Cost Accounting

COST : The amount of expenditure ( actual or notional) incurred on or attributable to given thing.

(1) CONVERSION COST – The cost of converting direct materials into finished products, i.e. direct wages, direct expenses and factory overheads.

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(2) CONTROLABLE COST : Costs chargeable to a job or cost center which can be influenced by the actions of the persons in whom the control of such a center is vested.

(3) DIFFERENTIABLE COST : The difference in total cost between two alternatives.

(4) FIXED COST : The cost which remains fixed irrespective of the quantum of output over a certain capacity of the organization.

(5) OPPORTUNITY COST : The value of the benefit scarified in favor of choosing a particular alternative or action.

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(6) Uncontrollable Cost : The costs chargeable to a job or cost center which cannot be influenced by the action of the person in whom the control of the center vests.

(7) Variable Cost : The cost which tends to vary in direct proportion to changes in the volume of output or turnover.

Cost AccountingThe accounting system that provides the

information to measure product costs and performance , and control the operations of a firm is called cost accounting

Elements of Cost1) Material

2) Labour

3) Expenses

(1)Material : The substance for which the product is made is known as material it may be in a raw or a manufactured state. It can be direct or indirect.

(a) Direct Material : All material which becomes an integral part of the finished product and which can be conveniently assigned to specific physical units is termed as ‘Direct Material’.

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(b) Indirect Expenses : These are expenses which cannot be directly, conveniently and wholly allocated to cost centers or cost units. Example of such expenses are rent, insurance charges, etc.

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Cost

Materials Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

Classification of CostsFixed Cost BehaviorVariable Costs BehaviorSemi-variable Cost BehaviorFixed Costs rising in steps

Overheads The term overhead includes indirect material, indirect labour and

indirect expenses. Thus , all indirect costs are overheads.

Overhead

Factory Office & Admin. Selling & Distribution

Direct Indirect Indirect Direct Indirect Indirect Direct Indirect Indirect

Materials Labour Expenses Materials Labour Expenses Materials Labour Expenses

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Factory Overheads : They include :

1) Indirect material used in the factory such as lubricants, oil, consumable stores, etc.

2) Indirect labour such as gate keeper’s ,works manager’s salary, etc.

3) Indirect expenses such as factory rent, factory insurance, factory lighting, etc.

Office & Administration Overheads : They include :

1) Indirect material used in the office such as printing and

stationary material , rooms and dusters, etc.

2) Indirect labour such as salaries payable to office manager, office

accountant , clerks, etc.

3) Indirect Expenses such as rent, insurance, lighting of the office.

Selling & Distribution Overheads

It include : Indirect material used such as packing material , printing and

stationary material, etc.

Indirect labour such as salaries of salesmen and sales manager, etc.

Indirect expenses such as rent , insurance, advertising expenses, etc.

Costing Costing is the process and technique of ascertaining costs. Different

methods can be applied to ascertain costs. The method to be used differ from industry to industry and according to nature of business.

It primarily depends on the manufacturing process and the method of measuring the departmental and finished products.

Types of Costing :

(1) Specific order costing / Terminal Costing

(2) Operations /process/period costing

Specific order costing / Terminal Costing :

(1)Job Costing : According to this method, costs are collected for each job/work/project separately.

(2)Batch Costing : It is an extensive of job costing. A batch consists of a number of similar products.

(3)Contract Costing : A costing is a job and is spread over a period of time.

Operations/Process/Period Costing : The basic method of costing is applicable where standardized products result from a sequence of repetitive and , more or less continuous operation to which costs are charged.