Cost Accounting

Lecture-1
Introduction of cost accounting

By: Riaz Hussain Ansari

Lecturer Department of Business Administration
University of Sahiwal
 Accounting

 It is a language about financial information (which is measurable in

terms of money) commonly used in business.

Branches Of Accounting

Accounting

Financial Accounting
Cost Accounting Management Accounting

For external For internal Fed by

reporting reporting financial and
cost accounting
User Group

User Group

Financial Accounting Cost & Management Accounting

Investors Managers

Lenders Directors

Govt Agencies

Suppliers

Management

Employees
Branches Of Accounting

Financial Accounting is an art of recording (Journal),

classifying (Ledger), summarizing (Trial balance), reporting
(Profit & Loss A/c & Balance Sheet) and analysis
(Interpretation) the financial information.

Cost Accounting deals with ascertainment, measurement,

accumulation, budgeting and evaluating cost structure of the
entity.

Management Accounting deals with decisions relating to the

generation and effective utilization of the financial resources of
an entity.
Cost Accounting

So Cost accounting is a specialized branch of accounting

which provide processed set of information / statements to
the management which assist them in decision making.

In cost accounting cost of product or a process is;

 Ascertained
 Measured
 Accumulated
Management Accounting

 Management is central coordinating body in an entity

 Management is concerned with the maximization of wealth
through

Minimization of cost
Maximization of profit

 For this purpose information provided by cost accounting is

analyzed by the management for decision making and
management control function.
Management Accounting

 Reports generated through management accounting are

used internally.
 Major function of management accounting:
• Planning & Forecasting
• Controlling
• Decision making
• Pricing
• Make or Buy
• Shut down or Continued operation
• Equipment Replacement
Purpose Of Cost Accounting

 Provides information relating to cost of production.

 Determines the appropriate selling price.
 Discloses profitable products, areas and activity level.
 Helps in make or buy decision.
 Budgeting relating to production function.
 Controls production variances.
 Provides information to financial accountant.
 Classification Of Cost

Cost Classification

Direct Cost Indirect Cost

Other Direct
Direct Material Direct Labor Factory Overhead
Expenses
Direct Cost

 Cost that can be traced in full to the product or services is

direct cost
Types Of Direct Cost

Direct material costs are those cost of material that are

traceable in full in the cost of a product or services

For example wood in manufacturing of table

Direct labor cost are the specific cost of the worker in

producing a or service

For example labor involve in cutting wood

Types Of Direct Cost

Other Direct Expenses These are expenses other than

direct material and direct labor which have been incurred in
full as direct consequences of producing product or services

Royalty on production, Cost of jigs / moulds

Indirect Cost

 The cost that is incurred in producing product or services but which can not
traced in full

Factory overhead (FOH)

 FOH means all expenses of factory other than direct material, direct labor
and other direct production expenses.

Indirect material
Indirect Labor
Deprecation of machinery
Factory utility bills
Cost classification

Direct Material + Direct Labor + Other Direct Cost = Prime cost

Direct Labor + Other Direct Cost + FOH = Conversion cost

Prime Cost + FOH = Total factory cost

Summary

Material cost Labor cost Other production Total production

cost cost

Direct = Prime cost

Direct Direct

Indirect Indirect Indirect = FOH cost

Total Total Total Total Factory

=
Cost
Cost classification

Direct material Rs 12,000

Direct labor 8,000
Other direct cost 2000
Prime cost 22,000
FOH
Indirect material 3000
Indirect labor 2000
Electricity bill 1500
Rent of factory 3500
Depreciation 1000
11000
Total factory cost 33000
Behavior Of Cost

 Fixed cost  Step fixed cost

 Variable cost  Semi variable cost

Fixed cost

Fixed cost is a cost that do not vary with the level of

production. Simple means the variation in production has no
impact on fixed cost. For example rent of building and
accountant salary etc

3000

Fixed cost 2000

1000

100 200 300

No. of units
Fixed Cost Per Unit Reaction

Fixed cost per unit decreases as the number of units produced

increases and vice versa

For example rent of building is Rs. 10,000 and number of units

produced is 5000.

Per unit fixed cost = 10000 / 5000 = 2 per unit

If the number of units produced increases to 10000

Per unit fixed cost = 10000 / 10000 = 1 per unit

Step Fixed Cost
Costs which are constant for a relevant range of activity
and rise to new constant level once that range exceeded.
For example rent.

Fixed cost

No. of units
Variable Cost

The expenses that vary in direct proportion to volume of product.

For example Prime cost.

Variable cost

No. of units
Variable Cost Per Unit Reaction

Variable cost per unit remain constant

Units of Labor Total wages Per labor wage rate

10 10,000 1,000
20 20,000 1,000
Semi Variable Cost

The cost that is partly fixed and partly variable cost. For
example electricity bills, salesman salary.

3000
Semi variable
cost 2000

1000

100 200 300

No. of units
Summary

If the production volume increases

Per unit Total

Fixed cost Decreases Constant

Variable cost Constant Increases

Total cost Decreases Increases

Summary
If the production volume decreases

Per unit Total

Fixed cost Increases Constant

Variable cost Constant Decreases

Total cost Increases Decreases

Total cost

Total cost include both fixed cost and variable cost

As VC added in FC shifts upward

Total cost

Variable cost

3000
Total cost
2000 Fixed cost
1000

100 200 300

No. of units
Thank You