An Orientation to Cost Accounting

Presented by : Amit Kumar, Amit Pandey, Anand Prakash, Arjun Kafle, Ashish Kumar

COST
Cost

is the amount of expenditure incurred relating to a specific thing or activity.

Cost

is the cash or cash equivalent values sacrificed to obtain some goods or services.

COST ACCOUNTING

Cost

accounting is classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for the purpose of control and guidance of management.

OBJECTIVE OF COST ACCOUNTING

To ascertain the product cost.

To facilitate planning and control of regular business activities.

To supply information for short and long run decisions.

Direct Material

Selling, Distribution & Administrative overhead

Direct Labor

ELEMENTS OF COST

Factory Overhead

Direct Expenses

Direct Material : The cost of materials

which become a major part of finished product.

Direct Labour : The labour associated with

workers engaged in the production process.

Direct Expenses : expenditure other than

direct material and direct labour directly incurred on a specific cost unit.

Factory overhead : defined as cost of

indirect materials, indirect labour and indirect expenses.

Indirect material

Indirect labour

Indirect expenses

Selling and distribution and administrative overhead :

Distribution expenses begins when factory cost ends. It covers the cost of making sale and delivering products. Administrative overhead includes cost of planning and controlling general policies and the operations of the enterprise.

Prime cost :

Direct materials, direct labour and expenses constitute prime cost.

Conversion cost : Direct labour and factory overhead

together are called conversion cost.

Cost Classification
Fixed Cost
Variable Cost
Committed cost Managed cost Discretionary cost

Vary directly and proportionately with the output

Mixed Cost

Total Fixed Cost + (units x) variable cost per unit

Direct and Indirect Cost :

A direct cost is one that can be economically traced to a single cost object. An indirect cost is one that is associated with the manufacture of two or more units of finished product.

Costing
Costing is the techniques and process of determining costs of a product manufactured or a service rendered.

Types of costing

Job costingJob costing used in those business concern where production is carried out as per specific order of a group of identical or similar product.

Batch costing

Contract costing
Mutual or terminal costing

Types of costing

Process costingThis costing method is used in those industries where manufacture is done continuously.

Unit or single output costing

Operating costing
Operation costing

Technique of costing
Historical costing Standard costing

Absorption or Full costing

Variable or Marginal costing

Uniform costing

Costs:
The expenses which are incurred in converting the raw materials into the finished form plus all other expenses incurred in purchasing raw material and distribution of goods.

 Based on behavior Based on decision making and control Element wise classification Functional classification Based on financial nature of costs

Classification based on behavior

Fixed costs Variable costs

Total costs

Fixed costs The costs which will not vary with the level of output. Examples are rent, property taxes, depreciation, etc.

Variable costs
The costs which vary with the level of output. Examples include raw materials, sales commission, etc.

If the operation is shut down , the variable costs will be eliminated.

Total costs
Total Cost= Fixed Cost +Variable Cost
Total Cost Variable cost

Fixed cost

Cost for Decision making and Control

Opportunity cost Sunk cost

Explicit costs
Imputed cost Out of-pocket cost

Opportunity Costs
The expected returns from the second best use of resources which are forgone due to the scarcity of resources.

Sunk costs
The costs which cant be increased, decreased or altered . The costs are incurred in the past.

Explicit costs
The costs which are entered in the books of accounts.
These costs involve cash payments.

Imputed Costs
The costs which did not enter in the books of accounts .

Note: A combination of implicit and explicit costs makes economic cost.

Out-of Pocket Costs

The items of expenditure which involve cash payments . All explicit costs fall in this category.

Element wise classification

Direct costs

Indirect costs

Direct costs
Also known as traceable costs The costs which can be identified easily and traced easily with a product is called direct costs. E.g.. Cost for direct labor, direct materials, etc

Indirect Costs
The costs which cant be allocated to a single product. For e.g. Electricity.

Functional classification
Production costs Administration costs Selling and distribution costs Research and development costs

Production Costs
It is the inclusive of all direct material, direct labor, direct expenses, and manufacturing expenses. It refers to costs concerns with manufacturing activity which starts with supply of material and ends with the primary packaging of the product.

Administration Costs
These costs are incurred for carrying the administrative functions of the organization For example: cost of policy formulation and implementation etc.

Selling And Distribution Costs

The costs which are incurred in the selling and distribution activities.

For example: salesman commission, logistics expenses, advertising costs, etc

Research & Development Costs

The cost incurred in the search of new product, modification of existing products . For Example: Cost incurred in idea generation, prototype development, market testing, etc.

Based On Financial Nature Of Costs

Financial costs cash costs Non cash costs Non-financial costs

Cash Costs & Non Cash Costs

Cash costs are those costs that are reflected on actual cash outflows Includes both revenue and costs Non cash costs are those costs that do not involve cash outlays at the time when cost is recognized For example: depreciation, opportunity costs

Non-financial Costs
These are the costs that are not directly traceable through the company's cash flows.

Examples are morale of employees

 Management Accounting by Khan and Jain Cost Accounting by Jain and Narang Introduction to management accounting by Horngren, Sundem, and Stratton: 13th edition Advanced management accounting by Ravi M. Kishore: 2nd edition Cost accounting: Jawaharlal Lal by 2nd edition Managerial economics: DN Diwedi by 6th edition

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