Cost Analysis

Dr. Pushparaj Kulkarni

Asst. Professor
M. Com., MBA, ICWA
Contents of the session
Concept of cost and its classification.
Cost volume profit analysis.
Traditional cost computation.
Cost reduction vs cost control
Strategic Cost Analysis.
Concept of Cost
A cost may be broadly defined as the amount
of sacrifice attributable to a specified activity,
item, process etc.
It represents the amount of resources given
up to obtain a given object or objective
(benefit).
Classification of Cost
Cost can be classified
by element.
by function.
by nature.
by accounting treatment
by control
by Managerial Decision-Making.
Classification by element
Direct Cost:
A cost which can be visibly traced to specific
product or service under the condition considered
.
Indirect Cost:
A cost that cannot be identified with a product
or service or department but which can be
appointed to cost centre or cost units in a
standard accounting practice .
Classification by functions
Classification of cost is based on functions of
an organization:
1. Production cost.
2. Administrative cost.
3. Selling and Distribution cost.
4. Financing Cost.
Classification by Nature
While doing a classification cost behaviour is
taken into consideration.
A. Fixed Costs.
B. Variable Costs.
C. Semi-variable costs.
Fixed Cost
Characteristics:
The cost which remains constant irrespective of
any level of production.
Total fixed cost remains unchanged.
Per unit total cost is always changing, it decreases
as production increases and vice-versa.
Variable Cost
Characteristics:
The cost which remains constant per unit
irrespective of any level of production.
Total variable cost is always changing with changes
in output, it has direct relationship with the
production.
Semi-Variable Cost
This cost do not vary in direct proportion or
activity to the certain extent, it remains
constant to the extent, later it varies directly
with the production.
This cost is combination of Fixed and variable
cost.
Classification by accounting treatment
The accounting treatment classifies costs into
product and period cost.
The aggregate of costs that are associated
with the manufacturing process are referred
to as product cost.
Period cost may be defined as an expenses of
the period to which it relates.
Classification by Managerial Decision-
Making
Differential Cost and Sunk Cost.
Out of Pocket Cost and book costs
Replacement costs and Historical Cost
Opportunity cost and Outlay cost
Cost Volume Profit Analysis
Break even analysis is a costing technique that
helps executives in profit planning.
The break even point is defined as the volume
of activity at which total sales revenue are
exactly equals total cost of the output
produced or sold.
This level is also known as no profit no loss
level.
Concepts in BEP
Break even point.
Profit volume ratio.
Margin of safety.
Managerial application of CVP
Budgeting.
Make or buy decision.
Pricing decision.
Sales mix variance.
Cost Reduction
Vs
Cost Control

Strategic Cost Analysis
Strategic cost analysis does not and should not
advocate a single approach to cost analysis to
cost absorption, as cost and profits are to be
viewed as per changing circumstances.
Hence enterprise must use all flexible
techniques to ascertain, absorb, analyze and
allocate the cost as per objective.
Application of Strategic Cost analysis
It has to be carried out at four different
decisions and control levels
For formal reporting and tax computation.
For product pricing based on market forces.
For internal cost control and continuous
benchmarking.
For all value driven inputs for the end-calculation
of owners target.s
Auditing
Audit is process of checking, verifying and
authenticating the financial information kept
by the business during a specific period, and
certifying whether the maintenance of
accounts are as per the norms and procedure
and to further certify that it represents the fair
position of a business.
Principles of auditing
Auditor should be Independent
Verification of evidence.
Authority should be clearly mentioned.
Answerability of the executive
Types of Audit
Internal
External
Auditing Objectives
Verification of accounts and financial records
Detection of errors and frauds
Prevention of errors and frauds.
Responsibilities of Auditor
Establishment of accuracy
Competent authority should authorized the
expenditure.
Proper allocation of expenditure between
revenue and capital.
Verification of physical existence of the assets
and their valuation.
Records have been kept according to law and
prescribed format.
Classification of transaction
Audit of revenue receipts:
Adequate norms and rules should be
ascertained.
Do the test check.
Receipts are properly classified.
Reconcile bank accounts.
Classification of transaction
Audit of expenditure:
Process of payment of money on government
account:
The submission of claim
The scrutiny of the claim disbursement
The classification of the transaction in the
accounts under the relevant head of account.
Classification of transaction
Audit of expenditure:
Proper sanction
Proper provision of fund
Expenditure should be accordance with rules
and regulations.

Thanks