Cost Accounting

Presented by
Ms Sophie A.D
Final year
MHA
JNMC

Basic Cost Concepts

Cost is the cash or cash-equivalent value
sacrificed for goods and services that are
expected to bring a current or future benefit
to the organization.
Opportunity cost is the benefit given up or
sacrificed when one alternative is chosen
over another.
An expense is an expired cost or a cost used
up in the production of revenues.

Ms.Sophie A.D

08/25/15

Costs and Activities

A cost object is any item for which costs are

measured and assigned.

An activity is a basic unit of work performed

within an organization.

Ms.Sophie A.D

08/25/15

Origins
Cost accounting has long been used to help

managers understand the costs of running

a business. Modern cost accounting
originated during the industrial revolution,
when the complexities of running a large
scale business led to the development of
systems for recording and tracking costs to
help business owners and managers make
decisions.

Ms.Sophie A.D

08/25/15

Standard Cost Accounting

In modern cost accounting, the concept of

recording historical costs was taken further,

by allocating the company's fixed costs
over a given period of time to the items
produced during that period, and recording
the result as the total cost of production.

Ms.Sophie A.D

08/25/15

This allowed the full cost of products that

were not sold in the period they were

produced to be recorded in inventory using
a variety of complex accounting methods,
which was consistent with the principles of
GAAP (Generally Accepted Accounting
Principles).

Ms.Sophie A.D

08/25/15

GAAP (Generally Accepted Accounting

Principles).
Generally

Accepted
Accounting
Principles (GAAP) is the term used to
refer to the standard framework of
guidelines for financial accounting used in
any given jurisdiction.
GAAP includes the standards, conventions,
and rules accountants follow in recording
and summarizing transactions, and in the
preparation of financial statements.

Ms.Sophie A.D

08/25/15

Introduction
Management

cannot avoid making decisions,

even if the decisions is to do nothing in a
particular situations. decision- making is focused
towards specific goals and without data about
these goals decision will lack purpose and
effectiveness.
An efficient decision consumes minimum amount
of resources to achieve the desired goal.
Cost accounting is a subject that provides
knowledge to take effective and efficient
decisions for cost control, ascertainment of
profitability and internal and external reporting.

Ms.Sophie A.D

08/25/15

Cost Accountancy:

It is a comprehensive term .
It is used to describe the principles
, conventions, techniques and
systems that are employed in a
business to plan and control the
utilization of its resources.

Ms.Sophie A.D

08/25/15

Cost

accounting: it is the process of

accounting for cost . This process begins
with recording of income and expenditure
and ends with preparation of statistical
data .

10

Ms.Sophie A.D

08/25/15

OBJECTIVE
The primary objectives of cost accounting

include controlling cost, stimulating costconsciousness, ascertaining product unit

cost and determining profit and loss for
various
products
and
services
and
inventory valuation.

11

Ms.Sophie A.D

08/25/15

Functional activities include under

the general term of cost accounting:
A.

Cost book keeping :

It involves recording of cost.

B. Cost Control:
The determination of whether the current costs

represent what is regarded as satisfactory cost

performance(cost collection, cost analysis, cost
presentation, and cost interpretation).

12

Ms.Sophie A.D

08/25/15

C. Cost analysis:

It involves determination of why costs are

out of line and fixation of responsibility for
the same.
It deals with determination of different
relationships between cost and various
determinants of costs.

13

Ms.Sophie A.D

08/25/15

Cost comparison: the comparison of the

cost of alternatives products , activities,
methods or areas in the field of
production or distribution.
E. Cost planning: involved in accounting for
cost.
F.
Cost finding: measurement or estimation
of
cost
of
individual
products,
departments, or other segments of the
firms operations.
D.

14

Ms.Sophie A.D

08/25/15

Types of cost
Historical

costs: Are collected after they

have been incurred.
Future costs: Are costs expected to be
incurred at a later date.
Replacement costs: is cost of replacement in
the current market.
Standard
cost:
is
scientifically
pre
determined cost which is arrived at
assuming a particular level of efficiency in
utilization of material, labour and indirect
services.
15

Ms.Sophie A.D

08/25/15

Estimated

cost:
Is
an
approximate
assessment of what the cost will be. It is
based on fast averages adjusted to
anticipate feature changes.
Product cost: is the cost of finished product
built up from its cost elements .
Production cost: Represents prime cost plus
absorbed production overhead.

16

Ms.Sophie A.D

08/25/15

Direct

cost: Is a cost
which can be
economically identified with a specific
saleable cost unit.
Prime cost: Is the aggregate of direct
material cost and direct labour cost
Indirect cost : Is the cost that cannot be
directly identified to the unit of output
Fixed cost : is the cost which is incurred for a
period and which within certain output and
turnover limits tends to be unaffected by
fluctuations in the levels of activity
17

Ms.Sophie A.D

08/25/15

Variable cost : is the cost which tends to

vary with the level of activity

Joint cost : is the cost of process which
results in more than one main product

18

Ms.Sophie A.D

08/25/15

HISTORICAL COSTS
The use of the term cost in financial accounting

invariably means historical or actual cost.

A historical cost may be an expired cost or an
unexpired cost.
Expired cost, is the monetary value of the
resources that have already been used in
producing revenue; it does not have a future
revenue- producing potential.
Expense: When the revenue producing potential
of an expired cost has been used up in
producing revenue, it is called an expense.
19

Ms.Sophie A.D

08/25/15

Cost, Expense and loss

A

cost may sometimes expire without

generating any revenue to the firm, and
such expired cost is the loss.
The expired costs expenses and losses
are reported in the profit and loss
account (income statement).
Unexpired cost, is the one which still has
the potential of generating revenue in
future; it represents the monetary value of
an unused resource.
20

Ms.Sophie A.D

08/25/15

Expenditur
e
Cost
Expired
Cost

Deferred cost
or unexpired
cost
Expens
es

Balance
sheet
21

Ms.Sophie A.D

Loss

Profit and loss

account

08/25/15

Advantages
Cost accounting
1.Helps

in optimum utilization of mean,

material and machines.
2.Identifies the areas requiring corrective
action.
3.Helps management in formulation of
policies.
4.Helps management in making short-term
decisions by use of techniques like
marginal costing.
22

Ms.Sophie A.D

08/25/15

5. Provides useful data for final accounts by

giving cost of closing stock of raw

materials, work -in progress and finished
products.
6. Provides a data- base for reference by
government, wage Tribunals and Trade
unions etc.,
7. Helps in formation of cost centre's and
responsibility centre's to exercise control.

23

Ms.Sophie A.D

08/25/15

8. Helps to face increasing

difficulties in
setting prices and improving efficiency.
9. Facilities use of specialized techniques like
cost reduction , value analysis, operations
research
and
management
by
exception,etc.,
10. Focuses attention on the profitability of
each product and services unlike financial
accounting, which presents profitability
for company as a whole.
24

Ms.Sophie A.D

08/25/15

LIMITATIONS
1. It is not an exact science and involves

inherent element of judgment.

2. Cost varies with purpose .Therefore cost
collected for one purpose will not be
suitable for another purpose.
3. Most of the cost accounting techniques
are based on some pre-assumed notions.
4. Different views are held by different cost
accountants about the item to be included
in cost.
25

Ms.Sophie A.D

08/25/15

26

Ms.Sophie A.D

08/25/15