Cost Accounting

Introduction to Cost accounting

Lecture-1

JAMEEL A KHAN HAKRO

 Accounting

 It is all about providing financial information

relating to an economic activity.
 Branches Of Accounting

Accounting

Financial Accounting
Cost Accounting Management Accounting

For external For internal Fed by

reporting reporting financial and
cost accounting
User Group
User Group

Financial Accounting Cost & Management Accounting

Investors Managers

Lenders Directors

Govt Agencies

Suppliers

Management

Employees
 Branches Of Accounting

Financial Accounting is an art of recording (Journal), classifying

(Ledger), summarizing (Trial balance), reporting (Income Statement
& Balance Sheet) and analyzing (Interpretation) the financial
information for external use (for those who supply funds and for other
concerned parties).
Cost Accounting deals with ascertainment, measurement,
accumulation, budgeting and evaluating cost structure of the entity
for internal use.
It is primarily concerned with the accumulation and analysis of
information relevant for internal use by managers for decision making
Management Accounting deals with decisions relating to the
generation and effective utilization of the financial resources of an
entity.
 Cost Accounting

So Cost accounting is a specialized branch of accounting

which provides processed set of information / statements to
the management which assist them in decision making.

In cost accounting cost of product or a process is;

 Ascertained
 Measured
 Accumulated
 Management Accounting

 Management is central coordinating body in an entity

 Management is concerned with the maximization of wealth
through

Minimization of cost
Maximization of profit

 For this purpose information provided by cost accounting is

analyzed by the management for decision making and
management control function.
Cost

 Forms the basis for product costing, performance evaluation

and managerial decision making.

 Value of sacrifice made to acquire goods or services measured

in rupees by reduction in assets or incurrence of liabilities at
the time benefits are acquired.
 On acquisition, It is for present or future benefits but when utilized
becomes expenses.

 Expense is defined as a cost that has given a benefit and is

now expired.
 Unexpired cost that can give future benefits are classified as assets.
Cost

 Expenses are matched against revenue to

determine profit or loss for a period.
 Revenue is price of products sold or services rendered.
 Sometimes goods & services purchased become valueless without
having provided any benefit (losses) appear in IS as a deductions.
 Cost Classification (Cost Pool)

 Categories
 Elements of Product.
 Relationship to Production.
 Relationship to volume.
 Ability to trace.
 Departments where incurred.
 Functional areas (Activities performed).
 Period charged to income.
 Relationship to planning, controlling and decision making
Elements of Product

 Material cost
 Direct Material cost
 Indirect Material cost
 Labor cost
 Direct Labor cost
 Indirect Labor cost
 Factory overhead cost
 Indirect material, indirect labor and all other indirect manufacturing
cost that cannot be directly identified.
Material
 Principal substances used in production that are
transformed into finished goods by addition of direct labor
and Factory overhead.
 Direct Material: Identified with the production of a finished product,
can be easily traced to a product.
 Indirect Material: Involved in production of product but is not an
integral part of the product, part of FOH.
Labor
 Physical or mental effort expended in production of
product.
 Direct Labor: All labor directly involved in production of a finished
product.
 Indirect Labor: All labor not indirectly involved in production of
production
Factory Overhead (FOH)
 All cost used to accumulate indirect materials,
indirect labor, and all other indirect manufacturing
costs which can not be directly identified with
products.
 Rent, depreciation of factory equipment.
 Depends on the relationship to the product.
Relationship to Production
 Prime Cost.
 Conversion Cost
Prime Cost
 Prime Cost
 Direct material plus direct labor.
 Conversion Cost
 Concerned with transforming direct materials into finished
goods.
 Direct labor and FOH.
 Cost classification

Direct Material + Direct Labor + Other Direct Cost = Prime cost

Direct Labor + FOH = Conversion cost

Prime Cost + FOH = Total factory cost

 Summary

Material cost Labor cost Other production Total production

cost cost

Direct = Prime cost

Direct Direct

Indirect Indirect Indirect = FOH cost

Total Factory
Total Total Total =
Cost
Cost classification
Direct material Rs 12,000
Direct labor 8,000
Other direct cost 2000
Prime cost 22,000
FOH
Indirect material 3000
Indirect labor 2000
Electricity bill 1500
Rent of factory 3500
Depreciation 1000
11000
Total factory cost 33000
 RELATIONSHIP TO VOLUME

 Fixed cost  Step fixed cost

 Variable Cost  Semi variable cost
 Fixed cost
Fixed cost is a cost that do not vary with the level of
production. Simple means the variation in production has no
impact on fixed cost. For example rent of building and
accountant salary etc

3000

Fixed cost
2000

1000

100 200 300

No. of units
 Step Fixed Cost
Costs which are constant for a relevant range of activity
and rise to new constant level once that range exceeded.
For example rent.

Fixed cost

No. of units
 Variable Cost
The expenses that vary in direct proportion to volume of
product. For example Prime cost.

Variable cost

No. of units
 Semi Variable Cost

The cost that is partly fixed and partly variable cost. For
example electricity bills, salesman salary.

3000

Semi variable 2000

cost
1000

100 200 300

No. of units
 Ability to Trace

Cost Classification

Direct Cost Indirect Cost

Other Direct
Direct Material Direct Labor Factory Overhead
Expenses
 Ability to Trace

Cost Classification

Direct Cost Indirect Cost

Other Direct
Direct Material Direct Labor Factory Overhead
Expenses
 Direct Cost

 Cost that can be traced in full to the product or services is

direct cost
Types Of Direct Cost

Direct material costs are those cost of material that are

traceable in full in the cost of a product or services

For example wood in manufacturing of table

Direct labor cost are the specific cost of the worker in

producing a or service

For example labor involve in cutting wood

Types Of Direct Cost

Other Direct Expenses These are expenses other than

direct material and direct labor which have been incurred in
full as direct consequences of producing product or services

Royalty on production
Indirect Cost

 The cost that is incurred in producing product or services but which can
not traced in full

Factory overhead (FOH)

 FOH means all expenses of factory other than direct material, direct
labor and other direct production expenses.

Indirect material
Indirect Labor
Deprecation of machinery
Factory utility bills
Departments Where Incurred
 Production Departments
 Service Departments
Functional Areas
 Manufacturing Costs
 Marketing Costs
 Administrative Costs
 Financing Costs
Period Charged To Income
 Product Costs
 Period Costs
 Relationship to Planning, Controlling
and decision Making

 Committed and Discretionary Fixed Costs.

 Relevant and Irrelevant Costs.
 Differential Costs.
 Opportunity Costs.
 Shutdown Costs.
 Thank you