Cost Accounting
Introduction of cost accounting
Lecture-1
By
Main Ahmad Farhan (ACA)
Accounting

It is a language about financial information (which is measurable in
terms of money) commonly used in business.
Branches Of Accounting
Accounting
Financial Accounting
For external
reporting
Cost Accounting
Management Accounting
For internal
reporting
Fed by
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
(Profit & Loss A/c & Balance Sheet) and analysis
(Interpretation) the financial information.
Cost Accounting deals with ascertainment, measurement,
accumulation, budgeting and evaluating cost structure of the
entity.
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 provide 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.
Management Accounting


Reports generated through management accounting are
used internally.
Major function of management accounting:
•
Planning & Forecasting
•
Controlling
•
Decision making
Pricing
Make or Buy
Shut down or Continued operation
Equipment Replacement
Purpose Of Cost Accounting







Provides information relating to cost of production.
Determines the appropriate selling price.
Discloses profitable products, areas and activity level.
Helps in make or buy decision.
Budgeting relating to production function.
Controls production variances.
Provides information to financial accountant.
Classification Of Cost
Cost Classification
Direct Cost
Direct Material
Direct Labor
Indirect Cost
Other Direct
Expenses
Factory Overhead
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 is specific cost of the worker in
producing a product or service
For example labor involved 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, Cost of jigs / moulds
Indirect Cost

The cost that is incurred in producing product or services but which can
not be 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
Cost classification
Direct Material + Direct Labor + Other Direct Cost = Prime cost
Direct Labor + Other Direct Cost + FOH = Conversion cost
Prime Cost + FOH = Total factory cost
Summary
Material cost
Labor cost
Other production
Total production
cost
Direct
Direct
Indirect
Indirect
Total
Total
cost
Direct
=
Prime cost
Indirect
=
FOH cost
Total
=
Total Factory
Cost
Cost classification
Direct material
Direct labor
Other direct cost
Prime cost
FOH
Indirect material
Indirect labor
Electricity bill
Rent of factory
Depreciation
Total factory cost
Rs 12,000
8,000
2000
22,000
3000
2000
1500
3500
1000
11000
33000
Behavior Of Cost

Fixed cost

Variable cost

Step fixed 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
No. of units
300
Fixed Cost Per Unit Reaction
Fixed cost per unit decreases as the number of units
produced increases and vice versa
For example rent of building is Rs. 10,000 and number of
units produced is 5000.
Per unit fixed cost = 10000 / 5000 = 2 per unit
If the number of units produced increases to 10000
Per unit fixed cost = 10000 / 10000 = 1 per unit
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
Variable Cost Per Unit Reaction
Variable cost per unit remain constant
Units of Labor
Total wages Per labor wage rate
10
10,000
1,000
20
20,000
1,000
Semi Variable Cost
The cost that is partly fixed and partly variable cost. For
example electricity bills, salesman salary.
3000
Semi variable
cost
2000
1000
100
200
No. of units
300
Summary
If the production volume increases
Per unit
Fixed cost
Variable cost
Total cost
Total
Decreases
Constant
Constant
Increases
Decreases
Increases
Summary
If the production volume decreases
Per unit
Fixed cost
Variable cost
Total cost
Total
Increases
Constant
Constant
Decreases
Increases
Decreases
Total cost
Total cost include both fixed cost and variable cost
As VC added in FC shifts upward
Total cost
Variable cost
3000
Total cost
2000
Fixed cost
1000
100
200
No. of units
300