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Introduction To Cost Accounting and Cost Concepts

This document provides an introduction to cost accounting concepts. It defines cost accounting as the process of recording, classifying, allocating and controlling costs. Cost accounting helps management control costs, determine selling prices, and assess operating efficiency. It provides more detailed information about costs than financial accounting. Costs are classified by elements, function, behavior, and other attributes to aid management decision making.

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35 views23 pages

Introduction To Cost Accounting and Cost Concepts

This document provides an introduction to cost accounting concepts. It defines cost accounting as the process of recording, classifying, allocating and controlling costs. Cost accounting helps management control costs, determine selling prices, and assess operating efficiency. It provides more detailed information about costs than financial accounting. Costs are classified by elements, function, behavior, and other attributes to aid management decision making.

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INTRODUCTION TO

COST ACCOUNTING
AND COST CONCEPTS
INTERFACE OF FINANCIAL ACCOUNTING
WITH COST ACCOUNTING

 Financial Accounting:
-Record keeping
-Profit and Loss Statement
-Balance Sheet
-Financial Position of company
LIMITATIONS OF FINANCIAL
ACCOUNTING
 No clear idea of operating efficiency
 Does not help in fixing the price

 No classification of expenses and accounts

 No data for comparison and decision making

 No control on cost

 Does not provide standards to assess the performance

 Provides only historical information


MEANING OF COST ACCOUNTING
 Costing: The techniques and processes of Ascertaining costs

 Cost Accounting: It is a specialized branch of accounting


which involves classification, accumulation, assignment
and control of costs.

 Classification: Classifying costs such as Material, Labour


and Overheads

 Accumulation: Collects costs in different categories

 Assignment: Assign these accumulated costs to designated


cost objects

 Cost Control: Cost control means the control of costs by


management.
DEFINITION OF COST ACCOUNTING
COST ACCOUNTING: The Institute of Cost and
Management Accountant, England (ICMA) has
defined Cost Accounting as – “the process of
accounting for the costs from the point at which
expenditure incurred, to the establishment of its
ultimate relationship with cost centers and cost
units.
In its widest sense, it embraces the preparation of
statistical data, the application of cost control
methods and the ascertainment of the profitability of
activities carried out or planned”.

Cost Accounting = Costing + Cost Reporting + Cost


Control.
COST UNITS
 A unit of quantity of product, Service or Time in
relation to which costs may be ascertained or
expressed.

 For example
Industry Cost Unit basis
Automobiles Numbers
Brick works per 1000 bricks
Cement/Steel/Sugar per metric Ton
Transport Kilometer
COST CENTRE
 A location, person or item of equipment for which
costs may be ascertained or used for the purpose
of cost control
OBJECTIVES OF COST ACCOUNTING
 Ascertainment of costs

 Estimation of costs

 Cost control

 Cost reduction

 Determining selling price

 Facilitating preparation of financial and other

statement
IMPORTANCE OF COST ACCOUNTING
 Costing is an aid to Management
 Costing is an aid to Creditors

 Costing is an aid to employee

 Costing is an aid to national economy


TYPES OF COSTS
 By Element
 By Nature or Traceability

 By Functions

 By Behavior

 By Controllability

 By Time

 By Decision making Costs


BY ELEMENTS
BY NATURE OR TRACEABILITY
 Direct Costs

 Indirect Cost
BY FUNCTIONS
 Production

 Administration

 Selling and distribution

 Research & Development


BY BEHAVIOR
 Fixed

 Variable

 Semi-variable
BY CONTROLLABILITY
 Controllable costs

 Uncontrollable costs
BY NORMALITY
 Normal costs

 Abnormal costs.
BY TIME
 Historical Costs

 Predetermined costs /Standard Costs.


BY DECISION MAKING COSTS
 Marginal cost: This cost is the change in the aggregate costs due to
change in the volume of output by one unit.

 Differential Costs: This cost is the difference in total cost that will
arise from the selection of one alternative to the other.

 Opportunity Costs : It is the value of benefit sacrificed in favor of an


alternative course of action.

 Replacement Cost: This cost is the cost at which existing items of


material or fixed assets can be replaced. Thus this is the cost of
replacing existing assets at present or at a future date.

 Shutdown Cost: These costs are the costs which are incurred if the
operations are shut down and they will disappear if the operations are
continued.
BY GROUPING THE ABOVE ELEMENTS
OF COST:

 1. Prime cost = Direct Materials + Direct Labour+ Direct


Expenses
 2. Works or Factory Cost = Prime Cost + Works or Factory
Overheads
 3. Cost of Production = Works Cost + Administration
Overheads
 4. Total Cost or Cost of Sales = Cost of Production +
Selling and Distribution Overheads
 The difference between the cost of sales and selling price
represents profit or loss.
COST SHEET/ STATEMENT OF COST
 When costing information is set out in the form of
a statement, it is called “Cost Sheet”.
 It is usually adopted when there is only one main
product and all costs almost are incurred for that
product only.
 The information incorporated in a cost sheet
would depend upon the requirement of
management for the purpose of control.
FORMAT OF COST SHEET/STATEMENT OF COST
Particulars Total Cost Cost per Unit
(Rs.) (Rs.)

Direct Materials xxx xxx


Direct Labour xxx xxx
Prime Cost xxx xxx
Add: Works Overheads/Factory Overhead xxx xxx
Work Cost/Factory Cost xxx xxx
Add: Administrative Overheads/Office xxx xxx
Overheads
Cost of Production xxx xxx
Add: Selling and Distribution Overheads xxx xxx
Total Cost or Cost of Sales xxx xxx
Add: Profit xxx xxx
Sales xxx xxx

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