COST ACCOUNTING

Presented By:-

Rishitosh Ranjan.
Tobin Augustine.

Sweta.
Pallavi.
Apurva Gaurav Pandya.

Danish wasim
 COST ACCOUNTING
 Costingis a specialised branch of accounting. It
has been developed because of limitations of
financial accounts.

 Inthe present day it is absolutely necessary that

a business concern should operate its activities
with utmost efficiency and at the lowest cost.
Meaning Of Cost, Costing And Cost Accounting

The term ‘cost’ has a wide variety of meanings.

Different people use this term in different senses for
different purposes. For example, while buying a book,
you generally ask, “how much does it cost”? Here the
cost means price.
The costing terminology of the Institute of Cost and
Works Accountants,London defines cost as “the amount
of expenditure incurred on or attributable to a given
thing”.
Costing is the technique and process of ascertaining
costs. In simple words costing is a systematic procedure
of determining the unit cost of product/service.
OBJECTS AND MEANING OF COST ACCOUNTING

Analysis and Ascertainment of costs: The main

object of costing is to ascertain the cost of each product,
process, department, service or operation.
Presentation of costs for cost reduction and cost
control: Important function of costing is to control and
reduce costs.
Planning and decision making: It has now developed
as a tool in the hands of the management for planning
and taking crucial decisions like pricing of product,
introduction of new product in the market, make or buy
decisions.
 CONCEPT OF COST

The “COST” refers to expenditure not the price

of any goods.

It’sthe process of ascertaining cost(its

principles & rules).
DEFINITION OF COST A/C
.“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 centre & cost
units.”(I.C.M.A,London)
2.The amount of expenditure incurred on or
attributable to given thing.”(I.C.W.A,London)
3.The is distinguish from from expenses & losses.
 CLASSIFICATION OF COSTS
The main objective of costing is to ascertain cost of
each product, process, department, service or
operation.
Costs can be classified into different
categories depending upon the purpose of their
classification.
1. Classification by nature or element.
2. Functional classification.
3. Classification on the basis of behaviour.
4. Classification on the basis of managerial
decision making and control.
1. Classification on the basis of nature or
element:-
(a) Direct Costs.
(b) Indirect Costs.
 CLASSIFICATION BY NATURE
ELEMENTS OF
COSTS

INDIRECT
DIRECT COSTS
COSTS

MATERIAL

LABOUR

EXPENSE
(1)Direct Cost:- These are costs directly attributable to
producing a product.
The following comes under the Direct Cost:-
(i)Direct Material Cost:- It is the cost of material which can be
directly allocated to a cost centre.
Example:- Raw material consumed for production of a
product.
(ii)Direct Labour Cost:- It is the cost of wages of those workers
who are readily identified or link with cost centre.
(iii)Direct Expense:- These are the expenses other than direct
material or direct labour which can be identified with cost
centre.
 (2)Indirect Costs:- These are the costs which can not be
assign to any particular cost unit, i.e job product or process.

 (i) Indirect Material:- Material which cannot be directly

allocated to a particular cost centre.

 (ii)Indirect
Labour:- These are the wages of employees
which are not directly allocable to a particular cost centre.

 (iii)IndirectExpense:- These are the expense other than the

nature of material or labour and cannot be directly
attributable to a particular cost centre.
 FUNCTIONAL CLASSIFICATIONS
 PRIME COST = Direct Material +Direct Labour+ Direct
Expense.

 FACTORY COST: Prime cost + Factory Overheads+

Opening stock of work- in- progress- closing stock of
work- in- progress.

 COST OF PRODUCTION: Factory cost+ Admin

overhead + R&D overheads.
 COST OF GOODS AVAILABLE FOR SALE: Cost of
Production+ Opening stock for finished goods.
 COST OF GOOD SOLD= Cost of good available- closing
stock of finished goods

 TOTAL COST= Cost of good sold + Selling &

distribution overhead.
Classification on the basis of behaviour

(i)Fixed costs: Costs which do not vary with the

level of production are known as fixed costs.

(ii)Variable Cost:- Costs that vary in direct

proportion to the volume of production.

(iii)Semi-variable costs:- Costs which contain both

fixed and variable components are called semi
-variable costs
Classification on the basis of Managerial decision making
& control

(I ) Marginal costs: Costs of producing one additional unit.

It is useful for price fixation.

(II)Opportunity costs: It refers to the value of sacrifice

made for benefit of opportunity foregone in accepting an
alternative course of action.

(III)Normal & Abnormal costs: Normal costs are normally

incurred at a given level of output, while Abnormal cost
is an unusual or unexpected and due to some abnormal
situation of the production.
.
(IV) Sunk Costs: It is a cost which has been already
incurred or sunk in the past. It is not relevant for
decision making.

(V)Imputed cost: The cost which do not involve any

expenditure in real sense. They included in cost
accounts only for taking managerial decisions.
Nature of Cost Accounting
(I)Cost accounting is an organized body of knowledge.

(II)These certain principles to which the technique of

costing should be applied.

(III) These principles and rules have been developed over a

period of time by experience.

(IV)Besides being a science, cost accounting is an art also.

Its principles, rules and techniques are not static but
dynamic.
(V)Although it is an organized body of knowledge, its
principles can not be verified and proved by experiments.
Hence, it is not an exact science. Since it is operated by
human beings, so it is a behavioral science.

(VI)Old principles and techniques are replaced by new. It not

only lays down the rules but also shows the way of
achieving the objectives for which it is installed.
 Scope of Cost Accounting.
 1. Cost Ascertainment
In this region of cost accounting, cost accounting collects
product's material, labor and overhead cost and try to
calculate total and per unit cost of product. This total cost
calculation will be based on historical or standard or
estimated basis. After this, cost accountant will use any
method of costing like specific order costing, operation
costing, and direct costing technique.
2. Cost Records
In this part of cost accounting, cost accountant maintains
cost books, vouchers, ledgers, reports and other cost
related documents for future comparison and reference. It
will also be under the scope of cost accounting.
3. Cost Control
This is the end boundary of cost accounting scope. In this
division, cost accountant used different techniques and
methods for controlling the cost. Save One Rupees in the
cost of product means we have earned one rupees in the
production of goods. So, Cost accountant uses budgetary
control, standard costing, break even point analysis and
many other techniques for controlling the cost.
ADVANTAGES OF COST
ACCCOUNTING

 Cost accounting is not only helpful to provide cost

information for internal use by management but it also
helps management in setting objectives and programme
of operation in comparing actual performance with
expected performance.
BENEFITS
 PROVIDE DATA AND COST INFORMATION
 DISCLOSE OPERATING EFFICIENCY
 HELPFUL IN DECISION MAKING
 MAXIMUM UTILISATION OF RESOURCES
 HELP FINANCIAL ACCOUNTING
 HELPFUL IN AVOIDING LOSSES
RELATIONSHIP BETWEEN
COST AND MANAGENENT
ACCOUNTING
THE FOLLOWING ARE THE MAIN POINTS OF
RELATION BETWEEN COST AND MANAGEMENT
ACCOUNTING:-
 1)OBJECT : The object of cost accounting is to record the
cost of producing a product or providing a service. The
cost is recorded product wise or unit wise. Besides
recording, it deals with cost control, matching of cost
with revenue and decision-making. The purpose of
management accounting is to provide information to
the management for planning and co-ordinating the
activities of the business.
2.SCOPE : The scope of management accounting is very
wide. It includes financial accounting, Cost accounting,
budgeting, tax planning, reporting to management and
interpretation of financial data.
 On the other hand , cost accounting deals primarily
with cost ascertainment.

 3.NATURE : Management accounting is generally

concerned with the projection of figures for future. The
policies and plans are prepared for providing future
guidelines.
 Cost accounting uses both past and present figures.
 4.DATA USED : In cost accounting only those transactions are
taken which can be expressed in figures only quantitative
aspect is recorded in cost accounting. Management
accounting uses both quantitative and qualitative
information.

 5.DEVELOPMENT : The development of cost accounting is

related to industrial revolution. Financial accounting could
not satisfy information need of management.
 Cost accounting was thus evolved as supplementary
accounting methods. Cost accounting was able to provide
information not only about cost structure but also for
planning and decision-making.
 Management accounting has developed only in the last 30
years.
 Management accounting and cost accounting are both
complementary subjects.
 6.PRINCIPLE FOLLOWED : Certain principles and
procedures are followed for recording cost of different
products. The same rules are applicable at different
times too .
 No specific rules and procedures are followed in
reporting management accounting.
 The information is prepared and presented as is
required by the management.
BREAK EVEN POINT
 Definition
That point of sales volume at which total revenue is
equal to total cost.

It is a point of no profit no loss

Break Even Total sales = Total Cost

The Break Even Point can be computed in terms of:

a) Units of Sales Volume

b) Budget Total or in terms of Money

Value(Rupees)
Units of Sales Volume
 Break even point in Units can be calculated in the following ways:-
B.E.P = Fixed Cost
Selling Price per unit - Variable Cost per Unit
Or
B.E.P = Fixed Cost
Contribution per Unit

 Fixed Cost = Those cost which do not vary with changes in volume
of output.

 Variable Cost – Those Cost which fluctuate to the volume of

output.
 Contribution – It is the difference between sales and variable cost.
It may be defined as the excess of selling price over variable cost.
 Budget Total or in terms of Money Value

Break even point in Rupees(Rs) can be calculated in the

following ways:-

B.E.P in Units = Fixed Cost / Sales- Variable Cost * Sales

or
B.E.P = Fixed Cost/Contribution * Sales
 We can find Break Even Point with the help of Profit
Volume Ratio also by:-

 Profit Volume Ratio (P.V. Ratio)= it is also called

Contribution Ratio or Marginal Ratio.
 Express the relation of contribution to sales or it shows
the relation between the contribution and sales.

B.E.P – Fixed Cost/Profit Volume Ratio

 As

Profit Volume Ratio=Contribution/Sales