Elements , Nature & Scope of Cost Accounting

8/3/2019 Elements , Nature & Scope of Cost Accounting

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Elements , Nature & Scope ofCost Accounting


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Out line

Meaning

Definition

Scope

Objectives

Advantages

Limitations

Elements of cost

- Material, Labour, Overhead


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Meaning

Cost accounting is concerned withrecording, classifying andsummarizing costs for determination

of costs of products or services,planning, controlling and reducingsuch costs and furnishing of

information to management fordecision making


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Definition

Definition: According to Wheldon,Cost accounting is the application of

accounting and costing principles,

methods and techniques in theascertainment of costs and analysis ofsaving or excess cost incurred as

compared with pervious expenses orwith standards.


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Scope

It deals primarily with cost data

It involves classification, accumulation,assignment and control of costs.

It establishes budgets and standards.

Right information to the Right personat the Right time.

It records Income and Expenditure.


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Objectives

Ascertainment of cost

Control of cost

Guide to business policy

Determination of selling price

Measuring and improving performance


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Advantages

Advantages to Management1. Reveals profits and un profitable activities2. Helps in cost concepts:3. Helps in decision making

4. Guides in fixing selling prices:5. Helps in inventory control:6.Aid in formulating policies.7. Helps in cost reduction

8. Reveals idle capacity9. Checks the accuracy of financial accounts10. Prevents frauds and manipulation


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Advantage to works

Advantage to society

Advantages to government agencies

and others


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Limitations

It is unnecessary

It is expensive

It is inapplicable

It is a failure


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Elements of cost

Elements ofcost

Material

Direct

Primecost

Indirect

OverHead

Labour

Direct

Primecost

Indirect

OverHead

OtherExpenses

Direct

Primecost

Indirect

OverHead


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Material cost

The cost of commodities supplied toan undertaking

Direct material is a part of finished

producteg: cotton used in a textile mill ,clay inbricks etc.

Indirect material is one which cannotbe easily identified in the product.eg: pins, screws, nuts etc.


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Labour Cost The human effort required to convert

the materials into finished product.

Direct Labour cost consists of wagespaid to a workers directly engaged ineh converting raw material intofinished product.

eg: wages paid to carpenter, feespaid to tailor etc.


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Indirect labour is of general characterand cannot be conveniently identifiedwith a particular cost unit.

eg: Supervisor, Inspector, cleaner,clerk etc


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Expenses

The cost of services provided to anundertaking and the notional cost ofthe use of owned asset.

Direct expenses are those expenseswhich can be directly allocated toparticular job, process or product.

Eg: Cost of patent rights, experimentalcost etc.


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Indirect expenses are those expenseswhich cannot be directly allocated toparticular job, process or product.

eg: Rent and rates , depreciation,advertisement, insurance etc.


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Over Head

Prime cost = Direct material + Directlabour + Direct expenses

Over head = Indirect material +

Indirect labour + Indirect expenses

Over head

Production Office &Administration

Selling &distribution


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Production Overhead

It is also known as factory overhead,works overhead, manufacturingoverhead.

It convert with the production function It includes direct material, direct

wages and direct expenses producinggoods and services.

Eg: Coal, oil, grease, factory rent,depreciation of plant, maintenance ofplant etc.


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Office and Administration

The indirect expenses incurred ingeneral administration function

Have no direct contact with production

or sales activities.eg: postage, Salary of office staff,

rent of office building, legal expenses,

telephone expences


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Selling and distribution

Selling is the cost of promotion salesand retaining customers.

eg: Advertisement, samples and free gifts,salaries of salesmen etc.

Distribution cost includes allexpenses incurred from the time theproduction is complete until it reaches

its destination.eg: Carriage outwards, insurance ofgoods in transit, warehousing etc.


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Documents

Elements , Nature & Scope of Cost Accounting