Intro Cost Acc

7/31/2019 Intro Cost Acc

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Amity Business School

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AMITY Business School

B.Com.(Hons), IIIrd Semester

Cost Accounting

Nupur Agarwal


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COST - MEANING

Cost means the amount of expenditure ( actual or

notional) incurred on, or attributable to, a given thing

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OBJECTIVES OF COST ACCOUNTING

Ascertainment of costs

Estimation of costs

Cost control

Cost reduction

Determining selling price

Facilitating preparation of financial and other statement

Providing basis for operating policy4


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COST TERMINOLOGY

COST: Cost means the amount of expenditure incurred on a particular

thing.

COSTING: Costing means the process of ascertainment of costs.

COST ACCOUNTING: The application of cost control methods

and the ascertainment of the profitability of activities carried out or

planned.

COST CONTROL: Cost control means the control of costs by

management. Following are the aspects or stages of cost control.

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Differences between cost accounting and

financial accounting

Audience. Financial accounting involves the preparation of a standard set of reports

for an outside audience, which may include investors, creditors and credit rating

agencies and regulatory agencies. Cost accounting involves the preparation of abroad range of reports that management needs to run a business.

Format. The reports prepared under financial accounting are highly specific in their

format and content, as mandated by either GAAP or IFRS. Cost accounting

involves creating reports that can be in any format specified by management, with

the intention of including only that information pertinent to a specific decision or

situation. Level of detail. Financial accounting primarily focuses on reporting the results and

financial position of an entire business entity. Cost accounting usually results in

reports at a much higher level of detail within the company, such as for individual

products, product lines, geographical areas, customers or subsidiaries.

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Differences between cost accounting and

financial accounting

Product costs. Cost accounting compiles the cost of raw material, finished goods

and WIP inventory, while financial accounting incorporates this information into its

financial reports (primarily into the balance sheet). Regulatory framework. The structure of financial accounting reports are tightly

governed by either generally accepted accounting principles or international

financial reporting standards. There is no regulatory framework governing cost

accounting reports.

Report timing. Financial accounting personnel issue reports only at the end of a

reporting period. Cost accounting staff may issue reports at any time and with anydegree of frequency, depending upon management's need for the information.

Time horizon. Financial accounting is only concerned with reporting the results of

reporting periods that have already been completed. Cost accounting does this too,

but also can be involved in a variety of projections for future periods.

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Similarity between Cost Accounting and

Financial Accounting

Two activities which are performed in a business are-

Operating activity: related with the production of itemsusing material, labor, machinery etc. and its sales

Financial activity: related with arranging money for

these activities.

Operating activity Cost accounting Financing activity Financial accounting

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Basis: the vouchers on the basis of which accounts are

maintained are same in both the methods.

Methods of Book keeping: both the methods are based upon

double entry system as legal procedure of accounting.

Profit/Loss: both the systems aim at calculating profit/loss

for a given period. However, profits revealed by the twosystems are not necessarily equal.

Account of Direct and Indirect expenses: both the systems

keep records of both direct and indirect expenses.

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Evaluation of earlier plans: both the systems are required

for evaluating any plan

Future planning: for future plans both cost and financial

data is required

Helpful in fixing the Selling price: Both the accounts are

helpful in calculating SP of the items produced.

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Cost v/s Expenses

Expense is an expired cost resulting from productive usage

of an asset.

It is the cost which has been applied against revenue for an

accounting period Unexpired part of cost is recorded as an asset in the b/s.

Such unexpired cost is converted into expense when it

expires while earning revenue.

Loss is reduction in the firms equity, other then fromwithdrawal of capital for which no compensating value has

been received.

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Cost

Expired Cost Unexpired Cost

Expense Loss

Shown in the P/L a/c (Dr. Side)

Shown in the B/s as an

asset


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Cost centre: for calculating cost, the whole organization is

divided into small parts. Each such part is treated as a cost

centre for which cost is ascertained.

It can be a location, person or item of equipment for which

cost is calculated and used.

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Cost unit: it is the unit of product or service in relation to

which costs are ascertained.

Cost units may be of two types:

Units of production: tonne of steel, meter of cable, liter

of oil etc.

Units of service: seats in a cinema hall, consultancyhours etc.

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Cost Object: anything for which a separate measurement of

cost is desired.

It may be a product, service, activity or a process.

Example-

Product- car, computer

Service- Taxi service, Conference callsProcess- Melting process, weaving process

Activity- Website development, raw material purchase

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ACCOUNTING INFORMATION SYSTEM

The overall objective of an accounting information system

is to provide information to users.

This system is divided into two major subsystems:

1. The financial information system.

2. The cost management information system.

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THE COST MANAGEMENT INFORMATION

SYSTEM

This system is primarily concerned with producing outputs forinternal users for satisfying management objectives.

Such a system is not bound by any formal rules andconventions, unlike the financial accounting system. Insteadsuch criteria are set internally.

This system has the following three broad objectives:

1. To provide information for costing out services, productsand other objects of interest to management.

2. To provide information for Planning and Control.

3. To provide information for Decision making.

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Difficulties in Installing Cost Accounting

System

Lack of support from top management.

Resistance of accounting staff

Lack of trained cost accountants

Considered as over complex and lengthy

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Classification of Cost

Classification of costs can be made according to the

following basis-

Classification according to elements :-

Raw material

Labor

Overheads

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Classification according to nature

As per this classification, costs can be classified into

Direct costs: these are the costs which are identifiable with

the product unit or cost centre

Indirect costs: these are not identifiable with the productunit or cost centre and hence they are to be allocated,

apportioned and then absorb in the production units.

All elements of costs like material, labor and expenses can

be classified into direct and indirect.

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Direct and Indirect Material

Direct material is the material which is identifiable with

the product.

Indirect material cannot be identified with the product.

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Direct and Indirect Labor

Direct labor can be identified with a given unit of

product. E.g. wages paid to workers who are directly

engaged in the production can be identified and hence

they are direct wages.

Indirect Labor cannot be identified with a product. E.g.

wages paid to workers like sweepers, gardeners,

maintenance workers etc are indirect wages as they cannot

be identified with the given unit of production

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Direct and Indirect Expenses

Direct expenses refers to expenses that are specifically

incurred and charged for specific or particular job,

process, service, cost centre or cost unit. These expensesare also called as chargeable expenses. Examples of

these expenses are cost of drawing, design and layout,

royalties payable on use of patents, copyrights etc.

Indirect expenses on the other hand cannot be traced tospecific product, job, process, service or cost centre or

cost unit. Several examples of indirect expenses can be

given like insurance, electricity, rent, salaries,

advertising etc.25


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Classification according to behaviour

Fixed Costs

Out of the total costs, some costs remain fixed irrespective

of changes in the production volume. These costs are called

as fixed costs. Examples of these costs are salaries, insurance, rent, etc.

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Variable Costs

These costs are variable in nature, i.e. they change

according to the volume of production.

Their variability is in the same proportion to the production.

Example, if the production units are 2,000 and the variablecost is Rs. 5 per unit, the total variable cost will be Rs.

10,000, if the production units are increased to 5,000 units,

the total variable costs will be Rs. 25,000, i.e. the increase is

exactly in the same proportion of the production.

Another feature of the variable cost is that per unit variable

cost remains same while the total variable costs will vary

Examples of variable costs are direct materials, direct labor

etc.27


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Semi-variable Costs

These costs are partly fixed and partly variable. In other

words, they contain the features of both types of costs.

Examples of these costs are Maintenance costs, supervisory

costs etc

These costs are also called as stepped costs.

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Classification according to functions Production Costs - All costs incurred for production of

goods are known as production costs.

Administrative Costs - Costs incurred for administration are

known as administrative costs. Examples of these costs are

office salaries, printing and stationery, office telephone,

office rent, office insurance etc.

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Classification according to time

Historical Costs

These are the costs which are incurred in the past, i.e. in the

past year, past month or even in the last week or yesterday.

The historical costs are ascertained after the period is over. Though historical costs have limited importance, still they

can be used for estimating the trends of the future

Predetermined Cost

These costs relating to the product are computed in advance

of production, on the basis of a specification of all the

factors affecting cost and cost data.

Pre determined costs may be either standard or estimated31


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Classification of costs for Management decision making

Marginal Cost

Marginal cost is the change in the aggregate costs due to

change in the volume of output by one unit

Marginal cost is also termed as variable cost and hence perunit marginal cost is always same, i.e. per unit marginal cost

is always fixed.

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Differential Costs

Differential costs are also known as incremental cost.

This cost is the difference in total cost that will arise from

the selection of one alternative to the other. This type of analysis is useful for taking various decisions

like change in the level of activity, adding or dropping a

product, change in product mix, make or buy decisions,

accepting an export offer and so on.

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Opportunity Costs

It is the value of benefit sacrificed in favour of an

alternative course of action.

It is the maximum amount that could be obtained at anygiven point of time if a resource was sold or put to the most

valuable alternative use that would be practicable.

Opportunity cost of goods or services is measured in terms

of revenue which could have been earned by employing thatgoods or services in some other alternative uses.

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Replacement Cost This cost is the cost at which existing items of material or

fixed assets can be replaced. Thus this is the cost of

replacing existing assets at present or at a future date.

Abnormal Costs It is an unusual or a typical cost whose occurrence is usually

not regular and is unexpected. This cost arises due to some

abnormal situation of production. Abnormal cost arises due

to idle time, may be due to some unexpected heavybreakdown of machinery. They are not taken into

consideration while computing cost of production or for

decision making.

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Controllable Costs

Controllable costs are those which can be controlled or

influenced by a conscious management action. For example,

costs like telephone, printing stationery etc can be

controlled while costs like salaries etc cannot be controlled

at least in the short run.

Generally, direct costs are controllable while uncontrollable

costs are beyond the control of an individual in a given

period of time.

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Shutdown Cost

These costs are the costs which are incurred if theoperations are shut down and they will disappear if the

operations are continued.

Examples of these costs are costs of sheltering the plant and

machinery and construction of sheds for storing exposedproperty.

Computation of shutdown costs is extremely important for

taking a decision of continuing or shutting down operations.

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Capacity Cost

These costs are normally fixed costs. The cost incurred by a

company for providing production, administration and

selling and distribution capabilities in order to perform

various functions.

Capacity costs include the costs of plant, machinery and

building for production, warehouses and vehicles for

distribution and key personnel for administration.

These costs are in the nature of long-term costs and are

incurred as a result of planning decisions.

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Cost sheet

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Intro Cost Acc