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Introduction to Cost 1
Accounting
Objective
To Understand:
• Interface of Financial Accounting with Cost
Accounting
• Types of Costs
• Cost Units
• Characteristics of Cost Information
• Costs on Financial Statements
• Cost Behavior and Cost Estimation
• Preparation of Cost Sheet
Introduction to Cost 2
Accounting
Cost Accounting- Definition
• ‘Classifying, recording and appropriate allocation
of expenditure for the determination of costs, the
relation of these costs to sales value and
ascertainment of profitability’ - Weldon
• ‘A measurement in monetary terms of the
amount of resources used for the purpose of
production of goods or rendering of services’ –
ICWAI (Now ICAI)
Introduction to Cost 3
Accounting
Contd.
• Cost Accounting is the Classifying, recording
and appropriate allocation of expenditure for the
determination of expenditure for the
determination of the cost of products or services,
and for the presentation of suitably arranged
data for purpose of control and guidance of
Management.
Introduction to Cost 4
Accounting
Cost Accountancy
Introduction to Cost 6
Accounting
Cost Accounting
Introduction to Cost 7
Accounting
Interface of Financial Accounting with Cost
Accounting
Financial accounts are kept to the fulfill Cost Accounts are kept voluntarily to meet
the requirement of law the requirements of the management
Introduction to Cost 8
Accounting
Interface of Financial Accounting with Cost
Accounting
Financial Accounting Cost Accounting
Financial statements report the total costs. Cost accounts report the cost per unit.
Financial accounts relate to the cost accounts relate to the transactions
commercial transactions. with in the enterprise like manufacture of
the product, provision of service etc.
Financial accounting deals only with Cost accounting also deals with non-
monetary transactions. monetary information.
Financial accounting data is meant to Cost accounting provides data for fixation
report the profits or losses of the of selling prices.
enterprises.
Financial accounting is based purely on Cost accounting is also based on
facts and figures. estimates.
In Financial accounting, stocks are valued In Cost accounting, the stock is always
at cost or market value, which ever is less valued at cost.
Introduction to Cost 9
Accounting
Types of Costs
Basis Classification
Nature of Element Materials cost, Labor cost and Overheads cost.
Functions Manufacturing and Production costs, Administrative
costs, and Selling and Distribution costs
Traceability Total cost is divided into direct costs and indirect costs
Variability Fixed cost, Variable cost and semi-variable cost
Controllability Controllable costs and Uncontrollable costs
Normality Normal costs and Abnormal costs
Capital and Revenue or Capital Expenditure and Revenue Expenditure
Financial accounting
classification
Introduction to Cost 10
Accounting
Types of Costs
Basis Classification
Time Historical costs and Predetermined costs
Association with Product Product cost and Period cost
According to Planning and Control Budgeted costs and Standards costs
Managerial Decisions Marginal costs, Out of pocket costs, Differential
costs, Sunk costs, Imputed (or Notional ) costs,
Opportunity cost, Replacement cost, and
Avoidable and Unavoidable costs
Introduction to Cost 11
Accounting
Cost Unit and Cost Centers
Introduction to Cost 13
Accounting
Cost Unit and Cost Centers
• A location or person or item of equipment or a
group for which costs may be ascertained and
used for the purpose of control. -CIMA
Introduction to Cost 15
Accounting
Characteristics of Cost Information
• Tracing of costs is an attempt to assign costs on the
basis of their cause. Tracing of costs is essential for
two primary reasons: the cost control and product
costing.
Introduction to Cost 17
Accounting
Cost Behavior and Cost Estimation
• Organization’s cost behavior enables managers to
anticipate changes in cost when the organization’s
level of activity changes.
• Cost predictions are valid for a range of activity known
as relevant range. Relevant range is the range of
activity for which the fixed costs remain the same.
• Variety of cost behavior patterns exist, ranging from
simple variable and fixed costs to more complicated
semi-variable and curvilinear costs.
Introduction to Cost 18
Accounting
Elements of Cost
• Cost
• It is the amount of resources given up in exchange for
some goods or services
Material
Labor and
Overheads - Indirect
Introduction to Cost 19
Accounting
Elements of Cost
1. Material
I. Direct
II. Indirect
• 2.Labour
I. Direct
II.Indirect
• 3.Other Expenses
I. Direct
II.Indirect
Administration Overheads
(All Indirect Expenses related to Administration)
Introduction to Cost 22
Accounting
Proforma of Cost Sheet
Introduction to Cost 23
Accounting
Cost Sheet or Statement of Cost
• Cost Sheet is a statements designed to show
the output of a particular accounting period
along with break-up of cost.
• Objectives
1. To Disclose the total cost and cost per unit
2. To control over the cost of production
3. Comparative study (present and past results)
4. Fixing the Selling Price of a product
5. Preparation of Quotations.
Introduction to Cost 24
Accounting
Cost sheet of ---- for the year ended ----
Particulars Rs. Per Unit
Opening Stock of Raw Material xxxx
Add: Purchase of Raw Material xxx
Xxxx
Less: Closing Stock of Raw Material xxx
Raw Material Consumed xxx xxx
Add: Direct Labor xxx xxx
Direct Expenses xxx xxx
Prime Cost xxxx xxx
Add: Factory of Works Over heads xxx xxx
Add: Opening Stock of Work-in-Progress xxx xxx
Less Closing Stock of Work-in-progress xxx xxx
Less: Sale of Scrap xx xx
Factory or Works Cost xxxx xxx
Add: Office and Administration Over heads xxx xxx
Cost of Production xxxx xxx
Introduction to Cost 25
Accounting
Add: Opening Stock of Finished Goods xxx xxx
Less: Closing stock of Finished Goods xxx xxx
Cost of Goods Sold xxxx xxxx
Add: Selling and Distribution Overheads xxx xxx
Cost of Sales or Total Cost xxxx xxx
Profit xxx xxx
Sales xxxxx xxxx
Introduction to Cost 26
Accounting
• PRIME COST
Prime cost consists of Direct Materials, Direct Labor and Direct
Expenses.
• PRIME COST = Direct Material + Direct Labor + Direct Expenses
• WORKS COST
Works Cost consists of Prime cost plus works or factory overheads.
• WORKS COST = Prime Cost + Works or Factor Overheads
• COST OF PRODUCTION
Cost of production consists of Works cost and Administration over
heads
• COST OF PRODUCTION = Works Cost + Administration
Overheads
• TOTAL COST OR COST OF SALES
The term Total Cost consists of Cost of Production and selling and
distribution over heads.
• TOTAL COST = Cost of Production + Selling and distribution
overheads
Introduction to Cost 27
Accounting
Tenders or Quotations
Introduction to Cost 28
Accounting
Techniques of Costing
In addition to the different methods of costing, the
following techniques are used to ascertain costs:
• Historical Costing
• Absorption Costing
• Marginal Costing
• Direct Costing
• Standard Costing
• Uniform Costing
Introduction to Cost 29
Accounting
Summary
• Cost Accounting lays emphasis on cost
ascertainment, cost control and ascertainment of
profitability of concerns.