p 3 ach 1 introduction to cost accounting
TRANSCRIPT
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IPCC Paper 3: Cost Accounting Chapter 1
BY
CA. B.N. Pattabhi, M.Com, FCA
Cost Accounting An Introduction
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Salutations
DEDICATED TO MY
NOBLE,
EVER LOVING,
EVER INSPIRINGMOTHER
LALITAMMA
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Learning Objectives
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Introduction to Cost Accounting
Cost Accounting is basically a MIS i.e.
A Management Information System
Its an aid to the Management in its PrimaryFunction of Decision Making
It aims at Ascertainment of Cost for the purposeof Cost Analysis and Control
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Evolution of Cost Accounting
An Intro.
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Before Industrial Revolution
Sellers Market since Skilled
Labourers were very few and Buyerswere unlimited i.e
Low Production High Demand
Price was determined by Sellers
No Competition because of HighDemand
Hence cost was not relevant
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Industrial Revolution - Initial Stage
Automation of Production Process
Limited Production but still short of Demand
Whatever was produced was Sold
Prices were still high and unrelated to cost
Progression towards Large Scale Production and increase in efficiency
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Developments in the Field of
Management
Different concepts evolved in the field of
Management like
1 Scientific Management Theory
2 Time & Motion Study
3 Functional Departmentalisation
4 Specialisation etc
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Industrial Revolution - Maturity Stage
Oragnisations mastered Efficient Processes
Scaled up production to derive Economies of Large Scale Operation
In fact there was a glut in the market
For the First Time Supply was more than Demand
Organisations Started Competing for Market Share
Price Competition crept in based on Financial Statements
Price Competition turned into a cut throat price competition based on historical Info
Organisations survived for a year or two based on reserves
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Industrial Revolution-Maturity Stage 2
Organisations started going Bankrupt
Even though the efficiency levels were high i.e. upwards of 99% and Production Processes werehighly efficient still Organisations went bankrupt
Management scientists or Managers started searching for the reasons of bankruptcy
Fixing the price based on earlier periods Financial Statements
The information based on which pricing decisions were taken were old and not up to date
Managers zeroed in on the reasons for bankruptcy i.e
Managers started realising that the basis of their decisions were incorrect
The need for an efficient MIS was being felt by managers across the cadres
An MIS in tune with the changes / trends in the management was the need of the hour
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Financial Accounting System Limitations
Its a post mortem of transactions
No mechanism to consider the future trend i.e. no mechanism for precise estimates
No mechanism for considering the present trends / changes in the situations
Information presented is historical and based on historical cost basis
Stock Records do not form part of Financial Records
Concept of Work in progress does not exist
Concept of issue and consumption does not exist
The time gap between recording and reporting is very long
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Evolving Cost Accountancy
To meet the changingneeds of the Managersa new system of MISemerged known asCost Accountancy
The New MIS had allthe mechanisms andtechniques to overcome
the shortcomings ofFinancial Accounting
System
Cost Accountancy isForward Looking,
Analytical and Current
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Definitions
Cost Accounting
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Cost
It is the sum total of expenditureIncurred or Attributable toproduce an article or thing orrender a Service.
The expenditure may be real orimplied
The payment is not a criteria
To Sum up its the aggregate of
value of all factors of productionsused to produce an article or athing or render a Service
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Costing Costing is a term used to
collectively refer to all thosetechniques, Processes andactivities that are used to
ascertain cost It is the process of ascertainment
of cost
It includes all those activities
which are performed to collectinformation for the ascertainmentof cost
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Cost Accounting
It is the process of accountingfor costs or the physicalprocess of collecting and
recording of expenditure &income, identifying the basesfor collecting of informationand culminates in preparation
of reports and statements thatare used for ascertainmentand control of costs
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Cost Accountancy
It is the process of applyingcosting and cost accounting
principles, methods, techniques
and processes to the Science art
and practice of Ascertainment ofcost for the purpose of analysis
and control of cost.
It deals with preparation of MIS
reports that form the basis ofmanagerial decision making
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Scope and Objective
Of Cost Accounting
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Scope
Cost Book Keeping
Cost System
Cost Ascertainment
Cost Analysis
Cost Comparison
Cost Control
Cost Reports
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Objectives & Scope
The Primary objective of CostAccounting is to provide themanagement with analytical,
accurate and reliable reports &information (MIS Report) based onwhich management can takeinformed decisions
In a nutshell Cost Accounting is anAid or tool in the hands ofManagement which facilitatesdecision making
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Objectives & Scope - 2
Theoretically the objectives are
Ascertainment of Cost
Determination of Selling Price
Cost Control and Cost Reduction
Ascertaining the profit of each
activity
Assisting Management in DecisionMaking
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Objectives & Scope - 3
Ascertainment of cost
Post Costing
Ascertainment of cost based on or by
analysing Financial Information is called aspost costing, it is helpful in Cost Plus
Contracts, wherein the price will have to be
determined based on cost plus an agreed
rate of profit on cost
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Objectives & Scope - 4
Continuous Costing
It is a process which aims at collecting costs
as and when they are incurred. Its a process
which involves a careful estimation of certainImplied costs such as overheads etc. This
system of costing aims at ascertainment of
cost of completion simultaneously with the
completion of the production/job
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Objectives & Scope - 5
Determination of Selling Price
Cost of Production is one of the factors for
determining the price of a product or service.
Cost Accounting helps in determining theSelling Price of a product or Service
It is pertinent to note here that the market
maxim is Cost is a fact, Price is a policy
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Objectives & Scope - 6
Cost Control
One of the objectives of Cost Accounting is
cost control. Once the cost is ascertained
the next step is to analyse such costs with aview to exercise control over them by clearly
establishing objectives & achieving optimum
efficiency and comparing the performance
with the objectives set
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Objectives & Scope - 7
Cost Reduction
Its defined as achieving real and permanent
reduction in the unit cost of manufacturing a
product or rendering a service withoutcompromising on either the Quality of the
product or impairing the suitability of the
product for the intended use
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Objectives & Scope - 8
Cost Reduction Continued
It also implies retaining of the essential
characteristic features & quality of the
product or service. It is achieved throughconstant innovation and improvisation of
processes, so that there is a permanent and
real reduction in cost
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Cost Control & Cost Reduction
ost ontrol ost Reduction
It maintains cost
Aims at achieving lowest
possible cost
Focuses on past &
Present
It is preventive in nature
It has a limited target
Aims at reducing the cost
Aims at optimising the
costby challenging the
practices
Focuses on present &
future
It is corrective in nature
It is a continuous process
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Objectives & Scope - 9
Ascertainment of Profit of each activitySince cost information is collected activity
wise ascertainment of profit activity wise
becomes easier. In financial accountingsystem it may not be possible to identify the
profit of each activity.
In fact profit can be ascertained for each
activity level.
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Objectives & Scope - 10
Assisting Management in Decision MakingThis is one of the most important & relevant
objectives of Cost Accounting. In fact it is
the genesis of Cost Accounting.It is this need of the management for reliable
and accurate information for basing its
decision that gave birth to aseparate system
of accounting called Cost Accounting
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Cost Centre
A Cost Centre is defined as a person,location or an item of equipment or a
combination of these for which cost is
ascertained for the purpose of analysis andcontrol.
Cost Centre can be Personal or Impersonal
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Cost Unit
It is a physical measure or unit of product, Serviceor Time or a combination of these for which costs
may be ascertained.
The cost unit may differ from product to product and
service to service depending on the inherent natureof the product or service or the process
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Cost Object
Anything for which a separate measurementof cost is intended is called as a cost object.
The cost object may be a Product, Service,
Project, Customer, an Activity etcA Cost object is used to ascertain the selling
price of the Product or Service
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Elements of Cost
These are akin to heads of account in financialaccounting
Elements of cost are those items of cost which form
a significant portion of the total cost, which deserve
to be mentioned separately.
In a nutshell elements of cost are those expenses
incurred which are separately identified in
ascertaining the cost
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Cost Accounting System
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Installation of a Costing System
The prime considerations for installation of a costingsystem are
Economic Viability i.e. whether the cost
incurred on installing a costing system justifythe benefits derived there from.
Managements attitude towards having a
sound MIS. If the management is averse tousing an MIS report, then installing a costing
system doesnt make sense
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Factors to be considered
Objective Type of Business
General Organisation
Technical Details Change in Operations
Method of Maintenance of Cost Records
Information
Accuracy
Informative and Simple
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Essentials of a Good Costing System
Informative and SimpleAccuracy
Support from Management
Cost Benefit Precise Information
Procedure
Trust
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Cost Accounting - Relationship
An Intro.
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Relationship of Cost Accounting
With Financial Accounting, Management Accountingand Financial Management
Cost Accounting is a branch of accounting, while
Financial Accounting aims at preparation and
presenting General Purpose Financial Statements,Cost Accounting aims at preparation and
presentation of MIS reports which are for the
exclusive use of Management.
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Relationship Continued
Management Accounting Aims at analysing theFinancial Statements and providing inputs to the
management based on the analysis and focuses on
certain set parameters such as Gross Profit,
Operating Margin, etc Whereas cost accounting is a real time exercise
which furnishes information on income &
Expenditure as and when it is incurred
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Relationship Continued
Financial Management aims at maximising thewealth of an organisation through profit
maximisation whereas cost accounting aims at
ascertainment of cost for the purpose of Analysis,
control and reduction.To sum up cost accounting is an additional
supplementary and indispensible source of
information for the management in its decision
making process
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Classification of Cost
On the basis of elements Viz Material Direct & Indirect
Labour Direct & Indirect
Expenses Direct & Indirect Overheads Production/works/Factory
Administration, Selling & Distribution
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Classification of Cost continued
By Function Prime Cost
Factory Cost
Cost of Production Cost of Goods Sold
Cost of Sales
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Classification of Cost continued
On the basis of variability or behaviourFixed Cost
Variable Cost
Semi variable CostBy Controllability
Controllable Cost
Uncontrollable Cost
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Classification of Cost continued
By NormalityNormal Cost
Abnormal Cost
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Lesson Summary
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Thank You