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Introduction To Cost Accounting

Cost accounting is defined as the application of accounting principles to ascertain and analyze costs. It is used for cost ascertainment, control, planning, standard setting, performance evaluation, inventory management, setting selling prices, identifying profitable/unprofitable activities, and identifying waste and inefficiencies. Cost accounting has different purposes, users, legal requirements, time spans, degrees of detail, and report formats than financial accounting. Costs are classified in various ways including by function, behavior, traceability, normality, avoidability, and element. Cost centers and cost objects are defined and costs can be allocated, apportioned, and estimated based on cost drivers and cost behavior analysis including fixed, variable and mixed costs. Cost-volume-

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39 views3 pages

Introduction To Cost Accounting

Cost accounting is defined as the application of accounting principles to ascertain and analyze costs. It is used for cost ascertainment, control, planning, standard setting, performance evaluation, inventory management, setting selling prices, identifying profitable/unprofitable activities, and identifying waste and inefficiencies. Cost accounting has different purposes, users, legal requirements, time spans, degrees of detail, and report formats than financial accounting. Costs are classified in various ways including by function, behavior, traceability, normality, avoidability, and element. Cost centers and cost objects are defined and costs can be allocated, apportioned, and estimated based on cost drivers and cost behavior analysis including fixed, variable and mixed costs. Cost-volume-

Uploaded by

Humphrey Osaigbe
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COSTING PRINCIPLES

 Cost Accounting Defined


Cost Accounting is defined as the application of accounting and costing principles, methods and techniques in the ascertainment of cost
and the analysis of savings and excesses as compared with previous experience or standard.

 Purposes of Cost Accounting


i. Cost Ascertainment
ii. Cost Control
iii. Planning
iv. Standard Setting
v. Performance Evaluation
vi. Inventory Management
vii. Setting Selling Prices
viii. Identifying Profitable and Unprofitable activities
ix. Identification of Wastage & Inefficiencies

 Users of Financial Information


i. Management
ii. Shareholders
iii. Creditors
iv. Employees
v. Government
vi. General Public

 Differences Between Cost Accounting and Financial Accounting


a) Purpose
b) Users
c) Legal Requirements
d) Time Span
e) Time Focus
f) Unit of Measures
g) Degree Details
h) Format
i) Frequency of Reports

 Cost Analysis
 Cost:
Cost is the amount of expenditure (notional or actual) incurred on or attributable to a specified thing or activity.
Cost = Price * Quantity

 Cost Classification

a) Classification by function
i. Production Costs
ii. Administrative Costs
iii. Selling & Distribution Costs
iv. Research & Development Costs

b) Classification by Behaviour
i. Fixed Costs
ii. Variable Costs
iii. Semi-variable Costs
iv. Semi-Fixed Costs

c) Classification by Traceability or Nature


i. Direct Costs
ii. Indirect Costs

d) Classification by Traceability
i. Controllable Costs
ii. Uncontrollable Costs

e) Classification by Element
i. Material Cost
ii. Labour Costs
iii. Overhead Costs
f) Classification by Normality
i. Normal Costs
ii. Abnormal Costs

g) Classification by Time Focus


i. Sunk Costs
ii. Pre-determined/Estimated Costs

h) Classification by Avoidability
i. Avoidable Costs
ii. Unavoidable Costs

 Cost Unit or Cost Object


A cost object is any activity for which a separate measurement of costs is desired or this is a unit of a product or service in relation to
which costs are ascertained. E.g. Cost of product or service.

 Cost Centre
This is a location, a person or an item of equipment or a group of these for which cost may be ascertained or used for the purpose of cost
control.

 Types of Cost Centres


i. Personal Cost Centre
ii. Impersonal Cost Centre
iii. Production Cost Centre
iv. Service Cost Centre

 Cost Allocation
This is the assigning of the whole item of cost or revenue to a cost unit, cost centre account or time period.

 Cost Apportionment
This involves spreading or sharing of cost or revenue over two or more cost centres, accounts or time of period.

 Cost Driver
A cost driver can be defined as any factor whose change causes a change in the total cost of an activity. Examples of cost drivers include
direct labour hours, machine hours, units of output and number of production run set-ups.

 COST ESTIMATION AND COST BEHAVIOUR

 Cost behavior:
Cost behavior is the study of ways in which cost vary or do not vary with the level of activity.

 Reasons for Studying Cost Behaviour


a) To facilitate budgetary and corporate planning
b) Estimation of cost for various decision-making process.
c) Performance Evaluation purposes

 Level of Activity
This refers to the amount of activity used by a cost object.

 Relevant Range
is used to refer to the output range at which the firm expects to be operating within a short-term planning horizon.

 Cost Classification
Cost could be classified as follows:
a) Fixed Costs
b) Variable Costs
c) Mixed Costs

 Methods of Separating Mixed Costs


i. engineering methods
ii. inspection of the accounts method
iii. graphical or scatter graph method
iv. high–low method
v. least-squares method

COST–VOLUME–PROFIT ANALYSIS

CVP analysis examines the relationship between changes in activity (i.e. output) and changes in total sales revenue, costs and net profit.
 Assumptions of CVP Analysis
i. All other variables remain constant.
ii. A single product or constant sales mix.
iii. Total costs and total revenue are linear functions of output.
iv. Profits are calculated on a variable costing basis.
v. Costs can be accurately divided into their fixed and variable elements.
vi. The analysis applies only to the relevant range.
vii. The analysis applies only to a short-term time horizon.

 Break-even point
The level of output at which costs are balanced by sales revenue and neither a profit nor a loss will occur

 Profit-Volume Ratio
The profit–volume ratio (also known as the contribution margin ratio) is the contribution divided by sales. It represents the
proportion of each ₦1 of sales available to cover fixed costs and provide for profit.

 Margin of safety
The amount by which sales maydecrease before a loss occurs.

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