elements , nature & scope of cost accounting
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Elements , Nature & Scope ofCost Accounting
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Out line
Meaning
Definition
Scope
Objectives
Advantages
Limitations
Elements of cost
- Material, Labour, Overhead
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Meaning
Cost accounting is concerned withrecording, classifying andsummarizing costs for determination
of costs of products or services,planning, controlling and reducingsuch costs and furnishing of
information to management fordecision making
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Definition
Definition: According to Wheldon,Cost accounting is the application of
accounting and costing principles,
methods and techniques in theascertainment of costs and analysis ofsaving or excess cost incurred as
compared with pervious expenses orwith standards.
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Scope
It deals primarily with cost data
It involves classification, accumulation,assignment and control of costs.
It establishes budgets and standards.
Right information to the Right personat the Right time.
It records Income and Expenditure.
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Objectives
Ascertainment of cost
Control of cost
Guide to business policy
Determination of selling price
Measuring and improving performance
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Advantages
Advantages to Management1. Reveals profits and un profitable activities2. Helps in cost concepts:3. Helps in decision making
4. Guides in fixing selling prices:5. Helps in inventory control:6.Aid in formulating policies.7. Helps in cost reduction
8. Reveals idle capacity9. Checks the accuracy of financial accounts10. Prevents frauds and manipulation
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Advantage to works
Advantage to society
Advantages to government agencies
and others
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Limitations
It is unnecessary
It is expensive
It is inapplicable
It is a failure
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Elements of cost
Elements ofcost
Material
Direct
Primecost
Indirect
OverHead
Labour
Direct
Primecost
Indirect
OverHead
OtherExpenses
Direct
Primecost
Indirect
OverHead
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Material cost
The cost of commodities supplied toan undertaking
Direct material is a part of finished
producteg: cotton used in a textile mill ,clay inbricks etc.
Indirect material is one which cannotbe easily identified in the product.eg: pins, screws, nuts etc.
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Labour Cost The human effort required to convert
the materials into finished product.
Direct Labour cost consists of wagespaid to a workers directly engaged ineh converting raw material intofinished product.
eg: wages paid to carpenter, feespaid to tailor etc.
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Indirect labour is of general characterand cannot be conveniently identifiedwith a particular cost unit.
eg: Supervisor, Inspector, cleaner,clerk etc
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Expenses
The cost of services provided to anundertaking and the notional cost ofthe use of owned asset.
Direct expenses are those expenseswhich can be directly allocated toparticular job, process or product.
Eg: Cost of patent rights, experimentalcost etc.
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Indirect expenses are those expenseswhich cannot be directly allocated toparticular job, process or product.
eg: Rent and rates , depreciation,advertisement, insurance etc.
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Over Head
Prime cost = Direct material + Directlabour + Direct expenses
Over head = Indirect material +
Indirect labour + Indirect expenses
Over head
Production Office &Administration
Selling &distribution
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Production Overhead
It is also known as factory overhead,works overhead, manufacturingoverhead.
It convert with the production function It includes direct material, direct
wages and direct expenses producinggoods and services.
Eg: Coal, oil, grease, factory rent,depreciation of plant, maintenance ofplant etc.
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Office and Administration
The indirect expenses incurred ingeneral administration function
Have no direct contact with production
or sales activities.eg: postage, Salary of office staff,
rent of office building, legal expenses,
telephone expences
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Selling and distribution
Selling is the cost of promotion salesand retaining customers.
eg: Advertisement, samples and free gifts,salaries of salesmen etc.
Distribution cost includes allexpenses incurred from the time theproduction is complete until it reaches
its destination.eg: Carriage outwards, insurance ofgoods in transit, warehousing etc.
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