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-: Pr esentation o n :-

Cost Accounting & Costing


Analysis

Harshad S. Deshpande, Cost Accountant, Pune India 1


Drivers of Change
Economic Technological Sociopolitical
Environment Environment Environment

• Liberalization of the Indian • Rapid rise of information • Reduced interference


economy - dismantling of technology - Internet of politics in business
License Raj and e-commerce • Cultural shift towards
• Globalization • Cost reduction due to westernization
• Increased competition technological innovation • Increasing role of
from both within and • Increased automation – trade associations
outside India Flexible Manufacturing • Increased focus on
• Advent of WTO - Systems, JIT, etc. customer service and
Reduction in tariffs and • Organization-wide quality
QRs networking - online
• Increasing sickness in information systems
Indian industry • Rise of Indian IT
• Heightened M&A activity superpowers

Harshad S. Deshpande, Cost Accountant, Pune India 2


Emerging Concepts For Cost Accountants…

Traditional New
Approach Approach

Cost + Profit Sales - Profit

Business Process
-A Paradigm Shift

SALES COST

Continuous Innovation for Cost Reduction


to survive in the competitive environment
Harshad S. Deshpande, Cost Accountant, Pune India 3
Purposes of Cost Accounting:-
 Ascertainment of costs: The first and foremost
Purpose of Cost accounting is to ascertain the cost
using various costing methods.
 Determining and controlling efficiency: A cost
accountant must study the various operations in
involved in the manufacture of products. This study will
enable him to render the service of measuring the
efficiency of the organisation and in doing so he will be
able to devise means of exercising efficiency.
 Determining the selling price: Cost accounting
provides detailed and relevant cost figures for
determining the selling price of products or services.
Cont…..
Harshad S. Deshpande, Cost Accountant, Pune India 4
Purposes of Cost Accounting:-

 Preparation of financial statement:


Where cost
accounts are kept, the ascertainment of the value of
closing stocks of raw materials, work-in-progress and
finished goods becomes easy and as such financial
statements can be prepared monthly or even weekly.

 Providing a basis for operating policy:Cost


accounting plays an important part in the management as
it is used as a basis for formulating operating policies

Harshad S. Deshpande, Cost Accountant, Pune India 5


ADVANTAGES OF COST ACCOUNTING
1. Establishment 0f more accurate unit costs

3. Development of cost comparisons

5. Elimination of inefficiencies in plant operation

7. Presentation of more frequent and more accurate


financial accounts

9. Establishment of increased operating efficiency

Cont…..

Harshad S. Deshpande, Cost Accountant, Pune India 6


ADVANTAGES OF COST ACCOUNTING
1. Establishment of control over materials, labour &
overhead expenditures

3. Assisting in developing cost calculations for new


products.

5. Establishment of an effective costing system prevents


manipulation and fraud.

Harshad S. Deshpande, Cost Accountant, Pune India 7


ELEMENTS OF COST
 Direct materials cost: Direct materials cost is the cost of
materials which can be identified with, and allocated to, cost
centres or cost units. Direct material is that material which
becomes a part of the product.
 Direct wages: Direct wages (labour costs) are the wages
which can be identified with and allocated to cost centres and
cost units. Direct labour is the labour expended in altering the
condition, conformation or composition of the product.
 Direct expenses: Direct expenses are expenses (other
than direct material cost or direct wages) which can be
identified with and allocated to cost centres or cost units.

Cont…..

Harshad S. Deshpande, Cost Accountant, Pune India 8


ELEMENTS OF COST
 Production or factory overhead: Production or factory
overhead includes all indirect material cost, indirect wages,
and indirect expenses incurred in the factory from the receipt
of the order until its completion ready for despatch.
Indirect materials
Indirect wages
Indirect expenses

 Administration overhead: Administration overhead


includes all indirect materials cost, indirect wages and
indirect expenses incurred in the direction, control and
administration of an undertaking.

Cont…..
Harshad S. Deshpande, Cost Accountant, Pune India 9
ELEMENTS OF COST
 Selling overhead: Selling overhead includes all indirect
materials cost, indirect wages and indirect expenses incurred
in promoting sales and retaining customers.

 Distribution overhead: Distribution overhead includes all


indirect material cost, indirect wages and indirect expenses
incurred with making the packed product available for
despatch and ends with making the reconditioned returned
empty packages available for reuse.

Harshad S. Deshpande, Cost Accountant, Pune India 10


Cost Classification
 Costs may be classified on the basis of various factors
such as
 Nature or element :-
 Material Cost
 Labour Cost
 Overheads
 Function :-
 Production cost
 Administration cost
 Selling cost
 Distribution cost
 Research and Development cost Cont…..
Harshad S. Deshpande, Cost Accountant, Pune India 11
Cost Classification
 Direct or Indirect

 Variability:-
 Fixed Cost
 Variable Cost
 Semi – Variable Cost

 Decision Making:-
 Relevant Cost
 Irrelevant Cost

Harshad S. Deshpande, Cost Accountant, Pune India 12


METHODS OF COSTING

Different methods of cost finding are used because


businesses vary in their nature and in the type of
products or services they produce.

The main systems of cost finding which have been


evolved

1. Job costing
2. Process costing.
3. Multiple or Composite Costing
Cont…..

Harshad S. Deshpande, Cost Accountant, Pune India 13


METHODS OF COSTING
 Job costing: This method is applied where the items of
prime cost are traceable to specific jobs or orders, as in
house-building; shipbuilding; construction and repair.
Contractors' work e.g. garage and repair shops. Here
each job is separately identified and prime cost as well
as overhead is charged to it.
Job costing may include the following terms:
1. Contract costing
2. Terminal costing
3. Departmental costing
4. Batch costing
Cont…..
Harshad S. Deshpande, Cost Accountant, Pune India 14
METHODS OF COSTING
 Process costing: -
This method of costing is used where it is impossible to
trace the items of prime cost to a particular order because
its identity is lost in volume of continuous production.
The following additional terms are used instead of
process costing, but each is basically process costing:
(a) Single, output or unit costing
(b) Operating or operative costing

Cont…..
Harshad S. Deshpande, Cost Accountant, Pune India 15
METHODS OF COSTING
 Multiple or composite costing:
Some products are so complex (e.g. a motorcar,
aeroplanes, cycles, radios, etc.) that no single system of
costing is applicable. Where total cost is ascertained by
aggregating component costs which are collected by both
job and process costing, the system is termed multiple or
composite costing. Multiple costing applies to agricultural
machineries, general hosiery, electrical accessories, etc.

Harshad S. Deshpande, Cost Accountant, Pune India 16


TECHNIQUES OF COSTING
There are certain costing techniques which may be adopted for
the purpose of control and managerial decision-making.

 Historical costing :-
It is the ascertainment of costs after they have been incurred. It
permits comparison of costs over different periods.

 Direct costing :-
It is the practice of charging all direct costs to jobs, operations,
processes, leaving all indirect costs to be charged to profit and
loss account of the period in which they arise.

 Absorption costing :-
It is the practice of charging all costs, both variable and fixed,
to jobs, operations or processes
Cont…..
Harshad S. Deshpande, Cost Accountant, Pune India 17
TECHNIQUES OF COSTING

 Standard costing :-
Standard costing is frequently employed in conjunction
with budgetary control. It permits management to
investigate the reasons for variances and to take suitable
corrective actions.

 Marginal costing :-
Here, variable costs are charged to products and total
fixed costs are charged to costing profit and loss account
of the period in which they arise

Cont…..
Harshad S. Deshpande, Cost Accountant, Pune India 18
TECHNIQUES OF COSTING
 Activity based costing :-
It is the attribution of costs to cost units on the basis of
benefit received from indirect activities, such as ordering,
setting-up, quality control, etc.

 Uniform costing :-
It is the use of the same costing principles and/ or
practices by several undertakings to ensure inter-firm
comparison.

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Comparison between Financial Record
and Costing Record.
In order to show how valuable the presentation of cost
accounting information is, let us consider the following
example :

The financial records show that there is a profit of Rs.


6000 i.e. 15 % of the sales.
This company produces three products X, Y and Z and the
cost accountant has analysed cost and submitted the
following product wise statement of profit or loss. In his
statement the cost accountant has attributed the different
cost to each individual product and as result profit has
been arrived at for each product for the purpose of
managerial decision making.

Harshad S. Deshpande, Cost Accountant, Pune India 20


Comparison between Financial Record and Costing Record.

Debit Credit
Particulars Rs. Particulars Rs.

To Material consumed 10,000 By Sales 40,000


Wages 9,000
Chargeable exp. 1,000
Production exp. 5,000
Gross profit c/d 15,000

Total 40,000 Total 40,000

To Administration Exp. 2,000 By Gross Profit 15,000


Selling and Dist. Exp 7,000
Net Profit 6,000
(15% of sales)
Total 15,000 Total 15,000

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Statement showing Profit or Loss of X, Y and Z

Total
Item (Rs.) Products
X (Rs.) Y (Rs.) Z( Rs.)
Direct material cost 10,000 4,000 4,000 2,000
Direct wages 9,000 4,000 2,400 2,600
Direct expenses 1,000 600 400

Prime cost 20,000 8,000 7,000 5,000


Production overheads 5,000 2,000 1,500 1,500
Cost of Production 25,000 10,000 8,500 6,500
Administration overheads 2,000 1,000 500 500
Selling & Dist. Overheads 7,000 4,000 1,500 1,500
Total Cost 34,000 15,000 10,500 8,500
Sales 40,000 12,000 16,000 12,000
Profit/ Loss 6,000 (-)3,000 5,500 3,500
Profit (%) to Turnover 15% (-)25% 34.40% 29.20%

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Application of Costing
1. Make or Buy decision
2. Accepting or Rejecting an Order
3. Extra Shift Decision
4. Profit Planning
5. Adding or deleting department or product
6. Exploring Foreign Market
7. Plant Replacement Decision
8. Shut Down Decision
9. Preventive vs. Breakdown Maintenance
10. Use of Break Even Point concept
11. Cost Control

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