CHAPTER 1 INTRODUCTION TO COST ACCOUNTING.pdf
- 1. COST ACCOUNTING CHAPTER-1 INTRODUCTION TO COST ACCOUNTING
- 2. COST - MEANING Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing.
- 3. COST ACCOUNTING - MEANING Cost Accounting is the process of accounting for costs.
- 4. COST ACCOUNTING - DEFINITION According to Wheldon, Cost accounting is “the process of classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, the relation of these costs to sales values and the ascertainment of profitability”.
- 5. OBJECTIVES OF COST ACCOUNTING ➢ Ascertainment of costs ➢ Determining selling price ➢ Measuring and increasing efficiency ➢ Cost control and cost reduction ➢ Ascertaining profit ➢ Providing basis for managerial decision making
- 6. SL No Financial Accounting Cost Accounting 1 Records financial data of the organization. So it records all relevant monetary data Records and summarizes cost information and data. This includes information about labour, materials and various overheads of the manufacturing process. 2 Financial accounting only deals in historical costs (only actual costs and figures) Cost accounting uses both historical and pre-determined costs (standard costs, estimates etc.) 3 The users of the information provided by financial accounting are both internal and external users Information provided by cost accounting is only meant for people within the firm like management, employees etc. 4 Financial accounting is mandatory for all firms. Every organization has to keep some record of its financial transactions Cost accounting is only done by manufacturing firms. And in most cases, it is not mandatory. 5 The emphasis here is on recording the transactions/data and presenting it in the given format. Other than recording data it also provides a system of cost control of labour, material, overhead costs 6 Financial accounts deal with the business in its entirety. So it provides us with profit or loss for the whole concern Costing will enable us to get the profit or loss for individual products, process, job etc. 7 In financial accounting, there is no aspect of forecasting. It is simply a record of the financial position of the firm In Cost accounting, forecasting is possible using some of the budgeting techniques Differences between Financial Accounting and Cost Accounting
- 7. ELEMENTS OF COST Element of cost Materials Labour Expenses Direct Indirect Direct Indirect Direct Indirect
- 8. 1. MATERIAL The substance from which the finished product is made is known as material. (a) DIRECT MATERIAL: is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc. (b) INDIRECT MATERIAL: one which cannot be easily identified in the product.
- 9. EXAMPLES OF INDIRECT MATERIAL At factory level – lubricants, oil, consumables, etc. At office level – Printing & stationery, Postage,Telegrams etc. At selling & dist. level – Packing materials, printing & stationery, etc.
- 10. LABOUR The human effort required to convert the materials into finished product is called labour. (a) DIRECT LABOUR: is one which can be conveniently identified or attributed wholly to a particular job, product or process. Eg:wages paid to carpenter, fees paid to tailor,etc. (b) INDIRECT LABOUR: is one which cannot be conveniently identified or attributed wholly to a particular job, product or process.
- 11. EXAMPLES OF INDIRECT LABOUR At factory level – foremen’s salary, works manager’s salary, gate keeper’s salary,etc At office level – Accountant’s salary, GM’s salary, Manager’s salary, etc. At selling and dist.level – salesmen salaries, Logistics manager salary, etc.
- 12. EXPENSES Those expenses other than materials and labour. DIRECT EXPENSES: are those expenses which can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc. INDIRECT EXPENSES: are those expenses which cannot be directly allocated to particular job, process or product.
- 13. Examples of other expenses At factory level : factory rent, factory insurance, lighting, etc. At office level : office rent, office insurance, office lighting, etc. At sales & dist.level : advertising, show room expenses like rent, insurance, etc.
- 14. CLASSIFICATION OF COST Classification On basis of : Nature Function Variability Controllability Normality Time In relation to the Product Managerial decision making
- 15. ONTHE BASIS OF NATURE Material Labour Expenses
- 16. ON THE BASIS OF FUNCTION ON THE BASIS OF FUNCTION PRODUCTION COST ADMINISTRATION COST SELLING COST DISTRIBUTION COST
- 17. ONTHE BASIS OF VARIABILITY Fixed cost Variable cost Semi Variable cost
- 18. ON THE BASIS OF CONTROLLABILITY ➢ Controllable costs ➢ Uncontrollable costs ON THE BASIS OF NORMALITY ➢ Normal costs ➢ Abnormal costs
- 19. ON THE BASIS OF TIME: ➢ Historical costs ➢ Pre determined costs ON THE BASIS OF RELATION TO THE PRODUCT ✓ Direct cost ✓ Indirect cost
- 20. ONTHE BASIS OF COSTANALYSIS FOR DECISION MAKING ▪ Marginal cost ▪ Opportunity cost
- 21. Meaning of Cost Centre: CIMA defines Cost Centre as “a production or service, function, activity or item of equipment whose costs may be attributed to cost units. A cost centre is the smallest organizational sub-unit for which separate cost allocation is attempted.”
- 22. Example of Cost centre ❖ A machine can be a cost centre by charging all costs relate to it. Those costs may be depreciation, maintenance, power, consumable, share of rent and establishment expenses, heating and lighting etc. ❖ A sales person can be treated as cost centre by charging all costs relating to him like salary, commission, travel expenses, postage and telephone, samples, entertainment expenses etc.
- 23. Cost unit A cost unit is defined as “a unit of quantity of product, service or time (or a combination of these) in relation to which costs may be ascertained or expressed”. In other words, a cost unit is a standard or unit of measurement of the goods manufactured or service rendered. Cost unit may be in terms of number, length, area, weight, volume, time and value.
- 24. The following are examples of Cost Unit: Brick Industries Cost Unit per 1000 bricks. Coal Mines Cost Unit per quintal. Cotton Mills Cost Unit per meter. Electric Company Cost Unit per unit. Transport Companies Cost Unit per kilometre. Steel Companies Cost Unit per tonne. Water Supply Cost Unit per 1000 litres Furniture Industries Cost Unit per number Oil Companies Cost Unit per litre.
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