MEANING, NEED, OBJECTIVES, CLASSIFICATION, ELEMENTS AND METHODS OF COST and MANAGEMNT Accounting
- 1. COST Accounting BY N. ILANGO Assistant Professor, Department of MBA Sri Ramakrishna College of Arts & Science, CBE
- 2. COST Accounting Cost Accounting A branch of accounting that deals with the recording, classification, allocation & analysis of costs associated with the production of goods or services Primary purpose is to ascertain the cost per unit, control costs & help in decision-making Cost Accounting = Control + Cost Analysis Management Accounting The use of financial & cost information for planning, controlling & decision-making by management Transforms data into meaningful insights to support strategic objectives Management Accounting = Strategy + Decision Support
- 3. Objectives of COSTING OBJECTIVE EXPLANATION Cost Ascertainment Find out the cost of products, processes, jobs or services Cost Control Identify waste & inefficiencies to reduce avoidable expenses Cost Reduction Achieve permanent cost saving without compromising quality Profitability Analysis Understand profitability of different products or segments Inventory Valuation Provide accurate value of work-in-progress & finished goods Decision Making Support pricing, make or buy & product mix decisions Budgeting & Planning Help in setting budgets & comparing with actual performance
- 4. Classification of COST TYPE EXAMPLE EXPLANATION Material Cost Raw cotton, steel, flour Cost of raw materials used in production Labour Cost Wages of machine operators Cost of human effort in production Expenses Power, rent, depreciation All other production-related expenses 1. By Nature or Element 2. By Function TYPE EXAMPLE EXPLANATION Production Cost Factory rent, wages Cost incurred in manufacturing Administrative Cost Office salaries, printing General management expenses Selling Cost Advertising, commission Expenses to promote and sell Distribution Cost Delivery, packaging Expenses to deliver the product to customers
- 5. Classification of COST TYPE EXAMPLE EXPLANATION Fixed Cost Factory rent, manager salary Cost remains constant irrespective of output Variable Cost Direct material, fuel Changes with output level Semi-variable Cost Telephone, maintenance Partially fixed and partially variable 3. By Behaviour 4. By Identifiability TYPE EXAMPLE EXPLANATION Direct Cost Raw materials, direct wages Directly attributable to a product or job Indirect Cost Factory rent, supervision Common cost not directly traceable to a unit
- 6. ELEMENTS of COST ELEMENT COMPONENTS Example Direct Material Raw materials Cotton, timber, steel Direct Labour Wages paid to workers involved in production Assembly line workers Direct Expenses Cost directly attributable to a unit Royalties, special tools Indirect Costs (Overheads) Factory, admin, selling & distribution overheads Supervisor salary, electricity, marketing
- 7. METHODS of COST METHOD EXPLANATION Example 1. Job Costing Costs accumulated for each specific job or order Interior decoration, Printing press 2. Batch Costing Cost per batch of identical products is calculated Bakery production, Pharma batch 3. Process Costing Used when production is continuous & units are identical Oil refining, textile dyeing 4. Contract Costing For large construction contracts lasting months/ years Road construction, Dam building 5. Unit Costing (Output Costing) Cost per unit of output Cement, bricks 6. Operating Costing (Service Costing) Used in service industries Transport, electricity, hospitals 7. Multiple Costing (Composite Costing) Combination of methods Car manufacturing (Job + Process)
- 8. Examples for Each Methods of Cost Job Costing: A printing press receives a custom book order for . 5,000 brochures ₹ Materials, labour & overheads are recorded against this job separately Process Costing: A textile company ‘Dyes cotton in Process 1’, ‘Prints designs in Process 2’ & ‘Finishes cloth in Process 3’; Cost is tracked at each stage Batch Costing: A bakery makes 1,000 cupcakes in one batch The total cost is . 5,000; So, cost per cupcake = . 5/- ₹ ₹ Contract Costing: L & T undertakes a . 50 crore highway construction ₹ Materials, Equipment & Labour are tracked ‘over time per project’ Unit Costing: In a brick kiln, 10,000 bricks are made at a cost of . 1,00,000 ₹ Unit cost = . 10 per brick ₹ Operating Costing: A bus operator calculates cost per km run including fuel, salaries, maintenance, etc.,
- 9. SUMMARY Cost & Management Accounting: : provides deep insights into cost behavior, : helps in strategic decisions & : ensures cost control & efficiency in operations Understanding various cost classifications, elements & costing methods enables a business to choose “Right Technique” for ‘Profitability & Sustainability’