(1st chapter) OBJECTIVES OF COST ACCOUNTING The main objectives of cost accounting are given below1.

To explain manufacturing and non-manufacturing cost and how they are reported in the financial statements. 2. To ascertain the per-unit cost, profitability and selling price of manufactured products. 3. To advise the management on how to maximize profit, future expansion policy and proposed capital projects. 4. To present and interpret useful data for management planning, decision-making, measuring efficiency and cost-control. 5. To organize cost reduction programmers with the help of different departmental managers. 6. To help in the preparation of budgets and implementation of budgetary controls COST ACCOUNTING AN AID TO MANAGEMENT Cost management aids the three major functions of management1. PLANNING: Planning is thinking in advance what, when, how to do and who to do it. Planning concerns future activity and formulates budgets to meet the objectives of the organization. 2. DECISION MAKING: Planning is choosing one course of action out of several available alternative courses. 3. CONTROLLING: Controlling is comparing actual performance against the planned performance, finding out deviations and taking remedial steps to remove the deviations. FINANCIAL ACCOUNTING VS COST ACCOUNTING Information Provides information about the Provides information to the business in a general way. management for planning, controlling and decision making. Disclosure Discloses net profit or loss of the Discloses profit or loss of each whole business. product, job or service. Relationship Relates to commercial transactions Relates to manufacturing of business and includes all transactions of goods and services expenses- manufacturing, office, and includes production expense. and selling. Concern Concerns with external Concerns with internal transaction. transactions. Valuation of Valued at cost or market price Valued at cost. stock whichever is lower. Dealings Deals with actual facts and figures. Deals partly with actual facts and figures and partly with estimates. COST ACCOUNTING CYCLE 1. RECORDING COST DATA Recording the element of product cost to determine manufacturing cost. 2. CLASSIFYING COST Classifying cost according to their function, nature and behaviour.

3. DETERMINING TOTAL COST Calculating cost of goods sold. 4. UNIT COST Total cost of goods sold divided by total number of units. 5. SELLING PRICE Includes cost of sales plus a margin of profit. 6. COST CONTROL AND DECISION MAKING Using standard costing, budget and budgetary control system. (2nd chapter) COST AND EXPENSE COST: The total value of sacrifice mode to acquire a good or service. EXPENSE: The value of sacrifice mode to use a good or service which is measured in monetary units by the reduction of assets. A machine purchased for 10,000 Tk which has a life of 10 years. Here the cost is 10,000 Tk. and the expense is 1,000 Tk depreciation per year. CLASSIFICATION OF COST The cost of a product is classified according to their major activities and the functions of a business which are1. Elements of a product 2. Relationship to a production 3. Relationship to volume or behaviour 4. Ability to trace 5. Department where incurred 6. Functional areas 7. Period charged 8. Relationship to planning, controlling and decision-making 1. ELEMENTS OF PRODUCT COST/ MANUFACTURING COST: The cost elements of a product are-(i) direct materials, (ii) direct labour and (iii) factory overheads. (i) MATERIALS: The principle substances of production which are transformed into finished goods by the addition of direct labour and factory overheads. Material cost is divided into (a) direct material and (ii) indirect material. (a) DIRECT MATERIAL: Directly related to production or manufacture Can be identified with the production of the finished goods. Can be easily traced to the product. Such as- cloth for dress, wood for furniture etc. (b) INDIRECT MATERIAL: Not directly related to the production or manufacture (ii) LABOUR: Labour is the mental or physical effort that is expended in the production of a product. Labour cost is divided into (a) direct labour and (ii) indirect labour. (a) DIRECT LABOUR: Labour cost that can be physically and conveniently traced to the individual units of product.

 Cost of machine operator. (b) INDIRECT LABOR: Labour cost that can not be physically and conveniently traced to the individual units of product. Salary of night guard. (iii) FACTORY OVERHEADS: Factory overheads include all costs of manufacturing a product except direct materials and direct labour, such as- indirect material, indirect labour, light and heat. Depreciation, tax and rent. 2. RELATIONSHIP OF PRODUCTION: (i) PRIME COST Prime costs are directly related to production. Prime cost includes cost of direct materials and direct labour. (ii) CONVERSION COSTS Conversion cost is concerned with the transformation of direct materials into finished goods. Conversion cost includes direct labour and factory overheads. 3. RELATIONSHIP TO VOLUME/ BEHAVIOUR: (i) FIXED COST Cost that remains constant over a relevant range of output. Constant for total units but variable for per unit. (ii) VARIABLE COST Cost that changes proportionately with the change of level in output. Variable for total units but constant for per unit. (iii) MIXED COST The fixed portion of cost remains constant over a relevant range of output and the variable portion of cost changes proportionately with the change of level in output. 4. FUNCTIONAL AREAS: (i) MANUFACTURING COST Costs that are related to the production of an item. Includes direct materials, direct labour and factory overheads. (ii) ADMINISTRATION COSTS Cost that are related to the directing, controlling and operating of a company. Includes salaries paid to the management and staff. (iii) MARKETING & SELLING COSTS Cost that are related to the promotion of a good or service. Such as- advertising, shipping, sales commission, sales salary. (iv) RESEARCH AND DEVELOPMENT COSTS Costs that are related to(a) Seeking a new product and improving an existing product, (b) Developing research ideas into a state where they may be implemented into production plan. 5. RELATIONSHIP TO PLANNING, CONTROLLING AND DECISIONMAKING: (i) COMMITTED FIXED COST Costs that arises on the future decision by the higher management authority. Such as- insurance, depreciation, income-tax.

(ii) DISCRETIONARY FIXED COST Costs that arises from yearly appropriation decision by the higher management authority. Such as- repairs and maintenance cost, advertising cost, research and development cost