INTRODUCTIO

N TO COST
GROUP MEMBERS
Aatif Ansari 01
Abdullah Tayyebi 03
Amin Khan 13
Asif Bharucha 23
Asif Khan 24
Ativeer Jain 27
Bhavani Shahi 28
Dharmen Shah 32
Imran Atiq 49
Kashif Sayyed 57
 Contents
Introduction
Elements of cost
Cost concepts
Classification of cost
Cost sheet
Relationship and difference
EVOLUTION OF COST
ACCOUNTING

ØPrior to industrial revolution

ØAdvent to industrial revolution

ØDuring World War 1 and World

War 2
INVENTO
DEFINITION
S
COSTING

COST ACCOUNTING

COST ACCOUNTANCY
 OBJECTIVES OF COST
ACCOUNTING
Ø Ascertainment of costing
üPost costing
üContinuous costing

Ø Cost control
üInvestigate cause of failure
üDetermine the objective
clearly
üMeasure the actual
Ø Determination of selling price

Ø Ascertaining the profit of each

activity

Ø Assisting management in decision

making

Ø Cost reduction
 IMPORTANCE OF COST
ACCOUNTING TO BUSINESS
CONCERN
Ø Control of material cost

Ø Control of labour cost

Ø Control of overheads
 ADVANTAGES OF A COST
ACCOUNTING SYSTEM
It Identifies unprofitable activities
It Identifies exact cause of increase or
decrease in profit/loss of the business
It provides data to the management
It is useful tool for Price Fixation
It helps in cost comparison
 ADVANTAGES OF A COST
ACCOUNTING SYSTEM
(CONTD…)
It helps Government, wage tribunals and


other bodies


The Marginal Costing techniques helps in



taking short term decisions



It helps in finding the cost of idle capacity




 ESSENTIALS OF A GOOD
ACCOUNTING SYSTEM
CAS should be tailor made
The data to be used by CAS should be
accurate
Co-operation and participation from
various departments
Avoiding unnecessary details
The cost of operating and installing should
justify the results
Faith of management in CAS
VARIOUS REPORTS PROVIDED
BY COST ACCOUNTING
Consumption of material statement
Labour utilization statement
Overheads incurred compared with
budgets
Sales affected compared with
budgets
Reconciliation of actual profit with
estimated profit
VARIOUS REPORTS PROVIDED
BY COST ACCOUNTING

The total cost of spoiled work in

factory
The total cost of inventory
Labour turnover reports
Expenses occurred on research and
development
Reports about particular departments
operations
ELEMENTS
OF COST
 MATERIALS COST
Direct Materials :
Materials which are present in the finished
product or can be economically identified
in the product are called Direct Material
Cost

Indirect Materials :
Materials which do not normally form part
of the finished product are known as
Indirect Material Cost
 LABOUR COST
Direct Labour :
Labour which can be economically
identified or attributed wholly to a ost
object is called Direct Labour Cost

Indirect Labour :
Labour cost which cannot be allocated but
can be appointed to or absorbed by the
cost units or cost centres is known as
Indirect Labour
 OTHER EXPENSES
Direct Expenses:
It includes all expenses other than
direct material or direct labour which
are specially incurred for a particular
cost object

Indirect Expenses:
Expenses other than direct expenses
are known as Indirect Expenses
 OVERHEADS
It is the aggregate of indirect
material costs, indirect labour costs
and indirect expenses . Its subdivided
into:-
Production or Works Overheads
Administration Overheads
Selling Overheads
Distribution Overheads
COST
PRODUCT AND PERIOD
COST
Cost of goods produced & kept
ready for sale

These cost are not necessary for

production
 EXAMPLES
Product Cost Period Cost

Raw Material Advertising

Direct Labour Sales Salaries
Mfg Overheads Prepaid Insurance
Indirect Labour Office Salaries
Travel &
Repairs Entertainment
Power Legal Fees
Depreciation Postage &
Stationery
 ILLUSTRATION
Material Cost
Wages
Selling And Distribution
Variable Mfg Expenses
Fixed Mfg Expenses
Administration Expenses
 COMMON COST
Indirect cost that is incurred for the
general benefit of a no of
departments which is necessary for
present and future operation

e.g.
Salary of manager of production
department which is mfg more than
1 product
 JOINT COST
Cost of either a single process or a
series of processes that
simultaneously produced two or
more products

Kerosene, fuel oil, gasoline, & other

oil products derived from crude oil
 SHORT-RUN COST
Varies with output when fixed plant &
capital equipment remains the same
e.g.
Material cost
 LONG-RUN COST
Varies with output when all input
factors including plant and
equipment varies
 PAST COST
Actual costs incurred in the past and
are generally contained in the
financial accounts
 FUTURE COST
Expected to be incurred at a later
date and are the only cost that
matter for managerial decisions
 CONTROLLABLE &
UNCONTROLLABLE COST
Cost over which a manager has
direct and complete decision
authority

Cost which in beyond the control of a

particular individual over a period of
time
 ILLUSTRATION
Maintenance Cost
Indirect Labor
Power Cost
Controlling Scrap
Physical Hazard Due To Fire, Flood,
Etc
Economic Risk
Political Risk
Technological Risk
 REPLACEMENT AND
HISTORICAL COST
Cost of replacing an asset at any
given point of time either at present
or in the future

Actual cost of the asset

 AVOIDABLE AND
UNAVOIDABLE COST
Cost which can be reduced due to
contraction in business activities
E.g.
Reducing credit sales, closing an
unprofitable branch

Cost which cannot be avoided

 OUT OF POCKET AND
BOOK COST
Cost which signify the cash cost
associated with an activity

Cost which do not require current

cash payments
e.g. Depreciation
 IMPUTED AND SUNK
COST
A hypothetical cost from the point of
view of financial accounting
e.g. Interest on capital

Cost that have been incurred in a

project but will not be recovered if
the project is terminated
RELEVANT & IRRELEVANT
COST
Cost appropriate in aiding to make specific
management decisions.

E.g.
Present depreciated cost of machine is
relevant in case of decision of its sale but is
irrelevant in case of decision of its replacement
 OPPORTUNITY COST
Cost of value of benefit sacrifice
in favour of an alternative course
of action
 DIFFERENTIAL COST
Extra Cost of taking one course of
action rather than another
E.g.
Changing the channel of distribution
Replacing a machine by a better
machine
ILLUSTRATION 1
 CONVERSION COST
Cost incurred for converting the raw
material into finished product
E.g.
Power consumption
labour
 COMMITED COST
Cost primarily associated with
maintaining the organizations legal
and physical existence
E.g.
Insurance premium
Rent
Depreciation
 SHUTDOWN COSTS
Cost incurred in relation to the
temporary closing/reopening of
department/division/enterprise
e.g. Sheltering the plant and
equipment and construction of
shades for storing exposed
properties
reemployment of workers may
involve cost of recruitment and
 ABANDONMENT COST
Cost incurred in closing down a
department or a division or in
withdrawing a product or seizing to
operate in a particular sales territory
 URGENT COST
Cost which must be incurred in order
to continue operations of the firm

E.g.
Cost of Materials
Labour
 POSTPONABLE COSTS
Cost which can be shifted to the
future with little or no effect on the
efficiency of current operations.

e.g.
Painting of factory
 MARGINAL COST
Variable cost of 1 unit of a product or
a service
 NOTIONAL COST
Hypothetical cost taking into account
in a particular situation to represent
the benefit enjoyed by an entity in
respect of which no actual expenses
is incurred
E.g.
Depreciation
Contract
Provisions
CLASSIFICA
TION OF
CLASSIFICATION OF COSTS
Classification Based on Financial
Nature

Element Wise Classification

Classification For Exercising Control

Functional Classification Of Costs

Classification Based On costs

CLASSIFICATION BASED ON
FINANCIAL NATURE
FINANCIAL COSTS
Cash Costs
Reflected In Actual Cash Outflows
Reward – Sacrifice = Gain
Revenue – Costs = Profit

Non Cash Costs

Do Not Involve Cash Outlays
Eg: Depreciation
NON FINANCIAL COSTS

Not Directly Traceable Through a

Company’s Cash
Flow

Eg: Low Morale Of Employees

Do Not Represent Immediate Cash

Outlays
 ELEMENT WISE
CLASSIFICATON OF COSTS
– Object Of Interest For Identifying Costs
– Elements Of Total Costs:-Material, labour
, Expenses

DIRECT COST
– Can Be Identified Easily With A Unit Of
Operation Or Costing Unit
– Also Called Traceable Cost
INDIRECT COST
– Cannot Be Allocated But Can Be
Apportioned To Cost Unit
– All Overhead Cost Are Indirect Cost
– Indirect material, Indirect Labour,
Indirect Expenses
– Segregation Necessary For proper
Accounting, Control And Decision
Making
 FUNCTIONAL
CLASIFICATION OF COSTS
PRODUCTION COST

ADMINISTRATION COST

SELLING AND DISTRIBUTION COST

RESEARCH AND DEVELOPMENT COST

CLASSIFICATION
FOR EXERCISING
ENGINEERED COST
MANAGED COST
Capacity Cost
CLASSIFICATION
BASED ON COST
Variable Cost
Fixed Cost
A fixed cost can be depicted

graphically as follows,
Semi-variable cost or
Semi-

fixed cost
 COST
SHEETS
DISTINGUISH
AND
 DISTINGUISH BETWEEN FINANCIAL
ACCOUNTING (FA) AND COST ACCOUNTING
(CA)
Nature

Financial accounting classifies, records, presents and interprets in

terms of money, transactions and events that are of financial
characters.

Cost accounting classifies records, presents and interprets in a

significant manner the material, labour and overhead cost.

Report recipients

External/Outsiders namely the shareholders and government (tax)

The focus of cost accounting is essentially internal. it tends to

 Outputs

Maintaining the accounts in the company it maintains the flow of funds

in the company.
To calculate the cost of materials, labour, overheads and cost of
related jobs and contracts

 Regulating framework

Accounting concepts (as laid down by the Accounting Standards Board)

plus statutory requirements of the Companies Acts

None prescribed, although the guidance and formats of the CIMA

Terminology tends to be followed in most organizations
 Regulating framework

Accounting concepts (as laid down by the Accounting Standards

Board) plus statutory requirements of the Companies Acts

None prescribed, although the guidance and formats of the CIMA

Terminology tends to be followed in most organizations
 Accounting systems

Financial accounting follows entry system for recording, classifying

and summarizing business transactions.

Cost accounting is not based on double entry system.

Accounting principle

Financial accounting is based on the general accepted accounting

principles necessary in business transaction.

Cost accounting is not bound to use the generally accepted

accounting business principles.
 Time span

Financial accounting data and statements are developed for a

definite period, usually yearly, half yearly or quarterly.

Cost accounting reports and statement are prepared whenever

needed, usually monthly, weekly or daily basis.

Unit of measurement

All information under the financial accounting is in the terms of

money.

Cost accounting applies any measurement unit that is useful in

particular situation. Example:- labour hours, machine hours
RELATIONSHIP BETWEEN COST ACCOUNTING
AND MANAGEMENT ACCOUNTING

Both the branches of accounting are internal to the organization

Both the branches of accounting assist management in carrying

out its functions of planning, decision making and controlling.

There is a great deal of over lapping in their functions

DISTINGUISH BETWEEN COST ACCOUNTING
(CA) AND MANAGEMENT ACCOUNTING (MA)

Objective

CA – to ascertain and control cost.

MA – is to provide useful information to management for decision

making.

Basis

CA – it is based on both present and future transactions for cost

ascertainment
MA – is concerned purely with the transaction related to future

Scope

CA - has a narrow scope as it covers matter relating to

ascertainment and control of cost.

MA – has a wide scope as it covers the area of financial accounts,

cost accounts, taxation, statistics, law etc.
Dealing of the transaction

CA – deals only with monetary transaction i.e. it covers only

quantitative aspects.

MA – deals with both monetary and non monetary transactions

i.e. it covers quantitative as well as qualitative aspects .

Principles

CA – follows a definite principle for ascertaining cost and a format

for recording.

MA – it does not follow a definite principle an format. Instead, the

data to be presented depends upon the needs of management.
Positional level
CA – Cost accountants occupies the lower position as compared to
the management accountant in an hierarchy of the management.

MA – Management accountants occupies a higher position in

organizational setup.

Time Span

CA – it is concerned with the short term planning.

MA – it is concerned with both short term as well as long term

planning.
Approach

CA – it is historical in approach.

MA – it is basically futuristic in approach. It is more predictive in

nature.

Dependency

CA – it is independent of management accounting.

MA – it is dependent on the cost accounting.

Thank