INTRODUCTION TO COST

MANAGEMENT

MODULE I
 WHAT IS COST?
According to the dictionary meaning cost is
the price paid for something. In other words
cost is the amount of resources used for
something which must be measured in terms
of money.
Cost is defined as the amount of expenditure
whether actual or notional incurred on or
attributable to a given thing or to ascertain
the cost of a given thing.
 COST ACCOUNTING
Cost accounting is a process of collecting,
analyzing, summarizing and evaluating various
alternative courses of action. Its goal is to advise
the management on the most appropriate course
of action based on the cost efficiency and
capability.
Cost accounting provides the detailed cost
information that management needs to control
current operations and plan for the future.
 ELEMENTS OF COST
The cost is composed of three elements. They are:
Raw materials
Labor
Indirect expenses/overhead
Material (Material is a very important part of business)
Direct material/Indirect material
Labor
Direct labor/Indirect labor
Overhead (Variable/Fixed)
Production or works overheads
Administration overheads
Selling overheads
Distribution overheads
Maintenance & Repair
Supplies
Utilities
Other Variable Expenses
Salaries
Occupancy (Rent)
Depreciation
Other Fixed Expenses
 CLASSIFICATION OF COSTS
Costs may be classified on different bases. They can be
classified as follows:
By time (historical, predetermined)
By nature of elements (material, labour, overhead)
By association (product or period)
By traceability (direct, indirect)
By changes in activities or volume (fixed, variable, semi-
variable)
By function (manufacturing, administration, selling, research
and development)
Controllability (controllable, non-controllable)
Analytical and decision-making (marginal, uniform,
opportunity, sunk, differential etc.)
By nature of expense (capital, revenue)
Miscellaneous (conversion, traceable, normal, total)
 Classification on the Basis of Time
Costs can be classified into historical costs and predetermined costs.
Historical costs:
Historical costs are determined after they are incurred actually. When
production is completed, i.e., products reached their final stage of finished
status, costs are available and on that basis costs are ascertained. Only on
the basis of actual operations, costs are accumulated. Hence they are
objective in nature.
Predetermined costs:
Costs are calculated before they are incurred, i.e., before the production
process is completed.
These predetermined costs may further be classified into estimated costs
and standard costs
Estimated costs:
Costs are estimated before goods are produced. As these are purely
estimates, they lack accuracy.
Standard costs: These costs are also predetermined. But certain factors are
analysed with care before setting up costs. Standard cost is not only a
concept of cost but a technique or method of costing also.
Classification by Nature or Elements