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Cost Ascertainment

Importance of Right Cost


Alternate Strategies
Cost Competitiveness Strategy
Product Differentiation Strategy

Key for knowing cost right


Effective Costing System

Cost is a Perception

How is the Cost Sheet Built?


From Small to Big: What are the Issues?
Order -1

Order - 2

Order - N

Total

Order -1

Order - 2

Order - N

Total

Materials
Total Cost
Sales
Costing Profit

Materials
Labour
Total Cost
Sales
Costing Profit

How is the Cost Sheet Built? Contd


From Small to Big: What are the Issues?

Order -1
Materials
Labour
Expenses
Total Cost
Sales
Costing Profit

Order - 2

Order - N

Total

Cost Elements and Nature


Cost Elements

Traceability

Materials

Functional
Classification
Factory overheads

Direct

Labour

Administrative overheads
Indirect

Expenses

Selling and Distribution


overheads

Cost-Sheet Looks Like


Item
Direct Material Consumed
Direct Wages
Direct Expenses
PRIME COST
Factory overheads absorbed*
Work-in-process
FACTORY COST adjustment# +/FACTORY COST OF PRODUCTION
Administrative Overheads absorbed*
PRODUCTION COST
Finished goods adjustment# +/PRODUCTION COST OF SALES
Selling & Distribution overheads absorbed*
COST OF SALES
Sales Revenues
Costing Profit

Product
X
Y
Z

Total

Calculating Costs: Primary Decisions

Cost vs. Non-cost Items


Cost Units
Cost Centers and Cost Structure
Direct vs. Indirect costs
Process and Treatment of Overheads

Calculating Costs: Process


Allocation of Direct Costs
Treatment of Overheads
Allocation of OH to Cost Centers
Apportionment of OH to micro cost centers
Reapportionment of Dead-end cost-centers to the
micro cost centers
Absorption of OH to Cost Units

Process & Treatment of Overheads


A] Allocation of Overheads
At lowest possible cost center

B] Apportionment of Overheads
Keeping appropriate data
Selection of appropriate basis for distribution

C] Re-apportionment of Overheads
Keeping appropriate data
Selection of appropriate basis for distribution

D] Absorption of (Charging) Overheads


Method selection
Rate determination

Sources of Inaccuracies in Calculated Cost


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Cost Accounting & Decision Making


Management Accounting Tools
Marginal costing: for repetitive decisions
Relevant Costing: for one-time decisions
Standard Costing: for short-term planning and control
Budgeting: for aggregating all decisions

Strategic Cost Management (New tools)


Sound costing system is a pre-requisite
Pro-active thinking in handling problems
External events and strategies are central

SCM Tools
Value Chain Analysis
Supply Chain
Value Added Chain
Consumption Chain

Strategic Position Analysis

Cost Competitiveness
Product Differentiation
Cost Driver Analysis
Target Costing
Learning Curve Analysis
Quality Cost Analysis

Evolution of Cost Accounting System


Conventional System
Emphasis on Cost Elements
Process costing & Job costing

Structural Analysis Approach


Attempt to make blueprint costing system for
different categories of businesses
Contract costing, batch costing, operating costing,
operations costing etc. developed

System Approach

Costing Principles

Cost is an economic sacrifice


Cost must be objective
Principle of exception
Cost specialisation
Fixing cost responsibility

Costing Concepts

Concept of allocation
Economy concept
Concept of cost normality and comparability
Consistency concept
Need concept
Conservatism concept