UNIT - IV

COST ACCOUNTS
o Cost Accounts
o Classification of manufacturing costs
o Accounting for manufacturing costs.
o Cost Accounting Systems
o Job order costing - Process costing- Activity Based
Costing- Costing and the value chain - Target
costing- Marginal costing including decision making
o Budgetary Control & Variance Analysis
o Standard cost system
 COST ACCOUNTS
It refers to the monetary expenditure which a firm has to incur in
order to purchase or hire the factors of production. It is the
expense of purchasing or hiring factor services for production
and other business activities.
Costs that are usually considered an expense of the current
period may not be recorded as such because of special
circumstances.
Cost accounting is the process of accounting for cost which
begins with the incurrence of cost and ends with the control
 COST ACCOUNTS

According to ICMA, London, Cost accounting is the

process of accounting for cost which begins with the
recording of income and expenditure and ends with the
preparation of periodical statements and reports for
ascertaining and controlling cost.
 NATURE OF COST ACCOUNTING

Cost Accounting is a branch of knowledge.

Cost accounting is a science
Cost accounting is an art
Cost accounting is a profession
 FIXED AND VARIABLE COST
• A fixed cost is an expense or cost that does not change with
an increase or decrease in the number of goods or services
produced or sold. Fixed costs are expenses that have to be
paid by a company, independent of any business activity.

A variable cost is a corporate expense that changes in

proportion with production output. Variable costs increase or
decrease depending on a company's production volume;
 Direct and Indirect Costs

• Direct costs are similar to variable costs. They can be directly

attributed to the production of output. The value of inventory is the
sum of direct material, direct labor, and all variable manufacturing
costs.
• Indirect costs, on the other hand, are similar to fixed costs. They
are not directly related to the volume of output. Indirect costs in a
manufacturing plant may include supervisors' salaries, indirect labor,
factory supplies used, taxes, utilities, depreciation on building and
equipment, factory rent, tools expense, and patent expense. These
indirect costs are sometimes referred to as manufacturing overhead.
• Mixed costs - costs that vary in total but not in proportion to
changes in activity. It basically includes a fixed cost potion plus
additional variable costs. An example would be electricity expense
that consists of a fixed amount plus variable charges based on usage.
Manufacturing cost is the sum of costs of all resources
consumed in the process of making a product.

• Direct materials cost, - Direct materials are the raw materials that become a

part of the finished product.
• Direct labor cost and - The direct labour cost is the cost of workers who can be easily
identified with the unit of production. Types of labor who are considered to be part of the
direct labor cost are the assembly workers on an assembly line.
• Manufacturing overhead -
• Indirect labor cost: The indirect labor cost is the cost associated
with workers, such as supervisors and material handling team,
who are not directly involved in the production.
• Indirect materials cost: Indirect materials cost is the cost
associated with consumables, such as lubricants, grease, and 
water, that are not used as raw materials.
• Other indirect manufacturing cost: includes machine
depreciation, land rent, property insurance, electricity, freight and
transportation, or any expenses that keep the factoryoperating.
 Nonmanufacturing costs
• Nonmanufacturing costs - not incurred in
transforming materials to finished goods.
These include selling expenses (such as
advertising costs, delivery expense, salaries
and commission of salesmen) and
administrative expenses (such as salaries of
executives and legal expenses).
• a sunk cost is a cost that has already been
incurred and cannot be recovered (also known
as retrospective cost).
• Marginal Costs – Marginal cost is the cost of
producing an extra unit. If the total cost of 3
units is 1550, and the total cost of 4 units is
1900. The marginal cost of the 4th unit is 350.
FUNCTIONS OF COST ACCOUNTING

Analysis and Cost

Ascertainment
of cost control

Ascertainment Estimation
of profitability of cost
 SCOPE OF COST ACCOUNTING

Cost Ascertainment
Aids to Management
Proper Marching of cost with revenue
Cost control
 ADVANTAGES OF COST ACCOUNTING

Cost Accounting as an aid to Management

Advantage to employee
Advantage to creditors, investors and bankers.
Advantage to the government and the society.
 DIS ADVANTAGES OF COST ACCOUNTING

It is unnecessary
It is expensive
It is inapplicable for small scale unit
It is a failure
 MANUFACTURING COST

The term manufacturing costs usually refers to material

used, direct labour incurred and overhead incurred in a
manufacturing business.
MANUFACTURING COST
 COST SHEET

Cost sheet is a statement designed to show the output of

a particular accounting period along with break up of
costs.

Cost sheet is prepared on the basis of :

Historical cost
Estimated cost
 IMPORTANCE COST SHEET

Cost Ascertainment
Fixation of selling price

Help in cost control

Minimize competition

Facilitates managerial decisions.

 COST ACCOUNTING SYSTEMS

Cost accounting system is a formal means of gathering,

analyzing and reporting cost data to aid management in
coordinating collective decisions in the achievement of
the overall goals of an organisation.
 COST ACCOUNTING SYSTEMS

INPUT MEASUREMENT BASIS

INVENTORY VALUATION METHOD

COST ACCUMULATION METHOD

COSTFLOW ASSUMPTION

RECORDING INTERVAL CAPABILITY

 ESSENTIAL OF A GOOD COST ACCOUNTING
SYSTEM
Suitability
Simplicity
Flexibility
Economical
Comparable
Timely
Uniform
Labour saving
Control Reconciliation
 ESSENTIAL OF A GOOD COST ACCOUNTING
SYSTEM
Suitability
Simplicity
Flexibility
Economical
Comparable
Timely
Uniform
Labour saving
Control Reconciliation
 JOB ORDER COSTING
An order specific costing techniques, used in situations where each job is different and
is performed to the customers specifications is called job costing
Job costing is the method of costing used to determine the cost of non-standard jobs
carried out according to customer’s specifications.
Job order costing is used in
Printing press
Automobile repair shop
Interior decoration
General engineering
Machine tools etc.,
 Process costing
• Is that from operation costing which is used to
ascertain the cost of the product at each
process or stage of manufacture where
processers are carried on from one process to
another process becomes the input for the
next process.
 Activity Based Costing (ABC)
An accounting method that identifies the activities
that a firm performs and then assigns indirect cost
to products is called ABC.
 TARGET COSTING
• Target costing is a system under which a
company plans in advance for the product
price points / price cost.
 Marginal Costing
• the cost added by producing one additional unit
of a product or service.
• COST – VOLUME – PROFIT ANALYSIS
– The study of the effects on future profits of changes
in fixed cost, variable cost, sales price, quantity and
mix.
– It is an inter relationship of three basic factors
• Cost of production
• Volume of production or sales
• Profit.
• Contribution : difference between sales and
variable cost
=Sales – variable cost
 P/V Ratio : it is an percentage of sale.
= Contribution / Sales * 100
Contribution = (Sales – variable cost)
so P/V Ratio = Sales – variable cost / Sales *
100
 BEP
• Break Even Point where total cost = total
revenue
• All the expenses is equal to revenues
 BUDGET
• A budget is pre-determined statement of management policy
during a given period which a standard for comparison with the
results actually achieved.
• Master Budget : summary budget incorporating from functional
budget
• Cash budget : estimates the cash receipts and cash payments
for all purpose and the cash balance during the year.
• Flexible budget: budget which is change in relation to the level
activity attained.
• Labour Budget : Labour requirements
• Raw material Budget : estimated quantities for all raw materials
 Standard costing
• A procedure or method for selling the
predetermined cost estimation for providing a
basis for comparison with actual cost is called
standard costing.
• Variance:
• Variance means deviation. A variance occurs
when actual cost differ from standard costs.