1. Chapter Introduction

2. Cost Accounting: Intro. & Objectives

3. Understanding & Classifying Costs

4. Cost Sheet

 

1.   Chapter Introduction:

                                                     This chapter will familiarize you with the process of determination of costs, particularly in a manufacturing concern. Moreover, it will explain how the costing techinques are useful in the process of managerial decision making.

2. Cost Accounting: Intro. & Objectives:

            

              Q. What do you understand by cost accounting? State its objectives. (June 03)

                 OR

              Q. Write a short note on Cost accounting. (Dec. 01)

Cost accounting is concerned with the application of costing principles, methods and techniques for ascertaining the costs with a view to controlling them and assessing the profitability and efficiency of the enterprise.

In the initial stages cost accounting was merely considered to be a technique for ascertainment of costs of products or services on the basis of historical data. In course of time it was realized, due to competitive nature of the market, that ascertaining of cost was not so important as controlling costs was. Hence, cost accounting started to be considered more as a technique for cost control rather than as a technique merely for cost ascertainment. The objectives of cost accounting are:

• Ascertaining the costs
• Controlling the costs
• Reducing the costs

3. Understanding & Classifying Costs: Q. Explain the meaning of:

1. Fixed Cost
2. Shut Down Costs
3. Sunk Costs
4. Opportunity Cost (Dec. 99, June 01, June 02)
5. Controllable Costs
6. Uncontrollable Costs
7. Variable Cost
8. Imputed or Hypothetical Costs (June 00)

 

Fixed Cost: These are the costs which remain constants irrespective of the quantum of output within and up to the capacity that has been built up. Examples of such costs are: rent, insurance charges, management salary etc. Fixed Cost is divided into (i) committed fixed costs and (ii) discretionary fixed costs.

1. Committed Fixed Costs: This consists largely of those fixed costs that arise from the possession of plant, equipment and a basic organizational structure. For example, once a building is constructed and plant is installed noting much can be done to reduce the costs such as depreciation, property taxes, insurance and salaries of the key personnel etc., without impairing the organization’s competence to meet the long-term goals.
2. Discretionary Fixed Costs: These are those costs, which are set at fixed amount for specific time periods by the management in the budgeting process. These costs directly reflect top management policies and have no particular relationship with volume of output. These costs can therefore be reduced or eliminated entirely, if the circumstances so require. Examples of such costs are: research and development costs, advertising and sales promotion costs, donations, management consulting fees, etc. these costs are also termed as managed or programmed costs

Shut Down Costs: Those costs which continue to be incurred even when a plant is temporarily shut-down, e.g. rent, rates, depreciation, etc. these costs cannot be eliminated with the closure of the plant. In other words, all fixed costs, which cannot be avoided during the temporary closure of a plant, will be known as shut down costs.

Sunk Costs: Historical costs incurred in the past are known as sunk costs. They play no role in decision making in the current period. For example, in the case of a decision relating to the replacement of a machine the written down value of the existing machine is a sunk cost and therefore, not considered.

Opportunity Cost (Dec. 99, June 01, June 02): This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, a firm financing its expansion plans by withdrawing money from its bank deposits. In such a case the lots of interest on the bank deposit is the opportunity cost for carrying out the expansion plant.

Another example is if an owned building is proposed to be utilized for housing a new project plant, the likely revenue which the building could fetch, if rented out, is the opportunity cost.

Controllable Costs: These are costs, which can be influenced by the action of a specified member of an organization. For example, the foreman of a production department can control the utilization of power or raw material in his department. These are, therefore, controllable costs as far as he is concerned.

Uncontrollable Costs: These are costs that cannot be influenced by the action of a specified member of an undertaking. For example, the foreman of a production department can control the wastage of power in his department, but he cannot control the power, which is being wasted in the powerhouse itself resulting in higher cost per unit of power to him.

Variable Cost: Variable costs tend to vary with the volume of output. Any increase in the volume of production result in an increase in the variable cost and vice-versa. For example, cost of material; cost of labor, etc.

Imputed or Hypothetical Costs (June 00): These types of costs are not recorded in the books of accounts. These costs are not actually incurred but are considered while making a decision. For example, in accounting, interest and rent are recognized only as expenditure when they are actually paid. But in costing they are charged on a notional basis while ascertaining the cost of a product.

4. Cost Sheet:

 

Q. What is a Cost Sheet? How it is prepared? (Jan. 01)

A Cost Statement or Cost Sheet is "a document which provides for the assembly of the detailed Cost of a Cost Center or Cost Unit". It is a detailed statement depicting the subdivision of cost arranged in a logical order under different heads.

The main advantages of a Cost Sheet are as follows:

1. It provides the total cost figure as well as cost per unit of production..

2. It helps in cost comparison.

3. It facilitates the preparation of cost estimates required for submitting tenders.

4. It provides sufficient help in arriving at the figure of selling price.

5. It facilitates cost control by disclosing operational efficiency.

Specimen of Cost Sheet or Statement of Cost

			Total Cost Rs.		Cost Per Unit Rs.
	Direct materials		----		-----
	Direct labour		----		-----
	Direct expenses		----		-----
	Prime Cost		----		-----
	Add: Works overheads		----		-----
	Works cost/Factory cost		----		-----
	Add: Administration overheads		----		-----
	Cost of production		----		-----
	Add: Selling and distribution overheads		----		-----
	Cost of sales		----		-----

Treatment of stock of raw materials, work-In-progress and finished goods while preparing a Cost Sheet

Stock of raw material: If the figures of opening stock of raw materials, purchases of raw materials and closing stock of raw materials are given, then the figure of raw material consumed (direct material) can be calculated as below:

	Particulars		Rs.
	Opening stock of raw materials		---------
	Add: Purchases of raw materials		---------
	Less: Closing Stock of raw materials		---------
	Raw materials consumed		----------

Work-in-Progress: Work-in-progress represents those units on which some work has been done but which are not yet complete. It is valued at works cost or prime cost basis, but the former is preferred when work-in-progress is valued at works or factory cost then opening and closing stock will be adjusted as below:

	Particulars		Rs.
	Prime Cost.		----------
	Add: Factory overheads		----------
	Add: Opening work-in-progress		----------
	Less: Closing work-in-progress		----------
	Works cost		----------

Finished goods: When the opening arid closing figures of finished goods are given, the same may be adjusted before calculating cost of goods sold as under:

Particulars		Rs.
Cost of production
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Cost of Goods Sold