1. Cost Accounting

2. Definition & meaning of cost accounting
Cost terminology
Classification of costs and calculation of various cost.
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3. COST ACCOUNTING
INTRODUCTION

4. 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

5. 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.

6. COST - MEANING
Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing.

7. 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

8. 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.

9. ELEMENTS OF COST Element of cost Materials Labour Expenses
Direct Indirect

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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

17. 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.)     

18. 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        

19. COST CLASSIFICATION – ON THE BASIS OF
Nature
Function
Direct & indirect
Variability
Controllability
Normality
Financial accounting classification
Time
Planning and control
Managerial decision making

20. ON THE BASIS OF NATURE
Materials
Labour
Expenses

21. 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

22. ON THE BASIS OF VARIABILITY
Fixed costs
Variable costs
Semi variable costs

23. ON THE BASIS OF CONTROLLABILITY
Controllable costs
Uncontrollable costs
ON THE BASIS OF NORMALITY
Normal costs
Abnormal costs

24. ON THE BASIS OF FINANCIAL ACCOUNTS:
Capital costs
Revenue costs
Deferred revenue costs

25. ON THE BASIS OF TIME: Historical costs Pre determined costs
ON THE BASIS OF PLANNING AND CONTROL:
Budgeted costs
Standard costs

26. 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

27. TERMS IN COST ACCOUNTING
Cost unit
Cost centre
Cost estimation
Cost ascertainment
Cost allocation
Cost apportionment
Cost reduction
Cost control

28. METHODS OF COSTING Job costing Contract costing Batch costing
Process costing
Unit costing
Operating costing
Operation costing
Multiple costing

29. TYPES OF COSTING Uniform costing Marginal costing Standard costing
Historical costing
Direct costing
Absorption costing

30. 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

31. Accounting is the language of business.
Accountants
Financial accountants provide information to external parties
Investors
Creditors
Regulators
Managerial accountants provide information to internal users
Managers
Cost accountants provide information to both internal and external users
Product cost information
Accounting is the language of business.

32. Relationship of Financial, Management, and Cost Accounting
Product Costs
FINANCIAL
ACCOUNTING
COST
ACCOUNTING
MANAGEMENT
ACCOUNTING

33. Types of Accounting Financial Management
Meet external information needs
Comply with GAAP
Management
Meet internal information needs
Does not have to comply with GAAP

34. Financial versus Managerial
External focus
Whole organization
Historical
Quantitative
Monetary
Verifiable
GAAP
Formal recordkeeping
Managerial
Internal focus
Segments or divisions
Current/projected
Quantitative/qualitative
Monetary and nonmonetary
Timely/reasonable estimate
Benefits exceed costs
Formal and informal recordkeeping .

35. Product Cost Information
External parties—stockholders, creditors, and regulators
For investment and credit decisions
Complies with GAAP
Enterprise focus
Internal parties
Planning, controlling, and decision making
Evaluating performance
Includes upstream and downstream costs
Disaggregated .

36. Accounting Bodies Financial
Public Company Accounting Oversight Board (PCAOB)
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
Management
Institute of Management Accountants (IMA)
Society of Management Accountants of Canada
Cost Accounting Standards Board (CASB)

37. Management Accounting Organizations
IMA
Statements on Management Accounting
(not legally binding)
Society of Management Accountants of Canada
Management Accounting Guidelines
Cost Accounting Standards Board (CASB)
Government contracting standards
(legally binding)

38. Professional Ethics
Earnings management—deliberate accounting adjustments to “hit” profit targets
Often adjustments involve cost accounting
Product costs
Inventory valuations
Stretching legitimate accounting techniques
Outright fraud© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

39. Ethics and Legislation
Sarbanes-Oxley Act—CEOs and CFOs personally accountable for the accuracy of their organization’s financial reporting
False Claims Act—whistle-blower protection and penalties for failure to blow the whistle (disclose known financial frauds)

40. Ethics and Management Accounting
Standards of Ethical Conduct for Management Accountants
Competence
Confidentiality
Integrity
Credibility .

41. Organizational Strategy
Develop mission statement
Implement strategy
Deploy resources to create value for customers and shareholders
Recognize that each organization is unique—thus unique strategies must be developed

42. Organizational Strategy
Develop mission statement
Implement strategy
Develop, implement, and monitor necessary information systems
Establish appropriate measures of accomplishment .

43. Five Factors in Organizational Strategy
Core competencies
Organizational structure
Management style and organizational culture
Organizational constraints
Environmental constraints

44. Organizational Strategies
Core competency—critical function or activity providing a competitive advantage
Cost leadership strategy—undercut competitor prices
Product differentiation strategy—superior quality products or unique services sold at a premium .

45. Strategy Questions
What are your customers’ most important purchase criteria?
How do you and your competitors rate on these purchase criteria?
What are your main strengths and competencies? Are they appreciated by the market?
Which are your priority segments?
Where is it most important that you gain market share?
What is your competitive advantage?
Who are your five most important competitors?
Is your firm more or less profitable than these firms?
Compare prices for equivalent products/services.
Are they higher or lower? Explain the difference. Is it customers, costs, or profit requirements?
Are your costs higher or lower than those of main competitors? Where are the differences most pronounced?
What segment(s) of your business represents 80% profits?
For each business segment above, how large are you relative to the largest competitors? Are you gaining or losing relative market share? .

46. Organizational Structure
Distribution of authority and responsibility in an organization
Authority—right to use resources to accomplish a task or achieve an objective
Responsibility—obligation to accomplish a task or achieve an objective
Line manager works directly toward attaining organizational goals
Staff employees give assistance and advice to line managers
Treasurer and Controller
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

47. Communicate strategy to all members of the value chain.
A set of value-adding functions and processes that converts inputs into products or services
Marketing
Distribution
Customer Service
Research and Development
Product Design
Supply
Production
Communicate strategy to all members of the value chain.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

48. Components of the Value Chain
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

49. Balanced Scorecard

50. Balanced Scorecard Perspectives
Learning and Growth
Use the organization’s intellectual capital to adapt to changing customer needs or to influence new customers’ needs and expectations through product or service innovations
Internal Business
Things to do well to meet customer needs and expectations
Customer Value
How well the organization is doing relative to important customer criteria
Financial
Address stockholders/stakeholders concerns about profitability and organizational growth

51. Balanced Scorecard Measures
Short-term and long-term
Internal and external
Financial and nonfinancial

52. Ethics in Multinationals
Foreign Corrupt Practices Act—prohibits bribes to obtain/retain business
Organization of Economic Cooperation and Development Convention—crime to offer, promise, give bribes to obtain/retain internal business deals .