Cost Accumulation System

MAC Set 2
Prof. Sunder Ram Korivi, CMA, PhD
Presentation Structure
• Cost Unit
• Traditional Costing and Classification
• Direct and Indirect Costs
• Cost Stages
• Inventories and FIFO
• COGS
Cost Unit
• Costs are incurred in lumpsum
• What is bought is different from what is sold (conversion)
• Costs are accumulated (materials, labour, overheads)
• Costs are recovered per unit (from customer, through sale price)
• Goods, Services
• Most important is to understand the cost unit
• This aspect is ignored in Financial Accounting
Traditional Costing and Classification
• Also called Absorption Costing or Full Costing
• Chronology: Materials, Labour, Overheads (O/h)
• Functional: Material, Labour, Manuf O/h, Admin O/h, Sales O/h
• Traceability: Direct and Indirect Costs
• Direct: Direct Materials, Direct Labour + Direct Expenses
• Indirect: Indirect Materials + Indirect Labour + Manuf O/h
• Direct Costs + Indirect Costs = Total Cost
Direct and Indirect Costs
• Direct Cost: That which is directly attributable to the finished product
and traceable to the finished product in an economically feasible
manner
• All other costs are treated as Indirect Costs
Cost Stages
• Direct Material + Direct Labour = Prime Cost
• Prime Cost + Manuf Expenses = Works Cost or Manufacturing Cost

• Cost structures through the decades:

Age of Physics (1920-1960) = Metals
Age of Chemistry (1960-1990)= Chemical Complex
Age of Biology (1990-2021) = Intellectual Inputs
Inventories and FIFO
• Material Cost = Opening Stocks + Purchases – Closing Stocks
• The logic is chronological, hence known as First-in, First-out (FIFO)
COGS
• Direct Costs • Product Costs (Inventoriable)
• Product Costs (Inventoriable)
• +Manufacturing O/h
• + Opening Stocks of FG
• - Closing Stocks of FG
• = Cost of Goods Sold (COGS) • Period Costs
• + Admin O/h • Period Costs
• + Selling O/h
Thank You