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COST ACCOUNTING

Meaning of Costing and Cost Accounting:

The Charted Institute of Management Accountants defined costing as “ the techniques and processes of ascertaining costs” Costing simply means cost finding by technique. Cost accounting is a formal system of accounting for costs in the books of account, by mean of which cost of product and services are ascertained and controlled.

WHAT IS COSTING

Costing is the technique and process of ascertaining costs. It is referred to as classifying recording and appropriate allocation of expenditure for the determination of costs of products or services.

What is cost Accounting

Cost accounting is the formal mechanism by means of which costs of product or services ascertained and controlled. Weldon Defines Cost accounting as “ the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services, the relation of these costs to sales value and the ascertainment of profitability”

Characteristics

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Cost Recording- posting of the cost transactions Cost Classification- grouping of the cost into a common group like material , labour etc Cost Allocation- allotment of cost to various department Cost Control Cost Reporting- furnishing of data on a regular basis Cost Ascertainment – cost of goods

Objectives and Functions of Cost Accounting:
1) Ascertainment of Cost: 2) Cost control and Cost Reduction:

3) Guide to Business Policy:
4) Determination of Selling Price: 5) Fixing profit per products.

Importance of Cost Accounting


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Detailed Cost information Help in price fixation Reveals profitable or non profitable activity Reveals idle capacity Helps in decision making Helps in controlling costs Cost comparison Helps in inventory control

Methods of costing

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1) Job order costing: Costs are collected for each job/ work/ project separately. Where production is not repetitive. Example: Printing, machine tool manufacturing. 2) Contract costing: A contract is a big job and is spread over a period of time. This costing applicable to builders. Dams, bridges and roads. 3) Batch costing: it is extension of job costing. A batch consists of number of similar products. the cost of group of products constituting the batch Example: drugs, cigrates, clothing, medicines etc..

production industries manufacturing standard products in continues process of manufacturing. To arrive cost per unit, the total cost of a process is divided by no of units produced.  Example: car manufacturing, refineries, sugar manufacturing etc.  5) Operational costing: it is nothing but refinement and more detailed application of process costing. It involves ascertainment for each operation instead of process.  Example: mines, steel production etc.  6)_Service costing: where services are being provided rather than goods manufactured. Example: hospital, hotel , education industries etc

4) Process costing: this method is used in mass

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7) Single, or output or unit costing: used when production is uniform and consists of a single or two or more varieties of same products. Where product is produced in different grade. Example: car manufacturing, steel production. 8) Service costing: it is used in undertaking which provide services instead of manufacturing products. Example: transport co, electricity co. 9) Multiple or Composite costing: this method used in industries where a number of components are separately manufactured and then assembled into final product. Example: television set manufacturing

Techniques of costing

1) Standard costing: This is a very valuable technique of controlling cost. Standard cost is pre-determined as target of performance, and different between actual cost incurred and standard cost analyze. 2) Budgetary costing: 3) Marginal costing: In this technique, separation of costs in to two parts: fixed and variable costs. Marginal costing regards only variable costs as the cost of the products. This technique is used to study the effect on profit of changes in volume or type of output.

4) Total absorption costing: it is a traditional method of costing where by total costs( fixed and variable) are charged to products. This is in complete contrast to marginal costing where only variable cost are charged for products. 5) Uniform costing: it simply denotes a situation in which a number of firms adopt a uniform set of costing principles.

Classification of cost

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A) Classification into Direct and Indirect Costs: direct costs: these are those costs which are incurred for and identified with a particular cost unit. Indirect costs: these costs cannot be identified with the particular cost unit. B) Classified into fixed and variable costs: fixed cost: variable cost: semi variable or semi fixed costs:

C) classification into committed and Discretionary costs: committed: Example: salary of manager, and depreciation. Discretionary costs: costs which can be avoided by the management decisions. Such cost are not permanent. Example: research and development.

D) classification into product costs and period costs: product costs: these are those costs which are necessary for production and which will not be incurred if there is no production. Period costs: these costs are not necessary for production but incurred even if there is no production. Example: showroom rent, salary of supervisor.

E) classification into controllable and non- controllable costs: controllable cots: non-controllable costs:

F) Classification into historical and pre-determined costs: historical costs: these are the costs which are ascertained after these have been incurred. Historical costs are thus, nothing but actual costs. pre-determined costs: these are future costs which are ascertained in advance of production on the basis of specification of all the factors affecting cost.

Special costs for Management Decision making

Relevant cost: Not all costs are relevant for decision making. A relevant cost is a cost whose magnitude will be effected by a decision being made. ( future cost and revenue) Irrelevant cost: These are those costs that will not be affected by a decision. Sunk costs: a sunk cost is an expenditure made in the past that cannot be changed and over which management has no longer has control.

Differential costs: is the increase or decrease in total cost that result from an alternative course of action. Marginal cost: is the additional cost of producing one additional unit. Marginal cost is the same thing as variable cost. Opportunity cost: Sacrifice of benefits or return by not choosing the next best alternative. Replacement cost: current market value of replacing asset.

Elements of cost

Cost divided in to 3 parts.  1) material.  2) labour.  3) expenses.  1) Material cost: divided into 2 parts.  a) direct material: cost is that which can be conveniently identified with and allocated to cost units. Direct material generally become a part of the finished products.  Example: leather in shoes, steel in machines.

B) indirect material: are those materials which cannot be conveniently identified with individual cost units.  Example: lubricant oil, small tools, nuts and bolts. 2) Labour cost: a) direct labour cost: b) indirect labour cost example: supervisor, clerk, watchmen. 3) Expenses cost: a) direct expenses: b) indirect expenses: Example: rent, depreciation, advertising.

ELEMENTS OF
COST

COST

MATERIALS

OTHER EXPENSES

LABOUR

DIRECT

INDIRECT DIRECT

INDIRECT

DIRECT

INDIRECT

OVERHEADS
DOH

FOH

AOH

SOH

Overhead cost

1) factory overhead. a) indirect material+ indirect labour + indirect expenses of factory. 2) office overhead. b) indirect material+ indirect labour + indirect expenses of office. 3) selling and distribution overhead. c) indirect material+ indirect labour + indirect expenses of selling.

Examples of Indirect material
At factory level – lubricants, oil, etc.  At office level – Printing & stationery, Dusters, etc.  At selling & dist. level – Packing materials, printing & stationery, etc.

Examples of Indirect 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.

Particulars Direct Material opening stock of raw materials Add: Purchases Add: Carriage inward/import duty Less: Closing Stock of raw material Prime Cost Add:Factory or works overheads Indirect material Indirect wages Factory rent Factory lighting Factory insurance Drawing office expenses Power and fuel

Total cost

cost per unit

Depreciation repairs
Maintaince of Plant Factory manager Salary cost of sale of scrap Less: sale of Scrap Factory cost or work cost

Add: Office And Administration Overheads Office rent

Office Salaries
Director's Fees Office Lighting Establishment charges audit fees Legal Charges Bank Charges General Office Expenses Cost of Production Add:Opening stock of finished goods Less: Closing Stock of finished Goods Cost of Goods Sold Add: Selling and distribution Expenses showroom expenses salesman Salaries trvelling Expenses advertisement Market research Bad debts Cost of free samples Cost of Sales or total Cost

Add: Profit
Sales

Determination of the total cost

Prime cost = Direct Material + Direct Labor+ Direct expenses Works cost or factory cost= Prime cost + Works overhead Cost of production= Works cost or factory cost+ Office and administration Expenses Total cost or cost of sales= Cost of production+ Selling & Distribution expenses Sales Price= Total cost or cost of sales+ Profit

Limitation of Cost Accounting


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Expensive Unnecessary Inapplicable Failure Not reliable