COST ACCOUNTING

Principles & Applications

 Cost Accounting-Introduction
Why Cost Accounting: Cost accounting helps the management
foresee the cost price and selling price of a product or a service,
which helps them formulate business policies. With cost value as a
reference, the management can come up with techniques to control
costs with an aim to achieve maximum profitability.
Cost Establishment for Different Types of Businesses: For a
Retail Store, the calculation of Cost of Goods Sold is important to
see at which price the goods can be resold to the customers. In Case
of Manufacturing Concerns, this calculation is way much
complicated. It involves the cost of Raw Material, the processing
cost, the Labor and Overhead Costs etc. Moreover, the goods
manufactured in one period is not necessarily sold in that period so,
the value of ending inventory is also to be calculated. The Income
Statement of a Manufacturing Concern looks like:
 Manufacturing Costs Classified
Direct Materials: Direct material cost is the cost of the raw materials
and components used to create a product. The materials must be easily
identifiable with the resulting product.
Direct Labor: Direct labor cost is wages that are incurred in order to
produce goods or provide services to customers. The total amount of
direct labor cost is much more than wages paid. It also includes the
payroll taxes associated with those wages, plus the cost of company-paid
medical insurance, life insurance, workers' compensation insurance, any
company-matched pension contributions, and other company benefits.
Manufacturing Overheads: Overheads are business costs that are
related to the day-to-day running of the business. Unlike operating
expenses, overheads cannot be traced to a specific cost unit or business
activity. Instead, they support the overall revenue-generating activities of
the business. These include a) Indirect materials b) Indirect Labor c)
Other Manufacturing Overheads
 Types of Manufacturing Overheads
Variable Overheads: Variable overheads are expenses that vary with
business activity levels, and they can increase or decrease with different
levels of business activity. During high levels of business activity, the
expenses will increase, but with reduced business activities, the overheads
will substantially decline or even be eliminated. For Example Rent,
Administrative Expenses, Utilities, Insurance, maintenance and repair
of equipment.
Fixed Overheads: Fixed overheads are costs that remain constant every
month and do not change with changes in business activity levels.
Examples of fixed overheads include salaries, rent, property taxes,
depreciation of assets, and government licenses etc.
Semi-Variable Overheads: Semi-variable overheads possess some of the
characteristics of both fixed and variable costs. A business may incur such
costs at any time, even though the exact cost will fluctuate depending on
the business activity level. A semi-variable overhead may come with a
base rate that the company must pay at any activity level, plus a variable
Prime and Conversion Costs
• Prime costs are a firm's expenses directly related
to the materials and labor used in production.

• Conversion costs include direct labor and

overhead expenses.
 Types of Inventories for
Manufacturing Concerns
• Raw Materials Inventory:

• Work in process Inventory: This account reflects the cost of

Raw material, cost of Labor and Overheads incurred on goods
on which manufacturing has been started but not yet
completed.

• Finished Goods Inventory: This account reflects the cost of

goods that have been completed and ready for sale
 Types of Costing Systems
Job Order Costing System: Job order costing is a system that
takes place when customers order small, unique batches of
products. The system accumulates cost applicable to each specific
job or lot of similar goods manufactured on a specific order for stock
or for a customer. This system determines the price of each
individual product and ensures that the cost for each product is
reasonable enough for a customer to purchase it while still allowing
the company to make a profit.
Process Costing System: this system accumulates costs without
attempting to allocate them to specific units of goods manufactured
during the accounting period. At the end of the accounting period,
the average cost is allocated to the units produced or in Process by
dividing the total no. of units to the total cost incurred/accumulated.