Learning Center
Plans & pricing Sign in
Sign Out
Get this document free

Cost Accounting Cost Accounting is that branch of accounting which


									Cost Accounting:
Cost Accounting is that branch of accounting which establishes budget and actual cost
of operations, processes, departments or products and the analysis of variances,
profitably or social use of funds. Managers use cost accounting to support a
company’s decision making to cut down a company’s costs and improve profitability.
As a form of management accounting, cost accounting need not follow accounting
standards as its primary use is for internal managers rather than outside users.

Objectives of cost accounting:
Providing information for decision making :
Cost accounting helps the management in providing information for managerial
decisions for formulating operative policies. These policies relate to the following
a) Determination of cost-volume-profit relationship.
b) Make or buy a component.
c) Shut down or continue operation at a loss.
d) Continue with the existing machinery or replace it with upgraded and economical
Controlling cost:
Cost accounting helps in achieving aim of controlling cost by using various
techniques such as inventory control, standard costing and budgetary control. Each
item of cost is budgeted at the beginning of the period and actual expenses incurred
are compared with the budget.
Ascertaining costing profit:
Cost accounting helps in ascertaining costing profit or loss of any activity on
an objective basis by matching cost with the revenue of the activity.
Facilitating preparation of financial and other statements :
Cost Accounting helps to produce statements at short intervals as
Management may require. In order for the business to operate at high efficiency, it is
essential for management to have a review of production, sales and operating results.
Cost accounting provides daily, weekly or monthly statements of units produced,
accumulated cost with analysis. Cost accounting system provides immediate
information regarding stock of raw materials; semi finished goods and finished goods.
This helps in the preparation of financial statements.

Importance of cost accounting to business concerns:
Management of business concerns expects from Cost Accounting detailed cost
information in respect of its operations to equip their executives with relevant
information required for planning, scheduling, controlling and decision making. To be
more specific, management expects from cost accounting information and reports to
help them discharge the following functions:
(a) Measuring efficiency
For measuring efficiency, Cost Accounting department should provide information
about standards and actual performance of the concerned activity.

(b) Curtailment of loss during the off-season
Cost Accounting can also provide information, which may enable reduction of
overheads, by utilizing idle capacity during the off-season
(c) Expansion:
Cost Accounts may provide estimates of production of various levels on the basis of
which the management may be able to formulate its approach to expansion.
( d) Arriving at decisions
Most of the decisions in a business undertaking involve correct statements of the
likely effect on profits. Cost Accounts are of vital help in this respect. In fact, without
proper cost accounting, decisions would be like taking a jump in the dark, such as
when production of a product is stopped.
(e) Control of material cost
Cost of material usually constitutes a substantial portion of the total cost of a product.
Therefore, it is necessary to control it as far as possible. Such a control may be
exercised by:

Difference between Cost Accounting & Financial Accounting:
Basis                Cost accounting                      Financial accounting
1.Objective          It provides information              It provides information
                     of ascertainment of cost to          about the financial
                     control cost and for decision        performance as well as
                     making about the cost                the financial position of
                                                          the business
2.Nature             It classifies, records, presents and It classifies records,
                     interprets in a significant manner presents and interprets
                     the material, labor and overheads transactions in terms
                     cost                                 of money.

3.Recording of data      It records and presents the           It records historical data.
                         estimated/budgeted data. It
                         Makes use of historical costs and
                         pre determined costs.
4.Users                  It is used by internal                The users of financial
of information           management at different levels.       statements are
                                                               shareholders, creditors,
                                                               Financial analysts and

5.Analysis of costs      It provides the details of cost and   It shows the profit/loss
and profits              profit of each product, process,      of the organization
                         job, contracts
6.Time period            Its reports and statements are        Financial statements are
                         prepared as and when required         prepared for a definite
                                                               period, usually a year.
Question 2

A bank is a financial intermediary and appears in several related basic forms:
1. A central bank issues money on behalf of a government, and regulates the money
2. A commercial bank accepts deposits and channels those deposits into lending
activities, either directly or through capital markets. A bank connects customers with
capital deficits to customers with capital surpluses on the world's open financial
3. A savings bank, also known as a building society in Britain is only allowed to
borrow and save from members of a financial cooperative.

 The airline industry exists in an intensely competitive market. In recent years, there
has been an industry-wide shakedown, which will have far-reaching effects on the
industry's trend towards expanding domestic and international services. In the past,
the airline industry was at least partly government owned. This is still true in many
countries, but in the U.S. all major airlines have come to be privately held.
The airline industry can be separated into four categories by the U.S. Department of
Transportation (DOT):
- 130+ seat planes that have the ability to take passengers just about anywhere in the
world. Companies in this category typically have annual revenue of $1 billion or
b) National
- Usually these airlines seat 100-150 people and have revenues between $100 million
and $1 billion.
c) Regional
- Companies with revenues less than $100 million that focus on short-haul flights.
d) Cargo
- These are airlines generally transport goods.

Advertising is a form of communication used to persuade an audience (viewers,
readers or listeners) to take some action with respect to products, ideas, or services.
Most commonly, the desired result is to drive consumer behavior with respect to a
commercial offering, although political and ideological advertising is also common.
Advertising messages are usually paid for by sponsors and viewed via various media;
including traditional media such as newspapers, magazines, television, radio, outdoor
or direct mail; or new media such as websites and text messages. Commercial
advertisers often seek to generate increased consumption of their products or services
through "branding," which involves the repetition of an image or product name in an
effort to associate certain qualities with the brand in the minds of consumers. Non-
commercial advertisers who spend money to advertise items other than a consumer
product or service include political parties, interest groups, religious organizations
and governmental agencies. Organizations may rely on free modes of persuasion,
such as a public. Internationally, the largest ("big four") advertising conglomerates are
Interpublic, Omnicom, Publics, and WPP.

Real estate is the modern term for land and anything that is permanently affixed to it.
Fixtures include buildings, fences, and things attached to buildings, such as plumbing,
heating, and light fixtures. Property that is not affixed is regarded as Personal
Property. For example, furniture and draperies are items of personal property. With
the development of private property ownership, real estate has become a major area
of business, commonly referred to as commercial real estate. Purchasing real estate
requires a significant investment, and each parcel of land has unique characteristics,
so the real estate industry has evolved into several distinct fields.

A hospital, in the modern sense, is an institution for healthcare providing patient
treatment by specialized staff and equipment, and often, but not always providing for
longer-term patient stays. Today, hospitals are usually funded by the public sector, by
health organizations (for profit or nonprofit), health insurance companies or charities,
including by direct charitable donations. Historically, however, hospitals were often
founded and funded by religious orders or charitable individuals and leaders.
Conversely, modern-day hospitals are largely staffed by professional physicians,
surgeons, and nurses, whereas in history, this work was usually performed by the
founding religious orders or by volunteers. There are over 17,000 hospitals in the

 Transport or transportation is the movement of people and goods from one location
to another. Modes of transport include air, rail, road, water, cable, pipeline, and
space. The field can be divided into infrastructure, vehicles, and
operations. Transport is important since it enables trade between peoples, which in
turn establishes civilizations.
Transport infrastructure consists of the fixed installations necessary for transport, and
may be roads, railways, airways, waterways, canals and pipelines, and terminals such
as airports, railway stations, bus stations, warehouses, trucking terminals, refueling
depots (including fueling docks and fuel stations), and seaports. Terminals may be
used both for interchange of passengers and cargo and for maintenance.
Vehicles traveling on these networks may include automobiles ,bicycles, buses, trains,
trucks, people, helicopters , and aircraft. Operations deal with the way the vehicles are
operated, and the procedures set for this purpose including financing, legalities and
policies. In the transport industry, operations and ownership of infrastructure can be
either public or private, depending on the country and mode

 The health care industry, or health profession, treats patients who are injured, sick,
disabled, or otherwise physically or mentally infirm, and maintains general health in
populations and communities through the promotion of healthy behavior and
prevention of disease. The delivery of modern health care depends on an expanding
interdisciplinary team of trained professionals. For purposes of finance and
management, the healthcare industry is typically divided into several groups and
The Industry Classification and the Industry Classification Benchmark divide the
industry into two main groups:
(1) Health care equipment & services; and
(2) Pharmaceuticals, biotechnology & related life sciences. Health care equipment
and services comprise companies and entities that provide medical equipment,
medical supplies, and health care, such as hospitals, home health care providers, and
nursing homes. The second industry group comprises sectors companies that produce
biotechnology, pharmaceuticals, and miscellaneous scientific services.

In law and economics, insurance is a form of risk management primarily used to
hedge against the risk of a contingent, uncertain loss. Insurance is defined as the
equitable transfer of the risk of a loss, from one entity to another, in exchange for
payment. An insurer is a company selling the insurance; an insured, or policyholder,
is the person or entity buying the insurance policy. The insurance rate is a factor used
to determine the amount to be charged for a certain amount of insurance coverage,
called the premium. Risk management, the practice of appraising and controlling risk,
has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively
small loss in the form of payment to the insurer in exchange for the insurer's promise
to compensate (indemnify) the insured in the case of a financial (personal) loss. The
insured receives a contract, called the insurance policy, which details the conditions
and circumstances under which the insured will be financially compensated.
Insurance involve pooling funds from many insured entities (known as exposures) to
pay for the losses that some may incur. The insured entities are therefore protected
from risk for a fee, with the fee being dependent upon the frequency and severity of
the event occurring. In order to be insurable, the risk insured against must meet
certain characteristics in order to be an insurable risk.

A courier is a person or a company who delivers messages, packages, and mail.
Couriers are distinguished from ordinary mail services by features such as speed,
security, tracking, signature, specialization and individualization of services, and
committed delivery times, which are optional for most everyday mail services. As a
premium service, couriers are usually more expensive than usual mail services, and
their use is typically restricted to packages where one or more of these features are
considered important enough to warrant the cost. Many companies who operate under
a Just-In-Time or "JIT" inventory method often utilize on-board couriers. On-board
couriers are individuals who can travel at a moment's notice anywhere in the world,
usually via commercial airlines. While this type of service is the second costliest—
general aviation charters are far more expensive—companies analyze the cost of
service to engage an on-board courier versus the "cost" the company will realize
should the product not arrive by a specified time (i.e. an assembly line stopping,
untimely court filing, lost sales from product or components missing a delivery
deadline, organ transplants).

 The hospitality industry consists of broad category of fields within the service
industry that includes lodging, restaurants, event planning, theme parks,
transportation, cruise line, and additional fields within the tourism industry. The
hospitality industry is a several billion dollar industry that mostly depends on the
availability of leisure time and disposable income. A hospitality unit such as a
restaurant, hotel, or even an amusement park consists of multiple groups such as
facility maintenance, direct operations (servers, housekeepers, porters, kitchen
workers, bartenders, etc.), management, marketing, and human resources. The
hospitality industry covers a wide range of organizations offering food service and
accommodation. The industry is divided into sectors according to the skill-sets
required for the work involved. Sectors include accommodation, food and beverage,
meeting and events, gaming, entertainment and recreation, tourism services, and
visitor information.

INDUSTRY         COST COMPONENT                                      UNIT OF         METHOD
                                                                     COST            OF
Hotel            Building-(owned-depreciation, lease-                Per room /day   Service/Oper
                 rent),salary paid to staff and waiters,                             ational
                 electricity charges, transport charges, salary to                   Costing

Transport        Office charges, Vehicles, salary to drivers,        Per            Service/Oper
                 maintenance cost, cost of fuel, printing and        passenger/kilo ational
                 stationery                                          meter          Costing
Banking       Office (owned-depreciation/lease-                   Per               Service/Oper
              rent),electricity charges, salary to staff and      transaction/cli   ational
              clerks, conveyance allowance to sales               ent               Costing
              executives, printing and stationery

Insurance     Office (owned-depreciation/lease-                   Per               Service/
              rent),electricity charges, salary paid to staff     policy/           Operatio
              and clerks ,printing and stationery,                client            nal Costing
              conveyance allowance

Airline       Aircraft (owned-depreciation/lease-                 P e r             Service/
              rent),repairs and maintenance, salary paid to       p a s s e         Operatio
              ground staff ,air hostess, pilots, service cost     n g e r           nal Costing

Courier       Office( owned-depreciation/lease-rent),             Per           Volume
              Transport cost, salary paid to staff, electricity   weight/packag based costing
              charges, packaging cost, printing and               e
Advertising   Office(owned-depreciation/lease-                    Per               Job costing
              rent),electricity charges, Newspaper      
              advertisement-cost of publishing, Television        aper)Per job
              advertisement-cost of screening, salary paid to
              office staff Per second(Television)
Real Estate   Office(owned-depreciation/lease-                    Price per sq.     Contract
              rent),electricity &water charges, transport         foot(Construct    costing
              charges, payment to labor, staff                    ion)
Healthcare    Building (owned-depreciation/lease-                 P e r             Service/
              rent),salary paid to staff, repairs and             b i l l / p       Operatio
              maintenance, equipment cost, electricity            e r s o n         nal Costing
Hospitals     Building (owned-depreciation/lease-                 P e r             Service/
              rent),electricity charges, equipment charges,       b e d / p e       Operatio
              salary paid to doctors, nurses, ward boys,          r s o n           nal Costing
              maintenance charges of facility
Question 3
SELLING expenses
           Particulars                            Amount Rs
           bad debts                              340
           agents commission                      11500
           travelling expenses                    1520
                  total                           13360

           Particulars                            Amount Rs
           1.warehouse wages                      3600
 , rate, insurance of             620
           3.warehouse lightning                  540
           4.warehouse repair                     1020
           total                                  5780

          Particulars                              Amount Rs
          1.establishment expenses                 32380
 salaries                        2260
 lightning                       140
          4.directors remuneration                 2800
 charges                           200
,rate,insurance of office          460
          7. printing and stationery               3000
          Total                                    41240

EXPENSES which will not be considered in determining total costs.

Particulars                                 Amount Rs
Trade magazine                              140
donation                                    300
discount allowed                            3940
Total                                       4380

To top