Introduction

Meaning and Scope

 Cost accounting is a facet of management accounting that

determines the actual cost associated with manufacturing a
product or providing a service by looking at all expenses within the
supply chain.
 It is done for the purpose of budget preparation and profitability
analysis.
 The information derived from this process is useful to managers in
determining which products, departments or services are most
profitable and which ones need improvement.
 Scope of Cost Accounting

 Cost book-keeping: It involves maintaining complete record of all costs

incurred from their incurrence to their charge to departments, products
and services. Such recording is preferably done on the basis of double
entry system.
 Cost system: Systems and procedures are devised for proper accounting
for costs.
 Cost ascertainment: Ascertaining cost of products, processes, jobs,
services, etc., is the important function of cost accounting. Cost
ascertainment becomes the basis of managerial decision making such as
pricing, planning and control.
 Cost Analysis: It involves the process of finding out the causal factors of
actual costs varying from the budgeted costs and fixation of responsibility
for cost increases.
 Scope of Cost Accounting

 Cost comparisons: Cost accounting also includes comparisons between

cost from alternative courses of action such as use of technology for
production, cost of making different products and activities, and cost of
same product/ service over a period of time.
 Cost Control: Cost accounting is the utilization of cost information for
exercising control. It involves a detailed examination of each cost in the
light of benefit derived from the incurrence of the cost. Thus, we can state
that cost is analyzed to know whether the current level of costs is
satisfactory in the light of standards set in advance.
 Cost Reports: Presentation of cost is the ultimate function of cost
accounting. These reports are primarily for use by the management at
different levels. Cost Reports form the basis for planning and control,
performance appraisal and managerial decision making.
 Objectives

 Determining selling price,

 Controlling cost
 Providing information for decision-making
(i)Determination of cost-volume-profit relationship.
(ii) Make or buy a component
(iii) Shut down or continue operation at a loss
(iv) Continuing with the existing machinery or
replacing them by improved and economical
machines.
Objectives

 Ascertaining costing profit

 Facilitating preparation of financial
and other statements.
 DIFFERENCE BETWEEN FINANCIAL
ACCOUNTING AND COST
ACCOUNTING
Basis Financial Accounting Cost Accounting
Objective It provides information
It provides information
of ascertainment of cost
about the financial
to control cost and for
performance and
decision making about
financial position of the
the cost.
business.

Nature It classifies, records,

It classifies records, presents, and interprets
presents and interprets in a significant manner
transactions in terms of the material, labour and
money. overheads cost.
 Differences…… Contd

Recording of data It also records and presents

the estimated/budgeted
It records Historical data. data. It makes use of both
the historical costs and pre-
determined costs..
Users of information The users of financial The cost accounting
accounting statements are information is used by
shareholders, creditors, internal management at
financial analysts and different levels.
government and its
agencies, etc.
Analysis of costs and profits It provides the details of cost
It shows the profit/ loss of the
and profit of each product,
organisation.
process, job, contracts, etc.
 Differences…..Contd

Basis Financial Accounting Cost Accounting

Time Period Its reports and

Financial Statements statements are
are prepared for a prepared as and when
definite period, usually a required.
year.

Presentation of There are not any set

information A set format is used for formats for presenting
presenting financial cost information.
information.
 Importance of Cost Accounting

 Importance to Management
(i) Helps in ascertainment of cost
(ii) Aids in Price fixation
(iii) Helps in Cost reduction
(iv) Elimination of wastage
(v) Helps in identifying unprofitable activities
(vi) Helps in checking the accuracy of financial account
(vii) Helps in fixing selling Prices
(viii) Helps in Inventory Control
(ix) Helps in estimate
 Importance to Employees
 Cost accounting and creditors
 Importance to National Economy
 Limitations

 It is expensive because analysis, allocation and absorption of

overheads require considerable amount of additional work.
 The results shown by cost accounts differ from those shown by
financial accounts. Preparation of reconciliation statements
frequently is necessary to verify their accuracy. This leads to
unnecessary increase in workload.
 It is unnecessary because it involves duplication of work. Some
industrial units are functioning efficiently without any costing
system.
 Costing system itself does not control costs. If the management is
alert and efficient, it can control cost without the help of the cost
accounting. Therefore it is unnecessary.
 Elements of Cost

 The term ‘cost’ means the amount of expenses incurred

on or attributable to specified thing or activity.
 As per Institute of cost and work accounts (ICWA) India,
Cost is ‘measurement in monetary terms of the amount
of resources used for the purpose of production of goods
or rendering services.
 Cost of production/manufacturing consists of various
expenses incurred on production/manufacturing of
goods or services.
 These are the elements of cost which can be divided
into three groups : Material, Labour and Expenses.
 Material

 To produce or manufacture material is required

 All material which becomes an integral part of finished product
and which can be conveniently assigned to specific physical
unit is termed as “Direct Material”.
 The substance from which the product is made is known as
material. It may be in a raw or manufactured state.
 Material is classified into two categories:
Direct Material
Indirect Material
 Direct material
Direct Material is that material which can be easily identified and related
with specific product, job, and process. Timber is a raw material for making
furniture, cloth for making garments, sugarcane for making sugar, and Gold/
silver for making jewellery, etc are some examples of direct material
 Indirect material
Indirect Material is that material which cannot be easily and conveniently
identified and related with a particular product, job, process, and activity.
Consumable stores, oil and waste, printing and stationery etc, are some
examples of indirect material.
Indirect materials are used in the factory, the office, or the selling and
distribution department.
 Labour

 Labour is the main factor of production.

 For conversion of raw material into finished goods, human
resource is needed, and such human resource is termed as labour.
 Labour cost is the main element of cost in a product or service.
 Labour can be classified into two categories:
Direct Labour, and
Indirect labour
 Direct labour
Labour which takes active and direct part in the production of a commodity.
Direct labour is that labour which can be easily identified and related with
specific product, job, process, and activity.
Direct labour cost is easily traceable to specific products.
Direct labour varies directly with the volume of output.
Direct labour is also known as process labour, productive labour, operating
labour, direct wages, manufacturing wages, etc.
Cost of wages paid to carpenter for making furniture, cost of a tailor in
producing readymade garments, cost of washer in dry cleaning unit are some
examples of direct labour.
 Indirect labour
Indirect labour is that labour which can not be easily identified and related
with specific product, job, process, and activity.
It includes all labour not directly engaged in converting raw material into
finished product.
It may or may not vary directly with the volume of output.
Labour employed for the purpose of carrying out tasks incidental to goods
or services provided is indirect labour
Wages of store-keepers, time-keepers, salary of works manager, salary of
salesmen, etc, are all examples of indirect labour cost.
 Expenses

 All cost incurred in the production of finished goods other than

material cost and labour cost are termed as expenses.
 Expenses are classified into two categories:
 Direct expenses, and
 Indirect expenses (An item of overheads)
 Direct expenses
These are expenses which are directly, easily, and wholly allocated to
specific cost center or cost units. All direct cost other than direct
material and direct labour are termed as direct expenses.
Direct expenses are also termed as chargeable expenses.
Some examples of the direct expenses are hire of special machinery,
cost of special designs, moulds or patterns, feed paid to architects,
surveyors and other consultants, inward carriage and freight charges
on special material, Cost of patents and royalties.
Indirect expenses
 These expenses cannot be directly, easily, and wholly
allocated to specific cost center or cost units.
 All indirect costs other than indirect material and indirect
labour are termed as indirect expenses.
 Indirect expenses are treated as part of overheads. Rent,
rates and taxes of building, repair, insurance and
depreciation on fixed assets, etc, are some examples of
indirect expenses.
 Overheads : Meaning

 The term overhead has a wider meaning than the term indirect
expenses.
 Overheads include the cost of indirect material, indirect labour and
indirect expenses.
 This is the aggregate sum of indirect material, indirect labour and
indirect expenses.

 Overheads are classified into following three categories:

Factory/works/ production overheads
Office and administrative overheads
Selling and distribution overheads
Factory/works overheads
 All indirect costs incurred in the factory from the stage of procurement of
material till the stage of production of finished goods is termed as
factory/works overheads.
 These include indirect material such as consumable stores, cotton waste,
oil and lubricants etc.
 Indirect labour cost such as wages paid to foreman/storekeeper. Works
manager’s salary.
 Indirect expenses incurred in the factory such as cost of factory
lighting/power expenses, rent/insurance/repairs of factory
building/machinery, depreciation on factory building or machinery etc.
 Indirect wages
(i) Salary of factory manager, foremen, supervisors, clerks etc.
(ii) (ii) Salary of storekeeper
(iii) Salary and fee of factory directors and technical directors
(iii) (iv) Contribution to ESI, PF., Leave pay etc. of factory employee.
 Indirect expenses
(i) Rent of factory buildings and land
 (ii) Insurance of factory building, plant, and machinery
 (iii) Municipal taxes of factory building
 (iv)
 (v) (vi)
 Depreciation of factory building, plant and machinery, and their repairs and
maintenance charges
 Power and fuel used in factory Factory telephone expenses.
 Office and administrative overheads
 These expenses are related to the management and
administration of the business.
 They include:
 Indirect material such as stationary items, office supplies etc.
 Indirect labour cost such as salaries paid to accounts and
administrative staff, Director’s remuneration etc.
 Indirect Expenses such as postage/telephone,
rent/insurance/repairs/depreciation on office building,
general lighting, legal /audit charges , bank charges etc.
 Selling and distribution overheads
 Selling and distribution overheads consists of all overhead costs
incurred from the stage of final manufacturing of finished goods
till the stage of sale of goods in the market and ollection of dues
from the customers. They include:
 Indirect material such as packing material, samples etc.
 Indirect labour like slaries paid to sales personnel, commission
paid to sales manager etc.
 Indirect expenses like carriage outwards, warehouse charges,
advertisement, bad debts, repairs and running of distribution van,
discount offered to customers. etc.
 Cost Sheet

 Cost sheet is a statement, which shows various components of total cost of a

product. It classifies and analyses the components of cost of a product.
 Cost sheet is prepared on the basis of :
1. Historical Cost 2. Estimated Cost
 Historical Cost
Historical Cost sheet is prepared on the basis of actual cost incurred. A
statement of cost prepared after incurring the actual cost is called Historical
Cost Sheet.
 Estimated Cost
Estimated cost sheet is prepared on the basis of estimated cost. The statement
prepared before the commencement of production is called estimated cost
sheet. Such cost sheet is useful in quoting the tender price of a job or a contract.
 Components of Total Cost

 Prime Cost
It consists of direct material, direct wages and direct expenses. It is also known
as basic, first, flat or direct cost of a product.

 Prime cost = Direct material cost + Direct Labour cost + Direct Expenses
 Direct material means cost of raw material used or consumed in
production.
 Material consumed – Opening stock + Purchases – Closing stock
 Illustration 1

 Calculate prime cost from the following particulars for a

production unit: Rs.
 Cost of material purchased 30,000
 Opening stock of material 6,000
 Closing stock of material 4,000
 Wages paid 3,000
 Rent of hire of a special machine for production 5,000
 Factory Cost

 In addition to prime cost it includes works or factory overheads.

 Factory overheads consist of cost of indirect material, indirect
wages, and indirect expenses incurred in the factory.
 Factory cost is also known as works cost, production or
manufacturing cost.
 Factory cost = Prime cost + Factory Overheads
 COST CENTRE
 According to the Chartered Institute of Management Accountants,
England, cost centre means ―a location, person or item of equipment or
group of these for which costs may be ascertained and used for the
purpose of cost control. It can be a department or a sub-department or an
item of equipment or machinery or a group of persons.
 PROFIT CENTRE
 A profit center is a business unit or department within an organization that
generates revenues and profits or losses. Here, both the inputs and outputs
are measured in monetary terms, and accounting for both costs and
revenues results in automatic computation of profit with respect to this
centre, termed as profit centre.
 Illustration 2

 Calculate factory cost from the following particulars: Rs

Material consumed 60,000
Productive wages 20,000
Direct Expenses 5,000
Consumable stores 2,000
Oil grease/Lubricating 500
Salary of a factory manager 6,000
Unproductive wages 1,000
Factory rent 2,000
Repair and Depreciation on Machine 600
 Illustration 3

 From the following list of balances , prepare a statement showing Cost

of sales, Gross Profit, Operating Expenses, Operating Profit and Net
Profit
Sales 7,80,000
Purchases 4,83,000
Sales Returns 30,000
Salaries: Office 40,350
Selling 22,950
Particulars Rs.
Sales 7,80,000
Purchases 4,83,000
Sales Returns 30,000
Salaries: Office 40,350
Selling 22,950 63,300
Rent and Taxes : Office 2,700
Selling 1,350 4,050
Stationary and Postage 3850
Depreciation 13950
Advertising 4700
Selling Expenses 2350
Travelling Expenses 3000
Opening Stock 114375
Sundry Expenses: Office 16500
Selling 8250
Closing stock 147750
Dividend on shares 13500
Profit and sale of shares 4500
Loss on sale of shares 6000
 Illustration 4

 From the books of accounts of M/s ABC Ltd, following details

have been extracted for the year ending March, 2019
 You are required to prepare:
 Prime cost
 Factory Overheads
 Factory cost
 Administration Overheads
 Selling Overheads
 Total cost
Particulars Rs
Stock of materials: Opening 188000 188000
Closing 200000 200000
Materails purchased 832000
Direct wages paid 238400
Indirect wages paid 16000
Salaries to administrative staff 40,000
Freights- Inward 32000
Outward 20,000
Cash discounts allowed 14000
Bad debts written off 18800
Repairs to plant and machinery 42400
Rent and taxes – Factory 12000
Office 6400
Travelling Expenses 12400
Salesmen salaries and commission 33600
Depreciation- Plant & Machinery 28400
- Furniture 2400
Director’s fees 24000
Electricity charges( Factory) 48000
Fuel(for boiler) 64000
General charges 24800
Manager’s salary 48000
Manager's time is shared between factory and office in the ratio 20:80