COST AND MANAGEMENT

ACCOUNTING
What is accounting?
• A language
• Which communicates economic information.(to
whom?)
• To people who have an interest in an organization.
• Who are such people?
• Managers, shareholders, potential investors,
employees, creditors, government.
• Accounting can be divided into two broad
categories based on information needs
 Accounting
Information

For internal parties For external parties outside

within the the
organization(Managers/ organization(Shareholders/
Employees) creditors/Government)

Management Accounting Financial Accounting to

for decision making match revenues and costs

What is the meaning of "match revenue and costs"?

What is Cost Accounting?
Matching Revenue and costs
One thousand staplers are produced
at a total cost of Rs. 50,000. Seven
hundred staplers are sold for Rs.
49,000. What is the profit and what is
the value of the closing stock?
 Matching Revenue and costs
Answer:
No. of staplers produced 1000
No. of staplers sold 700
Total Per Unit
Production Cost for 1000 staplers 50000 50
Calculation of Profit
Sale of 700 Staplers 49000 70 ) In FA this information will
Cost of 700 Staplers 35000 50 ) appear in the Profit and
Profit on sale of 700 staplers 14000 20 ) Loss account.
Calculation of Closing Stock Value
No. of staplers produced 1000 )
No. of staplers sold 700 )
Unsold staplers(Closing Stock) 300 ) In FA the value of closing
Cost of one stapler 50 ) stock will appear in the
Value of closing stock(300 staplers) 15000 ) Balance Sheet

We do not do "50000-49000=1000", which is wrong.

 What is cost Accounting?
Cost Accounting is concerned with the calculation of product costs for
use in Financial Accounting. How did we arrive at the cost of Rs.
50000? What does it consist off? It could consist of the following:

Material Cost
Cost of steel 25000
Cost of Plastic 10000
35000
Cost of Labour 12000
Overheads 3000
50000
What is cost Accounting?
• Cost accounting involves accumulation of cost
under appropriate heads for stock valuation to
meet requirements of external reporting.
• The total value of unsold finished stock, work in
progress(WIP) and unused raw material is to be
deducted from current period costs when
calculating profit.
Cost accounting was developed to provide
this information. The void left by FA is filled
by CA.
Definitions/concepts
• Cost-amount of expenditure incurred on or
attributed to a given item. Cost consists of
material, labour, other expenses, whether direct or
indirect. Terms interchangeably used are expense
and loss.
• Activity-Manufacturing a product, rendering a
service, operating a machine.
• Cost Objective is any activity for which separate
measurement of cost is desired.
• Costing-process of determining cost. Objects of
costing are activities
 Definitions/concepts
• Period Costs are those not included in stock
valuation and are treated as expenses in the period
to which they pertain.(Rent/Insurance)
• Product Costs are those costs which are
identified with goods produced for sale. In a
manufacturing organization they are attached to
the product and included in stock valuation of
Finished Goods and WIP(Steel).

Both period costs and product costs are eventually

classified as expenses. Major difference is the point in
time at which they are so classified.
 Period Cost and Product Cost.
Manufacturing Cost(Direct Unsold Recorded as an asset in the
Product Cost
Material/Labour) Balance sheet and becomes
an expense in the profit and
loss account when product is
Sold sold

Non Manufacturing Recorded as an expense in

Period Cost
Cost(Rent, Insurance) the Profit and loss account in
the current accounting period
Example
100 nos. of a product are produced with following costs in the
year 2012. Out of 100 units, 75 nos are sold for Rs. 1500 each.

Manufacturing cost
Materials 90000
Labour 10000
Total 100000

Non Manufacturing cost

Rent for 2012 6000
Insurance 2012 4800

1.What is the manufacturing cost per unit?

2.What is the profit for the period?
3.What is the value of inventory as on 31.12.12?
4.What would be the answer to 2 & 3 be, if 90 units were sold?
No of Units Manufactured 100

Manufacturing cost Total Per Unit

Materials 90000 900
Labour 10000 100
Total 100000 1000
Calculation of profit Value of Inventory
No of Units Sold 75 90 No of units in stock 25 10
Per unit Total Total Unit Mfg. Cost 1000 1000
Selling Price/Sales(A) 1500 112500 135000 Inventory value 25000 10000
Manufacturing cost
Materials 900 67500 81000
Labour 100 7500 9000
Total Mfg Cost(B) 75000 90000
Gross Profit-C(A-B) 37500 45000
Non Manufacturing cost
Rent for 2012 6000 6000
Insurance 2012 4800 4800
Total Non Mfg Cost(D) 10800 10800
Net Profit(C-D) 26700 34200
What is the total cost per unit if 75 units are sold and if 90 units are sold?
Cost Per Unit
Manufacturing cost 75 Units 90 Units
Materials 900 900
Labour 100 100
Total Mfg Cost(A) 1000 1000

Non Manufacturing cost

Rent for 2012 80 67
Insurance 2012 64 53
Total Non Mfg Cost(B) 144 120
Total Cost per Unit(A+B) 1144 1120
Selling Price Per Unit 1500 1500
Profit per unit 356 380
Total Profit 26700 34200
What do you observe?
Elements of Cost
• Material
• Labour
• Expenses
 Elements
of Cost

Material Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

Material Material Labour Labour Expenses Expenses

Prime
Cost Overheads
 Overheads

Office & Selling &

Factory
Administration Distribution
Overheads
Overheads Overheads
 Definitions/concepts
• Cost collection System.-accumulates costs
and classifies, them into certain costs such as
labour, material or overheads costs and then
allocates these costs to cost objectives.

• Keywords: Accumulates/Classifies/Allocates
Cost Collection System

Accumulates
All Costs

Classifies Material Labour Others

Activity Activity Activity Activity Activity Activity

Allocates 1 2 1 2 1 2
Classification of Cost:
• On the basis of Identifiability or Traceability
- Direct Cost
- Indirect Cost
• On the basis of Functions
- Factory or Production or Manufacturing Cost
- Administration Cost
- Selling and Distribution Cost
- Research and Development Cost
• On the basis of Variability
- Fixed Cost - Semi-Variable Cost
- Variable Cost
Costs according to behavior

• Fixed Costs-those that arise in relation to

passage of time and which within certain limits
are not affected by fluctuations in the level of
output .Fixed in relation to time.Vehicle
Servicing.
• Variable Costs-those that change with the
level of activity. (Petrol, materials, power).
• Semi Variable -include both fixed and
variable(overtime, maintenance)
 How Fixed cost reacts to changes in level of activity
Total Per Unit

Rs. Rs.

Activity Activity

How variable cost reacts to changes in level of activity

Total Per Unit

Rs. Rs.

Activity Activity
 How Fixed cost reacts to changes in level of activity
Total Per Unit

Rs. Rs.

Activity Activity

A factory is manufacturing staplers. The factory premises are rented out at a cost
of Rs. 10000 per month.What will be the rental cost per stapler if the factory
produces 50,100,150,200,250,300,350.400,450,500 staplers per month?

No of Rent per
Staplers Total Rent Stapler
50 10000 200
100 10000 100
150 10000 67
200 10000 50
250 10000 40
300 10000 33
350 10000 29
400 10000 25
450 10000 22
500 10000 20
 How variable cost reacts to changes in level of activity
Total Per Unit

Rs. Rs.

Activity Activity

The cost of steel to make one stapler is Rs. 100.What is the total cost of steel to
make 50,100,150,200,250,300,350,400,450,500 staplers?
No of Total Steel Steel per
Staplers Cost Stapler
50 5000 100
100 10000 100
150 15000 100
200 20000 100
250 25000 100
300 30000 100
350 35000 100
400 40000 100
450 45000 100
500 50000 100