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Cost Accounting

The document discusses cost accounting, including definitions, objectives, and comparisons to financial and management accounting. It covers key cost accounting concepts like cost objects, cost units, cost centers, and responsibility centers.

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Melka Belmonte
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0% found this document useful (0 votes)
27 views6 pages

Cost Accounting

The document discusses cost accounting, including definitions, objectives, and comparisons to financial and management accounting. It covers key cost accounting concepts like cost objects, cost units, cost centers, and responsibility centers.

Uploaded by

Melka Belmonte
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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COST ACCOUNTING – INTRODUCTION Comparison of cost, management and financial

accounting

Meanings:
Accounting for determination and control of
costs.  Financial accounting

COST ACCOUNTING: The Institute of Cost and  Cost accounting


Management Accountant, England (ICMA) has
 Management accounting
defined Cost Accounting as – “the process of
accounting for the costs from the point at which
expenditure incurred, to the establishment of
its ultimate relationship with cost centers and Financial accounting
cost units. In its widest sense, it embraces the  Provides information to users who are
preparation of statistical data, the application of external to the business
cost control methods and the ascertainment of
the profitability of activities carried out or  It reports on past transactions to draw
planned”. up financial statements

Cost Accounting = Costing + Cost Reporting +  The format are governed by law and
Cost Control. accounting standards established by
the professional accounting policies

Cost accounting
 CA is a formal system of accounting for
costs in the books of accounts by  Is concerned with internal users of
means of which costs of products and accounting information, such as
services are ascertained and operation managers
controlled.  The generated reports are specific to
 Cost means the amount of expenditure the requirement of the management
( actual or notional) incurred on, or  The reporting can be in any format
attributable to, a given thing. which suits the user
 Cost ascertainment is computation of Management accounting
actual costs incurred
 Comprises all cost accounting functions
 Cost estimation is a process of
predetermining costs of goods and  The accounting for product and service
service. costs, management accounting extends
to use various internal accounting
reports for planning, control and
OBJECTIVES OF COST ACCOUNTING decision making

 Ascertainment of costs CA and FA – Comparison

 Estimation of costs  Purpose

 Cost control  Statutory requirements

 Cost reduction  Analysis of cost and profit

 Determining selling price  Periodicity of reporting

 Facilitating preparation of financial and  Control aspect


other statement  Historical and predetermined costs
 Providing basis for operating policy  Format of presenting information

 Types of transactions recorded


Differences Between Financial and Managerial
Accounting
Element of cost
Financial Managerial
Accounting Accounting  Cost object
1. Users External persons who Managers who plan for
make financial decisions and control an organization
 Cost
2. Time focus Historical perspective Future emphasis

3. Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control  Cost unit
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness  Cost centre
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization

6. Requirements Must follow GAAP Need not follow GAAP


 Profit centre
and prescribed formats or any prescribed format

Cost object
Cost accounting
vs.  It is an activity or item or operation for
Management accounting which a separate measurement of
costs is desired

 E.g. the cost of operating the personnel


department of a company, the cost of a
repair fob, and the cost for control

Cost

 It is the amount of expenditure


incurred on a specific cost object

 Total cost = quantity used * cost per


unit (unit cost)

Cost Unit

 Cost units are the things, that the


business is set up to provide, of which
cost is ascertained.

 Unit of product, service or time in


relation to which cost may be
ascertained or expressed

 Types:

 Units of production such as a


ream of paper, a tonne of steel,
a meter of cable etc.

 Units of services such as


passenger miles, consulting
Cost concepts hours, room per day, bed per
day

Responsibility centre

 Responsibility centers are identifiable


segments within a company for which
individual managers have accepted
authority and accountability.
Responsibility centers define exactly
what assets and activities each
manager is responsible for.
Cost Centre

 Cost center is a location, person, or ON THE BASIS OF NATURE – Module 2


item of equipment (or group of these)
 Materials
for which costs may be ascertained
and used for the purpose of control  Labor
 It refers to a section of the business to  Expenses - Direct expenses
which costs can be charged.
ON THE BASIS OF FUNCTION
 Types:
 Manufacturing costs
Personal and Impersonal cost centre
 Commercial costs – ADM and S&D
Production and Service cost centre Costs
Profit centre ON THE BASIS OF DIRECT AND INDIRECT
 It is location or function where  Direct costs
managers are accountable for sales
revenues and expenses  Indirect costs

 E.g. division of a company that is


responsible for the sales of products

Revenue centre Classifications of Costs


 A revenue center is the business Manufacturing costs are often
operation responsible for generating a classified as follows:
company’s sales revenue.

 These centers may be departments,


divisions or business units that have
direct interaction with consumers to sell
goods and services.

 For example, a hotel might add a snack


bar or a coffee counter to generate
extra sales. Companies usually break
down their business operations into
revenue centers to determine Nonmanufacturing Costs
the profitability of each good or service
Marketing and selling costs . . .
it produces. Company size, the number
of product or service lines and industry  Costs necessary to get the order
standards are all factors companies use and deliver the product.
when choosing or adding additional
Administrative costs . . .
centers for their operations.
 All executive, organizational,
COST CLASSIFICATION – ON THE BASIS OF
and clerical costs.
 Nature

 Function
Direct Costs and Indirect Costs
 Direct & indirect
Direct costs
 Variability
 Costs that can be
 Controllability easily and conveniently traced to a unit
of product or other cost objective.
 Normality
 Examples: direct material and direct
 Financial accounting classification
labor
Time

 Planning and control

 Managerial decision making


Indirect costs  It processes characteristics of both fixed
and variable cost
 Costs cannot be easily and
conveniently traced to a unit of  It increases or decreases with activity
product or other cost object. level but not in direct proportion

 Example: manufacturing overhead ON THE BASIS OF CONTROLLABILITY

 Controllable costs

 Uncontrollable costs

ON THE BASIS OF NORMALITY

ON THE BASIS OF VARIABILITY  Normal costs

 Fixed costs  Abnormal costs

 Variable costs *Cost accounting – Arora TB

 Semi variable costs ON THE BASIS OF TIME:

 Historical costs

Cost Classifications for Predicting Cost Behavior  Pre determined costs

How a cost will react to changes in the level of ON THE BASIS OF PLANNING AND CONTROL:
business activity.
 Budgeted costs
 Total variable costs change
 Standard costs
when activity changes.
*Cost accounting – Arora TB
 Total fixed costs remain
unchanged when activity
changes.
ON THE BASIS OF MANAGERIAL DECISION
Total Variable Cost MAKING - *Cost accounting – Arora TB
Your total long distance telephone bill is based  Marginal costs
on how many minutes you talk.
 Out of pocket costs

 Sunk costs
Variable Cost Per Unit
 Imputed costs
The cost per long distance minute talked is
constant. For example, 10 cents per minute.  Opportunity costs

 Replacement costs

Total Fixed Cost  Avoidable costs

Your monthly basic telephone bill probably does  Unavoidable costs


not change when you make more local calls.  Relevant and irrelevant costs

 Differential costs
Fixed Cost Per Unit

The average cost per local call decreases as Opportunity Costs


more local calls are made
The potential benefit that is given up when one
Cost Classifications for Predicting Cost Behavior alternative is selected over another.

Example: If you were


not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for one year is $15,000.
Semi-variable cost
Sunk Costs determination of optimum quantity to
Sunk costs cannot be changed by any decision. constitute an economical batch is all the
They are not differential costs and should be more important.
ignored when making decisions.

Example: You bought an automobile that cost


Cost organization and other depts…
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade In the organization chart, the cost department
it, or sell it, you cannot change the $10,000 occupies a very important position. The cost
cost. department is responsible

For keeping records connected with material,


labor and expenses,
Differential Costs and Revenues
For analyzing all costs of manufacturing,
Costs and revenues that differ among
marketing and administration, and
alternatives.
For issuing control reports and data for decision
Example: You have a job paying $1,500 per making to the executives, department heads,
month in your hometown. You have a job offer section heads and foremen. When management
in a neighboring city that pays $2,000 per is provided with useful reports, they assist in
month. The commuting cost to the city is $300 controlling and improving cost and operations.
per month. Such information data are, again, used for
making new decisions.
Differential revenue is:

$2,000 – $1,500 = $500


Cost organization and other depts…

Differential cost is: The effectiveness of the control of cost depends


upon proper communication through control
$300
reports from the cost accountant to the various
levels of operating management. Accounting
and control reports are directed to these levels
COST TERMINOLOGY: of management, i.e. top management, middle
 COST: Cost means the amount of management and lower level or shop floor level
expenditure incurred on a particular of management. Each management level
thing. requires data for deciding and solving various
problems. The cost accountant must devise a
 COSTING: Costing means the process of cost system into which data are marshalled to fit
ascertainment of costs. the numerous problems confronting
 COST ACCOUNTING: The application of management. The cost department is intimately
cost control methods and the connected with the other departments in the
ascertainment of the profitability of organization. Their relationship can be briefly
activities carried out or planned”. established as follows:–

 COST CONTROL: Cost control means the


control of costs by management. Cost organization and other depts…
Following are the aspects or stages of
cost control.  Manufacturing departments control
the scheduling, manufacturing and
 Methods of costing and techniques of inspection of each job or processed
costing products to their finished stage in terms
 JOB COSTING: It helps in finding out the of efficiency norms established. Costs
cost of production of every order and incurred at each stage are measured
thus helps in ascertaining profit or loss and compared with the norms.
made out on its execution. The  Production planning, research and
management can judge the profitability design department involve cost
of each job and decide its future department for cost estimates needed
courses of action. for each type of material, labor and
 BATCH COSTING: Batch costing machine process before a decision can
production is done in batches and each be reached in accepting or rejecting a
batch consists of a number of units, the design.
 Personnel department is interested to *Conversion cost is the production cost of
maintaining employee cost up-to-date. converting raw materials into finished product
The wage rate and methods of
remuneration agreed with the
employees form the basis for • Total cost = Prime cost + Overheads
computing payroll. Cost department (admin, selling, distribution cost)
provides all data.
OR
 Marketing department needs a good
product at a competitive price. While = Production cost + period cost
cost cannot determine price, it can (administrative, selling, distribution and finance
influence fixation of price. Besides, cost)
accurate cost data help sales manager *Period cost is treated as expenses and
distinguished profitable with matched against sales for calculating profit, e.g.
nonprofitable products and compare office rental
cost of marketing against sales volume.

 Public relation department establishes


good relations with the public in general
and customers, creditors, shareholders,
and employees in particular. The cost
department provides information
concerning price, cost, etc.

 Legal department finds cost


department helpful in keeping many
affairs of the company in conformity
with the law, specially excise, customs,
sales tax and other legislation regarding
maintenance of accounts and cost
records.

 The finance department relies on the


cost department for accounting,
valuation of inventory, cash flow
statements, C.A.S. data for banks, etc.
Where finance department is composed
of general accounting and cost
accounting, besides taxation and funds
management departments, it is usual to
consider cost accounting department
providing unit cost of goods
manufactured and sold to general
accounting department.

Cost accumulation

 Prime cost = direct materials + direct


labor + direct expenses

• Production cost = Prime cost + factory


overhead

OR

= Direct materials +
Conversion cost

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