COST ACCOUNTING : AN INTRODUCTION

The accounting used to study the various aspects of cost is known as cost accounting

 It measures the operating efficiency of the enterprise

 It is an internal aspect of the organization

 The Institute of Cost and Management Accounting, London defines Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. It embraces the preparation of statistical data, application of cost control methods and the ascertainment of profitability of activities carried out or planned.

 Functional activities are included in the scope of cost accounting: 1. Cost book-keeping: 2. Cost system: 3. Cost ascertainment: 4. Cost Analysis: 5.Cost comparisons: 6. Cost Control: 7. Cost Reports:

 Cost accounting has the following main objectives to serve: 1. Determining selling price, 2. Controlling cost 3. Providing information for decision-making 4. Ascertaining costing profit 5. Facilitating preparation of financial and other statements.

 Management accounting contains a number of decision-making tools that require the conversion of all operating costs and expenses into fixed and variable components.

 The most volatile variable in any business is

volume; that is, units produced or units

sold.

 In management accounting theory, the relationship between volume and total variable cost is presented as a continuous linear function; that is, a straight line when plotted on a graph. In economic theory, the relationship is assumed to be curvilinear.

 Variable costs are caused by activity.

 As the rate increases, the slope also become steeper.

 Mathematically, the average variable cost rate or V may be defined as: V=Vm+Vl+Vo+Vs+Va Where: V m - variable material cost rate V l - variable labor cost rate V o - variable overhead rate V s - variable selling expense rate V a - variable administrative rate

 An important point that needs understanding is that some costs are not inherently fixed or variable but become one or the other by management exercising its decision-making powers.

 the direct use of material will always be a variable cost. However, this per unit cost of material is to a large extent controllable by the decision making powers of management.

 Fixed costs provide capacity to manufacture or to sell.

 When actual activity is less than capacity available, a major problem exist.

 The portion of unused capacity cost should be measured as idle capacity cost and not treated as a production cost. The consequence is that the per unit cost of goods manufactured varies significantly with the percentage of capacity utilized.

 There are three capacities: machine, supervision, and space. A major concern of management is to have a balance or equality among the different ranges of capacity services. Each type of fixed cost provide different output limits.

 Production cannot exceed 10,000 units, even though machine and space capacity is larger. A major responsibility of management is to make those fixed cost decisions that create a balance among the different types of capacity services.

 Inherent in the nature of fixed cost is the potential for idle capacity The cost of idle capacity cannot be transferred to another period in the manner in which unused material can be stored and used in a later period.

 F = F L + F o + F s + F a (6) Where: F L - fixed labor cost F s - fixed selling expenses F o - fixed overhead costs F a - fixed administrative expenses