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Chapter 1 Introduction
• 1.1 What are cost accounting, management accounting and financial accounting. • 1.2 costing, cost, cost unit and cost centre. • 1.3 classification and type of cost.
cost accounting is a process of assigning cost to the cost object. which begins with regarding and classifying of incomes and expenditures and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.• cost accounting is the process of accounting for cost. • Therefore. .
material cost constitutes a major portion of the cost of the product.Why need cost accounting? i) Control of Material Cost : • Normally. (ii) Control of Labour Cost iii) Control overhead . Hence control of material cost can ensure a good amount of benefit.
• iv) budgeting • v) measure efficiency • Vi) strategic decision making Besides that. cost accounting is prepared to overcome limitations of financial accounting which are : a) Only provide historical past information b)Not reveal the details operation informations of segments. .
.c) cannot provide information required for future planning.
In cost accounting. the main emphasis is on cost and it deals with its collection. .Cost Accounting and Management Accounting • The scope of management accounting is broader than that of cost accounting. analysis. • Management accountancy utilizes the principles and practices of financial accounting in addition to other modern management techniques for efficient operation of the organisation. interpretation and presentation for various problems of the management. relevance.
.• The main emphasis in management accountancy is towards determining policy and formulating plans to achieve the desired objective of the management.
Cost represents the amount of expenditure (actual or notional) incurred on or attributable to a given thing. .Cost. cost unit and cost centre • Cost . It represents the resources that have been or must be sacrificed to attain a particular objective.
• Cost units are usually units of physical measurement like number. area.Cost unit • Meaning . volume etc. the need arises to express the cost of output (product / service). time. weight. service or time (or a combination of these) in relation to which costs may be ascertained or expressed. .Once the cost of various cost centres is ascertained. A cost unit is defined as a unit of quantity of product. length.
and the directors of each department would be responsible to keep costs to as low a level as possible. and a payroll department. . • Each department could be a cost center. consider a company that has a manufacturing department. which allows managers to take immediate responsibility for cost growth and credit for cost cutting. The company thus accounts for each cost center separately. a research and development department. For example.Cost centre • A department or other section of a company where managers are directly responsible for costs.
Responsibility( controllable and uncontrollable) • iv) Tracebility ( direct and indirect) • v)Product and period cost • vi)Relevance and irrelivence.Cost classification • i.Function • iii. . behavioral • ii.
cost of labour. . it increases on increase in production volume and vice-versa. rent.Fixed cost is that cost which remains constant at all levels of production. cost of materials.g.e.Classification By Behaviour • Fixed cost . • Variable cost . For e. insurance. For e..g.The cost which varies with the level of production is called variable cost i.
This cost is partly fixed and partly variable in relation to the output. but is variable over a large volume range. telephone bill. For e. electricity bill • A step cost• is a cost that is fixed over a small volume range. A step cost is also a fixed cost that rises to a new level in step with the significant changes in activity or usage. but at discrete points.g. . It is a cost that does not change steadily.• Semi-variable cost .
In other words it is nothing but the cost of manufacture which is incurred up to the stage of primary packing of the product.Classification By Function : • i. research and development etc. Production cost .It is the cost of the entire process of production. Administrative cost .It is the indirect cost pertaining to the administrative functionwhich involves formulation of policies. This cost is not related to any other functions like selling and distribution. directing the organisation and controlling the operations of an undertaking. • ii. .
. Selling cost .It is the cost of the sequence of operations which begins with making the packed product available for despatch and ends with making the reconditioned returned empty package.Selling cost represents theind irect cost which is incurred for (a)seeking to create and stimulate demand and (b) securing orders. for re-use.• iii. Distribution cost . if any available. • iv.
then the cost is controllable cost. • i) Controllable cost • If a manager responsible to the cost. . • Ii) Uncontrollable cost are cost which cannot be influenced by the action of specified manager.Responsibility classification • This refers to the controllable and uncontrollable cost.
For e.Tracebility • Direct or indirect cost • i. wages paid to indirect labour.g. cost of direct materials. .Direct cost . Indirect cost . cost of direct labour. For e.Cost which cannot be identified with a particular cost centre or cost unit is called indirect costs. • ii.g.Direct cost is that cost which can be identified with a cost centre or a cost unit.
and manufacturing overhead. . these costs consist of direct materials. direct labor.Product and period cost • product costs include all the costs that are involved in acquiring or making product. In the case of manufactured goods.
• Period costs are not included as part of the cost of either purchased or manufactured goods. Both items are expensed on the income statement in the period in which they are incurred. Sales commissions and office rent are good examples of period costs. .
Also. ignoring irrelevant data in analysis can save time and effort. . It is often important for businesses to distinguish between relevant and irrelevant costs when analyzing alternatives because erroneously considering irrelevant costs can lead to unsound business decisions.Relevance and irrelevance costs • Relevance cost is a cost that differs between alternatives being considered.
• Other relevance cost for decision making are : • Differential cost . . it represents the change in total cost (both fixed and variable) due to a change in the level of activity. etc.It is the difference in the total cost between alternatives calculated to assist decision making. technology. process or method of production. Thus.
g. For e..• Opportunity cost . A works in his brother’s firm instead of working in X Ltd.It refers to the value of sacrifice made or benefit of opportunity forgone in accepting an alternative course of action.. If Mr. A suffers by foregoing employment in X Ltd. . then the loss of salary Mr. is the opportunity cost of working in his brother's firm.
They are relevant for decision making purposes. .• Avoidable costs : • Can be eliminated or saved when a product or segment is discontinued.
• It also means that the variable costs of one unit of product or a service. .• Marginal cost .It is the amount at any given volume of output by which aggregate cost changes if the volume of output changes increases/decreases) by one unit.
term decision making like make or buy. Out of pocket cost can be avoided if a particular proposal under consideration is not accepted. price fixation during recession.It is that portion of total cost which involves cash outlay.• Out of pocket cost . . It is a short term cost concept and is used in short.
So. These costs are known as irrelevant costs. An example of irrelevant cost is sunk cost. .Irrelevant costs • Some cost that would not changed by decision. it can be ignored in decision making process.
• For eg. In the case of a decision relating to the replacement of a machine. .Historical cost which is incurred in the past is known as sunk cost.• Sunk cost . the written down value of the existing machine is a sunk cost and hence irrelevant to decision making. This cost is not relevant in decision making in the current period.
• End of chapter 1 .
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