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Module 8. Introduction To Cost & Managerial Accounting04.05.2012

This document provides an introduction to cost accounting concepts. It defines key cost accounting terms like cost, product cost, period cost, and cost centers. It outlines the objectives of cost accounting like cost ascertainment, control, and assisting management decisions. It also describes different ways to classify costs, such as by elements, functions, and variability. Specific cost types are defined, like direct vs indirect costs, fixed vs variable costs, and normal vs abnormal costs. The importance of relevant costs is also discussed.

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30 views50 pages

Module 8. Introduction To Cost & Managerial Accounting04.05.2012

This document provides an introduction to cost accounting concepts. It defines key cost accounting terms like cost, product cost, period cost, and cost centers. It outlines the objectives of cost accounting like cost ascertainment, control, and assisting management decisions. It also describes different ways to classify costs, such as by elements, functions, and variability. Specific cost types are defined, like direct vs indirect costs, fixed vs variable costs, and normal vs abnormal costs. The importance of relevant costs is also discussed.

Uploaded by

vini2710
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Module 8

Introduction to Cost
1
Accounting
Cost Accounting
Cost
Product Cost
Period Cost
Elements of cost
2 Cost Centre
Classification of Cost
Other cost terms
Cost Accounting
Cost accounting involves
recording, controlling
estimating and reporting for
costs.
3
Cost Accounting
Cost accounting process
begins with the recording of
expenditure or the bases on
which they are calculated and
ends with the preparation of
statements for ascertaining
and controlling costs.
4
Objectives:
The main objectives of Cost
Accounting are as follows:
1. Ascertainment of cost
2. Cost control and cost
reduction
5
Cost Accounting Objectives:

3. Assisting management in
decision-making including
pricing, profit planning,
budgeting
6
Advantages
1. Helps in identifying
unprofitable activities, losses
or inefficiencies in any form.
2. Application of cost reduction
techniques, operation
research techniques and
value analysis technique 7
WHAT IS COST?

A cost can be defined


as the amount of
resources given up in
exchange for any
goods or service.
8
COST
Anything incurred during the
production of the good or
service to get the output into
the hands of the customer.

9
Factory Production Consumer
COST
e.g.
Material cost, Labour cost,
electricity cost, fuel cost etc.

10
COST
Capitalised Cost:
The cost incurred on fixed
assets are capitalised cost.
E.g. cost incurred to purchase
machineries. These cost are
not covered here, except
which is subsequently treated
as expenses (depreciation). 11
Cost Classification
• By elements
• By function
• As direct and indirect
• By variability
• By controllability
• By normality
• By relevance 12
By Nature or Element

Under this classification the


costs are divided into three
categories i.e. material cost,
labour cost and expenses.
13
ELEMENTS OF COST

Material Labour Expenses

14
Material
The cost which is incurred on
physical substance or thing.
e.g. Components or raw
materials purchased
15
Labour
The cost incurred on human
efforts. e.g.
??

16
Labour
The cost incurred on human
efforts. e.g.
Salary, Wages, Bonus,
Incentives, Retirement Benefits,
Perquisites
17
Expenses
The cost incurred for services.
Expenses are other than
material and labour are covered
here.
e.g. ??
18
Expenses
The cost incurred for services.
Expenses are other than
material and labour are covered
here.
e.g. Electricity expenses, Rent,
Telephone 19
By Function
In this classification costs are
divided according to the
function for which they have
been incurred. They
include ??
20
By Function
In this classification costs are
divided according to the
function for which they have
been incurred. E.g.
production cost, office &
administration cost, selling & 21
distribution costs
By Function
Production cost: materials, direct
labour, stores overheads etc.
Office & administration cost: cost
of formulating policy, directing
the organisation and controlling
the operations. E.g ??
22
By Function
Selling and distribution
expenses or marketing cost:
expenditure incurred
generating demand, on
moving articles to
prospective customers etc. 23
DIRECT COST

Direct costs are costs which can


be easily attributed to a
particular cost center/ product.
e.g.- the cost of hard disks
while assembling an PC.
24
INDIRECT COST

Cost that must be allocated in


order to be assigned to a product
or department. This cannot be
assigned directly to any particular
cost centre.
e.g. ?? 25
INDIRECT COST

Eg.
Costs incurred by the computer
maintenance and support group,
wages paid to security staff,
storage cost of units produced.
26
By Variability

According to variability
classification cost are
classified into three groups
viz. fixed, variable and semi-
variable.
27
VARIABLE COST

Variable Costs are those costs


that vary directly and
proportionately with the output.
There is a constant ratio between
the change in cost and change in
the level of output.
Examples
28
VARIABLE COST

Examples of variable cost are


direct wages, direct material,
Petrol cost for vehicle.
29
FIXED COST

Fixed Cost is a cost which does not


change in total for a given time
period despite wide fluctuations in
output or volume of activity.
Examples
30
FIXED COST

Fixed Cost
Examples are rent, property,
taxes

31
FIXED AND VARIABLE COSTS

Cost In Total Per Unit


Variable Changes as Remains
activity level constant
increases. as activity
level
increases
Fixed Remains Reduces
constant as as Activity
activity level level 32

increases increases
Semi-variable Cost

These costs contain both


fixed and variable
components and thus partly
affected by fluctuation in the
level of activity.
Examples 33
Semi-variable Cost

Examples of semi variable


costs are telephone bill,
electricity, Maintenance.
34
Example
A company has prepared
budget for July and Aug 2013.
1000 2000
Particulars Units Units
Direct Material 50000 100000
Direct Labour 28000 56000
Rent of the factory 75000 75000
Power 35000 50000
Maintenance 17000 26000 35
By Controllability

Costs here may be classified as


controllable and un- controllable
cost. Controllable costs are the cost
which can be influenced by an action
of the specified member of the
undertaking. Uncontrollable cost are
those which are not controllable.
36
By Controllability

The distinction between controllable


and uncontrollable costs is not very
sharp.
Infact no cost is uncontrollable; it is
only in relation to a particular
individual that we may specify a
particular to be either controllable or
uncontrollable. 37
By Controllability

For example, expenditure incurred by


tool room is controllable by foreman
in- charge of that section but share
which is apportioned to machine shop
can not to be controlled by machine
shop foreman.
38
By Normality
According to this basis cost may
be categorized as normal Cost
and abnormal cost. Normal cost
is normally incurred at a given
level of output under the
conditions in which that level of
output is normally attained.
39
By Normality
And cost which is abnormally
incurred is called as abnormal
cost.
e.g. cost of material which is
evaporated is normal loss
where as goods lost by fire or
theft is treated as abnormal
loss. 40
By relevance

Relevant costs are those future


costs which differ between
alternatives. Relevant costs
may also be defined as the cost
which are affected and changed
by a decision.

41
By relevance

Sunk costs are all costs incurred


in the past that cannot be
changed by any decision made
now or in the future. Sunk costs
should not be considered in
decisions.
e.g. cost incurred on research of
a product will be irrelevant while
42
By relevance
making decision whether to
undertake production or not, in
make or buy (the raw materials)
decision cost of the material,
wage rate will be relevant on the
other hand factory rent will be
irrelevant

43
DIFFERENTIAL COSTS

Differential cost is the difference


between any two alternatives.
Differential costs are equal to the
additional variable expenses
incurred in respect of the
additional output, plus the
increase in fixed costs if any
44
OPPORTUNITY COSTS

Opportunity cost is the cost of


opportunity lost. It is the cost of
selecting one course of action in
terms of opportunity which are
given up to carry out that course
of action. Opportunity cost is the
benefit lost by rejecting the best
competing alternative to one
chose. 45
The benefit lost is usually the net
earnings or profit that might have
been earned from rejected
alternative.
For example
if we invest 1 lakh in a business
then the opportunity cost would be
the amount of interest that money
would have earned if it was in bank,
46
An individual is earning Rs. 2.5
lakhs in year, now if he think to
start his own proprietary
business of computer
maintenance, his opportunity
cost will be 2.5 lakhs per annum.

47
MARGINAL COSTS

Marginal cost is the extra cost


incurred to produce one
additional unit
AVERAGE COSTS

Average cost is the total cost to


produce a quantity divided by
the quantity produced.
48
PRODUCT COST

Dr. Varadraj
Shailesh
Product Cost is the cost incurred to

J. Mehta
make or manufacture the product

Bapat,
School
and sell it. These are also known

IIT Mumbai
of Management
as inventoriable costs.
eg

49
PERIOD COSTS

Period Costs are the costs which


are charged as expenses against
the revenue of the period in which
they are incurred. These costs are
not assigned to product/ project,
but are treated as expenses of the
period in which they are incurred.
eg 50

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