H. R.

Patil
Associate Professor
Dept of Mechanical Engg
Basaveshwar Engg College.
Bagalkot
E-mail: patil_hr@yahoo.com
 Estimating & Costing:

Components of costs such as Direct Material Cost, Direct Labour

Cost, Fixed, Overheads, Factory Costs, Administrative Over Heads,
First Cost, Marginal Cost, Selling price, Estimation for simple
components.
 COST - MEANING

Cost means the amount of expenditure

( actual or notional) incurred on, or
attributable to, a given thing.
 COST ACCOUNTING INTRODUCTION
 Way back to 15th Century, no accounting system was there and it was
the barter system prevailed.
 It was in the last years of 15th century Luca Pacioli, an Italian found
out the double entry system of accounting in the year 1494.
 Later it was developed in England and all over the world up to 20th
Century.
 During the World War I and II the social importance of Cost
Accounting grew with the growth of each country’s defence
expenditure.
 In the absence of competitive markets for most of the material
required for war, the governments in several countries placed cost-
plus contracts under which the price to be paid was cost of production
plus an agreed rate of profit.
 The reliance on cost estimation by parties to defence contracts
continued after World War II.
 In Indian…
• In India, prior to independence, there were a few Cost
Accountants, and they were qualified mainly from I.C.M.A. (now
CIMA) London.
• During the Second World War, the need for developing the
profession in the country was felt, and the leadership of forming an
Indian Institute was taken by some members of Defence Services
employed at Kolkata.
• Enactment of the Cost and Works Accountants of India Act, 1959,
the Institute of Cost and Works Accountants of India (Now called as
The Institute of Cost Accountants of India) was established at
Kolkata.
• The profession assumed further importance in 1968 when the
Government of India introduced Cost Audit under section 233(B) of
the Companies Act, 1956.
• At present it is under Section 148 of the Companies Act, 2013.
 Cost Accounting :

• Cost Accounting may be defined as “Accounting for costs

classification and analysis of expenditure as will enable the
total cost of any particular unit of production to be ascertained
with reasonable degree of accuracy and at the same time to
disclose exactly how such total cost is constituted”.
• Thus Cost Accounting is classifying, recording an appropriate
allocation of expenditure for the determination of the costs of
products or services, and for the presentation of suitably
arranged data for the purpose of control and guidance of
management.
 COST ACCOUNTING - INTRODUCTION
Accounting for determination and control of costs.

 COST ACCOUNTING: The Institute of Cost and Management Accountant, England

(ICMA) has defined Cost Accounting as – “the process of accounting for the costs
from the point at which expenditure incurred, to the establishment of its ultimate
relationship with cost centers and cost units. In its widest sense, it embraces the
preparation of statistical data, the application of cost control methods and the
ascertainment of the profitability of activities carried out or planned”.

Cost Accounting = Costing + Cost Reporting + Cost Control.

 COST ACCOUNTING - MEANING

Cost accounting is concerned with recording,

classifying and summarizing costs for
determination of costs of products or services,
planning, controlling and reducing such costs and
furnishing of information to management for
decision making
 OBJECTIVES OF COST ACCOUNTING
• Ascertainment of Cost: The primary objectives of the cost accounting is to
ascertain cost of each product, process, job, operation or service rendered.
• Ascertainment of Profitability: Cost accounting determines the profitability of
each product, process, job, operation or service rendered. The statement of
profit or losses and Balance Sheet also submitted to the management
periodically.
• Classification of Cost: Cost accounting classifies cost in to different elements
such as materials, laborer and expenses. It has further been divided as direct
cost and indirect cost for cost control and recording.
• Control of Cost: Cost accounting aims at controlling cost by setting standards
and compared with the actual, the deviation or variation between two is
identified and necessary steps are taken to control them.
• Determining selling price (Fixation or Selling Prices): Cost accounting guides
management in regard to fixation of selling prices of the products. It is also
helpful for preparing tender and quotations.
• Facilitating preparation of financial and other statement
• Providing basis for operating policy
 Importance of Cost accounting
• Importance to management: Management is highly benefitted with the cost
accounting. It helps to ascertain the cost and selling price of the product. Cost data
help management to formulate the business policies. The introduction of
budgetary control and standard cost would be an aid to analyze cost. Helps to find
out reasons for profit or loss.
• Importance to investors: Investors want to know the FINANCIAL conditions and
earning capacity of the business.
• Importance of consumers: The ultimate aim of costing is to reduce the cost of
production to minimize the profit of business. Reduction in the cost is usually
passed on the consumers in the form of lower price. Consumers get quality goods
at a lower price.
• Importance to Employees: Cost accounting helps to fix the wages of the workers.
Efficient workers are rewarded for their efficiency. It helps to induce incentive wage
plan in business.
• Importance to Government: Cost accounting is one of the prime sources to
provide reliable data to internal & external parties. It helps government agencies to
determine excise duty & income tax. Government formulates tax policy, industrial
policy, export & import policy based on the information provided by the cost
accounting.
 COST TERMINOLOGY:

 COST: Cost means the amount of expenditure incurred on a particular thing.

 COSTING: Costing means the process of ascertainment of costs.

 COST ACCOUNTING: The application of cost control methods and the ascertainment of the
profitability of activities carried out or planned”.

 COST CONTROL: Cost control means the control of costs by management. Following are the
aspects or stages of cost control.

 JOB COSTING: It helps in finding out the cost of production of every order and thus helps in
ascertaining profit or loss made out on its execution. The management can judge the profitability
of each job and decide its future courses of action.

 BATCH COSTING: Batch costing production is done in batches and each batch consists of a
number of units, the determination of optimum quantity to constitute an economical batch is all

the more important.

 ELEMENTS OF COST

Element of cost

Materials Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

• MATERIAL: The substance from which the
finished product is made is known as
material.
• (a) DIRECT MATERIAL: is one which can be
directly or easily identified in the product
Eg: Timber in furniture, Cloth in dress, etc.
• (b) INDIRECT MATERIAL: one which cannot
be easily identified in the product.
 EXAMPLES OF INDIRECT MATERIAL

At factory level – lubricants, oil,

consumables, etc.
At office level – Printing & stationery,
Brooms, Dusters, etc.
At selling & dist. level – Packing materials,
printing & stationery, etc.
• LABOUR: The human effort required to
convert the materials into finished
product is called labour.
• (a) DIRECT LABOUR: is one which can be
conveniently identified or attributed wholly to
a particular job, product or process.
Eg: wages paid to carpenter, fees paid to tailor,
etc.
• (b) INDIRECT LABOUR: is one which cannot be
conveniently identified or attributed wholly to a
particular job, product or process.
 EXAMPLES OF INDIRECT LABOUR

At factory level – foremen’s salary, works

manager’s salary, gate keeper’s salary,etc
At office level – Accountant’s salary, GM’s
salary, Manager’s salary, etc.
At selling and dist.level – salesmen salaries,
Logistics manager salary, etc.
• OTHER EXPENSES: are those expenses other
than materials and labour.
• DIRECT EXPENSES: are those expenses
which can be directly allocated to
particular job, process or product.
• Eg : Excise duty, royalty, special hire
charges, etc.
• INDIRECT EXPENSES: are those expenses
which cannot be directly allocated to
particular job, process or product.
 Examples of other expenses

At factory level – factory rent, factory insurance,

lighting, etc.
At office level – office rent, office insurance,
office lighting, etc.
At sales & dist.level – advertising, show room
expenses like rent, insurance, etc.
COST CLASSIFICATION – ON THE BASIS
OF
 Nature
 Function
 Direct & indirect
 Variability
 Controllability
 Normality
 Financial accounting classification time
 Planning and control
 Managerial decision making
 ON THE BASIS OF NATURE

 Materials

 Labour

 Expenses
 ON THE BASIS OF FUNCTION

 Manufacturing costs
 Commercial costs – ADM and S&D Costs

ON THE BASIS OF DIRECT AND INDIRECT

 Direct costs

 Indirect costs
 ON THE BASIS OF VARIABILITY
 Fixed costs  – costs that do not change with output.  
 Variable costs – costs that vary in direct proportion
to output. 
 Semi-variable costs – costs that are a combination of
the above, with both a fixed and variable element
ON THE BASIS OF
CONTROLLABILITY

 Controllable costs

 Uncontrollable costs
 ON THE BASIS OF NORMALITY

 Normal Cost are the normal or regular costs which

are incurred in the normal conditions during
the normal operations of the organization. ...
  Abnormal Cost are the costs which are unusual or
irregular which are not incurred due
to abnormal situations of the operations  or
 productions
ON THE BASIS OF FINANCIAL ACCOUNTS:
 Capital costs: are fixed, one-time expenses incurred
on the purchase of land, buildings, construction, and
equipment used in the production of goods or in the
rendering of services.
 Revenue costs: are the ongoing operating expenses,
which are short-term expenses used to run the daily
business operations.
 Deferred revenue costs: also known as unearned
revenue, refers to advance payments a company
receives for products or services that are to be
delivered or performed in the future.
 ON THE BASIS OF TIME:
 Historical cost is a measure of value used in
accounting in which an asset on the balance sheet is
recorded at its original cost when acquired by the
company.
 Predetermined cost means that estimation which is
made by a manufacturing company in advance; it is
done even before the production of a product starts.

ON THE BASIS OF PLANNING AND CONTROL:

 Budgeted costs
 Standard costs
 ON THE BASIS OF PLANNING AND CONTROL

 Budgeted cost is an estimate of the expenses that a

company expects to spend going ahead. Or, we can
say it is the expenses that management estimates to
pay based on forecasted revenue and sales.
 A standard cost is an expected cost that a company
usually establishes at the beginning of a fiscal year
for prices paid and amounts used. The standard
cost is an expected amount paid for
materials costs or labor rates.
 ON THE BASIS OF MANAGERIAL DECISION MAKING
 Marginal costs; refers to the increase or decrease in the cost of producing one
more unit or serving one more customer.
 Out of pocket costs: Out-of-pocket expenses refer to costs that individuals pay
out of their own cash reserves.
 Sunk costs: A sunk cost is an irretrievable cost. Once spent, the sunk cost
cannot be recovered when the firm leaves the industry.
 Imputed costs: An imputed cost is a cost that is incurred by virtue of using an
asset instead of investing it or undertaking an alternative course of action
 Opportunity costs: Opportunity cost is the value of what you lose when
choosing between two or more options.
 Replacement costs: Replacement cost is the price that an entity would pay to
replace an existing asset at current market prices with a similar asset.
 Avoidable costs: An avoidable cost is an expense that will not be incurred if a
particular activity is not performed.
 Unavoidable costs: An unavoidable cost is an expenditure for which there is a
firm spending commitment in the short term.
 Profit
/ Loss
e
Selling & Pric
Distribution
Expenses ng
Office & Selli

Total Cost / Selling Cost

Administr

Office Cost / Manufacturing Cost /

Selling Price
ative

Production Cost / Gross Cost

of
Expenses
Factory Factory Cost / Works Cost on
Expenses
/ Works nati
On-cost
Direct ermi
Prime Cost /

Material Cost
Direct Cost

Direct Det
Labour Cost
Direct
Expenses
 Estimation
• Estimation is the assessment of the total cost in manufacturing a
product even before it is manufactured.
• One must have a sound knowledge of material, labour, processing
costs, quality and quantity of material required, selection of
manufacturing method, manufacturing time required, etc. in order
to do a proper estimation.
• The engineer must be able to state the probable cost at the stage
when only sketch plans are drawn.
• If the available funds are known, the designer has to work
backwards i.e. will have to design the building/product which may
be constructed within the available sum.
Acco
untin
g
Proce
ss
 COST SHEET 
DIRECT MATERIAL
DIRECT LABOUR
DIRECT EXPENSES
 

PRIME COST
FACTORY OVERHEADS
 

FACTORY COST
OFFICE OVERHEADS
 

COST OF PRODUCTION
SELL & DIST OVERHEADS
 

COST OF SALES
PROFIT
 

SALES
COST SHEET - ADVANCED
 
OPENING STOCK OF RAW MATERIALS
+PURCHASES
+CARRIAGE INWARDS
-CLOSING STOCK OF RAW MATERIALS
 
VALUE OF MATERIALS CONSUMED
+DIRECT WAGES
+DIRECT EXPENSES
 
PRIME COST
+FACTORY OVERHEADS
+OPENING STOCK OF WIP
-CLOSING STOCK OF WIP
 
FACTORY COST
(CONT.) 
 
 
 FACTORY COST
 
+ADMINISTRATIVE OVERHEADS
 
COST OF PRODUCTION
+OPENING STOCK OF FINISHED GOODS
-CLOSING STOCK OF FINISHED GOODS
 
COST OF GOODS SOLD
+SELL. & DIST. OVERHEADS
 
COST OF SALES
+PROFIT
 
SALES
 
 
 
 
 Calculation of various cost
Direct Materials
Opening stock of materials
Add Purchases of materials
Less Closing stock of materials
(a) Materials consumed
Direct Wages
Direct Expenses ------ ------
PRIME COST
Add Factory Overheads
Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs
Salaries of Works Manager etc. Indirect Materials
Drawing office and works office expenses Depreciation on factory land and building Less Scrap value
Defective work
Add Work in progress (opening)
Less Work in progress (closing) ------
WORKS COST
Add Office/Administration overheads
Office rent, insurance, lighting, cleaning
Office salaries, telephone, law and audit expenses

General Manager’s salary

Printing and stationery
Maintenance, repairs, upkeep of office bldg
Bank charges and miscellaneous expenses ------
COST OF PRODUCTION
Add Opening stock of finished goods
Less Closing stock of finished goods ------
COST OF GOODS SOLD
Add Selling and Distribution Overheads
Showroom expenses, salesmen’s salaries
& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.
COST OF SALES
Add Net Profit or deduct net loss: ------ SALES ------