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ACCOUNTING
Cost
• It is the amount of resource given up in
exchange for some goods or services.
• CIMA, London has defined cost as the
amount of expenditure (actual or notional)
incurred on or attributable to a specified
thing or activity.
Cost Accounting
• Cost Accounting is a specialised branch of
accounting which involves classification,
accumulation, assignment and control of costs.
• It is defined by CIMA, London as “the
establishment of budgets, standard costs and
actual costs of operations, processes, activities
or products; and the analysis of variances,
profitability or the social use of funds”.
Costing
• It is the technique and process of
ascertaining costs.
Cost Control
• It means controlling or regulating costs
through the application of management
tools and techniques to the performance of
any operations to achieve predetermined
objectives of quality, quantity, value and
time at an optimum outlay. It is exercised
by techniques like Standard Costing,
Budgetary Control, etc.
Cost Reduction
• It involves constant research and
development in the areas of product
design, production, procedures, etc.
Cost Audit
• It involves checking the arithmetical
accuracy of cost accounts and verifying
whether the principles laid down have
been followed or not.
Cost Centre
• It is a production or a service location,
function or activity, whose costs may be
attributed to cost units. It is the smallest
organisational sub-unit for which separate
cost collection is attempted.
Cost Unit
• It is a unit of quantity or product, service or
time in relation to which costs are
expressed.
Cost Estimation and Cost
Ascertainment
Cost Estimation is the process of
predetermining the costs of a particular
product, job or order whereas Cost
Ascertainment is the process of
determining costs on the basis of actual
data.
Elements of Costs
Cost
OVERHEADS
Factory /
Office / Selling &
Works /
Administrative Distribution
Manufacturing
Overheads Overheads
Overheads
Elements of Costs
• Material – It is the substance from which
product is made.
• Labour – It is the cost of human efforts
which is used for conversion of material
into finished goods.
• Expenses – All other items of costs come
in this category.
Items excluded from Cost Accounts
• Appropriation of profits (like dividend paid,
transfer to general reserve, taxes, etc.)
• Matters of pure finance (like interest on
loans, penalties, fines, interest/rental
income, dividend received, etc.)
• Abnormal gains and losses (like loss by
fire/theft)
Objectives of Cost Accounting
• To analyse and classify all expenditure with
reference to cost of products and operations
• To arrive at the cost of production of every unit,
job, operation, process, department or service
and to develop cost standard
• To indicate inefficiencies and wastage to top
management
• To reveal sources of economies in production
• To provide actual data of cost for comparison
with estimates
• To present comparative cost data for different
periods and various volumes of output
• To provide data for periodical profit and loss
accounts and balance sheets at regular intervals
• To provide information to enable management to
make short decisions of various types like
quotation of price to special customers or during
recessionary trends, make or buy decisions,
assigning priorities to products, etc.
Classification of Costs
By Time –
• Historical cost – these are ascertained
after they are incurred
• Predetermined costs – these costs are
calculated before they are incurred, on the
basis of factors affecting costs
By nature or elements –
• Material costs – these are the costs of the
substance from which material is made
• Labour costs – these are the costs of
human efforts which are used for
conversion of material into finished goods.
• Expenses – All other items of costs come
in this category.
By degree of traceability to product –
• Direct costs – these are the costs which can be
easily and conveniently traced to one unit of a
product. These are the costs related to
manufacturing / production.
• Indirect costs – these are the costs which cannot
be easily and conveniently traced to one unit of
a product. They are apportioned to different
products on some suitable basis.
By change in activity or volume –
• Fixed costs (committed costs) – these are the
costs which do not change due to change in
production. They have to be incurred in a period.
• Variable costs – these are the costs which vary
directly and proportionately with output
• Semi-variable costs (step costs) – these are the
costs which change in same direction as that of
output, but not in same proportion
Functional classification –
• Manufacturing / production costs – these are the
costs of operating a production division
• Administration costs – these are the costs
incurred in policy formulation, directing and
controlling the operations of an organisation
• Selling and Distribution costs – these are the
costs incurred to create and stimulate demand,
despatching, transportation, warehousing, etc.
Relationship with accounting period –
• Capital costs – these are the costs which
are incurred today but their benefits
accrue for a long term period
• Revenue costs – these are the costs
which are incurred today and their benefits
also accrue in the current period
By controllability –
• Controllable costs –
• Uncontrollable costs
By normalcy –
• Normal costs –
• Abnormal costs –
Costs for analytical and decision making
purposes –
• Opportunity costs – it is cost of selecting one
course of action and the losing of other
opportunities to carry out that course of action. It
is the amount that can be received if the asset is
utilised in its next best alternative.
• Sunk costs – it is the cost which has already
been incurred and cannot be avoided by future
decisions. It is the cost incurred in the past and
has no relevance in future decision making.
• Marginal cost – it is the cost of producing one
extra unit
• Differential cost – it is the difference in total
costs between two levels of production
• Joint costs – Sometimes the processing of single
raw material results in two or more products.
Costs which are incurred commonly for all those
products till the point of separation, are called as
joint costs. They have to be apportioned to
different products on some suitable / logical
basis.
• Common costs – these are the costs incurred for
more than one product simultaneously
• Imputed costs – these are notional costs which
are not actually incurred like notional rent,
interest on owner’s capital, etc.
• Replacement costs – it is the cost of replacing
an asset at current market value
Other costs –
• Conversion costs – it is the cost of converting
raw material into finished products. It includes
labour costs and manufacturing overheads.
• Normal costs – it is the cost which is normally
incurred at a given level of output
• Total costs – it is the sum of all costs associated
to a particular unit / product / department /
factory / batch
Cost Sheet
Direct material consumed
Direct labour costs
Direct expenses
Prime cost
Add: Works / Factory / Manufacturing overheads
Works / Factory / Manufacturing costs
Add: Office and Administrative overheads
Cost of Production
Add: Selling and Distribution overheads
Total Costs / Cost of Sales
Cost Sheet (with treatment of
stock)
Opening stock of raw materials
Add: Purchases of raw materials
Less: Closing stock of raw materials
Direct material consumed
Direct labour costs
Direct expenses
Prime cost
Add: Works / Factory / Manufacturing overheads
Works / Factory / Manufacturing costs (of
goods put into process)
Add: Opening stock of WIP
Less: Closing stock of WIP
Works / Factory / Manufacturing costs (of
completed units)
Add: Office and Administrative overheads
Cost of Production (of goods produced)
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Cost of Production (of goods sold)
Add: Selling and Distribution overheads
Total Costs / Cost of Sales
Costing
• It is the technique and process of
ascertaining costs
• As per CIMA terminology, there are
basically two methods of costing –
- Specific order costing
- Operations costing
Techniques of
Costing
Manufacturing/
Production of Services
Goods
Operating Costing
(e.g. Hospitals, canteen, Hotel)
Techniques of Costing
Manufacturing / Production
of Goods