Introduction to Cost Accounting

Semester I

Types of Accounting

Accounting

Financial Accounting

Cost Accounting

Management Accounting

Financial Accounting
Uses Generally Accepted Accounting Principles (GAAP) to record, classify and summarize business transactions and to prepare financial statements Summarizes results of operations for selected periods of time Shows financial position of the business at particular dates Provides useful information to investors, creditors and other users in making sound investment and economic decisions

Cost Accounting
Cost Accounting is accounting for cost aimed at providing cost data, statement and reports for the purpose of managerial decision making. It is an internal aspect of the organisation The work of managers focuses on: planning, which includes setting objectives and outlining how to attain these objectives; control, which includes the steps to take to ensure that objectives are realized

 To carry out these planning and control responsibilities, managers need information about the organization From an accounting point of view, this information often relates to the costs of organization Data is collected from financial accounting records

Objectives of cost accounting

Cost accounting has the following main objectives to serve: Determining selling price Ascertaining profit Controlling cost Providing information for decisionmaking

 Deals with providing information to managers for their use in planning, decision-making, performance evaluation, control, management of costs Requires data from both financial accounting and cost accounting Contains reports prepared to fulfill the needs of management Needs the support of a good management information system (MIS) Focuses on the future

Management Accounting

Cost Control, Cost Reduction, Cost Management

Cost control refers to management actions to keep the costs within standards and/or budget Cost control can be defined as the comparative analysis of actual costs with appropriate standards or budgets to facilitate performance evaluation and formulation of corrective measures Cost control does not necessarily mean reducing the cost

 Cost reduction may be defined as a planned, positive approach to bring costs down It implies real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their quality or suitability for the use intended The goal of cost reduction is achieved in two ways: by reducing the cost per unit by increasing productivity

 Cost management considers both cost control and cost reduction in its perspective The objective is to increase productivity and to relate them to enhance profitability by studying customer needs, bringing improvement in the existing products or services, smoothening process and layout of manufacturing goods or services to ensure customer satisfaction so as to maximise margins and earn higher profits

Methods of Costing
Methods of Costing for product and service

Job Costing

Process Costing

Batch Costing

Contract Costing

Composite Costing

Single output Costing

Operation Costing

Job Costing
Production is carried out as per specific order and customers specifications Each job (or product) is separate and distinct from the other jobs or products Enterprises engaged in house-building, ship-building, machinery production and repair

Types of Job Costing

Batch Costing - This method is used to determine the cost of a group of identical or similar products. The batch consisting of similar products is the unit and not the single item within the batch. Contract/Terminal Costing - This method of costing, based on the principle of job costing is used by house builders and civil contractors. The contract becomes the cost unit for which relevant costs are accumulated. Multiple/Composite Costing - This costing method is used in those industries where the nature of the product is complex, such as motor cars, airplanes, etc. In such cases costs are accumulated for different components making the final product and then summed up to ascertain the total cost of the product.

Process Costing
Production is done continuously Chemicals, oil, gas, paper Difficult to trace the costs to specific units The total cost is averaged for the number of units manufactured

Types of Process Costing

Unit or Single Output Costing - This method is used where a single item is produced and the final production is composed of homogeneous units. The per unit cost is obtained by dividing the total cost by the total number of units manufactured.

Operation/Hybrid Costing - Where products have some common characteristics but also must be handled individually to some extent, operation costing may be used to determine product costs. In this method output is achieved through a number of different operations.

 Operating (Service) Costing - Operating costing method is used by those organizations which render services and do not manufacture any physical item, such as transport, power house, hospital. The cost units differ among these service organizations depending upon the nature of service being rendered. But usually the units are passenger-mile, tone-mile, a bed in hospital, per student in a college.

TYPES OF COSTING

Types of Costing

Historical

Uniform

Marginal

Absorption

Standard

ABC