Dr. Sajid Ali Assistant Professor Department of Accounting College of Business Administration, Al-kharj, Kingdom of Saudi Arabia E-mail: [email protected]@gmail.com.

Dr. Sajid AliAssistant ProfessorDepartment of AccountingCollege of Business Administration, Al-kharj, Kingdom of Saudi Arabia E-mail: [email protected]://faculty.ksu.edu.sa/2277770190/default.aspx

COST ACCOUNTING (ACCT – 232)

ContentsNo ofWeeks

Contact hours

Introduction : Definition & meaning of cost accounting, cost terminology, classification of costs and calculation of various cost.

3 9

Job Costing: Concept, Job costing systems, Job costing in manufacturing, actual v/s normal costing, job costing systems in

manufacturing.2 6

Activity Based Costing: Simple v/s Activity based costing system, cost hierarchy, cost products or services using activity

based costing, ABC v/s ABM3 9

Process Costing: Process Costing methods, job order costing and spoilage, job costing & rework and accounting for scrap.

4 12

Cost Allocation: Joint Products v/s By Products, approaches to allocating joint costs and accounting for by-products.

2 6

Total 14 42

UNIT - 1

1. Definition & meaning of cost accounting

2. Cost terminology

3. Classification of costs and calculation of various cost.

4. Model Paper

5. Quiz

6. Home Assignment

INTRODUCTION

COST ACCOUNTING

Cost accounting is concerned with recording, classifying and summarizing costs for

determination of costs of products or services, planning, controlling and reducing such costs and

furnishing of information to management for decision making

COST ACCOUNTING - MEANING

COST ACCOUNTING - INTRODUCTION

COST ACCOUNTING: The Institute of Cost and Management

Accountant, England (ICMA) has defined Cost Accounting as –

“the process of accounting for the costs from the point at which

expenditure incurred, to the establishment of its ultimate

relationship with cost centers and cost units. In its widest sense,

it embraces the preparation of statistical data, the application of

cost control methods and the ascertainment of the profitability of

activities carried out or planned”.

Cost Accounting = Costing + Cost Reporting + Cost Control.

Accounting for determination and control of costs.

COST - MEANING

Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a

given thing.

OBJECTIVES OF COST ACCOUNTING

Ascertainment of costs

Estimation of costs

Cost control

Cost reduction

Determining selling price

Facilitating preparation of financial and other

statement

Providing basis for operating policy

COST TERMINOLOGY:

COST: Cost means the amount of expenditure incurred on a particular thing.

COSTING: Costing means the process of ascertainment of costs.

COST ACCOUNTING: The application of cost control methods and the

ascertainment of the profitability of activities carried out or planned”.

COST CONTROL: Cost control means the control of costs by management.

Following are the aspects or stages of cost control.

JOB COSTING: It helps in finding out the cost of production of every order and

thus helps in ascertaining profit or loss made out on its execution. The

management can judge the profitability of each job and decide its future courses of

action.

BATCH COSTING: Batch costing production is done in batches and each

batch consists of a number of units, the determination of optimum quantity to

constitute an economical batch is all the more important.

ELEMENTS OF COST

Element of cost

Materials Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

MATERIAL: The substance from which the finished product is made is known as material. (a) DIRECT MATERIAL: is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc.

(b) INDIRECT MATERIAL: one which cannot be easily identified in the product.

EXAMPLES OF INDIRECT MATERIAL

At factory level – lubricants, oil, consumables, etc.

At office level – Printing & stationery, Brooms, Dusters, etc.

At selling & dist. level – Packing materials, printing & stationery, etc.

LABOUR: The human effort required to convert the materials into finished product is called labour.

(a) DIRECT LABOUR: is one which can be conveniently identified or attributed wholly to a particular job, product or process.Eg:wages paid to carpenter, fees paid to tailor,etc.

(b) INDIRECT LABOUR: is one which cannot be conveniently identified or attributed wholly to a particular job, product or process.

EXAMPLES OF INDIRECT LABOUR

At factory level – foremen’s salary, works manager’s salary, gate keeper’s salary,etc

At office level – Accountant’s salary, GM’s salary, Manager’s salary, etc.

At selling and dist.level – salesmen salaries, Logistics manager salary, etc.

OTHER EXPENSES: are those expenses other than materials and labour.

DIRECT EXPENSES: are those expenses which can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc.

INDIRECT EXPENSES: are those expenses which cannot be directly allocated to particular job, process or product.

Examples of other expensesAt factory level – factory rent, factory

insurance, lighting, etc.At office level – office rent, office insurance,

office lighting, etc.At sales & dist.level – advertising, show room

expenses like rent, insurance, etc.

COST SHEET DIRECT MATERIALDIRECT LABOURDIRECT EXPENSES 

PRIME COSTFACTORY OVERHEADS 

FACTORY COSTOFFICE OVERHEADS 

COST OF PRODUCTIONSELL & DIST OVERHEADS 

COST OF SALESPROFIT 

SALES

COST SHEET - ADVANCED OPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDS-CLOSING STOCK OF RAW MATERIALS VALUE OF MATERIALS CONSUMED+DIRECT WAGES+DIRECT EXPENSES PRIME COST+FACTORY OVERHEADS+OPENING STOCK OF WIP-CLOSING STOCK OF WIP FACTORY COST (CONT.)   

FACTORY COST +ADMINISTRATIVE OVERHEADS COST OF PRODUCTION+OPENING STOCK OF FINISHED GOODS-CLOSING STOCK OF FINISHED GOODS COST OF GOODS SOLD+SELL. & DIST. OVERHEADS COST OF SALES+PROFIT SALES    

COST CLASSIFICATION – ON THE BASIS OF

Nature Function Direct & indirect Variability Controllability Normality Financial accounting classification Time Planning and control Managerial decision making

ON THE BASIS OF NATURE Materials

Labour

Expenses

ON THE BASIS OF FUNCTION

Manufacturing costsCommercial costs – ADM and S&D Costs

ON THE BASIS OF DIRECT AND INDIRECTDirect costs

Indirect costs

ON THE BASIS OF VARIABILITY Fixed costs

Variable costs

Semi variable costs

ON THE BASIS OF CONTROLLABILITY Controllable costs

Uncontrollable costs

ON THE BASIS OF NORMALITYNormal costs Abnormal costs

ON THE BASIS OF FINANCIAL ACCOUNTS: Capital costs

Revenue costs

Deferred revenue costs

ON THE BASIS OF TIME: Historical costs

Pre determined costs

ON THE BASIS OF PLANNING AND CONTROL:

Budgeted costs

Standard costs

ON THE BASIS OF MANAGERIAL DECISION MAKING

Marginal costsOut of pocket costsSunk costs Imputed costsOpportunity costsReplacement costsAvoidable costsUnavoidable costsRelevant and irrelevant costsDifferential costs

TERMS IN COST ACCOUNTING

Cost unit Cost centre Cost estimation Cost ascertainment Cost allocation Cost apportionment Cost reduction Cost control

METHODS OF COSTING Job costing Contract costing Batch costing Process costing Unit costing Operating costing Operation costing Multiple costing

TYPES OF COSTING

Uniform costingMarginal costingStandard costingHistorical costingDirect costingAbsorption costing

Calculation of various costDirect MaterialsOpening stock of materialsAdd Purchases of materialsLess Closing stock of materials(a) Materials consumedDirect WagesDirect Expenses ------ ------PRIME COSTAdd Factory OverheadsFactory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, RepairsSalaries of Works Manager etc. Indirect MaterialsDrawing office and works office expenses Depreciation on factory land and building Less Scrap valueDefective workAdd Work in progress (opening)Less Work in progress (closing) ------WORKS COSTAdd Office/Administration overheadsOffice rent, insurance, lighting, cleaningOffice salaries, telephone, law and audit expenses

General Manager’s salaryPrinting and stationeryMaintenance, repairs, upkeep of office bldgBank charges and miscellaneous expenses ------COST OF PRODUCTIONAdd Opening stock of finished goodsLess Closing stock of finished goods ------COST OF GOODS SOLDAdd Selling and Distribution OverheadsShowroom expenses, salesmen’s salaries& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.COST OF SALESAdd Net Profit or deduct net loss: ------ SALES ------

Home Assignment

1. What is Cost Accounting? How it is different from Management

Accounting?

2. Explain the various types of Cost?

Sample Quiz -1

1) The basic types of cost accounting system are: A)Job order cost systems, activity based cost systems and process cost systems.

(B) Direct cost system and indirect cost systems (C) Complete job cost systems and work in process cost system. (D) Fixed cost systems and variable cost systems 2 In ABC, only one cost driver should be used in applying overhead.

A) True (B) False

1) Elston's Metal Shop uses a job order cost system. It applies overhead to jobs at a rate of 150% of direct labor costs. Job No.2617 required $500bin direct labor costs. The job was initially budgeted to require $550 in direct labor costs. Overhead applied to No.2617 during the period amounted to: A) $550 (B) $750 (C) $825 (D) some other amount.

4 If the manufacturing overhead account at month end has a remaining debit balance, this indicates that overhead is under applied. A) True (B) False

• A predetermined overhead application rate: A) Is used in a job order cost system but cannot be used in a process cost system

(B) Can be determined by dividing budgeted direct labor cost by the budgeted factory overhead costs. (C) Is not generally accepted for financial reporting purpose. (D) Tends to avoid wide variation in per-unit overhead cost because of short -run changes in volume.