COST ACCOUNTING

-K. M. MIRANI
 Cost Accounting

The cost accounting method

is an internally focused,
firm-specific system
used to estimate
cost control,
inventory
and profitability.

It subdivides costs and inventory valuation.

 Need of Cost Accounting

 The science of cost accounting has developed

primarily to serve the needs of the management.

 The techniques of cost accounting are the best tools

by which management may conduct a business
towards profitable operations.

 It is so much allied to management that it is difficult

to indicate where the cost accounting ends and
managerial control begins.
 Principal activities include

(i) Determining costs and profit for an accounting

period.

(ii) Preparing data to aid in the control, reduction

or improvement of cost.

(iii) Aiding and participating in the creation and

execution of budgets.

(iv) Creating inventory values for costing and

pricing purposes and, at times, controlling physical
quantities.
 Scope

 In modern times, cost accounting concepts,

techniques, standards, and cost controls have been
applied in the field of marketing, administration,
banking, insurance, public utilities, finance
companies, departmental stores, hospitals, hotels,
education institutions, local government agencies,
transportation companies, rail roads, airlines,
shipping companies, and even in professional offices,
such as lawyers, doctors, teachers and accountants.
 Undoubtedly, cost accounting in this field has
reached its highest development.
 Advantages of Cost Accounting system:

1. Profitable and unprofitable Activities:

In Cost Accounting profitable and unprofitable activities are
disclosed. Management can take steps to eliminate or to
reduce those activities from which little or no profit is earned.
It can change the method of production in order to render
such activities more profitable.

2. Classification and Subdivision of costs:

Costs are accumulated and classified by every possible
division of business. In a good costing system data regarding
costs by departments, processes, jobs or orders, contracts and
services can be easily computed. Thus it helps management to
ascertain the profitability of each product, sales area, division
etc. in order to improve profit.
3. Cost Finding and Price-Fixing:
It provides accurate cost data which help in the fixation
of selling price and for submitting quotations. In periods
of depression it enables the management to determine
the extent to which prices can be reduced.

4. Control of Materials and supplies:

Since in all types of cost accounting, materials and
supplies must be accounted for in terms of departments,
processes, and units of production or services; a system
of receiving, handling, and issuing materials and supplies
is an essential part of cost control. This will eliminate or
reduce misappropriation, embezzlement, obsolescence,
and losses from scrap, defective, and spoiled materials
and supplies.
5. Control of Wages and Salaries:
Cost Accounting activities encourage accounting for labour by jobs
and by operations. In many manufacturing concerns daily summary
reports are prepared to show the number of hours and minutes
worked and the wage rate for each worker per job or operation.
Cost Accounting is a benefit to the employer by establishing
standards to measure the efficiency of labour to assist in assignment
of work to employees best fitted for it, and to determine the unit
cost of labour arising from each activity.

6. Overhead costs:
The Cost accountant first separates costs into direct and indirect
items. Direct costs consists of materials and labour whereas
indirect costs cover all costs except above. and are known as
Overhead expenses .
Overhead expenses include accounting fees, advertising,
insurance, interest, legal fees, labour burden, rent, repairs, supplies,
taxes, telephone bills, travel expenditures, and utilities.
 Questions

1.The records of V Tech Co. Ltd. show the following

data :
Balance: April 1, 1967…2,700 units at Rs. 41
Received: April 4, 1967….2, 800 units at Rs. 42
13, 1967….2, 400 units at Rs. 44
25, 1967….2, 200 units at Rs. 43
Issued: April 3, 1967……2, 500 units
19, 1967….2, 600 units
30, 1967….2, 200 units
Find out the inventory balance and the cost of issue
of the material on the basis of weighted average
2. 5,000 units of a raw material with a standard price of Rs. 250 are
purchased at Rs. 258. Calculate standard price variance and the unit
cost difference.
Solution:
Quantity Units Unit cost Amount
Rs. Rs.
Actual 5,000 × 258 (Actual) 12, 90, 000
Actual 5,000 × 250 (Standard) 12, 50, 000

Standard Price Variance 5,000 × 8 40, 000

Unit Cost Difference 8
 FORMULAS & IMPORTANT
TERMINOLOGIES
1. Prime Cost
= Direct Material + Direct Labour
2. Total Production Cost
= Prime Cost + FOH Cost
3. Conversion Cost
= Direct Labour + FOH Cost
4. Raw Material Consumed
= Raw Material Opening + Material Purchases
–
Material Closing
5. Manufacturing Cost
= Prime Cost + FOH Cost
6. Cost Of Goods Manufactured
= Manufacturing Cost + Opening WIP
–
ClosingWIP

7. Goods Available for Sale

= Cost Of Goods Manufactured + Opening Finished
Goods
8. Cost of Goods Sold
= Goods Available for Sale
–
Closing Stock of Finished Goods
9. Contribution Margin
= Sales
–
Variable Cost
10. Income Statement
= Gross Profit
–
Operating Expenses

11. Income Statement

= (Sale-COGS)
–
(Selling + Admin + Marketing Expenses)
 In Cost accounting Accounts,
calculations and reports are
manipulated and viewed from different angles.
Management can analyze information
based on criteria that it values,
which guides how prices are set,
resources are distributed,
capital is raised and
risks are assumed.
It's a crucial element in management discussion and
analysis.
Thanks