UNIT-1 NOTES

Cost Accounting - 22BAS4C10

UNIT 1:

Introduction: Cost Accounting-Meaning and Definition-Objectives–Difference between Financial

and Cost Accounting – Relationship with Management Accounting and Cost Accounting-
Elements of Costing-Cost Concepts and Classifications- Preparation of Cost sheet in accordance
with Cost Accounting Standards (CASB) – Reconciliation of Cost and Financial Accounting.

TOPICS(Should match with the Teaching Plan in CAMU)

NO. TOPICS
1 Syllabus given- Introduction-Definition
2 Cost Accounting-Meaning and Definition-Objectives–
3 Difference between Financial and Cost Accounting
4 Relationship with Management Accounting and Cost Accounting
5 Elements of Costing-Cost Concepts and Classifications-
6 Elements of Costing-Cost Concepts and Classifications-
7 Preparation of Cost sheet in accordance with Cost Accounting Standards
8 Preparation of Cost sheet in accordance with Cost Accounting Standards
9 Preparation of Cost sheet in accordance with Cost Accounting Standards
10 Preparation of Cost sheet in accordance with Cost Accounting Standards
11 Reconciliation of Cost and Financial Accounting.
12 Reconciliation of Cost and Financial Accounting.

LEARNING OUTCOMES
NO. LEARNING OUTCOMES
1 To understand the Cost sheet

2 To recall Preparation of material cost, Labour cost and overhead cost

3 To apply the knowledge to methods of costing

4 To apply the knowledge to Process costing

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INTRODUCTION:
The function of any accounting system is to make available necessary information accurately for all the
parties who are concerned with the welfare of the organization –owners, employees, creditors,
prospective investors and management .the requirements of majority of them are satisfied by means of
P&L account and balance sheet. The management however requires for more detailed information than
what the conventional financial statements can offer. Its main focus and not the past .for businessman ,
who manufactures goods and services , cost accountancy is an useful aid .it is an extension of financial
accounting and it was developed on account of limitations of financial accounting to meet ever growing
needs of the management . The development of cost accounting in India is of recent origin and it is
given importance after independence, when provision for cost audit under sec 233 B of companies act
was made. Under the companies act, the government was given the power to order for cost audit. This
has given impetus to the development of cost accounting in India.

DEFINITIONS:

“ the amount cost (i) actual expenditure incurred on a given thing” and (ii) “ notional
expenditure attributable to a given thing” according to this definition the term ‘cost ‘ represents the total
of all expenses incurred . Whether paid or due, in the production and sale of a product or expended in
rendering a services.

DETAILED NOTES:

The function of any accounting system is to make available necessary information accurately for
all the parties who are concerned with the welfare of the organization –owners, employees, creditors,
prospective investors and management .the requirements of majority of them are satisfied by means of
P&L account and balance sheet. The management however requires for more detailed information than
what the conventional financial statements can offer. Its main focus and not the past .for businessman ,
who manufactures goods and services , cost accountancy is an useful aid .it is an extension of financial
accounting and it was developed on account of limitations of financial accounting to meet ever growing
needs of the management . The development of cost accounting in India is of recent origin and it is
given importance after independence, when provision for cost audit under sec 233 B of companies act
was made. Under the companies act, the government was given the power to order for cost audit. This
has given impetus to the development of cost accounting in India.

COST:

The institute of cost and management accountants (ICMA) now known as the charted institute of
management accountants , London has defined the term cost, costing, cost accounting and cost
accountancy

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DEFINITION OF COST

“ the amount cost (i) actual expenditure incurred on a given thing” and (ii) “ notional
expenditure attributable to a given thing” according to this definition the term ‘cost ‘ represents the total
of all expenses incurred . Whether paid or due, in the production and sale of a product or expended in
rendering a services.

TERM COSTING (OR) DEFINE COSTING.

COSTING:

“The techniques and processes of ascertaing cost,” the term “technique“refers to the principles
and rules that are applied for ascertaing cost of products manufactured and services rendered. The
process of costing is the day-to –day affairs of ascertaing costs, whatever the costs ascertained may be
and by whatever means these costs are determined.

Costing accounting for cost which begins.

Costing means determining the cost by any technique or process like memorandum records or
formal records based on double entry system. It cost ascertainment is done by various methods and
techniques such as job costing, process costing, unit costing etc., it consists and principles and rules
which are used for determining:

a. The cost of producing a product

b. The cost of providing a service
c. The cost of performing an activity.

Definition:

According to CIMA London, Costing is defined as “the technique and process of ascertaining
costs”.

COST ACCOUNTING

Cost accounting is the process of accounting for cost which begins with the recording of income
and expenditure, on the basis of which they are calculated and ends with the preparation of periodical
statements and reports for ascertaing and controlling costs”

Definition:

According to ICMA, “the process of accounting for cost from the point at which expenditure is
incurred or committed to the establishment of its ultimate relationship with cost centers and costs units.

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In its widest usage it embraces the preparation of statistical data, the application of cost control methods
and the ascertainment of the profitability of activities carried out or planned.”

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“.according to this definition , the term cost accountancy includes (i) costing and cost accounting
(ii) accumulation , analysis and interpretation of cost data for internal use –for planning , control and
decision making (iii) the function of keeping costs with in prescribed limits , using techniques such as
standard costing , budgetary control etc.,

Definition:

According to CIMA cost accountancy is defined as “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.

Explain the scope of cost accounting (or) Discuss the scope of cost accounting. (or) What is the scope
of cost accounting?

Cost accounting is broader in scope and comprises costing, cost accounting, cost control, cost
reduction and cost audit.

1. Costing:

Costing is the technique and process of ascertaining costs.

2. Cost accounting:

Cost accounting is the process of costing for cost which begins with the incurrence of cost and
ends with the control of cost.

3. Cost control:

Cost control involves the establishment of target performance, measuring actual performance,
comparing actual performance against target performance and taking corrective action.

4. Cost reduction:

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 Cost reduction is the achievement of real and permanent reduction in the unit cost of products,
manufactured or services rendered without impairing their suitability for the use intended in the quality
of the product

5. Cost Audit:

Cost audit is the verification of cost accounts and a check on the adherence to the cost
accounting plan.

OBJECTIVES OF COSTING ACCOUNTING.

The main objectives of cost accounting are as follows:

Ascertainment of cost:

The basic objective of cost accountings to ascertain the cost, job or service. Expense relating to a
product is collected from diverse sources. In addition to direct expense relating to a product, joint
expenses pertaining to several products are also taken into consideration (apportioned on some
equitable basis) while ascertaining the cost of a product.

Control of cost:

The second objective of cost accounting is to control the cost so that maximum and better
production at minimum cost may be made possible .to achieve this objective, the techniques of
budgetary control and standard costing is adopted.

Reduction of cost:

Costs are not to be controlled but constant efforts are to be made for reducing them. Cost
reduction implies real and permanent reduction in the unit cost of goods manufacture or service
rendered with out impairing their (products or goods) suitability for the use intended. Value analysis,
time and motion study, standardization, simplification etc are the major techniques of cost reduction.

Determination of selling price:

Cost accounting provides cost information on the basis of which selling prices of products or
services can be determined .in the event of depression or recession, cost accounting guides in deciding
the extent to which the selling price may be reduced to meet special situations.

Matching cost with revenue:

The profit of any activity can be ascertained by matching cost with the revenue of that
activity .the purpose of this step is to determine profit or loss of any activity on an objective basis.

Providing basis for operating policy:

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 Cost accounting is essential tool for the management to formulate operating policies and to take
business decisions like determination of cost –volume –profit relationship; whether to buy or to make an
article etc.,

FEATURES OF COST ACCOUNTING:

The main advantages of cost accounting are as follows:

I. Advantages to management:

1. Helps in ascertainment of cost:

Cost accounting helps in the ascertainment of cost of each product, process job etc., by using
different methods of costing such as job costing and process costing.

2. Helps in control of cost:

It helps in the control of material costs, labour costs and overheads by using different techniques
of control such as standard costing and budgetary control.

3. Helps in fixing selling prices:

It helps the management in fixing selling prices of products or services by providing detailed cost
information.

4. Helps in Inventory control:

It helps in inventory control by using various techniques such as ABC analysis, EOQ, Inventory
Turnover ratio etc.,

5. Helps in Cost reduction:

It helps in the introduction of cost reduction programme and finding out new and improved
methods to reduce costs.

6. Helps in measurement of efficiency:

It helps in measurement of efficiency of operations through establishment of standards and

variance analysis.

7. Helps in preparation of budgets:

It helps in the preparation of various budgets such as sales budget, production budget.

8. Helps in identifying unprofitable activities:

It helps in identifying unprofitable activities so that the necessary corrective action may be taken

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9. Helps in identifying material losses:

It helps in identifying material losses such as wastage, scrap, spoilage and defective through
report on material losses so that the necessary corrective action may be taken.

10. Helps in Identifying Idle Capacity:

It helps in identifying idle capacity so the necessary corrective action may be taken.

11. Helps in checking the accuracy of financial accounts:

It helps in checking the accuracy of financial accounts with the help of reconciliation statement
prepared to reconcile the profit as per cost accounts with the profit it as per financial accounts.

12. Effective utilization of resources:

Marginal costing helps in decision making regarding ‘make or buy’ of components, profit,
planning, export decisions, sales mix etc, standard costing and budgetary control are also helpful in
effective utilization of resources.

II. Advantages to employees:

1. Stability of Tenure:

A good costing system is helpful to management in increasing productivity and profitability of

firms. This leads to prosperity of industries, better wages for workers and security of job.

2. Fair wage policy and suitable incentive schemes:

As cost accounting system keeps records for each element of cost, labour hours and labour cost
are recorded in full detail. This will be helpful for the management in introducing a good wage system to
reward skilled workers and stimulate them to go for higher production.

III. Advantages to society:

An efficient costing system benefits the society by providing products and services at lower
prices due to lower cost of production.

IV. Advantages to National Economy:

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 An efficient costing system benefits national economy by achieving higher production, higher
productivity because progress of enterprises leads to the progress of the industry which lead to progress
of the national economy.

V. Advantages to Government, its agencies and others:

An efficient costing system helps government, its agencies and others by providing required cost
information. Such cost information is useful for price fixation, wage level fixation, framing various
policies etc.,

VI. Advantages to Creditors:

Before the creditors offer loans to a firm, they can have better understanding of the progress and
profitability of the firm through relevant reports. Estimated and budgets can project the future
prospectors of a firm.

VII. Advantages to the Public:

Good costing system in proper utilization of resources. Cost reduction is helpful in fair of
products and profitability of organizations is helpful in prosperity of the industry through more
employment opportunities to the members of the public.

LIMITATIONS OF COST ACCOUNTING

Cost accounting has become indispensable tool to management for exercising effective
decisions. The following are the objectives of cost accounting.

1. Costly to operate:

One of the objectives against cost accounting is that it involves heavy expenditure to operate;
installation of costing system is also expensive. The benefits derived are less, compared to the expenses
incurred.

2. Cost accounting is unnecessary:

It is help by a few that cost accountings is of recent origin and an enterprise can survive without
cost accounting. Even today, some companies are doing well without cost accounting. Hence, it is
unnecessary.

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3. Not applicable to all type of industries:

Through a single cost accounting system may not be applicable to all industries but a costing
system may be specially designed to meet the needs of a specific industry.

4. It is based on estimations:

Some people claim that costing system relies on predetermined data and therefore it is not
reliable. It estimators costs scientifically based on past and present situations and with suitable
modifications for the future

5. Too much of paper work:

A large number of forms and statements are to be sent as a matter of routine. It involves
reporting of cost data to the management. As a result, there is a lot of unwanted paper work.

CLASSIFICATION OF COSTS.

Cost classification is the process of grouping costs according to their common characteristics.
The following are the bases on which costs can be classified.

I. Cost classification according to elements

(1) Materials

Cost of tangible, physical input used in relation to output/production; e.g., cost of raw materials,
consumable stores, maintenance items etc.

(2) Labour

Cost incurred in relation to human resources of the enterprise; e.g., wages to workers, salary to
office staff, training expenses etc.

(3) Expenses

Cost of operating and running the enterprise, other than materials and labour; this is the
residual category of costs. E.g., Factory rent, office maintenance, salesmen salary etc.

II. Cost classification according to function

(1) Production cost

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 Production cost is the cost of the set of operations commencing with supply of materials, labour,
services and ends with the primary packing of product. Thus it is equal to the total of direct materials,
Direct labour, Direct expenses and production overheads.

(2) Administration cost

Administration cost is the cost of formulating the policy, directing the organisation and
controlling the operations of the undertaking, which is not directly related to production, selling,
distribution, research or development activity or function. Some examples are office rent, accounts
department expenses, audit and legal expenses, direct remuneration etc.

(3) Selling cost

Selling cost is the cost of seeking to create and stimulate demand and of securing orders. These
are sometimes called marketing costs. Some examples are advertisement, salesmen remuneration,
showroom expenses, cost of samples etc.

III. Cost classification according to variability

(1) Fixed cost

Fixed cost is “A cost which tends to be unaffected by variations in volume of output”.

(2) Variable cost

Variable cost is “a cost which tends to vary directly with volume of output”.

(3) Semi-Variable cost

Costs are those which are partly fixed and partly variable.

IV. Cost classification according to controllability:

(1) Controllable cost

This is the cost which can be influenced by the action of a specified member of an undertaking.
E.g., direct material, direct labour etc.

(2) Uncontrollable cost

This is the cost which cannot be influenced by the action of any specified member of an
undertaking. E.g., rent, rates, takes, insurance, etc.

V. Cost classification on the basis of relationship:

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(1) Direct costs:

Costs which are directly related to / identified with / attributable to a cost centre or a cost unit is
known as direct cost. E.g., Cost of basic raw material used in the finished product, wages paid to site
labour in a construction contract etc.

(2) Indirect costs:

Costs which are not directly identified with a cost centre or a cost unit is known as indirect cost.
Such costs are apportioned over different cost centres using appropriate basis. E.g., Factory rent
incurrent over various departments; salary of supervisor engaged in overseeing various construction
contracts etc.

VI. Cost classification according to capital and revenue expenditure:

(1) Capital costs are those costs incurred in the acquisition of assets, either to earn income or
increase the earning capacity of the business. For example, cost of plant, machinery etc.
(2) Revenue costs are those costs incurred to maintain the earning capacity of the firm. In costing,
only revenue expenditure is taken into account while capital cost is ignored.

VII. Cost classification on the basis of normality:

(1) Normal cost:

Costs which can be reasonably expected to be incurred under normal, routine and regular
operating conditions is knows as normal cost.

(2) Abnormal cost:

Cost over and above normal cost; which not incurred under normal operating conditions e.g,
fines and penalties.

VIII. Cost classification according to managerial decision:

(1) Relevant costs

(a) Marginal cost:

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 Marginal cost is the total variable cost i.e. prime cost plus variable overheads. Marginal cost is a
relevant cost for decision as this cost will be incurred in future for additional units of production.

(b) Differential cost:

It is the change in costs due to change in the level of activity or pattern or method of production.

(c) Opportunity cost:

This refers to the value of sacrifice made or benefit of opportunity foregone in accepting an
alternative course of action.

(d) Out-of-Pocket costs:

These are costs which entail current or near future outlays of cash for the decision at hand as
opposed to costs which do not require any cash outlay such as depreciation. Such costs are relevant for
decision-making, as these will occur in near future.

(e) Replacement cost:

It is the cost at which there could be purchase of an asset or material identical to that which is
being replaced or revalued.

(f) Imputed costs:

These are notional costs appearing in the cost accounts only e.g. Notional rent charges, interest
on capital for which no interest has been paid.

(2) Irrelevant costs:

(a) Sunk cost:

It is a cost which has already been incurred or sunk in the past. It is not relevant for decision-
making and is caused by complete abandonment as against temporary shut-down.

(b) Committed cost:

A cost which has been already committed by the management is not relevant for decision-
making.

(c) Absorbed fixed cost:

Fixed costs which do not change due to increase or decrease in activity is irrelevant for decision-
making. However, if fixed costs are specific, they become relevant.

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Difference that exists between financial accounting and cost accounting

Basis Financial accounting Cost accounting

Purpose The purpose of financial accounting is The purpose of cost accounting is

external reporting mainly to owners, internal reporting i.e., to the
creditor’s government and prospective management of every business.
investors.

Coverage Transaction are recorded for a definite Transactions are identified with cost
period .it deals with all commercial units. Attention is focused on
transactions transactions relating to manufacturing
, sales &services

Statutory It is almost necessary to maintain this The companies act has made it
requirements accounting to run business. to meet the obligatory for certain industries to
requirements of companies act and maintain cost accounting ;other wise it
income tax act , it is obligatory to keep is voluntary to maintain them
them

Analysis of It discloses profit for the entire business It shows the profitability or otherwise
profit as a whole of each product, process or operation
so as to reveal the areas of
profitability

Stock valuation Stocks are valued at cost price or market Stocks are valued at cost price
price which ever is lower.

Analysis of cost Expenditure is analyses item wise , ex , Records expenses by departments ,

wages , salaries ,depreciation etc elements products or processes to
study them analytically

Duration of Generally , financial accounts provide Cost accounting furnishes cost data at
reporting financial information once a year frequent intervals .some reports are
made daily some are weekly and some
are monthly

Figures It deals mainly with actual facts and It deals partly with facts and figures
figures and partly with estimates

Evaluation of The information provided by financial The cost data helps in evaluating the
efficiency accounts is not sufficient to evaluate the efficiency of the business
efficiency of the business

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 Comparison of Data is not sufficient for drawing inter- Detailed comparison of results of two
cost figures period and inter-firm comparison from periods in an industry is possible
time to time

Pricing It fails to guide the formulation of pricing It provides adequate data for
policy formulating pricing policy

Types of costing:

 Historical costing
It is the ascertainment of costs after they have been incurred. This type of costing has limited
utility.

 Standard costing
Under this technique, standards for performance are set up in advance. Actual performance is,
then measured against these standards and differences are located so that corrective action may
be taken.

 Uniform costing
This technique refers to the application of the uniform method of costing by different
undertakings in the same industry. This makes the inter-firm comparison possible. It helps in
improving the performance of the undertaking.

 Marginal costing
Under marginal costing costs are classified into fixed and variable. Variable costs are treated as
product costs and fixed costs are treated as period costs. Marginal costing is helpful in
management decision making.

What are the elements of cost? Or explain the major components of cost? Give a few examples of
each.

Total cost of a product is composed of three elements a. material b. labour and

c.expenses. each of these elements may be further divided into two parts – direct and indirect
costs.

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Direct costs:
Direct costs are those costs which can de identified with and allocated directly to a
particular product, process or job. These costs are known as prime cost.
Indirect costs:
Indirect costs are those costs, which cannot be allocated but can be apportioned to or
absorbed by a particular product, process or job. These costs are known as overheads

THE VARIOUS ELEMENTS OF COST MAY BE ILLUSTRATED AS

BELOW:
ELEMENTS OF COST

MATERIALS LABOUR EXPENSES

DIRECT INDIRECT

PRIME COST OVERHEADS

PRODUCTION OVERHEADS OFFICE OVERHEADS SELLING & DISTRIBUTION

OVERHEADS

By grouping the above elements of cost, the following divisions of costs are obtained:

Prime cost = Direct material + Direct Labour + Direct expenses

Factory cost = Prime cost + Factory overheads
Cost of production = Factory cost + Administrative Overheads
Cost of Sales = Cost of production + Selling and Distribution overheads
The elements of cost are explained below:
Materials:
The substance from which the products are made are known as materials. They can be
direct or indirect.
Direct Materials:

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 Direct materials are those materials, which form a part of the finished product. These
materials cost can be conveniently identified with and allocated to a particular product, process
or job. It is a part of the prime cost. Eg: Timber in furniture making, cloth in dress making,
leather in shoe making, bricks in building a house...
Indirect Materials:
Indirect materials are those materials, which do not form a part of the finished product.
Cost of indirect materials cannot be identified with and allocated but can be apportioned to a
particular product, process or job.
E.g. Cotton waste, lubricant, grease, small tools etc.
Labour:
For conversion of raw materials into finished product human effort is needed. Such
human effort is called labour. Labour can be direct as well as indirect.
Direct Labour:
Direct labour is that labour which is directly engaged in the production of goods or
services. The wages of such labour are known as direct wages. These labour cost or direct wages
can be identified with and allocated to a particular product, process or job. It is a part of the
prime cost.
Indirect Labour:
Indirect labour is that labour which is nor directly engaged in production of goods or
services. It directly helps the direct labour engaged in production. The wages paid for indirect
labour is known as indirect wages. Indirect wages cannot be identified with and allocated but can
be apportioned to a particular product, process or job. E.g. Wages of mechanics, supervisors,
watchman, sweepers, time-keepers etc.
Expenses:
Expenses may be direct or indirect.
Direct or Chargeable expenses:
All expenses (other than direct material cost or direct wages) that are directly charged to
production are direct expenses. It is a part of the prime cost. E.g. Excise duty, royalty on
production, cost of special drawings and designs, architect’s fees, hire charges of special tools or
equipments for a particular job etc.
Indirect Expenses:
Expenses (other than indirect material and indirect labour) that are not directly charged to
production are indirect expenses. It can be classified as follows:
a. Factory Overheads:
These are also called manufacturing overheads or works overheads or works on cost.
Factory overheads cover all indirect expenses incurred from the stage of raw materials to
finished goods. It includes indirect material, indirect wages and indirect expenses.
E.g. Factory rent, supervisor’s salary, power and fuel, heating and lighting, depreciation on
factory building,
b. Administrative Overheads:
These are expenses incurred for running the administrative office E.g. Office rent and
salaries, printing and stationery, legal expenses, telephone expenses etc.

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c. Selling Overheads:
These are expenses incurred for actual sales and promotion of sales.
E.g. Salaries of sales manager, commission, travelling expenses of salesman, and promotion
expenses like advertising and publicity, after sales services etc.
d. Distribution overheads:
These are expenses concerned with the packing and delivery of goods to the customers.
E.g. Packing charges, warehouse expenses, depreciation of delivery van, loading charges etc.

Methods of costing

1. Job costing:

Under this method, the cost of each job is ascertained separately. It implies that the
direct cost of each job is traceable and identifiable. It is suitable in all cases where work is undertaken
on receiving a customer’s order/assignment. Some examples are: printing press, motor workshop etc.

2. Contract costing:

It is applied in concerns involved in construction work, like laying of roads, bridges and
buildings, etc. For each of the contracts a separate account is opened and the total cost incurred is
identified with it. The contracts may take a long time for completion. It is also known as terminal
costing.

3. Batch costing:

It is an extension of job costing. It is used where the output under a particular work
order consists of similar units. It may not be economically feasible to ascertain cost per unit. Hence a
collection or lot of units called a batch is taken for cost ascertainment purposes. Each batch is treated as
a unit of cost and thus separately costed.

4. Multiple costing:

It represents a combination of two or more methods of costing outlined above. For

example, if a firm manufactures bicycles including its components; the parts will be costed by batch
costing system but the cost of assembling the bicycle will be computed by the single or output costing
method. The whole system of costing is known as multiple costing.\

5. Process costing and operation costing:

The cost of completing each stage of work is ascertained, like cost of making pulp and
cost of making paper from pulp. In mechanical operations, the cost of each operation may be
ascertained separately; the name given is operation costing.

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 6. Single or output costing:

Cost is ascertained for a product, the product being the only one produced like bricks,
coals etc.

7. Operating or service costing:

Ascertainment of cost of rendering or operating a service is called service costing or

operating costing. It is used in the case of concerns rendering services like transport, cinema, hotels,
etc., where there is no identifiable tangible cost unit.

DIFFERENCES BETWEEN COST ACCOUNTING AND MANAGEMENT ACCOUNTING.

S. no Cost accounting Management accounting

1. Cost accounting is concerned with cost Management accounting is

ascertainment, determining profitability and control concerned with providing relevant
of costs through budgetary control, marginal costing information to formulate the policies
and standard costing. of the organization and improving its
profitability.

2. Cost accounting is developed and improved Management accounting is

out of financial accounting. conceived out of cost accounting.

3. Cost accounting suggests to the Management accounting

management the best of the alternative by use of considers cost as well as non cost
different costing techniques. techniques and information for
deciding upon alternatives.

4. Cost accounting reveals variances to Management accounting is

management by using budgets and standard costing helpful in suggesting to the
techniques. management ways and means of
deletion of unfavourable variances.

Features of cost accounting

 It is a formal system of accounting by means of which costs of products, services or

activities are ascertained and controlled.
 It provides information to management for proper planning, operation, control, control
and decision making
 It relates to transactions connected with the manufacture of goods or services
 Deals partly with facts and figures partly with estimates.

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  It is not only positive but also a normative science

THE INSTALLATION OF COST ACCOUNTING?

The following steps should be taken at the time of introducing a costing system in an
organization:

1. The nature of business and the process of operations carried on should be studied.
2. The costing system should be designed in such a manner to suit the specific requirements of
the business.
3. The degree of accuracy desired and frequency and regularity of supplying cost data to the
management should also be determined before designing the costing system.
4. The system of costing should be simple and easily understood by the operators.
5. Before it is put into effect, its benefits should be clearly explained to all the people
connected with it to obtain their co-operation.
6. It should be introduced gradually and smoothly without much disturbance to the existing
organization.
7. The relative profitability of the amount to be spent and the benefits to be obtained from the
introduction of a costing system should also be considered.
8. The cost department should function independently. It should have easy access to the other
departments which helps it to understand their problems and to take corrective action.

SHORT NOTES

(1) Costing system:

The term costing system refers to an accounting system followed to accumulate cost of
product or jobs, to prepare cost information using some procedures and principles for recording
of cost data.

(2) Cost unit:

It is a unit of production, service or time or combination of these, in relation to which

costs may be ascertained or expressed. It should be one with which expenditure can be most
readily associated. Cost units differ from one business to the other. They are usually units of
physical measurement like number, weight, area, volume, time, length and value.

(3) Profit centre:

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 Profit centre is a centre whose performance is measured in terms of income earned and
cost incurred. It is created for evaluating performance of a division.

(4) Cost centre:

It is defined as –

(a) A location – E.g. Chennai factory, Calcutta factory etc.

(b) A person – E.g. Sales manager A, B etc.
(c) An item of equipment – E.g. Machinery X, Y or Process I, II etc.
Or a group of these, for which cost may be ascertained and used for the purpose of cost control.

(5) Cost control:

It is defined as the guidance and regulation by executive action of costs of operating an

undertaking. It is exercised through numerous techniques like standard costing, budgetary
control, inventory control, quality control etc.

(6) Cost reduction:

It is concerned with reducing costs. It is a continuous process. The advantages are:

 Reasonable price for the customers

 Continuous employment for the workers
 Increase in productivity
 Expected return on capital
 Prosperity of the industry
 Economic use of resources
 Increased credit worthiness etc.

(7) Allocation:

Allocation means charging of expenses to a department, cost centre, process, cost unit
or operation. It is the process by means of which all cost incurred for a particular cost centre or
cost unit are fully charged to it. For example, salary of the foreman in a factory can be fully
allocated to the production department.

(8) Apportionment:

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 Apportionment means charging of a proportionate amount of overhead to a cost centre
or cost unit on an appropriate basis. It is the process by means of which expenses are indirectly
charged and distributed to the cost centre or cost unit i.e., they can not be directly allocated to
them.

For example, factory manager’s salary or rent of factory building can not be directly allocated to
any product or department, but they are apportioned to the department on an appropriate
basis.

Cost Sheet:

It is a statement showing the total cost of a product or job in detail. It also shows the various elements
of cost and cost per unit.

Purposes of cost sheet:

 To fix up the selling price

 To determine the estimated prices for tenders or quotations
 To enable the manufacturer to control and minimize the cost
 To formulate the production policies
Tender or Quotation.

Generally, producers are required to give tender or quotation for the supply of goods
manufactured by him or for completing the job. While granting such tender or quotation the following
factors are kept in mind:

1. Past cost figures.

2. Variations in cost in the current period.
3. Expected profit margin.
4. Competition in the field.
Since the lowest tender is accepted by the intending buyer, the producer has to carefully take into
consideration the above factors. The preparation of tender takes the form of a cost sheet. Sheet includes
estimated materials, wages, overheads and expected profits.

SPECIMEN FORM OF SIMPLE COST SHEET (Without stocks)

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 Particulars Total Cost per unit

Rs. Rs.

Direct material xxxx xxx

Direct Labour / wages xxxx xxx

Direct expenses / Chargeable expenses xxxx xxx

PRIME COST xxxx xxx

Add: Production / Factory / Works overheads xxxx xxx

FACTORY COST xxxx xxx

Add: Office & Administration overheads xxxx xxx

COST OF PRODUCTION xxxx xxx

Add: Selling & distribution overheads xxxx xxx

COST OF SALES OR TOTAL COST xxxx xxx

PROFIT / LOSS xxxx xxx

SALES xxxx xxx

Sketch Out The Specimen Form Of Comprehensive Cost Sheet (With Stocks)?

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 SPECIMEN FORM OF COMPREHENSIVE COST SHEET (With stocks)

Particulars Rs. Rs.

Direct material consumed:

Opening stock of raw material xxxxx

Add: Purchases xxxxx

Carriage inwards xxxxx

Transit insurance xxxxx

Expenses on purchase xxxxx

Less: closing stock of raw material xxxxx xxxxx

Direct labour / wages xxxxx

Direct expenses / chargeable expenses xxxxx

PRIME COST xxxxx

Add: Production/ Factory/ Works overheads

Indirect materials xxxxx

Indirect wages xxxxx

Factory rent xxxxx

Factory lighting and heating xxxxx

Factory rates xxxxx

Power and fuel xxxxx

Repairs and maintenance xxxxx

Drawing office expenses xxxxx

Research and experiment cost xxxxx

Depreciation of factory plant xxxxx

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 Works stationery xxxxx

Insurance of factory xxxxx

Factory managers salary xxxxx xxxxx

xxxxx

Add: Opening stock of work in progress xxxxx

Less: Closing stock of work in progress xxxxx

FACTORY COST xxxxx

Add: Office and Administration overheads

Office salary xxxxx

Office rent and rates xxxxx

Cleaning expenses xxxxx

Telephone and postages xxxxx

Printing and stationery xxxxx

Depreciation of office furniture xxxxx

Depreciation of office equipment xxxxx

Insurance xxxxx

Legal expenses xxxxx xxxxx

COST OF PRODUCTION xxxxx

Add: Opening stock of finished goods xxxxx

Less: Closing stock of finished goods xxxxx

COST OF GOODS SOLD xxxxx

Add: Selling and Distribution overheads

Advertising xxxxx

Salesman’s salaries xxxxx

Samples and free gifts xxxxx

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 Sales office rent xxxxx

Sales promotion expenses xxxxx

Packing and demonstration xxxxx

Showroom rent and rates xxxxx

Commission xxxxx

Travelling expenses xxxxx

Warehouse rent and rates xxxxx

Repairs of delivery van xxxxx

Carriage / freight output xxxxx xxxxx

COST OF SALES OR TOTAL COST xxxxx

PROFIT / LOSS xxxxx

SALES xxxxx

COST OF PRODUCTION xxxxx

Add: opening stock of finished goods xxxxx

Less: closing stock of finished goods xxxxx

COST OF GOODS SOLD xxxxx

Add: Selling And Distribution Overheads:

Advertising xxxxx

Salesman’s salaries xxxxx

Samples and free gifts xxxxx

Sales office rent xxxxx

Sales promotion expenses xxxxx

Packing and demonstration xxxxx

Showroom rent and rates xxxxx

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 Commission xxxxx

Travelling expenses xxxxx

Warehouse rent and rates xxxxx

Repairs of delivery van xxxxx

Carriage / freight output xxxxx xxxxx

COST OF SALES SOR TOTAL COST xxxxx

PROFIT / LOSS xxxxx

SALES xxxxx

UNIT I PROBLEMS

SIMPLE COST SHEET

1. The following details are obtained from the books of ganesh ltd., for the quarter ended 31-3-
99 ascertain the direct material consumed for the period.

Material purchased- 4,48,000.

Import duty on material purchased – 38,000.

Stock of material 1.1.99 - 1,62,000.

Carriage on material purchased – 40,000.

Stock of material on 31.3.99 – 1,46,000.

Realization from material scrap – 14,000.

2. In a factory 20,000 units of product a where manufactured in the month of july 1990. From
the following figures obtained from the costing records prepare cost sheet showing cost per unit.

Opening stock of raw material – 5,000.

Purchases – 55,000.

Closing stock of raw material – 10,000.

Direct wages – 25,000.

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Factory over heads – 40,000.

Office and administrative over heads – 20,000.

3. The following cost data are available from the books for the year ended 31.12.95.

Direct material – 9,00,000.

Direct wages – 7,50,000.

Profit – 6,09,000.

Selling and distribution overheads – 5,25,000.

Administrative over heads – 4,20,000.

Factory overheads – 4,50,000.

prepare a cost sheet indicating the prime cost , work cost, production cost, cost of sales and
sales value.

4. A factory produces 100 unit s of a commodity. The cost of production is

Direct material -10000

Direct wages-5000

Direct expense -1000

Factory o/h -6500

Admn o/h -3480

if profit of 25% on sales is to be realized what would be the selling price of each unit of the
commodity

5. A factory produces 100 units of a commodity the cost of production is

Material-10000

Wages -5000

Direct expense -1000

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 factory over head 125% on wages, office over head 20% on work cost. Expected profit 25% on
sales .Calculate the price to be fixed per unit.

6. From the following particulars, prepare cost sheet showing selling price per unit .

Raw materials rs. 9100

Labour and other direct exp 4000

Factory exp 80% of the labour and other direct exp

Office over head 10 % of the work cost

Selling and distribution exp rs.2 per unit sold

Unit produced and sold = 10,000.

Percentage of profit – 20% on selling price.

Cost sheet –with details of over heads :

7. Calculate 1. Prime cost 2. Factory cost3. Cost of production 4.cost of sales& 5. Profit from the
following particulars

Direct material-100000

Direct wages -25000

Direct exp -5000

Wages of foremen -2500

Electric power -500

Lighting:

factory- 1500

office -2500

Rent:

factory-5000

office-2500

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Salaries to sales men-1250

Advertising-1250

Income tax -10000

Sales -189500

8.prepare a statement showing cost and profit from the following detail , clearly showing a.
Prime cost b. Work cost c. Cost of production d. Cost of sales & e. Profit

Particulars Rupees Particulars Rupees

Direct wages 150000 Direct materials 500000

Power 2500 Oil & water 2500

Store keeper wages 5000 Transfer to general 5000

reserve

Factory rent 25000 Fore men’s salary 12500

Office rent 12500 Factory lighting 7500

Repairs Depreciation

Factory plant -17500 Factory plant -2500

Office building -2500 Office building -6250

Good will written off 2500 Office lighting 2500

Consumable stores 12500 Managers salary 25000

Director’s fees 6250 Office stationery 2500

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 Telephone rent 625 Postage 1250

Salesmen salary 6250 Traveling exp 2500

Advertising 6250 Ware house rent 2500

Income tax 50000 Dividend paid 10000

Sales 947500

9. Following data are extracted from the pavan kishore for the year 1991

Opening stock of raw material -25000

Closing stock of raw material -40000

Purchase of raw materials -85000

Carriage inwards -5000

Wages direct-75000

Wages indirect – 10000

Other direct charges-15000

Rent & rates factory -5000

Rent & rates office -500

Indirect consumption of material -500

Depreciation plant -1500

Depreciation office furniture -100

Salary office -2500

Salary sales men -2000

Other office exp -900

Other factory exp-5700

Managing director remuneration -12000

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Other selling exp -1000

Traveling exp-1100

Carriage out wards -1000

Sales -250000

Advance income tax paid -15000

Advertisement-2000

Managing directors remuneration is allocated as rs 4000 to the factory , rs 2000 to the office and rs 6000
to the selling departments

From the above information find out:

a. Prime cost b. Work cost c. Cost of production d. Cost of sales e. Net profit

10. Draw a statement of cost from the following particulars

opening stock : materials – 200000

work in progress – 60000

finished goods – 5000

cloasing stock : materials – 180000

work in progress – 50000

finished good – 15000

materials purchased – 500000

direct wages – 150000

manufacturing exp – 100000

sales – 800000

selling & distribution exp – 20000

Cost sheet – closing stock valuation.

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 11. The following data relatet the manufacture of a standard product dring 4 weeks ended
26.3.1991.

Raw materials consumed – 15000

Direct wages – 9800

Machine hours worked – 2300 hrs

Machine hour rate – 0.50 p

office on cost – 10% of work cost

Selling on cost – re.0.10 per unit

Units producted – 19030

Unit sold – 11418 @ rs 2 each

You are required to prepare a cost sheet in respect of the above showing the cost of production
and profit per unit.

12. Selvi. kavitha furnishes the following data relating to the manufature of a standard product during
the month of the April -1994

Raw material consumed rs 15000

Direct labour charges –rs 9000

Machine hours worked -900 hrs

Machine hour rate rs 5

Administrative over head-20 %on work cost

Selling overhead re0.50 per unit

Units produced: 17100

Units sold -16000@ re 4 per unit

You are required to prepare statement showing cost and profit per unit .

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 13. from the following particulars of product X, compile cost sheet for the month of march 1991
raw materials

opening stock -20000

purchases -150000

closing stock -10000

direct labour -60000

factory over heads -22500

office & administration over heads -27500

finished stock:

opening stock 500 units at 11.20 per unit

closing stock 1500 uniot at current cost price

profit on sales 20%

selling and distribution o/h 20000

units produced 25000 units

Cost sheet – with sales price computation

14. A company has received an enquiry for the supply of 10000 steel folding chairs. The cost are
estimated as following .

Raw materials – 100000 kgs at re.1 per kg

Direct wages 10000 hrs at is 4 per hr

Variable overheads :

Factory – rs 2.40 per labour hr

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Selling & distribution – rs 16000

Fixed overhead :

Factory – rs 6000

Selling & distribution – rs 14000

Prepare a statement showing the price to be fixed which will result in a profit of 20% on the the
selling price

15. The cost structure of an articles the selling prices of which is rs.45000 is as follows

Direct materials : 50%

Direct labour 20%

Overheads 30% an increase of 15% in the cost materials and of 25% in the cost of labour is
anticipated. There increased cost in relation ot the present selling price would cause a 25% decread in
the amount of present profit per article

Prepare (a) a statement of profit pr article at present and (d) the revised selling price to rpduce the
same percentage of profit to sales as before .

Cost sheet –estimated for next period:

16. Prepare a cost sheet for the year 1986 from the following showing the total cost and cost
per unit. Number of units produced 2000.

Opening stock of raw materials – 10000

Purchases – 180000

Direct wages – 56000

Indirect wages – 48000

Closing stock of raw materials – 12000

Working in progress on 1-1-86 – 5000

Factory overheads – 26000

Office overheads – 45000

Selling overheads – 16000

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Opening stock of finished goods (100 units) – 20000

Closing stock of finished goods (120units) – profit 10% on sales

During the year 1987. It is decided to icrease the productions to 2400 units it is anticipated that

(a) Material prices will increase by 10%

(b) Wages will reduce by 20%
(c) Other exp will remain constant per unit
(d) Expected profit 20% on sales
Ascertain selling price to be fixed per unit

17. A manufacturer of scooter finds that in 1993 it cost him rs.720060 to manufacture 175
scooters which he sold for rs.5400 each the cost is made up of

Material – 282000

Direct wages – 324000

Factory overheads – 48600

office overheads – 65460

For the year he estimate that

(a) Each scooter will require material of rs.1600 and labour rs.1800
(b) The factory overheads will bear the same relation to wages in the previous year
(c) The office overhead percentage on factory cost will be the same as in the past prepare a
statement showing the profit he would make per unit if he reduces the price of scooter by rs.200
Cost sheet-tenders&quotation

18.the accounts of a machine manufacturing company disclose the following information for the
six months ending 31.12.88

Material used – 150000

Productive wages – 120000

Factrory overhead expenses – 24000

Establishnment and general expenses – 17640

prepare a cost sheet of the machine and calculate the price which the company should quote for
the manufacture of a machine requiring materials valued at rs 1250 and expenditure in productive wages
of rs 750 so that the price may yield a profit of 20% on the sellinf price

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 19.the accounts of pleasant company ltd show the following details for the year 1990.

Materials – 350000

Labour – 270000

Factory overheads – 81000

Administration overheads – 56080

it is estimated the rs 1000 for material and rs 700 for labour will be required for one unit of the
finished product for quotation purpose

absarb factory overhead on the basis of labour and administrative overheads on the selling price
is required on quotation

(a) Prepare a cost sheet

(b) Prepare a statement of the selling price per unit of the finished product.

20. The following details are available from a company books

Stock of material 1.1.90-12800

Stock of finished goods 1.1.90-28000

Purchase during the year -292000

Production wages -198800

Sale of finished goods -592000.

Stock of raw materials 31.12.90-13600

Stock of finished goods-31.12.90-30000

Work over head-43736

Office expense-35547

the company is about to send a tender for a large plant . The costing dept estimates that
material required would cost rs 20000

And wages for making the plant would cost rs12000.tender is to be made keeping net profit of 20% on
the selling price state what would be the amount of the tender, if based on the usual percentages

Cost sheet with hidden information

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 21. Compute the cost of raw material purchased from the data given below

Opening stock of raw material -10000.

Closing stock of raw material-15000

Exp on purchase-5000

Direct wages-50000

Prime cost-100000

22. The following information has been obtained from the cost records of ”Adithya Chemicals
Ltd” for 1988

Finished goods on 1.1.88-50000

Raw materials 1.1.88-10000

Work in progress 1.1.88-14000

Direct labour-160000

Purchase of raw material -98000

Indirect labour-40000

Heat ,light and power -20000

Factory insurance and taxes -5000

Repairs to plant -3000

Factory supplies -5000

Depreciation factory building -6000

Depreciation plant-10000

Other information made available is

Factory cost of goods produced -280000

Raw material consumed-95000

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 Cost of goods sold in 1988-160000

No office and admn exp were incureed during 1988 .prepare a stament showing of cost for the year
ending 1988 giving maximum possible information and its break up.

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SELF-ASSESSMENT
1. Fill in the Blanks Questions –
1. Hire purchase act enacted in the year
(a) 1971 (b) 1972 (c) 1973 (d) 1974
2. Ownership of goods under hire purchase agreement is transferred at the time of :
A. Payment of down payment B. Payment of first instalment C. Payment of last instalment
D. None of the above
3. The amount of interest is credited by the buyer to……………...
A. Hire purchase Account B. Hire Vendor Account C. Interest Account D. Cash Account
4. The depreciation in the books of buyer is charged on…………….. A. Hire Purchase Price B.
Market price C. Total Instalment amount D. Cash Price
5.Under hire purchase system the buyer is called _________. A. Buyer. B. Hirer. C. Hire vendor.
D. Debtor.
6. Installment system is governed by _______ A. Hire Purchase Act. B. Sale of Goods Act C.
Installment Act. D. Properties Registration Act.

7. Under hire purchase system, interest is calculated on _______. A. Cash Price. B. Hire
Purchase Price C. MRP. D. Outstanding Balance.
8. In the books of Hirer, the interest and depreciation account will be transferred to ______. A.
Trading account B. P & L account C. P & L appropriation account D. Balance sheet.
9. .In the books of hirer, when the asset is repossessed, asset account will be ______. A. Debited.
B. Credited. C. Rectified. D. Reversed.
10. Under ______ system the buyer does not get ownership of goods immediately A. Installment
B. HP C. Installment and HP D. None of these
11. .Hire Purchase price = A. Cash price + Down payment B. Cash price + Total interest C. Cash
price D. Sum of total instalments
12. Cash Price = A. Hire purchase price – total interest B. Down payment in cash C. Down
payment + Interest D. None of the above
13. The system of keeping accounts generally adopted by small size branches are: a) Debtors
system b) Stock & Debtors system c) Wholesale branch system d) Final account system
14. Goods are supplied by the head office to dependent branches are at: a) Cost price b) Invoice
price c) Market price d) Cost or invoice price

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15. Under debtors system which account is prepared by head office to calculate profit or loss of
each branch: a) capital account b) debtors account c) branch account d) branch adjustment
account.
2. Match the Following :
A Hire purchase act enacted in the Cash Price
year

B Hirer charges depreciation on Hire Purchase Price

C Installment system is governed by 1972
D Cash price plus interest is Agreement
E Nature of hire purchase agreement Sale Of Goods Act
is

3. Short Answer Questions –

1. Briefly explain the types of costing?
2. What is the scope of cost accounting?
3.State the Objectives Of Cost Accounting.
4. What are the elements of cost?
5. Briefly explain the methods of costing?
Long Answer Questions – minimum two
1. HOW WILL YOU CLASSIFY THE COSTS?
2.Distinguish between financial accounting and cost accounting

Case Study Question: –

4. In Auto Supply, Company Ltd. v. V. Raghunatha Chetty : AIR 1929 Mad 884, a company
had agreed to offer a bus on a hire-purchase" agreement, on condition that Rs. 1140 were
to be paid by the hirer on delivery, and 11 monthly instalments were to be paid thereafter,
each of Rs. 226, and the owners were to be entitled to terminate the contract on default
occurring if hirer for any month was in arrears.

A suit was brought by the owners for possession of the bus on the happening of the said
condition. Lord Coutts Trotter, C.J. held that though there was no such explicit condition,
yet it was the necessary implication that when the agreement terminated either by the
choice or default of the hirer, all sums paid by him are to be retained by the owners, the
amount Rs. 1140 being construed either as the first instalment or the hire money or as the

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 premium taken by the owner for granting lease and in either case money received was not
to be refunded. The money was not to be regarded as advance of rent. Justice
Ananthakrishnan Ayyar held:

"In a contract of sale for a price payable by instalments, the purchaser has no option of
terminating the contract and returning the chattel, whereas in a contract of hire-purchase
the hirer has such an option. In the case of hire-purchase contract, the hirer has got option
to purchase, which he may exercise or not according to his sweet will and pleasure; but in
the case of a contract of sale the purchaser has become the owner of the chattel, but the
price is by agreement payable by agreement payable by instalments."

7.Problem Solving Questions :

1.Ram purchased four machines of Rs 14,000 each by hire purchase system. The hire
purchase price for all the four machines was Rs 60,000 to be paid as Rs 15,000 down and
3 instalment of Rs 15,000 each at the end of each year. Depreciation is written off at 10%
per annum on the straight line method.
Down payment and first instalment were paid. On the default of second instalment
vendor took possession of three machines, leaving one machine with buyer. The
machines were taken by the vendor at a depreciated value of 20% per annum under
written down value method. Vendor has spent Rs 1,200 on repairs and sold the three
machines for Rs 35,000.
2. Jain & Co., have a hire purchase department. Goods are sold on hire purchase at cost
plus 331/3 . From the following particulars prepare shop stock a/c, hire purchase
adjustment account.
1978 Rs

Assignment Tasks
SUMMARY
KEYWORDS:
TEXT BOOKS (with indicative page numbers)

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REFERENCE BOOKS (with indicative page numbers)

E-RESOURCES(Websites, YouTube, etc)

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