COST

ACCOUNTING
BBA (2nd Semester)

- Dr. Khushboo Maheshwari

 • 1 • 5

Cost Acc
ou n tin g Costing System
- Introdu
c ti o n CONTENTS

• 4
• 2
i o n s of
t
ia l • 3 L im ita n ti n g
Financ c c o u
nti n g v s C ost C ost A
Accou Objectives of
n t i ng
Accou
Cost Accounting
Click icon to add picture

Accounting
Classification
Cost Accounting and its
relationship with other branches
of Accounting
ACCOUNTING - CLASSIFICATION

FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT ACCOUNTING

• Financial Accounting is • Cost Accounting is • Management accounting is
primarily concerned with the classifying, recording an concerned with data collection
preparation of financial from internal and external
appropriate allocation of
statements, which sources, analysing, processing,
expenditure for the
summarise the results of interpreting and
determination of the costs communicating the
operations for selected
of products or services, information for use within the
period of time and show the
financial position of the
and for the presentation of organisation so that
suitably arranged data for management can more
company at particular dates.
effectively plan, make
the purpose of control and
• Mainly concerned with decisions and control
guidance of management.
external reporting. operations.

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 1. Aim
2. Primary Users
3. Statutory
Requirement
4. Emphasis
5. Profit Analysis
6. Scope of Transactions
7. Unit of Measurement
8. Time Span

Basis of difference between

Cost Accounting & Financial
Accounting
 1. Objective
2. Scope
3. Emphasis
4. Tools and
Techniques
5. Period of Planning
6. Hierarchy Level

Basis of difference between

Cost Accounting & Management
Accounting
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Cost Accounting
- Introduction
COST ACCOUNTING
• Cost accounting refers to the process of determining and accumulating the cost
of some particular product or activity.
• It is the formal mechanism by means of which cost of products or services are
ascertained and controlled.
• The costs so determined and accumulated may be the estimated future costs
for planning purposes, or actual (historical) costs for evaluating performance.
• The Institute of Cost and Management Accountants, England defines cost
accounting as,

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“
“the application of costing and cost
accounting principles, methods and
techniques to the science, art and
practice of cost control. It includes the
presentation of information derived
therefrom for the
purpose of managerial decision-
making.
 Ascertain
OBEJCTIVES ment of
Cost
OF COST
ACCOUNTING Estimation
of Cost
Cost
Control

Cost
Reduction Determini
ng Selling
Price

Supply Minimisati
Informatio on of
n wastages
and losses
 Art

Nature of Cost Scien

Accounting ce

Profes
sion

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Click icon to add picture

Costly

System is more complex

Lack of accuracy

Time-consuming
Limitations of Cost
Requires efficient manpower
Accounting Increases workload

Only a means, not an end

 Installation of
Costing System
Ideal Cost Accounting System
Factors to be considered
Process of installation of costing
system
Difficulties at the time of installation

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 Simplicit
y
Essentials of an
Ideal Cost Suitable to
the
business Accurac
Accounting y
System Comparabili
ty Economic
al

Reconciliati
Uniformit on of cost
y and
financial
accounts
Promptn
Equity ess
Factors to be considered before installing
a Cost Accounting System
• Nature of Business
• Organisational Factors
• Accounting aspects
• Area of control
• Product Price
• Selling and Distribution
• Use of Electronic Data Processing
• Technical Considerations
• Uniformity
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Process of Installation of Cost Accounting System

1. Understanding the process flow

2. Understanding the costing

methods
3. Identifying the cost of each
activity
4. Understanding the prime cost
structure
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Process of Installation of Cost Accounting System

5. Understanding the nature of cost

and overhead cost behaviour

6. Setting of proper allocation and

apportionment methods

7. Creating cost awareness

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Difficulties at the time of installation of cost accounting
system
• Resistance by existing accounting staff
• Non-cooperation from middle and bottom level
management
• Lack of support from management
• Heavy expenses in installing and maintaining
Insert Image the
system
• Lack of trained staff

How to overcome these difficulties?

Concept of
Cost and
Costing

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 • 1 • 5

M e an ing • Elements
CONCEPT
OF COST

• 4
• 2
e n te r
t C
• 3 • C os
i fi c a t ion
C lass
• Cost Unit
 COSTING

• The Institute of Cost and Management Accountants, London has defined costing
as the ascertainment of costs.
• Costing includes the ‘techniques’ and ‘processes’ of ascertaining costs. The
technique refers to principles and rules which are applied for ascertaining costs
of products manufactured and services rendered.
• There are mainly two methods of costing known as job costing and process
costing.

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CONCEPT 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.
• Cost in simple, words, means the total of all expenses.
• Cost is also defined as the amount of expenditure (actual or notional) incurred
on or attributable to a given thing or to ascertain the cost of a given thing.
Thus, it is that which is given or in sacrificed to obtain something.

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CLASSIFICATION OF COST
By Nature of Expense

By Traceability

By Cost Behaviour

By Function

Cost for Decision making

By Association

By Time

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CLASSIFICATION OF COST
By Nature of Expense

Nature
of
Expense

Expense
Material Labour
s
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CLASSIFICATION OF COST
By Nature of Expense

By Traceability

By Cost Behaviour

By Function

Cost for Decision making

By Association

By Time

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CLASSIFICATION OF COST
By Traceability

Relation to Cost
Center

Direct Indirect
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CLASSIFICATION OF COST
By Nature of Expense

By Traceability

By Cost Behaviour

By Function

Cost for Decision making

By Association

By Time

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CLASSIFICATION OF COST
By Cost Behaviour

Cost Behaviour

Semi-
Fixed Variable
Variable

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CLASSIFICATION OF COST
By Nature of Expense

By Traceability

By Cost Behaviour

By Function

Cost for Decision making

By Association

By Time

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CLASSIFICATION OF COST
By Function

By Function

Administratio Research &

Production Selling Distribution
n Development

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CLASSIFICATION OF COST
By Nature of Expense

By Traceability

By Cost Behaviour

By Function

Cost for Decision making

By Association

By Time

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 CLASSIFICATION OF COST
Cost for Decision making

Costs for Decision

making

Out-of-
Imputed Differential Opportunity Marginal Replaceme Avoidable Relevance
Sunk Costs Pocket
Costs Costs Costs Costs nt Costs Costs Costs
Costs

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CLASSIFICATION OF COST
By Nature of Expense

By Traceability

By Cost Behaviour

By Function

Cost for Decision making

By Association

By Time

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CLASSIFICATION OF COST
By Association

Association with the

Product

Product Period
Cost Cost
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CLASSIFICATION OF COST
By Nature of Expense

By Traceability

By Cost Behaviour

By Function

Cost for Decision making

By Association

By Time

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CLASSIFICATION OF COST
By Time

By Time

Pre-
Historical
determined
Costs
Costs

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 Cost Unit
It refers to a unit of product or service
or time or combination of these which Click icon to add picture
are to be used for the purpose of
ascertainment of cost through the
process of allocation, apportionment or
absorption.
(weight, number, value, time, length)

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Cost Centre

• A cost centre refers to a part of a factory for which costs are accumulated
separately.
• In order to facilitate charging of costs to cost units, it is necessary to divide the
factory or industry into various parts which can be used to accumulate costs for
subsequent distribution. Each such part of a factory or industry is known as cost
centre.
• Cost centre has been defined by ICMA as

Sunday, January 31, 20XX Sample Footer Text 38

“
a location, person or item of equipment
or group of these in respect of which
costs may be ascertained and related
to cost units.”
Types of Cost Centres

Cost Centres

Operation & Production Personal &

Process & Service Impersonal
Cost Centre Cost Centre Cost Centre

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Cost Reduction V/S Cost Control

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 Elements of Cost

Sunday, January 31, 20XX Sample Footer Text 42

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Example: Calculate the factory cost for the following
data:

Factory Cost: 2,98,000

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Example: Calculate the prime cost, factory cost, cost of
production cost of sales and profit form the following
particulars:

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Example: The following data has been from the records of
Centre corporation for the period from June 1 to June 30,
2005

Prime Cost: 13,70,000; works cost:

15,48,000; COP: 16,08,000; COS:
16,58,000 46
Example: From the following information extracted from
the records of the M/s Sundaram & Co

Prime Cost: 13,80,000; works cost:

18,00,000; COP: 20,00,000; COS:
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22,60,000
Prepare Cost Sheet:

Prime cost : Rs. 90,500 Works cost : Rs. 1,00,000 Cost of production :
Sunday, January 31, 20XX
Rs. 1,05,300 COGS: Rs. 1,00,300 Cost of sales : Rs. 1,04,500 Net profit
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:
Rs. 70,500
From the above information compute: (a) Prime cost (b) Works cost
(c) Cost of Production (d) Cost of sales and (e) Net Profit.

Managing director’s remuneration is allocated as Rs. 4,000 to the

factory, Rs. 2,000 to the office and Rs. 6,000 to the selling
department Prime cost : Rs. 1,65,000 Works cost : Rs. 1,91,700 Cost of
production : Rs. 1,97,700 Cost of sales : Rs. 2,10,800 Net
profit : Rs. 39,200
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 Total cost: 25,350; Sales: 30,420

Sunday, January 31, 20XX Sample Footer Text 50

 Total cost : Rs. 1,87,500; Total profit : Rs.
28,500; Cost per unit : Rs. 1,041.67; Profit per
unit : Rs. 158.33
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 Cost of raw materials purchased: 50,000

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 (a) Rs. 10,00,000; (b) 16,50,000; (c) Rs. 17,50,000 (d)
Sunday, January 31, 20XX 30% and (e) 6.06% 53
Prepare a cost sheet showing cost of production and profit from the
following data:

Cost of production: Rs. 1,55,340; Cost of sales : Rs.

Sunday, January 31, 20XX 1,72,800
Sample FooterProfit:
Text = Rs. 44,130. 54
 Cost of Production: Rs. 1,22,400; Rs. 6.12 per unit, Cost of sales:
Rs. 1,28,160; Rs. 7.12 per unit, Profit: Rs. 51,840; Rs. 2.88 per
Sunday, January 31, 20XX 55
unit
 Prime cost : Rs. 13,08,800 Works cost : Rs. 19,40,800 COGS: Rs.
18,19,500 Net profit : Rs. 11,80,500
Sunday, January 31, 20XX Sample Footer Text 56
Prime cost : Rs.4,59,200 Works cost : Rs. 6,37,750 COP: 6,56,620
COGS: Rs. 6,21,620 COS: 7,14,020 Profit : Rs. 39,980
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THANK
YOU