Cost Accounting Dr. Sajid Ali E-mail: sajidraoalig@gmail.com 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) Contact hours No of Weeks Contents 9 3 Introduction : Definition & meaning of cost accounting, cost terminology, classification of costs and calculation of various cost. 6 2 Job Costing: Concept, Job costing systems, Job costing in manufacturing, actual v/s normal costing, job costing systems in manufacturing. Activity Based Costing: Simple v/s Activity based costing system, cost hierarchy, cost products or services using activity based costing, ABC v/s ABM 12 4 Process Costing: Process Costing methods, job order costing and spoilage, job costing & rework and accounting for scrap. Cost Allocation: Joint Products v/s By Products, approaches to allocating joint costs and accounting for by-products. 42 14 Total

UNIT - 1 Definition & meaning of cost accounting Cost terminology Classification of costs and calculation of various cost. Model Paper Quiz 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 Labour Expenses 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 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 What is Cost Accounting? How it is different from Management Accounting? 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 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 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.