intro cost acc
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AMITY Business School
B.Com.(Hons), IIIrd Semester
Cost Accounting
Nupur Agarwal
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COST - MEANING
Cost means the amount of expenditure ( actual or
notional) incurred on, or attributable to, a given thing
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OBJECTIVES OF COST ACCOUNTING
Ascertainment of costs
Estimation of costs
Cost control
Cost reduction
Determining selling price
Facilitating preparation of financial and other statement
Providing basis for operating policy4
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COST TERMINOLOGY
COST: Cost means the amount of expenditure incurred on a particular
thing.
COSTING: Costing means the process of ascertainment of costs.
COST ACCOUNTING: The application of cost control methods
and the ascertainment of the profitability of activities carried out or
planned.
COST CONTROL: Cost control means the control of costs by
management. Following are the aspects or stages of cost control.
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Differences between cost accounting and
financial accounting
Audience. Financial accounting involves the preparation of a standard set of reports
for an outside audience, which may include investors, creditors and credit rating
agencies and regulatory agencies. Cost accounting involves the preparation of abroad range of reports that management needs to run a business.
Format. The reports prepared under financial accounting are highly specific in their
format and content, as mandated by either GAAP or IFRS. Cost accounting
involves creating reports that can be in any format specified by management, with
the intention of including only that information pertinent to a specific decision or
situation. Level of detail. Financial accounting primarily focuses on reporting the results and
financial position of an entire business entity. Cost accounting usually results in
reports at a much higher level of detail within the company, such as for individual
products, product lines, geographical areas, customers or subsidiaries.
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Differences between cost accounting and
financial accounting
Product costs. Cost accounting compiles the cost of raw material, finished goods
and WIP inventory, while financial accounting incorporates this information into its
financial reports (primarily into the balance sheet). Regulatory framework. The structure of financial accounting reports are tightly
governed by either generally accepted accounting principles or international
financial reporting standards. There is no regulatory framework governing cost
accounting reports.
Report timing. Financial accounting personnel issue reports only at the end of a
reporting period. Cost accounting staff may issue reports at any time and with anydegree of frequency, depending upon management's need for the information.
Time horizon. Financial accounting is only concerned with reporting the results of
reporting periods that have already been completed. Cost accounting does this too,
but also can be involved in a variety of projections for future periods.
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Similarity between Cost Accounting and
Financial Accounting
Two activities which are performed in a business are-
Operating activity: related with the production of itemsusing material, labor, machinery etc. and its sales
Financial activity: related with arranging money for
these activities.
Operating activity Cost accounting Financing activity Financial accounting
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Similarity between Cost Accounting and
Financial Accounting
Basis: the vouchers on the basis of which accounts are
maintained are same in both the methods.
Methods of Book keeping: both the methods are based upon
double entry system as legal procedure of accounting.
Profit/Loss: both the systems aim at calculating profit/loss
for a given period. However, profits revealed by the twosystems are not necessarily equal.
Account of Direct and Indirect expenses: both the systems
keep records of both direct and indirect expenses.
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Similarity between Cost Accounting and
Financial Accounting
Evaluation of earlier plans: both the systems are required
for evaluating any plan
Future planning: for future plans both cost and financial
data is required
Helpful in fixing the Selling price: Both the accounts are
helpful in calculating SP of the items produced.
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Cost v/s Expenses
Expense is an expired cost resulting from productive usage
of an asset.
It is the cost which has been applied against revenue for an
accounting period Unexpired part of cost is recorded as an asset in the b/s.
Such unexpired cost is converted into expense when it
expires while earning revenue.
Loss is reduction in the firms equity, other then fromwithdrawal of capital for which no compensating value has
been received.
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Cost
Expired Cost Unexpired Cost
Expense Loss
Shown in the P/L a/c (Dr. Side)
Shown in the B/s as an
asset
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Cost centre: for calculating cost, the whole organization is
divided into small parts. Each such part is treated as a cost
centre for which cost is ascertained.
It can be a location, person or item of equipment for which
cost is calculated and used.
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Cost unit: it is the unit of product or service in relation to
which costs are ascertained.
Cost units may be of two types:
Units of production: tonne of steel, meter of cable, liter
of oil etc.
Units of service: seats in a cinema hall, consultancyhours etc.
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Cost Object: anything for which a separate measurement of
cost is desired.
It may be a product, service, activity or a process.
Example-
Product- car, computer
Service- Taxi service, Conference callsProcess- Melting process, weaving process
Activity- Website development, raw material purchase
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ACCOUNTING INFORMATION SYSTEM
The overall objective of an accounting information system
is to provide information to users.
This system is divided into two major subsystems:
1. The financial information system.
2. The cost management information system.
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THE COST MANAGEMENT INFORMATION
SYSTEM
This system is primarily concerned with producing outputs forinternal users for satisfying management objectives.
Such a system is not bound by any formal rules andconventions, unlike the financial accounting system. Insteadsuch criteria are set internally.
This system has the following three broad objectives:
1. To provide information for costing out services, productsand other objects of interest to management.
2. To provide information for Planning and Control.
3. To provide information for Decision making.
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Difficulties in Installing Cost Accounting
System
Lack of support from top management.
Resistance of accounting staff
Lack of trained cost accountants
Considered as over complex and lengthy
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Classification of Cost
Classification of costs can be made according to the
following basis-
Classification according to elements :-
Raw material
Labor
Overheads
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Classification according to nature
As per this classification, costs can be classified into
Direct costs: these are the costs which are identifiable with
the product unit or cost centre
Indirect costs: these are not identifiable with the productunit or cost centre and hence they are to be allocated,
apportioned and then absorb in the production units.
All elements of costs like material, labor and expenses can
be classified into direct and indirect.
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Direct and Indirect Material
Direct material is the material which is identifiable with
the product.
Indirect material cannot be identified with the product.
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Direct and Indirect Labor
Direct labor can be identified with a given unit of
product. E.g. wages paid to workers who are directly
engaged in the production can be identified and hence
they are direct wages.
Indirect Labor cannot be identified with a product. E.g.
wages paid to workers like sweepers, gardeners,
maintenance workers etc are indirect wages as they cannot
be identified with the given unit of production
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Direct and Indirect Expenses
Direct expenses refers to expenses that are specifically
incurred and charged for specific or particular job,
process, service, cost centre or cost unit. These expensesare also called as chargeable expenses. Examples of
these expenses are cost of drawing, design and layout,
royalties payable on use of patents, copyrights etc.
Indirect expenses on the other hand cannot be traced tospecific product, job, process, service or cost centre or
cost unit. Several examples of indirect expenses can be
given like insurance, electricity, rent, salaries,
advertising etc.25
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Classification according to behaviour
Fixed Costs
Out of the total costs, some costs remain fixed irrespective
of changes in the production volume. These costs are called
as fixed costs. Examples of these costs are salaries, insurance, rent, etc.
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Variable Costs
These costs are variable in nature, i.e. they change
according to the volume of production.
Their variability is in the same proportion to the production.
Example, if the production units are 2,000 and the variablecost is Rs. 5 per unit, the total variable cost will be Rs.
10,000, if the production units are increased to 5,000 units,
the total variable costs will be Rs. 25,000, i.e. the increase is
exactly in the same proportion of the production.
Another feature of the variable cost is that per unit variable
cost remains same while the total variable costs will vary
Examples of variable costs are direct materials, direct labor
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Semi-variable Costs
These costs are partly fixed and partly variable. In other
words, they contain the features of both types of costs.
Examples of these costs are Maintenance costs, supervisory
costs etc
These costs are also called as stepped costs.
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Classification according to functions Production Costs - All costs incurred for production of
goods are known as production costs.
Administrative Costs - Costs incurred for administration are
known as administrative costs. Examples of these costs are
office salaries, printing and stationery, office telephone,
office rent, office insurance etc.
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Classification according to time
Historical Costs
These are the costs which are incurred in the past, i.e. in the
past year, past month or even in the last week or yesterday.
The historical costs are ascertained after the period is over. Though historical costs have limited importance, still they
can be used for estimating the trends of the future
Predetermined Cost
These costs relating to the product are computed in advance
of production, on the basis of a specification of all the
factors affecting cost and cost data.
Pre determined costs may be either standard or estimated31
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Classification of costs for Management decision making
Marginal Cost
Marginal cost is the change in the aggregate costs due to
change in the volume of output by one unit
Marginal cost is also termed as variable cost and hence perunit marginal cost is always same, i.e. per unit marginal cost
is always fixed.
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Differential Costs
Differential costs are also known as incremental cost.
This cost is the difference in total cost that will arise from
the selection of one alternative to the other. This type of analysis is useful for taking various decisions
like change in the level of activity, adding or dropping a
product, change in product mix, make or buy decisions,
accepting an export offer and so on.
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Opportunity Costs
It is the value of benefit sacrificed in favour of an
alternative course of action.
It is the maximum amount that could be obtained at anygiven point of time if a resource was sold or put to the most
valuable alternative use that would be practicable.
Opportunity cost of goods or services is measured in terms
of revenue which could have been earned by employing thatgoods or services in some other alternative uses.
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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.
Abnormal Costs It is an unusual or a typical cost whose occurrence is usually
not regular and is unexpected. This cost arises due to some
abnormal situation of production. Abnormal cost arises due
to idle time, may be due to some unexpected heavybreakdown of machinery. They are not taken into
consideration while computing cost of production or for
decision making.
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Controllable Costs
Controllable costs are those which can be controlled or
influenced by a conscious management action. For example,
costs like telephone, printing stationery etc can be
controlled while costs like salaries etc cannot be controlled
at least in the short run.
Generally, direct costs are controllable while uncontrollable
costs are beyond the control of an individual in a given
period of time.
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Shutdown Cost
These costs are the costs which are incurred if theoperations are shut down and they will disappear if the
operations are continued.
Examples of these costs are costs of sheltering the plant and
machinery and construction of sheds for storing exposedproperty.
Computation of shutdown costs is extremely important for
taking a decision of continuing or shutting down operations.
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Capacity Cost
These costs are normally fixed costs. The cost incurred by a
company for providing production, administration and
selling and distribution capabilities in order to perform
various functions.
Capacity costs include the costs of plant, machinery and
building for production, warehouses and vehicles for
distribution and key personnel for administration.
These costs are in the nature of long-term costs and are
incurred as a result of planning decisions.
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Cost sheet
..\..\cost sheet.docx
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