Cost Accounting

Cost accounting means accounting for cost. It covers classification, analysis and interpretation of costs. Cost accounting is concerned with: 1. Cost ascertainment 2. Cost presentation 3. Cost Control. All the costs incurred from the very beginning of manufacturing operations till the final stages of disposal of goods find their accounting in Cost accounting

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Cost
Cost is the amount of expenditure actual (incurred)or notional (attributable)relating to a specific thing or activity. The specific thing or activity. activity may be a product, job, service , process or any other activity. activity. Cost is the amount of resources given up in exchange of some goods or services When a cost is incurred it can be in the form of a deferred cost(asset) or expired cost(expense).
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Elements of Cost
Cost of making and selling of a product can be divided into three main classes: classes: 1. Material 2. Labour 3. Expenses These three classes of cost are known as elements of cost. cost.

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Material Cost
Material is basically the substance from which the product is made. It can be direct or Indirect. made. Indirect. Direct material cost refers to the cost of material which are conveniently and economically traceable to the specific unit of output. output. Eg. Eg. Raw cotton in cotton textiles, timber in furniture making industry, leather in shoe making industry. industry. It also includes: includes: Primary packing material Import duty, dock charges, transportation cost of material, storing material. material.
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Direct Material Cost:

Indirect Material Cost: It is the cost of those

materials that are needed for the completion of the product but whose consumption with regard to the product is either so small or so complex that it would not be appropriate to treat it as a direct material cost. cost. Any material cost other than direct material cost is indirect material cost. cost. Eg. Eg. Lubricant, cotton waste. waste.
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Labour Cost
Labour is the physical or mental effort expended in production. The remuneration production. for such effort is known as wages. Labour wages. cost may again be: be: Direct labour Cost Indirect labour cost

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Direct Labour Cost: It is the labour cost of those

workers who are directly engaged in production process. process. It is the labour applied directly upon the material comprising the finished goods. goods. Eg: Eg: Labour working on assembly line or operating a machine. machine. Indirect Labour Cost: It is the labour cost of production related activities that cannot be associated with or conveniently and economically traced to specific product via physical observation. observation. Eg: Eg: Wages paid to foreman, cleaners, employees 7 LECTURE 9 engages in maintenance work or other service

Expenses
Expenses denotes cost of services provided to the organization. It can again be: organization. be: Direct Expenses Indirect Expenses. Expenses.

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Direct Expenses: Expenses: These Includes any expenditure other than direct material and direct labour incurred in a specific product or job. job. Such expenditure can be identified with the product or job. job. Eg: Eg: Cost of hiring special plant or machinery, Cost of drawing and pattern, licence fees
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Indirect Expenses: This term covers all indirect Expenses: expenditure incurred by the manufacturing enterprise from the time production has started to its completion and its transfer to the finished goods store. store. They are incurred for the benefit of more than one product, job or activity and must be apportioned by appropriate bases to various functions. functions. For eg: light, rent, telephone expenses, factory eg: managers salary. salary.
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FIXED COST
Fixed Cost is the cost which does not increase or decrease with volume of production and it remains fixed ( Within a relevant output range) Examples: Examples: rent, property tax, depreciation on office facilities. facilities. Fixed cost are constant in total amount but fluctuates per unit as production changes. changes. Fixed cost per unit increases when volume of production decreases and fixed cost per unit decreases when volume of production increases. increases. Fixed cost can be controlled mostly by top management.

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FIXED COST

TOTAL FIXED COST

COST(RS) FIXED COST PER UNIT

X VOLUME OF PRODUCTION
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Output(units) productA Total Fixedcost(Rs)

Fixed cost cost per unit Rs1000 Rs100 Rs10 Rs1

1 10 100 1000

Rs 1000 Rs1000 Rs1000 Rs1000

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VARIABLE COST
Variable Costs are those costs which vary directly and proportionately with the output. output. It is the only total variable costs that changes as more units are produced, the total variable costs per unit remains constant. Eg. constant. Eg. Direct material cost and Direct labour cost. cost.

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VARIABLE COST

COST(RS)

TOTAL VARIABLE COST

VARIABLE COST PER UNIT

X VOLUME OF PRODUCTION
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Output(units) productA Total Variable cost(Rs) 1 10 100 1000 Rs 10 Rs100 Rs1000 Rs10,000

Variable cost per unit Rs10 Rs10 Rs10 Rs10

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MIXED COST OR SEMI VARIABLE OR SEMI FIXED COSTS

It is a cost containing both fixed or variable elements. elements. Because of variable component they fluctuate with volume and because of fixed component, they do not change in direct proportion to output. output. There is no fixed pattern in their behaviour. It behaviour. has a fixed element below which it will not fall in any level of output. output. E.g. Telephone Charges

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SEMISEMI-VARIABLE COST

Y SEMI-VARIABLE COST COST(RS)

X VOLUME OF PRODUCTION
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FIXED, VARIABLE AND SEMI-VARIABLE SEMICOST

COST(RS) A=FIXED COST B=SEMI-VARIABLE COST C=VARIABLE COST 0 X VOLUME OF PRODUCTION

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Cost Sheet
Cost sheet is a statement which is prepared to show the details of all the costs incurred to produce the total output for a given period of time. time. Cost sheet is prepared to find out the total cost of production. production. Cost sheet can be prepared on a weekly, monthly or other time period basis as desired by the management. management. Cost sheet including sales and profit is also known as production account. account.

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SIMPLE COST SHEET

Name of the Product... Units Produced..... Units sold.......

Particulars Direct Materials Add: Direct Labour Add: Direct Expenses Prime Cost Add: Factory Overheads Factory Cost Add: Office Overheads Cost of Production Add: Selling and Distribution Overheads Total Cost Add: Profit/ Less Loss Sales
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Total Cost

Unit Cost

(+) (+) (1) (+) (2) (+) (3) (+) (4) (5) (+) ((-)

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COST SHEET WITH STOCK ADJUSTMENTS

Particulars Opening Stocks of Raw Materials Add: Purchase of Raw materials (+) Add: Expenses on purchase of ram materials (+) Less: Closing stock of raw materials ((-) Less: Purchases Returns ((-) Less Sale of Scrape or Defective of Raw Materials(-) Materials(cost of materials consumed (1) Add: Direct labour (+) Add: Direct Expenses (+) Prime Cost (2) Add: Factory Overheads (+) Add: Opening stock of Work-in-progress Work-in(+) Less: Closing stock of work in progress ((-) Less: Sale of scrap or defectives of work in progress Factory Cost (3) Add: Office Overheads (+) Cost of Production (4) Add :opening stock of finished goods Less: closing stock of finished goods Cost of Goods sold (5) Add: Selling and Distribution Overheads LECTURE 9 Total Cost(cost of sales) Total Cost Unit Cost

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