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COST

ACCOUNTING

McGraw-Hill Technology Copyright © 2006 by The McGraw-Hill Companies, Inc. All


Education rights reserved.
Introduction to Cost
Accounting

McGraw-Hill Technology Copyright © 2006 by The McGraw-Hill Companies, Inc. All


Education rights reserved.
Accounting

• It is a language about financial information (which


is measurable in terms of money) commonly used
in business.
Branches Of Accounting

Accounting

Financial Accounting Cost Accounting Management Accounting

For external For internal Fed by


reporting reporting financial and
cost accounting
User Group

Investors Managers

Lenders Directors

Govt Agencies

Suppliers

Management

Employees
Branches Of Accounting

Financial Accounting is an art of recording (Journal),


classifying (Ledger), summarizing (Trial balance), reporting
(Profit & Loss A/c & Balance Sheet) and analysis
(Interpretation) the financial information.

Cost Accounting deals with ascertainment(discover,


determine), measurement, accumulation, budgeting and
evaluating cost structure of the entity.

Management Accounting deals with decisions relating to the


generation and effective utilization of the financial resources of
an entity.
Cost Accounting

• Cost Accounting means: Accounting for cost.


 Question arises what is cost?
cost is expenditure incurred
 Next question arises expenditure incurred
for what ?
Expenditure incurred for a product
 Next question arises what is product?
Production of a article
Rendering of services
Cost Accounting

So Cost accounting is a specialized branch of accounting which


provide processed set of information / statements to the
management which assist them in decision making.

In cost accounting cost of product or a process is;


• Ascertained
• Measured
• Accumulated
Management Accounting

• Management is central coordinating body in an entity


• Management is concerned with the maximization of wealth
through
Minimization of cost
Maximization of profit

• For this purpose information provided by cost accounting is


analyzed by the management for decision making and
management control function.
Management Accounting

• Reports generated through management accounting are


used internally.
• Major function of management accounting:

• Planning & Forecasting


• Controlling
• Decision making

Pricing
Make or Buy
Shut down or Continued operation
Equipment Replacement
Purpose Of Cost Accounting

Provides information relating to cost of production.


Determines the appropriate selling price.
Discloses profitable products, areas and activity level.
Helps in make or buy decision.
Budgeting relating to production function.
Controls production variances.
Provides information to financial accountant.
Classification Of Cost
Direct Cost

• Cost that can be traced in full to the product or services is


direct cost
Types Of Direct Cost

Direct material costs are those cost of material that are


traceable in full in the cost of a product or services

For example wood in manufacturing of table

Direct labor cost are the specific cost of the worker in


producing a product or service

For example labor involve in cutting wood


Types Of Direct Cost

Other Direct Expenses These are expenses other than


direct material and direct labor which have been incurred in
full as direct consequences of producing product or services

Royalty on production
Indirect Cost
• The cost that is incurred in producing product or services but which can
not traced in full

Factory overhead (FOH)

• FOH means all expenses of factory other than direct material, direct
labor and other direct production expenses.

Indirect material
Indirect Labor
Deprecation of machinery
Factory utility bills
Cost classification

Direct Material + Direct Labor + Other Direct Cost = Prime cost

Direct Labor + Other Direct Cost + FOH = Conversion cost

Prime Cost + FOH = Total factory cost


Summary

Material cost Labor cost Other production Total production


cost cost

Direct = Prime cost


Direct Direct

Indirect Indirect Indirect = FOH cost

Total Factory
Total Total Total =
Cost
Cost classification

Direct material Rs 12,000


Direct labor 8,000
Other direct cost 2000
Prime cost 22,000
FOH
Indirect material 3000
Indirect labor 2000
Electricity bill 1500
Rent of factory 3500
Depreciation 1000
11000
Total factory cost 33000
Behavior Of Cost

• Fixed cost  Step fixed cost

• Variable cost  Semi variable cost


Fixed cost

Fixed cost is a cost that do not vary with the level of


production. Simple means the variation in production has no
impact on fixed cost. For example rent of building and
accountant salary etc

3000

Fixed cost
2000

1000

100 200 300


No. of units
Fixed Cost Per Unit Reaction

Fixed cost per unit decreases as the number of units


produced increases and vice versa

For example rent of building is Rs. 10,000 and number of


units produced is 5000.

Pernumber
If the unit fixed cost =produced
of units 10000 / 5000 = 2 pertounit
increases 10000

Per unit fixed cost = 10000 / 10000 = 1 per unit


Step Fixed Cost

Costs which are constant for a relevant range of activity


and rise to new constant level once that range exceeded.
For example rent.

Fixed cost

No. of units
Variable Cost

The expenses that vary in direct proportion to volume of


product. For example Prime cost.

Variable cost

No. of units
Variable Cost Per Unit Reaction

Variable cost per unit remain constant

Units of LaborTotal wages Per labor wage rate


10 10,000 1,000
20 20,000 1,000
Semi Variable Cost

The cost that is partly fixed and partly variable cost. For
example electricity bills, salesman salary.

3000

Semi variable 2000


cost
1000

100 200 300

No. of units
Summary
If the production volume increases

Per unit Total

Fixed cost Decreases Constant

Variable cost Constant Increases

Total cost Decreases Increases


Summary

If the production volume decreases

Per unit Total

Fixed cost Increases Constant

Variable cost Constant Decreases

Total cost Increases Decreases


Total Cost

Total cost include both fixed cost and variable cost

As VC added in FC shifts upward

Total cost

Variable cost

3000
Total cost
2000 Fixed cost
1000

100 200 300


No. of units
End

McGraw-Hill Technology Copyright © 2006 by The McGraw-Hill Companies, Inc. All


Education rights reserved.

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