1.Basic Cost Concept

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Course: SYBBA-CSubject Code: 203

Cost & management Accounting


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Unit 1: Basic Cost Concepts

Cost Concept & Classification

Objective of Cost Accounting

Cost Accounting v/s Management Accounting

Cost Accounting v/s Financial Accounting

Cost Centers & Activities


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Classification of Costs

In te !or"s of #eral" $% el"on' ( a classificationas to ma"e to arrive at te "etaile" costs of"epartments' process or oter cost units%)

Important basis of cost classification:1% Classification b* nature or element%

+% Functional Classification

,% Classification on te basis of beavior-% Classification for managerial "ecision & control


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1% Classification b* nature or .lement

.lements of Cost

irect Cost

irect

Material

irect

0abour

irect

.penses

In"irect Cost

In"irect

Material

In"irect

labour

In"irect

.penses


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irect Cost

irect cost are te cost !ic can be convenientl*i"entifie" !it & allocate" to a particular unit of finalpro"uct%

2uc cost are treate" as te cost of te unitpro"uce"%

It is also 3no!n as prime cost or first cost


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Cont4

irect Material:

All material !ic become an integral part of te finise"pro"uct an" !ic can be convenientl* assigne" to specificp*sical unit is calle" "irect material%

.% All primar* pac3aging material


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Cont4

irect 0abour: irect labour cost consist of !ages pai" to !or3ers "irectl*

engage" in manufacturing or an"ing pro"uct' job or process%

irect .penses5 Cargeable .penses6: All epenses oter ten te "irect material or "irect labour tat

as specificall* incurre" for particular job' pro"uct or processare calle" "irect epenses%

.% Cost of special tools' ire carges for a special e7uipment'insurance on special material%


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In"irect Cost

In"irect cost are tose cost !ic can not be assignto an* particular cost unit%

In"irect cost are usuall* incurre" for business as a!ole%


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Cont4

In"irect Material

.% Fuel' 0ubricating oil' 2mall tools etc%

In"irect 0abour ages of general supervisor' inspectors' !or3sop cleaner'

store 3eeper' !atcmen etc%

In"irect .penses 8ent' insurance' canteen' ligting' ospital etc%


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Cont4

A% Factor* overea"sIt inclu"es all in"irect epenses connecte" !it temanufacturing of all pro"uct

.: lubricants' oil' !or3s manger9s salar*' factor* rent' insurance

B% Office & a"ministration overea"sIt inclu"es all in"irect epenses relating to a"ministration &management of an office

.: office rent' office ligting' insurance' salar* of clerical &

eecutive staff%C% 2elling & "istribution overea"s

It inclu"es all in"irect cost connecte" !it mar3eting & sales

.: a"vertising epenses' salar* of salesmen%


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Functional Classification

rime /first /"irect cost: irect Material ; irect 0abour ; irect .penses

Factor* /!or3 /pro"uction /manufacturing cost:

rime Cost ; Factor* overea"s

Cost of pro"uction/office/a"ministration/gross cost of

pro"uction:

Factor* cost ; office & a"ministrative epenses


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Classification on te basis of beaviour

Basis of

Beaviour

=ariable

Cost

Fie"

Cost

2emi>=ariable

Cost


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Cont%%%

=ariable Cost Costs tat ma* var* almost in "irect proportion to te volume of

pro"uction are calle" variable cost% .: irect material' irect 0abour' irect .penses suc as electric

po!er' fuel etc%

Fie" Cost Cost !ic "o not var* !it te level of pro"uction are 3no!n as

fie" cost%


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Cont%%%

2emi>variable cost


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Classification of costs for managerial "ecision & control

Controllable & uncontrollable costs

?ormal & abnormal Costs

Avoi"able & unavoi"able costs

2ut "o!n & sun3 cost

ro"uct cost & perio" costifferential' incremental & "ecremental costs

Out of poc3et cost

Marginal cost

Opportunit* costConversion cost

Bu"get an" stan"ar" cost

Impute" or *potetical cost


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Controllable & uncontrollable costs

Controllable cost

Controllable cost are tose cost !ic can be controlle" or

influence" b* a specifie" person or a level of management%

.: 2alar* of .mplo*ee

Uncontrollable Cost

Cost !ic cannot be controlle" or influence" b* te action of

a specifie" person are 3no!n as uncontrollable costs%

.: taation polic* b* government


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?ormal & abnormal Costs

?ormal Cost

Costs !ic are normall* incurre" at a given level of output are

calle" normal cost%

.: labour !elfare epenses or cost

Abnormal Cost


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Avoi"able & unavoi"able costs

Avoi"able cost

Avoi"able cost are tose costs !ic can be escape" or avoi"e"

.: 8efresment epenses

Unavoi"able cost

Unavoi"able costs are tose !ic cannot be escape" or

eliminate"

.:


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2ut "o!n & sun3 cost

2ut "o!n cost


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ro"uct & perio" cost

ro"uct Cost

Costs !ic are associate" !it pro"uction an" !ic become

part of te pro"uct are calle" pro"uct cost%

.: ra! material' "irect !ages' etc

erio" Cost

Costs !ic are associate" !it perio" for !ic te* incurre"

are calle" perio" cost%

.: rent' insurance' salesmen salar*' etc%


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ifferential' incremental' "ecremental cost

ifferential cost


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Out of poc3et cost

It is tat cost !ic gives rise to costs epen"iture%

Out of poc3et cost are important for price fiation

"uring recession an" !ere ma3e or bu* "ecision isinvolve" .: ersonal use of Compan* lan"line pone


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Marginal Cost

Marginal cost is te cost of pro"ucing one a""itional

unit%

Marginal cost is te total of variable cost onl* an"not fie" cost%


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Opportunit* cost

Opportunit* cost refer to te a"vantages foregone asa result of a"opting one course of action an" not teoter%

.: if an buil"ing is propose" to be use" for a project' teepecte" rent of te buil"ing is te opportunit* cost%


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Conversion cost

It is te cost of converting ra! materials intofinise" pro"ucts%

Conversion cost can be calculate" as te total of"irect labour' "irect epenses an" factor* overea"s%


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Bu"get & stan"ar" cost

Bu"get cost

Bu"get cost are estimate" costs prior to a "efine" perio" of time%

.: cas bu"get

2tan"ar" cost

2tan"ar" cost is a pre"etermine" cost base" on tecnical estimate

for materials' labour an" overea"s for selecte" perio" of time an"

for a prescribe" set of !or3ing con"itions

2tan"ar" cost are base" upon tecnical assessments !ere as

bu"get are base" on istorical costs a"juste" future tren"s%


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Impute" or *potetical cost


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Objective of cost accounting

1%


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Cont%%%

1%


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Cont%%%

+%


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Cont%%%

,% Information for "ecisions:

An important purpose of te cost accounting s*stem is to

provi"e "ata an" special anal*ses for sort & long run "ecision%

Appropriate cost information must be accumulate" to ma3e a

!i"e variet* of sort & long run "ecisions%


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Cost Centres


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Documents

1.Basic Cost Concept