Dr. Sajid Ali
Assistant Professor
Department of Accounting
College of Business Administration, Al-kharj,
Kingdom of Saudi Arabia
E-mail: sajidraoalig@gmail.com
http://faculty.ksu.edu.sa/2277770190/default.aspx
COST ACCOUNTING
(ACCT – 232)
Contents
No of
Weeks
Contact
hours
Introduction : Definition & meaning of cost accounting, cost terminology,
classification of costs and calculation of various cost.
3
9
Job Costing: Concept, Job costing systems, Job costing in manufacturing,
actual v/s normal costing, job costing systems in manufacturing.
2
6
Activity Based Costing: Simple v/s Activity based costing system, cost
hierarchy, cost products or services using activity based costing, ABC v/s ABM
3
9
Process Costing: Process Costing methods, job order costing and spoilage,
job costing & rework and accounting for scrap.
4
12
Cost Allocation: Joint Products v/s By Products, approaches to allocating
joint costs and accounting for by-products.
2
6
14
42
Total
UNIT - 1
1.
Definition & meaning of cost accounting
2.
Cost terminology
3.
Classification of costs and calculation of various cost.
4.
Model Paper
5.
Quiz
6.
Home Assignment
COST ACCOUNTING
INTRODUCTION
COST ACCOUNTING - MEANING
Cost accounting is concerned with recording, classifying and
summarizing costs for determination of costs of products or services,
planning, controlling and reducing such costs and furnishing of
information to management for decision making
COST ACCOUNTING - INTRODUCTION
Accounting for determination and control of costs.
 COST ACCOUNTING: The Institute of Cost and Management Accountant,
England (ICMA) has 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 cost units. In
its widest sense, it embraces the preparation of statistical data, the application
of cost control methods and the ascertainment of the profitability of activities
carried out or planned”.
Cost Accounting = Costing + Cost Reporting + Cost Control.
COST - MEANING
Cost means the amount of expenditure ( actual or
notional) incurred on, or attributable to, a given
thing.
OBJECTIVES OF COST ACCOUNTING

Ascertainment of costs

Estimation of costs

Cost control

Cost reduction

Determining selling price

Facilitating preparation of financial and other statement

Providing basis for operating policy
COST TERMINOLOGY:
 COST: Cost means the amount of expenditure incurred on a particular thing.
 COSTING: Costing means the process of ascertainment of costs.
 COST ACCOUNTING: The application of cost control methods and the ascertainment of the
profitability of activities carried out or planned”.
 COST CONTROL: Cost control means the control of costs by management. Following are the aspects or
stages of cost control.
 JOB COSTING: It helps in finding out the cost of production of every order and thus helps in ascertaining
profit or loss made out on its execution. The management can judge the profitability of each job and decide its
future courses of action.
 BATCH COSTING: Batch costing production is done in batches and each batch consists of a number of
units, the determination of optimum quantity to constitute an economical batch is all the more important .
ELEMENTS OF COST
Element of cost
Materials
Direct
Indirect
Labour
Direct
Expenses
Indirect Direct
Indirect
MATERIAL: The substance from which the
finished product is made is known as
material.
(a) DIRECT MATERIAL: is one which can be
directly or easily identified in the product
Eg: Timber in furniture, Cloth in dress, etc.
(b) INDIRECT MATERIAL: one which cannot be
easily identified in the product.
EXAMPLES OF INDIRECT MATERIAL
At factory level – lubricants, oil,
consumables, etc.
At office level – Printing & stationery,
Brooms, Dusters, etc.
At selling & dist. level – Packing materials,
printing & stationery, etc.
LABOUR: The human effort required to convert the
materials into finished product is called labour.
(a) DIRECT LABOUR: is one which can be
conveniently identified or attributed wholly to a
particular job, product or process.
Eg:wages paid to carpenter, fees paid to tailor,etc.
(b) INDIRECT LABOUR: is one which cannot be
conveniently identified or attributed wholly to a
particular job, product or process.
EXAMPLES OF INDIRECT LABOUR
At factory level – foremen’s salary, works
manager’s salary, gate keeper’s salary,etc
At office level – Accountant’s salary, GM’s
salary, Manager’s salary, etc.
At selling and dist.level – salesmen salaries,
Logistics manager salary, etc.
OTHER EXPENSES: are those expenses other than
materials and labour.
DIRECT EXPENSES: are those expenses which can
be directly allocated to particular job, process
or product. Eg : Excise duty, royalty, special hire
charges,etc.
INDIRECT EXPENSES: are those expenses which
cannot be directly allocated to particular job,
process or product.
Examples of other expenses
At factory level – factory rent, factory insurance, lighting, etc.
At office level – office rent, office insurance, office lighting,
etc.
At sales & dist.level – advertising, show room expenses like
rent, insurance, etc.
COST SHEET
DIRECT MATERIAL
DIRECT LABOUR
DIRECT EXPENSES
PRIME COST
FACTORY OVERHEADS
FACTORY COST
OFFICE OVERHEADS
COST OF PRODUCTION
SELL & DIST OVERHEADS
COST OF SALES
PROFIT
SALES
COST SHEET - ADVANCED
OPENING STOCK OF RAW MATERIALS
+PURCHASES
+CARRIAGE INWARDS
-CLOSING STOCK OF RAW MATERIALS
VALUE OF MATERIALS CONSUMED
+DIRECT WAGES
+DIRECT EXPENSES
PRIME COST
+FACTORY OVERHEADS
+OPENING STOCK OF WIP
-CLOSING STOCK OF WIP
FACTORY COST
(CONT.)
FACTORY COST
+ADMINISTRATIVE OVERHEADS
COST OF PRODUCTION
+OPENING STOCK OF FINISHED GOODS
-CLOSING STOCK OF FINISHED GOODS
COST OF GOODS SOLD
+SELL. & DIST. OVERHEADS
COST OF SALES
+PROFIT
SALES
COST CLASSIFICATION – ON THE BASIS OF
 Nature
 Function
 Direct & indirect
 Variability
 Controllability
 Normality
 Financial accounting classification
Time
 Planning and control
 Managerial decision making
ON THE BASIS OF NATURE
 Materials
 Labour
 Expenses
ON THE BASIS OF FUNCTION
 Manufacturing costs
 Commercial costs – ADM and S&D Costs
ON THE BASIS OF DIRECT AND INDIRECT
 Direct costs
 Indirect costs
ON THE BASIS OF VARIABILITY
 Fixed costs
 Variable costs
 Semi variable costs
ON THE BASIS OF CONTROLLABILITY
 Controllable costs
 Uncontrollable costs
ON THE BASIS OF NORMALITY
 Normal costs
 Abnormal costs
ON THE BASIS OF FINANCIAL ACCOUNTS:

Capital costs
 Revenue costs
 Deferred revenue costs
ON THE BASIS OF TIME:
 Historical costs
 Pre determined costs
ON THE BASIS OF PLANNING AND CONTROL:
 Budgeted costs
 Standard costs
ON THE BASIS OF MANAGERIAL DECISION
MAKING
 Marginal costs
 Out of pocket costs
 Sunk costs
 Imputed costs
 Opportunity costs
 Replacement costs
 Avoidable costs
 Unavoidable costs
 Relevant and irrelevant costs
 Differential costs
TERMS IN COST ACCOUNTING
 Cost unit
 Cost centre
 Cost estimation
 Cost ascertainment
 Cost allocation
 Cost apportionment
 Cost reduction
 Cost control
METHODS OF COSTING
 Job costing
 Contract costing
 Batch costing
 Process costing
 Unit costing
 Operating costing
 Operation costing
 Multiple costing
TYPES OF COSTING
 Uniform costing
 Marginal costing
 Standard costing
 Historical costing
 Direct costing
 Absorption costing
Calculation of various cost
Direct Materials
Opening stock of materials
Add Purchases of materials
Less Closing stock of materials
(a) Materials consumed
Direct Wages
Direct Expenses
------
------
PRIME COST
Add Factory Overheads
Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs
Salaries of Works Manager etc. Indirect Materials
Drawing office and works office expenses Depreciation on factory land and building Less Scrap value
Defective work
Add Work in progress (opening)
Less Work in progress (closing)
------
WORKS COST
Add Office/Administration overheads
Office rent, insurance, lighting, cleaning
Office salaries, telephone, law and audit expenses
General Manager’s salary
Printing and stationery
Maintenance, repairs, upkeep of office bldg
Bank charges and miscellaneous expenses
------
COST OF PRODUCTION
Add Opening stock of finished goods
Less Closing stock of finished goods
------
COST OF GOODS SOLD
Add Selling and Distribution Overheads
Showroom expenses, salesmen’s salaries
& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.
COST OF SALES
Add Net Profit or deduct net loss:
------ SALES
------
Home Assignment
1. What is Cost Accounting? How it is different from Management
Accounting?
2. Explain the various types of Cost?
Sample Quiz -1
The basic types of cost accounting system are :
A)Job order cost systems, activity based cost systems and process cost systems.
(B) Direct cost system and indirect cost systems
(C) Complete job cost systems and work in process cost system.
(D) Fixed cost systems and variable cost systems
2 In ABC, only one cost driver should be used in applying overhead .
A) True (B) False
1)
3
Elston's Metal Shop uses a job order cost system. It applies overhead to jobs at a rate of 150% of direct labor
costs. Job No.2617 required $500bin direct labor costs. The job was initially budgeted to require $550 in
direct labor costs. Overhead applied to No.2617 during the period amounted to :
A) $550 (B) $750 (C) $825 (D) some other amount .
4 If the manufacturing overhead account at month end has a remaining debit balance, this indicates that overhead
is under applied .
A) True (B) False
5 A predetermined overhead application rate :
A) Is used in a job order cost system but cannot be used in a process cost system
(B) Can be determined by dividing budgeted direct labor cost by the budgeted factory overhead costs.
(C) Is not generally accepted for financial reporting purpose.
(D) Tends to avoid wide variation in per-unit overhead cost because of short -run changes in volume .