Overview of Cost Accounting and Its Objectives
Cost accounting
Introduction
of cost Accounting
Definition
According to ICMA London, cost accounting is the application
of costing and cost accounting principles ,methods and
techniques to the science, art and practice of cost control and
ascertainment of profitability.it includes the presentation of
information for the purpose of decision making
.
Objectives of cost accounting
•
To find out the total cost and cost per unit
•
To disclose the proportion of different elements in the total cost
•
To provide necessary data for fixing the selling price
•
To ascertain the profitability of each product
•
To identify the sources of wastages and losses
•
To help in the preparation of budgets and its implementation
•
To formulate incentive bonus plans and implement them
•
To exercise effective control on the idle times of men and
machines
Advantages of cost accounting
•
Helps in decision making
•
Helps in fixing prices
•
Formulation of future plans
•
Avoidance of wastage
•
Highlights causes
•
Reward to efficiency
•
Prevention of fraud
•
Improvement in profitab
ility
Demerits of cost accounting
•
It is unnecessary
•
It is expensive
•
It is a failure
•
Too much of paper work
•
Restricted applicability
Elements of cost
Total cost
Material Labour other
expenses
Direct Indirect Direct Indirect Direct Indirect
overheads
Classification of cost
•
Classification according to nature element
•
Classification according to function
•
Classification according to variability
a)Fixed cost
b)variable cost
c)semi-variable cost
•
Classification according to normality
a)Normal cost
b)Abnormal cost
•
Classification according to controllability
a)controllable cost
b)uncontrollable cost
•
Classification by time
a)Historical cost
b)Pre –determined cost
•
Classification according to managerial decisions
a)Marginal cost
b)Differential cost
c)Imputed cost
d)Replacement cost
e)opportunity cost
f)sunk cost
•
Classification according to capital and revenue
a)capital costs
b)Revenue costs
•
Classification by association with products
a)products cost
b)period cost
Methods of costing
•
Job costing
•
Contract costing
•
Batch costing
•
Process costing
•
Unit costing
•
Operating costing
•
Multiple costing
Techniques of costing
•
Historical costing
•
Direct costing
•
Absorption costing
•
Uniform costing
•
Marginal costing
•
Standard costing
Cost unit
A cost unit refers to a unit of product, service or time in
relation to which costs may be ascertained or expressed
.
Cost Centre
A cost Centre is a location ,person or item of equipment for
which cost may be ascertained and used for the purpose of
cost control
Cost sheet
Cost sheet is a statement.it provides information regarding the
various elements of cost incurred in production.it discloses the
total cost and the cost per unit of products manufactured during
the given period
.
Types of cost Centre
•
Production cost Centre
•
Service cost Centre
•
Personal cost Centre
•
Impersonal cost Centre
•
Operation cost Centre
•
Process cost Centre
•
Profit Centre
Material control
Material control is defined as a systematic control over
purchasing ,storage and consumption of materials,so as to
maintain a regular supply of materials and avoiding at the same
time overstocking
Objectives of material control
•
To make available the right type of materials at the right time
•
To ensure effective utilization of material
•
To prevent over stocking of materials and consequent locking
of materials
•
To procure appropriately raw materials at reasonable price
•
To prevent losses during storage of materials
•
To supply information to the management
Pricing
issues
of
material
•
Pricing
of
materials
may
change
from
time
to
time.
•
Materials
are
usually
acquired
by
several deliveries
at different
prices.
•
Actual
costs
can
then
take
on
several
different
values.
•
Therefore,
the
materials
pricing
system
adopted
should
be
the
simplest
and
the most
effective
one.
Methods
of
stock
valuation
First-in-first-out(FIFO)
Last-in-first-out(LIFO)
Weight
average
cost
(WAVCO)
Specific
identification/unit
cost
method
First-in-first-out
•
This
method
assumes
that
the
first
stock
to
be
received
is
the
first
to
be
sold.
•
The
cost
of
materials
used
is
based
on
the
oldest
prices.
•
The
closing
stock
is
valued
at
the
most
recent
prices.
Last-in-first-out
(LIFO)
This
method
assumes
that
the
last
stock
to
be
received
is
the
first
to
be
sold.
Therefore,
the
cost
of
materials
used
is
based
on
the
most
recent
prices.
The
closing
stock
is
valued
at
the
oldest
prices.
This
method
assumes
that
the
cost
of
materials
used
and
closing
stock
are
valued
at
the
weighted
average
cost.
Weight
average
cost
(WAVCO)
Specific
identification/unit
cost
method
This
method
assumes
that
each
item
of the
stock
has
its
own
identity.
The
costs
of
materials
used
and
closing
stock
are
determined
by
associating
the
units
of
stock
with
their
specific
unit
cost.
Economic
Order
Quantity
(EOQ)
EOQ
is
the
order
quantity
that
minimizes
total
inventory
carrying
costs
and
ordering
costs.
Ordering
costs
are
costs
that
are
incurred
on
obtaining
additional
inventories.
They
include
costs
incurred
on
communicating
the
order,
transportation
cost,
etc.
Carrying
costs
represent
the
costs
incurred
on
holding
inventory
in
hand.
They
include
the
opportunity cost
of
money
held
up
in
inventories,
storage
costs,
spoilage
costs,
etc.
EOQ
=
2
*
O
*Q
C
Where
EOQ
=
Economic
Order
Quantity
O=
order
cost
per
order
Q
=
Annual
quantity
required
in
units
C
=Carrying
cost
per
unit
per
annum
E
x
a
mple
The
annual
consumption
of
a
part
“X”
is
5000
units.
The procurement
cost
per
order
is
$10
and
the
cost
per
unit
is $0.5.
The
storage
and
carrying
cost
is
10%
of
the
material
unit
cost.
Required:
Calculate
the
EOQ
S
o
l
u
tio
n
O=
$10
Q=5000,
C=
$0.5*10%
EOQ
=
2
O
Q
C
EOQ
=
2
*
5000
*10
0.5*10%
=
1414
units
Level
setting
•
It
is
to
determine
the
correct
or
most
optimal
stock
level
so
as
to
avoid
overstocking
or
under-
stocking
of
materials.
•
These
levels
are
known
as
the
Maximum,
Minimum
and
Re-order
levels.
Re-order
level
The
level
of
stock
of
material
at
which
a
new
order
for the
material
should
be
placed.
The
formula:
Re-order
level
=
(Maximum
usage
*
Maximum
lead
time
)
Maximum
level
The
maximum
stock
level
is
highest
level
of
stock
planned
to
be
held.
Any
amount
above
the
maximum
level
will
be
considered
as
excessive
stock.
The
formula:
Max
level
=
re-order
level
+
Re-order
quantity(EOQ)
–Min
anticipated
usage in
Minimum
lead
Minimum
level/Safety
stock
•
The
minimum
level is
that
level
of
stock
that
provides
a
safety
buffer
in
the
event
of
increased
demand
or
reduced
receipt
of
stock
caused
by
the
lengthening
of
lead
time.
•
The
stock
level
should
not
be
allowed
to
fall
below
the
safety
stock.
Min
level=
Re-order
level
–
Avg.
usage in
avg.
lead
time
E
X
AM
P
LE
Average
usage
Minimum
usage
Maximum
usage
Order
Quantity
1000
units
per
day
800
units
per
day
1350
units
per
day
9000
units
Delivery
reliably
expected
at
the
beginning of
the
fourth
day.
Required:
Find
the
three
control
levels.
Re-order
level
=
(Maximum
consumption
*
Maximum
re-order
period
)
=
1350
units
*4
=
5400
units
Minimum
level
=
Re-order
level
–
Average usage in
average lead
time
=
5400
units
–
(800
units
*4)
=
2200
units
Maximum
level
=
re-order
level
+
EOQ
–Minimum
anticipated
usage
in
Minimum
lead
=
5400
units
+9000
units
–
(800
units
*4)
=
11200
units
THANK
YOU
Cost accounting is the application of costing principles and techniques to control costs and ascertain profitability. It helps in decision-making, setting prices, identifying wastage sources, and improving efficiency. While it has advantages like aiding in decision-making and preventing fraud, it also has drawbacks such as being expensive and involving excessive paperwork.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
You are allowed to download the files provided on this website for personal or commercial use, subject to the condition that they are used lawfully. All files are the property of their respective owners.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.
E N D
Presentation Transcript
Definition According to ICMA London, cost accounting is the application of costing and cost accounting principles ,methods and techniques to the science, art and practice of cost control and ascertainment of profitability.it includes the presentation of information for the purpose of decision making.
Objectives of cost accounting To find out the total cost and cost per unit To disclose the proportion of different elements in the total cost To provide necessary data for fixing the selling price To ascertain the profitability of each product To identify the sources of wastages and losses To help in the preparation of budgets and its implementation To formulate incentive bonus plans and implement them To exercise effective control on the idle times of men and machines
Advantages of cost accounting Helps in decision making Helps in fixing prices Formulation of future plans Avoidance of wastage Highlights causes Reward to efficiency Prevention of fraud Improvement in profitability
Demerits of cost accounting It is unnecessary It is expensive It is a failure Too much of paper work Restricted applicability
Elements of cost Total cost Material Labour other expenses Direct Indirect Direct Indirect Direct Indirect overheads
Classification of cost Classification according to nature element Classification according to function Classification according to variability a)Fixed cost b)variable cost c)semi-variable cost Classification according to normality a)Normal cost b)Abnormal cost Classification according to controllability a)controllable cost b)uncontrollable cost
Classification by time a)Historical cost b)Pre determined cost Classification according to managerial decisions a)Marginal cost b)Differential cost c)Imputed cost d)Replacement cost e)opportunity cost f)sunk cost Classification according to capital and revenue a)capital costs b)Revenue costs Classification by association with products a)products cost b)period cost
Methods of costing Job costing Contract costing Batch costing Process costing Unit costing Operating costing Multiple costing
Techniques of costing Historical costing Direct costing Absorption costing Uniform costing Marginal costing Standard costing
Cost unit A cost unit refers to a unit of product, service or time in relation to which costs may be ascertained or expressed. Cost Centre A cost Centre is a location ,person or item of equipment for which cost may be ascertained and used for the purpose of cost control
Cost sheet Cost sheet is a statement.it provides information regarding the various elements of cost incurred in production.it discloses the total cost and the cost per unit of products manufactured during the given period.
Types of cost Centre Production cost Centre Service cost Centre Personal cost Centre Impersonal cost Centre Operation cost Centre Process cost Centre Profit Centre
Material control Material control is defined as a systematic control over purchasing ,storage and consumption of materials,so as to maintain a regular supply of materials and avoiding at the same time overstocking
Objectives of material control To make available the right type of materials at the right time To ensure effective utilization of material To prevent over stocking of materials and consequent locking of materials To procure appropriately raw materials at reasonable price To prevent losses during storage of materials To supply information to the management
Pricing issues of material Pricing of materials may change from time to time. Materials are usually acquired by several deliveries at different prices. Actual costs can then take on several different values. Therefore, the materials pricing system adopted should be the simplest and the most effective one.
Methods of stock valuation First-in-first-out(FIFO) Last-in-first-out(LIFO) Weight average cost (WAVCO) Specific identification/unit cost method
First-in-first-out This method assumes that the first stock to be received is the first to be sold. The cost of materials used is based on the oldest prices. The closing stock is valued at the most recent prices.
Last-in-first-out(LIFO) This method assumes that the last stock to be received is the first to be sold. Therefore, the cost of materials used is based on the most recent prices. The closing stock is valued at the oldest prices.
Weight average cost (WAVCO) This method assumes that the cost of materials used and closing stock are valued at the weighted average cost.
Specific identification/unit cost method This method assumes that each item of the stock has its own identity. The costs of materials used and closing stock are determined by associating the units of stock with their specificunit cost.
Economic Order Quantity(EOQ) EOQ is the order quantity that minimizes total inventory carrying costs and ordering costs. Ordering costs are costs that are incurred on obtaining additional inventories. They include costs incurred on communicating the order, transportation cost, etc. Carrying costs represent the costs incurred on holding inventory in hand. They include the opportunity cost of money held up in inventories, storage costs, spoilage costs, etc. 2*O*Q EOQ= C Where EOQ = Economic Order Quantity O= order cost perorder Q = Annual quantity required in units C =Carrying cost per unit perannum
Example The annual consumption of a part X is 5000 units. The procurement cost per order is $10 and the cost per unit is $0.5. The storage and carrying cost is 10% of the material unit cost. Required: Calculate the EOQ
Solution O= $10 Q=5000, C=$0.5*10% 2 OQ C EOQ = 2 * 5000*10 0.5*10% EOQ= = 1414units
Levelsetting It is to determine the correct or most optimal stock level so as to avoid overstocking or under- stocking of materials. These levels are known as the Maximum, Minimum and Re-order levels.
Re-orderlevel The level of stock of material at which a new order for the material should be placed. The formula: Re-orderlevel = (Maximum usage * Maximum lead time)
Maximumlevel The maximum stock level is highest level of stock planned to be held. Any amount above the maximum level will be considered as excessive stock. The formula: Max level = re-order level + Re-order quantity(EOQ) Min anticipated usage in Minimumlead
Minimum level/Safetystock The minimum level is that level of stock that provides a safety buffer in the event of increased demand or reduced receipt of stock caused by the lengthening of lead time. The stock level should not be allowed to fall below the safety stock. Min level= Re-order level Avg. usage in avg. lead time
EXAMPLE Average usage 1000 units per day 800 units Minimum usage per day 1350 units per day Maximum usage Order 9000units Quantity Delivery reliably expected at the beginning of the fourthday. Required: Find the three controllevels.
Re-orderlevel = (Maximum consumption * Maximum re-order period) = 1350 units*4 = 5400units Minimumlevel = Re-order level Average usage in average lead time = 5400 units (800 units *4) = 2200units Maximumlevel = re-order level + EOQ Minimum anticipated usage in Minimumlead = 5400 units +9000 units (800 units*4) = 11200units
