Cost Accounting

Introduction
COSTING
• “The techniques and processes of
ascertaining costs.”
• That means, the primary function of costing
is the ascertainment of cost of products and
services.
• Costing, as a technique, is a body of
principles & rules which govern the
procedure of ascertaining the costs.
COST ACCOUNTING
“The body of concepts, methods and
procedures used to measure, analyze, or
estimate costs, profitability, and the
performance of individual products,
departments and other segments of a
company’s operations, for either internal or
external use or both, and to report on these
questions to the interested parties.”
COST ACCOUNTING =
Costing (by systematic
procedure) + Application
of Cost Control Methods
+ Ascertainment of
Profitability
(This is not a mathematical equation)
COST ACCOUNTANCY
“ The application of costing and cost
accounting principles, methods and
techniques to the science, art and practice of
cost control and the ascertainment of
profitability. It includes the presentation of
information derived there from for the
purpose of managerial decision-making.”
COST ACCOUNTANCY =
Cost Accounting +
Presentation of Information
for Managerial Decision-
Making
(This is not a mathematical equation)
Accounting Differences
• Management accounting measures and reports
financial and nonfinancial information that helps
managers make decisions to fulfill the goals of
an organization. It focuses on internal reporting.
• Financial accounting focuses on reporting to
external parties.
• Cost accounting provides information for
management accounting and financial
accounting. It measures and reports financial and
nonfinancial information relating to the cost of
acquiring or utilizing resources in an
organization.
Some Basic Definitions
• COST: The amount of expenditure (actual or
notional) incurred on or attributable to a given
thing. Broadly, cost means resources sacrificed
or forgone to achieve a specific objective.
• EXPENSE: Represents sacrifice of resources for
an economic benefit. It is any expenditure that
give benefits not extending beyond the present
accounting period.
• EXPENDITURE: Any cost, the benefit of which
may extend beyond the current accounting year.
Acquisition cost of a machine may be reckoned as
Expenditure. Because, the company is going to derive
benefit from the machine for a number of years in
future including the year in which the machine was
acquired.
It is also called Unexpired cost as the utility of machine
has not fully been utilized during the year of acquisition
but the company continues to use the machine beyond
the acquisition year also. The amount of unexpired cost
goes on decreasing as the use of asset increases.
Conversely, if an item of asset (goods/services) are used
in full during the same accounting year, its acquisition
cost may be termed as Expense. In other words, the
utility of the item acquired expires (utilized or not)
within the accounting year. This is part of Expired
cost. That which represents the unutilized part of
expired cost is a Loss.
Cost Concepts
• Product Costs: Aggregate of costs that are
associated with a unit of product. The costs
of inputs (dm, dl, & fo) in forming the
product constitute the product costs.
• Period Costs: A cost not affected by
changes in level of manufacturing activity
during a given period of time. For example,
selling & distribution costs are period costs.
• Controllable Costs: Costs chargeable to a
budget or cost centre, which can be
influenced by the actions of the person in
whom control of the centre is vested. For
example, excessive scrap may arise from
inadequate supervision in purchased material.
• Replacement Cost: Cost of replacing an asset
at any given point of time either at present or
in the future.
• Historical Costs: Actual cost determined after
the event. For example, it states costs of plant
& materials at the price originally paid for
them.
• Imputed Costs: It is a hypothetical cost. For
example, “interest on capital” is a common
type of imputed cost. No actual payment of
interest is made but the basic concept is that
had the funds been invested elsewhere they
would have earned interest.
• Sunk Costs: Those costs that have been
invested in a project and which will not be
recovered if the project is terminated. It refers
to expenditure that has taken place in the past.
• Book Costs: Those costs which do not require
current cash payments.
• Relevant Costs: Business decisions involve
planning for future and consideration of
several alternative courses of action. In this
process the costs involved are future costs.
Such costs are relevant costs as they are
pertinent to the decisions in hand.
• Opportunity Costs: It is the value of a
benefit sacrificed in favour of an alternative
course of action. It is defined as the revenue
forgone by not making the best alternative
use. It is the cost of an opportunity lost.
• Incremental Costs: It is the extra cost of taking
one course of action rather than another. It also
called differential cost. Such costs will be
different in case of different alternatives (or
change in nature of business activity).
• Conversion Cost: Cost incurred for converting
raw material into finished product. It is
production cost less dm cost.
• Committed Cost: Cost that is primarily
associated with maintaining the company’s legal
and physical existence over which management
has little discretion. It is a fixed cost.
• Marginal Cost: It is variable cost of one unit of
a product or a service, i.e., a cost which would
be avoided if the unit was not produced or
provided. “The amount, at any given volume of
output, by which aggregate costs are changed
if volume of output is increased or decreased
by one unit.”
• Notional Cost: Is a hypothetical cost taken into
account in a particular situation to represent the
benefit enjoyed by an entity in respect of which
no actual expense is incurred.
• Total Cost: It is the sum of all the items of
costs which have been incurred irrespective
of payment or not, to produce and/or sell
the product or to generate and render
service to a customer.
• Prime Cost: It is the aggregate of direct
material cost and direct wages.
• Standard Cost: A predetermined cost which
is calculated from management’s standards
of efficient operation and relevant necessary
expenditure.
Cost Center
• 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 cost control.
• Location: department, division, or section.
• Person: salesman or sales representatives.
• Item: equipment, machine, or tools.
Cost Unit
• It is a unit of quantity of product, service, or
time (or a combination of these) in relation to
which costs may be ascertained or expressed.
• For instance, in steel industry, its output is
measured in terms of ‘tonnes’. Cost unit here
is ‘tonne’ so cost per tonne of steel is to be
computed. This is used as a base for
determining or revising the price per tonne of
steel and making other decisions.