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Dr. Sajid Ali

Assistant Professor

Department of AccountingCollege of Business Administration, Al-kharj,

Kingdom of Saudi Arabia

E-mail: sajidraoalig@gmail.com

http://faculty.ksu.edu.sa/2277770190/default.aspx

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COST ACCOUNTING(ACCT 232)

ContacthoursNo ofWeeksContents

93Introduction : Definition & meaning of cost accounting, cost terminology,classification of costs and calculation of various cost.

62Job Costing: Concept, Job costing systems, Job costing in manufacturing,actual v/s normal costing, job costing systems in manufacturing.

93Activity Based Costing: Simple v/s Activity based costing system, costhierarchy, cost products or services using activity based costing, ABC v/s ABM

124Process Costing: Process Costing methods, job order costing and spoilage,job costing & rework and accounting for scrap.

62Cost Allocation:Joint Products v/s By Products, approaches to allocatingjoint costs and accounting for by-products.

4214Total

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UNIT - 1

1. Definition & meaning of cost accounting

2. Cost terminology

3. Classification of costs and calculation of various cost.

4. Model Paper

5. Quiz

6. Home Assignment

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INTRODUCTION

COST ACCOUNTING

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Cost accounting is concerned with recording, classifying

and summarizing costs for determination of costs of

products or services, planning, controlling and reducingsuch costs and furnishing of information to management

for decision making

COST ACCOUNTING -

MEANING

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COST ACCOUNTING - INTRODUCTION

COST ACCOUNTING: The Institute of Cost and Management

Accountant, England (ICMA) has defined Cost Accounting as the

process of accounting for the costs from the point at which

expenditure incurred, to the establishment of its ultimate relationship

with cost centers and cost units. In its widest sense, 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 Accounting = Costing + Cost Reporting + Cost Control.

Accounting for determination and control of costs.

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COST - MEANING

Cost means the amount of expenditure (

actual or notional) incurred on, or

attributable to, a given thing.

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OBJECTIVES OF COST ACCOUNTING

Ascertainment of costs

Estimation of costs

Cost control

Cost reduction

Determining selling price

Facilitating preparation of financial and other

statement

Providing basis for operating policy

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COST TERMINOLOGY:

COST: Cost means the amount of expenditure incurred on a particular thing.

COSTING: Costing means the process of ascertainment of costs.

COST ACCOUNTING: The application of cost control methods and the

ascertainment of the profitability of activities carried out or planned.

COST CONTROL: Cost control means the control of costs by management. Following

are the aspects or stages of cost control.

JOB COSTING:It helps in finding out the cost of production of every order and thus

helps in ascertaining profit or loss made out on its execution. The management can judge

the profitability of each job and decide its future courses of action.

BATCH COSTING: Batch costing production is done in batches and each batch

consists of a number of units, the determination of optimum quantity to constitute an

economical batch is all the more important.

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ELEMENTS OF COST

Element of cost

Materials Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

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MATERIAL: The substance from which the

finished product is made is known asmaterial.

(a) DIRECT MATERIAL: is one which can

be directly or easily identified in theproduct Eg: Timber in furniture, Cloth in

dress, etc.

(b) INDIRECT MATERIAL: one which cannot

be easily identified in the product.

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EXAMPLES OF INDIRECT MATERIAL

At factory level lubricants, oil,consumables, etc.

At office level Printing & stationery,

Brooms, Dusters, etc.

At selling & dist. level Packing

materials, printing & stationery, etc.

LABOUR t t

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LABOUR: e uman e ort requ re toconvert the materials into finished

product is called labour.

(a) DIRECT LABOUR: is one which can beconveniently identified or attributed wholly to a

particular job, product or process.Eg:wages paid to carpenter, fees paid to

tailor,etc.

(b) INDIRECT LABOUR: is one which cannot beconveniently identified or attributed wholly to a

particular job, product or process.

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EXAMPLES OF INDIRECT LABOUR

At factory levelforemens salary,works managers salary, gatekeepers salary,etc

At office levelAccountants salary,GMs salary, Managers salary, etc.

At selling and dist.level salesmen

salaries, Logistics manager salary,etc.

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OTHER EXPENSES: are those expenses other

than materials and labour.

DIRECT EXPENSES: are those expenses which

can be directly allocated to particular job,

process or product. Eg : Excise duty, royalty,special hire charges,etc.

INDIRECT EXPENSES: are those expenseswhich cannot be directly allocated to

particular job, process or product.

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COST SHEETDIRECT MATERIAL

DIRECT LABOUR

DIRECT EXPENSES

PRIME COST

FACTORY OVERHEADS

FACTORY COST

OFFICE OVERHEADS

COST OF PRODUCTION

SELL & DIST OVERHEADS

COST OF SALESPROFIT

SALES

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COST SHEET - ADVANCED

OPENING STOCK OF RAW MATERIALS

+PURCHASES

+CARRIAGE INWARDS-CLOSING STOCK OF RAW MATERIALS

VALUE OF MATERIALS CONSUMED

+DIRECT WAGES

+DIRECT EXPENSES

PRIME COST

+FACTORY OVERHEADS

+OPENING STOCK OF WIP

-CLOSING STOCK OF WIP

FACTORY COST(CONT.)

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FACTORY COST

+ADMINISTRATIVE OVERHEADS

COST OF PRODUCTION

+OPENING STOCK OF FINISHED GOODS

-CLOSING STOCK OF FINISHED GOODS

COST OF GOODS SOLD

+SELL. & DIST. OVERHEADS

COST OF SALES

+PROFIT

SALES

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COST CLASSIFICATIONON THE BASIS

OF

Nature

Function

Direct & indirect

Variability

Controllability

Normality

Financial accounting classification

Time Planning and control

Managerial decision making

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ON THE BASIS OF NATURE

Materials

Labour

Expenses

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ON THE BASIS OF FUNCTION

Manufacturing costs

Commercial costsADM and S&D Costs

ON THE BASIS OF DIRECT AND INDIRECT

Direct costs

Indirect costs

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ON THE BASIS OF VARIABILITY

Fixed costs

Variable costs

Semi variable costs

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ON THE BASIS OF CONTROLLABILITY

Controllable costs

Uncontrollable costs

ON THE BASIS OF NORMALITY

Normal costs

Abnormal costs

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ON THE BASIS OF FINANCIAL

ACCOUNTS:

Capital costs

Revenue costs

Deferred revenue costs

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ON THE BASIS OF TIME:

Historical costs

Pre determined costs

ON THE BASIS OF PLANNING AND CONTROL:

Budgeted costs

Standard costs

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ON THE BASIS OF MANAGERIAL DECISION

MAKING

Marginal costs

Out of pocket costs

Sunk costs

Imputed costs

Opportunity costs

Replacement costs

Avoidable costsUnavoidable costs

Relevant and irrelevant costs

Differential costs

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TERMS IN COST ACCOUNTING

Cost unit Cost centre

Cost estimation

Cost ascertainment

Cost allocation

Cost apportionment

Cost reduction

Cost control

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METHODS OF COSTING

Job costing Contract costing

Batch costing

Process costing Unit costing

Operating costing

Operation costing

Multiple costing

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TYPES OF COSTING

Uniform costing

Marginal costing

Standard costing

Historical costing

Direct costing

Absorption costing

Calculation of various cost

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Calculation of various cost

Direct Materials

Opening stock of materials

AddPurchases of materials

Less Closing stock of materials

(a) Materials consumed

Direct Wages

Direct Expenses ------ ------PRIME COSTAddFactory Overheads

Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs

Salaries of Works Manager etc. Indirect Materials

Drawing office and works office expenses Depreciation on factory land and building Less Scrap value

Defective work

AddWork in progress (opening)

Less Work in progress (closing) ------

WORKS COSTAddOffice/Administration overheads

Office rent, insurance, lighting, cleaning

Office salaries, telephone, law and audit expenses

General Managers salary

Printing and stationery

Maintenance, repairs, upkeep of office bldgBank charges and miscellaneous expenses ------

COST OF PRODUCTIONAddOpening stock of finished goods

Less Closing stock of finished goods ------

COST OF GOODS SOLDAddSelling and Distribution Overheads

Showroom expenses, salesmens salaries

& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.

COST OF SALESAddNet Profit or deduct net loss: ------ SALES ------

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Home Assignment

1. What is Cost Accounting? How it is different from Management

Accounting?

2. Explain the various types of Cost?

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Sample Quiz -1

1) The basic types of cost accounting system are :

A)Job order cost systems, activity based cost systems and process cost systems.

(B) Direct cost system and indirect cost systems

(C) Complete job cost systems and work in process cost system.

(D) Fixed cost systems and variable cost systems

2 In ABC, only one cost driver should be used in applying overhead .

A) True (B) False

3 Elston's Metal Shop uses a job order cost system. It applies overhead to jobs at a rate of 150% of direct laborcosts. Job No.2617 required $500bin direct labor costs. The job was initially budgeted to require $550 in

direct labor costs. Overhead applied to No.2617 during the period amounted to :

A) $550 (B) $750 (C) $825 (D) some other amount .

4If the manufacturing overhead account at month end has a remaining debit balance, this indicates that overhead

is under applied .

A) True (B) False

5 A predetermined overhead application rate :

A) Is used in a job order cost system but cannot be used in a process cost system

(B) Can be determined by dividing budgeted direct labor cost by the budgeted factory overhead costs.

(C) Is not generally accepted for financial reporting purpose.

(D) Tends to avoid wide variation in per-unit overhead cost because of short -run changes in volume .