Cost Accounting Introduction of cost accounting Lecture-1 By Mian Ahmad Farhan (ACA)
Accounting • It is a language about financial information (which is measurable in terms of money) commonly used in business.
Branches Of Accounting For external reporting For internal reporting Fed by 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, measurement, accumulation, budgeting and evaluating cost structure of the entity. Management Accounting deals with decisions related to the generation and effective utilization of the financial resources of an entity.
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 Continue 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.
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 Direct labor cost is specific cost of the worker in producing a product or service For example wood in manufacturing of table For example labor involved 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, Cost of jigs / moulds
Indirect Cost • The cost that is incurred in producing product or services but which can not be 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
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 FOH cost Indirect Indirect Indirect = Total Factory Cost Total Total Total =
Cost classification Direct material Rs 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
Behavior Of Cost • Fixed cost • Variable cost • Step fixed cost • Semi variable 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 Fixed cost 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. If the number of units produced increases to 10000 Per unit fixed cost = 10000 / 5000 = 2 per unit 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 Labor Total wages Per labor wage rate 10 10,000 1,000 20 20,000 1,000
Semi Variable Cost The cost that is partially fixed and partially variable. For example electricity bills, salesman salary. 3000 Semi variable cost 2000 1000 100 200 300 No. of units
Summary If the production volume increases: Total Per unit Constant Fixed cost Decreases Constant Increases Variable cost Increases Total cost Decreases
Summary If the production volume decreases: Total Per unit Constant Fixed cost Increases Constant Variable cost Decreases Total cost Increases Decreases
Total cost Total cost includes 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