Juraz- Enhance Your Commerce Skills With Us

COST ACCOUNTING (B.Com)

Costing
It is the techniques and process of ascertaining costs.
Cost Accounting
It is a specialised branch of accounting which involves classification,
accumulation, assignment and control cost.
General principles of cost accounting
1. A cost should be related to its causes.
2. A cost should be charged only after it has been incurred.
3. The convention of prudence should be ignored.
4. Abnormal costs should be excluded from cost accounts.
5. Past costs not to be charged to future period.
6. Principles of double entry should be applied wherever necessary.
Objectives of cost accounting
1. To ascertain cost per unit of different products.
2. To provide correct analysis of costs.
3. To ascertain profitability of each product.
4. To advise management on future expansion policies.
5. To provide a perpetual inventory of stores and other materials.
Difference between financial accounting and cost accounting
Financial Accounting Cost Accounting
The purpose of financial The purpose of financial
accounting is to keep complete accounting is reducing and
record of the financial controlling cost.
transactions.
These are accounts of whole It is only a part of whole
business. accounts.
Valuation of stock at cost or Valuation of stock at cost price.
market price.
Financial accounting are Cost accounting are concerned
concerned with external with internal transactions.
transactions.
Only historical costs are Both historical and
recorded. predetermined costs are
recorded.
It discloses net profit and loss of It discloses profit and loss of
the business. each product, job or service.
Forecasting is not at all possible Forecasting is possible through
budgeting techniques.
It emphasises the measurement It aims at ascertainment of cost.
of profitability.
It records only actual cost. It records both actual and
estimated cost.
It does not guide the It provides adequate data for
formulation of pricing policy. formulating pricing policy.
Financial accounts are guided by No specific guidance.
GAAP.
Difference between cost accounting and management accounting
Cost Accounting Management Accounting
It is used for cost control and It is used for managerial decision
cost reduction. making.
The scope of cost accounting is The scope of management
narrow. accounting is broader.
Statutory audit is mandatory for No statutory audit requirement.
big business.
It is used for management, It is only for management.
shareholders and vendors.
It considers only quantitative It considers both quantitative
data. and qualitative data.
Only cost accounting principles Principles of cost accounting and
are used. financial accounting are used.
Cost accounting is restricted to It uses financial as well as cost
cost related data. accounting data.
It deals with both present and It deals with future transactions.
future transactions.
Importance of cost accounting
1. Cost accounting helps in making estimates.
2. It eliminates wastage.
3. It makes comparison possible.
4. It helps in inventory control.
5. It provides data for periodical profit and loss account.
6. It helps in determining efficiency.
7. It provides continuous employment and high remuneration to
employees.
Cost unit
The unit cost is the price incurred by a company to produce, store
and sell one unit of a particular product.
Cost Centre
It is the smallest organisational sub unit for which separate cost
collection is attempted.
Profit centre
It is a business unit or segment that generates revenues and incurs
cost.
Difference between profit centre and cost centre
Profit Centre Cost Centre
These are autonomous. These are not autonomous.
It is created because of It is created for accounting
decentralisation of operations. convenience of cost and their
control.
Profit centres has a profit target. Cost centres does not have
target cost.
Cost Classification
1. Direct Cost
Direct costs are those costs which are incurred for a particular
product which can be identified with a particular cost centre to cost
unit.
2. Indirect cost
Indirect costs are those costs which are incurred for the benefit of a
number of cost centre and cannot be identified with a particular cost
centre.
3. Fixed Cost
Fixed costs are predetermined costs that remains same throughout a
specific period.
4. Variable cost
It is a cost that changes the quantity of goods and services that
business produces changes.
5. Semi variable cost
These are costs which are partly fixed and partly variable.
6. Product cost
These are those costs which are traceable to the product.
7. Period cost
These are those costs which are incurred for a period and treated as
expense.
Types, Methods and Techniques of costing
1. Job Costing
It refers to a system of costing in which cost are ascertained in terms
of specific jobs or orders which are not comparable with each other.
2. Process costing
It is a method of costing used mainly in manufacturing where units
are continuously mass produced through one or more processes.
3. Unit costing
The unit cost is the price incurred by a company to produce, store
and sell one unit of a particular product.
4. Operating costing
It is the mix of job costing and process costing. This method is
applicable where services are rented rather than goods produced.
Elements of costing
1. Direct material
It refers to the raw materials that are directly used in the production
process of goods and services of the company.
2. Indirect material
Indirect material are those material that are used in the production
process but that are not directly traceable to the product.
Eg: Glue, oil, tape, cleaning supplies, etc.
3. Direct labour
It is the amount of effort exerted by employees to convert raw
materials into finished goods.
4. Direct expenses
It is the expense that is related to the purchase of product.
5. Overhead
It is the aggregate of the cost of indirect material, indirect labour and
such other expenses.
Cost sheet
When costing information is set out in the form of a statement, it is
called cost sheet or statement of cost.
Inventory
It is the raw material used to produce goods as well as the goods that
are available for sale.
Perpetual inventory system
A system of records maintained by the controlling departments
which reflects the physical movements of stock and their current
balance.
Advantages of perpetual inventory system
1. Quick valuation of closing stock.
2. Lesser investment in materials.
3. Helpful in formulating proper purchase policies.
4. Adequacy of working capital.
5. Immediate detection of theft and leakages.
6. Beneficial in ascertaining efficiency of stores organisation.
Bill of materials
A bill of material is centralised source of information used to
manufacture a product.
Material inspection note
It is a report prepared by the inspection department after inspecting
the material received.
Continuous stock taking
It means stock taking is conducted on regular basis.
Advantages of continuous stock taking
1. Improved stock management
2. Prevent unnecessary wastage and losses.
3. Improved stock management.
4. No need to shut down operations.
5. Eliminate delay in production and delivery.
Purchase order
It is a legal document by a buyer send to a supplier or vendor to
authorise a purchase.
Prime cost
Prime cost is the total direct cost of production including raw
materials and labour.
Economic order quantity (EOQ)
The quantity of material to be ordered at one time is known as
economic order quantity.
Bin Card
It is the record maintained under the perpetual inventory system by
the stores department and shows the quantities of the materials
received, issued and balance. It is also known as stock card.
Stores Ledger
It is a ledger which provides information for the pricing of material
issued and the money value at any time of each items of stores.
ABC analysis
It is an inventory management technique that determine value of
inventory items based on their importance to business.
VED analysis
It is an inventory management technique that classifies inventory
based on its functional importance.
JIT (Just In Time)
It is an inventory management method whereby labour, material and
goods are scheduled to arrive exactly when needed in the
manufacturing process.
Reordering level
It is that point of level of stock of a material where the storekeeper
starts the process of initiating purchase requisition for fresh supplies
of that materials.
Safety lock level
It is also known as minimum level. It is the minimum quantity of
material which must be maintained in hand at all times.
Maximum level
It is the maximum of stock which should be held in stock at any
period of year
Danger level
It is a level of stock at which normal issue of materials are stopped
and issues are made only under specific instructions.
FIFO (Fist In First Out)
Under this method, material received first are issued first.
Applicability of FIFO
1. Increased warehouse space.
2. Keeps stock handling to a minimum.
3. Enhanced quality control.
4. Warranty control.
5. Warehouse operations are more streamlined.
LIFO (Last In First Out)
Under this method, material received last are issued first.
Time keeping
It is the process of tracking and reporting work and leave time.
Time Booking
It is the recording of time spend by the workers on different jobs or
work.
Object of time booking
1. To ensure the time spend by a worker in a factory.
2. To ascertain labour cost of each individual job.
3. To ascertain unproductive time or ideal time.
4. To know the efficiency of workers.
Ideal time
There is a difference between the time booked to different jobs or
work orders and time recorded at the factory gate. This difference is
known as ideal time.
Over time
It is the work done beyond the normal working period in a day or
week.
System of wage payment
1. Time wage system
Under this method of wage payment, the workers is paid at an
hourly, daily, weekly or monthly rate.
Disadvantages of Time wage system
a) Workers are not motivated.
b) Strict supervision negatively affect.
c) workers will get payment for idle time.
d) It encourages go slow of work.
2. Piece rate wage system
Under this system of wage payment, a fixed rate is paid for each unit
produced, job completed or an operation performed.
Advantages of piece rate wage system
1. Workers are paid according to their merits.
2. Workers are motivated to increase production.
3. Profit per unit increases.
4. Idle time is minimized.
5. The employer can make quotations confidently.
6. Less case of defective tools and machinery.
7. Less supervision is required.
8. Inefficient workers are motivated to become efficient.
Halsey Premium Plan:
Under this method, the worker is given wages for the actual time
taken and a bonus equal to half of wages for time saved.
Advantages of Halsey Premium Plan
1. It is simple to calculate.
2. It guarantees time wages to workers.
3. Helpful in reducing labour cost per unit.
4. It motivates efficient workers.
5. Helps to reduce production cost.
Disadvantages of Halsey Premium Plan
1. Quality of work suffers.
2. Workers criticize this method on the ground that the employer
gets a share of wages of the time saved.
Rowan Plan:
Under this method bonus is that proportion of the wages of the time
taken which the time saved bears to the standard time allowed.
Advantages of Rowan Plan
1. It guarantees time wages to workers
2. The quality of work does not suffer
3. Labour cost per unit is reduced.
4. Fixed overhead cost is reduced.
Disadvantages of Rowan Plan
1. Workers do not get the full benefit of the time saved by them.
2. Very efficient and not so efficient workers may get the same
bonus.
Machine hours rate
It is the hourly cost in terms of factory overheads to operate a
particular machine.
Tenders or Quotation
It is an offer made by a person to supply certain goods at a specified
price.
Classification of overhead
1. Function wise classification
a. Manufacturing overhead
It is the total cost involved in operating all production facilities of a
manufacturing business. It is also called factory overhead or work
overhead.
b. Administrative overhead
It is the general business expenses not related to production,
marketing or research costs.
c. Selling and distribution overhead
The expenses incurred by an organisation in carrying out its selling
activities.
2. Behavioural wise classification
a. Fixed overhead
It is a set of cost that do not vary as a result of changes in activity.
b. Variable overhead
It is a cost of operating a firm that fluctuate with the level of business
or manufacturing activity.
c. Semi variable overhead
It is a cost composed of a mixture of both fixed and variable
components.
Job Costing
It means ascertaining costs of an individual job, work order or
projects separately.
Features of job costing
1. Each job is treated as unit.
2. A separate job cost sheet is made out for each job.
3. The duration of the job is usually a short period.
4. A separate working progress ledger is maintained for each job.
5. Profit or loss is determined for each job independently.
Advantages of job costing
1. It helps to control future cost.
2. It helps to distinguish profitable jobs from unprofitable jobs.
3. It helps to identify defective works.
4. Selling prices of special orders can easily be fixed.
Contract Costing
It is a form of specific order costing in which cost are attributed to
individual contracts.
Work in progress
It is the unfinished contract at the end of the accounting period and
it includes amount of work certified and amount of work uncertified.
Work certified
The sales value of work completed as certified by the architect is
known as work certified.
Work uncertified
It means work which has been carried out by the contractor but has
not been certified by the architect.
Retention money
The unpaid balance of work certified or the amount held back or
retained by contractee is known as retention money.
Process costing
Process costing is the method of costing used to ascertain the cost of
a product at each process.
Features of process costing
1. Production is continuous.
2. Products are standardised.
3. Products are homogeneous.
4. Products passes through two or more process.
5. Products are not distinguishable in processing stage.
6. The finished products of one process becomes the raw materials
of the subsequent process.
Advantages of process costing
1. It is easy to compute average cost.
2. It is simple.
3. It is less expensive.
4. It is possible to ascertain the process cost at short intervals.
Disadvantages of process costing
1. Process cost are only historical.
2. Difficult to value losses, waste, scrap etc.
3. Difficult to value work in progress.
4. These are not accurate. It’s only an average cost.
Difference between process costing and job costing
Process costing Job costing
Production is continuous Production according to
customers order.
Production is for stock. Production is not for stock.
Work in progress always exist. Work in progress may or may
not exist.
All units produced are Each job is different.
homogeneous.
There is a regular transfer of There is no such transfer.
cost of one process to another
process.
Normal process loss
This is the loss which is unavoidable on account of inherent nature of
production process.
Abnormal process loss
Any loss caused by unexpected or abnormal conditions such as plant
break down, substandard material, accident etc. Such loss are called
abnormal process loss.
Abnormal gain
It is the excess of actual production over normal output. It is also
called abnormal effective.
Operating costing
It is the method of costing designed to find out cost of operating or
rendering a service. It is also called service costing.
Budget
A financial plan expressed in terms of money is called budget.
Budgeting
A process of preparation, implementation and operation of budget is
called budgeting.
Objectives of budgetary control
1. To control activities.
2. To evaluate performance of managers.
3. To motivate managers.
4. To eliminate wastes.
5. To aid the planning of annual operation.
6. To coordinate activities of the organisation.
7. To communicate plans with responsibility centre managers.
Steps involved in budgetary control
1. Setting up of organisational goals.
2. formulating plans for achieving goals.
3. Translating plans into budget.
4. Relating the responsibility of executives to the requirements of a
policy.
5. Recording and reporting actual performance.
6. Continuous comparison of actual with budget.
7. Find out deviations.
8. Focusing attention on significant deviations.
9. Find out the reasons for deviations.
10. Presentation of information to the management.
11. Taking corrective action.
12. Revision of budgets.
Essentials of budgetary control system
1. Support by top management
2. Formal organisation.
3. Clear cut objectives.
4. Budget committee.
5. adequate accounting system
6. Periodic reporting.
Budget Manual
It is a written document which guides the executives in preparing
various budgets.
Budget period
A period for which a budget is prepared and employed is called
budget period.
Classification of budget
1. Classification according to time
a. Long term budget
A budget for a period of five to ten years is called long term budget.
b. Short term budget
A budget for a period of one to two years is called short term budget.
c. Current budget
A budget covers a period of one month is called current budget.
2. Classification according to flexibility
a. Flexible budget
It is a dynamic budget. It gives different budgeted cost for different
level of activity.
b. Fixed budget
It is a budget does not change with changes in the level of activity.
3. Classification according to function
a. Functional budget
Functional budgets are those which are prepared by heads of
functional departments for their respective departments. It is also
called operating budgets or financial budgets.
b. Master budget
It is the summary of all budgets. It summarises sales, production,
purchases, fiancé, labour etc.
Types of functional budgets
1. Sales budgets
It forecast the total sales expressed in quantities and money. It is
prepared by the sales manager.
2. Production budget
It is the forecast of the quantity of production for the budget period.
3. Material budget
It shows the estimated quantity of raw material required for the
production for a budget period.
4. Purchase budget
It shows the quantity of different types of materials to be purchased
during the budget period.
5. Cash budget
IT is a statement showing cash inflows and cash outflows over the
budgeted period.
Zero based budgeting (ZBB)
It is a recent trend in budgeting and it starts from zero base. It is
particular used of service departments and government.
Advantages of ZBB
1. It starts from zero.
2. It is useful for service department and government.
3. it ensure active participation of managers.
4. It helpful to management in making optimum allotment of scarce
resources.
5. It promote high level of motivation at the level of unit managers.
Difference between traditional budgeting and ZBB
Traditional budgeting ZBB
Begins with previous year Begins with zero, a base.
budget.
Focus on money. Focus on goals and objectives.
Prepare annually. Prepare once in every five years.
Produces a singe level of Produces alternative level of
expenditure for an activity. expenditure.
Resources are allotted not on Resources are allotted on basis
the basis of cost benefit analysis. of cost benefit analysis.
Standard Costing
It is defined as a benchmark measurement of resource usage, set in
defined conditions.
Difference between standard costing and budgetary control
Budgetary control Standard costing
It is based on past performance. It is based on technical estimate.
I fix minimum limits. It fix targets.
It does not required It requires standardisation of
standardisation of product. product.
Budget are expressed in total. Standard are expressed per unit
of production.
It is applicable to all types of It is applicable to manufacturing
organisations. organisation.
Budget consider both income It considers only expenditure.
and expenditure.

Objectives of standard costing

1. Performance measurement.
2. Cost control.
3. stock valuation
4. Establishing selling prices.
5. Profit planning.
6. Decision making.
Analysis of variance
It is the difference between standard cost and comparable actual
cost incurred during a period.
Difference between forecast and budget
Budget Forecast
It is prepared by management Estimate future trend based on
for future period. historical data.
Usually done for short term. Usually done for long term.
It is a static statement. It is flexible.

For more details, please visit the below link:

https://youtu.be/8VZCEpLbblU
https://youtu.be/Y8ANkOuEUYI
Telegram Link
https://t.me/JurazCommerce

This is just a theory short note based on syllabus of Cost Accounting.

You should concentrate more on problems. For full details of the
subject, please refer text book.
Prepared by:
JUBAIR MAJEED
RAHUL MURALI
ALL THE BEST