Cost Accounting with Types of Cost PDF

FINANCIAL MANAGEMENT UNIT 1ST COST ACCOUNTING PRESENTED BY DR. GAURAV BANSAL COST AACOUNTING COSTS COSTS  Anything incurred during the production of the good or service to get the output into the hands of the customer  The customer could be the public (the final consumer)...

FINANCIAL MANAGEMENT UNIT 1ST COST ACCOUNTING PRESENTED BY DR. GAURAV BANSAL COST AACOUNTING COSTS COSTS  Anything incurred during the production of the good or service to get the output into the hands of the customer  The customer could be the public (the final consumer) or another business  Controlling costs is essential to business success  Not always easy to pin down where costs are arising! COST CENTRES COST CENTRES  Parts of the business to which particular costs can be attributed  In large businesses this can be a particular location, section of the business, capital asset or human resource/s  Enable a business to identify where costs are arising and to manage those costs more effectively FULL COSTING A method of allocating indirect costs to a range of products produced by the firm.  e.g. if a firm produces three products - a, b, and c - and has indirect costs of £1 million, assume proportion of direct costs of 20% for a, 55% for b and 25% for c  Indirect costs allocated as 20% of 1 million to a, 55% of £1 million to b and 25% of £1 million to c ABSORPTION COSTING  All costs incurred are allocated to particular cost centres – direct costs, indirect costs, semi variable costs and selling costs  Allocates indirect costs more accurately to the point where the cost occurred MARGINAL COSTING  The cost of producing one extra unit of output (the variable costs)  Selling price – MC = Contribution  Contribution is the amount which can contribute to the overheads (fixed costs) STANDARD COSTING  The expected level of costs associated with the production of a good/service  Actual costs – Standard costs = Variance  Monitoring variances can help the business to identify where inefficiencies or efficiencies might lie TOTAL REVENUE TOTAL REVENUE  Total Revenue = Price x Quantity Sold  Price can be raised or lowered to change revenue – price elasticity of demand important here  Different pricing strategies can be used – penetration, psychological, etc.  Quantity Sold can be influenced by amending the elements of the marketing mix – 7 Ps BREAK EVEN  COST CONCEPTS  COST  1. Actual expenditure incurred on a given thing; and  2. Notional expenditure attributable to a given thing  COSTING  The techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services.  COST ACCOUNTING  The process of recording and accounting for all the elements of cost.   CLASSIFICATION OF COST  I-ACCORING TO ELEMENTS  1. MATERIALS  Materials cost is the cost of commodities supplied to an undertaking  TYPES  A. Direct materials cost  Materials which can be identified with units of output or services (e.g., Cotton used in production of cloth, leather used in production of leather goods)  B. Indirect materials  Materials cost which cannot be identified with a product, job, process ( e.g., Small tools, stationery used in works, office stationery and advertising posters)  2 LABOUR  The cost of remuneration (wages, salaries, commissions, bonus, etc) of the employees of an undertaking.  TYPES  A. Direct labour cost  The cost of labour directly engaged in production operations. ( e.g., workmen engaged in assembling parts, carpenters engaged in furniture making etc)  B. Indirect labour cost  The remuneration paid for labour engaged to help the production operations (e.g., inspectors, watchmen, sweepers, store keepers, etc)  3. EXPENSES  A. Direct expenses  The expenses which can be directly identified with a unit of output, job, process or operation (e.g., Hire charges of special plant used for a job, Royalty on products etc)  B. Indirect expenses  Expenses other than indirect material and indirect labour, which cannot be directly identified with units of output, job, process or operation (e.g., Rent, power, lighting, depreciation bank charges etc)  II-ACCORING TO FUNCTIONS   1. Production cost: The cost of sequence of operations which begins with supplying materials, labour and services and ends with primary packing of the product. (or)  Converting raw material into finished product. (or)  The aggregate of indirect materials, indirect labour and indirect expenses incurred in the factor (e.g., Rent, power, lighting etc)  2. Administration cost: The cost of formulating the policy, directing the organization and controlling the operations of an undertaking. (e.g., Directors fees etc)  3. Selling cost: The cost of seeking to create and stimulate demand and securing orders. (e.g., Salaries of salesmen, advertising etc)  4. Distribution cost: The cost of sequence of operations which begin with making and packed product available for dispatch. (e.g., warehouse rent, maintenance of delivery vans etc) III – ACCORING TO NATURE OF COSTS  1. Fixed cost: Fixed cost are those which do not change with increase or decrease in quantum of production but remain static.  2. Variable cost: A cost which tends to vary directly with volume of output.  3. Semi-variable cost: A cost which is partly variable.  IV – ACCORDING TO CONTROLLABILITY  1. Controllable cost: 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: Cost which cannot be influenced by the action of any specified member of an undertaking. (e.g., Rent, taxes, insurance etc) V – ACCORDING TO RELEVANCE TO DECISION MAKING  1. Shut down cost: A cost which is incurred irrespective of plant is in operation. E.g., the cost of rent, depreciation etc.  2. Sunk cost: A cost which is incurred in the past and is not relevant to the decision making. E.g., WDV of plant is irrelevant for replacement of machinery.  3. Imputed cost: It is the notional cost to be considered for making costs comparable. E.g., Rent of own building, interest on own capital.  4. Replacement cost: The cost of replacing a material or asset by purchase from the market at current prices.  PRODUCT COSTING  CONCEPT  The expenses of a product are analyzed under different heads in the form of statement. This statement is called product cost or cost sheet. (or)  A statement showing the total cost under proper classification in a logical order.  Specimen of Cost Sheet.  Particulars Rs. Rs.  Opening stock of material xxx  Add: Purchases xxx  Expenses on materials purchased xxx -----  Less: Closing stock xxx ----- xxx  Direct wages and expenses xxx -----  Prime cost xxx  Add: Factory overhead xxx  Add: Opening work-in-progress xxx ----- xxx  Less: Closing work-in-progress xxx -----  Work cost (or) Factory cost xxx  Add: Administration overheads xxx -----  Costof production xxx  Add: Opening stock of finished goods xxx ----- xxx  Less: Closing stock of finished goods xxx -----  Cost of production of goods sold xxx  Add: Selling and distribution overheads xxx -----  Cost of goods sold (or) cost of sales xxx  Add: Profit / :Loss xxx -----  Sales xxx ----- Exercise – 1 Exercise - 2  THANKS ? Presented By: Dr. Gaurav Bansal