Amity Business School

ACCOUNTING FOR
MANAGEMENT
MODULE IV
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COST ACCOUNTING

Meaning : Cost Accounting is the classifying , recording and

appropriate allocation of expenditure for the determination
of the costs of products or services, and for the presentation
of suitably arranged data for the purposes of control and
guidance of management.
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Features

• It is a process of accounting for costs

• It records income and expenditure relating to production of goods and services
• It provides statistical data on the basis of which future estimates are prepared
and quotations are submitted
• It is concerned with cost ascertainment, cost control and cost reduction
• It establishes budgets and standards so that actual cost may be compared to find
out deviations or variances
• It involves the preparation of right information to the right person at the right
time so that it may be helpful to management for planning, evaluation of
performance, control and decision making
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ELEMENT OF COST

For proper control and managerial decisions , management is to be

provided with necessary data to analyze and classify costs. For this
purpose, the total cost is analyzed by elements of cost i.e. by the nature
of expenses. The element of cost are material cost, labour cost and other
cost. The element of cost can be further explained through the following
chart
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Element of cost

Materials Labour Other Expenses

Direct Indirect Direct Indirect Direct Indirect

Overheads

Production or Administration Selling Distribution

Works overhead overheads overheads overheads
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By grouping the above element of costs the following divisions of costs

are obtained:-

PRIME COST:
Direct materials+ Direct Labour+ Direct Expenses

WORK or FACTORY COST:

Prime Cost + Work or Factory Overheads

COST OF PRODUCTION
Work cost + Administrative Overheads

TOTAL COST or COST OF SALES

Cost of Production + Selling and Distribution Expenses
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COST CLASSIFICATION
Cost classification is the process of grouping costs according to their common
characteristics. A suitable classification of costs is of vital importance in order to
identify the cost with cost centres or cost units. Cost may be classified according to
their nature, i.e. material, labour and expenses and number of other characteristics.
The same cost figures are classified according to different ways of costing depending
upon the purpose to be achieved and requirement of particular concern. The important
way of classification are as follows:-
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• Classification on the basis of Element

Material Cost Labour Cost Expenses

•Classification on the basis of Nature

Direct Cost Indirect Cost

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•Classification on the basis of Variability or Behaviour

Semi Variable
Variable Cost Fixed Cost Or
Semi Fixed cost

•Classification on the basis of Controllability

Controllable cost Uncontrollable cost

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•On the basis of Function

Production Cost Administration Cost Selling Cost Distribution Cost

•On the basis of Time

Historical Costs Pre- determined costs

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•Classification on the basis of Relevance to Decision Making & Control

Marginal Cost Sunk Cost Opportunity Cost Imputed Cost Differential cost

Shut Down Cost Postponable cost Replacement Cost

Abandonment Cost Out of Pocket Cost

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COST SHEET

The calculation of cost of production at various stages can be

shown by means of a statement called cost sheet Cost sheet is
an analytical presentation of the cost of the product in the form
of a statement and shows the various elements and
components of cost
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SPECIMEN OF A COST SHEET

Total Per unit
Particulars of items Rs.P. Rs. P.

Direct Materials consumed _ _

Direct Wages _ _
Direct Expenses _ _
Prime cost _ _
Factory Overheads _ _
_ _
Factory Cost( Work Cost) _ _
Office & administration Overhead

Cost of production _ _

Selling and Distribution Overheads _ _

Total Cost _ _
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VALUATION OF INVENTORIES
The value of materials has a direct bearing on the income of a
concern, so it is necessary that a method of pricing materials
should be such that it gives a realistic value of stocks.
Different methods can be used for the purpose of valuation of
inventories. The actual method to be adopted in a
manufacturing concern shall depend upon the nature of
materials and the nature of the business itself.
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Different methods that can be used for valuation of inventories are as

follows:
1. Cost price method

First –in-First-out Last –in-First-out Next–in-First-out

Highest –in-First-out
Method Method Method
Method
or or Or
or
FIFO Method LIFO Method NIFO Method
HIFO Method
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2. Market Price Method

3. Average price method

Weighted Periodic simple Periodic weighted Moving

Simple Average
Average Average Average Average
Price
Price Price Price Price
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4. Fixed Price Method or Standard Price Method

5. Inflated Price Method

6. Base Stock Method

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Selection Of A Proper Method Of Valuation

The selection will be made by taking into account a number of factors which
May be given as follows:

The nature of production – whether intermittent or continuous.

Volume/ Frequency of receipts of materials.
Variations and fluctuations in prices and their nature
Frequency of issue of material
Stock turnover rate.
Effect of pricing method on tax payable.
Clerical labour involved in the method.
Traceability of the issue to the particular lot or consignment.
Nature of the cost accounting system followed.