Accounts
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COST ACCOUNTING. Introduction Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values.
Cost:Cost is the amount of expenses incurred on a thing or activity.
Cost Accounting:These costs are needed for several purposes. For example, the costs of products and services produced and sold are needed for both tax and external financial statements. In other words, tax and financial accounting depend on cost accounting to provide cost information. Information about costs is also needed for a variety of management decisions. For example, cost estimates are needed to determine whether or not a product or service can be produced and sold at a profit. Unit costs of a product (or service) are also needed for product pricing and product discontinuance decisions. In addition, accurate cost information is required to determine whether or not a company should make (produce) or buy the raw materials, parts and subassemblies that become part of its major products and services. From this perspective, cost accounting is perhaps underrated as a discipline since none of the other disciplines including tax accounting, financial accounting or managerial accounting could exist without cost accounting
Objectives of Cost Accounting:(1).
Ascertainment of cost.
(2).
Determination of selling price.
(3).
Cost control and cost reduction.
(4).
Ascertaining the profit of each activity.
(5).
Assisting management in decision making.
(6).
To frame various budgets.
Importance of Cost Accounting:(1).
Control of material cost.
(2).
Control of labour cost.
(3).
Control of overheads.
(4).
Measuring efficiency.
(5).
Budgeting.
(6).
Price determination.
(7).
Curtailment of loss during the off season.
(8).
Expansion.
(9).
Arriving at decisions.
Advantages of Cost Accounting:(1).
Cost reduction.
(2).
Profit improvement.
(3).
Helps in arriving at decisions.
Various Decisions that a Cost and Management Accountant has to Furnish to the Management:I. Choosing the best budget when there are limiting factors restricting production or sales.
II. Make or buy decisions.
III. Accepting or rejecting an order.
IV. Extra shift decisions.
V. Cost indifferent point.
VI. Profit planning
VII. Differential cost analysis.
Adding or deleting departments (or products).
I.
Exploring foreign markets.
.
Plant replacement decisions.
X. Shutdown decisions.
XI. Preventive maintenance v/s breakdown maintenance.
XII. Further processing of joint products.
Methods of Costing:There are various methods of costing depended upon the type of output and nature of production. 1.
2.
3.
Job Costing:- In respect of each job undertaken, the companies producing goods against orders use this type of method to ascertain the cost and profit or loss. Process Costing:- This type of method is used where there is a continuous operation costing mostly in industries like oil, textiles, paints, food processors, etc. Farm Costing:- It is extension of utilization of costing principles to the farms where the land is used for agricultural production like paddy, potato, mustard, onion, etc.
Techniques of Costing:In each of the costing methods, the following techniques may be used to ascertain costs:1. Absorption Costing:- In this technique fixed as well as variable costs are allotted to cast units.
2. Standard Costing:- It uses standard costs and standard revenues for the purpose of control through variance analysis.
3. Marginal Costing:- In this technique variable costs are charged to cost units and the fixed cost attributable to the relevant period is written off in full against the contribution for that period.
4. Uniform Costing:- It is not a separate method of costing. It is using of the same costing principles or practices by several undertakings.
Classification of Costs:The term cost is defined in a variety of ways. Its simple meaning is ‘total expense’. Cost can be classified in a number of ways:1. 2. 3. 4. 5.
Direct Costs. Indirect Costs. Fixed Costs. Variable Costs. Semi-Variable Costs.
Direct Cost:Direct cost are those cost which can be conveniently associated wholly with a particular unit of final product.Direct costs can be directly identified with and allocated to cost centers or cost units. *Example:-* 1. 2. 3. 4.
Raw material charges. Workers wages. Carriage expenses on raw material Wages payable to worker who is directly involved in production carpenters wages in a firm manufacturing furniture
INDirect Cost:-
Cost which cannot be associated or connected with a particular unit of final product is termed as indirect costs*.
*E.g.:1.
Advertisement expenses.
2.
Office rents.
3.
Depreciation on furniture
4.
Legal expenses.
5.
Telephone expenses.
6.
Rent and rates.
7.
Packing expenses.
8.
Rent & rates
Overheads:Overheads mean indirect costs. Overheads are an aggregate of indirect materials, indirect labour and indirect expenses. (a).
Factory overheads,
(b).
Administrative overheads, and
(c).
Selling and Distribution overheads
Factory Overheads:Factory overhead is defined as the cost of indirect materials, indirect labour and indirect expenses.
1. Indirect Materials:- It refers to materials that are needed for the completion of the product but whose consumption with regard
to the product is so small that it cannot be assumed as direct materials.
2. Indirect Labour:- It refers to the labour cost of production related activities that cannot be conveniently traced to specific products via physical observation. 3.Indirect Expenses:- It means that it covers all expenditure incurred by manufacturing enterprise from the time production has commenced to its completion and its transfer to the finished goods store.
Administrative Overheads:They are the cost of indirect materials, indirect labour and indirect expense. It include all costs which can’t be charged either to production department or sales department. (a). Indirect Materials:- It refers to the materials that are needed for office and administrative activities. (b). Indirect Labour:- Indirect labour is the labour cost incurred towards office staffs. (c) Indirect Expenses:- It refers to all expenditure incurred by office.
Selling and Distribution Overheads:Selling and distribution overheads includes cost of all indirect materials,indirect labour and indirect expenses incurred in sales and delivering goods from warehouse to customers. Selling and distribution overheads includes: *Selling cost refers to the cost incurred in securing orders.
*Publicity cost repsents the cost incurred in advertising and promotion.
*Distribution cost refers to the cost incurred in warehousing saleable products and in delivering products to customers. (a) Indirect material refers to all materials that are required for selling and distribution activities. Eg:.Wooden boxes .Catalogues
(b) indirect labour is the labour cost related to selling & distribution activities. Eg:. Delivery staff . Salary to sales manager. (C) indirect expenses cover all expenditure incurred by selling and distribution department. Eg:*add in radio,T.V, internet etc. *depreciation of delivery vehicles.
Fixed Costs. . If a production volume based measure is used as the activity, a cost that changes for some reason other than a change in production
activity is considered fixed. This simply means that the cost is driven by a non-production volume related phenomenon. All costs tend to be variable in the long run.
Variable Costs. . Variable costs tend to increase at various rates that generate linear (straight line) or a variety of non-linear cost functions when the costs are plotted on a graph. The major activity that affects manufacturing costs is production volume, i.e., producing output. Production volume is frequently measured in terms of units produced, direct labor hours used, machine hours used, materials costs or some other production volume related measure.
Semi-Variable and Semi-Fixed Costs The point where the cost function intersects the vertical axis represents the fixed portion of the cost. There are also semi-fixed costs that do not change continuously as the level of activity changes, but do increase in steps as activity increases beyond various levels. These costs are sometimes referred to as step cost and step functions.
Types of costs:(1) Total costs:- Total coat at a given volume of output under consideration is called total cost. (2)Relevant cost:- Future managenment decisions which are taken are relevant to this cost. (3) Irrelevant cost:-If there is no change in the future fixed cost it becomes irrelevant for taking managenment decisions. (4) Sunk cost:- the cost which is already been incurred in the cost is sunk cost
(5) Marginal cost:-it is a cost of producing one unit of a product or services (6) Historical cost:-it is the cost which can never be recovered and which is allredy been incurred in the sheet earlier.
(7) Replacement cost:-when there is a replacement of an asset is done this cost is incurred. (8) Opportunity cost:-such cost are incurred for the purpose of comparision. (9) Standard cost:-this cost is predetermined.which calculates how much the cost should be ynder specific condition.
Cost:Cost is the amount of expenses incurred on a thing or activity.
Cost Accounting:These costs are needed for several purposes. For example, the costs of products and services produced and sold are needed for both tax and external financial statements. In other words, tax and financial accounting depend on cost accounting to provide cost information. Information about costs is also needed for a variety of management decisions. For example, cost estimates are needed to determine whether or not a product or service can be produced and sold at a profit. Unit costs of a product (or service) are also needed for product pricing and product discontinuance decisions. In addition, accurate cost information is required to determine whether or not a company should make (produce) or buy the raw materials, parts and subassemblies that become part of its major products and services. From this perspective, cost accounting is perhaps underrated as a discipline since none of the other disciplines including tax accounting, financial accounting or managerial accounting could exist without cost accounting
Objectives of Cost Accounting:(1).
Ascertainment of cost.
(2).
Determination of selling price.
(3).
Cost control and cost reduction.
(4).
Ascertaining the profit of each activity.
(5).
Assisting management in decision making.
(6).
To frame various budgets.
Importance of Cost Accounting:(1).
Control of material cost.
(2).
Control of labour cost.
(3).
Control of overheads.
(4).
Measuring efficiency.
(5).
Budgeting.
(6).
Price determination.
(7).
Curtailment of loss during the off season.
(8).
Expansion.
(9).
Arriving at decisions.
Advantages of Cost Accounting:(1).
Cost reduction.
(2).
Profit improvement.
(3).
Helps in arriving at decisions.
Various Decisions that a Cost and Management Accountant has to Furnish to the Management:I. Choosing the best budget when there are limiting factors restricting production or sales.
II. Make or buy decisions.
III. Accepting or rejecting an order.
IV. Extra shift decisions.
V. Cost indifferent point.
VI. Profit planning
VII. Differential cost analysis.
Adding or deleting departments (or products).
I.
Exploring foreign markets.
.
Plant replacement decisions.
X. Shutdown decisions.
XI. Preventive maintenance v/s breakdown maintenance.
XII. Further processing of joint products.
Methods of Costing:There are various methods of costing depended upon the type of output and nature of production. 1.
2.
3.
Job Costing:- In respect of each job undertaken, the companies producing goods against orders use this type of method to ascertain the cost and profit or loss. Process Costing:- This type of method is used where there is a continuous operation costing mostly in industries like oil, textiles, paints, food processors, etc. Farm Costing:- It is extension of utilization of costing principles to the farms where the land is used for agricultural production like paddy, potato, mustard, onion, etc.
Techniques of Costing:In each of the costing methods, the following techniques may be used to ascertain costs:1. Absorption Costing:- In this technique fixed as well as variable costs are allotted to cast units.
2. Standard Costing:- It uses standard costs and standard revenues for the purpose of control through variance analysis.
3. Marginal Costing:- In this technique variable costs are charged to cost units and the fixed cost attributable to the relevant period is written off in full against the contribution for that period.
4. Uniform Costing:- It is not a separate method of costing. It is using of the same costing principles or practices by several undertakings.
Classification of Costs:The term cost is defined in a variety of ways. Its simple meaning is ‘total expense’. Cost can be classified in a number of ways:1. 2. 3. 4. 5.
Direct Costs. Indirect Costs. Fixed Costs. Variable Costs. Semi-Variable Costs.
Direct Cost:Direct cost are those cost which can be conveniently associated wholly with a particular unit of final product.Direct costs can be directly identified with and allocated to cost centers or cost units. *Example:-* 1. 2. 3. 4.
Raw material charges. Workers wages. Carriage expenses on raw material Wages payable to worker who is directly involved in production carpenters wages in a firm manufacturing furniture
INDirect Cost:-
Cost which cannot be associated or connected with a particular unit of final product is termed as indirect costs*.
*E.g.:1.
Advertisement expenses.
2.
Office rents.
3.
Depreciation on furniture
4.
Legal expenses.
5.
Telephone expenses.
6.
Rent and rates.
7.
Packing expenses.
8.
Rent & rates
Overheads:Overheads mean indirect costs. Overheads are an aggregate of indirect materials, indirect labour and indirect expenses. (a).
Factory overheads,
(b).
Administrative overheads, and
(c).
Selling and Distribution overheads
Factory Overheads:Factory overhead is defined as the cost of indirect materials, indirect labour and indirect expenses.
1. Indirect Materials:- It refers to materials that are needed for the completion of the product but whose consumption with regard
to the product is so small that it cannot be assumed as direct materials.
2. Indirect Labour:- It refers to the labour cost of production related activities that cannot be conveniently traced to specific products via physical observation. 3.Indirect Expenses:- It means that it covers all expenditure incurred by manufacturing enterprise from the time production has commenced to its completion and its transfer to the finished goods store.
Administrative Overheads:They are the cost of indirect materials, indirect labour and indirect expense. It include all costs which can’t be charged either to production department or sales department. (a). Indirect Materials:- It refers to the materials that are needed for office and administrative activities. (b). Indirect Labour:- Indirect labour is the labour cost incurred towards office staffs. (c) Indirect Expenses:- It refers to all expenditure incurred by office.
Selling and Distribution Overheads:Selling and distribution overheads includes cost of all indirect materials,indirect labour and indirect expenses incurred in sales and delivering goods from warehouse to customers. Selling and distribution overheads includes: *Selling cost refers to the cost incurred in securing orders.
*Publicity cost repsents the cost incurred in advertising and promotion.
*Distribution cost refers to the cost incurred in warehousing saleable products and in delivering products to customers. (a) Indirect material refers to all materials that are required for selling and distribution activities. Eg:.Wooden boxes .Catalogues
(b) indirect labour is the labour cost related to selling & distribution activities. Eg:. Delivery staff . Salary to sales manager. (C) indirect expenses cover all expenditure incurred by selling and distribution department. Eg:*add in radio,T.V, internet etc. *depreciation of delivery vehicles.
Fixed Costs. . If a production volume based measure is used as the activity, a cost that changes for some reason other than a change in production
activity is considered fixed. This simply means that the cost is driven by a non-production volume related phenomenon. All costs tend to be variable in the long run.
Variable Costs. . Variable costs tend to increase at various rates that generate linear (straight line) or a variety of non-linear cost functions when the costs are plotted on a graph. The major activity that affects manufacturing costs is production volume, i.e., producing output. Production volume is frequently measured in terms of units produced, direct labor hours used, machine hours used, materials costs or some other production volume related measure.
Semi-Variable and Semi-Fixed Costs The point where the cost function intersects the vertical axis represents the fixed portion of the cost. There are also semi-fixed costs that do not change continuously as the level of activity changes, but do increase in steps as activity increases beyond various levels. These costs are sometimes referred to as step cost and step functions.
Types of costs:(1) Total costs:- Total coat at a given volume of output under consideration is called total cost. (2)Relevant cost:- Future managenment decisions which are taken are relevant to this cost. (3) Irrelevant cost:-If there is no change in the future fixed cost it becomes irrelevant for taking managenment decisions. (4) Sunk cost:- the cost which is already been incurred in the cost is sunk cost
(5) Marginal cost:-it is a cost of producing one unit of a product or services (6) Historical cost:-it is the cost which can never be recovered and which is allredy been incurred in the sheet earlier.
(7) Replacement cost:-when there is a replacement of an asset is done this cost is incurred. (8) Opportunity cost:-such cost are incurred for the purpose of comparision. (9) Standard cost:-this cost is predetermined.which calculates how much the cost should be ynder specific condition.
