Introduction to Cost Accounting- Module 1

7/24/2019 Introduction to Cost Accounting- Module 1

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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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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(



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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

htt#:22'oo+s(googe(ae2'oo+s3id4O5gI6oo-

7MoC8#g4SA9-

A68d.4costedge$s8h4en8sa4;8ei4Nedge$s8f4fase


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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%-

to2content2manage$ia-accounting-t)#es-of-

$es#onsi'iit)-cent(htm


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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.htm


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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(



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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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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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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

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Introduction to Cost Accounting- Module 1

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