BASIC CONCEPTS IN COSTING CA-CPT : Q.A & M.

Law
CA-IPCC : Costing & SM
CA-FINAL : AMA
COST
- The Monetary value of all sacrifices made to achieve PARAMETERS OF Payment Based
an objective. Time Based Controllability Based TECHNIQUES OF COSTING INSTALLATION OF A COST SYSTEM
COST EXPRESSION :
- The amount of expenditure (actual or notional) There is no one readymade cost system, which is suitable to all types
- Explicit - Historical
incurred on or attributable to a specified article, 1. Time Parameter - Cost Period. - Controllable / Avoidable / of businesses.
- Implicit - Current
product or activity. Discretionary Therefore, a cost system is specially designed to meet specific needs. PARTICULARS PRODUCT COST PERIOD COST
- Budgeted
2. Location Parameter - Cost Centre - Non - Controllable / Unavoidable / Marginal Costing Budget & Budgetary Control
COSTING- Non - discretionary. This technique involves Points to be Considered before Installing a Cost System:
This technique is popularly used Costs which are not associated

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According to CIMA, “An organization’s costing system 3. Output / Product for managerial decision making. preparation of budgets & use Nature, method and stage of production, no. of varieties, quantity and Cost which becomes part of
Meaning with production but with
is the foundation of the internal financial information Parameter - Cost Unit. Element Based It recognizes the division of of budgets in proper planning other technical aspects. production costs.
time period.
system for managers. It provides the information that Normality Based cost as variable & fixed cost only. & overall managerial control of
Size, layout and organizational structure.
management need to plan and control the organization’s the organization. These are included in These are not included in
- Material - Normal / Recurring
activities and to make decisions about the future.” Standard Costing Existing methods & procedures of purchase, receipts, storage, issue Inclusion in inventory valuation.
- Labour - Abnormal / inventory valuation.
It is technique whereby, std costs and revenues of materials. Inventory They are treated as
- Expenses Non - Recurring. They are written off as
are pre - determined and later on compared Valuation assets till the goods to
COST ACCOUNTING - METHODS OF COSTING : CLASSIFICATION with actual cost and revenue. Std costing is Existing wage payment method. expense in the period
OF COST which they are assigned in which they are
extremely helpful for cost control and is Needs and requirements of management with view to control costs. are actually sold

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Cost Accounting is defined as “ The process of Job Costing incurred.
accounting for cost which begins with the recording of generally used along with budgetary control.
Batch Costing. Associated Based Willingness & co - operation of the staff, workers, etc.
income and expenditure or the bases on which they Contract Costing. Function Based
are calculated and ends with the preparation of Examples Cost of Raw Material, General Administration
periodical statements and reports for ascertaining Process / Operation Costing - Period / Fixed Direct Wages, Costs, Salesmen Salary
and controlling costs.” Unit / Single / Output Costing. - Product / Variable Depreciation, etc.
- Production ESSENTIALS OF GOOD COSTING SYSTEM:
Operating Cosing - Administration Cost Unit : Cost unit is a unit of measurement in which cost may be Variable in nature & changes
- Selling ascertained. Cost effective and economical. Nature of Fixed in nature & changes
Multiple Costing - It is not a according to no. of units according to period of time.
COST ACCOUNTANCY - - Distribution Decision Making Based E. g - Soaps : Number / Carton, Wire : Meter / Km, etc. Cost
Nature Based Simple to understand & easy to operate. produced.

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separate method of costing but
use of combination of different -R&D
Cost Accountancy has been defined as, Minimum clerical work & expenditure.
methods as per the need and - Conversion - Fixed
“The application of costing and cost accounting - Relevant
suitability of the organization. - Pre - production - Variable It should fulfill requirements and needs of management for cost control
principles, methods and techniques to the science, art - Irrelevant Replacement Cost - It is the current market cost of replacing an asset COST SHEET
and practice of cost control and the ascertainment of - Semi - variable. Flexible to take care of any change, expansion or modernization
or material
profitability. It includes the presentation of information without much difficulty and cost. A cost sheet is a statement which shows the break-up and build-up of
derived there for the purpose of managerial decision costs. It is a document, which provides for the assembly of the detailed
making.” It should be introduced with simple & minimum modifications to cost of a cost center or a cost unit.
existing system.

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Sunk Cost : The costs which have already been incurred in the past and
will not require current cash expenditure (historical costs).
PARTICULARS EXPLICIT COST IMPLICIT COST Uses :
Cost Centre : It is defined as a location, person or items of equipment for which cost 1. Presentation of Cost Information.
SCOPE OF COST ACCOUNTING Conversion Cost - It refers to direct wages, direct expenses and OH for converting may be ascertained & used for the purpose of cost control. 2. Determination of Selling Price.
1. Cost Book - Keeping : It involves raw materials to the finished stage or for converting a material 3. Ascertainment of Profitability.
maintaining complete record of all costs Meaning Costs which involve cash payment. Cost which do not involve cash payment. from one stage of production to the other. Personal - Consisting of a person / group of persons. 4. Product-wise & Location-wise Cost Analysis.
incurred from their incurrence to their charge TYPES 5. Inter-firm and Intra-firm Cost Comparison.
to departments, products and services. Impersonal - Consisting of a location / item(s) of equipment. 6. Preparation of Cost Estimates for submitting tenders / quotations.

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Marginal Cost - Marginal cost is the total variable cost i.e. prime cost + variable OH 7. Preparation of Budgets.
2. Cost System : System and procedures are Otherwise known Opportunity costs / Notional costs / It is assumed that variable cost varies directly with production whereas, fixed cost
Out of pocket cost / Actual cost. 8. Disclosure of operational efficiency for Cost Control.
formulated for proper accounting for costs. as Imputed costs / Hidden costs. remains fixed irrespective of volume of production. It is relevant for decision making.
3. Cost Ascertainment : The main objective
of cost accounting is the ascertainment of PRODUCTION COST CENTRE SERVICE COST CENTRE
They are not actually incurred. They cannot Direct Expenses - These are expenses which can be allocated directly to jobs, Items not included in Cost Sheet :
cost of product or services rendered. These are actually incurred and hence, products, processes, cost centers or cost units. According to CIMA, London, Direct
Measurement can be easily and objectively measured. be easily measured and involves subjective
4. Cost Analysis : It involves the process of estimation. Expenses are ‘cost other than material and wages which are incurred for a specific It is a cost center which serves as an ancillary 1. Expenses or Income of purely financial nature.
product or saleable service’. These are also known as Chargeable Expenses. It is a cost center where raw material is
finding out the factors of actual costs varying unit & renders services to a production e.g - dividend, cash discount, etc.
They are included in Prime cost of a product. processed & converted into finished product.
from the budgeted costs and accordingly cost center.
fixation of responsibility for cost differences. Recording in books These are recorded in the books of These are not recorded in the books of 2. Expenses or profit of capital nature
of accounts accounts. accounts. E. g - Royalties, travelling and conveyance expenses, etc. Here only indirect costs are incurred. e.g - profit / loss on sale of investment, etc.
5. Cost Comparison : Cost accounting also Here both direct and indirect costs

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includes comparisons between cost from are incurred There are no direct cost as there is
alternative courses of action such as use of no measurable & saleable output. 3. Items not representing actual costs but dependent on arbitary
Accounting, Reporting, Cost Control & decisions and policies of the management.
different technology for production, cost of Purpose Used only for Decision Making.
Decision Making. e.g - unreasonably high salary to M.D.
making different products and activities, and RESPONSIBILITY CENTRE :
cost of same product / service over a period E.g -Machine shop, welding shop & E.g - Power - house, gas
of time.
It is an activity centre of a business organization entrusted with a special task. assembly shop production shop, etc. 4. Appropriation of profits for dividends, income tax, etc.
Examples Actual rent paid, salaries to staff, Interest on own capital, rent of own
6. Cost Control : It involves a detailed advertisement, etc. premises, salary to proprietor, etc. 5. Abnormal expenditure and costs like penalty, fines, etc.
It is a unit of function of a business organization headed by an executive responsible
examination of each cost in the light of
advantage received from the incurrence of for its performance.

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the cost. Thus, cost is analyzed to know
whether the current level of costs is
satisfactory or not.
7. Cost Reports : This is the ultimate function
of cost accounting. These reports are primarily
prepared for use by the management at
PARTICULARS COST ACCOUNTING FINANCIAL ACCOUNTING
Particulars Cost Centres Revenue Centres Profit Centres Investment Centres STANDARD FORMAT OF COST SHEET
different levels. They help in planning & control
performance appraisal & decision making. PARTICULARS Total Cost (Rs) Cost per unit
It is the application of costing and cost It is the art of recording, classifying and A centre for which a standard amount Centre whose performance is measured Centre responsible for generating

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accounting principles, methods & techniques summarizing in a significant manner and in A centre devoted to raising revenue.
Definition Meaning of cost is pre-determined & used in terms of income earned & cost adequate return on investment Direct Material Consumed : xx
to science, art and practice of cost control terms of money, transactions and events (No responsibility for production)
and ascertainment of profitability. It includes for control incurred by effective utilization of assets.
which are in part atleast of a financial
presentation of information derived for Opening Stock of Raw Material xx

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character & interpreting the results thereof.
decision making. Cost Reduction Profit Earning Earning return on
The primary objective is to contribute to Primary & Cost Control Generation of Sales
It provides financial analysis of business Responsibility Revenue Investments. Add : Purchases & Purchase Expenses xx
profitability through Cost Reduction and Cost It gives financial picture and state of affairs
Control Details Provided affairs product wise, service wise, element
of a business in totality. Less : Closing stock of Raw Material xx
wise or activity wise. Performance Standard Cost Budgeted Revenue Budgeted Profit Budgeted ROI
OBJECTIVE OF COST ACCOUNTING: (-) Actual Cost (-) Actual Revenue (-) Actual Profit (-) Actual ROI
It renders information for the guidance of It safeguards the interests of business, its Evaluation Add : Direct Labour / Employee Cost xx
1. Cost ascertainment. Users of management, proper planning, operation properties and other concerned like creditors,
Information

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2. Cost estimation & determination of control and decision making. shareholders, etc.
Selling Price. Add : Direct Expenses xx
Control of cost is subject to - In this case, one division may have Value of Investment in this centre
To ascertain correct profit / loss position and
3. Cost control and Cost reduction. Main Objective To ascertain the correct cost of production Also responsible for some to sale its output to another needs to be carefully defined & ROI
to give a true and fair view of the state of PRIME COST xx
4. Ascertaining the profit of each activity. or services. Other Points 1. Time. expenses related with division within the organization to be defined as before tax or
affair of business.
5. Assisting management in decision making. 2. Location. marketing of products. at profit, to achieve it’s profit after tax, before interest or
Time Period It is future oriented activity. It is post - mortem activity. target. after interest, etc. Add : Factory / Works OH xx
3. Product.
It forms the basis for managerial decision It forms the basis for fulfilling the legal Gross Factory / Works Cost xx
Usefulness making like make or buy, continue or requirements like Income tax Act, Companies
shutdown, product mix, etc. Act, etc.
IMPORTANCE & ADVANTAGES OF COST ACCOUNTING : Add : Opening WIP xx
ELEMENTS OF COST
COMPARATIVE ANALYSIS
Final Output The final output is in the form of a Cost Sheet. The final output is in the form of Profit & 1. A cost system identifies unprofitable activities, losses or inefficiencies Less : Closing WIP xx

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Basically there are three elements of costs -
1. Material Cost.
Loss A/c & Balance Sheet. such as idle time, spoilage of material, etc.
2. Labour Cost. Objective Profit Maximization. Profit / Loss Ascertainment. 2. Cost accounting locates the causes for decrease or increase in profit Net Factory Cost of Finished Goods xx
3. Expenses Particulars Value Price Cost
Stocks are valued at cost / Net realizable or loss.
Stock Valuation Stocks are valued generally at cost. Add : Administrative OH (Production) xx
These cost elements are further divided into - value, whichever is less. 3. Cost accounts furnish suitable data and information to management for
It considers both historical costs & pre - Generally historical costs are used for Relative Worth of a It is sales price charged by Expenditure incurred in decision making. Add : Quality Control / Packing / R&D Cost xx
Nature of Costs determined costs and extends to plans and recording purposes. Only explicit i.e. actual Meaning commodity to an individual the seller of goods or producing a product or in 4. It helps management to fix the selling price and to furnish quotations /
policies to improve fture performance cost is used in reporting. at a particular point of time. services to the buyer. rendering a service tenders. Less : Credit from Recoveries / Scrap / By-product xx

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Direct Material Indirect Material
(+) Direct Labour (+) Indirect Labour Ascertained 5. Application of Standard Costing & Budgetary Control techniques help to
(+) Direct Expenses (+) Indirect Expenses from
User’s Viewpoint Seller’s Viewpoint Producer’s Viewpoint
achieve optimum level of efficiency and control cost. Cost of Production xx
Prime Cost + Overheads = Total Cost
It is a policy decision of the 6. Variance analysis locates the areas of inefficiencies which require Add : Opening stock of finished goods xx
In practice, the element of cost are better known as - Differentiation /
Different persons attach management to fix the sales Ascertained on the basis of managerial attention. This saves time and energy through management by
1. Material Cost. different values to a product price of the product or services. uniform principles. Hence, it exception. Less : Closing stock of finished goods xx
Subjectivity
2. Labour Cost. at different points of time. They may also change the is objectively determined.
3. Overheads Cost. price from time to time. 7. Determination of Cost Centers helps management to define and fix
responsibilities upon individuals. Cost of Goods Sold xx
Inference Opinion Policy Fact 8. Cost of closing stock of raw material, WIP & finished goods can be easily Add : Administrative OH (General) xx
obtained from cost records & used in the financial accounting to determine
the quantum of profit / loss. Add : Selling & Distribution OH xx*

Cost of Sales xx