer
where there is an escalation clause in the agreement.
7. In case of cost plus contract, the client may demand the details of the expenses. In this case, an efficient
cost accounting system will be able to supply the required information quickly.
Distinction between Financial Accounting and Cost Accounting
Financial Accounting Cost Accounting
1. It aims at determining the profit of an 1. It aims at determining the cost of a product or
organisation service.
2. It is not prepared from cost accounting. 2. It is prepared from financial accounting.
3. Financial accounting is meant for external 3. Cost accounting is meant for internal users.
users.
4. It is prepared in accordance with generally 4. It is prepared in accordance with established
accepted accounting principles. cost accounting principles.
5. It uses natural classification of income and 5. It uses different classification of income and
expenses. Expenses.
6. It strikes a balance between relevance and 6. It emphasizes only relevance.
reliability.
7. It uses matrices that use accounting 7. Along with accounting numbers, it also uses
numbers. Non-financial measures.
8. Periodicity of financial reporting is fixed, 8. Periodicity of cost accounting depends on the
e.g., quarterly, annually. need of the organisation.
9. Financial accounting uses only actual 9. Along with actual costs and revenue, cost
costs and revenues. Accounting uses notional costs and revenues.
10. It is prepared in the format prescribed 10. It is prepared in the format internally decided
by regulatory authorities. by the firm.
Meaning of Management Accounting

Management Accounting is concerned with the provision and use of different accounting information to the
managers of an organisation, so that, using these information they can make strategic decisions for the
business and have a better control over the business processes and activities.
Following are the definitions provided by different accounting bodies :
According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is
“the process of identification, measurement, accumulation, analysis, preparation, interpretation and
communication of information used by management to plan, evaluate and control within an entity and to
assure appropriate use of and accountability for its resources. Management accounting also comprises the
preparation of financial reports for non-management groups such as shareholders, creditors, regulatory
agencies and tax authorities.” (CIMA Official Terminology)
The American Institute of Certified Public Accountants (AICPA) states that management accounting practice
extends to the following three areas :
� Strategic Management – Advancing the role of the management accountant as a strategic partner in
the organisation.
� Performance Management – Developing the practice of business decision-making and managing the
performance of the organisation.
� Risk Management – Contributing to frameworks and practices for identifying, measuring, managing
and reporting risks to the achievement of the objectives of the organisation.
The Institute of Certified Management Accountants (CIMA) state “A management accounting applies his
or her professional knowledge and skill in the preparation and presentation of financial and other decision
oriented information in such a way as to assist management in the formulation of policies and in the
planning and control of the operation of the undertaking. Management Accountants therefore are seen as
the “value-creators” amongst the accountants. They are much more interested in forward looking and
taking decisions that will affect the future of the organisations, than in the historical recording and
compliance (scorekeeping) aspects of the profession. Management accounting knowledge and experience
can therefore be obtained from varied fields and functions within an organisation, such as information
management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc.”
Management accounting is concerned with providing information to managers – that is, people inside an
organisation who direct and control the business operations. In contrast, financial accounting is concerned
with providing information to stockholders, creditors and others who are outside an organisation.
Management accounting provides the indispensable data with which the business are actually run. What
the financial accounting provides, could be described as the company’s scorecard, based on which it’s overall
past performance is judged by the outsiders.
Managerial accounting deals with variety of reports. These reports are used for reviewing all business
decisions, and how different strategies, projects or business units have actually performed, how much was the
deviation from actual planning, what was the reason(s) for the deviations.
Management accounting also reports on timely update on key indicators of the business, for example:
� orders received
� order backlog
� capacity utilisation
� sales
Management accounting also deals with analysis of various specific problems and investigates on the
cause, for example, a decline in the profitability of a product line. Managers make decision on expansion of
business; accordingly, some of the management accounting reports are prepared solely for the purpose of
analysing different situations or opportunities for business development and expansion. In contrast, financial
accounting is oriented towards producing a limited set of specific prescribed annual and quarterly financial
statements in accordance with Generally Accepted Accounting Principles (GAAP).
Information is of great essence in management accounting. However, management accounting information
differs from financial accounting information. The management accounting deals with information, which is
typically used for decision making. These information are computed using internal control and Management
Information System (MIS); they are not publicly reported. Management accounting deals with information,
which is forward-looking, not based on past data.
Management accounting gets involved in :
� formulation of business strategies
� planning and implementing business processes and activities
� strategic decision-making
� resource optimisation
� safeguarding organization’s assets
� supporting preparation of financial reports
Various tasks taken by the management accountants are a superset of that of the cost accountants, though,
the difference between these two groups are diminishing fast. Following is a list of activities performed by a
management accountant :
� Variance Analysis
� Rate & Volume Analysis
� Business Metrics Development
� Pride Modelling
� Product Profitability
� Geographic vs. Industry or Client Segment Reporting
� Sales Management Scorecards
� Cost Analysis
� Cost Benefit Analysis
� Client Profitability Analysis
� Capital Budgeting
� Buy vs. Lease Analysis
� Strategic Planning
� Strategic Management Advise
� Internal Financial Presentation and Communication
� Sales and Financial Forecasting
� Annual Budgeting
� Cost Allocation
� Resource Allocation and Utilisation
Distinction between Cost Accounting and Management Accounting
Cost Accounting Management Accounting
1. Cost Accounting is normally viewed as a 1. Management Accounting is the application of
process of determining a ‘cost’ measured techniques and concepts in processing the
in terms of money. historical and projected economic data of an
entity
2. Cost Accounting classifies, records, 2. Management Accounting functions largely
presents and interpretes in a significant through operating reports based upon
manner the cost of materials, labour and standard cost and budgets.
expenses necessary to manufacture and
sell each product.
3. Cost Accounting includes not only the 3. Managerment Accounting is concerned with
collection of cost data useful to providing information to managers who
management but also the arrangement direct and control the business operations.
and presentation of such data in such
a manner as to reveal significant
relationship to management.
4. Double entry principles are followed for 4. Management Accounting reports on timely
recording of different transactions in updates on key indicators of the business,
the cost books. In many cases, Cost for example,
Accounting Standards are strictly orders received;
followed. orders backlog;
capacity utilisation; and
sales
5. Cost Accounting generates different 5. Management Accounting deals with analysis
reports from cost accounting records of various specific problems and investigates
as per the requirement of the managers. on the causes. For example, a decline in the
profitability of a product line.
THEORETICAL QUESTIONS
1. Define cost accounting. (Page 1.1)
2. Discuss the role of cost accounting in an organisation. (Page 1.2)
3. What are the different steps to be followed for installing a cost accounting system in an organisation?
(Page 1.6)
4. What are the advantages of cost accounting system ? (Page 1.7)
5. What do you mean by management accounting ? (Page 1.8)
6. Distinguish between financial accounting and cost accounting. (Page 1.7)
7. Distinguish between cost accounting and management accounting. (Page 1.9)
Chapter 2
Cost Terms, Concepts and
Classifications
Introduction
Costs are associated with all types of organisations – manufacturing and non–manufacturing, business and
non–business, retail and wholesale. As a first step in studying cost accounting, it is very important to understand
the meaning of cost, various types of costs incurred by organisations and how these costs are managed.
In cost and management accounting the term 'cost' can have different meanings depending on the nature of
the organisation and the needs of the management. Managers may require cost data for (i) external reporting;
(ii) calculating the cost of the product; (iii) valuation of stock; and (iv) decision making.
Each different use of cost data requires a different definition and classification of costs. Cost data compiled
for one purpose may not be appropriate for another purpose. For example, current cost of manufacturing diesel
and petrol may be appropriate for valuation of closing stock of Reliance Industries Ltd for the year. However,
those costs may not be useful in planning the company's refinery operations for the future years because of
fluctuation in crude oil price in the international market. The important point is that different cost definition and
classifications are used for different purposes. A clear understanding of these concepts and classifications
enables the cost and management accountants to provide proper cost data to the managers right in time.
Definition of Cost
Cost Accounting Standard on “Classification of Cost” (Revised 2015) — (CAS – I) issued by the Council of the
Institute of Cost and Works Accountants of India (ICWAI) has defined cost as “Cost is a measurement, in
monetary terms of the amount of resources used for the purpose of production of goods or rendering
services.” (Para 4.5)
The committee on Cost Concepts and Standards of the American Accounting Association (AAA) defines
‘cost’ as “Cost is a foregoing, measured in monetary terms, incurred or potentially to be incurred to achieve
a specific objective.”
Definition of Cost Object
Cost Accounting Standard on “Classification of Cost” (Revised 2015) — (CAS – I) defines ‘cost object’ as “an
activity, contract, cost centre, customer, process, product, project, service or any other object for which costs
are ascertained.” (Para 4.7)
For example, The Oberoi Grand Hotel’s cost objects are its major departments — maintenance department,
house-keeping department, hospitality department and food and beverage department.
Definition of Cost Unit
Cost Accounting Standard on “Classification of Cost” (Revised 2015) — (CAS – I) defines ‘cost unit’ as “a
form of measurement of volume of production of a product or a service. Cost unit is generally adopted on the
basis of convenience and practice in the industry concerned.” (Para 4.10)
For example : Power – MW; Cement – MT; Automobile – Number; Transportation – Tonne-Kilometre
Cost units of some important industries are given in the next page. It must be appreciated that technological
or other changes may prompt a change in the cost unit.
2.2 Cost Terms, Concepts and Classifications
Cost Units of Representative Industries

S.N. Industry Product or Operation Possible Cost Unit
1. Accounting Firm Auditing / Accounting / Advising Audit Job performed per hour
2. Advertising Printing / Painting advertising signs Job order
3. Automobile Car / Truck / Bus 1 or 100 units
4. Auto Parts Head lights, steering, piston, radiator, etc. 100 units
5. Battery manufacturing Batteries 100 units
6. Brass Foundry Alloy Kg
7. Bicycles Bicycle 1 or 100 units
8. Brick Bricks 1,000 units
9. Cement Cement Ton (raw mill); Bag (sales unit)
10. Chemical Chemicals Gallon / Litre
11. Clay Products Mine clay Ton
12. Cotton Textile Yarns Kg and Meter
13. Coal Coal Ton
14. Dried fruit Apricots, Grapes 20 kg cartons (sales unit)
15. Fertiliser Phosphate Ton (raw mill); Bag (sales unit)
16. Furniture Furniture Each article
17. Flour Mill Flour Ton (raw mill); Packet (sales unit)
18. Gold Plating Melting Ounce / Gram
19. Hospital Consultation / Operation / Staying Patient per day / Outdoor patient visit
20. Pharmaceutical Cold creams Jar / Tube
21. Pharmaceutical Cosmetics Gram
22. Pharmaceutical Tablets, Pills Per 1,000 units
23. Pharmaceutical Toothpaste Kg (bulk); Tube (sales unit)
24. Printing Press Impression Per 1,000 sheets
25. Printing Folding Units and Sheets
26. Printing Ruling Units and Sheets
27. Rubber Tyre Tyre and Tube Per 100 units
28. Restaurant Meal served Per item
29. Sugar Sugar Ton / 100 kg bag
30. Screw Machine Screws, Bolts 100 pieces
31. Salt Mining and Refining Salt Ton and 1, 5 kg packet
32. Steel Steel Ton
33. Transport (Road / Rail) Passenger – km; Ton – km
34. Nursing Per Bed per day
35. Construction House Contract Each Contract
36. Interior Decoration Each job
Composite Cost Units

It is to be noted in the above table that some cost units are made up of two parts, e.g., ton – km (cost unit for
road transport) or per bed per day (cost unit for nursing home). The two–part cost units are known as Composite
Cost Units. Composite cost units are very useful for controlling costs. For example, in a passenger transport,
the measure of 'cost per passenger' might not be useful for control purposes. The cost per passenger will vary
depending on the distance travelled by the passenger. Therefore, controlling costs using this basis would be
difficult.
The cost per passenger – kilometer (cost of carrying one passenger for one kilometer) is not affected by the
distance travelled by a passenger. Therefore, it would be more useful for monitoring and controlling costs.
Definition of Cost Centre

Cost centre is defined as a location, person or an item of machinery or a group of machineries in respect of
which all costs are accumulated for the purposes of cost ascertainment and cost control.
Cost Accounting Standard on “Classification of Cost” (Revised 2015) — (CAS – I) defines ‘cost centre’ as
“Any unit of entity selected with a view to accumulating all cost under that unit. The unit can be division,
department, section, group of plant and machinery, group of employees or combination of several units.”
(Para 4.6)
Cost centre may be of two types – personal and impersonal cost centres. A cost centre which consists of a
person or a group of persons is called a Personal cost centre.
Cost centre which consists a location or an item of plant / machinery or a group of these is called an
Impersonal cost centre.
In case of a manufacturing organisation (For example, Tata Motors Ltd.) there are two types of cost centres
— Production Cost Centers and Service Costs Centers.
Production cost centers are those which are directly engaged in production. Examples are machine shop,
assembly shop, paint shop etc.
Service cost centers are those which are not directly engaged in production but these cost centers are
necessary for smooth running of the production activities. Examples are maintenance department, power
house, canteen, etc.
It should be noted that cost centre may be very small, .e.g., a single machine, or quite large. There may be a
series of cost centers within a department or whole department may be a cost centre.
Distinction between Cost Centre and Cost Unit
Cost Centre Cost Unit

1. Cost centre is a location, person or an item 1. Cost unit is a unit of quantity of product,
of machinery or a group of machineries in service in respect of which cost is
respect of which all costs are accumulated ascertained.
for the purpose of cost ascertainment and
cost control.
2. Cost centre may be personal or impersonal. 2. No distinction is made in respect of cost unit
Again, it may be production cost centre as personal and impersonal.
or service cost centre.
3. Cost centre is unique. 3. Cost unit may be composite cost unit, e.g.,
ton-km or per bed per day, etc.
4. As per the requirement of the management, 4. Generally, cost unit remains same for a long
cost centre may be changed to generate time. However, technological or other changes
more meaningful data. may prompt a change in the cost unit.
Illustration 1
From the following information of Apollo Hospital identify the cost centres or cost units as suitable :
1. Children ward 2. Pharmacy
3. Operation theatre 4. Per bed per day
5. Outdoor patient visit fees 6. Canteen
7. Operation theatre hour 8. Radiology department
9. House keeping department
Solution
Sl.No. Cost Centres Sl.No. Cost Units
1. Children ward 4. Per bed per day
2. Pharmacy 5. Outdoor patient visit fees
3. Operation theatre 7. Operation theatre hour
6. Canteen
8. Radiology department
9. House keeping department
Illustration 2
Given below is a list of ten industries. State the cost unit against each industry.
1. Nursing Home 6. Bridge construction
2. Road transport 7. Interior decoration
3. Steel 8. Advertising
4. Coal 9. Furniture
5. Bicycles 10. Sugar company
Solution
S.No. Industry Possible Cost Units
1. Nursing Home Per bed per day
2. Road transport Ton – km / passenger – km
3. Steel Per ton
4. Coal Per Ton
5. Bicycles Per 100 units
6. Bridge construction Each contract
7. Interior decoration Each job
8. Advertising Each job
9. Furniture Each unit
10. Sugar company Per ton / Quintal
Types of Cost
The term cost is used in very wide manner such as :
1. Historical cost 8. Period cost 15. Opportunity cost
2. Future costs 9. Prime cost 16. Sunk cost
3. Replacement cost 10. Conversion costs 17. Controllable cost
4. Standard costs 11. Direct costs 18. Uncontrollable cost
5. Marginal cost 12. Indirect costs 19. Joint costs
6. Estimated costs 13. Fixed cost 20. Differential cost, etc.
7. Product cost 14. Variable cost 21. Explicit Costs / Out of Pocket Costs
1. Historical Cost : Historical costs are those costs applicable to production already completed or to
service already rendered. Historical costs cannot be used for the purpose of cost control as this has
already been incurred before the costing figures are available to management.
2. Future Costs : Future costs are those costs which are expected to be incurred if a particular decision is
taken. At the time of replacing an existing machine with a new one, the future costs of operating the new
machine are to be taken into consideration for taking replacement decision.
3. Replacement Cost : Replacement cost is the cost at which there could be purchase of an asset identical
to that which is being replaced.
4. Standard Cost : Standard cost is a particular type of predetermined cost under specified efficient oper-
ating conditions. It is generally used in standard costing for calculating cost variances.
5. Marginal Cost : The official terminology of CIMA has defined marginal cost as "the amount at any
given volume of output by which aggregate costs are changed if the volume of output is increased or
decreased by one unit." In this context, it is to be noted that a unit may be a single article, a batch of
articles, a stage of production capacity, a process or a department.
6. Estimated Costs : Estimated costs are a form of predetermined costs calculated by the firm in advance of
production or construction. Manufacturers of computer, laptop, furniture calculate estimated costs for
determining price and profit. Construction companies engaged in construction of roads, bridges, air-
ports make use of the estimated cost for the purpose of quotation or biddings.
7. Product Costs : Product costs are those costs which are directly related to product. Examples are direct
material cost, direct labour cost, etc.
8. Period Costs : Period costs are those costs which are not included in the product costs. At the time of
stock valuation, no part of these costs are taken into consideration. Examples of period costs are sales
commission, advertisements, etc.
9. Prime Cost : Prime cost is the sum total of direct material, direct labour and direct expenses. Prime cost
reflect the primary sources of costs for units in production.
10. Conversion Cost : Conversion cost is the sum total of direct labour, direct expenses and production
overheads costs of converting raw material to the finished goods.
11. Direct Costs : Direct costs are those costs that can be identified directly with the product, process or
department. Examples are cost of leather used in manufacturing a bag, depreciation of a delivery van.
12. Indirect Costs : Indirect costs are those costs which are incurred for the benefit of all products, pro-
cesses or departments during a certain period. Examples are rent, rates and taxes of the factory building,
salary of the security staff, etc.
13. Fixed Costs: Fixed cost is a cost which does not vary with the change in the level of activity. Examples
include insurance, depreciation of plant and machinery, rent, rates and taxes of factory building. Fixed
cost is normally related to time rather than output / activity.
14. Variable Cost : Variable cost is a cost which vary in direct proportion to a change in the level of output.
Direct material and direct labour are good examples of variable costs.
15. Opportunity Cost : Opportunity cost is earnings or potential benefits foregone for taking certain deci-
sions. For example, an office space can be given on rent for ~ 50,000 per month or it can be used for own
business. If the office space is used for own business, the opportunity cost is ~ 50,000 per month.
16. Sunk Cost : Sunk cost is a historical cost that has been incurred and that cannot be changed by any
decision made now or in the future. For example, you want to replace an existing machine with a more
efficient machine, the cost paid for existing machine is a sunk cost.
17. Controllable Cost : Controllable cost is a cost which can be controlled by the action of a specified
member of the undertaking. For example, the accounts and finance manager probably has control over
the stationery used in his department but had no control over the air-conditioning expenses allocated
to the department.
18. Uncontrollable Cost : Uncontrollable cost is a cost which cannot be controlled by the action of a
specified member of an undertaking. Uncontrollable costs include fixed costs and allocated costs.
19. Joint Cost : Joint cost is the common cost incurred in the process up to the point of separation. It
includes raw materials, direct materials, direct labour and production overheads.
20. Differential Cost : Differential cost is the difference in cost between one alternative and another. For
example, running cost per KM of a petrol car is ~ 10 and that of a diesel car is ~ 6. The differential cost
is ~ 4 per KM of running.
21. Explicit Costs : Explicit costs are also known as “Out of Pocket Costs”. These are the costs which
requires immediate payment in cash. Examples are salary of the staff, rent, rates and taxes, etc.
Classification of Costs
Cost Accounting Standard on “Classification of Cost” (Revised 2015) — (CAS – I) defines ‘classification of
costs’ as “the arrangement of items of costs in logical groups having regard to their nature (subjective
classification) and purpose (objective classification).” (Para 4.3)
Classification of costs are necessary to bring out the significance of information. Cost must be so classified
and arranged that they can be combined in different ways to serve the above purposes.
At the time of classification of costs, the following generally accepted rules should be observed.
1. Cost should be classified by one characteristic at a time.
2. Classification scheme should be such that all items of cost can be classified. A miscellaneous
group may be used for small items of cost.
3. Classification scheme should be such that it will serve the purpose of the management.
Basis of Classification
Some of the more common bases of cost classification are given below :
1. Nature of cost / expense.
2. Relation to cost centre / object – traceability.
3. Functions / activities.
4. Behavior – fixed, semi–variable, variable and semi–fixed.
5. Management decision making
6. Product cost and period cost
Classification on the Basis of Nature of Cost / Expense
The process of classifying costs and expenses may start with a natural grouping of all manufacturing costs
according to the three main elements of cost : (i) materials; (ii) labour; and (iii) other expenses.
Cost
Materials Labour Other Expenses
[Fig. 2.1]
Material Cost : Material cost is the cost of all materials used in manufacturing the product or a service. For
example, in manufacturing a computer table – cost of plywood, cost of screw, cost of glue, etc. will be classified
under material. Material cost includes cost of purchase, freight inward, taxes, duties and insurance, etc.
Labour Cost : Labour cost is the remuneration paid to the worker involved in the manufacturing of the
product. Workers may be permanent or temporary. Remuneration will include all fringe benefits, wages for
holidays, overtime, etc. For example, in manufacturing a computer table, the wages paid to the carpenter will
be classified under labour cost.
Other Expenses : Other than material cost and labour cost, all expenses will fall under this category. It will
include rent, taxes and insurance, depreciation of machineries and equipments, job processing charges paid to
the outsiders, etc.
Total Cost = Material Cost + Labour Cost + Expenses
Classification on the Basis of Relation to Cost Centre / Cost Object — Traceability

Taking cost centre / cost object into consideration costs are basically classified into two: (i) Direct cost; and
(ii) Indirect cost.
Direct Costs : Direct costs are costs which can be traced in full to the cost centre / cost object. Conventionally,
direct costs can be further sub–divided into direct materials, direct labour and direct expenses.
If any cost cannot be traced to a cost centre / cost object in an economically feasible way then it is called
indirect cost. Indirect cost is also called overhead. Indirect costs can be further sub–divided into indirect
material, indirect labour and indirect expenses.
Cost
Direct Cost Indirect Cost
Material Labour Expenses Material Labour Expenses
[Fig. 2.2]
Direct Material Cost : Direct material cost is the cost of material which can be directly traced to a cost centre
or cost object in an economically feasible way. It becomes an integral part of the finished product. This would
include, for example, the battery Tata Motors Ltd. purchases from Exide Ltd installed in its Indica car. Another
example is the small electric motor 'Sony' uses in its CD players to make the CD spin.
Direct Labour Cost : Direct labour cost is the cost of wages of those workers who are readily identified or
linked with a cost centre or cost object. Direct labour is sometimes called touch labour, since direct labour
workers typically touch the produce while it is being manufactured. For example, labour cost of assembly–line
workers of ‘Apple’ mobile factory would be direct labour costs.
Direct Expenses : Direct expenses are the expenses other than direct materials cost or direct labour cost
which can be directly traced to the cost centre / cost object. The cost of hiring a special machine for any cost
centre or cost object is an example of direct expense. Another example of direct expense is royalties paid in
connection with the production of an article to the owner of the patent or copyright.
Indirect Materials : Indirect materials are those which are required for production but do not become an
integral part of the finished product. For example, materials used for the repair of a machine which is used for
the manufacturing of different products are treated as indirect materials. These items cannot be traced with any
one specific product.
However, it is important to note that materials which become an integral part of the finished product but are
insignificant in cost are also often treated as indirect materials. For example, cost of glue used in fixing 'Honda'
logo of Honda Civic Car may be so inexpensive that it is not worth tracing this cost to a specific car as direct
material.
Indirect Labour Cost : Indirect labour cost is wages and salaries of employees who do not work on the
product itself but who help in manufacturing operations.
For example, the salaries of the factory supervisors, salaries paid to the staff of computer department etc.
It should be noted here that in many industries (e.g., readymade garment industry) major shifts are
taking place in the structure of labour cost. Sophisticated computer controlled machines are
increasingly replacing direct labour. Direct labour has become insignificant.
Indirect expenses are those expenses which cannot be directly traced to a particular cost centre / cost object.
For example, rent, rates and taxes of the factory building, depreciation of plants and equipment, etc.
Illustration 3
Classify the following items as direct or indirect materials :
(a) Sandpaper used in furniture making.
(b) Bags in flour mills.
(c) Ingots used by a foundry for making casting.
(d) Battery to be installed in a car.
(e) Detergent used for factory cleaning.
(f) Milk to make ice cream.
Solution
(a) Sandpaper used in furniture making is an indirect material because its cost is insignificant and it is not
worth tracing their cost to a specific furniture.
(b) Bags in flour mills is a direct material because flour cannot be sold without the bag.
(c) Ingots used by a foundry for making casting is a direct material because it can be directly traced to a
cost object and it is an integral part of the finished product.
(d) Battery to be installed in a car is a direct material because it can be directly traced to a cost object and
it is an integral part of the finished product.
(e) Detergent used for factory cleaning is an indirect material because it cannot be directly traced to any
particular product.
(f) Milk to make ice cream is a direct material because it can be directly traced to a cost object and it is an
integral part of the finished product.
Summary of Analysis of Cost
Materials Cost = Direct Materials Cost + Indirect Materials Cost

+ + +
Labour Cost = Direct Labour Cost + Indirect Labour Cost
+ + +
Expenses = Direct Expenses + Indirect Expenses
Total Cost = Direct Cost + Indirect Cost or Overhead Cost
Classification on the Basis of Functions / Activities

A business has mainly five functions : (i) Production; (ii) Administration; (iii) Selling / Marketing; (iv) Distribution;
and (v) Research and Development.
Cost is classified according to major functions for which costs are incurred. The main objectives of this
classification are to ascertain cost of the product or service and control of cost based on different functions
of the business.
On the basis of functions, costs are classified into five categories as :
(i) Production cost
(ii) Administration cost
(iii) Selling / marketing cost
(iv) Distribution cost
(v) Research and development cost
Cost
Production Admin. Selling/Marketing Distribution R&D

Cost Cost Cost Cost Cost
[Fig. 2.3]
Production Cost : Production cost is the total cost incurred in the production of a product or service. It
includes all direct costs (e.g., direct materials, direct labour and direct expenses) and production overhead
(e.g., depreciation of plant and machinery, salaries of security guards, salaries of factory supervisors, etc.).
There are many organisations which are not manufacturing products but they are engaged in service
production. For example, hospitals, hotels, airlines, banks, etc. The same cost classification is used by these
organisations. For example, an airline produces air transport services. Direct materials includes cost of aviation
fuel, cost of foods and drinks, cost of tyre, parts, etc., of the aircraft. Direct labour includes salary of pilots,
cabin crew, etc. overhead costs include depreciation of different equipments, salaries of booking staff and
baggage handling staff, insurance etc.
Administration Costs : Administration costs are those costs which are incurred for general administration of
the organisation. These costs are indirect in nature. Salary of HR manager, system manager, accountants and
other office staff, legal expenses, audit fees, etc. are the examples of administration costs.
Selling / Marketing Costs : Selling / marketing costs are costs incurred for selling / marketing the products
or services. For example, advertising cost, product launching cost, salary of marketing manager and selling
staff, travel cost of sales personnel, etc.
Distribution Cost : Distribution costs are associated with transferring products from factory godown to
customers. Examples are transportation cost, secondary packing costs, etc.
Research and Development Costs : Research and Development Costs are costs incurred for developing
new products and services. It also include costs incurred for improving the quality of the existing products.
The cost of running laboratories, salaries of research staff, making of prototypes of new products and testing
new products are all classified as research and development costs.
Classification on the Basis of Behaviour
According to this criterion, costs are classified on the basis of their behavior with the change in the output.
These are : (i) Fixed; (ii) Variable; (iii) Semi–variable; and (iv) Semi–fixed.
Cost
Fixed Variable Semi-Variable Semi-Fixed
[Fig. 2.4]
Fixed Cost : Fixed Cost is a cost which does not vary with the change in the level of output. Examples include
insurance, depreciation of plant, machinery and factory building; rates and taxes of the local government etc.
A fixed cost is generally fixed only upto a certain level of production, beyond which a higher fixed
cost is to be incurred.
The characteristics of fixed cost are :
(i) Fixed cost remain same in total within a relevant output range.
(ii) Fixed cost per unit will decrease with the increase in output.
(iii) In most cases, fixed cost depends upon time factor rather than output factor.
(iv) Control of fixed cost rests with the top management rather than works manager or factory supervisors.
A graphical presentation of fixed cost is shown below :
[Fig. 2.5]
Let us assume that total fixed cost is ~ 1,00,000. The fixed cost per unit will change with the number of output.
The behaviour of fixed cost has been shown in the following table :
Tabulation of Fixed Cost
Output Total Fixed Cost Fixed Cost per Unit
1 ~ 1,00,000 ~ 1,00,000
2 ~ 1,00,000 ~ 50,000
. . .
. . .
. . .
5 ~ 1,00,000 ~ 20,000
. . .
. . .
. . .
10 ~ 1,00,000 ~ 10,000
. . .
. . .
. . .
100 ~ 1,00,000 ~ 1,000
Here, it should be noted that fixed costs can and do change. For example, corporation / municipality
taxes virtually always increase each year. However, this change in fixed cost is due to external factor
rather than change in volume.
Variable Cost : A variable cost changes in total in direct proportion to a change in the level of output. If there
is an increase of 50% in output, the variable cost increases by 50%. For example, cost of battery used by
Maruti in its car will increase by 50% if the output is increased by 50%. Direct material and direct labour are
good examples of variable costs.
The characteristics of Variable Costs are :
(i) Variable cost in total varies in direct proportion to output.
(ii) Variable cost per unit comparatively remain constant at all level of activity.
(iii) Variable cost is easy to assign to product / departments.
(iv) Variable cost can be controlled by the department head.
A graphical presentation of variable cost is given below :
[Fig. 2.6]
Tabulation of Variable Cost

Output Total Variable Cost Variable Cost per Unit
1 ~ 100 ~ 100
2 ~ 200 ~ 100
. . .
. . .
. . .
5 ~ 500 ~ 100
. . .
. . .
. . .
10 ~ 1,000 ~ 100
. . .
. . .
. . .
50 ~ 5,000 ~ 100
. . .
. . .
. . .
100 ~ 10,000 ~ 100
[Fig. 2.7]
Semi-Variable Cost : There are many costs which are neither purely fixed not purely variable. These costs are
semi-variable costs. Semi-variable costs are those costs which vary to some extent with change in output but
not in direct proportion.
Semi-variable costs include both a fixed and a variable element. In practice, semi-variable costs are very
common. For example, the cost of providing X-ray service to patients at Apollo Hospital is a semi-variable
cost. Fixed costs are depreciation of the X-ray machine, salary of operators and technicians, airconditioning
expenses, cost of rent of the space, etc.
Variable costs are X-ray film, power and supplies. Another example, of semi-variable cost is landline telephone
charge. A fixed amount must be paid as rental and a variable amount will be charged based on number of calls
made.
[Fig. 2.8]
Semi-Fixed Cost or Stepped Fixed Cost : A semi-fixed cost or stepped fixed cost is one where the cost
remains fixed within a narrow range of activity but show abrupt and distinct upward change with the increase
in output. Example of semi-fixed cost is supervision cost. A supervisor can supervise say 10 workers at a time.
The supervision cost will remain same up to 10 workers. The cost will be double if the number of workers
exceeds 10. However, it will remain same up to 20 workers. Again, it will increase abruptly when the number of
workers will exceed 20 and so on. A graphical presentation of fixed cost is given below :
[Fig. 2.9]
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CARLOMAN.
Courage, sire,
Is constant industry for happiness.
When I become a monk——
CHILPERIC.
Nay, no confession,
No putting reasons to your Overlord.
[to his nobles]
You need not shake your spears so stormily,
We leave you a stout leader for your wars,
[to Carloman] And you, your liberty. What use of it
You make is of no moment to the world,
And does not raise my curiosity,
Who for myself have found in meat and drink,
In sleep and long, long abstinence from care
The pleasure proper to me. Pepin, come!
[Exeunt Chilperic, Pepin and the Frankish Nobles.]

CARLOMAN.
He has no sight of God, is imbecile
And dropping into clay. I should not let
This show dishearten me; but I have suffered
A vulgar tongue to tell what from my lips
Alone is truth—that as the hidden spring,
Restless at touch of the diviner’s rod
Is dragged through to the surface by his spells,
I am discovered and borne upward, made
The answer to some perilous appeal:
And for my folly I must be dismissed
By a mere dotard with a passing sigh
Of envy, who forego the battlefield,
The Council-chamber, the sweet clang of arms
For just a pricking wonder at my heart,
A knowledge I would give to secrecy
Plunging it headlong in the ear of God.
Oh for the cloister! I will make escape
At once, in silence, without taking leave:
My joy is in the consciousness that Time
Will never draw me back to any wish
To any fondness I am flinging off....
[Enter Geneviva.]
My wife!
Is Geneviva come to me?
GENEVIVA.
Now the dull monk has left you. Rouse your head!
I have been taking thought how best to trim
My beauty for you. Boniface was slow
In giving counsel; slowly I took up,
Handled and dropt my jewels. Of a sudden,
When Pepin’s voice was heard upon the stair,
I laid these blossoms in a ruddy knot
Thus hasty on my bosom. Come to me.
My lord, you owe me many hours of love,
So many hours I have been beautiful
In vain. You do not see me when I sing,
You miss the marks of music in my face,
You do not love the hunt, and you have never
Ridden beside me in the morning light.
You see me but as now when I am vexed
And haughty for caresses.
CARLOMAN.
[after a pause] Geneviva,

You are a Christian?
GENEVIVA.
Dear my lord, you speak

As if I were laid sick.
CARLOMAN.
You were baptised?
GENEVIVA.
Assuredly, but the cold font has left
No chill upon my heart. Think not of that,
Think of our marriage-day. You leave me lonely
While Boniface enthralls you.
CARLOMAN.
[with hesitation] Women even

Have put aside their pomps and vanities ...
GENEVIVA.
Oh, leave me, you are insupportable!

You bring me word of kingdoms and of monks,
And thoughts of things that have not come to pass,
Or should be quite forgotten. We could spend
So sweet a moment now, for you are loved,
My Carloman—What need is there of talk
Concerning other matters?—loved of me,
Dreamed of when I am dreaming, when I wake
Wept for, sighed after. I have never cared
To listen to the minstrels, for the praise
My beauty covets most is in your eyes.
How wild they look and solemn!
[Carloman folds her in his arms quietly. Then with great effort bends over
her and speaks]
CARLOMAN.
Marcomir
Is restless for a pilgrimage to Rome.
I think we shall be starting presently:
And afterward ... If I am long away ...
GENEVIVA.
[breaking from him]
Oh, think a little! Can you leave this hair
So crisp and burnished? When the sun is bright
Across your shield, it has no livelier flash—
Confess, it has not? But you come to me
Stale, weary from your dreams and abstinence,
And tingle my suspicion.
CARLOMAN.
If these dreams
Were growing all the world to me!—You start,
You turn away, you will not understand.
The fear of hurting you has made me keep
So distant from you lately, and my eyes
You thought were worn with vigil and with books
Have burnt with tears at night for many a month
To think you have not known the tyrant-joy
That moves a soul to change and severance,
Except upon the day when for my sake
You parted from your home: but by the rapture
That made such tumult in the daughter’s grief
When she became a bride, your husband now
Implores your comprehension.
All thou hast,
So the Church teaches, family and spouse,
The child thou hast begotten, thine own life
Thou must abhor, if thou would’st have new days
Of blessing on the Earth. I feel this law
Is written in my very heart of hearts,
There is such haunting freshness deep below
The sorrow of farewell.
GENEVIVA.
[defiantly] My God is Love—
The God who made a bower in Paradise,
Who wedded Eve and Adam, who abode
In the sweet incense of His Church to bless
My marriage.
[Carloman stretches out his hand to support her.]
Have no fear that I shall fall,
I cannot swoon while I remember it—
How in the songful hush a restless hand
Grew tight about my fingers, and a vow
Thrilled all the girl in me to womanhood,
And stung the future lying at my heart
To joy and frankness. That was years ago ...
[She breaks into a bitter laugh]
O Carloman, you know not what you do,
You know not what I am, nor what a blank
Of mercy there is in you!
CARLOMAN.
Were I dead,
You would not be so violent: in a trance
Of resignation you would think of me,
With tears, not gasping laughter.
GENEVIVA.
[pacing the room excitedly] Pilgrimage!
Did you say, pilgrimage? To think of you
Growing each day more cramped about the mouth,
More full of resolution in the eyes.
What shall I do? Pray for you—but the dead,
You have just told me, should be left unmourned,
Forgotten as last summer’s autumn-leaves.
[facing him coldly] My lord, I am no reliquary-urn;
There is no widow in me.
[with still greater change of manner] If you leave

Your Kingdom, there are certain things to do
Before you start. There is that Gothic King,
The captive Hermann—you must break his chains.
CARLOMAN.
Hermann is dead. Count Marcomir reports

Last night he found him lifeless.
GENEVIVA.
[gasping] Late last night?

Marcomir!—Take your fingers from my sleeve;
But summon Marcomir, and if again
There is intelligence to break to me
Likely to hurt, give him the charge of it.
CARLOMAN.
No, Geneviva. I have little speech;
But when the secret crept into my soul
I loved you, it was not to Marcomir
I spoke: and if another secret now
Is breaking through my nature, do not think
That he will be the spokesman.
[noticing her agitation] Hermann died
I think by his own hand; he courted death.
What can a man prize in captivity?
[as Geneviva grows more agitated]
There! I will speak no more of him. Your maids—
[turning to summon her attendants].
GENEVIVA.
Weave the great arras. They have no concern

With me, except in silence to array.
You thought I cared to gossip with my maids!
But summon Marcomir.
[She looks after Carloman, who walks out, stroking his chin].
To think he dared
To lean above me with those burning eyes
Unconscious what they glassed. I did not learn
From him the magic that was born in me,
I learnt it when great Hermann passed in chains,
And he is dead. I promised I would go
To-day and visit him. How could he die?
[Marcomir enters.]
Why, you are deadly pale!
[She recoils, and says in a faint voice]
It is the hour
Fixed for our visit.
MARCOMIR.
But the man is dead.
GENEVIVA.
What does he look like now? Is he so changed

I must not see him?
MARCOMIR.
Death is not a fact

To touch with simile. What looks he like?
All men in moonlight mind one of the moon,
All dead men look like death.
GENEVIVA.
He lies in chains?
Are the brows restful?
MARCOMIR.
Had you been a man

You would have asked me how he came to die,
No more!
GENEVIVA.
I had forgotten ... then he perished

As Carloman reports?
[Marcomir turns away.] You cannot bear
That I should mourn him?
MARCOMIR.
[facing her again] Oh, a lifetime, if
It please you! I am going to a place
Where love is held of little consequence.
GENEVIVA.
Then you are bound for hell.
MARCOMIR.
[between his teeth] But you are safe!
GENEVIVA.
Keep me recluse from love, as men from war,

You spoil my faculties. Where will you go?
MARCOMIR.
To any coast you have not trod, wherever
The flowers are different from the flowers you wear,
To some Italian convent. Geneviva,
I am not framed to see you minister
To other men; but when long years are passed,
It may be in a fresco, I shall find
Some figure of a lady breaking bread
To mendicants, and kneel and pray to her
That she may bless me also: but till then ...
[covering his eyes]
O God, you shall not tempt me, though I feel
Just how your hair burns in a fiery wreath
Above your brow, and how your eyes are soft
With blue, and deeper blue, as through the hills
The valley stretches azure to the close.
You shall not tempt me, though I almost hear
Your bosom taking record of your breath,
And I could sit and watch that tide of life
Rising and falling through the lovely curves,
Till I was lost in ecstasy.
GENEVIVA.
Oh, hush!
But then you love me. It was in a fit ...?
MARCOMIR.
Of devilish malice.
GENEVIVA.
In a jealous fit?
You shall remain.
[She goes up to him: he takes her hands in his, kisses them coldly, and puts
them away.]
MARCOMIR.
I did not answer you—

His face was drawn.
GENEVIVA.
And I had given you charge

Of the great restive soldier.
MARCOMIR.
True, I swerved;
I have confessed my sin, and now must bear
The settling of my spirit on the Cross.
GENEVIVA.
So many favours!
MARCOMIR.
But you kissed his brows—

What need was there of that?
GENEVIVA.
You love me then,

You love me! Would you murder him again
If I again should touch him with my breath?
MARCOMIR.
Again, again.
GENEVIVA.
And Carloman complains

I am indifferent to him!
MARCOMIR.
He forgets;
But, Geneviva, if a thousand years
Broke over me, when Time had cleared his storms
I should look up and know your face by heart.
GENEVIVA.
Then stay, stay, stay with me!

Have you once thought
Through the long years how it will fare with me—
Nothing to watch except the sullen waste
Of my own beauty? Marcomir, I hold
If there be judgment it shall be required
Of women what delight their golden hair
Has yielded—have they put its wealth to use,
Or suffered it to lie by unenjoyed?
I rather would die spendthrift, nothing left
Of my rich heritage, save memory
Of the wild, passing pleasure it conferred
Than keep it untransmuted. And you choose
To take from me the only eyes that care
To mirror mine! I have so often thought
That some day I shall drown myself: the water
Reflects me with desire.
MARCOMIR.
[bitterly, as he turns away] A soul so wide
In innocence, so regal, on the day
He wedded, he appointed me your squire!
GENEVIVA.
[following him]
He keeps you with him, you can read his heart,
You know what way he travels, when his soul
Flies homeward. Tell me—’tis the only knowledge
I crave for in the world—does Carloman
Still hold me in affection? I beseech,
Tell me the truth. He loves you——
MARCOMIR.
Yes, he loves,
He does not use me for his purposes.
[perceiving PEPIN]
Not Carloman—his brother on the stair
Laughs at your light behaviour. So you lose
One last poor opportunity.
[Re-enter Pepin.]
PEPIN.
Good even.
Well, my fair sister, you have heard the news,
Wept [glancing at Marcomir]
and found consolation.
But to think
The son of Charles Martel should be a monk!
GENEVIVA.
A monk!—a pilgrim?
PEPIN.
No, a cloistered monk.
MARCOMIR.
What is his crime?
PEPIN.
Oh, no impiety;
A crazy fit: he must get near to God,
So puts away all intercourse with man:
And while I rule he thinks to thrill the world
With some convulsive movement from his prayers.
Ha, ha! But you shall queen it as before.
GENEVIVA.
Go fetch my husband and remain without,

For he alone can speak to me of this.
[Exit Pepin.]
[turning to Marcomir]
You are a murderer: this act of yours
Will leave me very lonely.
MARCOMIR.
I repent.
GENEVIVA.
There is no sin like that of looking back

When one has sinned. Whatever one attempts
It perfected in patience brings reward.
My Carloman will prosper: his whole heart
Is gone away from me.
Why there he is,
Passing in zealous talk with Boniface.
[Carloman and Boniface cross from right to left at the back of the hall.
Geneviva intercepts them.]
Farewell!
CARLOMAN.
[arrested] O Geneviva!
GENEVIVA.
Not my name,
Never my name again. Say, holy father—
They take new titles who renounce the world?
CARLOMAN.
[with flushing eagerness]
Then you too will renounce it? oh, the joy!
There is a strange new passion in your eyes.
Speak to me ... but you cannot! I could take
No leave of you in your fierce, worldly mood;
Now all is changed.
GENEVIVA.
Yes, all. How long ago

It seems since we were married!
CARLOMAN.
Think the day

Is yet to come, the joy is all before.
[taking her face between his hands]
O Boniface, this is no temptress’ face!
God has been with her, and she starts as I
Free in the great endeavour.
BONIFACE.
Do you choose,
Lady, a mere retreat among the nuns,
Or, like your husband, do you break all ties
That bind you to the earth?
GENEVIVA.
They all are broken:

Except ... oh, I forgot! I have a son.
CARLOMAN.
[nervously]
Pepin will guard him.
GENEVIVA.
Are you dreaming still?

Fool, fool! I tell you Pepin shall decide
What robes I wear, and haply suffer me
Sometimes at entertainments to look on,
And see young Charlemagne praised. But for my child
He shall remain with me.
[Re-enter Pepin] All is confirmed.
I shall not quit the world. How easily
A man is duped with God upon the brain!
I shall continue in my womanhood,
Giving, receiving pleasure.
I have heard
So much and suddenly; for Marcomir
Is to become a monk.
[to Carloman] Give him no welcome.
He takes the cowl a penitent; he is not,
Like you, a white-souled wayfarer.
[to Pepin] How strange
That we must pair together, you and I;
I know so little of your tastes and now
I must be often in your company.
MARCOMIR.
My lord, speak to her.
PEPIN.
Come, an end to this!
Brother, if you are wise you will not leave
This woman in the world. Convents are made
To tame the pride of such and keep them cool.
CARLOMAN.
O Geneviva, for my sake, and yet....

Not so, beloved.
[He turns away and covers his face.]

GENEVIVA.
Marcomir, farewell!
You will be monks together. When my husband
Forgets me, you must bring me to his thoughts
Recall that day we hunted and you fell;
I stayed to tend you; but the whole live day
My voice rang through the woods for Carloman
Until I wearied you; he was not found;
But you remember how I cried for him.
MARCOMIR.
Consul, have pity on her. I am free,

But she has need of love.
GENEVIVA.
O insolence!—
The virginal chill heart!—No intercession!
[to Carloman]
Our marriage is dissolved. How great a stranger
You have become to me! I should grow mad
To breathe by you another single hour.
[to Boniface]
And you, old man, who stand with such meek eyes,
Though you have robbed me of my name of wife,
And made my boy an orphan—go your way!
I cannot curse you, but I prophesy:
Dishonour motherhood, plant virgin homes,
Give to religion the sole charge of love,
And you will rear up lust of such an ice
As Death himself will shiver at.
[to Pepin] Lead on!
Now there is hope you may become a King,
There should be some high festival to keep
To-night in everlasting memory.
Lead me away.
PEPIN.
Brother, in all—good luck!

And may the Convent’s fare be angels’ food.
Your wife’s tears soon will dry.
[Exeunt Pepin and Geneviva.]

CARLOMAN.
The thing to do
Is simply just the sole thing to be done.
There should have been no tears, no taking leave;
A freeman can do anything he will.

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Cost and Management Accounting-I

McGraw Hill Education (India) Private Limited

Cost and Management Accounting-I

Copyright © 2018 by McGraw Hill Education (India) Private Limited.

This edition can be exported from India only by the publishers,

1. Introduction to Cost Accounting 1.1–1.10

1. Introduction to Cost Accounting ........................................................................... 1.1–1.10

2. Cost Terms, Concepts and Classifications ............................................................... 2.1–2.18

Classification on the Basis of Functions / Activities 2.9

3. Accounting for Materials ..................................................................................3.1–3.126

Computation of EOQ 3.23

Simple Average Method 3.83

4. Employee Cost and Incentive Systems .................................................................... 4.1–4.86

Normal Idle Time 4.15

Theoretical Questions 4.76

5. Accounting for Overheads .................................................................................5.1–5.128

Selection of the Base 5.35

6. Cost Book-Keeping ........................................................................................... 6.1–6.80

7. Job Costing and Batch Costing............................................................................. 7.1–7.66

8. Contract Costing.............................................................................................. 8.1–8.68

9. Operating/Service Costing .................................................................................. 9.1–9.36

10. Process Costing .........................................................................................10.1–10.108

Process Costing Vs. Job Costing 10.2

Preparation of Process Account 10.69

CC2.1Ch: Cost and Management Accounting–I

Internal Assessment 20 marks

Introduction to Cost Accounting

Future Role of Cost Accounting

Meaning of Management Accounting

Cost Units of Representative Industries

Composite Cost Units

Definition of Cost Centre

Cost Centre Cost Unit

Materials Labour Other Expenses

Classification on the Basis of Relation to Cost Centre / Cost Object — Traceability

Direct Cost Indirect Cost

Material Labour Expenses Material Labour Expenses

Materials Cost = Direct Materials Cost + Indirect Materials Cost

Classification on the Basis of Functions / Activities

Production Admin. Selling/Marketing Distribution R&D

Fixed Variable Semi-Variable Semi-Fixed

Tabulation of Variable Cost

[Exeunt Chilperic, Pepin and the Frankish Nobles.]

[after a pause] Geneviva,

Dear my lord, you speak

You were baptised?

[with hesitation] Women even

Oh, leave me, you are insupportable!

[with still greater change of manner] If you leave

Hermann is dead. Count Marcomir reports

[gasping] Late last night?

Weave the great arras. They have no concern

But the man is dead.

What does he look like now? Is he so changed

Death is not a fact

Had you been a man

I had forgotten ... then he perished

Then you are bound for hell.

[between his teeth] But you are safe!

Keep me recluse from love, as men from war,

I did not answer you—

And I had given you charge

But you kissed his brows—