BBA 102 – Cost Accounting

Unit I: Meaning and Scope of Cost Accounting:

Cost Accounting is classifying, recording an appropriate allocation of expenditure for the
determination of the costs of products or services, and for the presentation of suitably
arranged data for the purpose of control and guidance of management. It is the formal
mechanism by means of which cost of products or services are ascertained and controlled.

Cost Accounting provides analysis and classification of expenditure as will enable the total
cost of any particular unit of product / service to be ascertained with reasonable degree of
accuracy and at the same time to disclose exactly how such total cost is constituted. For
example it is not sufficient to know that the cost of one pen is 25/- but the management is
also interested to know the cost of material used, the amount of labour and other expenses
incurred so as to control and reduce its cost.

Thus Cost Accounting is a quantitative method that collects, classifies, summarizes and
interprets information for product costing, operation planning and control and decision
making.

Cost Accountancy: Cost Accountancy is defined as ‘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’. It includes the presentation of information derived
there from for the purposes of managerial decision making. Thus, Cost Accountancy is the
science, art and practice of a Cost Accountant. It is a science because it is a systematic body
of knowledge having certain principles which a cost accountant should possess for proper
discharge of his responsibilities. It is an art as it requires the ability and skill with which a
Cost Accountant is able to apply the principles of Cost Accountancy to various managerial
problems. Practice includes the continuous efforts of a Cost Accountant in the field of Cost
Accountancy.

Objectives of Cost Accounting

The following are the main objectives of Cost Accounting:-

 To ascertain the Costs under different situations using different techniques and
systems of costing.
 To determine the selling prices under different circumstances
  To determine and control efficiency by setting standards for Materials, Labour and
Overheads
 To determine the value of closing inventory for preparing financial statements of the
concern
 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;
 To provide requisite data and serve as a guide for fixing prices 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 maximized;
 To exercise effective control if stocks of raw materials, work-in-progress, consumable
stores and finished goods in order to minimize the capital locked up in these stocks;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, evaluation of performance
and control;
 To help in the preparation of budgets and implementation of budgetary control;

Scope of cost accounting:

The scope of Cost Accountancy is very wide and includes the following:-
Cost Ascertainment: The main objective of Cost Accounting is to find out the Cost of
product / services rendered with reasonable degree of accuracy.
Cost Accounting: It is the process of Accounting for Cost which begins with recording of
expenditure and ends with preparation of statistical data.
Cost Control: It is the process of regulating the action so as to keep the element of cost
within the set parameters.
Cost Reports: This is the ultimate function of Cost Accounting. These reports are primarily
prepared for use by the management at different levels. Cost reports helps in planning and
control, performance appraisal and managerial decision making.
Cost Audit: Cost Audit is the verification of correctness of Cost Accounts and check on the
adherence to the Cost Accounting plan. Its purpose is not only to ensure the arithmetic
accuracy of cost records but also to see the principles and rules have been applied correctly.
Advantages of Cost Accounting:
1. Fixation of responsibility: Whenever a cost center is established, it implies establishing a
kind of relationship between superior and subordinates. Thus, responsibilities are fixed on
every individual who is concerned with incurrence of cost.
2.Measures economic performance: By applying cost control techniques such as budgetary
control and standard costing it helps in knowing the performance of business.
3. Fixation of price: By providing cost data it helps management to fix the selling price in
advance. Hence, quotations can be supplied to prospective customers to secure orders.
4. Aids in decision-making: It helps management in making suitable decisions such as make
or buy, replace manual labour by machines, shut down or continue operations based on cost
reports.
5. Helps in the preparation of interim final accounts: By the process of continuousstock
taking it enables to know the value of closing stock of materials at any time. This facilitates
preparation of final accounts wherever desired.
6. Helps in minimizing wastages and losses: Cost accounting system enables to locate the
losses relating to materials, idle time and underutilization of plant and machinery.
7. Facilitates comparison: It facilitates cost comparison in respect of jobs, process,
departments and also between two periods. This reveals the efficiency or otherwise of each
job, process or department.
8. Assists in increasing profitability: Costing reports provide information about profitable
or unprofitable areas of operation. The management can discontinue that product line or those
departments which are responsible for incurring losses and only profitable line of activities
alone are retained.
9. Reconciliation with financial accounts: A well maintained cost accounting system
facilitates reconciliation with financial accounts to check the arithmetical accuracy of both
the systems.
10. It guides future production policy: Cost data help management in determining future
production policy. Any expansion or contraction of production for the future is based on past.
Limitations of Cost Accounting:
• It is expensive: The system of cost accounting involves additional expenditure to
beincurred in installing and maintaining it. However, before installing it, care must betaken to
ensure that the benefits derived is more than the investment made on thissystem of
accounting.
• The system is more complex: As the cost accounting system involves number ofsteps in
ascertaining cost such as collection and classification of expenses, allocationand
apportionment of expenses, it is considered to be complicated system of accounts.Moreover
the system makes use of several documents and forms in preparing thereports. This will tend
to delay in the preparation of accounts.
• Inapplicability of same costing method and technique: All business enterprisescannot
make use of a single method and technique of costing. It all depends uponthe nature of
business and type of product manufactured by it. If a wrong techniqueand method is used, it
misleads the results of business.
• Not suitable for small-scale units: A cost accounting system is applicable only toa large-
sized business but not to small-sized one. Hence, there is limitation to itsapplication to all
types of business.
• Lack of accuracy: The accuracy of cost accounts get distorted owing to the use ofnotional
cost such as standard cost, estimated cost, etc.
• It lacks social accounting: Cost accounting fails to take into account the socialobligation
of the business. In other words, social accounting is outside the purviewof cost accountscost
data.

Cost centres and cost units

Cost: Cost is a measurement, in monetary terms, of the amount of resources used for the
purpose of production of goods or rendering services.Cost in simple, words, means the total
of all expenses. Cost is also defined as the amount of expenditure (actual or notional)
incurred on or attributable to a given thing or to ascertain the cost of a given thing.
Thus it is that which is given or in sacrificed to obtain something. The cost of an article
consists of actual outgoings or ascertained charges incurred in its production and sale. Cost is
a generic term and it is always advisable to qualify the word cost to show exactly what it
meant, e.g., prime cost, factory cost, etc. Cost is also different from value as cost is measured
in terms of money whereas value in terms of usefulness or utility of an article.
Cost Object
Cost object is the technical name for a product or a service, a project, a department or any
activity to which a cost relates. Therefore the term cost should always be linked with a cost
object to be more meaningful. Establishing a relevant cost object is very crucial for a sound
costing system. The Cost object could be defined broadly or narrowly. At a broader level a
cost object may be named as a Cost Centre, whereas at a lowermost level it may be called as
a Cost Unit.
Cost Centre
CIMA defines a cost centre as “a location, a person, or an item of equipment (or a group of
them) in or connected with an undertaking, in relation to which costs ascertained and used for
the purpose of cost control”. The determination of suitable cost centres as well as analysis of
cost under cost centres is very helpful for periodical comparison and control of cost. In order
to obtain the cost of product or service, expenses should be suitably segregated to cost centre.
The manager of a cost centre is held responsible for control of cost of his cost centre. The
selection of suitable cost centres or cost units for which costs are to be ascertained in an
undertaking depends upon a number of factors such as organization of a factory, condition of
incidence of cost, availability of information, requirements of costing and management policy
regarding selecting a method from various choices. Cost centre may be production cost
centres operating cost centres or process cost centres depending upon the situation and
classification.
Cost centres are of two types-Personal and Impersonal Cost Centre.
A personal cost centre consists of person or group of persons. An impersonal cost centre
consists of a location or item of equipment or group of equipments. In a manufacturing
concern, the cost centres generally follow the pattern or layout of the departments or sections
of the factory and accordingly, there are two main types of cost centres as below :-
Production Cost Centre: These centres are engaged in production work i.e engaged in
converting the raw material into finished product, for example Machine shop, welding
shops...etc
Service Cost Centre: These centres are ancillary to and render service to production cost
centres, for example Plant Maintenance, Administration..etc
The number of cost centres and the size of each vary from one undertaking to another and are
dependent upon the expenditure involved and the requirements of the management for the
purpose of control.
Responsibility Centre
A responsibility centre in Cost Accounting denotes a segment of a business organization for
the activities of which responsibility is assigned to a specific person. Thus a factory may be
split into a number of centres and a supervisor is assigned with the responsibility of each
centre. All costs relating to the centre are collected and the Manager responsible for such a
cost centres judged by reference to the activity levels achieved in relation to costs. Even an
individual machine may be treated as responsibility centre for cost control and cost reduction.
Profit Centre
Profit centre is a segment of a business that is responsible for all the activities involved in the
production and sales of products, systems and services. Thus a profit centre encompasses
both costs that it incurs and revenue that it generates. Profit centres are created to delegate
responsibility to individuals and measure their performance. In the concept of responsibility
accounting, profit centres are sometimes also responsible for the investment made for the
centre. The profit is related to the invested capital. Such a profit centre may also be termed as
investment centre.
Cost Unit
Cost Unit is a device for the purpose of breaking up or separating costs into smaller sub
divisions attributable to products or services. Cost unit can be defined as a ‘Unit of product or
service in relation to which costs are ascertained’. The cost unit is the narrowest possible
level of costobject.
It is the unit of quantity of product, service of time (or combination of these) in relation to
which costs may be ascertained or expressed. We may, for instance, determine service cost
per tonne of steel, per tonne-kilometre of a transport service or per machine hour. Sometimes,
a single order or contract constitutes a cost unit which is known as a job. A batch which
consists of a group of identical items and maintains its identity through one or more stages or
production may also be taken as a cost unit. A few typical examples of cost units are given
below:
Industry/ Product Cost Unit
Automobile Number of vehicles
Cable Metres kilometres
Cement Tonne
Chemicals / Fertilizers Litre / Kilogram / tonne
Gas Cubic Metre
Power - Electricity Kilowatt Hour
Transport Tonne-Kilometre, Passenger-
Kilometre
Hospital Patient Day
Hotel Bed Night
Education Student year
Telecom Number of Calls
BPO Service Accounts handled
Professional Service Chargeable Hours

Cost Allocation
When items of cost are identifiable directly with some products or departments such costs are
charged to such cost centres. This process is known as cost allocation. Wages paid to workers
of service department can be allocated to the particular department. Indirect materials used by
a particular department can also be allocated to the department. Cost allocation calls for two
basic factors - (i) Concerned department/product should have caused the cost to be incurred,
and (ii) exact amount of cost should be computable.

Cost Apportionment
When items of cost cannot directly charge to or accurately identifiable with any cost centres,
they are prorated or distributed amongst the cost centres on some predetermined basis. This
method is known as cost apportionment. Thus we see that items of indirect costs residual to
the process of cost allocation are covered by cost apportionment. The predetermination of
suitable basis of apportionment is very important and usually following principles are
adopted - (i) Service or use (ii) Survey method (iii) Ability to bear. The basis ultimately
adopted should ensure an equitable share of common expenses for the cost centres and the
basis once adopted should be reviewed at periodic intervals to improve upon the accuracy of
apportionment.

Cost Absorption
Ultimately the indirect costs or overhead as they are commonly known, will have to be
distributed over the final products so that the charge is complete. This process is known as
cost absorption, meaning thereby that the costs absorbed by the production during the period.
Usually any of the following methods are adopted for cost absorption –
(i) Direct Material Cost Percentage
(ii) Direct Labour Cost Percentage
(iii) Prime Cost Percentage
(iv) Direct Labour Hour Rate Method
(v) Machine Hour Rate, etc.
The basis should be selected after careful maximum accurancy of Cost Distribution to various
production units. The basis should be reviewed periodically and corrective action whatever
needed should be taken for improving upon the accuracy of the absorption.

Conversion Cost
This term is defined as the sum of direct wages, direct expenses and overhead costs of
converting raw material to the finished products or converting a material from one stage of
production to another stage. In other words, it means the total cost of producing an article less
the cost of direct materials used. The cost of indirect materials and consumable stores are
included in such cost. The compilation of conversion cost is useful in a number of cases.
Where cost of direct materials is of fluctuating nature, conversion cost is used to cost control
purpose or for any other decision making. In contracts/jobs where raw materials are on
account of the buyers conversion cost takes the place of total cost in the books of the
producer. Periodic comparison/review of the conversion cost may give sufficient insight as to
the level of efficiency with which the production unit is operating.

Cost Control
Cost Control is defined as the regulation by executive action of the costs of operating an
undertaking, particularly where such action is guided by Cost Accounting.
Cost control involves the following steps and covers the various facets of the management:
• Planning: First step in cost control is establishing plans / targets. The plan/target may be in
the form of budgets, standards, estimates and even past actual may be expressed in physical
as well as monetary terms. These serves as yardsticks by which the planned objective can be
assessed.
• Communication: The plan and the policy laid down by the management are made known to
all those responsible for carrying them out. Communication is established in two directions;
directives are issued by higher level of management to the lower level for compliance and the
lower level executives report performances to the higher level.
• Motivation: The plan is given effect to and performances starts. The performance is
evaluated, costs are ascertained and information about results achieved are collected and
reported. The fact that costs are being complied for measuring performances acts as a
motivating force and makes individuals endeavor to better their performances.
• Appraisal and Reporting: The actual performance is compared with the predetermined plan
and variances, i.e deviations from the plan are analyzed as to their causes. The variances are
reported to the proper level of management.
• Decision Making: The variances are reviewed and decisions taken. Corrective actions and
remedial measures or revision of the target, as required, are taken.

Advantages of Control Cost

The advantages of cost control are mainly as follows
• Achieving the expected return on capital employed by maximising or optimizing profit
• Increase in productivity of the available resources
• Reasonable price to the customers
• Continued employment and job opportunity for the workers
• Economic use of limited resources of production
• Increased credit worthiness
• Prosperity and economic stability of the industry

Cost Reduction
Profit is the resultant of two varying factors, viz., sales and cost. The wider the gap between
these two factors, the larger is the profit. Thus, profit can be maximized either by increasing
sales or by reducing costs. In a competition less market or in case of monopoly products, it
may perhaps be possible to increase price to earn more profits and the need for reducing costs
may not be felt. Such conditions cannot, however, exist paramount and when competition
comes into play, it may not be possible to increase the sale price without having its adverse
effect on the sale volume, which, in turn, reduces profit. Besides, increase in price of products
has the ultimate effect of pushing up the raw material prices, wages of employees and other
expenses- all of which tend to increase costs. In the long run, substitute products may come
up in the market, resulting in loss of business. Avenues have, therefore, to be explored and
method devised to cut down expenditure and thereby reduce the cost of products.
Cost classification and elements of cost

Direct Material + Direct Labour + Direct Expenses = Prime Cost

Indirect Material+ Indirect Labour + Indirect Expenses = Overheads

Direct Material Cost:

Direct material cost can be defined as ‘The Cost of material which can be attributed to a cost
object in an economically feasible way’. Direct materials are those materials which can be
identified in the product and can be conveniently measured and directly charged to the
product.
Thus, these materials directly enter the product and form a part of the finished product. For
example, timber in furniture making, cloth in dress making, bricks in building a house. The
following are normally classified as direct materials:-
• All raw materials, like jute in the manufacture of gunny bags, pig iron in foundry and
fruits in canning industry.
• Materials specifically purchased for a specific job, process or order, like glue for book
binding, starch powder for dressing yarn.
• Parts or components purchased or produced, like batteries for transistor-radios.
• Primary packing materials like cartons, wrappings, card-board boxes, etc.
Indirect Material Cost
Materials the costs of which cannot be directly attributed to a particular cost-object. Indirect
materials are those materials which do not normally form a part of the finished product. It has
been defined as “materials which cannot be allocated but which can apportioned to or
absorbed by cost centers or cost units”. These are:
• Stores used in maintenance of machinery, buildings, etc., like lubricants, cotton waste,
bricks and cements.
• Stores used by the service departments, i.e., non-productive departments like Power House,
Boiler
• House and Canteen, etc., and
• Materials which due to their cost being small, are not considered worthwhile to be treated as
direct materials.

Direct Labour Cost

The cost of employees which can be attributed to a cost object in an economically feasible
way. In simple words, it is that labour which can be conveniently identified or attributed
wholly to a particular job, product or process or expended in converting raw materials into
finished goods. Wages of such labour are known as direct wages. Thus it includes payment
made to the following groups of labour:
• Labour engaged on the actual production of the product or in carrying out of an operation
or process.
• Labour engaged in adding the manufacture by way of supervision, maintenance, tool
setting, transportation of material etc.
• Inspectors, analysts etc., specially required for such production.

Indirect Labour Cost

The labour cost which cannot be directly attributed to a particular cost object. The wages of
that labour which cannot be allocated but which can be apportioned to or absorbed by cost
centres or cost units is known as Indirect Labour. In other words paid to labour which are
employed other than on production constitute indirect labour costs. Example of such labour
are: charge-hands and supervisors; maintenance workers; men employed in service
departments, material handling and internal transport; apprentices, trainees and instructors;
clerical staff and labour employed in time office and security office.
Direct or Chargeable Expenses
Direct expenses are expenses relating to manufacture of a product or rendering a service
which can be identified or linked with the cost object other than direct material cost and
direct employee cost.
Direct expenses include all expenditure other than direct material or direct labour that is
specifically incurred for a particular product or process. Such expenses are charged directly to
the particular cost account concerned as part of the prime cost. Examples of direct expenses
are:
(i) Excise duty; (ii) Royalty; (iii) Architect or Supervisor’s fees; (iv) Cost of rectifying
defective work; (v) Travelling expenses to the city; (vi) Experimental expenses of pilot
projects; (vii) Expenses of designing or drawings of patterns or models; (viii) Repairs and
maintenance of plant obtained on hire; and (ix) Hire of special equipment obtained for a
contract.

Overhead
Overheads comprise of indirect materials, indirect employee cost and indirect expenses which
are not directly identifiable or allocable to a cost object. Overheads may defined as the
aggregate of the cost of indirect material, indirect labour and such other expenses including
services as cannot conveniently be charged directly to specific cost units. Thus overheads are
all expenses other than direct expenses. In general terms, overheads comprise all expenses
incurred for or in connection with, the general organization of the whole or part of the
undertaking, i.e., the cost of operating supplies and services used by the undertaking and
includes the maintenance of capital assets.

Prime Cost: The aggregate of Direct Material, Direct Labour and Direct Expenses.

Cost Classification:
Classification of cost is the process of grouping the components of cost under a common
designation on the basis of similarities of nature, attributes or relations. It is the process of
identification of each item and the systematic placement of like items together according to
their common features.

(a) Classification by Nature of Expense

Costs should be gathered together in their natural groping such as Material, Labour and Other
Direct expenses. Items of costs differ on the basis of their nature. The elements of cost can be
classified in the following three categories. 1. Material 2.Labour 3. Expenses
Material Cost: Material cost is the cost of material of any nature used for the purpose of
production of a product or a service. It includes cost of materials, freight inwards, taxes &
duties, insurance ...etc directly attributable to acquisition, but excluding the trade discounts,
duty drawbacks and refunds on account of excise duty and vat.
Labour Cost: Labour cost means the payment made to the employees, permanent or
temporary for their services. Labour cost includes salaries and wages paid to permanent
employees, temporary employees and also to the employees of the contractor. Here salaries
and wages include all the benefits like provident fund, gratuity, ESI, overtime, incentives...etc
Expenses: Expenses are other than material cost or labour cost which are involved in an
activity.

(b) Classification by Relation to Cost Centre or Cost Unit

If expenditure can be allocated to a cost centre or cost object in an economically feasible way
then it is called direct otherwise the cost component will be termed as indirect. According to
this criteria for classification, material cost is divided into direct material cost and indirect
material cost, Labour cost is divided into direct labour and indirect labour cost and expenses
into direct expenses and indirect expenses. Indirect cost is also known as overhead.
Cost Classification by relation to cost centre:
1) Direct Material Cost: Cost of material which can be directly allocated to a cost centre or a
cost object in an economically feasible way.
2) Direct labour Cost: Cost of wages of those workers who are readily identified or linked
with a cost centreor cost object.
3) Direct Expenses: Expenses other than direct material and direct labour which can be
identified or linked with cost centre or cost object.

Direct Material + Direct labour + Direct Expenses = Prime Cost

1) Indirect Material: Cost of material which cannot be directly allocable to a particular cost
centre or cost object
2) Indirect Labour: Cost of wages of employees which are not directly allocable to a
particular cost centre.
3) Indirect expenses: Expenses other than of the nature of material or labour and cannot be
directly allocable to a particular cost centre.
Indirect Material + Indirect Labour + Indirect Expenses = Overheads

(c) Classification by Functions:

A business enterprise performs a number of functions like manufacturing, selling,
research...etc. Costs may be required to be determined for each of these functions and on this
basis functional costs may be classified into the following types:-
 Production or Manufacturing Costs
 Administration Costs
 Selling & Distribution cost
 Research & Development costs

(d) Classification based on Behavior – Fixed, Semi-variable or Variable

Costs are classified based on behavior as fixed cost, variable cost and semi-variable cost
depending upon response to the changes in the activity levels.
Fixed Cost: Fixed cost is the cost which does not vary with the change in the volume of
activity in the short run. These costs are not affected by temporary fluctuation in activity of
an enterprise. These are also known as period costs. Example: Rent, Depreciation...etc.
Variable Cost: Variable cost is the cost of elements which tends to directly vary with the
volume of activity. Variable cost has two parts (i) Variable direct cost (ii) Variable indirect
costs. Variable indirect costs are termed as variable overheads. Example: Direct labour,
Outward Freight...etc.
Semi-Variable Costs: Semi variable costs contain both fixed and variable elements. They
are partly affected by fluctuation in the level of activity. These are partly fixed and partly
variable costs and vice versa. Example: Factory supervision, Maintenance...etc.

(e) Classification based on Costs for Management Decision Making

Ascertainment of cost is essential for making managerial decisions. On this basis costing may
be classified into the following types.
Marginal Costing: Marginal Cost is the aggregate of variable costs, i.e. prime cost plus
variableoverhead. Marginal cost per unit is the change in the amount at any given volume of
output by which the aggregate cost changes if the volume of output is increased or decreased
by one unit. Marginal Costing system is based on the system of classification of costs into
fixed and variable. The fixed costs are excluded and only the marginal costs, i.e. the variable
costs are taken into consideration for determining the cost of products and the inventory of
work-in-progress and completed products.
Differential Cost: Differential cost is the change in the cost due to change in activity from
one level to another.
Opportunity Cost: Opportunity cost is the value of alternatives foregone by adopting a
particular strategy or employing resources in specific manner. It is the return expected from
an investment other than the present one. These refer to costs which result from the use or
application of material, labour or other facilities in a particular manner which has been
foregone due to not using the facilities in the manner originally planned. Resources (or input)
like men, materials, plant and machinery, finance etc., when utilized in one particulars way,
yield a particular return (or output). If the same input is utilized in another way, yielding the
same or a different return, the original return on the forsaken alternative that is no longer
obtainable is the opportunity cost. For example, if fixed deposits in the bank are proposed to
be withdrawn for financing project, the opportunity cost would be the loss of interest on the
deposits. Similarly when a building leased out on rent to a party is got vacated for own
purpose or a vacant space is not leased out but used internally, say, for expansion of the
production programme, the rent so forgone is the opportunity cost.

Replacement Cost: Replacement cost is the cost of an asset in the current market for the
purpose of replacement. Replacement cost is used for determining the optimum time of
replacement of an equipment or machine in consideration of maintenance cost of the existing
one and its productive capacity. This is the cost in the current market of replacing an asset.
For example, when replacement cost of material or an asset is being considered, it means that
the cost that would be incurred if the material or the asset was to be purchased at the current
market price and not the cost, at which it was actually purchased earlier, should be take into
account.

Relevant Costs: Relevant costs are costs which are relevant for a specific purpose or
situation. In the context of decision making, only those costs are relevant which are pertinent
to the decision at hand. Since we are concerned with future costs only while making a
decision, historical costs, unless they remain unchanged in the future period are irrelevant to
the decision making process.
Imputed Costs: Imputed costs are hypothetical or notional costs, not involving cash outlay
computed only for the purpose of decision making. In this respect, imputed costs are similar
to opportunity costs. Interest on funds generated internally, payment for which is not actually
made is an example of imputed cost. When alternative capital investment projects are being
considered out of which one or more are to be financed from internal funds, it is necessary to
take into account the imputed interest on own funds before a decision is arrived at.

Batch Costing: Batch Costing is the aggregate cost related to a cost unit which consists of
a group of similar articles which maintains its identity throughout one or more stages of
production. In this method, the cost of a group of products is ascertained. The unit cost is a
batch or group of identical products instead of a single job, order, or contract. This method is
applicable to general engineering factories which produces components in convenient
economical batches.

Process Costing: When the production process is such that goods are produced from a
sequence of continuous or repetitive operations or processes, the cost incurred during a period
is considered as Process Cost. The process cost per unit is derived by dividing the process
cost by number of units produced in the process during the period. Process Costing is
employed in industries where a continuous process of manufacturing is carried out. Costs are
ascertained for a specified period of time by departments or process. Chemical industries,
refineries, gas and electricity generating concerns may be quoted as examples of undertakings
that employ process costing.

Operation Cost: Operation Cost is the cost of a specific operation involved in a production
processor business activity. The cost unit in this method is the operation, instead of process.
When the manufacturing method consists of a number of distinct operations, operation
costing is suitable.

Operating Cost: Operating cost is the cost incurred in conducting a business activity.
Operating cost refer to the cost of undertakings which do not manufacture any product but
which provide services. Industries and establishments like power house, transport and travel
agencies, hospitals, and schools, which undertake services rather than the manufacture of
products, ascertain operating costs. The cost units used are Kilo Watt Hour (KWH),
Passenger Kilometer and Bed in the hospital....etc. Operation costing method constitutes a
distinct type of costing but it may also be classed as a variant of Process Cost since costs in
this method are usually compiled for a specified period.

Contract Costing: Contract cost is the cost of contract with some terms and conditions
between contractee and contractor. This method is used in undertakings, carrying out,
building or constructional contracts like constructional engineering concerns, civil
engineering contractors. The cost unit here is a contract, which may continue over more than
one financial year.
Joint Costs: Joint costs are the common cost of facilities or services employed in the output
of two or more simultaneously produced or otherwise closely related operations, commodities
or services. When a production process is such that from a set of same input two or more
distinguishably different products are produced together, products of greater importance are
termed as Joint Products and products of minor importance are termed as By-products and the
costs incurred prior to the point of separation are called Joint Costs. For example in
petroleum industry petrol, diesel, kerosene, naphtha, tar is produced jointly in the refinery
process.
By-product Cost: By-product Cost is the cost assigned to by-products till the split-off point.

Cost behavior pattern

Cost behaviour pattern is the manner in which a cost will react to changes in the level of
activity. Costs may be viewed as variable, fixed, or mixed (semi-variable). A mixed cost is
one that contains both variable and fixed elements. For planning, control, and decision
purposes, mixed costs need to be separated into their variable and fixed components,
The way a specific cost reacts to changes in activity levels is called cost behavior. Costs may
stay the same or may change proportionately in response to a change in activity.