Lecture # 1

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 Cost ????????????

Cost Accounting
Accounting
Account record of events

ing on-going process

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 Accounting
The systematic recording, reporting, and analysis of financial transactions of a business. The
person in charge of accounting is known as an accountant, and this individual is typically
required to follow a set of rules and regulations. Accounting allows a company to analyze the
financial performance of the business, and look at statistics such as net profit.

FINANCIAL MANAGEMENT
ACCOUNTING ACCOUNTING

Its focus is on reporting to external parties,

It measures and records business It measures and reports financial and
transactions, It provides financial non-financial information that helps
statements based on generally accepted managers make decisions to fulfill the
accounting principles. goals of an organization.

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 Major Differences Between
Financial & Managerial Accounting
Financial Accounting Managerial Accounting

Communicate financial position to

Purpose Decision making
outsiders

Internal managers who plan for & control

Primary Users External users make fin. Decisions
an organization

Focus/Emphasis Past /Historical -oriented Future-oriented

Objective financial information

Types of Information Financial and non financial information

Ultra current to very long

Time Span Historical monthly, quarterly reports
time horizons

Indirect effects on
Behavioral Issues Designed to influence employee behavior
employee behavior

Requirement Mandatory for external reports Not Mandatory

Recorder Keeping Formal Formal and informal

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Relationship of Financial, Management, and
Cost Accounting

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTING ACCOUNTING

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Cost Accounting?
 It provides information for both management
accounting and financial accounting.

 It measures and reports financial and non-financial

data.

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How Cost Accountant can play
effective role to achieve
predetermined objectives of
company.

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Cost????

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M. Naveed Alam 9
What is a Cost?
Cost
is a resource sacrificed or forgone to achieve a specific objective.

Outlay Cost Opportunity Cost

past, present, or forgone benefit
future cash from best
outflow alternative
course of action

Expense

Cost charged against revenue

in an accounting period

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Cost Example
Your education costs???MBA???

Outlay Cost Opportunity Cost

The cost The Rs15,000

of tuition you could
earn from a
job

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Cost, Expenses & Assets
 Defines cost as the monetary value of goods and services
expended to obtain current or future benefits

 Expenses are the costs of goods or services that have

expired. i.e., used up in the process of creating goods or
services

 Costs incurred to receive future benefits are recorded as

assets

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Cost vs Expense?
 A cost might be an expense or it might be an asset. An expense is a cost that has expired or
was necessary in order to earn revenues. We hope the following three examples will illustrate
the difference between a cost and an expense.

A company has a cost of $6,000 for property insurance covering the next six months. Initially
the cost of $6,000 is reported as the current asset Prepaid Insurance. However, in each of the
following six months, the company will report Insurance Expense of $1,000—the amount that
is expiring each month. The unexpired portion of the cost will continue to be reported as the
asset Prepaid Insurance.

The cost of equipment used in manufacturing is initially reported as the long lived asset
Equipment. However, in each accounting period the company will report part of the asset's
cost as Depreciation Expense.

A retailer's purchase of merchandise is initially reported as the current asset Inventory. When
the merchandise is sold, the cost of the merchandise sold is removed from Inventory and is
reported on the income statement as the expense entitled Cost of Goods Sold.

The matching principle guides accountants as to when a cost will be reported as an expense.
http://www.accountingcoach.com/blog/cost-expense-2
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Expense vs Assets ?
 Assets provide a future benefit to your business. They help bring in future
revenues and profits. Assets appear on the balance sheet. ~
 For example, inventory is an asset.
 Expenses are the cost of bringing in revenues. They were needed to bring in the
revenues and profits that you reported this year. Expenses appear on the income
statement.
 For example, just as inventory is an asset, “cost of goods sold” is an expense. This is the cost of
inventory that was sold during the year.
 The difference is really one of timing. An asset is expected to bring in a benefit
sometime in the future. When the benefit comes in, then the asset becomes an
expense.
 As it is sold, inventory is moved out of the inventory account on the balance sheet, and into the
cost of goods sold account on the balance sheet.
 Sometimes, an asset can lose value without ever providing a benefit. This would
be considered a loss, which is, like an expense, deducted in the income
statement.
 Suppose inventory is somehow damaged or rendered obsolete. Then it would be recorded as a loss
on the income statement.
 http://accountinator.com/2012/05/04/assets-vs-expenses/ M. Naveed Alam 14
Overview of Cost Classifications

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 Cost Classification for Cost Traceability
Direct costs Indirect costs
Costs that can be  Costs that cannot be easily and
easily and conveniently traced to a conveniently traced to a unit of
unit of product or other cost object. product or other cost object.

Examples: direct material and direct  Example: manufacturing overhead

labor
Sports magazine Paper on which Sports  Sports magazine Lease cost for Time-
Illustrated magazine is printed Warner building housing the senior
editors of its magazine

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Overview of Cost Classifications

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Variable

Fixed

Mixed

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Total Fixed Cost
Total fixed costs remain unchanged
when activity changes.
Monthly Line Rent

Your monthly Line Rent

Probably does not
change when
Number of Local Calls you make more local calls.

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 All Night
F&F
Fixed Cost Per Unit
Fixed costs per unit decline
as activity increases.

Your average cost per Monthly line rent per Call

call decreases as more calls
are made- line rent is fixed
Number of Calls
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 Per
Unit
Total Variable Cost Rate

Total variable costs change

when activity changes.
Telephone Bill
Total

Your total
telephone bill is based
on how many minutes
Minutes Talked you talk.

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Variable Cost Per Unit
Variable costs per unit do not change
as activity increases.

Telephone Charge
Per Minute
The cost per
minute talked is constant.
For example, 0.65 Rs.
per minute. Minutes Talked
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 Rental Metro
Generator Rent-A Car
Mixed Costs
Mixed costs contain a fixed portion that is
incurred even when facility is unused, and a
variable portion that increases with usage.
Example: monthly electric utility charge
 Fixed service fee
 Variable charge per
kilowatt hour used

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Cost Classifications for Predicting Cost Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.

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Quick Check 
Which of the following costs would be variable with respect
to the number of cones sold at a Baskins & Robbins shop?
(There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

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Quick Check 
Which of the following costs would be variable with respect
to the number of cones sold at a Baskins & Robbins shop?
(There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

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Overview of Cost Classifications

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Cost Classification for Value-Adding Attributes
Value-adding cost Non-value-adding cost
 The cost of an activity that increases  The cost of an activity that adds cost to
the market value or quality of a product a product or service but does not
or service are value-adding only if the increase its market value are non-value-
customer is willing to pay more for the adding costs because they do not
higher-quality product. increase the product’s market value in
the eyes of customer

 Example – Depreciation of a machine  Example – Depreciation of a car used by

that shapes a part used in the final the sales department.
product.
 Administrative activities (such as
accounting and human resources) are
non-value-adding costs but, are
necessary for the operation of the
business and cannot be eliminated.

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Overview of Cost Classifications

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 Cost Classification for Financial Reporting
Product costs Period costs
 Costs assigned to inventory  Costs of resources used during the
 Include direct materials, direct accounting period
labor, and manufacturing overhead  Include selling and administrative
 Also called inventoriable costs costs
 Also called noninventoriable costs

 Financial reporting of product  Financial reporting of period

costs costs
 Income statement  Income statement
 Appear as cost of goods sold  Appear as operating expenses
 Balance sheet
 Appear as finished goods
inventory

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Quick Check 
Which of the following costs would be considered a period
rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

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Quick Check 
Which of the following costs would be considered a period
rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

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Overview of Cost Classifications

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