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Cost accounting

Cost accounting. Introduction. COST. COST - MEANING Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing. COST ACCOUNTING - MEANING.

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Cost accounting

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  1. Cost accounting Introduction

  2. COST COST - MEANING Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing.

  3. COST ACCOUNTING - MEANING Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making

  4. ELEMENTS COST OF COST OTHER EXPENSES MATERIALS LABOUR INDIRECT DIRECT INDIRECT DIRECT INDIRECT DIRECT OVERHEADS DOH SOH FOH AOH

  5. MATERIAL: The substance from which the finished product is made is known as material.Direct material is one which can be directly or easily identified in the product Eg: Timber infurniture, Cloth in dress, etc.Indirect material is one which cannot be easilyidentified in the product.

  6. Examples of Indirect material At factory level – lubricants, oil, consumables, etc. At office level – Printing & stationery, Brooms, Dusters, etc. At selling & dist. level – Packing materials, printing & stationery, etc.

  7. LABOUR: The human effort required to convert the materials into finished product is called labour.DIRECT LABOUR is one which can be conveniently identified or attributed wholly to a particular job, product or process.Eg:wages paid to carpenter, fees paid to tailor,etc.INDIRECT LABOUR is one which cannot be conveniently identified or attributed wholly to a particular job, product or process.

  8. Examples of Indirect labour At factory level – foremen’s salary, works manager’s salary, gate keeper’s salary,etc At office level – Accountant’s salary, GM’s salary, Manager’s salary, etc. At selling and dist.level – salesmen salaries, Logistics manager salary, etc.

  9. OTHER EXPENSES are those expenses other than materials and labour.DIRECT EXPENSES are those expenses which can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc.INDIRECT EXPENSES are those expenses which cannot be directly allocated to particular job, process or product.

  10. Examples of other expenses At factory level – factory rent, factory insurance, lighting, etc. At office level – office rent, office insurance, office lighting, etc. At sales & dist.level – advertising, show room expenses like rent, insurance, etc.

  11. How to treat the following? • Carriage • Packaging expenses

  12. COST SHEETDIRECT MATERIALDIRECT LABOURDIRECT EXPENSESPRIME COSTFACTORY OVERHEADSFACTORY COSTOFFICE OVERHEADSCOST OF PRODUCTIONSELL & DIST OVERHEADSCOST OF SALESPROFITSALES

  13. COST SHEET - ADVANCEDOPENING STOCK OF RAW MATERIALS+PURCHASES+CARRIAGE INWARDS-CLOSING STOCK OF RAW MATERIALSVALUE OF MATERIALS CONSUMED+DIRECT WAGES+DIRECT EXPENSESPRIME COST+FACTORY OVERHEADS+OPENING STOCK OF WIP-CLOSING STOCK OF WIPFACTORY COST (CONT.)

  14. FACTORY COST+ADMINISTRATIVE OVERHEADSCOST OF PRODUCTION+OPENING STOCK OF FINISHED GOODS-CLOSING STOCK OF FINISHED GOODSCOST OF GOODS SOLD+SELL. & DIST. OVERHEADSCOST OF SALES+PROFITSALES

  15. COST CLASSIFICATION – ON THE BASIS OF • Nature • Function • Direct & indirect • Variability • Controllability • Normality • Financial accounting classification • Time • Planning and control • Managerial decision making

  16. ON THE BASIS OF NATURE • MATERIALS • LABOUR • EXPENSES

  17. ON THE BASIS OF FUNCTION • MANUFACTURING COSTS • COMMERCIAL COSTS – ADM AND S&D COSTS

  18. ON THE BASIS OF DIRECT AND INDIRECT • DIRECT COSTS • INDIRECT COSTS

  19. ON THE BASIS OF VARIABILITY • FIXED COSTS • VARIABLE COSTS • SEMI VARIABLE COSTS

  20. ON THE BASIS OF CONTROLLABILITY • CONTROLLABLE COSTS • UNCONTROLLABLE COSTS

  21. ON THE BASIS OF NORMALITY • NORMAL COSTS • ABNORMAL COSTS

  22. ON THE BASIS OF FIN. ACC • CAPITAL COSTS • REVENUE COSTS • DEFERRED REVENUE COSTS

  23. ON THE BASIS OF TIME • HISTORICAL COSTS • PRE DETERMINED COSTS

  24. ON THE BASIS OF PLANNING AND CONTROL • BUDGETED COSTS • STANDARD COSTS

  25. ON THE BASIS OF MANAGERIAL DECISION MAKING • MARGINAL COSTS • OUT OF POCKET COSTS • SUNK COSTS • IMPUTED COSTS • OPPORTUNITY COSTS • REPLACEMENT COSTS • AVOIDABLE COSTS • UNAVOIDABLE COSTS • RELEVANT AND IRRELEVANT COSTS • DIFFERENTIAL COSTS

  26. TERMS IN COST ACCOUNTING • COST UNIT • COST CENTRE • COST ESTIMATION • COST ASCERTAINMENT • COST ALLOCATION • COST APPORTIONMENT • COST REDUCTION • COST CONTROL

  27. METHODS OF COSTING • JOB COSTING • CONTRACT COSTING • BATCH COSTING • PROCESS COSTING • UNIT COSTING • OPERATING COSTING • OPERATION COSTING • MULTIPLE COSTING

  28. TYPES OF COSTING • UNIFORM COSTING • MARGINAL COSTING • STANDARD COSTING • HISTORICAL COSTING • DIRECT COSTING • ABSORBTION COSTING

  29. COST SHEET • ALL EXPENSES RELATING TO PRODUCT ARE EXTRACTED FROM FINANCIAL ACCOUNTS ARE ANALYSED UNDER EXPENSES HEAD IN THE FORM OF STATEMENT. • This tabulated statement is called cost sheet.

  30. PURPOSES-COST SHEET • BREAK UP FIQURES OF THE TOTAL COST UNDER DIFFERENT ELEMENTS • GIVES TOTAL COST AS WELL AS COST PER UNIT • FACILITATES COMPARISONS • PREPARATION OF COST ESTIMATES • FIXING THE SELLING PRICE • FACILITATE COST CONTROL

  31. COST SHEET • PRIME COST – Flat Cost; first cost or direct cost • It involves direct cost such as • Direct materials • Direct labour • Direct expenses

  32. Works Cost/Factory Cost • Total of all items of expenses

  33. COST OF PRODUCTION/OFFICE COST • Factory cost +administrative expenses

  34. TOTAL COST/FINAL COST

  35. SELLING PRICE • COST OF SALES + Margin of profit

  36. Problems: 1.Calculate Prime Cost; Factory Cost, Cost of Production, Cost of Sales and Profit from the following details: • Direct materials 10000 • Direct labour 4000 • Direct Expenses 500 • Factory expenses 1500 • Administrative expenses 1000 • Selling expenses 300 • Sales 20,000

  37. PROBLEM 2 From the following details you are required to prepare production account for the three months ending 31st March, assuming stock of finished goods at the end of the period to be valued at cost showing, • Value of materials consumed • Works cost • Cost of production • Costs of goods sold • Gross profit • Net profit

  38. Jan 1 Jan 31 • Raw materials 20,000 24,700 • Finished goods 14,300 8,400 • Work in progress 6,200 6,900 • Purchases of Raw materials 17,600 • Direct wages 14,000 • Indirect wages 500 • Work expenses 7,400 • Office expenses 2,600 • Selling expenses 3,000 • Sales 56,800

  39. 3. Draw the statement of cost from the following particulars Rs Opening stock (1) Materials 2,00,000 (2) Work in progress 60,000 (3) Finished goods 5,000 Closing stock(1) Materials 1,80,000 (2) work in progress 50,000 (3) Finished goods 15,000 Materials purchased 5,00,000 Direct wages 1,50,000 Manufacturing expenses 1,00,000 Sales 8,00,000 Selling and distribution expenses 20,000

  40. 4.Following data relate to the manufacture of a product during the month of January Raw materials consumed Rs.80,000 Direct wages Rs.48,000 Machine hours worked 8,000 Machine hour rate Rs.4 Office overhead 10% of works cost Selling Overhead Rs. 1.50 per unit Unit produced 4,000 Unit sold 3,600 at Rs.50 each Prepare a cost sheet and show (a) Cost per unit (b) Profit for the period

  41. 5. From the following particulars, prepare a statement showing the components of the total sales and profit for the year ended 31st December. Rs • Stock of finished goods (1st Jan) 6,000 • Stock of raw materials (1st Jan) 40,000 • Work in progress (1st Jan) 15,000 • Purchase of raw materials 4,75,000 • Carriage inwards 12,500

  42. Factory Rent, taxes 7,250 • Other Production expenses 43,000 • Stock of goods (31st Dec) 15,000 • Wages 1,75,000 • Work manager’s salary 30,000 • Factory Employee’s salary 60,000 • Power expenses 9,500 • General expenses 32,500 • Sales for the year 8,60,000 • Stock of raw materials 50,000 • Work-in-progress (31st Dec) 10,000

  43. TENDER: The price at which the items of output are offered for sale is known as tender or quotation price. .

  44. Tender is prepared by considering the following items: • Raw materials • Direct labour • Chargeable expenses • Works overhead • Office overhead • Selling overhead • Estimated profit • . .

  45. Steps to remember in estimation of overhead: It is estimated on the basis of past experience. Percentage of factory overheads to direct wages =Factory overheads/Direct wages * 100 .

  46. Percentage of office overheads to work cost =office overheads/work cost * 100 Percentage of Selling and distribution overheads to works cost = Selling and distribution overheads /works cost* 100 .

  47. Profit=cost of sales * percentage of profit/100 (or) Profit= cost of sales* Rate of profit on sales/100-rate % on sales .

  48. The following data have been extracted from the books of M/s Moon shine Industries for the calendar year 2010. Rs. Opening stock of raw materials 25,000 Purchase of raw materials 85,000 Closing stock of raw materials 40,000 .

  49. REVISION PROBLEM • 1) The following figures have been given from a factory for the year 2004 • Material Rs. 12,00,000 • Wages 10,00,000 • Factory overheads Rs. 6,00,000 • Administration expenses Rs. 6,72,000 • Selling overhead Rs. 4,48,000 • Distribution overhead Rs. 2,80,000 • Profit 8,40,000 • In 2005 the firm wants to execute a work order which requires Rs.16,000 for materials and Rs. 10,000 for direct wages. • Determine the price at the same rate of profit in 2004 • (Answer Work order 55,200; factory O/H % • to wages 60%; AD O/H to work cost 21% ; S&D O/H to WC 22.75% Profit 1/6 on sales=20% on cost)

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