Cost Accounting
CA is a formal system of accounting for costs in the books of accounts by means of which costs of products and services are ascertained and controlled. Cost means “the price paid for something” Cost ascertainment is computation of actual costs incurred Cost estimation is a process of predetermining costs of goods and service.
Objectives of Cost Accounting
Ascertainment of cost Control of cost Guide to business policy such as make or buy, introduction of new product etc Determination of selling price
CA and FA - Comparison
Purpose Statutory requirements Analysis of cost and profit Periodicity of reporting Control aspect Historical and predetermined costs Format of presenting information Types of transactions recorded
Cost Centre
Cost center is a location, person, or item of
equipment (or group of these) for which costs may be ascertained and used for the purpose of control
It refers to a section of the business to which costs can be charged. Types:
Personal and Impersonal cost centre Production and Service cost centre
Cost Unit
Cost units are the things, that the business is set up to provide, of which cost is ascertained. Unit of product, service or time in relation to which cost may be ascertained or expressed
Types:
Units of production such as a ream of paper, a tonne of steel, a meter of cable etc. Units of services such as passenger miles, consulting hours, room per day, bed per day
Methods of costing
It refers to the techniques and processes employed in the ascertainment of costs Choice of the method depends upon the type and nature of manufacturing activity Types: Broadly,
Job costing or job order costing Process Costing Other methods are variations of one of these methods.
Methods of costing - Types
Job Order Costing – Applies where work is
undertaken to customers special requirements. Contract Costing or Terminal Costing: It is same as Job order costing; however, job is small and contract is big contract. Contract is of long duration and may continue for more than a financial year. Batch costing: Cost of a batch or group of identical products is ascertained; each batch of products is a cost unit for which costs are ascertained.
Methods of costing – Types…..
Process Costing – Applies to a context where
there is a continuous process. Costs are accumulated for each process. And then total cost of a process is divided by the number of units produced to arrive at cost per unit. Operations Costing: Involves cost ascertainment for each operation. Operating or services costing: It is applied to services; cost units are passenger –kilometer, room per day, bed per day.
Methods of costing – Types…..
Multiple or composite costing – Application
of more than one method of costing in respect of the same product. Used in industries where a number of components are separately manufactured and then assembled into a final product. Single, output or unit costing: Applied to a context where output produced are identical, the cost per unit is found by dividing the total cost by the number of units produced. E.g. Steel output is identical but differentiated by grades.
Techniques of costing – Types…..
Standard costing – Standard cost is
predetermined as target of performance and actual performance is measured against the standard.
Budgetary control: By comparing actual with
planned / budgeted performance
Marginal costing: Only variable cost is
allocated to individual cost centers or cost units
Techniques of costing – Types…..
Total Absorption costing – Both fixed and
variable costs are charged to products.
Uniform Costing: It is not a technique but a
situation wherein several undertakings use the same costing principle and practices.
Elements of costs - Materials
Material cost : cost of commodities supplied to an undertaking Direct materials cost: those costs which are
incurred for and conveniently identified with a particular cost unit, process or department.
Ex: cost of raw material
Indirect materials cost: those costs which cannot
be conveniently identified with a particular cost unit,
process or department.
Ex: cost of material that are inexpensive but may or may not physically become part of the finished goods
Elements of costs – Labour cost
Labour cost : cost of remuneration (wages, salaries, commissions, bonuses, etc etc) of the employees of an undertaking Direct labour cost: wages paid to workers directly engaged in the production process.
Eg: Wages of machine operator
Indirect labour cost: those wages which cannot
process or department
be conveniently identified with a particular cost unit,
Elements of costs – Expenses
Expenses: The cost of services provided to an
undertaking
identified with and allocated to cost centers or units. . Eg: Royalty paid, depreciation of a plant used Indirect Expenses: All indirect costs other than indirect materials and labor. They cannot be directly identified with a particular job, process or work order and are common to cost units or cost centers Ex: Rent and rates, lighting and power
Direct Expenses: those expenses which can be
Elements of costs – Price cost
Direct Material + Direct labour + Direct Expenses
Elements of costs – Over heads
Indirect Material + Indirect labour + Indirect expenses
Overheads are divided into a. Production overheads b. Office and administration overheads c. Selling and distribution overheads
Elements of costs – Production
overheads
Indirect Material such as coal, oil grease,
stationary in factory office+ Indirect labour such as work manager’s salary, salary of factory office staff, salary of inspector and supervisors, watchman, sweeper Indirect Expenses such as factory rent, depreciation of plant, repairs and maintenance of plant, insurance of factory building, factory lighting and power, internal transport expenses
Elements of costs – Office and
administration overheads
Indirect Material such as stationary used in
administration office, postage, etc
Indirect labour such as salary of office staff, Indirect Expenses such as office rent,
insurance of office building, office lighting and power, telephone, depreciation of office furniture, office a/c, sundry office expenses
salary of of MD, Directors, watchman, sweeper
Elements of costs – Selling and
distribution overheads
Selling cost: cost of seeking to create and stimulate demand and of securing orders such as ads, samples and free gifts, salaries of salesmen Distribution cost: cost of making packed product available for dispatch and returning of empty packages for reuse Indirect Material such as stationary used in sales
office, packing mat, cost of samples, price list, oil for delivery vans Indirect labour such as salary of sales staff, salary of of MD, Directors, watchman, sweeper Indirect Expenses such as advertising, traveling expenses, showroom expenses, carriage outwards, rent
Components of total cost
1 Prime Cost 2. Works cost or factory cost
Prime cost + Factory Overheads
Cost
Total
of production cost or cost of sales
Work cost + Administration Overheads Cost of production + Selling and distribution overhead