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Cost Accounting

Cost Accounting. Introduction of cost accounting Lecture-1. User Group. Investors. Managers. Lenders. Directors. Govt Agencies. Suppliers. Management. Employees. Cost Accounting.

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Cost Accounting

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  1. Cost Accounting Introduction of cost accounting Lecture-1

  2. User Group Investors Managers Lenders Directors Govt Agencies Suppliers Management Employees

  3. Cost Accounting • Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making

  4. 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.

  5. Classification Of Cost

  6. Direct Cost • Cost that can be traced in full to the product or services is direct cost

  7. 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 Direct labor cost are the specific cost of the worker in producing a or service For example wood in manufacturing of table For example labor involve in cutting wood

  8. 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, Cost of moulds

  9. Indirect Cost • The cost that is incurred in producing product or services but which can not traced in full • FOH means all expenses of factory other than direct material, direct labor and other direct production expenses. Factory overhead (FOH) Indirect material Indirect Labor Deprecation of machinery Factory utility bills

  10. Cost classification Direct Material + Direct Labor = Prime cost Direct Labor + FOH = Conversion cost Prime Cost + FOH = Total factory cost or Total manufacturing cost

  11. Cost classification Direct material $ 12,000 Direct labor8,000 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

  12. Behavior Of Cost • Fixed cost • Variable cost • Step fixed cost • Semi variable cost

  13. 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 Fixed cost 3000 Fixed cost 2000 1000 100 200 300 No. of units

  14. 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

  15. Variable Cost The expenses that vary in direct proportion to volume of product. For example Prime cost. Variable cost No. of units

  16. Variable Cost Per Unit Reaction Variable cost per unit remain constant Units of Labor Total wages Per labor wage rate 10 10,000 1,000 20 20,000 1,000

  17. Semi Variable Cost The cost that is partly fixed and partly variable cost. For example electricity bills, salesman salary. 3000 Semi variable cost 2000 1000 100 200 300 No. of units

  18. Important terms • Cost unit • Cost center • Revenue center • Opportunity cost • Investment center • Relevant cost • Irrelevant cost • Sunk cost • Product cost • Period cost

  19. Important terms • Historical cost • Standard cost • Implicit cost • Explicit cost • Differential cost • Cost accumulation

  20. Cost unit It is a cost of a product or services in relation to which the cost is ascertained, in simple words the cost of producing the units. • Example • Ball point for a Ball point manufacturing concern. • Bottle for Beverage producing concern. • Fan for a Fan manufacturing concern.

  21. Cost centre Cost centre is a production or service location where costs are incurred and may be attributed to cost units. • Examples • Workshop in a manufacturing concern • Auto service department • Electrical service department • Packaging department • Janitorial service department

  22. Revenue Center It is part of the entity that earns sales revenue. Its manager is responsible for the revenue earned not for the cost of operations. • Examples: • Sales department • Factory outlet

  23. Profit Center Profit centre is a section of an organization where the manager responsible for producing profit by utilizing resources assigned by the organization • Examples: • A branch • A division

  24. Opportunity Cost Opportunity cost is the value of a benefit sacrificed in favor of alternate decision. Example Building already let out at a rent of $ 10,000 that can be utilized at the place of business. $10,000 is opportunity cost for the business.

  25. Relevant Cost Relevant cost is that changes with a change in decision. These are future costs that affect the current decision. • Examples • Variable cost • Fixed cost which changes with in an alternatives • Opportunity cost

  26. Irrelevant Cost Irrelevant costs are the costs that would not effect the current decision. • Examples: • Building Rent • Machine Depreciation

  27. Sunk Cost Sunk cost is the cost of resource already required that cannot be changed with the change in decision. • Examples: • Research Cost • Architect consultation fee

  28. Product Cost Product cost is a cost that is incurred in producing goods and services. Example Direct material, direct labor and factory overhead

  29. Period Cost The cost are not related to production and are matched against on a time period basis are period cost Example Selling and administrative expenses

  30. Historical cost Historical cost is an actual cost that is borne at the date of transaction . • Example • A building was purchased for Rs 400,000, • it is historical cost of building.

  31. Standard Cost Standard cost is a Predetermine cost of the units. Example Budgeted cost = Rs 400 Budgeted hours = 10 hours Standard cost per hour is $ 40

  32. Implicit Cost Implicit cost is an opportunity cost. • Example • Uses its own capital • Uses its owner's time and/or financial resources

  33. Explicit cost The actual cost incurred is an explicit cost . • Example • Wage • Rent • Materials

  34. Differential Cost or Incremental cost It is the difference of the costs of two levels. • Example • Cost at producing 1,000 units is 15,000 • Cost at producing 3,000 units is 60,000 • Difference between differential cost and marginal cost

  35. Cost Accumulation • Cost accumulation are the various ways in which the information in a set of cost accounts may be aggregated to produce report. It is a method of cost accounting applied to production carried out by a series of chemical or operational stages or processes. Generally, it is the allocation of all time, material and expenses to an individual project or job

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