Dr. R.A.N.M ARTS AND SCIENCE COLLEGE�Affiliated to Bharathiar University , Accredited with “ B+” NAAC

Mrs.D.Mageswari M.Com(CA).,Mphil., B.Ed., MBA.,

Assistant Professor,

Department of Commerce (CA)

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Course Name : Cost Accounting

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Welcome You All

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Introduction

Cost Accounting is a branch of accounting and has been developed due to limitations of financial accounting. Financial accounting is primarily concerned with record keeping directed towards the preparation of Profit and Loss Account and Balance Sheet. It provides information regarding the profit and loss that the business enterprise is making and also its financial position on a particular date. The financial accounting reports help the management to control in a generalway the various functions of the business but it fails to give detailed reports on the efficiency of various divisions.

Nature:

Cost accounting is a practice of cost control which is as follows:-

a) Cost accounting is a branch of systematic knowledge that is a discipline byitself.

b)It consist its own principles, concepts and conventions which may vary from industry to industry.

c) Cost accounting is a science and arts both .It is science because it is a body of systematic knowledge relating to a wide variety of subject and an artbecause without the efficiency and experience of cost auditor it is not possible to use costing techniques efficiently.

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Importance:

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a) Control of Material Cost

b) Control of Labor Cost

c) Control of Overheads d) Measuring Efficiency

e) Budgeting

f) Price Determination

g) Expansion

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Limitations of Cost Accounting :

a)Not Reliable:

b)Failure of the System

c)Unnecessary

d)Inapplicability

e)Expenses

Classification of Cost :

1. By Nature or Elements

2. By Functions

a) Administration costs

b) Selling and distribution costs

3 By Degree of Traceability to the Product

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Meaning of Materials

Materials cost is one of the important elements of cost of product or unit. It constitutes a substantial proportion of the total cost of production. For material cost control purposes, it is very essential to know the important aspects ofmaterial, material control and material purchase control.

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Materials Control

Materials control may be defined as the systematic control over the procurement, storage and usage of materials so as tomaintain an even flow ofmaterials and at the same time avoiding excessive investment in inventories.

Objectives:

 To ensure the smooth flow of production without interruptions.

 Prevention of excessive investments in materials stock.

Functions of materials Control:

 Purchasing of Materials

 Receiving of Materials

 Inspection of Materials

 Storage of Materials

 Issue of Materials

 Maintenance of Stores Records

 Stock Audit.

Advantages of Materials Control

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(1) It ensures continuous flow of production.

(2) There is maximum utilization of stores resources.

(3) It facilitates economy of buying.

(4) It ensures optimum investments in inventories.

(5) There is possibility of reduction of loss of theft, leakage, obsolescence etc.

(6) It minimizes cost of materials during purchase, storage and issue of materials.

(7) It facilitates effective information system to management

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Economic Order Quantity: (EOQ)

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The total costs of a material usually consist of Buying Cost+Total Ordering Cost+Total Carrying Cost.

Economic Order Quantity is ‘The size of the order for which both ordering and carrying cost are minimum’.

Ordering Cost: The costs which are associated with the ordering of material. It includes cost of staff posted for ordering of goods, expenses incurred on transportation, inspection expenses of incoming material etc..

Carrying Cos :The costs for holding the inventories. It includes the cost of capital invested in inventories. Cost of storage, Insurance etc…

Maximum Level:

MaximumLevel=ReOrderLevel + ReOrderQty – (MinimumRateofConsumption X Minimum Re- Order Period)

Minimum Level

Minimum Level = Re-Order level – (Normal Rate of Consumption X Normal Re-Order Period)Re- Ordering level=Minimum Level + Consumption during lead time

Danger Level:

Danger Level = Normal Rate of Consumption × Maximum Reorder Period for emergency purchases

Cost Price Method

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(a) First in First out

(b) Last-in-first out

(c) Base Stock Method

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Specific price method

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(a) Average Price Method

(b) Simple Average Price Method

(c) Weighted Average Price Method

(d) Moving Simple Average Method

(e) Moving Weighted Average Method

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Methods of Absorption of Overhead

(1) Direct Material Cost Method

(2) Direct Labour Cost Method

(3) Direct Labour Hours Method

(4) Prime Cost Method

(5) Unit of Output Method

(6) Machine Hour Rate Method

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MEANING

Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.

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Definition:

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CIMA London defines process costing as “that form of operation costing which applies where standardize goods are produced”

Meaning & Defnition of Process Costing

COSTING PROCEDURE

For each process an individual process account is prepared.

Each process of production is treated as a distinct cost centre.

Items on the Debit side of Process A/c.

Each process account is debited with–

 Cost of materials used in that process.

 Cost of labour incurred in that process.

 Direct expenses incurred in that process.

 Overheads charged to that process on some predetermined.

 Cost of ratification of normal defectives.

 Cost of abnormal gain(if any arises in that process)

Items on the Credit side:

Each process account is credited with

a) Scrap value of Normal Loss (if any) occurs in that process.

b) Cost of Abnormal Loss (if any occurs in that process)

Thank You