You are on page 1of 17

Cost accounting

Introduction

Accounting information is important for every business which serves the


needs of variety of interested parties.

To satisfy the needs of all interested parties, a sound accounting system is


very necessary.

Accounting may be divided into three parts:


1.
Financial accounting
2.
Cost accounting
3.
Management accounting

Branches of accounting

a) Financial Accounting: This is called original accounting, which is mainly


confined to the preparation of financial statement for the various concern
parties and financial institutions.
b) Cost Accounting: The process of accounting for cost which begins with the
recording of income and expenditure or the bases on which they are calculated
and ends with the preparation of periodicals statements and reports for
ascertaining and controlling cost.

c) Management Accounting: Management accounting is concerned with the

information needed for management decision making

Emergence of cost accounting

The Institute of Cost and Works Accountants of India (ICWAI) was established
as a company limited by guarantee for the development of cost accounting in
India.

The main purpose of this to develop the cost accounting as a profession. The
maintenance of cost accounting records became mandatory since 1965, after
the addition of Sec.209 (1) (d) in the companies act 1956

Meaning of cost

Cost is the resource given up in exchange for some goods or services.


This resource may represent money or money equivalent expressed in monetary units.
According to CIMA, London Cost is the expenditure incurred on, or attributable to a specified thing or activity.
For a consumer, cost means price. For owner, cost means expenditure incurred.

Costing, cost accounting

The process of ascertaining cost is known as costing.

Cost accounting is the specialized branch of accounting which involves classification, accumulation, assignment and
control of cost.

Methods of costing

Job Costing: In this system the cost of each job is ascertained separately which is
suitable in all cases where work is undertaken on receiving a customers order. Like
a printing press, motor work shop, ship building, machine construction etc.
Batch Costing: It is considered as the extension of job costing. It represents a
number of small orders passed through the factory in batch. Each batch here is
treated as a separate unit of cost. Examples are Pharmaceutical , readymade
garments, manufacturing of components part of radio, T.V. and watches

Contract Costing: It is suitable for the firms which are engaged in the work of
construction of bridges, roads, buildings etc.

Single or Output Costing: It is used in the business where a standard


production is turned out and it is desired to find the cost of a basic unit of
production.

Process Costing: It is a method of costing used to ascertain the cost of a


product which may passes through various processes before completion

Operating Costing: The cost of providing a service is known as operating cost and
the methods to ascertain the cost of such services is known as operating costing.

Multiple Costing: In multiple costing, a combination of two or more methods of


costing is used in conjunction to determine the cost of final product. This method is
used by the industries where different components are separately manufactured and
subsequently assembled into the finished product. For e.g.: Motor car, Television,
Ships etc.

Classification of Cost
(A)
(B)
(C)
(D)
(E)
(F)

Direct Material Cost


Indirect Material Cost
Direct Labour Cost
Indirect Labour Cost
Direct Expenses Cost
Indirect Expenses Cost

Direct Material cost

Material means those items which are applied for manufacturing of a product and
direct material is directly related to production. For example, raw cotton in textiles,
crude oil to make diesel etc.
Main points for direct material can be summarized as follows: (1) Direct material
specially acquired for a particular Job, order, process or product. (2) It is integrated
part of manufacturing unit. (3) Value of direct material is comparatively higher than that
of other materials. (4) Material passing from one process to another process. (5)
Primary packing materials e.g. wrapping, cardboard boxes, the glass bottle in
production of syrup etc (6) It Increases in the same ratio as the increase in production.

InDirect Material cost


indirect material cost is the material cost which cannot be allocated but which can be apportioned to or absorbed
by cost centres or cost units. Thus it may be said that indirect cost is the cost which cannot be directly identified to
the unit of output or to the segment of a business activity e.g. oil, grease, consumable stores etc.

Direct labour cost

Direct labour is known as the wage of those workers who are involved in the
production process whose time can be efficiently and economically traceable
to units of products e.g. wages paid to compositors in a printing press, labour
of machine operators and assemblers. It may also be defined as prime labour
cost, process labour cost, operating labour cost, manufacturing wages, Direct
wages and productive labour cost.
In the words of C.I.MA., London, direct wages is that wages which can be
allocated to cost centres or cost units.

InDirect labour cost

Some workers does not engage directly in conversion of output but contribute
indirectly. Labour is paid for the objective of carrying tasks incidental to goods or
service provided. It cannot be practically traced to particular units of output e.g.
wages of store-keepers, foremen, time-keepers, supervisors, Inspectors etc.
Wages which cannot be allocated but which can be apportioned or absorbed by cost
centres or cost units is indirect wages.

Direct Expenses Cost

It is also defined as chargeable expenses. These direct expenses are incurred


directly on a particular product, Job or cost units and recognizable with the
cost units.
According to C.I.M.A., London, Direct expenses means, expenses which can
be allocated to cost centres or cost units. For example, (1) Hiring of a
particular tool plant or equipment for job. (2) Cost of special moulds, designs
and patterns. (3) Fees paid to architects, surveyors and consultants. (4)
Insurance charges on special materials chargeable to a job.

InDirect Expenses Cost

Those expenses which cannot be directly, conveniently and fully charged to cost units are known as indirect
expenses.
Indirect expenses are expenses which cannot be allocated but which can be apportioned to or absorbed by cost
centres or cost unit For example, insurance, power, lighting and heating, rent, rates and taxes, depreciation etc.

Components of total cost


1.
2.

3.

4.

Prime Cost: It consists costs of direct material, direct labour and direct expenses. It
is also known as basic, first or flat cost.
Factory Cost: It comprises of prime cost and in addition, works or factory
overheads which include costs of indirect labour and indirect expenses. This cost
is also known as works cost, production or manufacturing cost.
Office Cost: If office and administration overheads are added to factory cost office
cost is arrived at. This is also termed as administration cost or total cost of
production.
Total Cost: Selling and distribution overheads are added to the total cost of
production to get the cost of sales.