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Cost mangement Basic concepts.ppt

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Cost mangement Basic concepts.ppt

  1. 1. COST & MANAGEMENT ACCOUNTING
  2. 2. What is ‘Cost’? Cost, Price, Value
  3. 3. What is ‘Cost Accounting’?
  4. 4. Financial Accounting v/s Cost Accounting Cost Accounting v/s Management Accounting
  5. 5. OBJECTIVES OF COST ACCOUNTING 1. Ascertainment of cost of product or service 2. Valuation of inventories 3. Providing data for planning, control and decision making
  6. 6. Ascertainment of cost of productservice  Measurement of various elements of costs 1. Materials, 2. Labour (Manpower costs), 3. Expenses (overheads)  Accounting for losses a) Normal loss, b) Abnormal loss  Fixation of price to be charged to the customers C+P= S S-C= P S-P= C
  7. 7. Valuation of inventories  Raw materials  Work in process  Finished goods  FIFOLIFOWeighted average cost
  8. 8. Providing data for planning, control and decision making  Introduction of a new product  Discontinuing or closing a product  Further processing of a product  Opening a new sales office or branch  Submitting tenders  Make or buy decision  Cost reduction or cost control
  9. 9. CLASSIFICATION OF COSTS
  10. 10. CLASSIFICATION OF COSTS
  11. 11. Rent Factory Cost Fixed Cost Uncontrollable Cost
  12. 12. Functional classification Factory costs  Material costs  Labour costs  Power  Repairs and maintenance Admin costs  Salaries to admin staff  Audit fees  Bank charges  Legal expenses Selling costs  Advertising  Sales Promotion  Trade exhibitions  Commission  Salesmen Travelling  After sales service Distribution costs  Storage costs  Order processing costs  Transportation costs Research and development costs  Product research  Process research  Marketing research
  13. 13. Traceable and non-traceable costs
  14. 14. Traceable costs Direct or indirect costs Materials Labour Overheads
  15. 15. Direct and indirect materials Direct materials- which can be directly allocated to a cost centre or a cost object Illustration- Raw materials used- Plastic in toys or bottles, steel in kitchen utensils, gold in gold necklace Indirect materials- which cannot be identified in or allocated to a product Illustration- cotton waste, lubricants, spares
  16. 16. Direct and indirect wages Direct labour cost- wages of those workers who are readily identified or linked with a cost centre or cost object Indirect labour cost- wages of the workers which are not directly allocable to a particular cost centre – factory security staff or maintainance staff salaries
  17. 17. Direct and indirect expenses Direct expenses- which can be linked to a product Illustration- Hire charges of a mould, royalties to collaborator, job processing charges Indirect expenses- which cannot be directly allocable to a product Illustration- Factory power, insurance, repairs
  18. 18. Behavioural classification of costs Behaviour Fixed costs Variable costs Semi-variable costs
  19. 19. Fixed costs  Cost which does not vary with the change in volume of activity  Factory or office rent, audit fees, permanent staff salaries, depreciation
  20. 20. Variable costs  Costs which tend to directly vary with the volume of activity  Raw materials consumed, wages on piece rate basis, sales commission
  21. 21. Semi variable costs  Costs which contain both fixed and variable elements. They are partly affected by fluctuation in the level of activity  Power, salesmen remuneration (fixed salary+commission on sales)
  22. 22. Controllability classification Controllable costs- discretion of management Illustration- Sponsorship of an event, outbound or offshore picnic for staff Uncontrollable- No option or discretion Illustration- Lease rent, property taxes, allocated costs from the view point of product manager
  23. 23. Conversion costs Costs which are necessary to convert raw materials into finished products- Direct labour costs and manufacturing overheads
  24. 24. Budgeted costs Costs which are expected to be incurred during a relevant accounting period
  25. 25. Standard costs Standard costs are the costs that should have been incurred on actual production
  26. 26. SPECIAL COSTS FOR DECISION MAKING
  27. 27. Opportunity cost The cost of opportunity lost or sacrificed
  28. 28. Notional cost It is an imaginary cost which is included in the cost units or cost centres especially when its performance is measured with competitors which are not enjoying the same benefits e.g. rent, interest
  29. 29. Historical cost Original cost of an asset when it was acquired or constructed
  30. 30. Replacement cost Cost of replacing an asset according to its current worth
  31. 31. Sunk cost A cost that has already been incurred and which cannot be recovered- Inventory, R & D, Asset discarded
  32. 32. Capacity costs Capacity costs tend to be fixed in relation to changes of activity within short term periods Over long term periods of several years, significant changes in demand will cause capacity costs to change
  33. 33. Period cost (Same as fixed costs)
  34. 34. Product costs Product costs refer to the costs incurred to create a product
  35. 35. Product costs MAY 10, 2022 MANY THANKS FROM ANSHUL GARG FAMILY & FRIENDS
  36. 36. Target costs Maximum amount of cost that can be incurred and with it a firm can still earn the required profit margin at a particular selling price
  37. 37. Step costs  A step cost is a cost that does not change steadily with changes in activity volume, but rather at discrete points- School picnic- buses Hospital- no of nurses
  38. 38. Relevant and Irrelevant costs  Costs which are are not relevant to the decision are relevant and irrelevant costs e.g. cost of raw material in stock in respect of product discontinued
  39. 39. Non cash costs Depreciation on assets
  40. 40. Management Accounting- Roadmap 2020 2021 2022 2023
  41. 41. Basis of classification Costs Related topic Functional classification Factory, admin, selling Methods of costing Behavioral classification Fixed, variable, semi variable CVP analysis Traceability classification Direct and indirect costs Allocation of overheads Standard Costing Standard and actual costs Standard costing and variances Budgetary control Budgeted costs Budgetary control Special costs Opportunity costs, relevant costs, sunk costs Decision making
  42. 42. Thanks

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