Detailed syllabus of COST ACCOUNTING

Study Note 1 : Introduction to Cost Accounting

- Definition, scope, objectives and significance of Cost Accounting, its relationship with Financial Accounting and Management Accounting
- Cost Object, Cost Centers and Cost Units – Elements of Cost
- Classification of Cost
- Role of Cost Accountants in Organisations
Study Note 2 : Cost Ascertainment - Elements of Cost
- Material Cost (CAS-6)
- Employee Costs (CAS-7)
- Direct Expenses (CAS-10)
- Overheads (CAS-3)
Study Note 3 : Cost Accounting Standards
- Preface to Cost Accounting Standards (CASs)
- Objectives and Functions of Cost Accounting Standards Board
- CAS 1-24 as issued by The Institute of Cost Accountants of India
Study Note 4: Cost Bookkeeping
- Cost Accounting Records, Ledgers and Cost Statements
- Items excluded from Cost and Normal and Abnormal Items/Cost
- Non-Integrated Accounting
- Integral Accounts
- Reconciliation of Cost Accounting Records with Financial Accounts
- Infrastructure, Educational, Healthcare and Port Services
Study Note 5 : Methods of Costing
- Job Costing
- Batch Costing
- Contract Costing
- Process Costing – Joint & By-Products
- Operating Costing or Service Costing – Transport, Hotel, and Hospital
Study Note 6: Cost Accounting Techniques
- Marginal Costing
- Standard Costing & Variance Analysis
- Budget and Budgetary Control

Fundamentals of Cost Accounting-

Cost accounting, Costing & Cost accountancy

Cost Accountancy:
1. Cost Accountancy is broadest in its nature.
2. It is concerned with formulation of costing principles, techniques and methods to be adopted by a business.
3. Periodicity of functioning in cost accountancy is a starting point.
4. The person involved is a management accountant.
Costing:
1. Costing is broader in its scope.
2. It is concerned with ascertainment of cost.
3. Periodicity of functioning in costing begins where cost accountancy ends.
4. The person involved in the cost accountant.
Cost Accounting:
1. Cost Accounting is narrow in its scope.
2. It is concerned with the recording of costs.
 3. Periodicity of functioning in cost accounting begins where costing ends.
4. The persons involved are cost clerks.

Objectives of Cost Accounting Scope of Cost Accounting

Difference between cost accounting and financial accounting

Limitation of Cost Accounting

Cost Accounting, Cost and Costing

Cost Accounting is a business practice in which we record, examine, summarize, and study the company’s cost spent on any process, service, product or anything else
in the organization.
This helps the organization in cost controlling and making strategic planning and decisions on improving cost efficiency. Such financial statements and ledgers give
management visibility on their cost information.
Management gets the idea where they have to control the cost and where they have to increase more, which helps in creating a vision and future plan. There are
different types of cost accounting such as marginal costing, activity-based costing, standard cost accounting, lean accounting.

Types and Classification of Cost Accounting

- Activity Based Costing

- Lean Accounting
- Standard Accounting
- Marginal Costing

Standard Accounting-
- Standard costing is a technique where the firm compares the costs that were incurred for the production of the goods and the costs that should have been
incurred for the same.
Marginal Costing
- This type of costing is based on the principle of dividing all costs into fixed cost and variable cost.
- Fixed costs are unrelated to the levels of production. As the name suggests these costs remain the same irrespective of the production quantities.
- Variable costs change in relation to production levels. They are directly proportional. The variable cost per unit, however, remains the same.

Meaning of Cost-

In commercial terms, the cost is the monetary valuation of the effort, materials, risks and opportunity costs all put together.

Cost is also defined as by the expenditure incurred to produce a given good or service. The cost will be the expenditure that is attributable to something.

Value is measured in terms of the usefulness of the product, the cost is measured strictly in monetary terms.

While cost is a very generic term, it can be classified further. All costs can be qualified as prime cost, sunk cost, factory cost, direct cost, indirect cost, etc. It is advisable
to classify costs as it gives more information about it.

Costing-
It is a system of ascertaining costs.
- Assigning variable costs according to the activity levels is direct costing
- And assigning fixed costs irrespective of activity levels is known as absorption costing

Classification of Costs

1] Classification by Nature

Material Costs: Material costs are the costs of any materials we use in the production of goods. We divide these costs further. For example, let’s divide material costs into
raw material costs, spare parts, costs of packaging material etc.

Labor Costs: Labor costs consists of the salary and wages paid to permanent and temporary employees in the pursuit of the manufacturing of the goods

Expenses: All other expenses associated with making and selling the goods or services.

2] Classification by Functions

This is the functional classification of costs. So the classification follows the pattern of basic managerial activities of the organization.
The grouping of costs is according to the broad divisions of functions such as production, administration, selling etc.

Production Costs: All costs concerned with actual manufacturing or construction of the goods

Commercial Costs: Total costs of the operation of an enterprise other than the manufacturing costs. It includes the admin costs, selling and distribution costs etc.

3] Classification by Traceability

This aspect is one of the most important classifications of costs, into direct costs and indirect costs. This classification is based on the degree of traceability to the final
product of the firm.

Direct Costs: So these are the costs which are easily identified with a specific cost unit or cost centers. Some of the most basic examples are the materials used in the
manufacturing of a product or the labor involved with the production process.

Indirect Costs: These costs are incurred for many purposes, i.e. between many cost centers or units. So we cannot easily identify them to one particular cost center. Take
for example the rent of the building or the salary of the manager. We will not be able to accurately determine how to ascertain such costs to a particular cost unit.

4] Classification by Normality

This classification determines the costs as normal costs and abnormal costs. The norms of normal costs are the costs that usually occur at a given level of output, under
the same set of conditions in which this level of output happens.

Normal Costs: This is a part of the cost of production and a part of the costing profit and loss. These are the costs that the firm incurs at the normal level of output in
standard conditions.

Abnormal Costs: These costs are not normally incurred at a given level of output in conditions in which normal levels of output occur. These costs are charged to the
profit and loss account, they are not a part of the cost of production.

Methods of Costing
1] Job Costing

Many firms and businesses work on a job work basis. In such cases, we use the job costing method. Here the cost is assigned to a specific job, assignment etc.

There is no pre-production here, each order is made to the specifications needed. If the system is implemented accurately we can find the profitability of each job.
Some important features of job costing are,

- It concerns itself with specific order costing, i.e the cost of each order or job regardless of the time taken to finish the job. But usually, the duration of each job is
relatively short.
- The costs are collected at the completion of the job
- Prime costs(direct materials + direct labor + direct expenses) are traced and overheads (indirect material, labor & expenses) are assigned to each job on some
appropriate proportionate basis.
2] Batch Costing

Batch costing is used when the goods are not produced to demand but are pre-produced. Here the production process is continuous and occurs in batches.

These batches may be for a specific order or some pre-determined quantity. In this system, the goods are more or less uniform.
The total cost incurred during the production of one such batch of goods is divided by the number of units produced to give us the cost per unit.

This method is very useful for consumer electronic goods such as televisions, washing machines etc.

3] Process Costing

This is one of the most popular methods of costing. There are many goods that are produced continuously.

These goods are homogeneous and are usually produced in huge quantities. So the method of process costing is used to find the cost of production of each unit.

In continuous processing, the output of one process becomes the input of the next process and so on until we achieve our finished product.

So for the purposes, we find out the costs of each process and divided it by the number of units produced in this process. Some examples of products that use process
costing are sugar, edible oil, chemicals, salt etc.

4] Operating Costing

Among all the methods of costing, the one best suited to the service sector is operating costing. We use operating costs to calculate the cost of the services provided to
the customers.

The service must be uniform service provided to all customers, not specialized services. And to ascertain the cost we average the total cost over the total services
rendered.

5] Contract Costing

To work out the cost of a contract undertaken we employ contract costing. So it will help us track the costs of a specific contract with a specific customer.

These methods of costing are mainly used for construction contracts, like the construction of complexes, highways, bridges, dams etc.

As you can see there are a lot of similarities between job costing and contract costing. But job costing is usually for a shorter period.

While contract costing is for a much longer time, several years usually. So there is work-in-progress at the end of a year in contract costing

Cost Object, Cost Centers and Cost Units – Elements of Cost

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.
At a broader level, a cost object may be named as a Cost Centre, whereas at a lowermost level it may be called a Cost Unit.

Cost Driver-
“the factor influencing the level of cost, for example, the number of purchase orders would be a Cost Driver for procurement cost”. In other words, we can say that the
Cost Driver is an activity which is responsible for cost incurrence. An activity may be an event, unit of work etc. Examples of the Cost Drivers are (i) number of machine
set−ups, (ii) number of purchase orders, (iii) hours spent on product inspection, (iv) number of tests performed etc.

Cost Center & Cost Objective

An accountant needs to ascertain the cost of the cost object (i.e. product, service or activity) either by cost centre, cost unit or by both. Cost Center is nothing but just one
portion of the entire organization, to which cost is charged. On the other hand, Cost unit refers to the unit in which cost is expressed.

Comparison Chart

BASIS FOR COMPARISON COST CENTRE COST UNIT

Meaning Cost center refers to a subdivision or Cost unit implies any measurable unit
any part of the organization, to which of product or service, with respect to
incurred, but does not contribute to the which costs are assessed.
company's revenues directly.

Use It is used as a basis for classifying It is used as a standard for making a

costs comparison.

Cost Costs are collected and absorbed by Measured and Expressed in terms of
cost units. cost units.

Ascertainment Ascertained as per the nature and Ascertained as per the nature of the
technique of production process, final output and the existing trade
organization size and structure. practices.

Sequence First Second

How Many Several cost centres are there, even if Different cost units for different
there is just one product or service products or services.
offered.

Cost Center- Cost centres are of two types-Personal and Impersonal Cost Centre. A personal cost center consists of a person or group of persons. An impersonal cost
center consists of a location or item of equipment or a group of equipment.

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 :-
(i) 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
(ii) 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 centers 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 Center
Definition of Responsibility Center
A responsibility center is a part or subunit of a company in which the manager has some degree of authority and responsibility. The company's detailed organization chart
is a logical source for identifying responsibility centers. The most common responsibility centers are the numerous departments within a company.

Examples of Responsibility Centers

Responsibility centers are often categorized by the degree of authority and responsibility given to the manager:

Cost centers. In a cost center the manager is responsible only for costs. Examples of cost centers include a production department, maintenance department, accounting
department, human resource department, etc.
Profit centers. In a profit center the manager is responsible for its costs and revenues. For example, a company may have a consumer products division and an industrial
division to more effectively market the company's products. Each division's manager is responsible for sales and expenses. However, if the company's executive team
makes all of the investment decisions, the divisions are considered to be profit centers.
Investment centers. In an investment center the manager is responsible for investment decisions as well as costs and revenues. For instance, in a large corporation with
many subsidiary companies, the corporation may give authority to the head of each subsidiary to make decisions on the needed investments. In that situation the
manager is the head of an investment center.

Cost Unit

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 cost object.
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 that consists of a group of identical items and maintains its identity through one or more stages of production may also be taken as a cost unit.

Cost Allocation

When items of cost are identifiable directly with some products or departments such costs are charged to such cost centers. This process is known as cost allocation.
Wages paid to workers of the 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) the exact amount of
cost should be computable.

Cost Apportionment