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COST ACCOUNTING

CH (1)

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DEFINITION OF COST ACCOUNTING

It is to hard to get definitely the definition for the cost of accounting.

This kind of accounting are trying to provide information belong to the cost element and recording, analysing and posting to the cost center and operating order for calculated the cost of production, units and prepare statements ,reporting for knowing where the high cost and how the management decreasing this cost .

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Cost of accounting type of important analysing and controlling which they giving information and data for the administration to help them to have right decision.

We can say the cost of accounting are collecting ,analysing and explaining the cost data for every department in the company and guiding them to giving the right decision for planning and controlling operation

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What is the different between cost accounting & financial accounting

Different way Cost accounting Financial accounting

The user of financial reporting

Internal user External user :creditors, investors and government

The reports Elective reports and related to part of company

Compulsory report and related to whole company.

Criteria of prepare the report

According to the company rules, instruction based from management

According to the international accounting criteria

Information type Historical ,presented and future data

Historical data

Quantity of the data The data are detailed and provide data by amount and quantity.

The data are generality and provide just by amount.

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The goals for cost accounting

Help the management for decision makingHelp the management for planning.Help the management for controlling of

cost elements.Measure the cost intonation.Measure efficiency.

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classification of costs

They are 5 methods to classification the cost element they are:

1. Natural.2. Function.3. The relationship between cost element and the

unit of product.4. The relationship between cost element and

the size of product.5. The relationship between cost element and the

available capacity &non available capacity.

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Natural classification

Natural cost

materials labor Other cost

direct indirect direct indirect direct indirect

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Material cost

Material cost: it is the cost which need for using in product and it is the major element for convert operation to be the final product.

Direct material cost such as : wood, plastic,…

Indirect material cost such as : cleaners

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Labor cost & other cost

Labor cost : it is all the cost paid from the company for the labor like salaries, bonus ,retired fund, health insurance,…

Direct labor cost: salaries , retired ,insurance

Indirect labor cost : cleaner salaries Other cost :All cost not belong to the

material or labor cost like: depreciation for equipment ,factory rent ,insurance.

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Classification Functionally

function

production marketing management

Product department Service product material labor expenses material labor expenses

material

labor

expenses

material

labor

expenses

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The relationship between cost element and the unit of product.

Cost element&Unit of product

Direct cost Indirect cost

Material Labor Service Product cost indirect Marketing costFinance and

management cost

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The relationship between cost element and the size of product.

COST ELEMENT &Size of product

Variable cost Fixed cost Mixed cost

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Variable Cost:

The costs which changing usually with the change of unit product and these like :the cost of direct materials or direct salaries.

SIZE OF PRODUCT

100 200 300 400

Variable cost by R.O

300 600 900 1200

variable costs by Per unit

3 3 3 3

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Fixed cost: The costs which not changing with the change of unit product such as ( rents the depreciation for machines and equipment…)

SIZE OF PRODUCT

100 200 300 400

Fixed cost by R.O

300 300 300 300

Fixed costs by Per unit

3 1.5 1 .75

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Mixed cost:

The costs which have both variable and fixed costs like electric costs ,indirect labor, Maintenance …

This cost called the semi - variable costs or semi-fixed costs.

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The relationship between cost element and the available capacity &non available capacity.

Fixed costs are divided into:

1. Relationship between fixed cost and available capacity.

2. Relationship between fixed cost and non available capacity.

To calculated the available capacity

Available capacity =total fixed cost x available capacity / available power

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To calculated the non available capacity

Available capacity =total fixed cost x non available capacity / available power.

Available capacity: it is the maximum energy of the business conducted after the exclusion the inevitable and non inevitable breakdowns.

Available power : it is the maximum energy of the business conducted after the exclusion the inevitable breakdowns.

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Non Available capacity: it is the wasted Energy for the reason of breakdowns maximum inevitable and non inevitable breakdowns.

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The financial statement in the trade companies Income statement for ABC company

Sales Revenue xxx

Less:

The cost of good sold:

Inventory in the first period xxx

purchases xxx

The total of the available

Of cost goods for sale xxx

Less:

Inventory in the last period xxx

The cost of good sold xxx

Profit or loss XXX

Less:

Expenses (sales expense & management expenses) xxx

Net income or loss xxx

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The financial statement in the factories

Income statement for ABC company

Sales Revenue xxx

Less:

The cost of good sold:

Cost product in the first period xxx

Cost product during the period xxx

The total of the available

Of cost product for sale xxx

Less:

Cost product in the last period xxx

The cost of good sold xxx

Profit or loss xxx

Less:

Expenses (sales expense & management expenses) xxx

Net income or loss xxx

Advantages of cost accounting

1. It helps the management in determining the cost of production of a given volume of output and thereby fixing the prices;

2. It helps the management in identifying the profitable and unprofitable lines of business;

3. It provides information upon which estimates and tenders are based;

4. It guides future production policies;

5. It provides valuable information for management decision making and forward planning;

6. With effective cost control methods, cost accounting helps the management to increase the overall profitability of the organization.

Limitations of cost accountingThe following are the main limitations of cost accounting:

1.Cost accounting lacks a uniform procedure – different cost accountant may have different procedures;

2.There are a large number of conventions, estimates and flexible factors such as classification of costs into its elements, issue of materials on average or standard prices, apportionment of overhead expenses, etc.

3.For getting the benefits of cost accounting, many formalities are to be observed by a small and medium size concerns;

4.The contribution of cost accounting for handling futuristic situations has not been much

Elements of costsThe following are main elements of costs:

1.Direct materials: Direct materials are those materials which can be identified in the product and can be conveniently measured and directly charged to the product. Thus, these materials directly enter the production and form a part of the finished product.

2.Direct labour: Direct labour is all labour expended in altering the construction, composition, confirmation or condition of the product. In simple words, it is that labour which can be conveniently identified or attributed wholly to a particular job, product or process or expended in converting raw materials into finished goods.

3. Overheads:

Overheads may be defined as the aggregate of the cost of indirect materials, indirect labour and indirect expenses. Overheads comprise of all expenses incurred for or in connection with the general organization of the whole or part of the undertaking. The main groups into which overheads may be sub-divided are:

(i)Manufacturing overheads;

(ii)Administrative overheads;

(iii)Selling overheads;

(iv)Distribution overheads; and

(v)Research and development overheads.

Cost sheetCost sheet is a statement designed to show the output of a particular accounting period along with break-up of costs. The data incorporated in cost sheet are collected from various statements of accounts which have been written in cost accounts, either day-to-day or regular records.

Cost sheet is a memorandum statement. Therefore, it does not form part of double entry cost accounting records. In spite of this, the relationship between cost sheet and financial accounts which are maintained on double entry system is very important as cost sheet drives its data from financial accounting.

Advantage of Cost sheetThe main advantages of a cost sheet are:

1.It discloses the total cost and the cost per unit of the units produced during the given period;

2.It enables a manufacturer to keep a close watch and control over the cost of production;

3.By providing a comparative study of the various elements of current cost with the past results and standards costs, it is possible to find out the causes of variations in the costs and to eliminate the variations;

4.It acts as a guide to the manufacture and helps him in formulating a definite useful production policy;;

5.It helps the businessman to submit quotations with reasonable degree of accuracy against tenders for the supply of goods.