Meaning Of Cost

“The amount of expenditure

incurred on or attributable to a
given thing”
 Meaning of Costing
Costing is defined as “the technique and
process of ascertaining costs”.
 Meaning of Cost Accounting

"the process of accounting for cost

which begins with the recording of
income and expenditure or the bases
on which they are calculated and
ends with the preparation of
periodical statements and reports for
ascertaining and con­trolling costs."
 Meaning of Cost Accountancy
• “the application of costing and cost
accounting principles, methods and
techniques to the science, art and practice
of cost control and the ascertainment of
profitability. It includes the presentation of
information derived there from for the
purpose of managerial decision making.”
 Objectives of Cost Accounting
• Ascertainment of cost.
• Determination of selling price.
• Cost control and cost reduction.
• Ascertaining the profit of each activity.
• Assisting management in decision­
making.
 Difference between Cost
Reduction and Cost Control
• Cost control aims at maintaining the costs
in accordance with the established
standards. While cost reduction is
concerned with reducing costs.
• Cost control seeks to attain lowest
possible cost under existing conditions.
While cost reduction recognises no
condition as permanent, since a change
will result in lower cost.
 Difference between Cost
Reduction and Cost Control
• In case of Cost Control, emphasis is on past
and present while in case of cost reduction it
is on present and future.
• Cost Control is a preventive function, while
cost reduction is a corrective function. It
operates even when an efficient cost control
system exisis.
• Cost control ends when targets are achieved
while cost reduction has no visible end.
 Importance of Cost Accounting
• Control of cost (material,labour,overhead).
• Measuring efficiency and compensating the
employees in a better way.
• Budgeting
• Price determination
• Provides useful information to creditors,
investors and bankers.
• Provides aid to management.
• Benefits to the government and society.
 Limitation of Cost Accounting
• Estimation
• Difference of item
• Not independent
 Reports By Cost Accounting
Department
• Cost sheets.
• Consumption of material statements,.
• Labour utilisation statements.
• Overheads
• Sales effected compared with budgets,.
• Reconciliation of actual profit earned
with estimated or budgeted profit.
• The total cost of abnormally spoiled work in
the facto­ry and abnormal losses in the
store.
 Reports By Cost Accounting
Department
• The total cost of inventory carried, analysed
into raw materials in chief stores and other
stores.
• labour turnover, and the cost of recruitment
and train­ing of new employees.
• Expenses incurred on Research and
Development
• Reports about particular departments and
operations (like trans­port or power generation)
 Advantages of a Cost Accounting
System
• Identifying unprofita­ble activities, losses or
inefficiencies in any form.
• The application of cost reduction techniques.
• Identifying the exact causes for decrease or
increase in the profit/loss of the business.
• Information and data to the management
making decisions.
• Cost Accounting is quite useful for price fixation.
 Advantages of a Cost
Accounting System
• Points out the deviations from the pre­
determined level(variance analysis)
• Cost comparison helps in cost control
• The cost of idle capacity can be easily
worked out
• The use of Marginal Costing technique, may
help the execu­tives in taking short term
decisions
 Essential factors for installing a
Cost Accounting system
• Objective
• Type of Business
• General organisation .
• The Technical Details
• Change in operations
• Method of maintenance of cost
records
• Information
• Accuracy
• Informative and Simple
 Essentials of a good Cost
Accounting System
• Informative and Simple
• Accuracy
• Support from Management
• Cost­ Benefit
• Precise Information
• Procedure
• Trust
 Comparison between
Management Acct and Financial
Acct
Financial Accounting Management
Accounting
• Objective
• Objective
To maintain account to
determine financial
position of business. To help management
to formulate policies
and plan.
 Management Accounting and
Financial Accounting
• Nature • Nature
It deals with historical • It deals with projection of
data. data for the future.
• Subject matter
• Subject matter
M.A deals separately with
F.A assess the result of different units, deptts.etc.
the whole business.
 Management Accounting and
Financial Accounting

• Compulsion • Compulsion
Preparation of F.A is Preparation of M.A is
compulsory by law. not necessary by
• Precision law.
It records the exact • Precision
figures of the It considers
transactions. approximate
figures.
 Cost and Management Accounting
• Cost Accounting • Management
Accounting
1. It records the 1. It records both
quantitative aspect qualitative and
of a transaction quantitative aspect

2. It records the cost of 2. Provides information

producing a product to management for
and providing a planning and co­
service ordination
 Cost and Management Accounting
• Mgmt Accounting
• Cost Accounting 3.It is wider in scope as it
3. It only deals with cost includes F.A, budgeting, Tax,
Ascertainment. Planning.
4. It is concerned with the
4. It uses both past and projection of figures for
present figures. future.
Cost and Management Accounting
• Management
• Cost Accounting
Accounting
5. It’s development is
5. It develops in
related to
accordance to the
industrial
modern business
revolution.
world.
6. It follows certain
6. It does not follow any
principles and
specific rules and
procedures for
regulations.
recording costs of
different products
 Cost Object
• Anything for which a separate
measurement of cost is desired
• Cost Object Example
• Product Four Wheeler
• Services Airlines
• Project Delhi Metro
 Cost Centre
• Location, person or an item of
equipment (or group of these) for
which cost may be ascertained and
used for the purpose of Cost Control
• Production Cost Centre : material is
handled for conversion into finished
product.. Machine shops, welding
shops.
• Service Cost Centre : Serves as an
ancillary unit to a production cost
centre. Power house, gas production
shop
 Cost Unit
• Unit of product, service or time (or
combina­tion of these) in relation to
which costs may be ascertained or
expressed.
• Industry or Product Cost Unit Basis
• Automobile Number
• Cement Tonne/per bag
• Chemicals Litre, gallon, kilogram
CLASSIFICATION OF COST
1. Classification By Nature Or
Element.
2. Functional Classification.
3. Classification On The Basis Of
Behaviour.
4. By Controllability
5. By Normality
6. Costs For Managerial Decisions
Making
 1.CLASSIFICATION BY NATURE
OR ELEMENT

1. Direct Cost .
2. Indirect Cost (Overhead)
 DIRECT COST
• Direct Material (Cloth in dress making)

• Direct Labour(Tailor)

• Direct Expenditure( Hire charges spl

Machinery)
 INDIRECT COST
• Indirect Material(lubricants)

• Indirect Labour(Maintenance workers)

• Indirect Expenditure (Power,llight)

 INDIRECT COST/OVERHEAD
• It is the aggregate of indirect material costs,
indirect labour costs and indirect expenses.
• Production or Works overheads: Rent,
Power etc.
• Administration overheads: Telephone,
Printing
• Selling overheads: Advertisement
Expenses.
• Distribution overheads: packing and
loading charges
2.FUNCTIONAL CLASSIFICATION

1. Prime Cost.
2. Factory Cost.
3. Cost Of Production.
4. Cost Of Goods Sold
5. Total Cost Or Cost Of Sales.
 SPECIMEN OF A COST­SHEET
COST­SHEET FOR THE PERIOD………………
PRODUCTION……………….UNITS
TOTAL COST COST PER
RS. UNIT RS.

(1) DIRECT MATERIALS:

OPENING STOCK OF RAW MATERIALS
ADD: PURCHASE OF RAW MATERIALS
LESS: ABNORMAL LOSS OF MATERIALS
LESS: RETURNS TO SUPPLIERS
LESS: CLOSING STOCK OF RAW MATERIALS

RAW MATERIAL CONSUMED

DIRECT WAGES
DIRECT EXPENSES

PRIME COST

FACTORY OVERHEADS EXPENSES

ADD: OPENING STOCK OF WORK IN PROGRESS
LESS: CLOSING STOCK OF WORK IN PROGRESS
 SPECIMEN OF A COST­SHEET
CONTINUED……………
TOTAL COST COST PER
RS. UNIT RS.

LESS: SALE OF SCRAP

FACTORY COST OR WORK COST

OFFICE ADMINSTRATIVE EXPENSES

COST OF PRODUCTION
ADD: OPENING STOCK OF FINISHED GOODS
LESS: CLOSING STOCK OF FININSHED GOODS

COST OF GOODS SOLD

SELLING AND DISTRIBUTION EXPENSES

TOTAL COST OF SALES

PROFIT

SELLING PRICE
 3. CLASSIFICATION ON THE
BASIS OF BEHAVIOUR
1. VARIABLE COSTS( Material)

2. Fixed Costs (Rent)

3. Semi­Variable Costs (Telephone Bill)

Variable Cost
Fixed Cost
Semi Variable Cost
Methods of segregating Semi­
variable costs
• 1.Graphical method:
 2.High points and low points
• method:
Sales value Total cost
• Rs. Rs.
• At the Highest volume 1,40,000 72,000
• At the Lowest volume 80,000 60,000
• 60,000 12,000
• Thus, Variable Cost (Rs. 12,000/Rs. 60,000) = 1/5 or 20%
of sales value
• = Rs. 28,000 (at highest volume)
• Fixed Cost Rs. 72,000 – Rs. 28,000 i.e., (20% of Rs.
1,40,000) = Rs. 44,000.
• Alternatively Rs. 60,000 – Rs. 16,000 (20% of Rs. 80,000) =
Rs. 44,000
 3.Analytical Method
• Suppose, last month the total semi­variable
expenses amounted to Rs. 3,000. If the
degree of variability is assumed to be 70%,
then variable cost = 70% of Rs. 3,000 = Rs.
2,100. Fixed cost = Rs. 3,000 – Rs. 2,100 =
Rs. 900.
• Now in the future months, the fixed cost will
remain constant, if in the next month
production increases by 50%, the total
semi­variable expenses will be:
• Fixed cost of Rs. 900, plus variable cost
viz., Rs. 3,150 i.e., (Rs. 2,100(V.C.) plus
50% increase of V.C. i.e., Rs. 1,050) i.e.,
Rs. 4,050.
 Comparison by period or level
of activity method
• Variable Cost per unit

Change in the amount of expense

Change in the quantity of output
 5.Least squared method
• The method uses the linear equation
y = mx + c, where
• m represents the variable element of
cost per unit,
• ‘c’ represents the total fixed cost,
• ‘y’ represents the total cost,
• ‘x’ represents the volume of output.
• Level of activity
• Capacity % 60% 80%
• Volume (Labour hours) x 150 200
• Semi­variable expenses Rs. 1,200 Rs. 1,275
• (maintenance of plant) y
• Substituting the values of x and y in the equation, y =
mx + c, at both the levels of activity, we get
• 1,200 = 150 m + c
• 1,275 = 200 m + c
• On solving the above equation, we get
• (c) (Fixed cost) = Rs. 975 and m (Variable cost) =
Rs. 1.50 per labour hour.
 4. BY CONTROLLABILITY
• 1.Controllable costs ­ These are the
costs which can be influenced by the
action of a specified member of an
undertaking.
• Direct costs by the shop level
management.
• 2.Uncontrollable costs ­ Costs which
cannot be influenced.
• Expenditure incurred by, say, the Tool
Room is controllable by the foreman
incharge but not machine shop
 5.BY NORMALITY

• Normal cost ­ Cost normally

incurred at a given level of output
• Abnormal cost ­ Cost not normally
incurred .Charged to Costing Profit
and loss Account.
 Costs For Managerial
Decisions Making
• Avoidable and unavoidable costs:­
Avoidable costs are those costs which
can be escaped or avoided if some
activity of the business to which they
relate is discontinued. Unavoidable
costs are those can cannot be
escaped or eliminated.
 Costs For Managerial Decisions
Making
• Shut down and sunk costs:­ Those fixed
costs which have to incurred even if
productions or operations of an
undertaking are discontinued temporarily
due to certain reasons such as strike,
storage of raw material, etc, are called
shut down costs. Costs which have been
incurred and are irrelevant in particular
situation are called sunk costs.
 Costs For Managerial Decisions
Making
• Product costs and period costs:­ Cost which are
associated with production and which become part of
the costs of the product are called product costs.
Raw material, direct wages, etc.
• Costs which are not associated with production or
which are associated with period for which they are
incurred are called period costs. Administration costs,
rent, insurance, salesmen salaries
 CONT……
• Differential, incremental and decremental
costs:­ The difference­in­costs due to the
change in the level of activity or the method of
production is known as ‘differential costs’. In
case, the change increases the costs, it is
called incremental costs, and in case, the
change decreases the costs, it is called
decremental costs.
 CONT……
• Out of pocket costs:­ It is that
costs which gives rise to cost
expenditure as opposed to that cost
which do not involve any cost
expenditure, e.g. depreciation of of an
asset owned is not an out of pocket
cost. The out of pocket cost are
important for price fixation during
rereccession and where make or duy
decision is involved.
 CONT……
• Marginal cost:­Marginal cost is the cost of
producing one additional unit. The marginal
costs concept is based on the distinction
between fixed and variable costs. Marginal cots
is the total of variable costs only and fixed costs
are ignored for the purpose of marginal cost.
The concept of marginal cost is very useful in
making many managerial decisions such as,
price fixation make or by decision.
 CONT……
• Opportunity costs:­ Opportunity costs
refer to the advantages of forgone as a
result of adopting one course of action
and not the other. For example, if an
owned building is proposed to be used
in a project, the expected rent of the
building is the opportunity cost that
must be taken into consideration while
evaluating the profitability of a project.
 CONT
• Conversion cost:­ It is the cost
of converting or transforming raw
material. Into finished product.
Conversion cost can also be
calculated as the total of direct
labour, direct expenses and
chargeable factory overheads.
 CONT……..
• Budget cost and standard cost:­
Budget cost are estimated priority a
defined period of time. Standard cost is
a' predetermined cost based on
technical estimate for materials, labour
and overheads for a selected period of
time and for prescribed working
conditions. Standards costs are best
upon technical assessments whereas
budgets are based on technical costs
adjusted to future trends.
 CONT…….
• Imputed or hypothetical costs:­ These costs
do not involve expenditure in real sense. They
are included in cost accounts only for taking
managerial decision for e.g. the rent of owned
building or interest on owned capital should be
taken into consideration while evaluating the
profitability of a project. these costs are also
called Notional costs.
 CONT…….
• Absolute cost ­ These costs refer to the
cost of any product, process or unit in its
totality. When costs are presented in a
statement form, various cost components
may be shown in absolute amount or as a
percentage of total cost or as per unit cost
or all together. Here the costs depicted in
absolute amount may be called absolute
costs and are base costs on which further
analy­sis and decisions are based.
 CONT…….
• Engineered costs ­ These are costs that
result specifically from a clear cause and
effect relationship between inputs and
outputs. The relationship is usually
personally observable.
• Examples of inputs are direct material
costs, direct labour costs etc.
• Examples of output are cars, computers
etc.
 CONT…….
• Estimated cost ­ Kohler defines
estimated cost as “the expect­ed cost
of manufacture, or acquisition, often
in terms of a unit of product computed
on the basis of information available
in advance of actual production or
purchase”..
 CONT…….
• Explicit Costs ­ These costs are also
known as out of pocket costs and refer to
costs involving immediate payment of
cash.
• Salaries, wages, postage and telegram,
printing and stationery, interest on loan
etc. are some examples of explicit costs
involving immediate cash payment.
• Implicit Costs ­ These costs do not
involve any immediate cash payment.
They are not recorded in the books of
account. They are also know as economic
costs.
 CONT…….
• Estimated cost ­ Kohler defines
estimated cost as “the expect­ed cost
of manufacture, or acquisition, often
in terms of a unit of product computed
on the basis of information available
in advance of actual production or
purchase”..
 METHODS OF COSTING

1. JOB COSTING.
2. PROCESS COSTING
3. MULTIPLE COSTING
METHODS OF JOB COSTING
1. Batch Costing (Medicine)

2. Contract Costing Or Terminal

Costing. (Road ,building)

3. Departmental Costing.
 METHODS OF PROCESS
COSTING

1. Single Output Or Unit Costing .(Bricks)

2. Operating Costing. (Transport)

3. Operation Costing.
 METHODS OF COSTING
• Multiple Costing: It is a combination of two
or more methods of costing outlined above.
Suppose a firm manufactures bicycles
including its components; the parts will be
costed by the system of job or batch costing
but the cost of assembling the bicycle will be
computed by the Single or output costing
method. The whole system of costing is
known as multiple costing.
 CODING SYSTEM
• “a system of symbols designed to be
applied to a classified set of items to give
a brief account reference , facilitating entry
collation and analysis”the first digit is 1,
the system implies that it refers to raw
material and if the number is 2 it
represents a labour cost. The second and
third numbers relating to 1
 CODING SYSTEM
• raw material, provide details of the type
e.g., whether the raw material is an
electronic component (number 4),
mechanical component (number 1)
consumables (number 2) or packing
(number 3) and the name respectively.
Hence the description of a cost with a
code 146.729 shall be understood as
follows:
 CODING SYSTEM
• Since the first number is 1 the cost refers to
raw material cost
• The second number being 4 indicates that
the raw material is an electronic component.
• The third number 6 refers to the description
which according to the company’s
codification refers to Diodes
Advantages of a coding system
• Short and simple
• Clarity.
• Computer friendly
The requirements for an efficient
coding system
• Unique
• Flexibility.
• Brief
• Centralised
• Similarity