Cost Accounting Fundamentals

Historical Costing

• Focuses on the actual cost incurred in acquiring an asset.
• Emphasizes the actual outlay made to acquire assets.
• Limitation: Doesn't reflect the current market value or the value of the asset in future.

Absorption Costing

• Treats fixed manufacturing overheads as product costs.
• Allocates fixed overheads to units produced based on a predetermined overhead rate.

Direct Costing

• Characteristic: Only considers variable costs as product costs.
• Excludes fixed manufacturing overhead from product costs.
• Purpose of Contribution Margin: Measures the contribution of each unit sold towards covering fixed costs and generating profit.
• Excluded from Inventory Valuation: Fixed manufacturing overheads.

Costing Methods for Decision-Making

• Best for Internal Management Decision-Making: Direct costing, as it provides a clearer picture of the contribution margin and profitability of each product.

Standard Costing

• Main Purpose: To establish predetermined costs for each unit of production.
• Used to compare actual costs with planned costs, identifying variances and improving efficiency.

Institute of Cost Accountants of India

• Main Objective: To promote and enhance the professional competency of cost and management accountants in India.

Uniform Costing

• Facilitates among Organizations in the Same Industry: Standardization of costing practices, improving comparability of financial data and promoting fair competition.

Cost Accounting System

• Essential Qualities: Accuracy, Relevance, Timeliness, Flexibility, Simplicity.
• Non-Essential Quality: Absolute accuracy, as minor errors are inevitable.

Cost Accounting Standards Board

• Constitution: By the Institute of Cost Accountants of India to formulate Cost Accounting Standards.
• Role: To develop and issue standards for cost accounting practices in India.

Cost Accounting System Tracking

• Material Use Tracking: When materials are received, stored, issued for production, consumed in production, and used in finished goods.

Economic Cost

• Primary Characteristics: Emphasizes opportunity costs and the value of resources used in production.

Cost in Production/Service

• Defines Cost: As the resources consumed in producing goods or services.

Uniform Costing Limitations

• Not Addressed: The unique characteristics of different businesses within the industry.

Cost Accounting Standards Board Establishment

• Year: 1976.

Controllable Costs

• Differentiation from Non-Controllable Costs: Controllable costs can be influenced by the actions of a specific manager, while non-controllable costs are beyond their control.

Cost Object

• Definition: An item for which costs are measured and accumulated.

Cost Unit

• Primary Function: To measure the consumption of resources in production.

Joint Costs

• Definition: Costs incurred in producing two or more products jointly.

CIMA Terminology - Cost Unit

• Focus: On the quantity of output produced, such as a unit of product, a batch, or a job.

Cost Analysis Process

• Step after Tracing Costs to Cost Centres: Cost allocation, where costs are distributed to different cost objects based on a predetermined formula.

Fixed Cost

• Definition: A cost that remains constant regardless of the level of activity.

Cost Object Examples

• Not Considered: A department (departments are cost centres, not objects).

Variable Costs

• Behaviour with Changes in Activity: Increase or decrease proportionally with changes in the level of activity.

GACAP23 Definition of Cost Unit

• Definition: A measurable unit of output, product, or service for which costs are collected and analyzed.

Semi-Variable Cost

• Definition: A cost that has both fixed and variable components.

Cost Unit Principle

• Principle: All costs should be associated with a specific cost unit to ensure accurate cost measurement and analysis.

Cost Behaviour Analysis

• Aim: To understand how different costs behave in relation to changes in the level of activity.

Cost Unit for Car Manufacturer

• Example: A car, as it represents a distinct unit of output for which costs are incurred.

Total Variable Costs

• Accurate Description: Increase in direct proportion to the increase in the level of activity.

Composite Cost Unit Definition

• Definition: A cost unit that combines multiple elements, such as units produced, labor hours, or machine hours.

Cost Behaviour Aside from Fixed and Variable

• Potential Behaviour: Step cost, which remains constant at a specific level of activity and then increases or decreases in discrete steps.

Composite Cost Unit for Freight Transport

• Example: Tonne-kilometre, which combines the weight of goods transported with the distance covered.

Significance of Understanding Cost Behaviour

• Significance: Enables organizations to make informed decisions about pricing, production, and investment.

GACAP Abbreviation

• Meaning: Generally Accepted Cost Accounting Principles.

Cost Centre

• Definition: A location, department, or activity for which costs are accumulated and controlled.

Cost Per Tonne Delivered

• Not a Valid Measure over Different Distances: Because it doesn't account for the varying costs associated with different distances, such as fuel consumption and driver time.

Composite Cost Unit for Hospitals

• Example: Patient-day, combining the number of patients with the length of their stay.

Cost Units and Centres Connection

• Connection: Cost units are typically assigned to cost centres to track and analyze the costs associated with specific activities or locations.