THE INSTITUTE OF CHARTERED ACCOUNTANTS
OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND
FINANCE - 2013/2014
Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya
B.Com Special (Col), ACA
Principles of Cost Accounting
Cost Accounting
A method of accounting in which all costs incurred
in carrying out an activity or accomplishing a
purpose are collected, classified, and recorded.
This data is then summarized and analyzed to
arrive at a selling price, or to determine where
savings are possible.
Cost
“ The amount of expenditure incurred or
attributable to a specified thing or activity”
i.e
Product “A” cost is Rs. 500
Cost object
A Product, Service, Center activity, Customer or
distribution channel in relation to which cost are
ascertained.

i.e. XYZ company produces a line of 10-speed
bicycles which is a cost object in their product
line.
Cost Center
It is a location, activity, item or function of an
organization in respect of which costs are ascertained
Examples of cost centers include research and
development
departments,
marketing
departments, help desks and customer service
Cost Classification
According
 According
 According
 According

to the
to the
to the
to the
elements
purpose
functions
Behavior
According to purpose
The cost are classified according to the reason for
which they have been incurred. Accordingly it
can be divided in to two.
◦ Direct Cost
 Cost that can be directly identified with the cost
unit/Object
 i.e. Direct Material, Direct Labor, Direct Expenses
◦
Indirect cost
◦ Cost that can not be directly identified with the cost
unit/Object ( all indirect cost called as overheads)
◦ i.e. indirect Material, indirect Labor, indirect Expenses
i. e Cost classification of a Garment
Direct
Indirect
Material
Fabric, Buttons,
Thread
stationery,
consumable supplies,
spare parts for
machine
Labor
Wages Paid to cutters,
Machine Operators
salaries of factory
supervision and office
staff
Other Expenses
Royalties
Rent, Depreciation,
Oil used for sawing
machines
According to Behavior
Costs can be classified into variable, fixed, semivariable, or step-costs according to how they
behave with respect of changes in activity levels
i.e.
Units
Cost
Cost
Cost
1000
1000
2000
3000
2000
1000
4000
5000
Fixed
cost
Variable
cost
Semi
Variable
cost
Fixed Cost
A cost remains constant over a relevant range of
activity level.
However, unit fixed cost falls with an increase in
activity volume.
i.e. Rent, Depreciation, Salaries of Executives.
ABC Company total fixed cost per month is Rs.500,000
Activity Level
Fixed cost
Fixed cost per
unit (FC/Units)
0
500,000
∞
1000
500,000
500.00
2000
500,000
250.00
3000
500,000
166.67
4000
500,000
125.00
5000
500,000
100.00
Graphical Representation-Total Fixed cost
Fixed cost per unit

Fixed cost per unit means the total fixed cost
divided by number of units.
Variable cost

Cost increases or decreases in direct proportion to
levels of activity,

However the unit variable cost remains constant

i.e. Raw material cost, Direct labor
necessary to complete a certain project.
Activity Level
Variable cost
Variable cost
per unit
(VC/Units)
1000
50,000
50
2000
100,000
50
3000
150,000
50
4000
200,000
50
costs
Graphical RepresentationTotal Variable cost & Variable cost per unit
Step cost
It remains constant for a range of activity levels,
then, on further increase in activity, the cost
jumps to a new level and remains constant over a
certain range until the next jump occurs.
Total Cost
Total of Variable cost & Fixed cost
Accordingly
Total Cost = Total Fixed Cost + Total Variable Cost
Total Cost = Total Fixed Cost + (Variable Cost per )
unit X no Units

ABC Ltd is producing product “A” & Management Accountant has
found following information
◦ Rent of the Factory
100,000
◦ Salaries of Executive staff
250,000
◦ Plant Depreciation
50,000
He also found following information with regard to per unit of
product “A”
Direct Martial used
: 3Kg @ Rs. 20
Direct Labor
: 2 Hrs @ Rs. 50 Per Hour
Royalty fee
: 100 Per unit
Find out total cost of producing
0 units
5,000 units
10,000 Units
Semi-variable cost
It processes characteristics of both fixed and
variable cost
It increases or decreases with activity level but
not in direct proportion ( also called mixed cost)
Cost Estimation:
Determine the cost behavior according to the level of
activity

High Low Method :
1st Identify the Variable cost & then it used to ascertain the fixed
cost
Steps
1. Based on a table of total costs and activity levels, determine the
high and low activity levels.
2.Calculate the variable cost per unit using high low activity level
Variable cost per unit = Change in the total cost
Change in the activity Level
3.Use following equation to determine the fixed cost by substituting
per unit variable cost
Fixed Cost= Fixed Cost +( Variable cost per unit X No of units)


Ex:01
Number of units
Total Cost
100
200,000
250
425,000
Calculate the cost of producing 200 units