Cost accounting

Cost accounting
• Cost accounting is the process of
tracking, recording and analyzing costs
associated with the products or activities
of an organization, where cost is defined
as 'required time or resources'.
• Costs are measured in units of currency
(eg. Rupees) by convention
• Cost accounting could also be defined as
a kind of management accounting that
translates the supply chain (the physical
movement of products) into financial value
to support decision making to improve
costs and cash flows.
 Costs
• Costs were originally considered fixed.
("Cost" comes from a Latin root meaning
"to stand".) In larger organizations, some
costs tend to remain the same even during
busy periods, while others rise and fall
with volume of work.
• A more convenient way of categorizing
these costs is to define them as either
fixed or variable. Fixed costs were
associated with the business
administration, and did not change during
quiet or busy times.
• Variable costs were associated with
productive work, and naturally rose and
fell with business activity.
 Fixed costs
• Fixed costs are expenses whose total does not
change in proportion to the activity of a
business. (Indirect costs may be fixed or
variable.)
• For eg, a retailer must pay rent and utility bills
irrespective of sales volumes.
• Fixed costs include, but are not limited to,
overheads (rent, insurance, and such) but can
include direct costs such as payroll
(particularly salaries).
 Variable costs
• Variable costs by contrast change in
direct proportion to the activity of a
business such as sales or production
volume.
• Eg. In retail the cost of goods is almost
entirely variable. In manufacturing, direct
material costs are an example of a
variable cost.
 Total cost
• Total cost describes the total economic
cost of production and is made up of
variable and fixed costs.
 Break even analysis
• The break even point for a product is the
point where total revenue received equals
total costs associated with the sale of the
product (TR=TC).
• A break even point is typically calculated in
order for businesses to determine if it
would be profitable to sell a proposed
product, as opposed to attempting to
modify an existing product instead so it
can be made lucrative (attractive).
• Break-Even Analysis can also be used to
analyze the potential profitability of an
expenditure in a sales-based business.
 Profit / Loss
• If the product can be sold in a larger
quantity than occurs at the break even
point, then the firm will make a profit;
below this point, a loss.
• Break-even quantity is calculated by:

Total fixed costs / (price - average variable costs) .

("price minus average variable cost" is the

variable profit per unit, or contribution
margin of each unit that is sold.)
 Depreciation
• Depreciation is an accounting and finance term for the
method of attributing the cost of an asset across the
useful life of the asset.
• Depreciation is a reduction in the value of a currency in
floating exchange rate.
• Depreciation is often mistakenly seen as a basis for
recognizing “wear and tear", obsolescence , or
impairment on an asset.
• The use of depreciation affects the financial statements
and in some countries the taxes of companies and
individuals.
• In economics depreciation is the decrease in value of the
capital stock, physical depreciation
 Capital expenditures
• Capital expenditures ("CAPEX") are
expenditures used by a company to
acquire or upgrade physical assets such
as equipment, property, industrial
buildings. In accounting, a capital expenditure is added to an
asset account (i.e. capitalized), thus increasing the asset's basis.
• The most common type of capital expenditure
occurs when you purchase or otherwise acquire
any asset that will benefit your business for more
than one year.
• Eg. New equipment, a car, computer, office
furniture, or even business real estate are the
things that most commonly come to mind when
you hear the words “capital asset."
• An ongoing question of the accounting of any
company is whether certain expenses should be
capitalized or expensed.
• Costs that are expensed in a particular month
simply appear on the financial statement as a
cost that was incurred that month.
• Costs that are capitalized, however, are
amortized over multiple years. Most ordinary
business expenses are clearly either expensable
or capitalizable, but some expenses could be
treated either way, according to the preference
of the company.
• A cash flow statement is a financial statement
that shows incoming and outgoing money during
a particular period (often monthly or quarterly).
The statement shows how changes in balance
sheet and income accounts affected cash and
cash equivalents and breaks the analysis down
according to operating, investing, and financing
activities. As an analytical tool the statement of
cash flows is useful in determining the short-
term viability of a company, particularly its ability
to pay bills.