Cost Concepts Finala

INTRODUCTIO N TO COST

GROUP MEMBERS Aatif Ansari Abdullah Tayyebi Amin Khan Asif Bharucha Asif Khan Ativeer Jain Bhavani Shahi Dharmen Shah Imran Atiq Kashif Sayyed

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Contents Introduction Elements of cost Cost concepts Classification of cost Cost sheet Relationship and difference

EVOLUTION OF COST ACCOUNTING ØPrior to industrial revolution ØAdvent to industrial revolution ØDuring World War 1 and World War 2

INVENTO

DEFINITION S COSTING COST ACCOUNTING COST ACCOUNTANCY

OBJECTIVES OF COST ACCOUNTING Ø Ascertainment of costing üPost costing üContinuous costing Ø Cost control üInvestigate cause of failure üDetermine the objective clearly üMeasure the actual

Ø Determination of selling price Ø Ascertaining the profit of each activity Ø Assisting management in decision making Ø Cost reduction

IMPORTANCE OF COST ACCOUNTING TO BUSINESS CONCERN Ø Control of material cost Ø Control of labour cost Ø Control of overheads

ADVANTAGES OF A COST ACCOUNTING SYSTEM It Identifies unprofitable activities It Identifies exact cause of increase or decrease in profit/loss of the business It provides data to the management It is useful tool for Price Fixation It helps in cost comparison

ADVANTAGES OF A COST ACCOUNTING SYSTEM (CONTD…)

It helps Government, wage tribunals and other bodies 

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The Marginal Costing techniques helps in taking short term decisions 

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It helps in finding the cost of idle capacity

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ESSENTIALS OF A GOOD ACCOUNTING SYSTEM CAS should be tailor made The data to be used by CAS should be accurate Co-operation and participation from various departments Avoiding unnecessary details The cost of operating and installing should justify the results Faith of management in CAS

VARIOUS REPORTS PROVIDED BY COST ACCOUNTING Consumption of material statement Labour utilization statement Overheads incurred compared with budgets Sales affected compared with budgets Reconciliation of actual profit with estimated profit

VARIOUS REPORTS PROVIDED BY COST ACCOUNTING The total cost of spoiled work in factory The total cost of inventory Labour turnover reports Expenses occurred on research and development Reports about particular departments operations

ELEMENTS OF COST

MATERIALS COST Direct Materials : Materials which are present in the finished product or can be economically identified in the product are called Direct Material Cost Indirect Materials : Materials which do not normally form part of the finished product are known as Indirect Material Cost

LABOUR COST Direct Labour : Labour which can be economically identified or attributed wholly to a ost object is called Direct Labour Cost Indirect Labour : Labour cost which cannot be allocated but can be appointed to or absorbed by the cost units or cost centres is known as Indirect Labour

OTHER EXPENSES Direct Expenses: It includes all expenses other than direct material or direct labour which are specially incurred for a particular cost object Indirect Expenses: Expenses other than direct expenses are known as Indirect Expenses

OVERHEADS It is the aggregate of indirect material costs, indirect labour costs and indirect expenses . Its subdivided into:Production or Works Overheads Administration Overheads Selling Overheads Distribution Overheads

COST

PRODUCT AND PERIOD COST Cost of goods produced & kept ready for sale

These cost are not necessary for production

EXAMPLES Product Cost Raw Material Direct Labour Mfg Overheads Indirect Labour Repairs Power Depreciation

Period Cost Advertising Sales Salaries Prepaid Insurance Office Salaries Travel & Entertainment Legal Fees Postage & Stationery

ILLUSTRATION Material Cost Wages Selling And Distribution Variable Mfg Expenses Fixed Mfg Expenses Administration Expenses

COMMON COST Indirect cost that is incurred for the general benefit of a no of departments which is necessary for present and future operation e.g. Salary of manager of production department which is mfg more than 1 product

JOINT COST Cost of either a single process or a series of processes that simultaneously produced two or more products Kerosene, fuel oil, gasoline, & other oil products derived from crude oil

SHORT-RUN COST Varies with output when fixed plant & capital equipment remains the same e.g. Material cost

LONG-RUN COST Varies with output when all input factors including plant and equipment varies

PAST COST Actual costs incurred in the past and are generally contained in the financial accounts

FUTURE COST Expected to be incurred at a later date and are the only cost that matter for managerial decisions

CONTROLLABLE & UNCONTROLLABLE COST Cost over which a manager has direct and complete decision authority

Cost which in beyond the control of a particular individual over a period of time

ILLUSTRATION Maintenance Cost Indirect Labor Power Cost Controlling Scrap Physical Hazard Due To Fire, Flood, Etc Economic Risk Political Risk Technological Risk

REPLACEMENT AND HISTORICAL COST Cost of replacing an asset at any given point of time either at present or in the future

Actual cost of the asset

AVOIDABLE AND UNAVOIDABLE COST Cost which can be reduced due to contraction in business activities E.g. Reducing credit sales, closing an unprofitable branch Cost which cannot be avoided

OUT OF POCKET AND BOOK COST

Cost which signify the cash cost associated with an activity

Cost which do not require current cash payments e.g. Depreciation

IMPUTED AND SUNK COST

A hypothetical cost from the point of view of financial accounting e.g. Interest on capital Cost that have been incurred in a project but will not be recovered if the project is terminated

RELEVANT & IRRELEVANT COST Cost appropriate in aiding to make specific management decisions.

E.g. Present depreciated cost of machine is relevant in case of decision of its sale but is irrelevant in case of decision of its replacement

OPPORTUNITY COST Cost of value of benefit sacrifice in favour of an alternative course of action

DIFFERENTIAL COST Extra Cost of taking one course of action rather than another E.g. Changing the channel of distribution Replacing a machine by a better machine

ILLUSTRATION 1

CONVERSION COST Cost incurred for converting the raw material into finished product E.g. Power consumption labour

COMMITED COST Cost primarily associated with maintaining the organizations legal and physical existence E.g. Insurance premium Rent Depreciation

SHUTDOWN COSTS Cost incurred in relation to the temporary closing/reopening of department/division/enterprise e.g. Sheltering the plant and equipment and construction of shades for storing exposed properties reemployment of workers may involve cost of recruitment and

ABANDONMENT COST Cost incurred in closing down a department or a division or in withdrawing a product or seizing to operate in a particular sales territory

URGENT COST Cost which must be incurred in order to continue operations of the firm E.g. Cost of Materials Labour

POSTPONABLE COSTS Cost which can be shifted to the future with little or no effect on the efficiency of current operations. e.g. Painting of factory

MARGINAL COST Variable cost of 1 unit of a product or a service

NOTIONAL COST Hypothetical cost taking into account in a particular situation to represent the benefit enjoyed by an entity in respect of which no actual expenses is incurred E.g. Depreciation Contract Provisions

CLASSIFICA TION OF

CLASSIFICATION OF COSTS Classification Based on Financial Nature Element Wise Classification Classification For Exercising Control Functional Classification Of Costs Classification Based On costs

CLASSIFICATION BASED ON FINANCIAL NATURE FINANCIAL COSTS Cash Costs Reflected In Actual Cash Outflows Reward – Sacrifice = Gain Revenue – Costs = Profit Non Cash Costs Do Not Involve Cash Outlays Eg: Depreciation

NON FINANCIAL COSTS Not Directly Traceable Through a Company’s Cash Flow Eg: Low Morale Of Employees Do Not Represent Immediate Cash Outlays

ELEMENT WISE CLASSIFICATON OF COSTS – Object Of Interest For Identifying Costs – Elements Of Total Costs:-Material, labour , Expenses

DIRECT COST – Can Be Identified Easily With A Unit Of Operation Or Costing Unit – Also Called Traceable Cost

INDIRECT COST – Cannot Be Allocated But Can Be Apportioned To Cost Unit – All Overhead Cost Are Indirect Cost – Indirect material, Indirect Labour, Indirect Expenses – Segregation Necessary For proper Accounting, Control And Decision Making

FUNCTIONAL CLASIFICATION OF COSTS PRODUCTION COST ADMINISTRATION COST SELLING AND DISTRIBUTION COST RESEARCH AND DEVELOPMENT COST

CLASSIFICATION FOR EXERCISING

ENGINEERED COST

MANAGED COST

Capacity Cost

CLASSIFICATION BASED ON COST

Variable Cost

Fixed Cost

A fixed cost can be depicted

graphically as follows,

Semi-variable cost or Semi-

fixed cost

COST SHEETS

DISTINGUISH AND

DISTINGUISH BETWEEN FINANCIAL ACCOUNTING (FA) AND COST ACCOUNTING (CA) Nature Financial accounting classifies, records, presents and interprets in terms of money, transactions and events that are of financial characters. Cost accounting classifies records, presents and interprets in a significant manner the material, labour and overhead cost. Report recipients External/Outsiders namely the shareholders and government (tax) The focus of cost accounting is essentially internal. it tends to

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Outputs

Maintaining the accounts in the company it maintains the flow of funds in the company. To calculate the cost of materials, labour, overheads and cost of related jobs and contracts 

Regulating framework

Accounting concepts (as laid down by the Accounting Standards Board) plus statutory requirements of the Companies Acts None prescribed, although the guidance and formats of the CIMA Terminology tends to be followed in most organizations

Regulating framework Accounting concepts (as laid down by the Accounting Standards Board) plus statutory requirements of the Companies Acts None prescribed, although the guidance and formats of the CIMA Terminology tends to be followed in most organizations

Accounting systems Financial accounting follows entry system for recording, classifying and summarizing business transactions. Cost accounting is not based on double entry system. Accounting principle Financial accounting is based on the general accepted accounting principles necessary in business transaction. Cost accounting is not bound to use the generally accepted accounting business principles.

Time span Financial accounting data and statements are developed for a definite period, usually yearly, half yearly or quarterly. Cost accounting reports and statement are prepared whenever needed, usually monthly, weekly or daily basis. Unit of measurement All information under the financial accounting is in the terms of money. Cost accounting applies any measurement unit that is useful in particular situation. Example:- labour hours, machine hours

RELATIONSHIP BETWEEN COST ACCOUNTING AND MANAGEMENT ACCOUNTING Both the branches of accounting are internal to the organization Both the branches of accounting assist management in carrying out its functions of planning, decision making and controlling. There is a great deal of over lapping in their functions

DISTINGUISH BETWEEN COST ACCOUNTING (CA) AND MANAGEMENT ACCOUNTING (MA) Objective CA – to ascertain and control cost. MA – is to provide useful information to management for decision making.

Basis CA – it is based on both present and future transactions for cost ascertainment

MA – is concerned purely with the transaction related to future Scope CA - has a narrow scope as it covers matter relating to ascertainment and control of cost. MA – has a wide scope as it covers the area of financial accounts, cost accounts, taxation, statistics, law etc.

Dealing of the transaction CA – deals only with monetary transaction i.e. it covers only quantitative aspects. MA – deals with both monetary and non monetary transactions i.e. it covers quantitative as well as qualitative aspects

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Principles CA – follows a definite principle for ascertaining cost and a format for recording. MA – it does not follow a definite principle an format. Instead, the data to be presented depends upon the needs of management.

Positional level CA – Cost accountants occupies the lower position as compared to the management accountant in an hierarchy of the management. MA – Management accountants occupies a higher position in organizational setup.

Time Span CA – it is concerned with the short term planning. MA – it is concerned with both short term as well as long term planning.

Approach CA – it is historical in approach. MA – it is basically futuristic in approach. It is more predictive in nature. Dependency CA – it is independent of management accounting. MA – it is dependent on the cost accounting.

Thank