Cost ascertainment and cost control.

MANAGEMENT ACCOUNTING, FINANCIAL ACCOUNTING

AND COST ACCOUNTING.
Mgt accng and Financial accng have different goals .
Mgt accng
Measures and reports fin. and non fin Info.
More wide ranging e.g development and
implementation of strategies, budgeting ,
forecasting, influence on employee
behavior.
GAAP is not strictly followed
Internal focus

Fin. Accng
Only financial
information

GAAP is strictly
followed
Mainly for external
reporting

Cost management and management accounting

Costing is a bit complex in manufacturing and service sectors
compared to merchandising / trading sectors.
No standard definition.
Not practiced in isolation.
1. Cost-Benefit approach is essential in designing and choosing
costing system (economic payoff)
2. Costing system should be tailored to the underlying operations.
The operations should not be tailored to fit the costing system.
3. Costing systems are only one source of information for
managers.

COSTS AND COST TERMINOLOGY

Cost a resource sacrificed or foregone for achieving an objective.
Examples of cost objects at Proctor & Gamble
Cost Object Illustrations
Product
Crest Tartar Control : Original Flavor toothpaste
product
-Service
Telephone hotline providing information and
assistance to users of Pampers Diapers product
Project
R&D Project on alternative scent-free formulations
of Tide detergent products
Customer
Safeway, the retailer, which purchases a broad
renge of Proctor & Gamble products
Brand
Vidal Sassoon range of hairstyle products
Category
Activity
Development and updating Web-site on the internet
or setting up machines for production
Department Environmental, Health and Safety Department.
Elements of costs
CLASSIFICATION OF COSTS
According to
1. Assignment of cost to cost object
2. Function
3. Behavior
1. Assignment to cost object
a.Direct and (Direct material, direct labor, direct other exp)
b. Indirect (Indirect material, indirect labor, indirect other
exp)
2. Function
a. Production (Manufacturing)
b. Administration (Non Manufacturing)

c. Selling and Distribution (Non manufacturing)

d. R & D (Non Manufacturing)
3. Behavior
a. Fixed cost
b. Variable cost
c. Semi-variable cost
DIRECT COSTS AND INDIRECT COSTS
Cost Tracing and cost Allocation
Direct costs of a cost object are related to a particular cost object
and can be traced to that cost object in an economically feasible
way. E.g cost of cans in pepsi cola
Indirect costs of a cost object are related to a particular cost
object but cannot be traced to that cost object in an economically
feasible way. E.g Supervisor in pepsi-cola looking over the bottling
of various drinks.
Factors affecting Direct and Indirect cost classification
Materiality of the cost in question
Available information gathering technology ( Bar codes )
Design of operations ( dedicated facilities )
Direct / Indirect classification depends on the choice of the cost
object. E.g Salary of an assembly department supervisor is a direct
cost if the cost object is the Assembly Dept., but it is an indirect
cost if the cost object is a particular car model.
COST BEHAVIOR PATTERN VARIABLE COSTS AND
FIXED COSTS

Variable cost It changes in total in proportion to changes in the

related level of total activity or volume
Fixed costs It remains unchanged in total for a given time period
despite wide changes in the related level of total activity or
volume.
No cost item is inherently variable or fixed. It depends on the
situation.
A cost item can be a variable cost with respect to one level of
activity and fixed with respect to another. Consider annual
registration and license costs for a fleet of planes owned by an
airline company. Registration and license costs would be a variable
cost with respect to the number of planes owned. But they are
fixed with respect to the miles flown by that plane during a year.
Every cost becomes variable in the long run.
COST DRIVERS
A variable such as level of activity which causally affects costs
over a given time span. E.g miles driven is a cost driver for
distribution costs.
The cost driver for a variable cost is the level of activity but it is
not a cost driver for fixed costs.
Costs that are fixed in the short run have no cost drivers but in the
long run certain cost items they may become a cost driver even for
fixed costs.E.g Testing department. Volume of production is not a
cost driver for testing department.
RELEVANT RANGE
It is that band of activity or level of activity in which there is a
specific relationship between level of activity and the cost in
question.

A fixed cost is fixed only in relation to a given range of activity (at

which the company is expected to operate) and for a given time
span. (usually a particular budget period).
e.g of Rental of refrigerated trucks.
Relevant range also applies to variable costs. After a certain level
of activity direct material may not change proportionately to
production volume due to quantity discounts.
UNIT COSTS AVERAGE COSTS AND TOTAL COSTS.
Give example first.
Use unit costs cautiously.
Units
produced
100,000
200,000
500,000
800,000
10,00,000

VC /
unit
60
60
60
60
60

Total VC

Total FC

Total costs

60,00,000
1,20,00,000
3,00,00,000
4,80,00,000
6,00,00,000

100,00,000
100,00,000
100,00,000
100,00,000
100,00,000

1,60,00,000
2,20,00,000
4,00,00,000
5,80,00,000
7,00,00,000

Unit
cost
160.00
110.00
80.00
72.50
70.00

MANUFACTURING , MERCHANDISING AND SERVICE

SECTOR COMPANIES.
Manufacturing Sector purchase raw material and components and
convert them into various finished goods. Example are TISCO
(Steel), Ranbaxy Labs (Pharmaceuticals Bulk Drugs and
Formulations), Cummins India (Engines), ACC (Cement) and
KSB Pumps.
Trading Sector companies purchase and then sell tangible
products without changing their basic form. Example are Shoppers

Stop, Competent Auto, Usha International, Sical Logistics and

STC.
Service Sector companies provide services or tangible products to
their customers. Examples are State Bank of india (Bank), Apollo
Hospitals (Health Care), Jet Airlines (Transport Airways) ,
Infosys Technologies (Computer Software) and Indian Hotels
(Hotel)
job costing tables\1.tif
Raw material / Direct material inventory,
Work in process inventory
Finished goods inventory.
Classification of manufacturing costs
Direct material cost (incl freight, custom duties)
Direct labor cost (wages and fringe benefits to workers and
assembly line operators)
Indirect manufacturing costs (lubricants, indirect labor, plant
electricity , plant maintenance etc. also known as manufacturing
overheads / factory overheads.
Direct and variable
Direct and fixed
Indirect and variable
Indirect and fixed.
Manufacturing overhead includes
Indirect labor
Forklift truck operator
Plant janitors
Plant guards

Rework labor
Overtime premium paid to plant workers
Idle time
Manager s , department heads, supervisors salary
Payroll fringe costs
Illustration 1:
A car assembly plant assembles two types of cars (Corollas and
Geo prisms). Separate assembly lines are used for each type of car.
Classify each item of cost as D or I and V or F
Cost item
D/ V/
I
F
1. Cost of tyres used on Geo prisms
2. Salary of public relations manager for the plant
3. Annual awards dinner for Corolla suppliers
4. Salary of engineer who monitors design changes on
Geo prisms
5. Freight costs of Corolla engine shipped from japan
6. Electricity costs for the whole plant
7. Wages paid to temporary assembly line workers
hired in periods of
High production (paid on hourly basis)
8. Annual fire insurance policy cost for the plant.
.

Cost Item
PP Beans
Coir
Machine Operator

D/I
D
D
D

V/F
V
V
V

Function
Manf
Manf
Manf

Helper
Sticking Glue
Electricity
Telephone
Tempo
Office staff
Office stationery
Marketing salaries

I
I
I
I
I
I
I
I

F
V
F (SV)
F (SV)
F (SV)
F
F (SV)
F (SV)

Manf
Manf
Manf
Manf.
Manf
Non Manf (Administration)
Non Manf (Administration)
Non- Manf (Marketing)

Illustration 2 :
Consolidated minerals (CM) owns the rights to extract minerals
from beach sands on Madh island. CM has cost in three areas.
a. Payment to a mining sub-contractor who charges 8000 /- per ton
of beach sand mined and returned to the beach after being
processed on the mainland to extract three minerals ilumnite,
rutile, zircon.
b. Payment of a government mining and environmental tax of
500/- per ton of beach sand mined.
c. Payment to a barge operator. This operator charges 15,00,000
per month to transport each batch of beach sand upto 100 tons
per day per batch to the mainland and then return to madh island
(i.e 0-100 tons per day 1,50,000/- per month; 101-200 tons per day
3,00,000/- per month and so on.) each barge operates for 25 days a
month. The monthly charges 0f 1,50,000 must be paid even if
fewer than 100 tons are transported on any day. and even if CM
requires fewer than 25 days of transportation in that month.
CM is currently mining 180 tons of beach minerals per day for 25
days per month.
1. What is the variable cost per ton of beach sand mined? What is
the fixed cost to CM per month?
2. Plot a graph of the variable cost and another graph of fixed cost
Is the concept of relevant range applicable to your graph.

3. what is the unit cost per ton of beach sand mined (a) if 180 tons
are mined each day (b) if 220 tons are mined each day? Explain the
unit cost figures.
ALTERNATIVE CLASSIFICATION OF COSTS
Inventoriable costs and Period costs ( Cost Sheet )
Prime cost and conversion costs
Prime costs All direct manufacturing costs
= DM + Direct manf labor
Conversion Costs All manf costs other than DM.
= Direct manf labor + Manf OH.
COSTING METHODS
1.Job costing (for job foundries or companies which produce goods
against orders)
Variants 1. a) Batch costing a batch of similar products is taken as a
job. E.g toy making industry, biscuit factory etc.)
1. b) Contract costing each order is unique and specific a
contract differs from another contract
2. Process costing (mass produced goods of similar kind, method
used in manufacturing of chemicals, oil, textiles, plastics, paints,
flour, canneries, rubber, cement, meat packing steel works etc.)
Variants
2. a) Unit costing Total production cost is divided by the
number of units produced. ( steel works cost per ton)
2. b) Departmental costing cost for each department is
ascertained and divided by the no. of units produced by the
department. Applied where the product passes through
different departments.
2. c) Operation costing each operation in the production
process is separately costed.

2. d) Operating costing applied in service industries for e.g

hospitals, transportation, canteens etc. composite units like
ton-miles, bed-days, passenger miles etc. are used.
.
3. Hybrid Costing (Operation Costing)
Composite or Multiple costing when job costing and
process costing are used in conjunction with each other. For
e.g production of motor-cars, radios aeroplanes and other
complex products
4. Farm costing
COSTING TECHNIQUES
1. Absorption costing
2. Marginal Costing
3. Target costing
4. Standard costing
5. Life cycle costing
6. Uniform costing
COSTING METHOD SUGGESTS HOW COSTS ARE TO BE
ACCUMULATED AND ASCERTAINED.
A COSTING TECHNIQUE INDICATES THE PRINCIPLES
AND CONCEPTS WHICH GUIDE THE TREATMENT OF THE
ACCUMULATED COST DATA.
A JOB COST MAY BE ASCERTAINED USING EITHER
ABSORPTION OR MARGINAL COSTING TECHNIQUE.
BOTH THE TECHNIQUES CAN BE WITH OR WITHOUT
STANDARD COSTING. SIMILARLY PROCESS COSTING
GENERALLY FOLLOWS ABSORPTION COSTING

TECHNIQUE BUT MARGINAL COSTING TECHNIQUE

CANNOT BE RULED OUT.
COST DRIVERS (SLIDE) ; DIFFERENT COSTS FOR
DIFFERENT PURPOSE. (SLIDE).
Illustration :
In the following situations, determine whether job costing or
process costing would be more appropriate.
1. A CPA firm
2. An oil refinery
3. A custom furniture manufacturer
4. A tire manufacturer
5. A textbook publisher
6. A pharmaceutical company
6. An advertising agency
7. An apparel manufacturing plant
8. A flour mill
9. A paint manufacturer
10. A medical care facility
11. A landscaping company
12. A cola-drink concentrate producer
13. A movie studio
14. A law firm
15. A commercial aircraft manufacturer
16. A management consulting firm
17. A breakfast cereal company
18. A catering service
19. A paper mill
20. An auto-repair garage.