UNIT 1

Cost Accounting
Concepts of financial accounting
 Financial accounting is the process of identifying,
measuring and communicating economic information
to the users of such information.

 It is a branch of accounting which is primarily related

to recording, classifying, summarizing and presenting
the day to day transactions.

 It aims to ascertain financial profitability and financial

position of the concern.
 LIMITATIONS OF FINANCIAL
ACCOUNTING HAS LED TO THE
DEVELOPMENT OF COST ACCOUNTING

 No clear idea about operating efficiency

 Discloses the overall results only

 Not helpful in the price fixation

 No control on cost.

 No classification of cost.

 Provides only historical information

MEANING
 Cost accounting relates to the collection,
classification, ascertainment of cost and its
accounting and control relating to the various
element of cost.
 It is that branch of accounting, which deals
with the classification, recording, allocation,
summarization and reporting of current and
prospective costs.
OBJECTIVES OF COST ACCOUNTING
 To ascertain cost.
 To fix selling price.
 To ascertain profits.
 To control cost
 To reduce cost
 To prepare financial statements.
 To provide information for planning and control.
 To assist management in decision making.
 ADVANTAGES OF COST ACCOUNTING
1. Helps in controlling cost
2. Provides necessary cost information
3. Ascertains the total and per unit cost of production
4. Introduces cost reduction programmers
5. Discloses the profitable and non profitable activities:
6. Provides information for the comparison of cost
7. Checks the accuracy of financial accounts
8. Helps investors and financial institutions
9. Beneficial to workers
 COST
Cost is defined as “ any amount of expenditure
(actual or notional) incurred on or attributable to a
given thing”.

ACTUAL EXPENDITURE-Amount paid for purchase

of raw material, wages paid to labourers engaged in
production.

NOTIONAL EXPENDITURE- Expd. Which is deemed

to have been incurred or attributed but not actually
paid. Eg: Rent of owned factory, interest on owned
capital etc.
COST CENTRE

 A Cost centre is a department within

the organization
 to which cost can be allocated or
 that is responsible for the cost that it
incurs.
 Ex- expense centre, profit centre etc.
 COST UNIT
Cost unit may be defined as a unit of quantity of
product, service in respect of which cost is ascertained.

Example:-
1. Sugar, paper, Steel, coal, cement- per tonne
2. Hospital-per bed per day
3. Power-per kilowatt hour
4. Textile-per meter
5. Bicycles/ Automobiles-Per automobile( i.e. number)
6. Advertising, Interior decoration-Each Job
 COST CONCEPT
1. Total Cost : All expenses incurred for producing and
selling a product or providing a service to a customer.
2. Marginal Cost: Marginal cost is the additional cost of
producing an additional unit of a product.
3. Standard Cost: it’s a cost which acts as benchmark for
the manager.
4. Conversion Cost : Any direct material, Direct Labour
Direct overheads cost arising out of production.
5. Direct Cost: Cost allocated to a particular product is
called direct cost
CLASSIFICATION OF COST
 Classification of cost means, the grouping of costs according to
their common characteristics. The important ways of
classification of costs are:
1. By nature or element: materials, labour, expenses
2. By functions: production, selling, distribution, administration,
3. By variability and volume: fixed, variable and semi variable
4. By controllability: controllable, uncontrollable
5. By normality: normal, abnormal
 ELEMENTS OF COST
 1. MATERIALS
Material cost is the cost of commodities supplied to an
undertaking. It includes cost of procurement, freight
inwards, taxes, insurance.
(a) Direct materials- direct material is that cost which
can be easily identified with and allocated to cost
units. e.g. flour in cakes, loaf of bread in sandwich
etc.
(b) Indirect materials- those materials which cannot be
easily identified with individual cost units. E.g. Nuts
, cheese etc.
2. LABOUR COST
Labour cost is the cost of remuneration( wages, salaries,
commission, bonuses, etc.) of the employee of an
undertaking. It includes all fringe benefits like P.F.,
overtime, incentive bonus, idle time.

(a) Direct labour-it consists of wages paid to workers

directly engaged in converting raw materials into
finished goods e.g. salaries paid to chefs

(b) Indirect labour- This is not directly engaged in

production operations but only to assist or help in
production operations. E.g. Supervisor, inspector,
cleaner, clerk, peon, watchman, housekeeping etc.
3. EXPENSES
All costs other than material and labour are termed as
expense.

(a) Direct expenses- These are those expenses which are

specially incurred in connection with a particular Job
or cost unit. E.g. Hire of special machine for a
particular Job, travelling expenses in securing a
particular contract.
(b) Indirect expenses- all cost other than indirect labour
and material is termed as indirect expenses. E.g.
Rent, lighting and power, advertising.
FIXED, VARIABLE & SEMI-VARIABLE
COSTS

Fixed costs are costs which do not vary with changes

in volume of output within a specified range of
output. Ex rent.

Variable cost are costs that tend to vary in total in

direct proportion to changes in proportion. ex-
cost of raw material.

Semi variable costs are costs which consist of both

fixed costs & variable cost e.g. Telephone bill,
power expenses
CONTROLLABLE & UNCONTROLLABLE
COSTS

 Controllable costs are the cost which may be

directly regulated at a given level of management
authority.
 Variable cost are generally controllable by the
department heads.
 E.g. Costs of raw materials can be controlled by
purchasing in larger quantities.

Uncontrollable costs are those costs which

cannot be influenced by the action of a specified
member of an enterprise.
 e.g. Factory rent, managerial salaries.
NORMAL COSTS & ABNORMAL COSTS
 Normal costs may be defined as a cost which is
normally incurred on expected lines at a given level
of output. This cost is a part of cost of production.

 Abnormal costs is that which is not normally

incurred at a given level of output. Such a cost is
over & above the normal cost & is not treated as a
part of cost of production & charged to P & La/c. ex
fire in hotel, theft of goods in warehouse.
UNIT – 2
MARGINAL COSTING/ CVP
ANALYSIS/ BREAK EVEN POINT
 MARGINAL COST
Marginal cost is the additional cost of producing an
additional unit of a product.

“Marginal cost is defined by I.C.M.A, London as ‘the

amount at any given volume of output by which
aggregate costs are changed if the volume of output is
increased or decreased by one unit.”

“This is measured by the total variable costs

attributable to one unit”.

It’s a technique of costing which is based on variable

cost of producing a commodity.

Fixed cost is not considered for decision making process

ADVANTAGES OF MARGINAL
COSTING

•Ascertainment of cost
•Fixation of selling price

•Profit planning

•Evaluation of performance

•Cost control

•Decision making.
TOOLS & TECHNIQUES OF MARGINAL
COSTING
1.CONTRIBUTION

= Sales – Variable Cost

= Fixed Cost + Profit

Contribution – Fixed expenses = Profit

Its Determines the profitability of

firm.
2. CONTRIBUTION TO SALES C/S
(OR)
P/V (PROFIT VOLUME) RATIO
= Contribution / Sales *100

= Sales – Variable Cost * 100

--------------------------------------
Sales

= Fixed Cost + Profit * 100

------------------------------
Sales

= Change in Profit / Contribution * 100

---------------------------
Change in sales
(If data relating to two years is given)
Q. From the following details find out
(a) Profit volume ratio

Sales Rs. 1,00,000

Total cost Rs.80,000
Fixed cost Rs.20,000
Net profit Rs.20,000
Q. Assuming that the cost structure & selling price
remains the same in period I & period II, Find out:
•P/V Ratio

PERIOD SALES PROFIT

I 120000 9000
II 140000 13000
 3. BREAK EVEN ANALYSIS AND
BREAK EVEN POINT
BEP ( in units ) = Fixed Costs
-------------------
Contribution Per Unit
Where ,
Contribution per unit = Selling price- Variable Cost
(Per Unit) (Per Unit)

BEP ( in Rs. ) = Fixed Costs * 1 00

-----------------------
P/V Ratio
Q. From the following details find out
(a) Break-even sales

Sales Rs. 1,00,000

Total cost Rs.80,000
Fixed cost Rs.20,000
Net profit Rs.20,000

Q. The fixed costs for the year are Rs.40, 000.

Variable cost per unit for the single product
being made is Rs.6. Estimated sales for the
period are valued at Rs. 1, 60,000. The number
of units involved coincides with the expected
volume of output. Each unit sells at Rs.10 each.
Calculate the break-even point.
4. MARGIN OF SAFETY
MOS = Actual Sales - Sales at Break Even Point

MOS ( in Rs. ) = Profit * 100

------------
P/V Ratio
From the following details find out
(a) Margin of safety

Sales Rs. 1,00,000

Total cost Rs.80,000
Fixed cost Rs.20,000
Net profit Rs.20,000
5.BREAK EVEN CHARTS
Graphical representation of break-even point is
known as the break-even chart.

It shows at what volume the firm first covers all

costs with revenue of break-even
Q. Assuming that the cost structure & selling price
remains the same in period I & period II,
Find out:
•Break even point
•Margin of safety in period II.

PERIOD SALES PROFIT

I 120000 9000
II 140000 13000
UNIT – 3
BUDGETARY CONTROL
 Budget
Budget is a financial/ or quantitative statement, prepared and
approved prior to a defined period of time, of the policy to be
pursed during that period for the purpose of attaining a given
objective.
Features :
 Expression of an firm’s plan.
 Prepared in monetary/quantitative terms.
 Prepared for a definite future period.
 Approved by management.
 Purpose – to attain given objectives.
ESSENTIALS OF A BUDGET
 It is prepared in advance and is based on
future plan of action.

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 It relates to a future period and is based
on objectives to be attained.
 It is a statement expressed in monetary or
physical unit prepared for the formulation
of policy.
BUDGETING – ACT OF PREPARING VARIOUS
BUDGETS.

Budgetary Control –
It is an establishment of budgets relating to the
responsibilities of executives to the requirements of a
policy and the continuous comparison of actual and
budgeted results, either to secure by individual action
the objective of that policy or to provide a basis for its
revision.
Basic elements / steps of budgetary control –
 Establishment of budgets.

 Fixing responsibilities.

 Recording performance of different executives.

 Continuous comparison.

 Ascertaining reasons for variations.

 Take corrective action.

 Revision of budgets, if necessary.

OBJECTIVES OF BUDGETARY
CONTROL
 To plan for future.
 To have coordination among different
department activities.
 Minimising of wastes & increase in profitability.

 To anticipate capital expenditure for future.

 To anticipate working capital for future.

 To safeguards the assets & get maximise utility

from them.
 To reduce cost both labour & overheads.

 To centralise the control system.

ADVANTAGES OF BUDGETARY
CONTROL
 Increase in profitability.
 Coordination.

 Minimising of wastes .

 Reduce cost both labour & overheads cost.

 Economy.

 Corrective actions.

 Revision of budgets.

 Timely decision.

 Efficiency.
DISADVANTAGES OF BUDGETARY
CONTROL
 Uncertain future.
 Discourages efficient employees.

 Conflict amongst departments.

 Non availability of future data.

TYPES OF BUDGETS:

On the basis of On the basis of On the basis of

coverage capacity/ flexibility period
• Functional • Fixed budgets • Long term
budgets • Flexible budgets budgets
• Master budget • Short term
budgets
Classification of budgets on the basis of coverage –

1. Master budget :
 consolidated summary of all the budgets.

“ The summary budget incorporating its component

functional budgets and which is finally approved,
adopted and employed”.
- The chartered institute of Management
Accountants, England.
2. Functional budgets : it is one which is related to any
functions or activities of an organization.
Main type of functional budgets are:
 Sales budget

 Purchase budget

 Production budget

 Administrative expenses budget

 Selling and distribution budget

ON THE BASIS OF TIME PERIOD
 Long term
 Short Term

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LONG TERM BUDGET & SHORT TERM
BUDGET
 Long-term budgets are prepared for those
organizations, which deal in regular product line.

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 Here organizations are not suppose to change
their proceedings in short time periods.

 AND

 Short term budgets are prepared for short time

periods which work for seasonal product line.
FINANCIAL PLANNING
 It is vital part of financial management.
 Financial Planning is the process of estimating

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the capital required and determining it’s
competition.
 It is the process of framing financial policies in
relation to procurement, investment and
administration of funds of an enterprise.
OBJECTIVES OF FINANCIAL PLANNING
 Determing capital requirements: short term &
long term.

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 Determining capital structure: own capital &
borrowed capital.
 Framing financial policies with regard to cash
control, lending borrowing etc.
 To ensure that the scarec financial resources are
utilized maximally.
IMPORTANCE OF FINANCIAL
PLANNING
 Adequate funds have to be ensured.
 Financial Planning helps in ensuring a

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reasonable balance between outflow and inflow of
funds so that stability is maintained.
 Financial Planning helps in making growth and
expansion programmes which helps in long-run
survival of the company.
 Financial Planning reduces uncertainties with
regards to changing market trends which can be
faced easily through enough funds.
 Financial planning helps in reducing
uncertainities.