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.

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

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

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

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

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
Process Costing
Other methods are variations of one of these
methods.

Methods of costing - Types

Job Order Costing Applies where work is
undertaken to customers special requirements.
Contract Costing or Terminal 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.

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.

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.

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

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.

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

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

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

Elements of costs Price cost

Direct Material +
Direct labour +
Direct Expenses

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

Elements of costs Production overheads

Indirect Material such as coal, oil grease,
stationary in factory office+
Indirect labour such as work managers 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

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

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.

Components of total cost

1 Prime Cost
2. Works cost or factory cost
Prime cost + Factory Overheads

Cost of production
Work cost + Administration Overheads

Total cost or cost of sales

Cost of production + Selling and
distribution overhead