cost accounting ch 1

8/2/2019 Cost Accounting Ch 1

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Cost Accounting

Chapter 1

Introduction


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1.1 What are cost accounting, management

accounting and financial accounting.

1.2 costing, cost, cost unit and cost centre.

1.3 classification and type of cost.


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cost accounting is the process of accounting

for cost, which begins with regarding and

classifying of incomes and expenditures and

ends with the preparation of periodical

statements and reports for ascertaining and

controlling costs.

Therefore, cost accounting is a process ofassigning cost to the cost object.


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Why need cost accounting?

i) Control of Material Cost :

Normally, material cost constitutes a major

portion of the cost of the product. Hence

control of material cost can ensure a good

amount of benefit.

(ii) Control of Labour Cost

iii) Control overhead


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iv) budgeting

v) measure efficiency

Vi) strategic decision making

Besides that, cost accounting is prepared toovercome limitations of financial accountingwhich are :

a) Only provide historical past informationb)Not reveal the details operation informations of

segments.


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c) cannot provide information required for

future planning.


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Cost Accounting and Management

Accounting

The scope of management accounting is broaderthan that of cost accounting. In cost accounting,the main emphasis is on cost and it deals with its

collection, analysis, relevance,interpretation and presentation for variousproblems of the management.

Management accountancy utilizes the principles

and practices of financial accounting in additionto other modern management techniques forefficient operation of the organisation.


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The main emphasis in management

accountancy is towards determining policy

and formulating plans to achieve the desired

objective of the management.


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Cost, cost unit and cost centre

Cost

- Cost represents the amount of expenditure

(actual or notional) incurred on or attributable

to a giventhing. It represents the resources

that have been or mustbe sacrificed to attain

a particular objective.


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Cost unit

Meaning - Once the cost of various costcentres isascertained, the need arises to express the cost

of output (product / service). A cost unit is

defined as a unit of quantity of product, serviceor time (or a combination of these) in relation towhich costs may be ascertained orexpressed.

Cost units are usually units of physicalmeasurement like number, weight, time, area,length, volume etc.


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Cost centre

A department or other section of a company wheremanagers are directly responsible for costs. Forexample, consider a company that has a manufacturingdepartment, a research and development department,

and a payroll department.

Each department could be a cost center, and thedirectors of each department would be responsible tokeep costs to as low a level as possible. The company

thus accounts for each cost center separately, whichallows managers to take immediate responsibility forcost growth and credit for cost cutting.


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Cost classification

i. behavioral

ii.Function

iii. Responsibility( controllable anduncontrollable)

iv) Tracebility ( direct and indirect)

v)Product and period cost vi)Relevance and irrelivence.


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Classification By Behaviour

Fixed cost - Fixed cost is that cost which

remains constant at all levels of production.

For e.g. rent, insurance.

Variable cost - The cost which varies with the

level of production is called variable cost i.e.,

it increases on increase in production volume

and vice-versa. For e.g. cost of materials, costof labour.


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Semi-variable cost - This cost is partly fixed andpartly variable in relation to the output. For e.g.telephone bill, electricity bill

A step cost-

is a cost that is fixed over a small volume range,but is variable over a large volume range. A stepcost is also a fixed cost that rises to a new level in

step with the significant changes in activity orusage. It is a cost that does not change steadily,but at discrete points.


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Classification By Function :

i. Production cost - It is the cost of the entire process ofproduction. In other words it is nothing but the cost ofmanufacture which is incurred up to the stage ofprimary packing of the product.

ii. Administrative cost - It is the indirect cost pertainingto the administrative functionwhich involvesformulation of policies, directing the organisation and

controlling the operations of an undertaking. This costis not related to any other functions like selling anddistribution, research and development etc.


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iii. Selling cost - Selling cost represents theindirect cost which is incurred for (a)seeking tocreate and stimulate demand and (b) securingorders.

iv. Distribution cost - It is the cost of thesequence of operations which begins withmaking the packed product available for

despatch and ends with making thereconditioned returned empty package, if anyavailable, for re-use.


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Responsibility classification

This refers to the controllable and

uncontrollable cost.

i) Controllable cost

If a manager responsible to the cost, then the

cost is controllable cost.

Ii) Uncontrollable cost are cost which cannot

be influenced by the action of specified

manager.


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Tracebility

Direct or indirect cost

i.Direct cost - Direct cost is that cost which can be

identified with a cost centre or a cost unit. For

e.g. cost of direct materials, cost of direct labour.

ii. Indirect cost - Cost which cannot be identified

with a particular cost centre or cost unit is calledindirect costs. For e.g. wages paid to indirect

labour.


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Product and period cost

product costs include all the costs that are

involved in acquiring or making product. In the

case of manufactured goods, these costs

consist of direct materials, direct labor, andmanufacturing overhead.


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Period costs are not included as part of the

cost of either purchased or manufactured

goods. Sales commissions and office rent are

good examples of period costs. Both items areexpensed on the income statement in the

period in which they are incurred.


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Relevance and irrelevance costs

Relevance cost

is a cost that differs between alternatives

being considered. It is often important for

businesses to distinguish between relevant

and irrelevant costs when analyzing

alternatives because erroneously considering

irrelevant costs can lead to unsound businessdecisions. Also, ignoring irrelevant data in

analysis can save time and effort.


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Other relevance cost for decision making are :

Differential cost - It is the difference in the

total cost between alternatives calculated to

assist decision making.

Thus, it represents the change in total cost

(both fixed and variable) due to a change in

the level of activity, technology, process or

method of production, etc.


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Opportunity cost - It refers to the value of

sacrifice made or benefit of opportunity

forgone in accepting an alternative course of

action. For e.g. If Mr. A works in his brothers

firm instead of working in X Ltd., then the loss

of salary Mr. A suffers by foregoing

employment in X Ltd., is the opportunity costof working in his brother's firm.


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Avoidable costs :

Can be eliminated or saved when a product or

segment is discontinued. They are relevant for

decision making purposes.


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Marginal cost - It is the amount at any given

volume of output by which aggregate cost

changes if the volume of output changes

increases/decreases) by one unit.

It also means that the variable costs of one

unit of product or a service.


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Out of pocket cost - It is that portion of total

cost which involves cash outlay. It is a short

term cost concept and is used in short- term

decision making like make or buy, pricefixation during recession. Out of pocket cost

can be avoided if a particular proposal under

consideration is not accepted.


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Irrelevant costs

Some cost that would not changed by

decision. These costs are known as irrelevant

costs. So, it can be ignored in decision making

process. An example of irrelevant cost is sunkcost.


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Sunk cost - Historical cost which is incurred in

the past is known as sunk cost. This cost is not

relevant in decision making in the current

period.

For eg. In the case of a decision relating to the

replacement of a machine, the written down

value of the existing machine is a sunk costand hence irrelevant to decision making.


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End of chapter 1

cost accounting ch 1

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