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Cost Accounting

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Cost Accounting Basics Explained Inventory Management | Stock Management | Material Cost Full Lectures Objectives of Cost Accounting  Classification of the Cost   Cost Unit 

Cost Accounting Basics Explained 

Inventory Management | Stock Management | Material Cost Full Lectures




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Objectives of Cost Accounting 

Ascertainment of Cost

The Primary objective Costing is to ascertain the cost of products, services etc. cost may be ascertained by post costing or Continuous costing.

Determination of Selling Price

Cost accounting provides the information regarding the cost to make and sell the product or services produced.

Cost Control

Cost Control aims at maintaining the costs in accordance with the established standard and improving the efficiency.

Ascertaining the profit of each activity

The profit of any activity can be ascertained by matching cost with the revenue of that activity. The purpose under this step is to determine costing profit or loss of any activity on an objective basis.

Classification of the Cost  

By Nature or Elements

Material

The substance from which the product is made is known as material.         

  • Direct material: It refers to those materials which become a major part of the finished product and can be easily traceable to the units.
  • Indirect material: All material which is used for purposes ancillary to production and which can be conveniently assigned to specific physical units is termed as indirect materials. Examples, oil, grease, consumable stores, printing and stationary material etc.

Labour

Worker cost for production is called labour cost.

  • Direct labour: It is defined as the wages paid to workers who are engaged in the production process whose time can be conveniently and economically traceable to units of products.
  • Indirect labour: Labour employed for the purpose of carrying and tasks incidental to goods or services provided, is indirect labour. It cannot be practically traced to specific units of output. Examples, wages of store-keepers, foreman, time-keepers, supervisors, inspectors etc.

Expenses

  • Direct expenses: These expenses are incurred on a specific cost unit and identifiable with the cost unit. Examples are cost of special layout, design or drawings, hiring of a particular tool or equipment for a job; fees paid to consultants in connection with a job etc.
  • Indirect expenses: These are expenses which cannot be directly, conveniently and wholly allocated to cost centre or cost units. Examples are rent, rates and taxes, insurance, power, lighting and heating, depreciation etc.

NOTES

  • It is to be noted that the term overheads has a wider meaning than the term indirect expenses.
  • Overheads include the cost of indirect material, indirect labour and indirect expenses. overheads may be classified as (a) production or manufacturing overheads, (b) administration overheads, (c) selling overheads, and (d) distribution overheads.

By Degree of Traceability to the Products

Cost can be distinguished as direct and indirect.

  • Costs which can be easily traceable to a product or some specific activity are called direct costs. 
  • Indirect costs are difficult to trace to a single product or it is uneconomic to do so. They are common to several products, e.g. salary of a factory manager.


Cost Unit 

  • The CIMA London defines a unit of cost as “a unit of product or service in relation to which costs are ascertained”. 
  • A cost unit is a devise for the purpose of breaking up or separating costs into smaller sub-divisions. -These smaller sub-divisions are attributed to products or services to determine product cost or service cost or cost of time spent for a particular job etc.
  • The forms of measurement used as cost units are usually the units of physical measurements like number, weight, area, length, value, time etc. 


Financial, Cost & Mangement Accounting  Meaning of Costing, Cost Accounting and Cost Accountancy Objectives of Cost Accounting  Classification of the Cost   Cost Unit 

Financial, Cost & Mangement Accounting 

Financial Accounting

Financial accounting is the branch of accounting that deals with the recording, classification, summarizing, and reporting of business transactions to present a true and fair view of the financial performance (profit or loss) and financial position (assets, liabilities, and equity) of an entity. Its primary purpose is to provide financial information to external users such as investors, creditors, government agencies, and the general public, adhering to generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).


Cost Accounting

Cost accounting is a systematic process of recording, classifying, analyzing, and allocating costs associated with the production of goods or services. 

Its main objective is to determine the cost of products or services, control costs, and provide information for decision-making regarding pricing, production planning, and cost reduction. It primarily serves the internal management of an organization.


Management Accounting

Management accounting is the process of identifying, measuring, analyzing, interpreting, and communicating financial and non-financial information to managers for the purposes of planning, controlling, and decision-making within an organization. It focuses on providing relevant, timely, and future-oriented information tailored to the specific needs of internal users, aiding them in achieving organizational goals and objectives. It is not bound by external reporting standards.

Meaning of Costing, Cost Accounting and Cost Accountancy

Costing 

  • Costing is the techniques and processes of ascertaining costs i.e. principles and rules which govern the procedure of ascertaining cost of products or services. The trading and profit and loss account of a business is designed to disclose the financial results of the collective activities of the business. 
  • The main object of orthodox cost accounts is the analysis of financial records, so as to subdivide expenditure and to allocate it carefully to selected cost centers, and hence to build up a total cost for the departments, processes or jobs or contracts of the undertaking. 


Cost Accounting

  • Cost accounting may be regarded as “a specialised branch of accounting which involves classification, accumulation, assignment and control of costs. 
  • The Costing terminology of C.I.M.A. London defines cost accounting as ”the establishment of budgets, standard costs and actual costs of operations, processes, activities or products, and the  analysis of variances, profitability or the social use of funds."  
  • It is thus, a formal mechanism by means of which costs of products or services are ascertained and controlled.
  • Cost accounting is different from costing in the sense that the former provides only the basis and information for ascertainment of costs. 
  • Once the information is made available, costing can be carried out arithmetically by means of memorandum statements or by method of integral accounting.


Cost Accountancy 

Cost Accountancy has been defined as “the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”. 

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Objectives of Cost Accounting 

Ascertainment of Cost

The Primary objective Costing is to ascertain the cost of products, services etc. cost may be ascertained by post costing or Continuous costing.

Determination of Selling Price

Cost accounting provides the information regarding the cost to make and sell the product or services produced.

Cost Control

Cost Control aims at maintaining the costs in accordance with the established standard and improving the efficiency.

Ascertaining the profit of each activity

The profit of any activity can be ascertained by matching cost with the revenue of that activity. The purpose under this step is to determine costing profit or loss of any activity on an objective basis.

Classification of the Cost  

By Nature or Elements

Material

The substance from which the product is made is known as material.         

  • Direct material: It refers to those materials which become a major part of the finished product and can be easily traceable to the units.
  • Indirect material: All material which is used for purposes ancillary to production and which can be conveniently assigned to specific physical units is termed as indirect materials. Examples, oil, grease, consumable stores, printing and stationary material etc.

Labour

Worker cost for production is called labour cost.

  • Direct labour: It is defined as the wages paid to workers who are engaged in the production process whose time can be conveniently and economically traceable to units of products.
  • Indirect labour: Labour employed for the purpose of carrying and tasks incidental to goods or services provided, is indirect labour. It cannot be practically traced to specific units of output. Examples, wages of store-keepers, foreman, time-keepers, supervisors, inspectors etc.

Expenses

  • Direct expenses: These expenses are incurred on a specific cost unit and identifiable with the cost unit. Examples are cost of special layout, design or drawings, hiring of a particular tool or equipment for a job; fees paid to consultants in connection with a job etc.
  • Indirect expenses: These are expenses which cannot be directly, conveniently and wholly allocated to cost centre or cost units. Examples are rent, rates and taxes, insurance, power, lighting and heating, depreciation etc.

NOTES

  • It is to be noted that the term overheads has a wider meaning than the term indirect expenses.
  • Overheads include the cost of indirect material, indirect labour and indirect expenses. overheads may be classified as (a) production or manufacturing overheads, (b) administration overheads, (c) selling overheads, and (d) distribution overheads.

By Degree of Traceability to the Products

Cost can be distinguished as direct and indirect.

  • Costs which can be easily traceable to a product or some specific activity are called direct costs. 
  • Indirect costs are difficult to trace to a single product or it is uneconomic to do so. They are common to several products, e.g. salary of a factory manager.


Cost Unit 

  • The CIMA London defines a unit of cost as “a unit of product or service in relation to which costs are ascertained”. 
  • A cost unit is a devise for the purpose of breaking up or separating costs into smaller sub-divisions. -These smaller sub-divisions are attributed to products or services to determine product cost or service cost or cost of time spent for a particular job etc.
  • The forms of measurement used as cost units are usually the units of physical measurements like number, weight, area, length, value, time etc. 


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