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Cost accounting involves tracking all business costs to determine product pricing and identify savings. Key concepts include types of costs (direct, indirect), cost behavior (fixed, variable), and methods for calculating costs (job order, process, batch costing). It is essential for budgeting, cost control, performance evaluation, pricing decisions, and profitability analysis.

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13 views4 pages

Study Breifs

Cost accounting involves tracking all business costs to determine product pricing and identify savings. Key concepts include types of costs (direct, indirect), cost behavior (fixed, variable), and methods for calculating costs (job order, process, batch costing). It is essential for budgeting, cost control, performance evaluation, pricing decisions, and profitability analysis.

Uploaded by

adeelaiqbal550
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Cost accounting is about keeping track of all the costs a business incurs and figuring out how

much it costs to make a product or provide a service. It helps businesses understand where they
are spending money and how they can save money.

Key Concepts in Cost Accounting

1. Types of Costs
Direct Costs: Costs that can be directly linked to making a product (e.g., raw materials, labor).
Indirect Costs: Costs that can't be linked to one product but are necessary for running the
business (e.g., electricity, rent).

2. How Costs Behave


Fixed Costs: Costs that don't change no matter how much you produce (e.g., rent).
Variable Costs: Costs that change depending on how much you produce (e.g., materials).
Semi variable Costs: Costs that are a mix of fixed and variable (e.g., electricity bills which have
a base charge plus usage fees).

3. Ways to Calculate Costs


Job Order Costing: Used when each product or order is different (e.g., custom furniture).
Process Costing: Used for mass production where everything is the same (e.g., soft drinks).
Activity Based Costing (ABC): Tracks all activities that add cost to a product and assigns costs
based on usage (e.g., quality checks, packaging).

4. Spreading Costs
Dividing indirect costs (like rent and utilities) among different departments, products, or
services.

5. Standard Costs
Setting an expected cost for making a product and comparing it to the actual cost to see if you're
over or under budget.

6. Variance Analysis
Looking at the differences between expected costs and actual costs to find out why they are
different.

7. Cost Volume Profit (CVP) Analysis


Figuring out how changes in costs and production levels affect profits.

8. Creating Budgets
Planning how much money will be spent in different areas of the business.

Why is Cost Accounting Important?


Budgeting: Helps plan future spending.
Cost Control: Identifies areas where money can be saved.
Performance Evaluation: Compares actual spending to the budget to see how well the business
is managing costs.
Pricing Decisions: Helps set prices that cover costs and make a profit.
Profitability Analysis: Determines which products or services are making money.
1. Job Order Costing System

A job order costing system is used by businesses that produce unique products or jobs. Each job
or order is treated as a separate project, and costs are tracked individually for each job.

How it Works:
Order Received: A customer places an order for a specific product or service.
Job Number Assigned: Each job is given a unique job number for identification.
Costs Accumulated: All costs related to the job (materials, labor, overhead) are recorded.
Job Completion: Once the job is completed, the total cost is calculated and used to determine
the price charged to the customer.

Examples:
Custom furniture manufacturing
Construction projects
Specialized equipment manufacturing

Job Cost Sheet

A job cost sheet is a document that records all costs associated with a particular job. It helps in
tracking and summarizing the costs for each job.

Components of a Job Cost Sheet:


Job Number: Unique identifier for the job.
Description: Details about the job or order.
Direct Materials: Costs of materials specifically used for the job.
Direct Labor: Costs of labor directly involved in completing the job.
Overhead Costs: Indirect costs allocated to the job (e.g., utilities, rent).
Total Cost: Sum of direct materials, direct labor, and overhead costs.

Batch Costing

Batch costing is used when products are produced in batches instead of individually. This system
is suitable for businesses that produce a group of similar products together.

Examples:
Bakery products (e.g., a batch of cookies)
Pharmaceutical products (e.g., a batch of pills)
Clothing manufacturing (e.g., a batch of t shirts)

Example Calculation:
Total Cost of Batch: PKR5000
Number of Units in Batch: 1000
Cost per Unit: PKR5000 / 1000 = PKR5 per unit
2. Process Costing

1. Continuous Production: Used in industries where production is continuous, and products are
indistinguishable from each other (e.g., chemicals, food processing).
2. Homogeneous Products: The products are identical or very similar.
3. Cost Accumulation: Costs are accumulated over a period and divided by the number of units
produced to determine the per unit cost.
4. Standardization: The production process is standardized and consistent.

Procedures of Process Costing

1. Identify the Process: Determine the different stages or processes through which the product
passes.
2. Accumulate Costs: Collect all costs (materials, labor, overhead) for each process over a specific
period.
3. Assign Costs to Units: Divide the total costs for each process by the number of units produced
during the period to determine the cost per unit.
4. Transfer Costs: Transfer the cost of units from one process to the next until the final product
is completed.
5. Calculate Equivalent Units: For partially completed units, calculate the equivalent units of
production to assign costs accurately.

Product Flow

1. Raw Materials to WIP (Work in Process): Raw materials are introduced into the production
process.
2. WIP to Finished Goods: As products move through various processes, they are transformed
from raw materials to work in process and finally to finished goods.
3. Finished Goods to Sale: Finished goods are stored and then sold to customers.

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