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COST ACCOUNTING - INTRODUCTION
COST ACCOUNTING: The Institute of Cost and Management Accountant,
Engand !ICMA" has defined Cost Accounting as the #$ocess of
accounting fo$ the costs f$om the #oint at %hich eenditu$e incu$$ed, to the
esta'ishment of its utimate $eationshi# %ith cost cente$s and cost units( In
its %idest sense, it em'$aces the #$e#a$ation of statistica data, the
a##ication of cost cont$o methods and the asce$tainment of the #$ofita'iit)
of acti*ities ca$$ied out o$ #anned(
Cost Accounting = Costing + Cost Reporting + Cost Control.
Accounting fo$ dete$mination and cont$o of costs(
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Cost Accounting
CA is a fo$ma s)stem of accounting fo$ costs inthe 'oo+s of accounts ') means of %hich costs of#$oducts and se$*ices a$e asce$tained andcont$oed(
Cost means the amount of eenditu$e ! actua o$notiona" incu$$ed on, o$ att$i'uta'e to, a gi*en
thing(
Cost ascertainmentis com#utation of actua costs
incu$$ed Cost estimationis a #$ocess of #$edete$mining
costs of goods and se$*ice(
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OBJECTIVES OF COST ACCOUNTING
Asce$tainment of costs
Estimation of costs
Cost cont$o
Cost $eduction
Dete$mining seing #$ice
aciitating #$e#a$ation of financia and othe$ statement
$o*iding 'asis fo$ o#e$ating #oic)
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Com#a$ison of cost,
management and financiaaccounting
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Meanings
inancia accounting
Cost accounting
Management accounting
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inancia accounting
$o*ides info$mation to use$s %ho a$e e&te$na tothe 'usiness
It $e#o$ts on #ast t$ansactions to d$a% u#
financia statements
The fo$mat a$e go*e$ned ') a% and accounting
standa$ds esta'ished ') the #$ofessiona
accounting #oicies
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Cost accounting
Is conce$ned %ith inte$na use$s of accountinginfo$mation, such as o#e$ation manage$s
The gene$ated $e#o$ts a$e s#ecific to the
$e.ui$ement of the management
The $e#o$ting can 'e in an) fo$mat %hich suits
the use$
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Management accounting
Com#$ises a cost accounting functions The accounting fo$ #$oduct and se$*ice costs,
management accounting e&tends to use *a$ious
inte$na accounting $e#o$ts fo$ #anning, cont$o
and decision ma+ing
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CA and A - Com#a$ison
u$#ose Statuto$) $e.ui$ements
Ana)sis of cost and #$ofit
e$iodicit) of $e#o$ting Cont$o as#ect
/isto$ica and #$edete$mined costs
o$mat of #$esenting info$mation
T)#es of t$ansactions $eco$ded
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Diffe$ences 0et%een inancia and
Manage$ia Accounting
Financial Managerial
Accounting Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organiation
!. "ime focus #istorical perspecti$e Future emphasis
%. &erifia'ilit( Emphasis on Emphasis on rele$ance
$ersus rele$ance $erifia'ilit( for planning and control
). *recision $ersus Emphasis on Emphasis on
timeliness precision timeliness
+. ,u'-ect *rimar( focus is on Focuses on segments
the whole organiation of an organiation
. /e0uirements Must follow AA* 2eed not follow AA*
and prescri'ed formats or an( prescri'ed format
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Cost accounting
*s(
Management accounting
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Managementaccounting
Cost accounting
Objective To provideinformation forplanning anddecision makingby themanagement
To ascertain andcontrol cost
Basic ofrecording
Concerned withtransactionsrelated to thefuture
Based on bothpresent and futuretransactions for costascertainment
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Managementaccounting
Cost accounting
Coverage Covers a widerarea: nancial
accounts costaccountsta!ation etc"
Covers mattersrelating to
ascertainment andcontrol of cost ofproduct or service
#tility Only the needs
of internalmanagement
The needs of both
internal and e!ternalinterested groups
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Managementaccounting Cost accounting
Types oftransactio
ns
$eals with bothmonetary any
non%monetarytransactionscovering both&uantitative and&ualitative
aspects
$eals only withmonetary
transactionscovering only&uantitative aspect
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Cost conce#ts
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Eement of cost
Cost o'1ect
Cost
Cost unit
Cost cent$e
$ofit cent$e
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Cost o'1ect
It is an acti*it) o$ item o$ o#e$ation fo$ %hich ase#a$ate measu$ement of costs is desi$ed
E(g( the cost of o#e$ating the #e$sonne
de#a$tment of a com#an), the cost of a $e#ai$ fo',
and the cost fo$ cont$o
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Cost
It is the amount of eenditu$e incu$$ed on as#ecific cost o'1ect
Tota cost 4 .uantit) used cost #e$ unit !unit
cost"
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Cost Unit
Cost units a$e the things, that the 'usiness is setu# to #$o*ide, of %hich cost is asce$tained(
Unit of #$oduct, se$*ice o$ time in $eation to%hich cost ma) 'e asce$tained o$ e$essed
T)#es: Units of production such s re! of pper" tonne of
steel" !eter of c#le etc.
Units of ser$ices such s pssenger !iles" consultinghours" roo! per d%" #ed per d%
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2&
Res#onsi'iit) cent$e
Responsibility centers a$e identifia'e segments%ithin a com#an) fo$ %hich indi*idua manage$s
ha*e acce#ted autho$it) and accounta'iit)(
Res#onsi'iit) cente$s define e&act) %hat assets
and acti*ities each manage$ is $es#onsi'e fo$( htt#:22%%%(dummies(com2ho%-
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Cost Cent$e
Cost cente$ isa ocation, #e$son, o$ item ofe.ui#ment !o$ g$ou# of these" fo$ %hich costs ma)'e asce$tained and used fo$ the #u$#ose ofcont$o
It $efe$s to a section of the 'usiness to%hich costs can 'e cha$ged(
T)#es:'ersonl nd (!personl cost centre
'roduction nd )er$ice cost centre
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$ofit cent$e
It is ocation o$ function %he$e manage$s a$eaccounta'e fo$ saes $e*enues and eenses
E(g( di*ision of a com#an) that is $es#onsi'e fo$
the saes of #$oducts
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Re*enue cent$e
A re$enue center is the #usiness opertionresponsi#le for generting co!pn%*s sles
re$enue.
hese centers !% #e deprt!ents" di$isions or
#usiness units tht h$e direct interction ,ithconsu!ers to sell goods nd ser$ices.
-or e!ple" hotel !ight dd snc/ #r or coffee counter to generte
etr sles. Co!pnies usull% #re/ do,n their#usiness opertionsinto
re$enue centers to deter!ine theprofit#ilit%of ech good or ser$ice itproduces. Co!pn% si0e" the nu!#er of product or ser$ice lines nd
industr% stndrds re ll fctors co!pnies use ,hen choosing or dding
dditionl centers for their opertions.
http://www.wisegeek.com/what-are-business-operations.htmhttp://www.wisegeek.com/what-is-profitability.htmhttp://www.wisegeek.com/what-is-profitability.htmhttp://www.wisegeek.com/what-are-business-operations.htm7/24/2019 Introduction to Cost Accounting- Module 1
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COST CLASSIFICATION ON THEBASIS OF
Natu$e unction Di$ect 8 indi$ect
a$ia'iit) Cont$oa'iit) No$mait) inancia accounting cassification
Time anning and cont$o Manage$ia decision ma+ing
ON THE BASIS OF NATURE
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ON THE BASIS OF NATURE Module 2
Mate$ias
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ON THE BASIS OF FUNCTION
Manufactu$ing costs
Comme$cia costs F ADM and S8D Costs
ON T/E 0ASIS O DIRECT AND INDIRECT
Di$ect costs
Indi$ect costs
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Cassifications of Costs
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
Manufactu$ing costs a$e oftencassified as foo%s:
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Nonmanufactu$ing Costs
Ma$+eting and seing costs ( ( ( Costs necessr% to get the order nd deli$er the
product.
Administ$ati*e costs ( ( (
All eecuti$e" orgni0tionl" nd clericl costs.
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Di$ect Costs and Indi$ect Costs
Di$ect costs
Costs that can 'eeasi) and con*enient)
t$aced to a unit of#$oduct o$ othe$ costo'1ecti*e(
E&am#es: di$ect
mate$ia and di$ecta'o$
Indi$ect costs
Costs cannot 'e easi)and con*enient) t$aced
to a unit of #$oduct o$othe$ cost o'1ect(
E&am#e:manufactu$ing
o*e$head
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ON THE BASIS OF VARIABILITY
i&ed costs
a$ia'e costs
Semi *a$ia'e costs
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Cost Cassifications fo$ $edicting Cost
0eha*io$
/o% a cost %i $eact tochanges in the e*e of
'usiness acti*it)(
otl *a$ia'e costs
chnge ,hen cti$it%chnges.
otl fi&ed costsre!inunchnged ,hen cti$it%chnges.
/o% a cost %i $eact tochanges in the e*e of
'usiness acti*it)(
otl *a$ia'e costs
chnge ,hen cti$it%
chnges.
otl fi&ed costsre!inunchnged ,hen cti$it%
chnges.
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Tota a$ia'e Cost
ou$ tota ong distancetee#hone 'i is 'ased on
ho% man) minutes )ou ta+(
Minutes Talked
TotalL
ongDistance
TelephoneBill
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a$ia'e Cost e$ Unit
Minutes Talked
Pe
rMinute
Teleph
oneCharge
The cost #e$ ong distance minuteta+ed is constant(
o$ e&am#e, 6> cents #e$ minute(
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Tota i&ed Cost
ou$ month) 'asic tee#hone 'i#$o'a') does notchange %hen )ou ma+e mo$e oca cas(
Number of Local Calls
Mon
thlyBasic
Tele
phoneBill
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i&ed Cost e$ Unit
Number of Local Calls
Monthly
BasicTelephone
Billp
erLocalCall
The a*e$age cost #e$ oca cadec$eases as mo$e ocacas a$e made(
Cost Cassifications fo$ $edicting Cost
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Cost Cassifications fo$ $edicting Cost
0eha*io$
3eha$ior of 4ost 5within the rele$ant range6
4ost 7n "otal *er Unit
&aria'le "otal $aria'le cost changes &aria'le cost per unit remains
as acti$it( le$el changes. the same o$er wide ranges
of acti$it(.
Fixed "otal fixed cost remains Fixed cost per unit goes
the same e$en when the down as acti$it( le$el goes up.
acti$it( le$el changes.
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Semi-*a$ia'e cost
It #$ocesses cha$acte$istics of 'oth fi&ed and*a$ia'e cost
It inc$eases o$ dec$eases %ith acti*it) e*e 'ut
not in di$ect #$o#o$tion
ON THE BASIS OF
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ON THE BASIS OFCONTROLLABILITY
Cont$oa'e costs
Uncont$oa'e costs
ON T/E 0ASIS O NORMA
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ON THE BASIS OF TIME:
/isto$ica costs
$e dete$mined costs
ON T/E 0ASIS O
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DECISION MAKING - Cost
accounting F A$o$a T0
Ma$gina costs
Out of #oc+et costs
Sun+ costs
Im#uted costsO##o$tunit) costs
Re#acement costs
A*oida'e costs
Una*oida'e costs
Ree*ant and i$$ee*ant costs
Diffe$entia costs
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O##o$tunit) Costs
The #otentia 'enefit that isgi*en u# %hen one ate$nati*e
is seected o*e$ anothe$(
!ample" #f you $erenot attending college%you could be earning&'(%))) per year*+our opportunity costof attending college for oneyear is &'(%)))*
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Sun+ Costs
Sun+ costs cannot 'e changed ') an) decision( The) a$e not
diffe$entia costs and shoud 'e igno$ed %hen ma+ing decisions(
!ample" +ou bought an automobile that cost &')%)))
t$o years ago* The &')%))) cost is sunk because$hether you drive it% park it% trade it% or sell it% you cannotchange the &')%))) cost*
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Diffe$entia Costs and Re*enues
Costs and $e*enues that diffe$ among ate$nati*es(
Example8 9ou ha$e a -o' pa(ing :1;+
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COST TERMINOLOGY:
COST: Cost means the amount of eenditu$e incu$$ed on a #a$ticua$ thing(
COSTING: Costing means the #$ocess of asce$tainment of costs(
COST ACCOUNTING: The a##ication of cost cont$o methods and the asce$tainment of
the #$ofita'iit) of acti*ities ca$$ied out o$ #annedH(
COST CONTRO
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Cost o$ganiJation and othe$ de#tsK
(n the orgni0tion chrt" the cost deprt!ent occupies $er% i!portntposition. he cost deprt!ent is responsi#le-or /eeping records connected ,ith !teril" l#our nd epenses"-or nl%0ing ll costs of !nufcturing" !r/eting nd
d!inistrtion" nd-or issuing control reports nd dt for decision !/ing to the
eecuti$es" deprt!ent heds" section heds nd fore!en. hen
!nge!ent is pro$ided ,ith useful reports" the% ssist in controlling
nd i!pro$ing cost nd opertions. )uch infor!tion dt re" gin"
used for !/ing ne, decisions.
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Cost o$ganiJation and othe$ de#tsK
he effecti$eness of the control of cost depends upon properco!!uniction through control reports fro! the cost ccountnt to the
$rious le$els of operting !nge!ent. Accounting nd control
reports re directed to these le$els of !nge!ent" i.e. top
!nge!ent" !iddle !nge!ent nd lo,er le$el or shop floor le$el of
!nge!ent. ch !nge!ent le$el reuires dt for deciding nd
sol$ing $rious pro#le!s. he cost ccountnt !ust de$ise cost
s%ste! into ,hich dt re !rshlled to fit the nu!erous pro#le!s
confronting !nge!ent. he cost deprt!ent is inti!tel% connected
,ith the other deprt!ents in the orgni0tion. heir reltionship cn#e #riefl% est#lished s follo,s
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Cost o$ganiJation and othe$ de#tsK
Manufactu$ing de#a$tments control the scheduling" !nufcturing ndinspection of ech o# or processed products to their finished stge in ter!s of
efficienc% nor!s est#lished. Costs incurred t ech stge re !esured nd co!pred
,ith the nor!s.
$oduction #anning, $esea$ch and design de#a$tment in$ol$e cost deprt!ent
for cost esti!tes needed for ech t%pe of !teril" l#our nd !chine process #efore decision cn #e reched in ccepting or reecting design.
e$sonne de#a$tment is interested to !intining e!plo%ee cost uptodte. he
,ge rte nd !ethods of re!unertion greed ,ith the e!plo%ees for! the #sis for
co!puting p%roll. Cost deprt!ent pro$ides ll dt.
Ma$+eting de#a$tment needs good product t co!petiti$e price. hile cost
cnnot deter!ine price" it cn influence fition of price. esides" ccurte cost dt
help sles !nger distinguish profit#le ,ith nonp rofit#le products nd co!pre
cost of !r/eting ginst sles $olu!e.
u'ic $eation de#a$tment est#lishes good reltions ,ith the pu#lic in generl
nd custo!ers" creditors" shreholders" nd e!plo%ees in prticulr. he costdeprt!ent pro$ides infor!tion concerning price" cost" etc.
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Cost o$ganiJation and othe$ de#ts
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Cost accumuation
:'ri!e cost = direct !terils + direct l#our + direct epenses
:'roduction cost = 'ri!e cost + fctor% o$erhed
;R
= d!inistrti$e" selling"distri#ution nd finnce cost?
:'eriod cost is treted s epenses nd !tched ginst sles for clculting