Cost Accounting Lecture Sheet By Muhammad Nazrul Islam FCMA
Cost Accounting:
Cost accounting is the identification, accumulation, assignment and analysis of production & cost data
to provide information for external reporting, internal planning and control ongoing operations and
special decisions.
Objectives of Costing System:
1. Cost Ascertainment
2. Determining Selling Price
3. Cost Control
4. Cost Reduction
5. Determining and Controlling Efficiency
6. Facilitating Preparation of Financial and Other Statements
7. Providing Basis for Operating Policy
Cost Control
• Cost control focuses on the minimization of wastage than the reduction of cost. Cost control
typically includes (1) investigative procedures to detect variance of actual costs from budgeted
costs, (2) diagnostic procedures to ascertain the cause(s) of variance, and (3) corrective
procedures to effect realignment between actual and budgeted costs.
• Cost control is routinely applied on a continuous basis.
• Cost control heavily relies on accounting techniques.
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 2
Cost Reduction:
• Cost reduction focuses on minimization of cost through new production process, improved
plant layout, scientific material handling etc.
• Cost reduction is applied when an opportunity for cost reduction is identified which offers a
competitive advantage for a longer time.
Distinction between financial and cost accounting–
Purpose-
To provide investors, creditor or other external
parties with useful information about the financial
position, financial performance and cash flow
prospect of an enterprise.
To provide the manager with information useful for
planning, evaluation and rewarding performance and
sharing with other outside parties and to apportion
decision making authority over the firm resources.
Types of report-
Primarily financial statements (profit & loss a/c and
balance sheet and cash flow statement and related
notes) provide investors, creditors and other users of
information to support external decision making
process.
Many different types of report depending on the
nature of business and the specific information
needs of the management. Example; Budget
financial projection, bench mark studies, activity
based cost report and cost of quality assessment.
Standards for presentation -
It follows generally accepted accounting principles
including those formally established in the
authoritative accounting literature and standard
industry practice.
Rules are set within the organization to produce
information relevant to the needs of management.
Time Periods-
Usually a year, quarter or month. Most report focus
on completed periods. Emphasis is pl aced on the
current period with prior periods often shown for
comparison.
Any period- year, quarter, month, weekday even a
work shift .Some reports are historical in nature.
Other focus on estimates and results expected in the
future period.
User of information-
Outsiders as well as managers. These outsiders
include shareholders, creditors, prospective
investors, regulatory authorities and the general
public.
Management (Different reports to different
managers), customers, auditors, suppliers and
others involved in an organization
Cost Data for Management purpose:
1. Planning. 2. Controlling 3. Income Measuring 4. Decision Making
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 3
Role of Cost accounting
1. Establishing costing method---that permits control, cost reduction and improvement of costs
2. Aiding & participation in the planning
3. Inventory value for costing and pricing
4. Determining company cost & Profit
5. Provide management information regarding problems that involves alternative for decision
making. Decision may be new market entrance, product develop, discontinue product line
increase profit etc.
Methods of Cost Accounting
a. Job order: job order costing system is used in situations where many different
products are produced each period. Each product is made according to a customer’s
specifications and the price quoted is closely tied to estimated cost. For example
clothing factory would typically made many different types of jeans for both men and
women during a month. In a job order costing system, costs are traced to the
jobs and then the costs of the job are divided by the number of units in the job to
arrive at an average cost per unit.
Other Variation
a. Batch Costing: Batch Costing is the identification and assignment of those costs incurred
in completing the manufacture of a specified batch of components. Having arrived at the batch
cost, the unit cost is simply derived by dividing it by the number of components in the batch.
In this method, products lose their individual identity as they are manufactured in a continuous
flow. The unit cost of process is an average cost for the period. Example: Medicine, toys,
Foods etc.
b. Contract Costing: Contract costing is applied for contract work like construction of dam
building civil engineering contract etc. each contract or job is treated as separate cost unit for
the cost ascertainment and control.
c. Multiple Costing: It means combination of two or more of the above methods of costing.
Where a product comprises many assembled parts or components (as in case of motor car)
costs have to be ascertained for each component as well as for the finished product for different
components, different methods of costing may be used. It is also known as composite costing.
This type of costing is applicable to industries producing motor vehicle, aeroplane radio, T.V. etc.
b. Process Costing: In process costing, one specific product is produced. The purpose of
process costing is to account for costs directly associated with that production process. These
costs include labor, materials and any overhead associated with production. Process costing
takes into account manufacturing costs as they accumulate from one department to the next
in the production process.
Method for determining the total unit cost of the output of a continuous production run (such
as in food processing, petroleum, and textile industries) in which a product passes through
several processes (or cost centers)
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 4
Other Variation
a. Operation Costing: Here, instead of the process, each operation is taken as the cost
centre. If in the manufacture of a particular product there are four distinct operations and
the operation costs are A,B,C and D the cost of the finished units determined by
(A+B+C+D)
b. Single or Output costing: Industries which produce only a single uniform product or a
very small number of similar products or a single product of different grades using this
method. Example: Mines, collieries, Iron & Steel Industries
c. Operating Costing: This system is employed where expenses are incurred for provision
of services such as those tendered by bus companies, electricity companies, or railway
companies. The total expenses regarding operation are divided by the appropriate units
(e.g., in case of bus company, total number of passenger/kms.) and cost per unit
of service is calculated.
Techniques of Cost Accounting
1. Historical Cost Accounting:
Accounting is concerned with past events and it requires consistency and comparability that is why it
requires the accounting transactions to be recorded at their historical costs. This is called historical
cost concept. Historical cost is the value of a resource given up or a liability incurred to acquire an
asset/service at the time when the resource was given up or the liability incurred.
In subsequent periods when there is appreciation is value, the value is not recognized as an increase
in assets value except where allowed or required by accounting standards.
Examples
1. 100 units of an item were purchased one month back for Tk. 10 per unit. The price today is
Tk. 11 per unit. The inventory shall appear on balance sheet at Tk. 1,000 and not at Tk.
1,100.
2. The company built its ERP in 2008 at a cost of Tk. 40 million. In 2010 it is estimated that the
present value of the future benefits attributable to the ERP is Tk. 1 billion. The ERP shall stand
on balance sheet at its historical costs less accumulated depreciation.
The concept of historical cost is important because market values change so often that allowing
reporting of assets and liabilities at current values would distort the whole fabric of accounting, impair
comparability and makes accounting information unreliable.
2. Standard Cost Accounting:
Costing done as per setting standard. Standard cost accounting systems start with the annual
production budget. The total material, labor and overhead costs for the year are documented in the
production budget. The annual production budget also includes the estimated production units for the
year. The material, labor and overhead costs are divided by the estimated production units to
calculate a standard cost. Throughout the year, managers compare the actual cost to the standard
cost. The difference between actual and standard cost is the variance.
3. Direct/ Variable Cost Accounting:
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 5
A method where only the variable manufacturing costs are assigned to inventory and the cost of
goods sold. Fixed manufacturing costs are viewed as expenses of the period in which they are
incurred. Under variable costing, notice that all variable costs of production are included in product
costs.
4. Absorption Cost Accounting:
Absorption costing is a costing system which treats all costs of production as product costs, regardless
weather they are variable or fixed. The cost of a unit of product under absorption costing method
consists of direct materials, direct labor and both variable and fixed overhead. Absorption costing
allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the
variable manufacturing cost. Because absorption costing includes all costs of production as product
costs, it is frequently referred to as full costing method. Under the absorption costing, notice that all
production costs, variable and fixed, are included when determining the unit product cost.
Example 1
A company manufactures and sells 5000 units of product X per year . Suppose one unit of product X
requires the following costs:
Direct materials: Tk.5 per unit
Direct labor: Tk.4 per unit
Variable manufacturing overhead: Tk.1 per unit
Fixed manufacturing overhead: Tk. 20,000 per year
The unit product cost of the company is computed as follows:
Absorption Costing Variable Costing
5 5
4 4
1 1
4* -
——- ——-
14 10
——- ——-
* 20,000 / 5,000
Notice that the fixed manufacturing overhead cost has not been included in the unit cost under
variable costing system but it has been included in the unit cost under absorption costing system. This
is the primary difference between variable and absorption costing.
Installation of Cost accounting System
Without a Cost accounting System it is doubtful whether a business of any size can survive in the
intensely competitive conditions. Before installing a Cost accounting System management should
consider the following issues:
1. Objectives of the costing system: System engineer should consider the expectation of the
management from the costing system
2. Product and the business: According to the current product and techniques/method
adopted by the company, proposed Method/technique should be advised.
3. Organizational problem: Probable Problem should be identified after installation of this
system.
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 6
4. Technical aspects of the organization: Following technical aspects should be taken into
account:
a. Manufacturing process or operation
b. Material handling system
c. Labor control and wages payment system
d. Number of production and service department
e. Factory layout
f. Routine of products
5. Accounting System: The costing system to be installed must be adaptable to the accounting
system.
6. Communication System: Communication System of the organization should be verified
7. The Economy: It should be economical against the cost of operating the system.
Characteristics of an ideal cost accounting System
1. According to nature of product, manufacturing process this system should be suitable
2. Flexible and capable to work in any condition
3. Logical & simple
4. Formed to used for collecting data as particle and minimum clerical
5. Accurate and provide timely information
6. Proper internal checking inbuilt in the system
7. Cost data aggregate and reporting with minimum clerical work
8. Capable to sending data to all mgt
9. Ensured security of material & labor
10. Should identify cost centre correctly
11. Economical
12. Duty & responsibility of Cost Accountant clearly defined and access to work in all dept.
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 1
102.01 Introduction of Cost Accounting
Contents:
Costs Vs Expenses; Definition of Cost Accounting; Objectives of Costing System ;distinction between
financial accounting and cost accounting ; Cost data for Management purposes; role, method and
techniques of Cost accounting; Installation of Cost accounting System ; Characteristics of an ideal cost
accounting System etc.
Cost Vs Expenses
Cost: An amount that has to be paid or given up in order to get something.
Expenses: Costs that are matched with revenues on the income statement. For example, Cost of
Goods Sold is an expense caused by Sales. Insurance Expense, Wages Expense, Advertising 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.
a. Cost is used on something that has returns, while expenses are expenditures used on things
that depreciate.
b. Cost is reported in the balance sheet because it means more funds will come to the balance
sheet after the expenditure. Expense on the other hand, is reported on the income sheet
because it will be taking away funds from the income sheet in making the expenditures.
c. Cost is used when one is buying assets while expense is used on buying things that eventually
expire.
Section: B (Evening)
Page 1
102.01 Introduction of Cost Accounting
Contents:
Costs Vs Expenses; Definition of Cost Accounting; Objectives of Costing System ;distinction between
financial accounting and cost accounting ; Cost data for Management purposes; role, method and
techniques of Cost accounting; Installation of Cost accounting System ; Characteristics of an ideal cost
accounting System etc.
Cost Vs Expenses
Cost: An amount that has to be paid or given up in order to get something.
Expenses: Costs that are matched with revenues on the income statement. For example, Cost of
Goods Sold is an expense caused by Sales. Insurance Expense, Wages Expense, Advertising 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.
a. Cost is used on something that has returns, while expenses are expenditures used on things
that depreciate.
b. Cost is reported in the balance sheet because it means more funds will come to the balance
sheet after the expenditure. Expense on the other hand, is reported on the income sheet
because it will be taking away funds from the income sheet in making the expenditures.
c. Cost is used when one is buying assets while expense is used on buying things that eventually
expire.
Cost Accounting:
Cost accounting is the identification, accumulation, assignment and analysis of production & cost data
to provide information for external reporting, internal planning and control ongoing operations and
special decisions.
Objectives of Costing System:
1. Cost Ascertainment
2. Determining Selling Price
3. Cost Control
4. Cost Reduction
5. Determining and Controlling Efficiency
6. Facilitating Preparation of Financial and Other Statements
7. Providing Basis for Operating Policy
Cost Control
• Cost control focuses on the minimization of wastage than the reduction of cost. Cost control
typically includes (1) investigative procedures to detect variance of actual costs from budgeted
costs, (2) diagnostic procedures to ascertain the cause(s) of variance, and (3) corrective
procedures to effect realignment between actual and budgeted costs.
• Cost control is routinely applied on a continuous basis.
• Cost control heavily relies on accounting techniques.
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 2
Cost Reduction:
• Cost reduction focuses on minimization of cost through new production process, improved
plant layout, scientific material handling etc.
• Cost reduction is applied when an opportunity for cost reduction is identified which offers a
competitive advantage for a longer time.
Distinction between financial and cost accounting–
Purpose-
To provide investors, creditor or other external
parties with useful information about the financial
position, financial performance and cash flow
prospect of an enterprise.
To provide the manager with information useful for
planning, evaluation and rewarding performance and
sharing with other outside parties and to apportion
decision making authority over the firm resources.
Types of report-
Primarily financial statements (profit & loss a/c and
balance sheet and cash flow statement and related
notes) provide investors, creditors and other users of
information to support external decision making
process.
Many different types of report depending on the
nature of business and the specific information
needs of the management. Example; Budget
financial projection, bench mark studies, activity
based cost report and cost of quality assessment.
Standards for presentation -
It follows generally accepted accounting principles
including those formally established in the
authoritative accounting literature and standard
industry practice.
Rules are set within the organization to produce
information relevant to the needs of management.
Time Periods-
Usually a year, quarter or month. Most report focus
on completed periods. Emphasis is pl aced on the
current period with prior periods often shown for
comparison.
Any period- year, quarter, month, weekday even a
work shift .Some reports are historical in nature.
Other focus on estimates and results expected in the
future period.
User of information-
Outsiders as well as managers. These outsiders
include shareholders, creditors, prospective
investors, regulatory authorities and the general
public.
Management (Different reports to different
managers), customers, auditors, suppliers and
others involved in an organization
Cost Data for Management purpose:
1. Planning. 2. Controlling 3. Income Measuring 4. Decision Making
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 3
Role of Cost accounting
1. Establishing costing method---that permits control, cost reduction and improvement of costs
2. Aiding & participation in the planning
3. Inventory value for costing and pricing
4. Determining company cost & Profit
5. Provide management information regarding problems that involves alternative for decision
making. Decision may be new market entrance, product develop, discontinue product line
increase profit etc.
Methods of Cost Accounting
a. Job order: job order costing system is used in situations where many different
products are produced each period. Each product is made according to a customer’s
specifications and the price quoted is closely tied to estimated cost. For example
clothing factory would typically made many different types of jeans for both men and
women during a month. In a job order costing system, costs are traced to the
jobs and then the costs of the job are divided by the number of units in the job to
arrive at an average cost per unit.
Other Variation
a. Batch Costing: Batch Costing is the identification and assignment of those costs incurred
in completing the manufacture of a specified batch of components. Having arrived at the batch
cost, the unit cost is simply derived by dividing it by the number of components in the batch.
In this method, products lose their individual identity as they are manufactured in a continuous
flow. The unit cost of process is an average cost for the period. Example: Medicine, toys,
Foods etc.
b. Contract Costing: Contract costing is applied for contract work like construction of dam
building civil engineering contract etc. each contract or job is treated as separate cost unit for
the cost ascertainment and control.
c. Multiple Costing: It means combination of two or more of the above methods of costing.
Where a product comprises many assembled parts or components (as in case of motor car)
costs have to be ascertained for each component as well as for the finished product for different
components, different methods of costing may be used. It is also known as composite costing.
This type of costing is applicable to industries producing motor vehicle, aeroplane radio, T.V. etc.
b. Process Costing: In process costing, one specific product is produced. The purpose of
process costing is to account for costs directly associated with that production process. These
costs include labor, materials and any overhead associated with production. Process costing
takes into account manufacturing costs as they accumulate from one department to the next
in the production process.
Method for determining the total unit cost of the output of a continuous production run (such
as in food processing, petroleum, and textile industries) in which a product passes through
several processes (or cost centers)
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 4
Other Variation
a. Operation Costing: Here, instead of the process, each operation is taken as the cost
centre. If in the manufacture of a particular product there are four distinct operations and
the operation costs are A,B,C and D the cost of the finished units determined by
(A+B+C+D)
b. Single or Output costing: Industries which produce only a single uniform product or a
very small number of similar products or a single product of different grades using this
method. Example: Mines, collieries, Iron & Steel Industries
c. Operating Costing: This system is employed where expenses are incurred for provision
of services such as those tendered by bus companies, electricity companies, or railway
companies. The total expenses regarding operation are divided by the appropriate units
(e.g., in case of bus company, total number of passenger/kms.) and cost per unit
of service is calculated.
Techniques of Cost Accounting
1. Historical Cost Accounting:
Accounting is concerned with past events and it requires consistency and comparability that is why it
requires the accounting transactions to be recorded at their historical costs. This is called historical
cost concept. Historical cost is the value of a resource given up or a liability incurred to acquire an
asset/service at the time when the resource was given up or the liability incurred.
In subsequent periods when there is appreciation is value, the value is not recognized as an increase
in assets value except where allowed or required by accounting standards.
Examples
1. 100 units of an item were purchased one month back for Tk. 10 per unit. The price today is
Tk. 11 per unit. The inventory shall appear on balance sheet at Tk. 1,000 and not at Tk.
1,100.
2. The company built its ERP in 2008 at a cost of Tk. 40 million. In 2010 it is estimated that the
present value of the future benefits attributable to the ERP is Tk. 1 billion. The ERP shall stand
on balance sheet at its historical costs less accumulated depreciation.
The concept of historical cost is important because market values change so often that allowing
reporting of assets and liabilities at current values would distort the whole fabric of accounting, impair
comparability and makes accounting information unreliable.
2. Standard Cost Accounting:
Costing done as per setting standard. Standard cost accounting systems start with the annual
production budget. The total material, labor and overhead costs for the year are documented in the
production budget. The annual production budget also includes the estimated production units for the
year. The material, labor and overhead costs are divided by the estimated production units to
calculate a standard cost. Throughout the year, managers compare the actual cost to the standard
cost. The difference between actual and standard cost is the variance.
3. Direct/ Variable Cost Accounting:
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 5
A method where only the variable manufacturing costs are assigned to inventory and the cost of
goods sold. Fixed manufacturing costs are viewed as expenses of the period in which they are
incurred. Under variable costing, notice that all variable costs of production are included in product
costs.
4. Absorption Cost Accounting:
Absorption costing is a costing system which treats all costs of production as product costs, regardless
weather they are variable or fixed. The cost of a unit of product under absorption costing method
consists of direct materials, direct labor and both variable and fixed overhead. Absorption costing
allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the
variable manufacturing cost. Because absorption costing includes all costs of production as product
costs, it is frequently referred to as full costing method. Under the absorption costing, notice that all
production costs, variable and fixed, are included when determining the unit product cost.
Example 1
A company manufactures and sells 5000 units of product X per year . Suppose one unit of product X
requires the following costs:
Direct materials: Tk.5 per unit
Direct labor: Tk.4 per unit
Variable manufacturing overhead: Tk.1 per unit
Fixed manufacturing overhead: Tk. 20,000 per year
The unit product cost of the company is computed as follows:
Absorption Costing Variable Costing
5 5
4 4
1 1
4* -
——- ——-
14 10
——- ——-
* 20,000 / 5,000
Notice that the fixed manufacturing overhead cost has not been included in the unit cost under
variable costing system but it has been included in the unit cost under absorption costing system. This
is the primary difference between variable and absorption costing.
Installation of Cost accounting System
Without a Cost accounting System it is doubtful whether a business of any size can survive in the
intensely competitive conditions. Before installing a Cost accounting System management should
consider the following issues:
1. Objectives of the costing system: System engineer should consider the expectation of the
management from the costing system
2. Product and the business: According to the current product and techniques/method
adopted by the company, proposed Method/technique should be advised.
3. Organizational problem: Probable Problem should be identified after installation of this
system.
Course Material for Chapter:
Professional Level-1 102.01 Introduction of Cost Accounting
Section: B (Evening)
Page 6
4. Technical aspects of the organization: Following technical aspects should be taken into
account:
a. Manufacturing process or operation
b. Material handling system
c. Labor control and wages payment system
d. Number of production and service department
e. Factory layout
f. Routine of products
5. Accounting System: The costing system to be installed must be adaptable to the accounting
system.
6. Communication System: Communication System of the organization should be verified
7. The Economy: It should be economical against the cost of operating the system.
Characteristics of an ideal cost accounting System
1. According to nature of product, manufacturing process this system should be suitable
2. Flexible and capable to work in any condition
3. Logical & simple
4. Formed to used for collecting data as particle and minimum clerical
5. Accurate and provide timely information
6. Proper internal checking inbuilt in the system
7. Cost data aggregate and reporting with minimum clerical work
8. Capable to sending data to all mgt
9. Ensured security of material & labor
10. Should identify cost centre correctly
11. Economical
12. Duty & responsibility of Cost Accountant clearly defined and access to work in all dept.
Thank you Bhai
ReplyDeleteWellcome
ReplyDelete