basics

1. Cost Accounting
 CA is a formal system of accounting for costs
in the books of accounts by means of which
costs of products and services are ascertained
and controlled.
 Cost means “the price paid for something”
 Cost ascertainment is computation of actual
costs incurred
 Cost estimation is a process of predetermining
costs of goods and service.

4. Objectives of Cost
Accounting
 Ascertainment of cost
 Control of cost
 Guide to business policy such as make or buy,
introduction of new product etc
 Determination of selling price

5. CA and FA - Comparison
 Purpose
 Statutory requirements
 Analysis of cost and profit
 Periodicity of reporting
 Control aspect
 Historical and predetermined costs
 Format of presenting information
 Types of transactions recorded

6. Cost Centre
 Cost center is a location, person, or item of
equipment (or group of these) for which costs
may be ascertained and used for the purpose
of control
 It refers to a section of the business to
which costs can be charged.
 Types:
Personal and Impersonal cost centre
Production and Service cost centre

7. Cost Unit
 Cost units are the things, that the business is
set up to provide, of which cost is
ascertained.
 Unit of product, service or time in relation to
which cost may be ascertained or expressed
 Types:
 Units of production such as a ream of paper, a tonne of
steel, a meter of cable etc.
 Units of services such as passenger miles, consulting
hours, room per day, bed per day

8. Methods of costing
 It refers to the techniques and processes
employed in the ascertainment of costs
 Choice of the method depends upon the type
and nature of manufacturing activity
 Types: Broadly,
 Job costing or job order costing
 ProcessCosting
Other methods are variations of one of these
methods.

9. Methods of costing - Types
 Job Order Costing – Applies where work is
undertaken to customers special
requirements.
 Contract Costing orTerminal Costing: It is same
as Job order costing; however, job is small
and contract is big contract. Contract is of
long duration and may continue for more
than a financial year.
 Batch costing: Cost of a batch or group of
identical products is ascertained; each batch
of products is a cost unit for which costs are
ascertained.

10. Methods of costing –
Types…..
 Process Costing – Applies to a context where
there is a continuous process.Costs are
accumulated for each process.And then total
cost of a process is divided by the number of
units produced to arrive at cost per unit.
 Operations Costing: Involves cost
ascertainment for each operation.
 Operating or services costing: It is applied to
services; cost units are passenger –kilometer,
room per day, bed per day.

11. Methods of costing –
Types…..
 Multiple or composite costing – Application of
more than one method of costing in respect
of the same product. Used in industries where
a number of components are separately
manufactured and then assembled into a
final product.
 Single, output or unit costing: Applied to a
context where output produced are identical,
the cost per unit is found by dividing the total
cost by the number of units produced. E.g.
Steel output is identical but differentiated by
grades.

12. Techniques of costing –
Types…..
 Standard costing – Standard cost is
predetermined as target of performance and
actual performance is measured against the
standard.
 Budgetary control: By comparing actual with
planned / budgeted performance
 Marginal costing: Only variable cost is
allocated to individual cost centers or cost
units

13. Techniques of costing –
Types…..
 Total Absorption costing – Both fixed and
variable costs are charged to products.
 Uniform Costing: It is not a technique but a
situation wherein several undertakings use
the same costing principle and practices.

14. Elements of costs -
Materials
 Material cost : cost of commodities supplied to an
undertaking
Direct materials cost: those costs which are incurred for
and conveniently identified with a particular cost unit,
process or department.
Ex: cost of raw material
Indirect materials cost: those costs which cannot be
conveniently identified with a particular cost unit, process
or department.
Ex: cost of material that are inexpensive but may or may not
physically become part of the finished goods

15. Elements of costs – Labour
cost
 Labour cost : cost of remuneration (wages,
salaries, commissions, bonuses, etc etc) of the
employees of an undertaking
Direct labour cost: wages paid to workers
directly engaged in the production process.
Eg:Wages of machine operator
Indirect labour cost: those wages which cannot be
conveniently identified with a particular cost unit,
process or department

16. Elements of costs – Expenses
 Expenses: The cost of services provided to an
undertaking
Direct Expenses: those expenses which can be identified
with and allocated to cost centers or units.
. Eg: Royalty paid, depreciation of a plant used
Indirect Expenses: All indirect costs other than indirect
materials and labor.They cannot be directly identified
with a particular job, process or work order and are
common to cost units or cost centers
Ex: Rent and rates, lighting and power

17. Elements of costs – Price
cost
 Direct Material +
 Direct labour +
 Direct Expenses

18. Elements of costs – Over
heads
 Indirect Material +
 Indirect labour +
 Indirect expenses
Overheads are divided into
a. Production overheads
b. Office and administration overheads
c. Selling and distribution overheads

19. Elements of costs –
Production overheads
 Indirect Material such as coal, oil grease,
stationary in factory office+
 Indirect labour such as work manager’s salary,
salary of factory office staff, salary of inspector
and supervisors, watchman, sweeper
 Indirect Expenses such as factory rent,
depreciation of plant, repairs and maintenance
of plant, insurance of factory building, factory
lighting and power, internal transport expenses

20. Elements of costs – Office and
administration overheads
 Indirect Material such as stationary used in
administration office, postage, etc
 Indirect labour such as salary of office staff,
salary of of MD, Directors, watchman, sweeper
 Indirect Expenses such as office rent, insurance of
office building, office lighting and power,
telephone, depreciation of office furniture,
office a/c, sundry office expenses

21. Elements of costs – Selling
and distribution
overheads
 Selling cost: cost of seeking to create and stimulate
demand and of securing orders such as ads, samples and
free gifts, salaries of salesmen
 Distribution cost: cost of making packed product available
for dispatch and returning of empty packages for reuse
Indirect Material such as stationary used in sales office,
packing mat, cost of samples, price list, oil for delivery
vans
Indirect labour such as salary of sales staff, salary of of
MD, Directors, watchman, sweeper
Indirect Expenses such as advertising, traveling expenses,
showroom expenses, carriage outwards, rent of
warehouse, bad debts, insurance of goods in transit etc.

22. Components of total cost
 1 Prime Cost
 2.Works cost or factory cost
Prime cost + Factory Overheads
 Cost of production
Work cost + AdministrationOverheads
 Total cost or cost of sales
Cost of production + Selling and
distribution overhead