ACCOUNTING OVERVIEW

INPUT PROCESSING OUTPUT

Business
transactions in Recording, classifying, Financial
terms of summarizing, analyzing & statements for
money interpreting communication

There are various users of financial information. To satisfy the

information needs of different users, Different branches of accounting
have been developed.
 Wage rate having been increased by Rs. 5 per hour,
should selling price be increased, and if so, by how
much?
 If the sale of product A were discontinued and efforts
made to increase the sale of product B, what would be
effect on net profit ?
 Should an attempt to be made to sell more products or
is the factory operating to capacity ?
 Limitations of financial accounting has led
to the development of cost accounting
 Not helpful in the price fixation
 No clear idea about operating efficiency
 Weakness not spotted out by collective results
 No control on cost
 Provides only historical information
BRANCHES OF ACCOUNTING
BRANCHES OF
ACCOUNTING

Financial Cost Management

Accounting Accounting accounting
MEANING OF COST
Cost is defined as value of sacrifice made to acquire goods/
services, measured in monetary terms.
Cost is “ the amount of expenditure(actual or notional)
incurred or attributable to a given thing.” -CIMA, London

An expense is defined as a cost that has given a benefit and is

now expired. Unexpired cost that can give future benefits
are classified as assets.
MEANING OF COSTING & COST ACCOUTING
CIMA, London has defined costing as” the
techniques and processes of ascertaining costs.”
Thus, costing means cost finding by any process or
technique.
MEANING OF COST ACCOUNTING
Cost accounting is the classifying, recording and appropriate allocation
of expenditure for the determination of the cost of product or
services, and for the presentation of suitably arranged data for
purpose of control and guidance of management.

“ Cost accounting is the application of accounting and costing principles,

methods and techniques in the ascertainment of cost and the analysis
of savings/excess cost incurred as compared with previous experience
or with standards.” - WHELDON

It establish budgets, standard cost and actual cost of operations,

processes, departments or products and the analysis of variance ,
profitability and social use of funds.
DIFFERENCE BETWEEN COST ACCOUTNING & FINANCIAL
ACCOUNTING
BASIS FINANCIAL COST ACCOUNTING
ACCOUNTING
1. PURPOSE Its purpose is to prepare Its purpose is to provide
profit & loss a/c & balance detailed cost information
sheet for reporting to to management.
owners & other outside
parties.
2. Statutory requirements These accounts have to be Maintenance of these
prepared according to the accounts is voluntary .
legal requirements of
Companies act & Income
Tax act

3. Periodicity of reporting Financial reports are It may be daily, weekly,

prepared periodically i.e. monthly etc.
on annual basis.
4. control It lays emphasis on It provides a detailed
recording aspect without system of control for
attaching any importance materials, labour and
to control. overhead cost
BASIS FINANCIAL COST ACCOUNTING
ACCOUTNING
5. Analysis of profit It reveals the profit or loss It shows the detailed cost
of the business as a whole. or profit data for each
product line , department,
process
6. information It deals with monetary It deals with both monetary
information only. or non- monetary
information .
7. Fixation of selling price These are not maintained These provide sufficient
with the object of fixing data for fixation of selling
selling prices. prices.
8. Figures They deal mainly with They deal partly with facts
actual facts & figures & figures & partly with
estimates.
9. Stock valuation Stocks are valued at cost or Stocks are valued at cost.
market price whichever is
less.
10. Format of presenting It has a single uniform It has varied forms of
information format of presenting presenting cost information
information which are tailored to meet
the needs of management.
OBJECTIVES OF COST ACCOUNTING

 Ascertainment of costs
 Controlling of costs
 Cost reduction
 Providing information necessary for decision making.
 Determination of selling price
 To facilitate the preparation of financial and other
statements
 Cost centre
“ Any unit of cost accounting selected with a view to
accumulating all cost under that unit. The unit may be a
product, a service, division, department, section, group of
plant and machinery, a group of employees.”
The main purpose is control of cost. It can be very small or
very large. There can be series of cost centres within a
department or whole department may be a cost centre.
 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 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
Q.-From the following information of Apollo Hospital
identify the cost centre or cost units as suitable:
1. Children ward
2. operation theatre
3. Operation theatre hour
4. House keeping department
5. Per bed per day
6. Canteen
7. Pharmacy
8. Radiology department
COST ASCERTAINMENT & COST ESTIMATION
 COST ASCERTAINMENT
Cost ascertainment is concerned with computation of actual
cost incurred. It refers to the methods & processes employed
in ascertaining cost.
 COST ESTIMATION
Cost estimation is the process of pre-determining cost of goods
or services. These are definitely the future costs and are
based on the average of past actual cost adjusted for past
changes in future. Its uses are:
1. price quotations & bidding for contracts
2. Preparation of budgets
3. In evaluating performance
4. Preparing projected financial statements
5. Serve as targets in controlling 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, labor, expenses
2. By functions: production, selling, distribution, administration,
R&D, development,
3. By traceability: direct and indirect
4. By changes in activity, variability and volume: fixed, variable
and semi variable
5. By controllability: controllable, uncontrollable
6. By normality: normal, abnormal
7. By time: historical costs, predetermined cost.
8. By association with the product: product cost, period cost
9. For managerial decisions: Sunk cost, Opportunity cost, relevant
and irrelevant costs, marginal cost, out of pocket cost.
Direct & indirect costs
Direct costs are those costs which are incurred for &
conveniently identified with a particular cost unit, process
or department.eg. Cost of raw material & wages.

Indirect costs cannot be conveniently identified with a

particular cost unit. E.g. Depreciation of machinery,
insurance, power, rent, salaries
Q.- Different costs associated with the operation of a
factory are given below: You are required to classify
each cost as being either treated as a direct cost or
indirect cost.
a. Cloth used in making casual shirts.
b. Thread used in making casual shirts.
c. Sugar preservatives used in production of soft
drinks.
d. depreciation on bottling plant of soft drinks.
e. Lubricants needed for running the machinery.
f. salary of security staff of the factory.
g. electricity used for running the machineries.
h. cost of battery used in mobile phones.
 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. Trade discounts, rebates are deducted in
determining the cost of materials.
(a) Direct materials- direct material is that cost which can be easily
identified with and allocated to cost units. e.g. Clay in bricks,
leather in shoes, timber in furniture.
The following are normally classified as direct materials:
1. All raw materials
2. Materials specifically purchased for a specific job, process or
order
3. Parts or components purchased or produced
4. Primary Packing materials
(a) Indirect materials- those materials which cannot be easily
identified with individual cost units. These are small &
inexpensive items. E.g. Nuts and bolts, sand paper, lubricating
oil
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.,
gratuity, ESI, 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. Wages paid to machines operator

(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
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 plant for a particular
Job, travelling expenses in securing a particular
contract, experimental cost
(b) Indirect expenses- all cost other than indirect labour
and material is termed as indirect expenses. E.g.
Rent and taxes, depreciation, lighting and power,
advertising, insurance, repairs
By Functions
 Production or factory overheads- Wages of foreman;
Electric power; Storekeeper’s wages;
Factory rent; Depreciation- factory; Repairs and renewals
Factory
 Administration- Office rent; Office lighting; Manager’s
salary; Director’s fees; Office stationery; Telephone;
Postage
 Selling and distribution- Carriage outwards; Salesmen’s
salaries; Travelling expenses; Advertising; Ware house
expenses
Product costs and period costs
Product costs are those cost which are necessary for
production & which will not be incurred if there is
no production. These are included in the cost of the
product. e.g. Direct materials, labour & expenses.
Period cost are those cost which are not necessary for
production & are incurred even if there is no
production. These are recorded as expense in the
profit & Loss a/c of the current period. E.g.
Administration & selling expenses
Q.- Classify the following cost as either product cost or
period costs in a manufacturing company:
1. Lubricant used for maintenance of machines.
2. Hire charges for equipment used in the manufacturing
process.
3. factory supervisor’s salary.
4. Salary paid to the driver of sales manager’s car.
5. The cost of wood used to create the tables.
6. Depreciation on Sales manager’s Car
7. The cost of factory rent and cost of factory utilities
8. The wages of the receptionist in the administrative
offices.
9. Sales promotion expenses.
10. Heat, water, and power consumed in the factory.
11. The cost of packaging the company's product.
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.

Variable cost are costs that tend to vary in total in direct

proportion to changes in proportion.

Semi variable costs are costs which consist of both fixed costs &
variable cost e.g. Telephone bill, power expenses
Variable and Fixed Costs
Variable Costs – costs that change proportionately (in total) with the
activity level within a relevant range of activity

Fixed Costs – costs that do not change in total as activity level changes
within a relevant range of activity

Example: Publishing a magazine

Variable costs Fixed Costs
Cost of paper Rent on building
Cost of ink Salaries to reporters
Sales Commissions Depreciation on printing equipment
Cost of lubricants for machine
Cost of operating press
Total Variable and Fixed Costs
Total Variable Cost Total Fixed Cost

Number of units Number of

units
Variable and Fixed Costs Per Unit
Per Unit Variable Cost Per Unit Fixed Cost

Number of units Number of units

Controllable & uncontrollable
costs
 Controllable costs are costs that can be influenced or
regulated by the manager or head responsible for it.
Controllable costs can be altered in the short term.
 For example: direct materials, direct labor, Advertising
expense, Bonuses, Employee compensation, Office supplies
Training

Uncontrollable costs are those costs which cannot be

influenced by the action of a specified member of an
enterprise. These are usually foxed cost which can be
altered only in the long run e.g insurance, share in rent,
Repairs and maintenance etc.
Historical costs and
predetermined costs
 Historical costs are the costs which are ascertained
after they have been incurred. These costs are
available only after the completion of the
manufacturing operations.

 Pre-determined costs are the costs which are

ascertained in advance of production on the basis of a
specification of all the factors affecting cost.
Relevant & irrelevant costs
Costs which is influenced by a decision is a relevant
cost & is important for decision makers.

Cost which is not affected by decision is irrelevant cost

i.e. It will be the same regardless of the same
regardless of the choice that is made. As a result,
such a cost is of no relevance to decision- makers& it
is ignored while taking a decisions. E.g. We have to
decide about making a journey by own car or bus,
insurance cost of a car is irrelevant cost & cost of
petrol will be relevant costs.
Quick Check 
Suppose you are trying to decide whether to drive or
take the train to Portland to attend a concert.
You have enough cash to do either, but you don’t want
to waste money needlessly.
Is the cost of the train ticket relevant in this decision?
In other words, should the cost of the train ticket
affect the decision of whether you drive or take the
train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Quick Check 
Suppose you are trying to decide whether to drive or
take the train to Portland to attend a concert. You
have ample cash to do either, but you don’t want to
waste money needlessly. Is the annual cost of
licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
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. Eg destruction due to
fire, shut down of machinery, lock outs, etc.
Out of pocket costs & sunk costs
A cost which requires current or future cash
expenditures as a result of decision is called as out of
pocket costs e.g. payment of materials, wages,
insurance, salaries etc.

Those costs which have already been incurred in the

past & will not require current cash expenditure are
called as sunk costs.
e.g. Depreciation are past costs
Opportunity cost & imputed costs
Opportunity cost is a cost that measures the benefit that is lost or
sacrificed when the choice of one course of action requires that other
alternative course of action be given up. E.g. A company has deposited
Rs 1 lacs in bank at 10% interest. If he invests in 17% debentures , it will
have to forego bank interest of RS 10,000 p.a. Which is the opportunity
cost.

Imputed costs are hypothetical costs which are specially computed

outside the accounting system for the purpose of decision making . e.g
interest on capital is not included in cost but taken into account when
deciding about alternative capital investment projects.
Differential costs

Differential cost is the increase or decrease in total cost

that results from an alternative course of action. It is
ascertained by subtracting the cost of one alternative
from the cost of another alternative. The alternative
choice may arise because of change in method of
production, sales volume, change in product mix,
make or buy decisions etc.
Example: You have a job paying Rs. 1,500 per month
in your hometown. You have a job offer in a
neighboring city that pays Rs. 2,000 per month. The
travelling cost to the city is Rs. 300 per month.

Differential revenue is: Differential cost is:

Rs2,000 – Rs1,500 = Rs 500 Rs. 300
COST SHEET
 It is a periodical statement of cost.
 prepared to ascertain the total cost and the unit cost
of the products.
 in an analytical and detailed form.
 Cost Sheet is a statement designed to show the output
of a particular accounting period along with breakup
of costs.
 its generally presented in columnar form.
 Cost sheet is a memorandum statement.
 it discloses the total cost and the cost per unit.
SPECIMEN OF COST SHEET OR STATEMENT OF COST

Total Cost Cost per unit

Rs. Rs.
Direct material
Direct labour
Direct or chargeable expenses
Prime Cost

Add: Works Overheads

Factory Cost /Works Cost

Add: Administration/office Overheads

Cost of Production

Add: Selling and Distribution Overheads

Total cost/Cost of Sales
SALES
PROFIT
 Total Cost Cost per unit
Opening stock Rs. Rs.
ADD: purchases
ADD: expenses incurred on purchase of raw material
LESS: closing stock.
Raw Material Consumed
Direct material
Direct labour
Direct or chargeable expenses
Direct /Prime Cost

Add: Works Overheads

Less: Sale of scrap
Add: opening stock of WIP
Less: closing stock of WIP
Factory Cost /Works Cost
Add: Administration/office Overheads
Cost of Production
Add: opening stock of finished goods
Less: closing stock of finished goods
Cost of Goods sold

Add: Selling and Distribution Overheads

Total cost/Cost of Sales

SALES
PROFIT
PRIME COST
Prime cost= direct material+ direct labour+ direct expense
OVERHEAD
Overhead=Indirect material+ indirect labour+ indirect expenses
Overheads is divided into three groups:
1. Production overhead- also known as works overhead,
factory overhead or manufacturing overhead. These
overheads are concerned with production function. It
includes indirect materials, wages, expenses in producing
goods or services.
Indirect material- Coal, grease, oil, stationery , cotton waste,
brush, sweeping broom etc. Used in factory office
Indirect labour- salary of factory staff, factory watchman,
sweeper, supervisor
Indirect expenses- factory rent, depreciation of plant, insurance
of factory building, factory lighting and power
2. Office and administration overhead- This is
indirect expenditure incurred in office i.e. In
formulating policies, planning and controlling the
functions, directing and motivating the personnel of
an organization in the attainment of objectives. It have
no connection with production or sales activities.
Indirect material- stationery used in office, postage,
sweeping broom and brush
Indirect labour-salary of office staff, managing director
Indirect expenses- rent of office building, legal expenses,
office lighting and power, telephone expenses,
depreciation of office furniture, office A.C. Sundry
office expenses.
3. Selling and distribution overheads-
Selling cost is the cost of promoting sales and retaining
customers. Distributing cost includes expenditure incurred
from time to time the product is completed until it reaches
its destination.
Indirect material- packing material, stationery used in sales
office, cost of samples, catalogues, grease for delivery vans
Indirect labour- salary of sales manger, office staff, salary of
drivers of delivery vans
Indirect expenses- advertising, travelling expenses, showroom
expenses, carriage outwards, rent of warehouse, bad debts,
insurance of goods in transit
 Classify the following items into factory, office and
administration and selling and distribution overheads:
 1. Packing expenses 6. Consumable stores
 2. Advertising 7. Cost of normal idle time
 3. Audit fees 8. Travelling and entertainment expenses
 4. Salary of storekeeper 9. Postage and stamps
 5. cost of sample 10. Market research expenses.
Elements of total cost can be grouped as follows:
(i) Prime cost= direct material+ direct labour+ direct
expenses
(ii) works or factory cost=prime cost+ works or factory
overheads+ WIP
(iii) cost of production= works cost + administration
overheads
(iv) cost of goods sold = cost of production+ FP
(v) cost of sales= Cost of goods sold + selling and
distribution overheads