COST ACCOUNTING

COST ACCOUNTING

1. Definition of Cost Accounting

   • Cost accounting is the application of accounting and costing principles

2. Concepts of Cost Accounting

   • Cost
     • Costs may be different For the same product, depending on the completion stages.
   • Expenses
     • Some costs are actual, such as raw material cost, freight cost, labor cost, etc
   • Loss
     • Expenses are incurred to obtain something and losses are incurred without any compensation
   • Cost Center
     • Cost center refers to a particular area of activity and there may be multiple cost
   • Profit Center
     • are inclusive of costs centers as well as revenue activities.
   • Cost Drivers
     • Cost of any product depends upon cost drivers. There may be different types of cost drivers such as number of units or types of products required to produce.
   • Conversion Cost
     • The cost required to convert raw material into product is called as conversion cost. It includes labor, direct expenses, and overhead.
   • Carrying Costs
     • Carrying cost represents the cost to maintain inventory, lock up cost of inventory, store rent, and store operation expenses.
   • Out of Stock Cost
     • Sometimes loss is incurred due to shortage of stock such as loss in sale, loss of goodwill of a business or idle machine.
   • Contribution Margin
     • Contribution margin is the difference between sale price and variable cost.
   • Ordering Costs
     • Ordering costs represent the cost to place an order, up to to stage until the material is included as inventory.
   • Development Cost
     • To develop new product, improve existing product, and improved method in producing a product
   • Policy Cost
     • The cost incurred to implement a new policy in addition to regular policy is called
   • Idle Facilities Cost and Idle Capacity Cost
     • If available facilities remain idle and some loss incurred due to it, it is called idle
   • Expired Cost
     • When the cost is fully consumed and no future monetary value could be measured,
   • Incremental Revenue
     • Incremental revenue implies the difference in revenues between two alternatives. While assessing the profitability of a proposed alternative,
   • Added Value
     • means value addition to any product
   • Urgent Cost
     • There are some expenses that are to be incurred on an immediate basis. Delaying such expenses may result in loss to business.
   • Postponable Cost
     • Without avoiding any expenses, if we are able to defer some expenses to future.
   • Pre-production Cost
     • The cost incurred before commencing formal production or at the time of formation.
   • Research Cost
     • Research costs are incurred to discover a new product or to improve an existing product.
   • Training Cost
     • The costs incurred on teaching, training, apprentice of staff or worker inside or outside the business premise to improve their skills.

3. Advantages of Cost Accounting

   • Disclosure of profitable and unprofitable activities
     • minutely calculates the cost,
   • Guidance for future production policies
     • On the basis of data provided by costing department about the cost of various processes and activities.
   • Periodical determination of prolossesfit and
     • helps us to determine the periodical profit and loss of a product
   • To find out exact cause of decrease or increase in profit
     • any organization can determine the exact cause of decrease or increase in profit that may be due to higher cost of product,
   • Control over material and supplies
     • teaches us to account for the cost of material and supplies according to department, process, units of production, or services that provide us.
   • Relative efficiency of different workers
     • we may introduce suitable plan for wages, incentives, and rewards for workers and employees of an organization.
   • Reliable comparison
     • provides us reliable comparison of products and services within and outside an organization.
   • Helpful to government
     • It helps the government in planning and policy making about import, export,
   • Helpful to consumers
     • accounting builds confidence in customers about fairness of price
   • Classification and subdivision of cost
     • Cost accounting helps to classify the cost according to department, process
   • .To find out adequate selling price
     • In tough marketing conditions or in slump period, the costing helps to determine selling price of the product at the optimum level, neither too high nor too low.
   • Proper investment in inventory
     • maintain inventory at the most optimum
   • Correct valuation of inventory
     • Cost accounting is an accurate and adequate valuation technique that helps an organization in valuation of inventory
   • Decision on manufacturing or purchasing from outside
     • Costing data helps management to decide whether in-house production of any product will be profitable, or it is feasible to purchase the product from outside.
   • Reliable check on accounting
     • Cost accounting is more reliable and accurate system of accounting. It is helpful to check results of financial accounting with the help of periodic reconciliation of cost accounts with financial accounts.
   • Budgeting
     • important tools of costing. Budgets show the cost, revenue, profit, production

4. Classification of Cost

   • Costs can be classified based on the following attributes:
     • By nature  By degree of traceability of the product  By controllability  By relationship with accounting period  By association with the product  By functions  By change in activity or volume  By time  According to planning and control  For managerial decision
   • By Nature
     • In this type, material, labor and overheads are three costs, which can be further sub-divided into raw materials, consumables, packing materials, and spare parts e
   • By Degree of Traceability of the Product
     • expenses may directly attributable to a particular product. Leather in shoe
   • By Controllability
     • In this classification, two types of costs fall:
     • Controllable:
       • These are controlled by management like material labor and d
     • Uncontrollable
       • : They are not influenced by management or any group
   • By Relationship with Accounting Period
     • relate to current accounting period. Capital expenditures are the benefits beyond accounting period. Fixed assets come under category of capital expenditu
   • By Association with the Product
     • There are two categories under this classification:
       • Product cost
         • Product cost is identifiable in any product. It includes direct material, direct labor
       • Time/Period base cost
         • costs are depends on both, product cost and time/period cost.
   • By Functions
     • Under this category, the cost is divided by its function as follows:
       • Production Cost
         • It represents the total manufacturing or production cost
     • Commercial cost
       • It includes operational expenses of the business
   • By Change in Activity or Volume
     • Under this category, the cost is divided as fixed, variable, and semi-variable costs:
       •  Fixed cost
         • t mainly relates to time or period. It remains unchanged irrespective of volume of production like factory rent,

5. Cost Accounting versus Financial Accounting

   • organization . gives an overall picture of profit or loss and costing provides detailed product-wise analysis.

6. Direct Labor

   • Any wages paid to workers or a group of workers which may directly co-relate to

7. Elements of Cost

   • Direct or Indirect Materials
     • The materials directly contributed to a product and those easily identifiable in the

8. Overheads

   • Indirect expen ses are called overheads, which include material and labor. Overheads are classified as:

9. Preparation of Cost Sheet or Statement of Cost

   • A cost sheet is prepared to know the outcome and breakup of costs for a particular

10. Cost Control and Cost Reduction

    • Let us go through cost control and its reduction:
      • Conceptually, accounting is the discipline that provides information on which

11. Cost Control Techniques

    • Costs can be controlling by employing the following methods:
      •  Material Control  Labor Control  Overheads Control  Standard costing  Budgetary Control  Capital Expenditure Control  Productivity and Accounting Ratios

12. Requirements for Successful Cost Control

13. Cost Reduction

    • Cost reduction is to be understood as the achievement of real and permanent

14. Fields Covered under the Cost Reduction Program

15. Design

16. Material Cost

17. Labor Cost

18. Tools and Techniques of Cost Reduction

    • Budgetary Control  Standard Costing  Simplification and Variety Reduction  Planning and Control of Finance  Cost Benefit Analysis

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