cost accounting dnrtmylove@infinite

8/14/2019 Cost Accounting DNRTmylove@infinite

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Cost Accounting


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COST

For an average man , cost means what he actually

pays to obtain the desired article i.e. the price paid

for something.

In management terminology, it refers to expenditure

and not the price.

Cost is the cash or equivalent value sacrificed to

obtain some goods or services.

Cash equivalent means the non cash assets can be

exchanged for the desired goods or services


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The Official Terminology of Management

Accounting published by the Institute of Costand Management Accounting (ICMA) London

in 1982 defines the term cost as the amount

of expenditure (actual or notional) incurred

on ,or attributable to a specified thing oractivity


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According to this definition, cost may be theactual expenditure or notional charges.Notional charges are those which do notinvolve cash outlays. They are not entered inthe books of account . But they are importantfor decision-making.

Examples-cost of land, capital and otherresources owned and supplied free of chargeby the proprietor of the business.


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Expenses- the term cost, expenses and lossare often used interchangeably. These wordsshould be used at the right place to conveythe exact idea. Expenses are costs whichhave been applied against the revenue of aparticular period. It includes all expired costs

which are deductible from revenues. Lossesare reduction in firms equity for which nocompensating value has been received.


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Classification in relation to Changes in

Output, Activity or Volume-1. Fixed cost

2. Variable cost

3. Semi-variable cost


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According to degree of trace ability to the

product-1. Direct cost

2. Indirect cost


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According to the degree of association with

the product-1. Product cost

2. Period cost


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Functional classification of costs-

1. Manufacturing cost2. Selling and distribution cost

3. Administrative cost


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Costs for decision making and planning

1. Opportunity cost

2. Sunk cost

3. Relevant cost

4. Differential cost

5. Imputed cost

6. Out of pocket cost

7. Shutdown cost

8. Direct and indirect cost


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Costs for control-

1. Controllable cost and uncontrollable cost2. Standard cost

3. Fixed, variable and mixed cost


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Traditional classification

COST

MATERIAL LABOUR

DIRECT INDIRECT DIRECT INDIRECT

EXPENSES

DIRECT INDIRECT


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Fixed cost- fixed cost is a cost which does notchange in total for a given time period despite by

fluctuation of output or volume of activity

Example- rent,electricity bill, managers salary,

auditors fees

variable cost- cost that vary in total amount directlyand proportionately with the level of output.

Eg- workers, material, direct expenses


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Mixed costs- costs made up of fixed and

variable elements. They are the combinationof semi- fixed and semi- variable cost.

Example- incentive payments, electricity bill


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Direct cost-the costs that are clearly identifiable andtraceable to a costing object or a product called

direct cost

Eg- direct material; direct labour and expenses

Indirect cost- the costs that are not clearly traceable

with a product called as indirect costEg- rent, salaries, postage and stationary


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Product cost- costs which are identified with

the product includes- direct material, directlabour, direct expenses and manufacturing

overheads

Period cost-costs that are not directly

related to product .they are treated asexpenses in the period in which the costs are

incurred


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Opportunity costs-An opportunity cost is

the benefit given up or sacrificed whenalternative is chosen over another.

Opportunity cost is the income foregone by

selecting another alternative. Opportunity

costs are important in decision making andevaluating alternatives.


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Sunkcost-A sunk cost is the cost that has

already been incurred .It is a past orcommitted cost, cost gone forever. thus, any

historical cost called sunk cost.


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Relevant cost- are those future cost which

differ between alternatives. Relevant costmay also be defined as the costs which are

affected and changed by a decision. If a cost

increases, decreases, appears or disappears

as different alternatives are compared, it is arelevant cost.


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Differential cost- Differential costs are alsoknown as incremental costs. Decision is taken after

evaluating all the alternatives and the most profitable

is selected may be because of profitability or least

costly. Differential cost is the difference in total costs

between any two alternatives.

Differential cost = additional variable expensesincurred in respect of the additional output plus

the increase in fixed costs, ifany


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Imputed cost- Cost do not enter into traditionalaccounting systems. But they being related with

economic reality, help in making better decisions

The cost incurred by proprietor for rendering his own

services

Paying interest on capital contributed by owner

Paid rent on land owned by owner


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Shut down cost- Shut down cost are those costswhich have to be incurred under all situations in the

case of stopping manufacture of a product or closing

down a department or a division. Shut down cost are

always fixed costs. If the manufacture of the product

is stopped, variable cost like direct materials, direct

labour, direct expenses, variable factory overheadwill not be incurred but fixed expenses will be

incurred such as rent, salaries, poperty taxes etc.


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Out of pocket cost- While imputed cost do notinvolve cash outlays, out of pocket cost signify the

cash associated with an activity,on cash such as

depreciation are not included in out of pocket cost.

This concept is significant for management in

deciding whether or not a particular project will at

least return the cash expenditures associated withthe project selected by management


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Controllable cost- variable cost

Uncontrollable cost- fixed cost


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Direct cost

Variable cost

Product cost

Controllable cost

Marginal cost

Indirect cost

Fixed cost

Period cost

Uncontrollable cost


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Cost sheet

Prime cost

Factory cost / work cost

Administration cost / office cost

Selling and distribution cost


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Calculation of Prime cost

Opening stock

(+)Purchases- purchase return(-)Closing stock

=Material consumed

(+)direct labour(+)direct expenses

=PRIME COST


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PRIME COST

(+)Factory overheads

depreciation on machinery

Foreman salary

Depreciation on factory furniture

Factory rent

Factory taxes and insurance

Factory heat and power

=FACTORY OR WORK COST


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ADMINISTRATION COST OR OFFICE

COST

FACTORY COST

(+) office cost

Managers salaryRent (office)

Auditors fees

Electricity bill

Computer operations costDepreciation on furniture

Depreciation on building

Taxes


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Selling and distribution cost

OFFICE COST

(+) Selling and distribution expenses-

Advertisement

Promotional expenses

Vans expenses

Warehouse expensesTraveling exp.

Commission to sales person


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Cost sheetDate Particulars Total Cost Cost p.u.

PRIME COST *

FACTORY COST **

OFFICE COST ***

S&D COST ****

PROFIT MARGIN *

SALES(S.P) *****


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