Concept note on Management Accounting Prof.

Bhavana Raj
Introduction to Management Accounting: Managerial accounting is often referred to as management
accounting. The Institute of Management Accountants describes management accounting as the
internal business-building role of accounting and finance professionals who design, implement, and
manage internal systems that support effective decisions, and support, plan, and control the
organization's value-creating operations. In short, managerial accounting supports the decision
making process through planning and controlling operations. Planning primarily appears in the
budgeting process. Controlling occurs when managers compare actual performance with budgeted
amounts to identify differences and then act upon differences that appear to be significant.

Meaning of Management Accounting:
The process of preparing management reports and accounts that provide accurate and timely financial
and statistical information required by managers to make day-to-day and short-term decisions.


Unlike financial accounting, which produces annual reports mainly for external stakeholders,
management accounting generates monthly or weekly reports for an organization's internal audiences
such as department managers and the chief executive officer. These reports typically show the
amount of available cash, sales revenue generated, amount of orders in hand, state of accounts
payable and accounts receivable, outstanding debts, raw material and inventory, and may also
include trend charts, variance analysis, and other statistics. Also called managerial accounting.

Nature of Management Accounting:
(1)The term management accounting is composed of 'management' and 'accounting'. The word
'management' here does not signify only the top management but the entire personnel charged with
the authority and responsibility of operating an enterprise.
(2)The task of management accounting involves furnishing accounting information to the
management, which may base its decisions on it. It is through management accounting that the
management gets the tools for an analysis of its administrative action and can lay suitable stress on
the possible alternatives in terms of costs, prices and profits, etc. but it should be understood that the
accounting information supplied to management is not the sole basis for managerial decisions.
(3)Along with the accounting information, management takes into consideration or weighs other
factors concerning actual execution. For reaching a final decision, management has to apply its
common sense, foresight, knowledge and experience of operating an enterprise, in addition to the
information that is already has.
(4)The word 'accounting' used in this phrase should not lead us to believe that it is restricted to a
mere record of business transactions i.e., book keeping only. It has indeed a 'macro-economic
approach'. As it draws its raw material from several other disciplines like costing, statistics,
mathematics, financial accounting, etc., it can be called an interdisciplinary subject, the scope of
which is not clearly demarcated.
(5)Other fields of study, which can be covered by management accounting, are political science,
sociology, psychology, management, economics, statistics, law, etc. A knowledge of political science
helps to understand authority relationship and responsibility identification in an organization. A study
of sociology helps to understand the behavior of man in groups. Psychology enables us to know the
mental make-up of employers and employees. A knowledge of these subjects helps to increase
motivation, and to control the actions of the people who are ultimately responsible for
costs. This builds a better employer-employee relationship and a sound morale.
(6)The subject of management reveals the processes involved in the art of managing, a knowledge of
economics assists in the determination of optimum output in the forecasting of sales and production,
etc., and also makes it possible to analyze management action in terms of cost revenues, profits,
growth, etc. It is with the help of statistics that this information is presented to the management in a
form that can be assimilated.
(7)The subject of management accounting also encompasses the subject of law, knowledge of which is
necessary to find out if the management action is ultra-vires or not. It is, therefore, a wide and diverse
subject. Management accounting has no set principles such as the double entry system of
bookkeeping. In place of generally accepted accounting principles, the philosophy of cost benefit
analysis is the core guide of this discipline. It says that no accounting system is good or bad but is can
be considered desirable so long as it brings incremental benefits in excess of its incremental
costs.
(8) Applying management accounting principles to financial matters can arrive at no single perfect
solution. It is, therefore, an inexact science, which uses its own conventions rather than standardized
principles. The facts to be studied here can be interpreted in different ways and the precision of the
inferences depends upon the skill, judgment and common sense of different management
accountants. It occupies a middle position between a fully matured and an infant subject.
(9)Since management accounting is managerially oriented, its data is selective in nature. It focuses on
potential opportunities rather than opportunities lost. The data is operative in nature catering to the
operational needs of a firm. It details events, monetary and non-monetary. The nature of data, the
form of presentation and its duration are mainly determined by managerial needs. It is quite
frequently reported as it is meant for internal uses and managerial control. An accountant should look
at his enterprise from the management's point of view. Whenever he fails to do that he ceases to be a
management accountant.
(10)Management accounting is highly sensitive to management needs. However, it assists the
management and does not replace it. It represents a service phase of management rather than a
service to management from management accountant. It is rather highly personalized service. Finally,
it can be said that the management accounting serves as a management information system and so
enables the management to manage better.

FUNCTIONS OF MANAGEMENT ACCOUNTING: The basic function of management accounting is to
assist the management in performing its functions effectively. The functions of the management are
planning, organizing, directing and controlling. Management accounting helps in the performance of
each of these functions in the following ways:

(i) Provides data: Management accounting serves as a vital source of data for management planning.
The accounts and documents are a repository of a vast quantity of data about the past progress of the
enterprise, which are a must for making forecasts for the future.

(ii) Modifies data: The accounting data required for managerial decisions is properly compiled and
classified. For example, purchase figures for different months may be classified to know total
purchases made during each period product-wise, supplier-wise and territory-wise.
(iii) Analyses and interprets data: The accounting data is analyzed meaningfully for effective planning
and decision-making. For this purpose the data is presented in a comparative form. Ratios are
calculated and likely trends are projected.
(iv) Serves as a means of communicating: Management accounting provides a means of
communicating management plans upward, downward and outward through the organization.
Initially, it means identifying the feasibility and consistency of the various segments of the plan. At
later stages it keeps all parties informed about the plans that have been agreed upon and their roles
in these plans.

(v) Facilitates control: Management accounting helps in translating given objectives and strategy into
specified goals for attainment by a specified time and secures effective accomplishment of these goals
in an efficient manner. All this is made possible through budgetary control and standard costing which
is an integral part of management accounting.
(vi) Uses also qualitative information: Management accounting does not restrict itself to financial data
for helping the management in decision making but also uses such information which may not be
capable of being measured in monetary terms. Such information may be collected form special
surveys, statistical compilations, engineering records, etc.

SCOPE OF MANAGEMENT ACCOUNTING:
Management accounting is concerned with presentation of accounting information in the most useful
way for the management. Its scope is, therefore, quite vast and includes within its fold almost all
aspects of business operations. However, the following areas can rightly be identified as falling
within the ambit of management accounting:
(i) Financial Accounting: Management accounting is mainly concerned with the rearrangement of the
information provided by financial accounting. Hence, management cannot obtain full control and
coordination of operations without a properly designed financial accounting system.
(ii) Cost Accounting: Standard costing, marginal costing, opportunity cost analysis, differential costing
and other cost techniques play a useful role in operation and control of the business undertaking.
(iii) Revaluation Accounting: This is concerned with ensuring that capital is maintained intact in real
terms and profit is calculated with this fact in mind.
(iv) Budgetary Control: This includes framing of budgets, comparison of actual performance with the
budgeted performance, computation of variances, finding of their causes, etc.
(v) Inventory Control: It includes control over inventory from the time it is acquired till its final
disposal.
(vi) Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other statistical
methods make the information more impressive and intelligible.
(vii) Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income statements
and the related reports, cash flow and funds flow statements, scrap reports, etc.
(viii) Taxation: This includes computation of income in accordance with the tax laws, filing of returns
and making tax payments.
(ix) Office Services: This includes maintenance of proper data processing and other office
management services, reporting on best use of mechanical and electronic devices.
(x) Internal Audit: Development of a suitable internal audit system for Internal control.

FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING:
Basis for distinction FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
1 Format Financial accounts are supposed to be
in accordance with a specific format
by IAS so that financial accounts of
different organizations can be easily
compared.
No specific format is designed
for management accounting
systems.
2 Planning and
control
Financial accounting helps in making
investment decision, in credit rating.
Management Accounting
helps management to record,
plan and control activities to
aid decision-making process.
3 External Vs. Internal A financial accounting system
produces information that is used by
parties external to the organization,
such as shareholders, bank and
creditors.
A management accounting
system produces information
that is used within an
organization, by managers
and employees.
4 Focus Financial accounting focuses on
history.
Management accounting
focuses on future & Present.
5 Users Financial accounting reports are
primarily used by external users, such
as shareholders, bank and creditors.
Management accounting
reports are exclusively used
by internal users viz.
managers and employees.
6 Reporting
frequency and
duration
Well-defined - annually, semi-
annually, quarterly.
As needed - daily, weekly,
monthly.
7 Optional? Preparing financial accounting
reports are mandatory especially for
limited companies.
There are no legal
requirements to prepare
reports on management
accounting.
8 Objectives The main objectives of financial
accounting are :i) to disclose the end
results of the business, and ii) to
depict the financial condition of the
business on a particular date.
The main objectives of
Management Accounting are
to help management by
providing information that
used by management to plan,
evaluate, and control.
9 Legal/rules Drafted according to GAAP - General
Accepted Accounting Procedure.
Drafted according to
management suitability.
10 Accounting process Follows a full process of recording,
classifying, and summarizing for the
purpose of analysis and
interpretation of the financial
information.
Cost accounts are not
preserved under
Management Accounting. The
necessary data from financial
statements and cost ledgers
are analyzed.
11 Segment reporting Pertains to the entire organization or
materially significant business units.
May pertain to smaller
business units or individual
departments, in addition to
the entire organization.
12 Nature of
information
Focus on quantitative information. Focus on both qualitative and
quantitative information.

COST ACCOUNTING VS MANAGEMENT ACCOUNTING:
Basis for distinction COST ACCOUNTING MANAGEMENT ACCOUNTING
1 External Vs. Internal Cost Accounting is that branch of
accounting information system which
records, measures and reports
information about costs.
A management accounting
system produces information
that is used within an
organization, by managers and
employees.
2 Objectives The primary purpose of the Cost
Accounting is cost ascertainment and
The main objectives of
Management Accounting are
its use in decision-making
performance evaluation.
to help management by
providing information that
used by management to plan,
evaluate, and control.
3 Accounting process Cost Accounting preserves cost
accounts by maintaining double-entry
accounting process if felt necessary.
Cost Ledger is used under it.
Cost accounts are not
preserved under Management
Accounting. The necessary
data from financial statements
and cost ledgers are analyzed.

FINANCIAL ACCOUNTING VS COST ACCOUNTING:
Basis for distinction FINANCIAL ACCOUNTING COST ACCOUNTING
1 Purpose It is prepared for providing
information about the final results
of the business activities as a whole
for a particular period to its
proprietors, outsiders etc.
The main purpose of Cost
Accounting is to provide
information to the management
for the proper planning, control
and decision making.
2 Need Financial Accounts are maintained as
per the requirements of Companies
Act and Income Tax Act.
Cost accounts are maintained to,
to meet the requirements of the
Management.
3 Recording Transactions are classified, recorded
and analyzed subjectively.
In cost accounting, transactions
are classified, recorded and
analyzed objectively according to
the purpose for which costs are
incurred.
4 Analysis of profit Financial accounting reveals the
profit of a business as a whole.
Cost accounting shows the profit
made on each product, job or
process.
5 Accounting Period Financial accounts are prepared for a
definite period.
Cost reports are prepared
frequently and submitted to the
management may be daily,
weekly, etc.
6 Stock Valuation In financial accounts, stocks are
valued at cost price or market price
whichever is less.
Cost accounting stocks are valued
at cost.
7 Dealings Financial counts deal with actual
facts and figures.
In cost accounting, emphasis is on
both actual facts and estimates or
predetermined costs.
8 Relative Efficiency Financial accounts dont reveal the
relative efficiency of each
department or section.
Cost account provides
information on the relative
efficiencies of various plant and
machinery.

CONCEPTS OF COST: The term cost means the amount of expenses [actual or notional] incurred
on or attributable to specified thing or activity. As per Institute of cost and work accounts (ICWA)
India, Cost is measurement in monetary terms of the amount of resources used for the purpose of
production of goods or rendering services.

CLASSIFICATION OF COSTS: The different bases of cost classification are:
(1) By time (Historical, Pre-determined).
(2) By nature or elements (Material, Labor and Overhead).
(3) By degree of traceability to the product (Direct, Indirect).
(4) Association with the product (Product, Period).
(5) By Changes in activity or volume (Fixed, Variable, Semi-variable).
(6) By function (Manufacturing, Administrative, Selling, Research and development, Pre-production).
(7) Relationship with accounting period (Capital, Revenue).
(8) Controllability (Controllable, Non-controllable).
(9) Cost for analytical and decision-making purposes (Opportunity, Sunk, Differential, Joint, Common,
Imputed, Out-of-pocket, Marginal, Uniform, Replacement).
(10) Others (Conversion, Traceable, Normal, Avoidable, Unavoidable, Total).

1. Classification on the Basis of Time:

(a) Historical Costs: These costs are ascertained after they are incurred. Such costs are available only
when the production of a particular thing has already been done. They are objective in nature and can
be verified with reference to actual operations.

(b) Pre-determined Costs: These costs are calculated before they are incurred on the basis of a
specification of all factors affecting cost. Such costs may be:

(i) Estimated costs: Costs are estimated before goods are produced; these are naturally less accurate
than standards.

(ii) Standard costs: This is a particular concept and technique. This method involves: (a) setting up
predetermined standards for each element of cost and each product; (b) comparison of actual with
standard to find variation; (c) pin-pointing the causes of such variances and taking remedial action.
Obviously, standard costs, though pre-determined, are arrived with much greater care than
estimated costs.

2. By Nature or Elements: There are three broad elements of costs:

(1) Material: The substance from which the product is made is known as material. It can be direct as
well as indirect.

(a)Direct material: It refers to those materials which become a major part of the finished product and
can be easily traceable to the units. Direct materials include:
(i) All materials specifically purchased for a particular job/process.
(ii) All material acquired and latter requisitioned from stores.
(iii) Components purchased or produced.
(iv) Primary packing materials.
(v) Material passing from one process to another.

(b) Indirect material: All material which is used for purposes ancillary to production and which can be
conveniently assigned to specific physical units is termed as indirect materials. Examples, oil, grease,
consumable stores, printing and stationary material etc.

(2) Labor: Labor cost can be classified into direct labor and indirect labor.

(a) Direct labor: It is defined as the wages paid to workers who are engaged in the production process
whose time can be conveniently and economically traceable to units of products. For example, wages
paid to compositors in a printing press, to workers in the foundry in cast iron works etc.

( b)Indirect labor: Labor employed for the purpose of carrying tasks incidental to goods or services
provided, is indirect labor. It cannot be practically traced to specific units of output. Examples,
wages of store-keepers, foreman, time-keepers, supervisors, inspectors etc.

(3) Expenses: Expenses may be direct or indirect.

(a)Direct expenses: These expenses are incurred on a specific cost unit and identifiable with the cost
unit. Examples are cost of special layout, design or drawings, hiring of a particular tool or equipment
for a job; fees paid to consultants in connection with a job etc.

(b)Indirect expenses: These are expenses which cannot be directly, conveniently and wholly
allocated to cost centre or cost units. Examples are rent, rates and taxes, insurance, power, lighting
and heating, depreciation etc.

It is to be noted that the term overheads has a wider meaning than the term indirect expenses.
Overheads include the cost of indirect material, indirect labor and indirect expenses. overheads may
be classified as (a) production or manufacturing overheads, (b) administration overheads, (c) selling
overheads, and (d) distribution overheads.

3. By Degree of Traceability to the Products : Cost can be distinguished as direct and indirect.

(a)Direct Costs: The direct costs are those which can be easily traceable to a product or costing unit or
cost center or some specific activity, e.g. cost of wood for making furniture. It is also called traceable
cost.

(b)Indirect Costs : The indirect costs are difficult to trace to a single product or it is uneconomic to do
so. They are common to several products, e.g. salary of a factory manager. It is also called common
costs.

Costs may be direct or indirect with respect to a particular division or department. For example, all
the costs incurred in the Power House are indirect as far as the main product is concerned but as
regards the Power House itself, the fuel cost or supervisory salaries are direct. It is necessary to know
the purpose for which cost is being ascertained and whether it is being associated with a product,
department or some activity.

Direct cost can be allocated directly to costing unit or cost center. Whereas Indirect costs have to be
apportioned to different products, if appropriate measurement techniques are not available. These
may involve some formula or base which may not be totally correct or exact.

4. Association with the Product :Cost can be classified as product costs and period costs.

(a) Product Costs: Product costs are those which are traceable to the product and included in
inventory values. In a manufacturing concern it comprises the cost of direct materials, direct labor and
manufacturing overheads. Product cost is a full factory cost. Product costs are used for valuing
inventories which are shown in the balance sheet as asset till they are sold. The product cost of goods
sold is transferred to the cost of goods sold account.

(b)Period Costs: Period costs are incurred on the basis of time such as rent, salaries, etc., include many
selling and administrative costs essential to keep the business running. Though they are necessary to
generate revenue, they are not associated with production, therefore, they cannot be assigned to a
product. They are charged to the period in which they are incurred and are treated as expenses.


Selling and administrative costs are treated as period costs for the following reasons:

(i) Most of these expenses are fixed in nature.
(ii) It is difficult to apportion these costs to products equitably.
(iii) It is difficult to determine the relationship between such cost and the product.
(iv) The benefits accruing from these expenses cannot be easily established. The net income of a
concern is influenced by both product and period costs. Product costs are included in the cost of the
product and do not affect income till the product is sold. Period costs are charged to the period in
which they are incurred.

5. By Changes in Activity or Volume : Costs can be classified as fixed, variable and semi-variable cost.

(I)Fixed Costs: The Chartered Institute of Management Accountants, London, defines fixed cost as
the cost which is incurred for a period, and which, within certain output and turnover limits, tends to
be unaffected by fluctuations in the levels of activity (output or turnover). These costs are incurred
so that physical and human facilities necessary for business operations, can be provided. These costs
arise due to contractual obligations and management decisions. They arise with the passage of time
and not with production and are expressed in terms of time. Examples are rent, property-taxes,
insurance, supervisors salaries etc. It is wrong to say that fixed costs never change. These costs may
vary depending on the circumstances. The term fixed refer to non-variability related to the relevant
range. Fixed cost can be classified into the following categories for the purpose of analysis:

(a) Committed Costs: These costs are incurred to maintain certain facilities and cannot be quickly
eliminated. The management has little or no discretion in this cost, e.g., rent, insurance etc.

(b) Policy and Managed Costs: Policy costs are incurred for implementing particular management
policies such as executive development, housing, etc. Such costs are often discretionary. Managed
costs are incurred to ensure the operating existence of the company e.g., staff services.

(c) Discretionary Costs: These are not related to the operations and can be controlled by the
management. These costs result from special policy decisions, new researches etc., and can be
eliminated or reduced to a desirable level at the discretion of the management.

(d) Step Costs: Such costs are constant for a given level of output and then increase by a fixed
amount at a higher level of output.

(II)Variable Cost: Variable costs are those costs that vary directly and proportionately with the output
e.g. direct materials, direct labor. It should be kept in mind that the variable cost per unit is constant
but the total cost changes corresponding to the levels of output. It is always expressed in terms of
units, not in terms of time. Management decisions can influence the cost behavior patterns. The
concept of variability is relative. If the conditions upon which variability was determined changes, the
variability will have to be determined again.

(III) Semi-fixed (Semi-Variable) costs: Such costs contain fixed and variable elements. Because of the
variable element, they fluctuate with volume and because of the fixed element; they do not change in
direct proportion to output. Semi-variable costs change in the same direction as that of the output but
not in the same proportion. Depreciation is an example; for two shifts working the total depreciation
may be only 50% more than that for single shift working. They may change with comparatively small
changes in output but not in the same proportion.

6. Functional Classification of Costs : A company performs a number of functions. Functional costs
may be classified as follows:

(a) Manufacturing/production Costs: It is the cost of operating the manufacturing division of an
undertaking. It includes the cost of direct materials, direct labor, direct expenses, packing (primary)
cost and all overhead expenses relating to production.

(b) Administration Costs: They are indirect and covers all expenditure incurred in formulating the
policy, directing the organization and controlling the operation of a concern, which is not related to
research, development, production, distribution or selling functions.

(c) Selling and Distribution Cost: Selling cost is the cost of seeking to create and stimulate demand
e.g. advertisements, market research etc. Distribution cost is the expenditure incurred which begins
with making the package produced available for dispatch and ends with making the reconditioned
packages available for re-use e.g. warehousing, cartage etc.

It includes expenditure incurred in transporting articles to central or local storage. Expenditure
incurred in moving articles to and from prospective customers as in the case of goods on sale or
return basis is also distribution cost.

(d) Research and Development Costs: They include the cost of discovering new ideas, process,
products by experiment and implementing such results on a commercial basis.

(e) Pre-production Cost: When a new factory is started or when a new product is introduced, certain
expenses are incurred. There are trial runs. Such costs are termed as pre-production costs and treated
as deferred revenue expenditure. They are charged to the cost of future production.

7. Relationships with Accounting Period : Costs can be capital and revenue.
Capital expenditure provides benefit to future period and is classified as an asset. On the other hand,
revenue expenditure benefits only the current period and is treated as an expense. As and when an
asset is written off, capital expenses to that extent becomes cost. Only when capital and revenue is
properly differentiated, the income of a particular period can be correctly determined. It is not
possible to distinguish between the two under all circumstances.

8. Controllability : Cost can be Controllable and Non-Controllable.

(a) Controllable Cost: The Chartered Institute of Management Accountants defines controllable cost as
cost which can be influenced by its budget holder.

(b)Non-Controllable Cost: It is the cost which is not subject to control at any level of managerial
supervision. The difference between the terms is very important for the purpose of cost accounting,
cost control and responsibility accounting.

A controllable cost can be controlled by a person at a given organizational level. Controllable cost are
not totally controllable.

Some costs are partly controllable by one person and partly by another e.g., maintenance cost can be
controlled by both the production and maintenance manager. The term controllable costs is often
used to mean variable costs and non-controllable costs as fixed.

Belkaoni has mentioned the following fallacies about controllable costs:

(i) All variable costs are controllable and fixed are not.
(ii) All direct costs are controllable and indirect costs are not.
(iii) All long-term costs are controllable.

Sometimes the time factor and the decision making authority can make a cost controllable. If the time
period is long enough, all costs can be controlled. Proper delegation helps in establishing clear
responsibility and controllability. But all costs can be controlled by one or another person. The
authority and responsibility of cost control is delegated to different levels, though the managing
director is responsible for all the costs.

9. Costs for Analytical and Decision Making Purposes:

(a) Opportunity Costs: Opportunity cost is the cost of selecting one course of action and the losing of
other opportunities to carry out that course of action. It is the amount that can be received if the
asset is utilized in its next best alternative. Edwards, Hermanson and Salmonson define it as the
benefits lost by rejecting the best competing alternative to the one chosen. The benefit lost is usually
the net earnings or profit that might have been earned from the rejected alternative

Example: Capital is invested in plant and machinery. It cannot be now invested in shares or
debentures. The loss of interest and dividend that would be earned is the opportunity cost. Another
example is when the owner of a business foregoes the opportunity to employ himself elsewhere.

Opportunity costs are not recorded in the books. It is important in decision making and comparing
alternatives.

(b) Sunk Costs: A sunk cost is one that has already been incurred and cannot be avoided by decisions
taken in the future. As it refers to past costs, it is called unavoidable cost.

The National Association of Accountants (USA) defines a sunk cost as an expenditure for equipment
or productive resources which has no economic relevance to the present decision making process.
This cost is not useful for decision making as all past costs are irrelevant. CIMA defines it as the past
cost not taken into account in decision making. It has also been defined as the difference between
the purchase price of an asset and its salvage value.

(c) Differential Cost: Differential cost has been defined as the difference in total cost between
alternatives, calculated to assist decision making. Differential cost is the increase or decrease in total
costs resulting out of:

(a) Producing and distributing a few more or few less of products;
(b) A change in the method of production/distribution;
(c) An addition or deletion of a product or a territory; and
(d) The selection of an additional sales channel.

The differential cost between any two levels of production is the difference between the marginal
costs at these two levels and the increase or decrease in fixed costs, if any. These costs are usually
specific purpose costs as they are determined for a particular purpose and under specific
circumstances.

Incremental cost measures the addition in unit cost for an addition in output. This cost need not be
the same at all levels of production. It is usually expressed as a cost per unit whereas the
differential cost is measured in total. The former applies to increase in production and is restricted to
the cost only, whereas the differential cost has a comprehensive meaning and application in the
sense that it denotes both increase or decrease.

Differential costs is useful in planning and decision making and helps to choose the best alternative.
It helps management to know the additional profit that would be earned if idle capacity is used or
when additional investments are made.

(d) Joint Costs: The processing of a single raw material results in two or more different products
simultaneously. The joint products are not identifiable as different types of product until a certain
stage of production known as the split-off point is reached. Joint costs are the costs incurred up to
the point of separation. One product may be of major importance and others of minor importance
which are called by-products.

Bierman and Djckman define it as: Joint costs relate to a situation in which the factors of production
by their basic nature result in two or more products. The jointness results from there being more than
one product, and these multi-products are the result of the methods of production or the nature of
raw material and not of a decision by management to produce both.

The National Association of Accountants defines it as follows: Joint costs relate to two or more
products produced from a common production process or element-material, labor or overhead or any
combination thereof or so locked together that one cannot be produced without producing the
other.

Joint costs can be apportioned to different products only by adopting a suitable basis of
apportionment.

(e) Common Costs: Common costs are those costs which are incurred for more than one product, job,
territory or any other specific costing object. They are not easily related with individual products and
hence are generally apportioned. The National Association of Accountants defines the term as the
cost of services employed in the creation of two or more outputs which is not allocable to those
outputs on a clearly justified basis. It should be kept in mind that management decisions influence
the incurrence of common costs e.g. rent of the factory is a common cost to all departments located in
factory.

(f) Imputed Costs: Some costs are not incurred and are useful while taking decision pertaining to a
particular situation. These costs are known as imputed or notional costs and they do not enter into
traditional accounting systems. Examples: Interest on internally generated funds, salaries of owners
of proprietorship or partnership, notional rent etc.

(g) Uniform Costs: They are not distinct costs as such. Uniform costing signifies common costing
principles and procedures adopted by a number of firms. They are useful in inter-firm comparison.

(h) Marginal Costs: It is the aggregate of variable costs, i.e., prime cost plus variable overheads. Thus,
costs are classified as fixed and variable.

(i) Replacement Costs: This is the cost of replacing an asset at current market values e.g. when the
cost of replacing an asset is considered, it means the cost of purchasing the asset at the current
market price is important and not the cost at which it was purchased.

(j) Out of Pocket Cost: It involves payment to outsiders i.e. gives rise to Cash Expenditure as
opposed to such costs as depreciation which dont involve any cash expenditure. Such costs are
relevant for price fixation during recession or when make or buy decision is to be made.

10. Other Costs :

(i) Conversion Cost: It is the cost of a finished product or work-in-progress comprising direct labor
and manufacturing overhead. It is production cost less the cost of raw material but including the
gains and losses in weight or volume of direct material arising due to production.

(ii) Normal Cost: This is the cost which is normally incurred at a given level of output in the conditions
in which that level of output is achieved.

(iii) Traceable Cost: It is the cost which can be easily associated with a product, process or
department.

(iv) Avoidable Costs: Avoidable costs are those costs which under the present conditions need not
have been incurred. Example: (a) Spoilage in excess of normal limit; (b) Unfavorable cost variances
which could have been controlled.

(v) Unavoidable Costs: Unavoidable costs are those costs which under the present conditions must
be incurred.

(vi) Total Cost: This is the sum of all costs associated to a particular unit, or process, or department or
batch or the entire concern. It may also mean the sum total of material, labor and overhead. The
term total cost however, is not precise, it needs to be made precise by using terms that indicate the
elements of cost included.

(vii) Value Added: Strictly, it is not cost. It means the selling price of the product/service less the cost
of materials used in the product or the service. Often depreciation is also deducted for ascertaining
value added.


CLASSIFICATION OF COST ON THE BASIS OF:
Nature (or)
Elements
Function Variability Normality Decision_ making &
Controllability
(1)Material
Cost
(1)Production
Cost
(1)Fixed Cost (1)Normal Cost (1)Controllable Cost
(2)Labor
Cost
(2)Administration
Cost
(2)Variable
Cost
(2)Abnormal Cost (or)
Semi-Fixed Cost
(2)Uncontrollable
Cost
(3)Other
Expenses
(3)Selling Cost (3)Semi-
Variable Cost
(3)Sunk Cost
(4)Distribution
Cost
(4)Opportunity Cost
(5)Replacement Cost
(6)Conversion Cost
Basic Cost Concepts: To get the results we make efforts. Efforts constitute cost of getting the
results. It can be expressed in terms of money; it means the amount of expenses incurred on or
attributable to some specific thing or activity. The term cost is used in this very form. In reference to
production/manufacturing of goods and services cost refers to sum total of the value of resources
used like raw material and labor and expenses incurred in producing or manufacturing of given
quantity.

Elements of cost: Cost of production/manufacturing consists of various expenses incurred on
production/manufacturing of goods or services. These are the elements of
cost which can be divided into three groups: (1) Material, (2) Labor and (3) Expenses.

(1)Material: To produce or manufacture material is required. For example to manufacture shirts cloth
is required and to produce flour wheat is required. All material which becomes an integral part of
finished product and which can be conveniently assigned to specific physical unit is termed as Direct
Material. It is also described as raw material, process material, prime material, production material,
stores material, etc. The substance from which the product is made is known as material. It may be in
a raw or manufactured state. Material is classified into two categories:

(a)Direct Material: Direct Material is that material which can be easily identified and related with
specific product, job, and process. Timber is a raw material for making furniture, cloth for making
garments, sugarcane for making sugar, and Gold/ silver for making jewellery, etc are some examples
of direct material.

(b)Indirect Material: Indirect Material is that material which cannot be easily and conveniently
identified and related with a particular product, job, process, and activity. Consumable stores, oil and
waste, printing and stationery etc, are some examples of indirect material. Indirect materials are used
in the factory, the office, or the selling and distribution department.

(2)Labor: Labor is the main factor of production. For conversion of raw material into finished goods,
human resource is needed, and such human resource is termed as labor. Labor cost is the main
element of cost in a product or service. Labor can be classified into two categories:
(a) Direct Labor: Labor which takes active and direct part in the production of a commodity. Direct
labor is that labor which can be easily identified and related with specific product, job, process, and
activity. Direct labor cost is easily traceable to specific products. Direct labor costs are specially and
conveniently traceable to specific products. Direct labor varies directly with the volume of output.
Direct labor is also known as process labor, productive labor, operating labor, direct wages,
manufacturing wages, etc. Cost of wages paid to carpenter for making furniture, cost of a tailor in
producing readymade garments, cost of washer in dry cleaning unit are some examples of direct
labor.

(b) Indirect Labor: Indirect labor is that labor which cannot be easily identified and related with
specific product, job, process, and activity. It includes all labor not directly engaged in converting raw
material into finished product. It may or may not vary directly with the volume of output. Labor
employed for the purpose of carrying out tasks incidental to goods or services provided is indirect
labor. Indirect labor is used in the factory, the office, or the selling and distribution department.
Wages of store-keepers, time-keepers, salary of works manager, salary of salesmen, etc, are all
examples of indirect labor cost.

(3)Expenses: All cost incurred in the production of finished goods other than material cost and labor
cost are termed as expenses. Expenses are classified into two categories:
(a)Direct expenses: These are expenses which are directly, easily, and wholly allocated to specific cost
center or cost units. All direct cost other than direct material and direct labor are termed as direct
expenses. Direct expenses are also termed as chargeable expenses. Some examples of the direct
expenses are hire of special machinery, cost of special designs, moulds or patterns, feed paid to
architects, surveyors and other consultants, inward carriage and freight charges on special material,
Cost of patents and royalties.

Note: (1) Cost center means a location, person, or item of equipment or group of these for which costs
may be ascertained and used for the purpose of cost control.
2. Cost object is anything for which a separate measurement of cost is desired. It may be a product,
service, project, or a customer.

(b)Indirect expenses (An item of overheads): These expenses cannot be directly, easily, and wholly
allocated to specific cost center or cost units. All indirect costs other than indirect material and
indirect labor is termed as indirect expenses. Thus,
Indirect Expenses = Indirect cost Indirect material Indirect labor
Indirect expenses are treated as part of overheads. Rent, rates and taxes of building, repair, insurance
and depreciation on fixed assets, etc, are some examples of indirect expenses.

OVERHEADS: MEANING: The term overhead has a wider meaning than the term indirect expenses.
Overheads include the cost of indirect material, indirect labor and indirect
expenses. This is the aggregate sum of indirect material, indirect labor and
indirect expenses.
Overhead = Indirect material + Indirect labor + Indirect expenses
Overheads are classified into following three categories:
(1)Factory/works/ production overheads: All indirect costs incurred in the factory for production of
goods are termed as factory/works overheads. Such costs are concerned with the running of the
factory or plant. These include indirect material, indirect labor and indirect expenses incurred in the
factory. Some examples are as follows:
(a)Indirect materials:
i. Grease, oil, lubricants, cotton waste etc.
ii. Small tools, brushes for sweeping, sundry supplies etc.
iii. Cost of threads, gum, nails, etc.
iv. Consumable stores
v. Factory printing and stationery
(b)Indirect wages:
i. Salary of factory manager, foremen, supervisors, clerks etc.
ii. Salary of storekeeper
iii. Salary and fee of factory directors and technical directors
iv. Contribution to ESI, PF., Leave pay etc. of factory employee.
(c)Indirect expenses:
i. Rent of factory buildings and land
ii. Insurance of factory building, plant, and machinery
iii. Municipal taxes of factory building
iv. Depreciation of factory building, plant & machinery, and their repairs & maintenance charges
v. Power and fuel used in factory
vi. Factory telephone expenses.

(2)Office and administrative overheads: These expenses are related to the management and
administration of the business. They are incurred for the direction and control of an undertaking.
These represent the aggregate of the cost of indirect material, indirect labor, and indirect expenses
incurred by the office and administration department of an organization. Some examples are as
follows: Office printing and stationery, Cost of brushes, dusters etc. for cleaning office building and
equipments, Postage and stamps. Salary of office manager, clerks, and other employees, Salary of
administrative directors, Salaries of legal adviser, Salaries of cost accountants and financial
accountants, Salary of computer operator. Rent, insurance, rates and taxes of office building, Office
lighting, heating and cleaning, Depreciation and repair of office building, furniture, and Equipment
etc., Legal charges, Bank charges, Trade subscriptions, Telephone charges, Audit fee etc.
(3)Selling and distribution overheads: Selling and distribution overheads are incurred for the
marketing of a commodity, for securing order for the articles, dispatching goods sold or for making
efforts to find and retain customers. These expenses represent the aggregate of indirect material,
indirect labor, and indirect expenses incurred by the selling and distribution department of the
organization. These overheads have two aspects (i) procuring orders (ii) executing the order. Based
upon this concept the selling and distributions are studied separately.
I. Selling overheads: Indirect costs incurred in relation to the procurement of sale orders are
termed as selling overheads. Some of the examples of selling overheads are as follows:


(1)Indirect material:
(i) Catalogues, price list
(ii) Printing and stationery
(iii) Postage and stamps
(iv) Cost of sample
(2)Indirect wages:
(i) Salaries of sales managers, clerks and other employees
(ii) Salaries and commission of salesmen and technical representatives
(iii) Fees of sales directors
(3)Indirect expenses:
(i) Advertising
(ii) Bad debts
(iii) Rent and insurance of showroom
(iv) Legal charges incurred for recovery of debts
(v) Travelling and entertainment expenses
(vi) Expenses of sending samples
(vii) Market research expenses.

II. Distribution overheads: Indirect costs incurred in relation to the execution of the sales order is
termed as distribution overheads. Some of the examples of distribution overheads are as follows:

(1)Indirect material:
(i) Cost of packing material
(ii) oil, grease, spare parts etc. for maintaining delivery vans
(2)Indirect wages:
(i) Salaries of go down employees
(ii) Wages of drivers of delivery vans
(iii) Wages of packers and dispatch staff.
(3)Indirect expenses:
(i) Packing expenses
(ii) Go down rent, insurance, depreciation, and repair etc.
(iii) Freight carriage outwards and other transport charges.
(iv) Running expenses of delivery vans, repair, and depreciation.
(v) Insurance in transit etc.

CLASSIFICATION OF COST: Costs are classified into following categories:
1. Cost behavior basis 2. Cost inventory basis 3. Cost Relation to Cost Centre basis
(a) Fixed Cost (a) Product cost (a) Direct costs
(b) Variable cost (b) Period cost (b) Indirect costs
(c) Semi-variable cost

1. Cost behavior basis:
(a) Fixed Cost (FC): A cost that remains constant within a given period of time and range of activity
in spite of fluctuations in production. Per unit fixed cost varies with the change in the volume of
production. If the production increases fixed cost per unit decreases and as there is decrease in
production, the fixed cost per unit increases. Rent and insurance of building, depreciation on plant
and machinery, salary of employees etc., are some examples of fixed costs. The fixed cost per unit
decreases as the total number of output units increase.

(b) Variable cost (VC): Variable costs are those cost which vary directly in proportion to change in
volume of production/output. The cost which increases or decreases in the same proportion in which
the units produced is termed as variable cost. Direct material, direct labor, direct expenses, variable
overheads are some examples of variable cost.



Variable costs, per unit same but total goes on fluctuating depending upon volume of
production/level of activity.

The variable cost per unit same and does not change if the total number of output units increases.

(c) Semi-variable cost: A cost contains both fixed and variable component and which is thus partly
affected by fluctuations in the level of activity. Semi-variable costs is that cost of which some part
remains fixed at the given level of production and other part varies with the change in the volume of
production but not in the same proportion of change in production. For example, expenses may not
change if output is up to 50% capacity but may increase by 5% for every 20% increase in output over
50% but up to 70%. For example, Telephone expenses of which rent portion is fixed and call charges
are variable.

Segregation of semi-variable cost: Semi-variable costs are segregated into fixed and variable cost by
using the following formula:
Semi-variable cost = Fixed cost + variable cost
Variable cost per unit = change in cost/change in output

2. Costs by inventory: Product cost and period cost:

(a)Product costs are those cost which are charged and identified with the product and included in
stock value. In other words, the costs that are the cost of manufacturing a product are called product
cost. Product cost includes direct material, direct labor, direct expenses, and manufacturing
overheads.
(b)Period costs are those costs which are not charged to products but are written off as expenses
against revenue of the period during which these are incurred. They are not transferred as a part of
value of stock to the next accounting year. They are charged against the revenue of the relevant
period. Period costs include all fixed costs and total administration, selling and distribution costs.

3. Cost Relation to Cost Centre: Direct and Indirect costs:
All costs are subdivided into direct and indirect costs. The concept of direct and indirect cost is of basic
importance in costing. Costs which are easily and directly allocated to products or units are termed as
direct cost. Direct costs include all traceable costs. In the process of manufacturing of a product,
materials are purchased, wages are paid to labor, and certain other expenses are also incurred
directly. All these expenses are called as direct costs.
The expenses incurred on those items which are not directly charged to a single product because they
are incurred for many products are termed as indirect Costs. The example of indirect costs are Oil and
scrap materials, [indirect materials], salary of factory supervisors [indirect labor], rent rates and
depreciation [indirect expenses]. Indirect costs often referred to as overheads have to be apportioned
to different products on suitable criterion/criteria.

EXPENSES EXCLUDED FROM COSTING: The following items of expenses are excluded from
computation of total cost:
(1)Capital expenditure/ Capital losses:
(a)Purchase of fixed assets such as plant and machinery, land and building, etc.
(b)Loss on sale of fixed assets
(c)Abnormal losses
(d)Preliminary expenses
(e)Patents written-off, etc.
(2)Transfer to reserves
(3)Income Tax paid
(4)Dividend paid
(5)Bonus paid to shareholders
(6)Financial items include cash discount, interest in debentures, interest on loans, interest on own
capital etc.
(7)Any appropriation of profits.


COST SHEET (OR) STATEMENT OF COST: Cost Sheet or a Cost Statement is a document which
provides for the assembly of the estimated detailed elements of cost in respect of cost centre or a cost
unit. The analysis for the different elements of cost of the product is shown in the form of a
statement called Cost Sheet.


The statement summarizes the cost of manufacturing a particular list of product and discloses for a
particular product:

(I)Prime Cost: Prime Cost is also called as Direct Cost of First Cost or Flat Cost. It consists of direct
material, direct labor and direct expense. These costs can be easily identifiable with the products.


Prime Cost = Direct Materials Costs + Direct Labors Costs + Direct Expenses



(II)Works Cost (or) Factory Costs: This cost is also known as, Works Costs (or) Production Costs (or)
Manufacturing Costs. It consists of the total of all items of expenses incurred in the manufacturing of a
product. In other words, it comprises of prime cost plus factory overheads.


Works Cost (or) Factory Costs = Prime Cost + Factory Overheads



SPECIMEN OF COST SHEET: Cost Sheet for the period
Particulars Total Cost (Rs.) Cost per Unit (Rs.)
Direct Materials:
Opening Stock of Raw Materials XXXXX
Purchases XXXXX
Carriage Inwards XXXXX
Less: Closing Stock of Raw Materials XXXXX
Direct Materials Consumed XXXXX
Add: Direct Wages XXXXX
Direct Expenses XXXXX
Prime Cost [1] XXXXX XXXXX
Add: Works or Factory Overheads: XXXXX XXXXX
Indirect Materials
Indirect Labor
Factory , Rent and Rates
Factory, Lighting and Heating
Power and Fuel
Repairs and Maintenance
Cleaning
Drawing Office Expenses
Cost of Research and Equipments
Depreciation of Factory Plant
Factory Stationery
Insurance of Factory
Factory or Works Managers Salary
Other Factory Expenses XXXXX XXXXX
Total Factory Cost XXXXX XXXXX
Add: Opening Stock of Work-in-Progress
Less: Closing Stock of Work-in-Progress
Works Cost (or) Factory Cost [2]
Add: Office and Administrative Overheads:
Office, Rent and Rates
Office Salaries
Lighting and Heating
Office Stationery
Office Insurance
Postage and Telegrams
Office Cleaning
Legal Charges
Depreciation of Furniture and Office
Equipments and Buildings Audit Fees XXXXX XXXXX
Bank Charges and Commission XXXXX XXXXX
Total Cost of Production [3] XXXXX
Add: Opening Stock of Finished Goods XXXXX XXXXX
Less: Closing Stock of Finished Goods XXXXX
Cost of Production [4] XXXXX XXXXX
Add: Selling and Distribution Overheads:
Showroom Rent and Rates
Salesmens Salaries
Salesmens Commission
Sales Office , Rent and Rates
Travelling Expenses of Salesmen
Warehouse Rent and Rates
Advertisement Expenses
Warehouse Staff Salaries
Carriage Outwards
Sales Managers Salaries
Repairs and Depreciation of Delivery Van
Sample and Free Gifts
Bad Debts, Debt Collection Expenses XXXXX XXXXX
Cost of Sales [5] XXXXX
Profit / Loss [6] XXXXX
Sales XXXXX


(III)Cost of Production: If office and administrative overheads are added to factory costs (or) works
costs , cost of production is arrived at. In other words, cost of production includes factory cost and
office and administrative overheads. This cost is also known as, Office on Cost (or) Administration
Cost.



Cost of Production = Factory Cost + Office and Administrative Overheads



(IV)Total Cost (or) Cost of Sales: Cost of Sales is also known as Total Cost. It represents cost of
production plus selling and distribution expenses incurred for a particular product. In other words,
total cost is ascertained by adding selling and distribution overheads to cost of production of goods
sold. When profit is added to the cost of sales, sales can be arrived at. In practice, the selling price is
fixed for a particular product on the basis of cost of sales.


Total Cost (or) Cost of Sales = Cost of Production + Selling and Distribution Overheads


COMPONENTS OF TOTAL COST: The components of Cost Sheet also forms the components of total
cost , as summarized below:
Stage Components Arrived at
I Direct Materials + Direct Labor + Direct Expenses Prime Cost (or) Direct Cost
II Prime Cost + Works Overheads (or) Factory Overheads Factory Cost (or) Works Cost
(or) Manufacturing Cost
III Works Cost + Office Overheads + Administrative
Overheads
Cost of Production
IV Cost of Production + Selling Expenses + Distribution
Expenses
Total Cost (or) Cost of Sales
V Total Cost or Cost of Sales +Profit or Loss Sales /Selling Price

Note: If profit percentage is given on sales, it must be converted to percentage on cost. For example, if
profit is 10% on sales, it indicates sale is 100% , profit is 10%. The cost of the product is = 100 -10 = 90.
Therefore, Profit to cost = 10/90 = 11.11 %.

TREATMENT OF STOCK (OR) INVENTORIES: While preparing a cost statement it is essential to require a
special treatment of stock. Stock may be grouped as raw materials, work-in-progress and finished
goods.
(I) STOCK OF RAW MATERIALS: When opening stock of raw materials, purchases of raw materials and
closing stock of raw materials are given, the raw materials consumed during a particular period can be
calculated with the help of the following:
COST OF RAW MATERIALS CONSUMED:
Opening Stock of Raw Materials XXXXX
Add: Purchase of Raw Materials XXXXX
XXXXX
Less: Purchase Returns XXXXX
XXXXX
Add: Carriage Inwards XXXXX
Taxes and duties on materials purchased XXXXX
XXXXX
Less: Closing Stock of Raw Materials XXXXX
Cost of Raw Materials Consumed XXXXX
(2)STOCK OF WORK-IN-PROGRESS: Work-in-progress is otherwise called as, Semi-Finished Goods. In
other words, work-in-progress means the units of production on which some work has been done but
which are not yet completely finished. Work-in-progress is valued or prime cost nor work cost basis,
but the latter is preferred. If it is valued at works (or) factory cost then the opening and closing stock
of work-in-progress are adjusted as given below:
COST OF PRODUCTION (FACTORY COST) (OR) WORKS COST (OR) MANUFACTURING COST:
Prime Cost XXXXX
Add: Factory Overheads XXXXX
XXXXX
Add: Opening Stock of Work-in-Progress XXXXX
XXXXX
Less: Closing Stock of Work-in-Progress XXXXX
Cost of Production (Factory Cost) (or) Works Cost (or) Manufacturing Cost XXXXX
(3)STOCK OF FINISHED GOODS: If opening and closing stock of finished goods are given , they are to be
adjusted before calculating cost of goods sold.
COST OF GOODS SOLD:
Cost of Production XXXXX
Add: Opening Stock of Finished Goods XXXXX
XXXXX
Less: Closing Stock of Finished Goods XXXXX
Cost of Goods Sold XXXXX

METHODS OF COSTING: The general fundamental principles of ascertaining costs are the same in
every system of cost accounting, but the methods of analysis and presenting the costs vary from
industry to industry. Different methods are used because business enterprises vary in their nature and
in the type of products or services they produce or render.

(1)Job Costing :It refers to a system of costing in which costs are ascertained in terms of specific jobs
or orders which are not comparable with each other. Industries where this method of costing is
generally applied are printing press, automobile garage, repair shop, ship-building, house building,
engine and machine construction, etc.

(2)Contract Costing: Although contract costing does not differ in principle from job costing, it is
convenient to treat contract cost accounts separately. The term is usually applied to the costing
method adopted where large scale contracts at different sites are carried out, as in the case of
building construction.
(3)Batch Costing : This method is also a type of job costing. A batch of similar products is regarded as
one job and the cost of this complete batch is ascertained. It is then used to determine the unit cost
of the articles produced. It should, however, be noted that the articles produced should not lose their
identity in manufacturing operations.
(4)Terminal Costing :This method is also a type of job costing. This method emphasizes the essential
nature of job costing, i.e. the cost can be properly terminated at some point and related to a
particular job.
(5)Operation Costing :This method is adopted when it is desired to ascertain the cost of carrying out
an operation in a department, for example, welding. For large undertakings, it is frequently necessary
to ascertain the cost of various operations.
(6)Process Costing :Where a product passes through distinct stages or processes, the output of one
process being the input of the subsequent process, it is frequently desired to ascertain the cost of
each stage or process of production. This is known as process costing. This method is used where it is
difficult to trade the item of prime cost to a particular order because its identity is lost in volume of
continuous production. Process costing is generally adopted in textile industries, chemical industries,
oil refineries, soap manufacturing, paper manufacturing, tanneries, etc.
(7)Unit or Single or Output or Single-output Costing :This method is used where a single article is
produced or service is rendered by continuous manufacturing activity. The cost of whole production-
cycle is ascertained as a process or series of processes and the cost per unit is arrived at by dividing
the total cost by the number of units produced. The unit of costing is chosen according to the nature
of the product. Cost statements or cost sheets are prepared under which various items of expenses
are classified and the total expenditure is divided by total quantity produced in order to arrive at unit
cost of production. This method is suitable in industries like brick-making, collieries, flour mills,cement
manufacturing, etc. This method is useful for the assembly department in a factory producing a
mechanical article e.g., bicycle.
(8)Operating Costing :This method is applicable where services are rendered rather than goods
produced. The procedure is same as in the case of single output costing. The total expenses of the
operation are divided by the units and cost per unit of service is arrived at. This method is employed
in railways, road transport, water supply undertakings, telephone services, electricity companies,
hospital services, municipal services, etc.
(9)Multiple or Composite Costing: Some products are so complex that no single system of costing is
applicable. It is used where there are a variety of components separately produced and subsequently
assembled in a complex production. Total cost is ascertained by computing component costs which
are collected by job or process costing and then aggregating the costs through use of the single or
output costing system. This method is applicable to manufacturing concerns producing motor cars,
aeroplanes, machine tools, type-writers, radios, cycles, sewing machines, etc.
(10)Departmental Costing :When costs are ascertained department by department, the method is
called Departmental Costing. Usually, for ascertaining the cost of various goods or services
produced by the department, the total costs will have to be analyzed, say, by the use of job costing or
unit costing.

TECHNIQUES OF COSTING :The following techniques of costing are used by the management for
controlling costs and making managerial decisions:

(1)Historical (or Conventional) Costing :It refers to the determination of costs after they have been
actually incurred. It means that cost of a product can be calculated only after its production. This
system is useful only for determining costs, but not useful for exercising any control over costs. It can
serve as a guidance for future production only when conditions continue to be the same in future.

(2)Standard Costing :It refers to the preparation of standard costs and applying them to measure the
variations from standard costs and analyzing the variations with a view to maintain maximum
efficiency in production. What is done in this case is that costs of each article are determined before-
hand under current and anticipated conditions, but sometimes they are determined before-hand
under normal or ideal conditions. Then actual costs are compared with the pre-determined costs and
deviations known as variances are noted down. Thereafter, the reasons for the variances are
ascertained and necessary steps are taken to prevent their recurrence.

(3)Marginal Costing :It refers to the ascertainment of marginal costs by differentiating between fixed
costs and variable costs and the effect on profit of the changes in volume or type of output. In this
case, only the variable costs are charged to products or operations while fixed costs are charged to
profit and loss account of the period in which they arise.

(4)Uniform Costing :A technique where standardized principles and methods of cost accounting are
employed by a number of different companies and firms, is termed as uniform costing. This helps in
comparing performance of one firm with that of another.

(5)Direct Costing :The practice of charging all direct costs to operations, process or products leaving
all indirect costs to be written off against profits in the period in which they arise, is termed as direct
costing.

(6)Absorption Costing :The practice of charging all costs both variable and fixed to operation, process
or products or process is termed as absorption costing.

(7)Activity Based Costing :In a business organization, Activity-Based Costing (ABC) is a method of
assigning the organization's resource costs through activities to the products and services provided to
its customers. It is defined as a technique of cost attribution to cost units on the basis of benefits
received from indirect activities, e.g. ordering, setting up, assuring quality. ABC involves identification
of costs with each cost driving activity and making it as the basis of apportionment of costs over
different products or jobs on the basis of the number of activities required for their completion. It is
basically used for apportionment of overheads costs in an organization having products that differ in
volume and complexity of production. Under this technique, the overhead costs of the organization
are identified with each activity which is acting as a cost driver i.e. the cause for incurrence of
overhead cost. Such cost drivers may be purchase orders issued, quality inspections, maintenance
requests, material receipts, inventory movements, power consumed, machine time, etc. Having
identified the overhead costs with each cost centre, cost per unit of cost driver can be ascertained.
The overhead costs can be assigned to jobs on the basis of number of activities required for their
completion. This is generally used as a tool for understanding product and customer cost and
profitability. As such, ABC has predominately been used to support strategic decisions such as pricing,
outsourcing and identification and measurement of process improvement initiatives. ABC principles
are used: (i) to focus management attention on the total cost to produce a product or service, and (ii)
as the basis for full cost recovery. Support services are particularly suitable for activity-based
resourcing because they produce identifiable and measurable units of output.

Activity-Based Costing encourages managers to identify which activities are value addedthose that
will best accomplish a mission, deliver a service, or meet a customer demand. It improves operational
efficiency and enhances decision-making through better, more meaningful cost information.