Costing

• “the techniques and processes of ascertaining costs” • Method of determining the cost of products or services

Cost Accounting
• Cost accounting can be defined as the formal accounting mechanism by means of which costs are recorded in the books of accounts.

Objectives and Functions of Cost Accounting
• • • • Ascertainment of cost Cost control and cost reduction Guide to business policy Determination of Selling price

Classification of Cost
• Classification on the basis of identifiability: Direct costs-costs that can be identified with a particular cost object eg. Raw materials, labour etc. Indirect costs-costs that cannot be specifically identified with a particular cost object. These costs are incurred commonly for a number of cost objects eg. Depreciation, lighting, power, repairs etc.

• Classification on the basis of variability: Fixed costs-costs that remain constant for a specific range of production for a specified period of time. These costs do not increase or decrease when the volume of production changes eg. Rent, salaries, building insurance, Variable cost-costs that vary according to the volume of output eg. Material, wages, power Semi-variable or semi-fixed-costs are partly fixed and partly variable eg. Telephone expenses, light and power

• Classification on the basis of commitment: Committed costs-costs which are committed and are unavoidable eg. Salary of managing director Discretionary costs-costs which can be avoided eg. Advertising, research etc.

• Classification on the basis of profit determination: Product costs-all the costs that are involved in making of the product Period costs-costs incurred for a time period whether production takes place during that time period or not eg. Administration costs, selling costs etc.

• Classification on the basis of controllability: Controllable cost-costs which can be controlled and regulated eg. Cost of raw materials Uncontrollable costs-costs which cannot be regulated and controlled eg. Salary, rent etc.

• Classification on the basis of time: Historical cost-the costs which are ascertained after they have been incurred Predetermined costs-the costs which are ascertained in advance

• Classification of costs on the nature of production: Normal cost-cost incurred normally for an expected level of output Abnormal cost-cost incurred over and above the normal cost

• Classification of costs on the basis of decision making: Relevant costs-costs which will affect the decision making Irrelevant costs-costs which will not affect the decision making Sunk costs-costs which have been incurred in the past and which cannot be changed (contd.)

• Differential or Incremental costs-increase or decrease in the total cost due to an alternative course of action • Marginal costs-the cost of producing one additional unit • Imputed costs-hypothetical costs computed for the purpose of decision making • Opportunity costs-cost that measures the benefit that is lost when making the choice of action (contd.)

• Replacement costs-the current market cost of replacing an asset • Explicit costs-the costs that involves cash outlays • Implicit costs-the costs that does not involve cash outlays • Conversion costs-factory cost minus direct material cost

• Direct material+ • Direct Labour+ • Direct Expenses=Prime Cost Indirect material+ Indirect labour+ Indirect expenses=Overheads

Absorption Costing
• Also known as conventional costing or full costing • Absorption costing is the total cost technique under which the total cost comprising of both fixed and variable cost is fully charged to the production cost

Income statement under absorption costing
• • • • • • • • Sales+ Production costs = Cost of goods produced+ Opening stock of finished goodsClosing stock of finished goods+ Admin and selling overhead= Total cost Profit=sales-total cost

Advantages of marginal costing
• Helps in managerial decisions • Cost control • No problem of under absorption or over absorption of overheads • Realistic valuation of stocks • Helps in profit planning

Disadvantages of marginal costing
• Ignores time factor • Less effective in capital intensive industries

CVP Analysis
• The study of the effects on future profits of changes in fixed cost, variable cost, sales price, quantity and mix • Break even point-point of no profit and no loss where the amount earned is enough to cover the expenses

• Contribution=Sales-variable cost • P/V ratio=Contribution/Sales • P/V ratio=Change in contribution/change in sales • BEP in units=Total fixed cost/Contribution per unit • BEP in Rs. =Total fixed cost/contributionxSales • BEP in Rs. =Total fixed cost/PVratio

• Margin of safety=Actual sales-BEP • Break even chart-graphic representation of break even analysis • Angle of incidence-angle formed by the intersection of sales line and total cost line at the break even point

Income statement under Marginal Costing
• • • • • SalesVariable cost= ContributionFixed overheads= Profit

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