Cost Accounting
Introduction of cost accounting
Lecture-1
By
Main Ahmad Farhan (ACA)
Accounting
It is a language about financial information (which is measurable in
terms of money) commonly used in business.
Branches Of Accounting
Accounting
Financial AccountingCost Accounting Management Accounting
For external reporting
For internal reporting
Fed by financial and
cost accounting
User Group
User Group
Financial Accounting Cost & Management Accounting
Directors
Managers
Employees
Management
Lenders
Suppliers
Govt Agencies
Investors
Branches Of Accounting
Financial Accounting is an art of recording (Journal), classifying (Ledger), summarizing (Trial balance), reporting (Profit & Loss A/c & Balance Sheet) and analysis (Interpretation) the financial information.
Cost Accounting deals with ascertainment, measurement, accumulation, budgeting and evaluating cost structure of the entity.
Management Accounting deals with decisions relating to the generation and effective utilization of the financial resources of an entity.
Cost Accounting
So Cost accounting is a specialized branch of accounting which provide processed set of information / statements to the management which assist them in decision making.
In cost accounting cost of product or a process is; Ascertained Measured Accumulated
Management Accounting
Management is central coordinating body in an entity Management is concerned with the maximization of
wealth through
Minimization of cost Maximization of profit
For this purpose information provided by cost accounting is analyzed by the management for decision making and management control function.
Management Accounting
Reports generated through management accounting are used internally.
Major function of management accounting:
• Planning & Forecasting
• Controlling
• Decision making
Pricing
Make or Buy
Shut down or Continued operation
Equipment Replacement
Purpose Of Cost Accounting
Provides information relating to cost of production. Determines the appropriate selling price. Discloses profitable products, areas and activity
level. Helps in make or buy decision. Budgeting relating to production function. Controls production variances. Provides information to financial accountant.
Classification Of Cost
Cost Classification
Direct Cost Indirect Cost
Direct Material Direct Labor Factory Overhead Other Direct
Expenses
Direct Cost
Cost that can be traced in full to the product or
services is direct cost
Types Of Direct Cost
Direct material costs are those cost of material that are traceable in full in the cost of a product or services
Direct labor cost is specific cost of the worker in producing a product or service
For example wood in manufacturing of table
For example labor involved in cutting wood
Types Of Direct Cost
Other Direct Expenses These are expenses other than direct material and direct labor which have been incurred in full as direct consequences of producing product or services
Royalty on production, Cost of jigs / moulds
Indirect Cost The cost that is incurred in producing product or services but
which can not be traced in full
FOH means all expenses of factory other than direct material, direct labor and other direct production expenses.
Factory overhead (FOH)
Indirect material Indirect Labor
Deprecation of machineryFactory utility bills
Cost classification
Direct Material + Direct Labor + Other Direct Cost = Prime cost
Direct Labor + Other Direct Cost + FOH = Conversion cost
Prime Cost + FOH = Total factory cost
Summary
Material cost Labor cost Other production Total production cost cost
Indirect
Prime cost Direct Direct Direct
Indirect Indirect FOH cost
=
=
Total Total Total = Total FactoryCost
Cost classification
Direct material Rs 12,000Direct labor 8,000Other direct cost 2000
Prime cost 22,000FOHIndirect material 3000Indirect labor 2000Electricity bill 1500Rent of factory 3500Depreciation 1000 11000Total factory cost 33000
Behavior Of Cost
Fixed cost
Variable cost
Step fixed cost
Semi variable cost
Fixed cost
Fixed cost is a cost that do not vary with the level of production. Simple means the variation in production has no impact on fixed cost. For example rent of building and accountant salary etc
No. of units
Fixed cost
1000
2000
3000
300200100
Fixed Cost Per Unit Reaction Fixed cost per unit decreases as the number of units produced increases and vice versa
For example rent of building is Rs. 10,000 and number of units produced is 5000.
If the number of units produced increases to 10000
Per unit fixed cost = 10000 / 5000 = 2 per unit
Per unit fixed cost = 10000 / 10000 = 1 per unit
Step Fixed Cost
Costs which are constant for a relevant range of activity and rise to new constant level once that range exceeded.For example rent.
No. of units
Fixed cost
Variable Cost
The expenses that vary in direct proportion to volume of product. For example Prime cost.
No. of units
Variable cost
Variable Cost Per Unit Reaction
Variable cost per unit remain constant
Units of Labor Total wagesPer labor wage rate
10 10,000 1,000
20 20,000 1,000
Semi Variable Cost
The cost that is partly fixed and partly variable cost. For example electricity bills, salesman salary.
No. of units
Semi variable cost
1000
2000
3000
300200100
Summary If the production volume increases
Fixed cost
Variable cost
Total cost
Per unit Total
Decreases
IncreasesDecreases
Increases
Constant
Constant
Summary If the production volume decreases
Fixed cost
Variable cost
Total cost
Per unit Total
Constant
Constant
Increases
Increases
Decreases
Decreases
Total cost
Total cost include both fixed cost and variable cost
No. of units
Total cost
Fixed cost
Total cost
Variable cost
1000
2000
3000
300200100
As VC added in FC shifts upward