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Introduction
Branches of accounting
The Institute of Cost and Works Accountants of India (ICWAI) was established
as a company limited by guarantee for the development of cost accounting in
India.
The main purpose of this to develop the cost accounting as a profession. The
maintenance of cost accounting records became mandatory since 1965, after
the addition of Sec.209 (1) (d) in the companies act 1956
Meaning of cost
Cost accounting is the specialized branch of accounting which involves classification, accumulation, assignment and
control of cost.
Methods of costing
Job Costing: In this system the cost of each job is ascertained separately which is
suitable in all cases where work is undertaken on receiving a customers order. Like
a printing press, motor work shop, ship building, machine construction etc.
Batch Costing: It is considered as the extension of job costing. It represents a
number of small orders passed through the factory in batch. Each batch here is
treated as a separate unit of cost. Examples are Pharmaceutical , readymade
garments, manufacturing of components part of radio, T.V. and watches
Contract Costing: It is suitable for the firms which are engaged in the work of
construction of bridges, roads, buildings etc.
Operating Costing: The cost of providing a service is known as operating cost and
the methods to ascertain the cost of such services is known as operating costing.
Classification of Cost
(A)
(B)
(C)
(D)
(E)
(F)
Material means those items which are applied for manufacturing of a product and
direct material is directly related to production. For example, raw cotton in textiles,
crude oil to make diesel etc.
Main points for direct material can be summarized as follows: (1) Direct material
specially acquired for a particular Job, order, process or product. (2) It is integrated
part of manufacturing unit. (3) Value of direct material is comparatively higher than that
of other materials. (4) Material passing from one process to another process. (5)
Primary packing materials e.g. wrapping, cardboard boxes, the glass bottle in
production of syrup etc (6) It Increases in the same ratio as the increase in production.
Direct labour is known as the wage of those workers who are involved in the
production process whose time can be efficiently and economically traceable
to units of products e.g. wages paid to compositors in a printing press, labour
of machine operators and assemblers. It may also be defined as prime labour
cost, process labour cost, operating labour cost, manufacturing wages, Direct
wages and productive labour cost.
In the words of C.I.MA., London, direct wages is that wages which can be
allocated to cost centres or cost units.
Some workers does not engage directly in conversion of output but contribute
indirectly. Labour is paid for the objective of carrying tasks incidental to goods or
service provided. It cannot be practically traced to particular units of output e.g.
wages of store-keepers, foremen, time-keepers, supervisors, Inspectors etc.
Wages which cannot be allocated but which can be apportioned or absorbed by cost
centres or cost units is indirect wages.
Those expenses which cannot be directly, conveniently and fully charged to cost units are known as indirect
expenses.
Indirect expenses are expenses which cannot be allocated but which can be apportioned to or absorbed by cost
centres or cost unit For example, insurance, power, lighting and heating, rent, rates and taxes, depreciation etc.
3.
4.
Prime Cost: It consists costs of direct material, direct labour and direct expenses. It
is also known as basic, first or flat cost.
Factory Cost: It comprises of prime cost and in addition, works or factory
overheads which include costs of indirect labour and indirect expenses. This cost
is also known as works cost, production or manufacturing cost.
Office Cost: If office and administration overheads are added to factory cost office
cost is arrived at. This is also termed as administration cost or total cost of
production.
Total Cost: Selling and distribution overheads are added to the total cost of
production to get the cost of sales.