Dr.S.

MARIA ANTONYRAJ
M. Com, M. Phil, MBA, Ph. D
Associate Professor of Commerce and finance
Nims Institute of Management and Commerce
NIMS University,
Rajasthan, Jaipur.

COST ACCOUNTING
B.COM, IV, BBA IV SEM
MEANING AND DEFINITION OF
COST ACCOUNTING
 Cost Accounting is the recording, classifying, and summarizing costs
 For the determination of costs of products or services, planning, controlling and
reducing such costs and furnishing of information to management for decision
making.

 Costing is cost findings by any process or technique. It entails principles and rules
to determine the followings:
 i. The cost of manufacturing a product; and
 Ii. The cost of providing/ rendering a service.
Scope of Cost Accounting

 1. Cost Book Keeping

 2. Cost System
 3. Cost ascertainment
 4. Cost analysis
 5. Cost Comparisons
 6. Cost control
 7. Cost reports
Advantages of Cost Accounting

 The main advantages of cost accounting are as under:

 1.Accuracy of financial accounts
 2.Inventory control
 3.Reveals profitable
 4.Formulation of polices
 Limitations of Cost Accounting
Objectives of cost accounting

 1.Determine Selling price

 2.Determining and controlling efficiency
 3.Facilitating preparation of financial and other statements
 4.Providng basis for operating policy.
Technique of costing

 1.Marginal Cositng
 2.Differential costing
 3.Standard costing
 Historical costing
 i. Post costing
 ii. Continuous costing
5.Direct costing
6.Absrption (Total )Costing
7.Activity based costing
8.Throughput Accounting
9.Uniform costing
Methods of Costing

 A) Specific Order costing

 i. Job costing
 ii. Contract costing
 iii. Cost plus costing
 iv. Batch costing
 B) Operation Costing
 i. Process costing
 ii. Operation costing
 iii. Unit/Output/Single costing
 iv. Operating (Service) Costing
 v. Departmental costing
 vi. Composite or Multiple costing.
 Cost sheet
 Cost sheet or cost statement is that statement which is prepared to present
the total costs of production in details during a given period. It provides
information relating to cost per unit at different stages of completion of
the product.
 Cost per unit is obtained by dividing the total cost by the number of units
produced.
 Cost sheet can be prepared on weekly, monthly or any other time period
basis as desired by the management.
Advantages of cost sheet

 It shows the total cost and cost per unit of the product produced during the given
period.
 It facilitates control over the cost of production.
 It acts as a guide to the producer and helps him in formulating a definite and
profitable production policy
 It aids the management in fixing the selling price of the products.
 It helps the management in making a comparative study of the various
components of cost with the past results and the predetermined cost.
Computation of Profit

 Profit may be computed as a percentage of cost or as a percentage of selling price.

As a matter of convenience, it is advisable to take the given basis as equal to 100
and then proceed with the calculation work.
 Given, Cost : Rs.135,000, Profit percentage : 8, Basis of charge : Cost
 Solution : Take cost = Rs.100
 Profit =8 (100 x 0.08)
 Profit on a cost of 135000 is = 135000x 0.08
 =10800.
 2.Given, Cost: 135000, profit percentage :8, Basis of Selling price
 Solution:
 Take selling price =100
 Profit =8 (ie.100 x 0.08)
 Cost = 100 -8=92
 Multiplier = 8/92=2/23
 Profit on cost price of 135000 is
 135000x2/23 =11739.130
 Verficiation: Cost +profit=selling price
 135000+11739.130= 146739.130

 Profit on cost 146739.130x0.08=11739.130

 UNIT-II
 FIFO stands for “First-In, First-Out”. It is a method used for cost flow assumption purposes in the 
cost of goods sold calculation. The FIFO method assumes that the oldest products in a company’s
inventory have been sold first. The costs paid for those oldest products are the ones used in the calculation.

 Advantages of FIFO
 The method is easy to understand, universally accepted and trusted.
 FIFO follows the natural flow of inventory (oldest products are sold first, with accounting going by those
costs first). This makes bookkeeping easier with less chance of mistakes.
 Less waste (a company truly following the FIFO method will always be moving out the oldest inventory
first).
 Remaining products in inventory will be a better reflection of market value (this is because products not
sold have been built more recently).
 Higher profit.
 Financial statements are harder to manipulate.
 Disadvantages of FIFO
 The FIFO method can result in higher income tax for a business to pay, because
the gap between costs and profit is wider (than with LIFO).
 A company also needs to be careful with the FIFO method in that it is not
overstating profit. This can happen when product costs rise and those later
numbers are used in the cost of goods calculation, instead of the actual costs.
LIFO METHOD

 Last in, first out

 Last in, first out (LIFO) is a method used to account for inventory. Under
LIFO, the costs of the most recent products purchased (or produced) are the first
to be expensed. LIFO is used only in the United States and governed by the
generally accepted accounting principles (GAAP).
 LIFO stands for “Last-In, First-Out”. It is a method used for cost flow assumption
purposes in the cost of goods sold calculation. The LIFO method assumes that the
most recent products added to a company’s inventory have been sold first. The costs
paid for those recent products are the ones used in the calculation.
 What Is Difference Between LIFO and FIFO?
 LIFO stands for “Last-In, First-Out”.
FIFO stands for “First-In, First-Out”.
 The LIFO method goes on the assumption that the most recent products in a company’s
inventory have been sold first, and uses those costs in the COGS (Cost of Goods Sold)
calculation.
 The FIFO method does the opposite - it assumes that the oldest products in a
company’s inventory have been sold first, and uses those lower cost numbers instead.
 FLEXIBLE BUDGET –PROBLEM 1

Problem 1
Using the following information, prepare a flexible budget for the production of 80% and 100% activity .

Production at 50% Capacity 5,000 Units

Raw Materials Rs.80 per unit
Direct Labor Rs.50 per unit
Direct Expenses Rs.15 per unit
Factory Expenses Rs.50,000 (50) (Fixed)
Administration Expenses Rs.60,000 (Variable)
 Solution

Flexible Budget at a Capacity of

Capacity of 50% 80% 100%

Output Units 5,000 8,000 10,000

Rs. Rs. Rs.

Raw Materials 4,00,000 6,40,000 8,00,000

Labor 2,50,000 40,000 50,000

Direct Expenses 75,000 1,20,000 1,50,000

Prime Cost 7,25,000 11,60,000 14,50,000

Factory Expenses 50% Fixed

25,000 40,000 50,000
(50,000)

Factory Cost 7,75,000 12,25,000 15,25,000

Admin Expenses 40% Fixed

24,000 24,000 24,000
(60,000)

Variable 60% 36,000 57,600 72,000

Total Cost 8,35,000 13,06,000 16,21,000

Standard costing

 Standard costing is a system of accounting that uses predetermined 

standard costs for direct material, direct labor, and factory overheads.
 Standard costing is the second cost control technique, the first being 
budgetary control. It is also one of the most recently developed refinements of 
cost accounting.
 The Institute of Cost and Management Accountants (ICMA) defined standard cost
in the following way:
 A pre-determined cost which is calculated from management’s standards of
efficient operation and the relevant necessary expenditure. It may be used as a
basis for price fixation and for cost control through variance analysis.
 In ICMA’s definition of standard cost, the phrase “management’s standards of
efficient operation” is important. This is because standard cost is ascertained on
this basis.
 Advantages of Standard Cost
 This section highlights the most important advantages of standard cost.
 First, standard costs serve as a yardstick against which actual costs can be
compared.
 The difference between standard cost and actual cost are called variances. For
proper control and performance measurement in an organization, variances should
be measured and analyzed. This also ensures that regular checks are made on 
expenditures.
 The second advantage is that if immediate attention is taken, control over costs is
greatly facilitated. A proper standard costing system assists in achieving cost
control and cost reduction.
 Standard cost also helps to motivate employees. This is because the system can be
used to provide an incentive scheme wherein variance is minimized.
 Production and pricing policies are formulated with certainty when standard cost
systems are in place. This helps to keep costs in check.
 The last advantage of using standard cost is that even when other standards and
guidelines are constantly being revised, standard cost serves as a reliable basis for
evaluating performance and control costs.
MARGINAL COSTING

 Marginal costing is a technique/system of presentation of sales and cost data with

a view to guide the managers for taking short term decisions like sales mix
selection, make or buy, acceptance of special order, etc. It is also used by the
managers for cost control, budgeting and profit planning purposes.
 Meaning and Definition of Marginal Cost
 Marginal cost is the increase or decrease in total cost which occurs with small
variation in output (such as a unit). It generally excludes any element of fixed
cost.
 The Chartered Institute of Management Accountants, (CIMA) London defines
marginal cost as -“The cost of one unit of product or service which would be
avoided if that unit were not produced or provided.”
 Meaning of Management Accounting:
 Management Accounting is the presentation of accounting information in such a
way as to assist management in the creation of policy and the day-to-day
operation of an undertaking. Thus, it relates to the use of accounting data
collected with the help of financial accounting and cost accounting for the
purpose of policy formulation, planning, control and decision-making by the
management.
 Management accounting links management with accounting as any accounting
information required for taking managerial decisions is the subject matter of
management accounting.
 “Management Accounting is concerned with accounting information that is useful
to management.” —R.N. Anthony
 “Management accounting is a system of collection and presentation of relevant
economic information relating to an enterprise for planning, controlling and
decision-making.” —ICWA of India
 Management Accounting is “the application of appropriate techniques and
concepts in processing historical and projected economic data of an entity to assist
management in establishing plans for reasonable economic objectives and in the
making of rational decisions with a view towards these objectives”. —American
Accounting Association
SCOPE OF MANAGEMENT
ACCOUNTING
 Scope of Management Accounting:
 (i) Financial Accounting:
 Financial accounting though provides historical information but is very useful for future planning and
financial forecasting. Designing of a proper financial accounting system is a must for obtaining full
control and co-ordination of operations of the business.
 (ii) Cost Accounting:
 It provides various techniques of costing like marginal costing, standard costing, differential and
opportunity cost analysis, etc., which play a useful role n t operation and control of the business
undertakings.
 (iii) Budgeting and Forecasting:
 Forecasting on the various aspects of the business is necessary for budgeting. Budgetary control
controls the activities of the business through the operations of budget by comparing the actual with
the budgeted figures, finding out the deviations, analysing the deviations in order to pinpoint the
responsibility and take remedial action so that adverse things may not happen in future.
 (iv) Cost Control Procedures:
 These procedures are integral part of the management accounting process and
includes inventory control, cost control, labour control, budgetary control and
variance analysis, etc.
 (v) Reporting:
 The management accountant is required to submit reports to the management on
the various aspects of the undertaking. While reporting, he may use statistical
tools for presentation of information as graphs, charts, pictorial presentation,
index numbers and other devices in order to make the information more
impressive and intelligent.
 (vi) Methods and Procedures:
 It includes in its study all those methods and procedures which help the concern to
use its resources in the most efficient and economical manner. It undertakes
special cost studies and estimations and reports on cost volume profit relationship
under changing circumstances.
 (vii) Tax Accounting:
 It is an integral part of management accounting and includes preparation of
income statement, determination of taxable income and filing up the return of
income etc.
 (viii) Internal Financial Control:
 Management accounting includes the internal control methods like internal audit,
efficient office management, etc.
 (ix) Interpretation:
 Management accounting is closely related to the interpretation of financial data to
the management and advising them on decision-making.
 (x) Office Services:
 The management accountant may be required to maintain and control office services
in some organizations. This function includes data processing, reporting on best use
of mechanical and electronic devices, communication, etc.
 (xi) Evaluating the Performance of the Management:
 Management accounting provides methods and techniques for evaluating the
performance of the management. It evaluates the performance of the management in
the light of the objectives of the organisation. Thus, it helps in the implementation of
the principle of management by exception.
 It, therefore, can be said that management accounting services not only as a tool in
the hands of the management for evaluation; the performance of its subordinates, but
also provides methods and techniques for evaluating the performance of the
management itself.
Techniques of CVP Analysis:

 1. Contribution margin concept.

 2. Profit-Volume (P/V) analysis.
 3. Break-Even analysis.
 Contribution margin concept indicates the profits potential of a business enterprise
and also highlights the relationship between cost, sales and profit.
 Contribution margin is the excess of sales revenue over the variable cost and
expenses.
 Contribution = sales – variable cost
 Contribution = fixed cost + profit
Profit volume ratio

 The contribution margin can also be expressed as a percentage. This ratio is also
known as contribution to sales ratio. This ratio denotes the percentage of each
sales rupee available to cover the fixed cost and provide operating income to a
firm.
 Example sales of a company are Rs.100000, variable cost is Rs.60000 and fixed
cost is Rs.30000, the profit will be Rs.10000.
 P/v ratio is most useful when the increase or decrease in sales volume is measured
in terms of rupees, the unit contribution is useful when increase or decrease in
sales volume is measured in sales units.
 P/v ratio = Contribution / sales
Break even point

 3. Break-Even Analysis:
 A break-even analysis is performed to identify the level of operations at which the
entity has covered all costs but has not yet earned any profit. In other words the
total revenues and total expenses are equal i.e. there is neither profit nor loss.
 This is an important point to management because it represents a minimum
acceptable level of operations and it indicates that profitable operations can only
result when the level of activity exceeds the break-even point.
 There are three methods of calculating break-even point: the equation method, the
contribution margin method and graphic method.
OVERHEAD

 Overhead is the aggregate of indirect material, indirect labor, and indirect

expenses. It refers to any cost which is not directly attributable to a cost unit. The
term indirect means that which cannot be allocated, but which can be apportioned
to or absorbed by cost centers or cost units.
 Overhead Costs Examples

 For example, a business that offers services with an office has overhead costs, like
rent, insurance, utilities, office supplies, etc. These are in addition to the direct
costs of providing its services.
 Some other overhead costs’ examples are:
 Employee travel
 Advertising expenses
 Accounting and legal expenses
 Salaries and wages
 Depreciation
 Government fees and licenses
 Property taxes
 Overhead costs can be classified in terms of functions, behavior, and elements.
RATIO ANALYSIS

 Ratio analysis is a widely used tool of financial analysis. It is defined as the

systemic use of ratio to interpret the financial statements so that the strengths and
weaknesses of a firm, as well as its historical performance and current financial
condition, can be determined.
 Ratios make the related information comparable. A single figure by itself has no
meaning but when expressed in terms of related figures it yields significant
inferences. Thus ratios are relative figures reflecting the relationship between
related variables. 
 Types of Ratios
 Ratios can be broadly classified into four groups:
 1. Liquidity ratios;
 2. Capital Structure / Leverage ratios;
 3. Profitability ratios and
 4. Activity ratios.
Important of liquidity ratio
Profitability ratio
CLASSSIFCIATION OF OVERHEAD

 On the basis of functions: 1.General and Administration overhead

 2.Production overhead
 3.Selling and distribution overhead costs
 On the basis of behavior: Fixed Overhead
 2.Variableoverhead
 On the basis of elements: Indirect Material overhead
 2.Indirect Labour overhead


 Problem -1 Overhead

S. Ltd. has two production departments A, B and one service department S. The actual costs for a period are as follows: