Cost Accounting

Introduction of cost accounting Lecture-1 By Main Ahmad Farhan (ACA)

Accounting

It is a language about financial information (which is measurable in terms of money) commonly used in business.

Branches Of Accounting

Accounting

Financial Accounting

Cost Accounting

Management Accounting

For external reporting

For internal reporting

Fed by financial and cost accounting

User Group
User Group Financial Accounting Investors Lenders Govt Agencies Cost & Management Accounting Managers Directors

Suppliers
Management Employees

Branches Of Accounting
Financial Accounting is an art of recording (Journal), classifying (Ledger), summarizing (Trial balance), reporting (Profit & Loss A/c & Balance Sheet) and analysis (Interpretation) the financial information. Cost Accounting deals with ascertainment, measurement, accumulation, budgeting and evaluating cost structure of the entity. Management Accounting deals with decisions relating to the generation and effective utilization of the financial resources of an entity.

Cost Accounting

So Cost accounting is a specialized branch of accounting which provide processed set of information / statements to the management which assist them in decision making. In cost accounting cost of product or a process is; Ascertained Measured Accumulated

Management Accounting

Management is central coordinating body in an entity Management is concerned with the maximization of wealth through

Minimization of cost Maximization of profit

For this purpose information provided by cost accounting is analyzed by the management for decision making and management control function.

Management Accounting

Reports generated through management accounting are used internally. Major function of management accounting:

Planning & Forecasting

Controlling
Decision making Pricing Make or Buy Shut down or Continued operation Equipment Replacement

Purpose Of Cost Accounting

Provides information relating to cost of production. Determines the appropriate selling price. Discloses profitable products, areas and activity level. Helps in make or buy decision. Budgeting relating to production function. Controls production variances. Provides information to financial accountant.

Classification Of Cost

Cost Classification

Direct Cost

Indirect Cost

Direct Material

Direct Labor

Other Direct Expenses

Factory Overhead

Direct Cost

Cost that can be traced in full to the product or services is

direct cost

Types Of Direct Cost

Direct material costs are those cost of material that are traceable in full in the cost of a product or services
For example wood in manufacturing of table

Direct labor cost are the specific cost of the worker in producing a or service
For example labor involve in cutting wood

Types Of Direct Cost

Other Direct Expenses These are expenses other than direct material and direct labor which have been incurred in full as direct consequences of producing product or services

Royalty on production, Cost of jigs / moulds

Indirect Cost

The cost that is incurred in producing product or services but which can not traced in full

Factory overhead (FOH)

FOH means all expenses of factory other than direct material, direct labor and other direct production expenses.
Indirect material Indirect Labor Deprecation of machinery Factory utility bills

Cost classification

Direct Material + Direct Labor + Other Direct Cost = Prime cost

Direct Labor + Other Direct Cost + FOH = Conversion cost

Prime Cost + FOH = Total factory cost

Summary
Material cost Labor cost Other production Total production

cost

cost

Direct

Direct

Direct

Prime cost

Indirect

Indirect

Indirect

= =

FOH cost Total Factory Cost

Total

Total

Total

Cost classification
Direct material Direct labor Other direct cost Prime cost FOH Indirect material Indirect labor Electricity bill Rent of factory Depreciation
Total factory cost

Rs 12,000 8,000 2000 22,000

3000 2000 1500 3500 1000 11000 33000

Behavior Of Cost

Fixed cost Variable cost

Step fixed cost Semi variable cost

Fixed cost
Fixed cost is a cost that do not vary with the level of production. Simple means the variation in production has no impact on fixed cost. For example rent of building and accountant salary etc

3000

Fixed cost

2000
1000 100 200 300

No. of units

Fixed Cost Per Unit Reaction

Fixed cost per unit decreases as the number of units produced increases and vice versa For example rent of building is Rs. 10,000 and number of units produced is 5000.
Per unit fixed cost = 10000 / 5000 = 2 per unit

If the number of units produced increases to 10000

Per unit fixed cost = 10000 / 10000 = 1 per unit

Step Fixed Cost

Costs which are constant for a relevant range of activity and rise to new constant level once that range exceeded. For example rent.

Fixed cost

No. of units

Variable Cost
The expenses that vary in direct proportion to volume of product. For example Prime cost.

Variable cost

No. of units

Variable Cost Per Unit Reaction

Variable cost per unit remain constant

Units of Labor
10 20

Total wages Per labor wage rate

10,000 20,000 1,000 1,000

Semi Variable Cost

The cost that is partly fixed and partly variable cost. For example electricity bills, salesman salary.

3000 Semi variable cost 2000 1000 100 200 No. of units 300

Summary
If the production volume increases
Per unit Total

Fixed cost

Decreases

Constant

Variable cost

Constant

Increases

Total cost

Decreases

Increases

Summary
If the production volume decreases
Per unit Total

Fixed cost

Increases

Constant

Variable cost

Constant

Decreases

Total cost

Increases

Decreases

Total cost
Total cost include both fixed cost and variable cost
As VC added in FC shifts upward Total cost Variable cost
3000 Total cost

2000
1000 100 200 No. of units 300

Fixed cost