1. Basic Cost Concepts COST ACCOUNTING Chapter One

2. LEARNING OBJECTIVES  To understand the meaning of different costing terms  To understand different costing methods  To have a basic idea of different costing techniques  To understand the meaning of cost sheet

3. Meaning of Cost Accounting 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.

4. Development of Cost Accounting The main causes behind the development of cost accounting system may be enumerated as below:  Financial Accounting cannot give (normally) the product- wise picture nor can it say that the result obtained is, what it should be. The main causes behind the development of cost accounting system may be enumerated as below:  Financial Accounting cannot give (normally) the product- wise picture nor can it say that the result obtained is, what it should be.

5. Development of Cost Accounting  Financial Accounting does not find out the cost of the goods manufactured.  Financial Accounting never aims at making an effort for converting a losing unit into a profitable one through cost control.

6. Development of Cost Accounting  Financial Accounting does not provide means for controlling different elements of cost, reduction of expenses, elimination of wastage, measurement of levels of efficiency etc.  Financial Accounting presents the total cost as incurred during a period and that also, at the end of the period. It cannot present the cost incurred daily and in the absence of this day-to –day information, control becomes impossible.  Financial Accounting also fails to explain properly the result with appropriate break-up.  Financial Accounting does not provide means for controlling different elements of cost, reduction of expenses, elimination of wastage, measurement of levels of efficiency etc.  Financial Accounting presents the total cost as incurred during a period and that also, at the end of the period. It cannot present the cost incurred daily and in the absence of this day-to –day information, control becomes impossible.  Financial Accounting also fails to explain properly the result with appropriate break-up.

7. OBJECTIVES OF COST ACCOUNTING To determine cost and control efficiency To Facilitate preparation of financial and other statement To provide basis for operating policy

8. Cost Accounting Vs. Financial Accounting  Financial accounting is concerned with providing information to external users. But cost accounting is prepared for the internal users.

9. Financial Accounting Vs. Cost Accounting  Financial accounting is oriented towards the preparation of financial statements which summarize the results of operations fro selected periods of time and show the financial position of the business at particular dates. Cost accounting often provides detailed information about manufacturing or rendering particular product or service.

10. Financial Accounting Vs. Cost Accounting  Financial accounting prepares report according to GAAP as a mandatory obligation. But Compliance is not mandatory for cost accounting.

11. Role of Cost Accounting Cost accounting furnishes management with the necessary accounting tolls for planning and controlling activities. Specifically, the collection, presentation, and analysis of cost data should help management accomplish the following tasks:

12. Role of Cost Accounting Creating and executing plans for budget Establishing costing methods and procedures. Creating inventory values for costing and pricing

13. Role of Cost Accounting Determining company costs and profit for and annual accounting period. Choosing from among two or more alternatives which might increase revenues or decrease costs. Determining company costs and profit for and annual accounting period. Choosing from among two or more alternatives which might increase revenues or decrease costs.

14. Advantages of Cost Accounting  Elimination of wastes, losses, inefficiencies  Cost reduction  Detection of reasons for profit or loss  Advice on various matters  Fixation of price  Cost control  Assisting the government, trade unions etc.  Marginal analysis of cost  Fixation of responsibility  Elimination of wastes, losses, inefficiencies  Cost reduction  Detection of reasons for profit or loss  Advice on various matters  Fixation of price  Cost control  Assisting the government, trade unions etc.  Marginal analysis of cost  Fixation of responsibility

15. Advantages of cost Accounting  Help in preparation of final accounts under financial accounting system  Prevention of frauds etc. thereby helping the management, the Government & others connected with the organization  Help in preparation of final accounts under financial accounting system  Prevention of frauds etc. thereby helping the management, the Government & others connected with the organization

16. Concept of Cost The term cost cannot be exactly defined. Its interpretation depends upon the following factors: –The nature of business or industry –The context in which it is used The term cost cannot be exactly defined. Its interpretation depends upon the following factors: –The nature of business or industry –The context in which it is used

17. Manufacturing Cost Direct Material Direct Labor Manufacturing overhead Direct Material Direct Labor Manufacturing overhead

18. Non-Manufacturing Cost Administration Cost Selling and Distribution Administration Cost Selling and Distribution

19. COST TERMS Fixed Cost Variable Costs Semi Variable Cost