Basic Cost Concepts Basic Cost Concepts

COST ACCOUNTING

Chapter One

LEARNING OBJECTIVESLEARNING OBJECTIVES LEARNING OBJECTIVESLEARNING OBJECTIVES

To understand the meaning of different costing terms

To understand different costing methods To have a basic idea of different costing techniques To understand the meaning

of cost sheet

To understand the meaning of different costing terms

To understand different costing methods To have a basic idea of different costing techniques To understand the meaning

of cost sheet

Meaning of Cost AccountingMeaning of Cost Accounting

Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making.

Development of Cost Accounting

Development of Cost Accounting

The main causes behind the development of cost accounting system may be enumerated as below:

Financial Accounting cannot give (normally) the product- wise picture nor can it say that the result obtained is, what it should be.

The main causes behind the development of cost accounting system may be enumerated as below:

Financial Accounting cannot give (normally) the product- wise picture nor can it say that the result obtained is, what it should be.

Development of Cost AccountingDevelopment of Cost Accounting

Financial Accounting does not find out the cost of the goods manufactured. Financial Accounting does not find out the cost of the goods manufactured.

Financial Accounting never aims at making an effort for converting a losing unit into a profitable one through cost control.

Financial Accounting never aims at making an effort for converting a losing unit into a profitable one through cost control.

Development of Cost Accounting

Development of Cost Accounting

Financial Accounting does not provide means for controlling different elements of cost, reduction of expenses, elimination of wastage, measurement of levels of efficiency etc.

Financial Accounting presents the total cost as incurred during a period and that also, at the end of the period. It cannot present the cost incurred daily and in the absence of this day-to –day information, control becomes impossible.

Financial Accounting also fails to explain properly the result with appropriate break-up.

Financial Accounting does not provide means for controlling different elements of cost, reduction of expenses, elimination of wastage, measurement of levels of efficiency etc.

Financial Accounting presents the total cost as incurred during a period and that also, at the end of the period. It cannot present the cost incurred daily and in the absence of this day-to –day information, control becomes impossible.

Financial Accounting also fails to explain properly the result with appropriate break-up.

OBJECTIVES OF COST ACCOUNTING OBJECTIVES OF COST ACCOUNTING

•To determine cost and control efficiency

•To Facilitate preparation of financial and other statement

•To provide basis for operating policy

Cost Accounting Vs. Financial Accounting

Cost Accounting Vs. Financial Accounting

Financial accounting is concerned with providing information to external users. But cost accounting is prepared for the internal users.

Financial Accounting Vs. Cost Accounting

Financial Accounting Vs. Cost Accounting

Financial accounting is oriented towards the preparation of financial statements which summarize the results of operations fro selected periods of time and show the financial position of the business at particular dates. Cost accounting often provides detailed information about manufacturing or rendering particular product or service.

Financial accounting is oriented towards the preparation of financial statements which summarize the results of operations fro selected periods of time and show the financial position of the business at particular dates. Cost accounting often provides detailed information about manufacturing or rendering particular product or service.

Financial Accounting Vs. Cost Accounting

Financial Accounting Vs. Cost Accounting

Financial accounting prepares report according to GAAP as a mandatory obligation. But Compliance is not mandatory for cost accounting.

Financial accounting prepares report according to GAAP as a mandatory obligation. But Compliance is not mandatory for cost accounting.

Role of Cost AccountingRole of Cost Accounting

Cost accounting furnishes management with the necessary accounting tolls for planning and controlling activities. Specifically, the collection, presentation, and analysis of cost data should help management accomplish the following tasks:

Cost accounting furnishes management with the necessary accounting tolls for planning and controlling activities. Specifically, the collection, presentation, and analysis of cost data should help management accomplish the following tasks:

Role of Cost AccountingRole of Cost Accounting

•Creating and executing plans for budget

•Establishing costing methods and procedures.

•Creating inventory values for costing and pricing

Role of Cost AccountingRole of Cost Accounting

• Determining company costs and profit for and annual accounting period.

• Choosing from among two or more alternatives which might increase revenues or decrease costs.

• Determining company costs and profit for and annual accounting period.

• Choosing from among two or more alternatives which might increase revenues or decrease costs.

Advantages of Cost AccountingAdvantages of Cost Accounting

Elimination of wastes, losses, inefficiencies Cost reduction Detection of reasons for profit or loss Advice on various matters Fixation of price Cost control Assisting the government, trade unions etc. Marginal analysis of cost Fixation of responsibility

Elimination of wastes, losses, inefficiencies Cost reduction Detection of reasons for profit or loss Advice on various matters Fixation of price Cost control Assisting the government, trade unions etc. Marginal analysis of cost Fixation of responsibility

Advantages of cost Accounting

Advantages of cost Accounting

Help in preparation of final accounts under financial accounting system

Prevention of frauds etc. thereby helping the management, the Government & others connected with

the organization

Help in preparation of final accounts under financial accounting system

Prevention of frauds etc. thereby helping the management, the Government & others connected with

the organization

Concept of Cost Concept of Cost

The term cost cannot be exactly defined. Its interpretation depends upon the following factors: –The nature of business or industry

–The context in which it is used

The term cost cannot be exactly defined. Its interpretation depends upon the following factors: –The nature of business or industry

–The context in which it is used

Manufacturing CostManufacturing Cost

Direct Material Direct Labor Manufacturing overhead

Direct Material Direct Labor Manufacturing overhead

Non-Manufacturing CostNon-Manufacturing Cost

Administration Cost

Selling and Distribution

Administration Cost

Selling and Distribution

COST TERMSCOST TERMS

Fixed Cost

Variable Costs

Semi Variable Cost