INTRODUCTION

TO COST
ACCOUNTING
UNIT-1
 Introduction to Cost Accounting:
Introduction- Meaning and Definition of Cost, Costing and Cost Accounting-
Objectives of Costing- Comparison between Financial Accounting and Cost
Unit-I Accounting- Applications of Cost Accounting- Designing and Installing a Cost
Accounting System- Cost Concepts- Classification of Cost- Cost Unit- Cost Centre-
Elements of Cost- Preparation of Cost Sheet- Tenders and Quotations

Material Cost:
Meaning- Types- Direct Material- Indirect Material- Material Control- Purchasing
Procedure- Store Keeping- Techniques of Inventory Control- Setting of Stock Levels
Unit-II EOQ- ABC Analysis-VED Analysis- Just In Time- Perpetual Inventory System-
Documents used in Material Accounting- Methods of Pricing Material Issues-FIFO-
LIFO Weighted Average Price Method and Simple Average Price Method
 Labour Cost:
Meaning- Types- Direct Labour- Indirect Labour- Timekeeping- Time booking- Idle
Time Overtime- Labour Turnover, Methods of Labour Remuneration- Time Rate
System- Piece Rate System- Incentive System - Halsey plan- Rowan plan- Taylor's
Unit-III
differential Piece Rate System and Merricks Differential Piece Rate System-
Problems.

Overhead Cost:
Meaning and Definition- Classification of Overheads- Procedure for Accounting and
Control of Overheads- Allocation of Overheads- Apportionment of Overheads-
primary overhead- Distribution Summary- Secondary Overhead Distribution
Unit-IV Summary- Repeated Distribution Method and Simultaneous Equation Method –
Absorption of factory Overheads- Method of Absorption- Machine Hour Rate-
Problems
 Marginal Costing and Budgetary Control:
Marginal Costing; Meaning- Features and Assumptions- Calculation of P/V ratio,
Break Even Point- Margin of Safety- desired profit and desired sales- Problems.
Unit V Budgetary Control: Introduction- Meaning and Definition of Budget and Budgetary
Control- Objectives of Budgetary Control- Classifications of Budges-Functional
budgets- Problems on Flexible Budget and Cash Budget
Meaning of Cost
• Cost is a measurement, in monetary terms of the
amount of resources used for the purpose of
production of goods or rendering services.

• According to CIMA, UK Cost is the “amount of

expenditure (actual or notional) incurred or attributable
to a given thing”.
Meaning of costing
• According to the Chartered Institute of Management
Accountants(CIMA) of UK has defined costing as, “
the techniques and processes of ascertaining costs”.

• Costing is the classifying, recording and appropriate

allocation of expenditure for the determination of
costs, the relation of these costs to sales value and the
ascertainment of profitability.
 Meaning of cost accounting
• It is a formal system of accounting for costs in the books of
account by means of which costs of products and services are
ascertained and controlled.
• According to CIMA of UK,” cost accounting is the process of
accounting for costs from the point at which expenditure is
incurred or committed to the establishment of its ultimate
relationship with cost center and cost units.
• In its widest usage, it embraces the preparation of statistical data,
the application of cost control methods and ascertainment of
profitability of activities carried out or planned”
 Objectives of cost accounting
• Fixing Selling Price
• Making a Foundation of Total Cost
• Determining the Profitable Products
• Controlling Costs Becomes Easier
• Handle Bonus Plans in an Organization
• Helps in Proper Decision-making
• Making Statements
• To Enhance Communication Among Departmental Managers
 DIFFERENCES BETWEEN FINANCIAL
ACCOUNTING AND COST ACCOUNTING
BASIS FINANCIAL ACCOUNTING COST ACCOUNTING
The main purpose is to prepare profit The main purpose is to
and loss account and balance sheet provide detailed cost
Purpose
for reporting to owners and outside information to management
agencies that is internal users

These accounts are obligatory to be

Maintenance of these
Statutory requirements prepared as per companies and
accounts are voluntary
income tax act

Financial reports are prepared Cost reporting is a continuous

Periodicity of reporting
periodically usually on an annual process and may be on daily,
basis monthly, weekly basis.
 DIFFERENCES BETWEEN FINANCIAL
ACCOUNTING AND COST ACCOUNTING
BASIS FINANCIAL ACCOUNTING COST ACCOUNTING
It records only external
It records not only external
Types of transaction transactions like sales, purchases,
transactions but also internal or
recorded receipts with outside parties.
inter departmental transactions
Internal transactions not recorded
It generates special purpose
Types of statements Profit and loss account and statements like report on loss of
prepared balance sheet materials, idle time report, variance
report etc
It has a single uniform format of Cost accounting has varied forms of
Format of presenting presenting information i.e P/L a/c, presenting cost information to meet
information balance sheet and cash flow the needs of management and there
statement is no uniform format
 Installation of Cost System or
Cost Accounting System
• Preliminary investigation should be made relating to the technical
aspects of the business. Ex the nature of the product and methods of
production
• The organization structure of the business should be studied to
ascertain the scope of authority of each executive.
• The methods of purchase, storage and issue of materials should be
examined and modified as per the requirements.
• The existing methods of remunerating labour should be examined
for the purpose of introducing any incentive systems
• Forms and accounting records should be so designed so as to
involve minimum clerical labour and expenditure
• The size and layout of the factory should be studied
• The costing system should be effective in cost control and cost
reduction
• The installation and operation should be economical.
 Classification of costs
1. Direct and indirect costs
2. Fixed cost and variable costs
3. Controllable costs and non-controllable costs
4. Historical cost and predetermined costs
5. Normal cost and abnormal costs
6. Sunk costs
7. Differential cost
8. Marginal cost
9. Opportunity cost
10. Replacement cost
11. Conversion cost
 Classification of costs
1. Direct and indirect costs
• Direct costs are those costs which are incurred for and conveniently
identified with a particular cost unit, process or department.
• Cost of raw materials used and wages of machine operator are common
examples of direct costs.

• Indirect costs are general costs and are incurred for the benefit of a number
of cost units, processes or departments. These costs cannot be conveniently
identified with a particular cost unit or cost centre.
• Eg: insurance , lighting ,power, rent etc.
2. Fixed cost and variable costs
• Fixed cost are those costs which remain constant in total amount over a
wide range of activity for a specified period of time. These costs do not
increase or decrease when the volume of production changes
• Eg: building rent, managerial salaries remain constant
• Variable cost:
• These costs tend to vary in direct proportion to the volume of output. It
means if volume of output increases, total variable cost also increases and
if volume of output decreases the total variable cost also decreases.
• Ex. Raw material cost, Delivery cost, Packaging supply
• Semi-variable or semi-fixed (mixed costs);
• It include both a fixed and a variable component that is these are partly
fixed and partly variable.
3. Controllable costs and non-controllable costs
• Controllable costs are those costs which may be directly regulated at a
given level of management authority
• Eg: cost of raw material may be controlled by purchasing in larger
quantities, Advertising Expenses, employee bonus

• Non-controllable costs:
• These are those costs which cannot be influenced by the action of a
specified member of an enterprise
• Eg: it is very difficult to control costs like factory rent, managerial salaries,
tax etc.
 4. Historical cost and predetermined costs
• Historical costs are past costs which are ascertained after these
have been incurred. These are actual cost incurred

• Predetermined costs:
• These are future costs which are ascertained in advance of
production on the basis of a specification of all the factors
affecting cost. These costs are mainly used for the purpose of
planning and control.
 5. Normal cost and abnormal costs
• Normal costs are costs which are normally incurred on expected
lines at a given level of output. This cost is a part of cost of
production.
• Ex. repairs, maintenance, salaries paid to employees
• Abnormal cost
• cost that is not normally incurred at a given level of output. Such
cost is over and above the normal cost and it is not treated as a part
of cost of production.
• Ex. destruction due to fire, shut down of machinery, lock outs, etc.
• Sunk costs:- It is a cost that has already been incurred and
that cannot be changed by any decision made now or in the
future. Such costs are not relevant for decision making about
the future.
• Ex. your rent, marketing campaign expenses or money spent
on new equipment

• Differential cost:- It is the increase or decrease in total cost

that results from an alternative course of action. It is the
difference in total cost resulting from a contemplated change.
• Ex. Changed marketing strategies (Newspaper, TV ads to
Social media ads)
• Marginal cost:- It is the additional cost of producing one
additional unit.
• It is the technique of charging only variable cost to product.
Marginal cost is the change in the total cost when the quantity
produced is incremented by one more unit.
• For example, if a company needs to build a new factory in
order to produce more goods, the cost of building the factory
is a marginal cost.
• Opportunity cost:- It is the potential benefit that is lost or
sacrificed when the selection of one course of action makes it
necessary to give up competing course of action.
• for example, you spend time and money going to a movie, you
cannot spend that time at home reading a book, and you can't
spend the money on something else.
• another example, a certain kind of bamboo can be used to
produce both paper and furniture. If the business takes a decision
to consider using bamboo for furniture, then the society has to
forego the number of bamboos that could have been used for
manufacturing paper.
• Opportunity Cost = Return on investment for an option not
chosen – Return on investment for a chosen option
• Replacement cost:- It is the current market cost of replacing an
asset.

• Conversion cost:- It is the total cost of converting raw material

into finished product. It includes sum of direct labour and factory
overhead costs in the production of a product.
 Cost Object
• Cost object is the technical name for a product or a service, a
project, a department or any activity to which a cost relates.
• A cost object is anything for which a separate measurement of costs
is desired. Examples include a product, a service, a project, a
customer, a brand category, an activity, and a department.
• Therefore the term cost should always be linked with a cost object
to be more meaningful. Establishing a relevant cost object is very
crucial for a sound costing system.
• The Cost object could be defined broadly or narrowly. At a broader
level a cost object may be named as a Cost Centre, where as at a
lowermost level it may be called as a Cost Unit.
 Cost Centre
• According to CIMA of UK, cost centre has defined as a “location,
person or item of equipment(or group of these) for which costs may
be ascertained and used for the purposes of control”.
• The selection of suitable cost centres or cost units for which costs are
to be ascertained in an undertaking depends upon a number of factors
such as organization of a factory, condition of incidence of cost,
availability of information, requirements of costing and management
policy regarding selecting a method from various choices.
• Cost centre may be production cost centres, operating cost centres or
process cost centres depending upon the situation and classification.
 Example of Cost Centre
• Accounts department in any company is one of the examples of cost
centre as they are responsible for maintaining the accounts of the
company and tracking the expense through various means and do
not directly generate any revenues or bring any profits to the
company.
• However for running this department there involves costs such as
salary to accounting staff, software and hardware cots for facilitating
them in maintaining the records etc.
• Other examples of Cost centre are maintenance department,
customer service centre, Information technology department,
Human resource department etc.
 Cost Unit
• Cost Unit is a device for the purpose of breaking up or separating costs into
smaller sub divisions attributable to products or services.
• Cost unit can be defined as a ‘Unit of product or service in relation to which
costs are ascertained’. The cost unit is the narrowest possible level of cost
object.
• A cost unit is characterised as the unit of service, time, movement, product, or
mix according to which cost is assessed. At the time of setting up the cost
proclamations, statements, and records, a specific unit is needed to be chosen.
It assists with distinguishing the expense precisely and allot the different
costs. It helps the expense estimation interaction of the organisation and
advances correlation.
• The cost unit of the steel business would be a ton, and the expense unit of the
hotel business is a room.
A few examples of cost units
INDUSTRY / PRODUCT COST UNIT
Automobile Number of vehicles
Cable Metres / kilometres
Cement Tonne
Chemicals / Fertilizers Litre / Kilogram / tonne
Gas Cubic Metre
Power - Electricity Kilowatt Hour
Transport Tonne-Kilometre, Passenger-Kilometre
Hospital Patient Day
Hotel Bed Night
Education Student year
Telecom Number of Calls
BPO Service Accounts handled
Professional Service Chargeable Hours
Elements of cost
Elements of
Cost

Material Labour Expenses

Direct Direct Direct

Material Labour Expenses

Indirect Indirect Indirect

Material Labour Expenses
• Direct Material + Direct Labour + Direct Expenses = Prime Cost

• Indirect Material+ Indirect Labour + Indirect Expenses = Overheads

• Overheads are divided into :
• a) Production overheads
• b) Office and administration overheads
• c) Selling and distribution overheads
Cost sheet
• It is a document which provides for the assembly of the
detailed cost of a cost centre or cost unit.

• Cost sheet is a periodical statement of cost designed to show

in detail the various elements of cost of goods. It is prepared
at regular intervals like weekly, monthly, quarterly, yearly
etc.
Purpose of cost sheet
1. It reveals the total cost and cost per unit of goods produced
2. It discloses the breakup of total cost into different elements of cost
3. It acts as a guide to management in fixation of selling price and
quotation of tenders
4. It provides a comparative study of the cost of current period with
that of the corresponding period.
Format of Cost Sheet for the period…….
Particulars Total cost Cost per unit

Direct Materials
Direct Labour
Direct (Chargeable expenses) Expenses
Prime cost
Add: Works overheads/ Factory overheads
Works cost
Add: Office and administrative overheads
Cost of production
Add: Selling and distribution overheads
TOTAL COST OR COST OF SALES
PROFIT OR LOSS
SALES
 Quotation
• Quotation is the formal document or document of promise given by
supplier to supply goods & services to buyer at stated price under
some specific conditions.

• Quotation consists of terms of sales, payment, warranty, price to

charge for product/services, time, date, delivery location, validity
period. It also helps buyers in knowing the cost of goods/services
before purchase. Generally government enterprises float the tenders.
 Tender
• Tender is the response to an invitation of offer. This invitation
provides services/products at quoted price at specific quality (with
specific conditions). Generally tenders are floated by government
undertakings, corporate players, and financial institutions.

• They want goods at large scales in order to meet the production

requirements. In most cases, in order to meet the requirement they
can't deliver on their own and they have to go to a third party supplier
to meet the requirements. For these reasons they invite bids from third
party suppliers.