cost accounting- an introduction

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Cost accounting

Introduction


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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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COST ACCOUNTING -

MEANINGCost accounting is concerned with

recording, classifying and summarizingcosts for determination of costs of products

or services, planning, controlling and

reducing such costs and furnishing of

information to management for decision

making


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COST

MATERIALS LABOUROTHER EXPENSES

DIRECTDIRECT DIRECTINDIRECT INDIRECTINDIRECT

OVERHEADS

FOH AOH SOHDOH

ELEMENTS

OF

COST


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MATERIAL: The substance from which the

finished product is made is known as

material.

Direct material is one which can be directly

or easily identified in the product Eg: Timber

in furniture, Cloth in dress, etc.

Indirect material is one which cannot be

easily identified in the product.


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Examples of Indirect material

At factory levellubricants, oil, consumables,

etc.

At office levelPrinting & stationery,

Brooms, Dusters, etc.

At selling & dist. levelPacking materials,printing & stationery, etc.


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LABOUR: The human effort required to convert

the materials into finished product is called labour.

DIRECT LABOUR is one which can be

conveniently identified or attributed wholly to a

particular job, product or process.Eg:wages paid to carpenter, fees paid to tailor,etc.

INDIRECT LABOUR is one which cannot beconveniently identified or attributed wholly to a

particular job, product or process.


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Examples of Indirect labour

At factory levelforemens salary, worksmanagers salary, gate keepers salary,etc

At office levelAccountants salary, GMssalary, Managers salary, etc.

At selling and dist.levelsalesmen salaries,

Logistics manager salary, etc.


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OTHER EXPENSES are those expenses other

than materials and labour.

DIRECT EXPENSES are those expenses which

can be directly allocated to particular job, process

or product. Eg : Excise duty, royalty, special hirecharges,etc.

INDIRECT EXPENSES are those expenses whichcannot be directly allocated to particular job,

process or product.


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Examples of other expenses

At factory levelfactory rent, factory insurance,

lighting, etc.

At office leveloffice rent, office insurance, officelighting, etc.

At sales & dist.leveladvertising, show room

expenses like rent, insurance, etc.


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How to treat the following?

Carriage

Packaging expenses


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COST SHEET

DIRECT MATERIAL

DIRECT LABOUR

DIRECT EXPENSES

PRIME COST

FACTORY OVERHEADS

FACTORY COST

OFFICE OVERHEADS

COST OF PRODUCTION

SELL & DIST OVERHEADS

COST OF SALES

PROFIT

SALES


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COST SHEET - ADVANCED

OPENING STOCK OF RAW MATERIALS

+PURCHASES

+CARRIAGE INWARDS

-CLOSING STOCK OF RAW MATERIALS

VALUE OF MATERIALS CONSUMED

+DIRECT WAGES

+DIRECT EXPENSES

PRIME COST

+FACTORY OVERHEADS

+OPENING STOCK OF WIP-CLOSING STOCK OF WIP

FACTORY COST

(CONT.)


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FACTORY COST

+ADMINISTRATIVE OVERHEADS

COST OF PRODUCTION

+OPENING STOCK OF FINISHED GOODS

-CLOSING STOCK OF FINISHED GOODS

COST OF GOODS SOLD+SELL. & DIST. OVERHEADS

COST OF SALES

+PROFIT

SALES


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Comet Computer Corporation

Schedule of Cost of Goods Manufactured

Raw material used 134,980$

Direct labor 50,000

Total manufacturing overhead 230,000

Total manufacturing costs 414,980$

Add: Work-in-process inventory, January 1 120

Subtotal 415,100$

Deduct: Work-in-process inventory, December 31 100

Cost of goods manufactured 415,000$

Schedule of Cost of Goods

Manufactured

Exh.

2-7


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Direct labor 50,000




Subtotal 415,100$




Manufactured

Computation of Cost of Raw Material Used

Raw-material inventory, January 1 6,000$

Add: Purchases of raw materials 134,000

Raw material available for use 140,000

Deduct: Raw material inventory, December 31 5,020


Exh.

2-7


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Direct labor 50,000




Subtotal 415,100$




ManufacturedInclude all direct labor costsincurred during the current

period.

Exh.

2-7

S h d l f C t f G d M f t d


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Direct labor 50,000




Subtotal 415,100$




Computation of Total Manufacturing Overhead

Indirect material 10,000$

Indirect labor 40,000Depreciation on factory 90,000

Depreciation on equipment 70,000

Utilities 15,000

Insurance 5,000

Total manufacturing overhead 230,000$

Exh.

2-7


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Direct labor 50,000




Subtotal 415,100$




ManufacturedBeginning work-in-processinventory is carried overfrom the prior period.

Exh.

2-9

E h


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Direct labor 50,000




Subtotal 415,100$




ManufacturedEnding work-in-process inventorycontains the cost of unfinished goods, and

is reported in the current assets section of

the balance sheet.

Exh.

2-9

E h


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Income Statement for a

Manufacturer


Income StatementFor the Year Ended December 31, 20X2

Sales revenue 700,000$

Less: Cost of goods sold 415,010

Gross margin 284,990$

Selling and administrative expenses 174,490

Income before taxes 110,500$

Income tax expense 30,000

Net income 80,500$

Exh.

2-7

E h


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Income StatementFor the Year Ended December 31, 20X2

Sales revenue 700,000$

Less: Cost of goods sold 415,010

Gross margin 284,990$

Selling and administrative expenses 174,490

Income before taxes 110,500$

Income tax expense 30,000

Net income 80,500$

Income Statement for a Manufacturer


Schedule of Cost of Goods Sold

For the Year Ended December 31, 20X2

Finished-goods inventory, Jan. 1 200$

Add: Cost of goods manufactured 415,000

Cost of goods available for sale 415,200

Deduct Finished-goods inventory, Dec. 31 190

Cost of goods sold 415,010$

Exh.

2-7


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COST CLASSIFICATION ON THE BASIS OF

NatureFunction

Direct & indirect

VariabilityControllabilityNormality

Financial accounting classification

TimePlanning and control

Managerial decision making


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ON THE BASIS OF NATURE

MATERIALS

LABOUR

EXPENSES


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ON THE BASIS OF FUNCTION

MANUFACTURING COSTS

COMMERCIAL COSTSADM AND

S&D COSTS


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ON THE BASIS OF DIRECT

AND INDIRECT DIRECT COSTS

INDIRECT COSTS


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ON THE BASIS OF

VARIABILITY FIXED COSTS

VARIABLE COSTS

SEMI VARIABLE COSTS


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ON THE BASIS OF

CONTROLLABILITY CONTROLLABLE COSTS

UNCONTROLLABLE COSTS


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ON THE BASIS OF

NORMALITY NORMAL COSTS

ABNORMAL COSTS


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ON THE BASIS OF FIN. ACC

CAPITAL COSTS

REVENUE COSTS

DEFERRED REVENUE COSTS


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ON THE BASIS OF TIME

HISTORICAL COSTS

PRE DETERMINED COSTS


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ON THE BASIS OF

PLANNING AND CONTROL

BUDGETED COSTS

STANDARD COSTS


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ON THE BASIS OF MANAGERIAL DECISION

MAKING

MARGINAL COSTS

OUT OF POCKET COSTS

SUNK COSTS

IMPUTED COSTS

OPPORTUNITY COSTS

REPLACEMENT COSTS

AVOIDABLE COSTS

UNAVOIDABLE COSTS

RELEVANT AND IRRELEVANT COSTS DIFFERENTIAL COSTS


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Terms / Jargons used in Cost

Accounting


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COST UNIT

ICMA defines cost unit as A unit of

quantity of product, service or time related

to which costs may be ascertained or

expressed.

For e.g.

Brick worksper 1,000 bricks

Steel co.sper tonne of steel

Transport co.sper pass km


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COST CENTRE

ACCORDING TO ICMA, Cost

centre means A location, person or

item of equipment for which costsmay be ascertained and used for the

purpose of cost control.


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COST ESTIMATION

Cost estimation is the process of

pre determining the costs of acertain product, job or order.


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COST ASCERTAINMENT

Cost ascertainment is the process of

determining costs on the basis of

actual data.


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COST ALLOCATION

Cost allocation refers to the

allotment of whole items of costs to

cost centres or cost units.Eg: salary offoreman, power, etc.


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COST APPORTIONMENT

Cost apportionment refers to the

allotment of proportions of items of

cost to cost centres or cost units.Eg : Salary of GM is apportioned to

various departments on the basis of

time devoted by him.


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COST CONTROL AND COST

REDUCTION Cost control aims at maintaining the costs

in accordance with established standards

while cost reduction is concerned withreducing costs.

The objective of cost control is to achieve

the cost target while the that of costreduction is to improve the targets

themselves.


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COST CONTROL AND COST

REDUCTIONCONTD. Cost control ends when targets are achieved

while cost reduction has no visible end.

Cost control is a preventive function whilecost reduction is a corrective function.


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Conclusion

cost accounting- an introduction

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