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section guidelines, the introduction of this article may need to be rewritten. Please discuss this issue on the talk page and read the layout guide to make sure the section will be inclusive of all essential details. (July 2011) This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (June 2007) Accountancy Key concepts Accountant Accounting period Bookkeeping Cash and accrual basis Cash flow management Chart of accounts Journal Special journals Constant item purchasing power accounting Cost of goods sold Credit terms Debits and credits Double-entry system Mark-to-market accounting FIFO and LIFO GAAP / IFRS General ledger Goodwill Historical cost Matching principle Revenue recognition Trial balance Fields of accounting Cost Financial Forensic Fund Management Tax (U.S.) Financial statements Statement of financial position Statement of cash flows Statement of changes in equity Statement of comprehensive income Notes Management discussion and analysis XBRL Auditing

Auditor's report Financial audit GAAS / ISA Internal audit SarbanesOxley Act Accounting qualifications CA CPA CCA CGA CMA CAT CFA CIIA CIA CTP This box: view talk edit Cost accounting information is designed for managers. Since managers are taking decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, the important criterion is that the information must be relevant for decisions that managers operating in a particular environment of business including strategy make. Cost accounting information is commonly used in financial accounting information, but first we are concentrating in its use by managers to take decisions. The accountants who handle the cost accounting information generate add value by providing good information to managers who are taking decisions. Among the better decisions, the better performance of your organization, regardless if it is a manufacturing company, a bank, a non-profit organization, a government agency, a school club or even a business school. The cost-accounting system is the result of decisions made by managers of an organization and the environment in which they make them. The organizations and managers are most of the times interested in and worried for the costs. The control of the costs of the past, present and future is part of the job of all the managers in a company. In the companies that try to have profits, the control of costs affects directly to them. Knowing the costs of the products is essential for decision-making regarding price and mix assignation of products and services. The cost accounting systems can be important sources of information for the managers of a company. For this reason, the managers understand the forces and weaknesses of the cost accounting systems, and participate in the evaluation and evolution of the cost measurement and administration systems. Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles. As a result, there is a wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization. The following are different cost accounting approaches:

standardized or standard cost accounting lean accounting

activity-based costing resource consumption accounting throughput accounting marginal costing/cost-volume-profit analysis

Classical cost elements are: 1. Raw materials 2. Labor 3. Indirect expenses/overhead Contents

1 Origins 2 Elements of cost 3 Classification of costs 4 Standard cost accounting

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4.1 The development of throughput accounting

5 Activity-based costing 6 Lean accounting 7 Marginal costing 8 See also 9 References 10 External links

[edit] Origins Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions. In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a

factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes. Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early twentieth century, these costs were of little importance to most businesses. However, in the twentyfirst century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing. For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components, and pay 6 laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing that making a coach required spending $300, managers knew they couldn't sell below that price without losing money on each coach. Any price above $300 became a contribution to the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a profit of $500 in both cases. [edit] Elements of cost

Material (Material is a very important part of business)

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Direct material

Labor
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Direct labor

Overhead (Variable/Fixed)
o o o o o

Indirect material Indirect labor Maintenance & Repair Supplies Utilities

o o o o o

Other Variable Expenses Salaries Occupancy (Rent) Depreciation Other Fixed Expenses

(In some companies, machine cost is segregated from overhead and reported as a separate element) They are grouped further based on their functions as,

Production or works overheads Administration overheads Selling overheads Distribution overheads Financial Expenses

[edit] Classification of costs Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are:

By nature or element: materials, labor, expenses By functions: production, selling, distribution, administration, R&D, development, By traceability: direct and indirect By variability: fixed, variable, semi-variable By controllability: controllable, uncontrollable By normality: normal, abnormal

[edit] Standard cost accounting In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex

accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product. For example: if the railway coach company normally produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an overhead of $25 ($1000 / 40). Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach. This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor. For example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively minor difference. An important part of standard cost accounting is a variance analysis, which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand why costs were different from what was planned and take appropriate action to correct the situation. [edit] The development of throughput accounting Main article: Throughput accounting As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came under question. Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began to understand that "every production process has a limiting factor" somewhere in the chain of production. As business management learned to identify the constraints, they increasingly adopted throughput accounting to manage them and "maximize the throughput dollars" (or other currency) from each unit of constrained resource. For example: The railway coach company was offered a contract to make 15 opentopped streetcars each month, using a design that included ornate brass foundry work, but very little of the metalwork needed to produce a covered rail coach. The buyer offered to pay $280 per streetcar. The company had a firm order for 40 rail coaches each month for $350 per unit. The cost accountant determined that the cost of operating the foundry vs. the metalwork shop each month was as follows:

Overhead Cost by Department Foundry Metal shop Total

Total Cost

Hours Available per month

Cost per hour $45.63 $20.63 $33.13

$ 160 7,300.00 $ 160 3,300.00 $10,600. 320 00

The company was at full capacity making 40 rail coaches each month. And since the foundry was expensive to operate, and purchasing brass as a raw material for the streetcars was expensive, the accountant determined that the company would lose money on any streetcars it built. He showed an analysis of the estimated product costs based on standard cost accounting and recommended that the company decline to build any streetcars. Standard Cost Accounting Analysis Monthly Demand Price Foundry Time (hrs) Metalwork Time (hrs) Total Time Foundry Cost Metalwork Cost Raw Material Cost Total Cost Profit per Unit Streetca Rail rs coach 15 $280 3.0 1.5 4.5 40 $350 2.0 4.0 6.0

$136.88 $ 91.25 $ 30.94 $ 82.50 $120.00 $ 60.00 $287.81 $233.75 $ (7.81) $116.25

However, the company's operations manager knew that recent investment in automated foundry equipment had created idle time for workers in that department. The constraint on production of the railcoaches was the metalwork shop. She made an analysis of profit and loss if the company took the contract using throughput accounting to determine the profitability of products by calculating "throughput" (revenue less variable cost) in the metal shop.

Throughput Cost Accounting Analysis Coaches Produced Streetcars Produced Foundry Hours Metal shop Hours Coach Revenue Streetcar Revenue Coach Raw Material Cost Streetcar Raw Material Cost Throughput Value Overhead Expense Profit

Decline Contract 40 0 80 160 $14,000 $0 $(2,400) $0 $11,600 $(10,600) $1,000

Take Contract 34 15 113 159 $11,900 $ 4,200 $(2,040) $(1,800) $12,260 $(10,600) $1,660

After the presentations from the company accountant and the operations manager, the president understood that the metal shop capacity was limiting the company's profitability. The company could make only 40 rail coaches per month. But by taking the contract for the streetcars, the company could make nearly all the railway coaches ordered, and also meet all the demand for streetcars. The result would increase throughput in the metal shop from $6.25 to $10.38 per hour of available time, and increase profitability by 66 percent. [edit] Activity-based costing Main article: Activity-based costing Activity-based costing (ABC) is a system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company. "Talking with customer regarding invoice questions" is an example of an activity inside most companies. Accountants assign 100% of each employee's time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities). The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker's salary spent on that activity.

A company can use the resulting activity cost data to determine where to focus their operational improvements. For example, a job-based manufacturer may find that a high percentage of its workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a currency amount pegged to the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for resolving this process deficiency. Activity-based management includes (but is not restricted to) the use of activity-based costing to manage a business. While ABC may be able to pinpoint the cost of each activity and resources into the ultimate product, the process could be tedious, costly and subject to errors. As it is a tool for a more accurate way of allocating fixed costs into product, these fixed costs do not vary according to each month's production volume. For example, an elimination of one product would not eliminate the overhead or even direct labor cost assigned to it. ABC better identifies product costing in the long run, but may not be too helpful in day-to-day decision-making. [edit] Lean accounting Main article: Lean accounting Lean accounting[1] has developed in recent years to provide the accounting, control, and measurement methods supporting lean manufacturing and other applications of lean thinking such as healthcare, construction, insurance, banking, education, government, and other industries. There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company's accounting, control, and measurement processes. This is not different from applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors & defects, and make the process clear and understandable. The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change & improvement, provide information that is suitable for control and decision-making, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely & confusing financial reports. These are replaced by:

lean-focused performance measurements simple summary direct costing of the value streams decision-making and reporting using a box score

financial reports that are timely and presented in "plain English" that everyone can understand radical simplification and elimination of transactional control systems by eliminating the need for them driving lean changes from a deep understanding of the value created for the customers eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP) value-based pricing correct understanding of the financial impact of lean change

As an organization becomes more mature with lean thinking and methods, they recognize that the combined methods of lean accounting in fact creates a lean management system (LMS) designed to provide the planning, the operational and financial reporting, and the motivation for change required to prosper the company's on-going lean transformation. [edit] Marginal costing See also: Cost-Volume-Profit Analysis and Marginal cost The cost-volume-profit analysis is the systematic examination of the relationship between selling prices, sales, production volumes, costs, expenses and profits. This analysis provides very useful information for decision-making in the management of a company. For example, the analysis can be used in establishing sales prices, in the product mix selection to sell, in the decision to choose marketing strategies, and in the analysis of the impact on profits by changes in costs. In the current environment of business, a business administration must act and take decisions in a fast and accurate manner. As a result, the importance of cost-volume-profit is still increasing as time passes. CONTRIBUTION MARGIN A relationship between the cost, volume and profit is the contribution margin. The contribution margin is the revenue excess from sales over variable costs. The concept of contribution margin is particularly useful in the planning of business because it gives an insight into the potential profits that can generate a business. The following chart shows the income statement of a company X, which has been prepared to show its contribution margin: Sales $1,000,0 00

(-) Variable Costs Contribution Margin (-) Fixed Costs Income from Operations CONTRIBUTION MARGIN RATIO

$600,00 0 $400,00 0 $300,00 0 $100,00 0

The margin contribution can also be expressed as a percentage. The contribution margin ratio, which is sometimes called the profit-volume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to provide operating revenue. For the company Fusion, Inc. the contribution margin ratio is 40%, which is computed as follows: Contribution Margin Ratio = (Sales - Variable Costs) / Sales The contribution margin ratio measures the effect on operating income of an increase or a decrease in sales volume. For example, assume that the management of Fusion, Inc. is studying the effect of adding $80,000 in sales orders. Multiplying the contribution margin ratio (40%) by the change in sales volume ($80,000) indicates that operating income will increase $32,000 if additional orders are obtained. To validate this analysis the table below shows the income statement of the company including additional orders: Sales (-) Variable Costs Contribution Margin (-) Fixed Costs Income from Operations $1,080,000 $648,000 (1,080,000 x 60%) $432,000 (1,080,000 x 40%) $300,000 $132,000

Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. Thus, in the above income statement, the variable costs are 60% (100% - 40%) of sales, or $648,000 ($1'080,000 X 60%). The total contribution margin $432,000, can also be computed directly by multiplying the sales by the contribution margin ratio ($1'080,000 X 40%).

[edit] See also

Accountancy Cost overrun Fixed asset turnover Management accounting IT Cost Transparency

[edit] References 1. ^ Maskell & Baggaley (December 19, 2003). "Practical Lean Accounting". Productivity Press, New York, NY.

Maher, Lanen and Rahan, Fundamentals of Cost Accounting, 1st Edition (McGraw-Hill 2005). Horngren, Datar and Foster, Cost Accounting - A Managerial Emphasis, 11th edition (Prentice Hall 2003). Consortium for Advanced Manufacturing-International Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective (Harvard Business School Press, 1987) ISBN 0-87584-186-4 Sapp, Richard, David Crawford and Steven Rebishcke "Article title?" Journal of Bank Cost and Management Accounting (Volume 3, Number 2), 1990. Author(s)? "Article title?" Journal of Bank Cost and Management Accounting (Volume 4, Number 1), 1991.

[edit] External links

Accounting Systems, introduction to Cost Accounting, ethics and relationship to GAAP.

Retrieved from "http://en.wikipedia.org/w/index.php? title=Cost_accounting&oldid=465343598"

Presentation Transcript
Cost accounting : Cost accounting Introduction

COST - MEANING : COST - MEANING Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing.

COST ACCOUNTING - MEANING : COST ACCOUNTING - MEANING Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making

Slide 4: COST MATERIALS LABOUR OTHER EXPENSES DIRECT DIRECT DIRECT INDIRECT INDIRECT INDIRECT OVERHEADS FOH AOH SOH DOH ELEMENTS OF COST

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. : 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.

Examples of Indirect material : Examples of Indirect material At factory level lubricants, oil, consumables, etc. At office level Printing & stationery, Brooms, Dusters, etc. At selling & dist. level Packing materials, printing & stationery, etc.

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 be conveniently identified or attributed wholly to a particular job, product or process. : 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 be conveniently identified or attributed wholly to a particular job, product or process.

Examples of Indirect labour : Examples of Indirect labour At factory level foremens salary, works managers salary, gate keepers salary,etc At office level Accountants salary, GMs salary, Managers salary, etc. At selling and dist.level salesmen salaries, Logistics manager salary, etc.

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 hire charges,etc.INDIRECT EXPENSES are those expenses which cannot be directly allocated to particular job, process or product. : 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 hire charges,etc.INDIRECT EXPENSES are those expenses which cannot be directly allocated to particular job, process or product.

Examples of other expenses : Examples of other expenses At factory level factory rent, factory insurance, lighting, etc. At office level office rent, office insurance, office lighting, etc. At sales & dist.level advertising, show room expenses like rent, insurance, etc.

How to treat the following? : How to treat the following? Carriage Packaging expenses

COST SHEET DIRECT MATERIALDIRECT LABOURDIRECT EXPENSES PRIME COSTFACTORY OVERHEADS FACTORY COSTOFFICE OVERHEADS COST OF PRODUCTIONSELL & DIST OVERHEADS COST OF SALESPROFIT SALES : COST SHEET DIRECT MATERIALDIRECT LABOURDIRECT EXPENSES PRIME COSTFACTORY OVERHEADS FACTORY COSTOFFICE OVERHEADS COST OF PRODUCTIONSELL & DIST OVERHEADS COST OF SALESPROFIT SALES

COST SHEET - ADVANCED OPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDSCLOSING STOCK OF RAW MATERIALS VALUE OF MATERIALS CONSUMED+DIRECT WAGES+DIRECT EXPENSES PRIME COST+FACTORY OVERHEADS+OPENING STOCK OF WIPCLOSING STOCK OF WIP FACTORY COST (CONT.) : COST SHEET - ADVANCED OPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDSCLOSING 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.)

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 : 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

COST CLASSIFICATION ON THE BASIS OF : COST CLASSIFICATION ON THE BASIS OF Nature Function Direct & indirect Variability Controllability Normality Financial accounting classification Time Planning and control Managerial decision making

ON THE BASIS OF NATURE : ON THE BASIS OF NATURE MATERIALS LABOUR EXPENSES

ON THE BASIS OF FUNCTION : ON THE BASIS OF FUNCTION MANUFACTURING COSTS COMMERCIAL COSTS ADM AND S&D COSTS

ON THE BASIS OF DIRECT AND INDIRECT : ON THE BASIS OF DIRECT AND INDIRECT DIRECT COSTS INDIRECT COSTS

ON THE BASIS OF VARIABILITY : ON THE BASIS OF VARIABILITY FIXED COSTS VARIABLE COSTS SEMI VARIABLE COSTS

ON THE BASIS OF CONTROLLABILITY : ON THE BASIS OF CONTROLLABILITY CONTROLLABLE COSTS UNCONTROLLABLE COSTS

ON THE BASIS OF NORMALITY : ON THE BASIS OF NORMALITY NORMAL COSTS ABNORMAL COSTS

ON THE BASIS OF FIN. ACC : ON THE BASIS OF FIN. ACC CAPITAL COSTS REVENUE COSTS DEFERRED REVENUE COSTS

ON THE BASIS OF TIME : ON THE BASIS OF TIME HISTORICAL COSTS PRE DETERMINED COSTS

ON THE BASIS OF PLANNING AND CONTROL : ON THE BASIS OF PLANNING AND CONTROL BUDGETED COSTS STANDARD COSTS

ON THE BASIS OF MANAGERIAL DECISION MAKING : 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

TERMS IN COST ACCOUNTING : TERMS IN COST ACCOUNTING COST UNIT COST CENTRE COST ESTIMATION COST ASCERTAINMENT COST ALLOCATION COST APPORTIONMENT COST REDUCTION COST CONTROL

METHODS OF COSTING : METHODS OF COSTING JOB COSTING CONTRACT COSTING BATCH COSTING PROCESS COSTING UNIT COSTING OPERATING COSTING OPERATION COSTING MULTIPLE COSTING

TYPES OF COSTING : TYPES OF COSTING UNIFORM COSTING MARGINAL COSTING STANDARD COSTING HISTORICAL COSTING DIRECT COSTING ABSORBTION COSTING

Presentation Transcript
Cost Accounting : Cost Accounting An Introduction

Meaning of Cost,Costing andCost Accounting : Meaning of Cost,Costing andCost Accounting Cost The costing terminology of the Institute of Cost and Works Accountants, London defines Cost as the amount of expenditure (actual or notional) incurred on or attributable to a given thing. Thus, cost refers to something that must be sacrificed to obtain a particular thing.

Costing : Costing Costing Costing is the technique and process of ascertaining costs. It consists of the principles and rules which are used for ascertaining the costs of products & services.

Cost Accounting : Cost Accounting The Costing terminology of I.C.M.A, London defines cost accounting as the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitablilty of activities carried out or planned.

Cost Accounting : Cost Accounting It has the following features- It is a process of accounting for costs. It records income and expenditure relating to production of goods & services. It provides statistical data on the basis of which future estimates are prepared and quotations are submitted.

Slide 6: iv. It is concerned with cost ascertainment and cost control. v. It establishes budgets and standards so that actual cost may be compared to find out deviations or variances. vi. It involves the preparation of right information to the right person at the right time so that it may be helpful to the management for planning, control and decision making.

Cost Accountancy : Cost Accountancy It is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. Cost accountancy is the science, art and practice of a cost accountant.

Scope of Cost accountancy : Scope of Cost accountancy It includes the following: i. Cost Ascertainment It deals with the collection and analysis of expenses, the measurement of production of the different products at the different stages of manufacture and the linking up of production with the expenses.

Slide 9: ii. Cost Accounting It is the process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data. It is formal mechanism by means of which costs of products or services are ascertained and controlled.

Slide 10: iii. Cost Control It is the guidance and regulation by executive action of the costs of operating an undertaking. It aims at guiding the actual towards the line of targets; regulates the actuals if they deviate or vary from the targets; this guidance and regulation is done by an executive action. The cost can be controlled by standard costing, budgetary control, proper presentation and reporting of cost data and cost audit.

Objectives of Cost Accounting : Objectives of Cost Accounting To ascertain the cost per unit of the different products manufactured by a business concern. To provide a correct analysis of cost both by process or operations and by different elements of cost. To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage.

Slide 12: To provide requisite data and serve as a guide to price fixing of products manufactured or services rendered. To ascertain the profitability of each of the products and advise management as to how these profits can be maximised. To exercise effective control of stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimise the capital locked up in these stocks.

Slide 13: To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads. To advise management on future expansion policies and proposed capital projects. To present and interpret data for management planning, decision-making and control.

Slide 14: To help in the preparation of budgets and implementation of budgetary control. To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings. To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labour by machine etc.

Slide 15: To organise the internal audit system to ensure effective working of different departments. To organise cost reduction programmes with the help of different departmental managers. To provide specialised services of cost audit in order to prevent the errors and frauds and to facilitate prompt and reliable information to management.

Slide 16: To find out costing profit or loss. The above objectives can be re-grouped under three heads- Ascertainment and analysis of cost and income by product, function and responsibility. Providing useful data to management for taking decisions.

Slide 17: (c) Accumulation and utilisation of cost data for control purposes to have the minimum possible cost consistent with maintenance of quality. This objective is achieved through fixation of targets, ascertainment of actuals, comparison of actuals with targets, analysis of reasons of deviations between actuals and targets and reporting deviations to management for taking corrective action.

Importance & Advantages of Cost Accounting : Importance & Advantages of Cost Accounting Profitable & unprofitable activities are disclosed and steps can be taken to eliminate those activities from which little or no benefit is obtained. It enables a concern to measure the efficiency and then to maintain and improve it. This is done with the help of valuable data made available for the pupose of comparison.

Slide 19: 3. It provides information upon which estimates and tenders are based. It guides future production policies. It helps in increasing profits. It enables a periodical determination of profits or losses. It furnishes reliable data for comparing costs in different period, in different departments and processes.

Slide 20: The exact cause of a decrease or increase in profit or loss can be detected. 9. Cost Accounting discloses the relative efficiencies of different workers.

Slide 21: A sound business concern with a good system of costing can attract more investors than a similar concern without an adequate system of costing. Helpful to the Government in price fixation, price control, tariff protection, wage level fixation, etc.

Slide 22: Helpful to consumers in the form of lower prices of goods & services. 13. Helpful in judging the efficiency of public enterprises to justify its running in the public sector.

Disadvantages of Cost Accounting : Disadvantages of Cost Accounting Cost Accounting lacks a uniform procedure as different cost accountants can give different interpretations according to their judgement. There are a large numbers of estimates based on assumptions leading to arbitrary profits.

Slide 24: It will supply future estimates but future is always uncertain. It is an expensive system which is suitable only to the very large industries. It involves unnecessary paper work.

Cost Accounting Vs Financial Accounting : Cost Accounting Vs Financial Accounting Financial Accounting It provides information about the business in a general way .i.e. its profit and loss & financial position to owners & outsiders. Cost Accounting It provides information to management for proper planning , control and decision-making.

Slide 26: 2. These financial accounts are kept in accordance with the requirements of Companies Act and Income Tax Act. 2. These accounts are kept voluntarily to meet the requirements of management.

Slide 27: 3. FA lays emphasis on the recording aspect without attaching any importance to control. 3. CA provides a detailed system of control for materials, labour & overhead costs with the help of standard costing & Budgetory Control.

Slide 28: FA reports operating results and financial position usually at the end of the year. 4. CA gives information through cost reports to management as and when desired.

Slide 29: 5. Financial Accounts are the accounts for the whole business & disclose net profit or loss at the end. 5. Cost Accounting can be done even for one part , division or unit of the business and discloses profit or loss of each product, job or service.

Slide 30: 6. Financial Accounts relate to commercial transactions and include all expenses manufacturing, selling,etc & are concerned with third party transactions which form the basis for payment or receipt of cash. 6. Cost accounts relate to transactions of manufacture only and includes only expenses for production and Cst Accounts are concerned with internal transaction which do not form part of payment or receipt of cash.

Slide 31: In FA, only monetary information is used. FA are not maintained with the object of fixation of selling prices. In CA, Non-monetary information is also used. CA provides sufficient data for the fixation of selling prices.

Slide 32: FA deals with mainly actual facts & figures. In devising a system of FA reference can be made in case of difficulty to the company law, case decisions, etc. CA deals partly with facts and figures and partly with estimates. No such reference is possible. Guidance can be made only form conventions followed by the cost Accountants.

Slide 33: FA do not provide information on efficiency of various workers, plants and machinery. In FA, Stocks are valued at cost or market price whichever is less. CA provide valuable information on the relative efficiencies of various plants and machinery. In CA, Stocks are valued only at costs.

General Principles of Cost Accounting : General Principles of Cost Accounting Cause effect relationship should be established for each item of cost. Charge of cost only after its incurrence. Cost accounting should give factual picture of profitability of project. Past cost should not be set-off against future cost.

Slide 35: Exclusion of abnormal cost from cost accounts. Reconciliation of Cost accounts with FA based on double entry system is necessary.

Methods of Costing : Methods of Costing Job Costing ICMA London defines as that form of specific order costing, which applies where work is undertaken to customers special requirements. Contract Costing For a large job in size and in duration, this method is applied.

Slide 37:

3. Batch Costing A batch contains a number of small orders passed in batches through the factory. ICMA defines batch costing as that form of specific order costing, which applies where similar articles are manufactured in batches either for sale or for use within the undertaking. In most cases, the batch costing is similar to job costing.

Slide 38: Process Costing This method is applied in the factories where raw material is processed in different stages to get a final product. 5. Single output / unit costing Under this method, production is continuous and units are identical.

Slide 39: Service Costing It is suitable for the firms that render service rather than product, such as railway, hospital, canteens, etc. Multiple Costing It is a combination of two or more of the above methods. This system is adopted in the manufacturing concerns, which produces the parts of a product separately and assemble it for a final product.

Types or Techniques of Costing : Types or Techniques of Costing Uniform Costing Using of same costing principles and practising by several undertakings for common control. Standard Costing To identify the positive or adverse effect raised and the cause for it, by comparing the actual cost with standard cost.

Slide 41: Marginal Costing To ascertain the marginal cost by differentiating the fixed cost with variable cost. Historical Costing It is the ascertainment of costs after they have been incurred. It aims at ascertaining costs actually incurred on work done in the past.

Slide 42: Direct Costing Under this practice, all direct costs i.e. variable costs and some fixed costs relating to operations, processes or products are charged. Absorption Costing Under this type, the practice of charging all costs irrespective of its types is followed.

Essentials of a Good Costing System : Essentials of a Good Costing System It should be simple, flexible, adaptable to the changing conditions, and easy to understand by the entire firm. The system should be economically suitable to the firm. It should facilitate the management to make comparison with experiences and or with other concerns.

Slide 44: Uniformity in maintenance of forms and statements should be followed. It should possess less clerical work. It should have efficient material and labour control. It should have proper and sound plans for the growth of the firm.

Slide 45: The systems of cost and financial accounting must be facilitated to reconcile them in the easiest manner. Cost accountants duties, liabilities and responsibilities should be defined clearly under good costing system.

Responsibility of a Cost Accountant before installing cost system in a firm : Responsibility of a Cost Accountant before installing cost system in a firm The system should relates to Objectives of good costing system. Business Product manufactured. Organisation. Manufacturing methods. Standard method to be followed in clerical work.

Slide 47: 7. Proper system of communication to be prepared to the management. Accounting system to be followed. Economical conditions of the firm. Cost records.

Presentation Transcript
Cost accounting : Cost accounting Introduction

COST - MEANING : COST - MEANING Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing.

COST ACCOUNTING - MEANING : COST ACCOUNTING - MEANING Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making

Slide 4: COST MATERIALS LABOUR OTHER EXPENSES DIRECT DIRECT DIRECT INDIRECT INDIRECT INDIRECT OVERHEADS FOH AOH SOH DOH ELEMENTS OF COST

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. : 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.

Examples of Indirect material : Examples of Indirect material At factory level lubricants, oil, consumables, etc. At office level Printing & stationery, Brooms, Dusters, etc. At selling & dist. level Packing materials, printing & stationery, etc.

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 be conveniently identified or attributed wholly to a particular job, product or process. : 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 be conveniently identified or attributed wholly to a particular job, product or process.

Examples of Indirect labour : Examples of Indirect labour At factory level foremens salary, works managers salary, gate keepers salary,etc At office level Accountants salary, GMs salary, Managers salary, etc. At selling and dist.level salesmen salaries, Logistics manager salary, etc.

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 hire charges,etc.INDIRECT EXPENSES are those expenses which cannot be directly allocated to particular job, process or product. : 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 hire charges,etc.INDIRECT EXPENSES are those expenses which cannot be directly allocated to particular job, process or product.

Examples of other expenses : Examples of other expenses At factory level factory rent, factory insurance, lighting, etc. At office level office rent, office insurance, office lighting, etc. At sales & dist.level advertising, show room expenses like rent, insurance, etc.

How to treat the following? : How to treat the following? Carriage Packaging expenses

COST SHEET DIRECT MATERIALDIRECT LABOURDIRECT EXPENSES PRIME COSTFACTORY OVERHEADS FACTORY COSTOFFICE OVERHEADS COST OF PRODUCTIONSELL & DIST OVERHEADS COST OF SALESPROFIT SALES : COST SHEET DIRECT MATERIALDIRECT LABOURDIRECT EXPENSES PRIME COSTFACTORY OVERHEADS FACTORY COSTOFFICE OVERHEADS COST OF PRODUCTIONSELL & DIST OVERHEADS COST OF SALESPROFIT SALES

COST SHEET - ADVANCED OPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDSCLOSING STOCK OF RAW MATERIALS VALUE OF MATERIALS CONSUMED+DIRECT WAGES+DIRECT EXPENSES PRIME COST+FACTORY OVERHEADS+OPENING STOCK OF WIPCLOSING STOCK OF WIP FACTORY COST (CONT.) :

COST SHEET - ADVANCED OPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDSCLOSING 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.)

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 : 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

COST CLASSIFICATION ON THE BASIS OF : COST CLASSIFICATION ON THE BASIS OF Nature Function Direct & indirect Variability Controllability Normality Financial accounting classification Time Planning and control Managerial decision making

ON THE BASIS OF NATURE : ON THE BASIS OF NATURE MATERIALS LABOUR EXPENSES

ON THE BASIS OF FUNCTION : ON THE BASIS OF FUNCTION MANUFACTURING COSTS COMMERCIAL COSTS ADM AND S&D COSTS

ON THE BASIS OF DIRECT AND INDIRECT : ON THE BASIS OF DIRECT AND INDIRECT DIRECT COSTS INDIRECT COSTS

ON THE BASIS OF VARIABILITY : ON THE BASIS OF VARIABILITY FIXED COSTS VARIABLE COSTS SEMI VARIABLE COSTS

ON THE BASIS OF CONTROLLABILITY : ON THE BASIS OF CONTROLLABILITY CONTROLLABLE COSTS UNCONTROLLABLE COSTS

ON THE BASIS OF NORMALITY : ON THE BASIS OF NORMALITY NORMAL COSTS ABNORMAL COSTS

ON THE BASIS OF FIN. ACC : ON THE BASIS OF FIN. ACC CAPITAL COSTS REVENUE COSTS DEFERRED REVENUE COSTS

ON THE BASIS OF TIME : ON THE BASIS OF TIME HISTORICAL COSTS PRE DETERMINED COSTS

ON THE BASIS OF PLANNING AND CONTROL : ON THE BASIS OF PLANNING AND CONTROL BUDGETED COSTS STANDARD COSTS

ON THE BASIS OF MANAGERIAL DECISION MAKING : 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

TERMS IN COST ACCOUNTING : TERMS IN COST ACCOUNTING COST UNIT COST CENTRE COST ESTIMATION COST ASCERTAINMENT COST ALLOCATION COST APPORTIONMENT COST REDUCTION COST CONTROL

METHODS OF COSTING : METHODS OF COSTING JOB COSTING CONTRACT COSTING BATCH COSTING PROCESS COSTING UNIT COSTING OPERATING COSTING OPERATION COSTING MULTIPLE COSTING

TYPES OF COSTING : TYPES OF COSTING UNIFORM COSTING MARGINAL COSTING STANDARD COSTING HISTORICAL COSTING DIRECT COSTING ABSORBTION COSTING

WHAT IS COST ACCOUNTING Cost sheet is a statement prepared to show the different elementsof cost. Preparation of cost sheet is one of the functions of costaccounting.