COST Online

ACCOUNTANCY
Lectures
BBA – II SEMESTER - III  

 
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PPT - 2
 Unit – I Introduction to Cost Accounting
Cost Unit
• It is a unit of product, service or time (or combination of these) in
relation to which costs may be ascertained or expressed.
• The forms of measurement used as cost units are usually the units of
physical measurement.
• The choice of cost unit depends upon the nature of the product
manufactured, methods of production and trade practices.
• Thus, cost units are usually the units of physical measurement like
number, weight, area, volume, length, time and value.
• For eg. In case of steel the cost is expressed per tonne, while in case of
transport service it is expressed per kilometer, etc.
• Each industry has a unit of its own for measurement of output of
finished as well as semi- finished products.
 Unit – I Introduction to Cost Accounting
Cost Centre
• Cost Centre is a segment of a plant or in some cases an entire plant
which is treated as a functional unit for the purpose of applying
process overhead.
• It may be a single work point, such as machine, a group of work points
smaller than a department, a processing department or an entire
plant.
• The purpose of creating cost centre is to accumulate and control costs
by subdivision of the plant and distribute them to products in the most
equitable manner.
• Cost Centre is defined as a location, person or an item of equipment
(or group of these) for which cost may be ascertained and used for the
purpose of Cost Control.
 Unit – I Introduction to Cost Accounting
Cost Centre
• So far as plant is concerned, cost centre fall under two categories viz.
productive cost centre and service cost centre.
• Productive Cost Centre:
 A productive cost centre is directly engaged in productive activity and may consist
of similar items of equipment.
 A cost centre based on similarity of operations is called an operation cost centre.
 A process consisting of series of operations may constitute a cost centre called
process cost centre.
 An operation cost centre consists of machines and/or persons carrying out similar
operations while a process cost centre consists of a specific process of a
continuous sequence of operations.
 Unit – I Introduction to Cost Accounting

• Service cost centre:

 Service cost centres are not directly engaged in productive work, but provide
services to productive cost centres so that production work may be carried out.
 Repairs and maintenance department, steam plant, power plant etc. are examples
of service cost centres.
 The cost of service cost centres (service departments) are apportioned to
productive costs centres (production department) on equitable basis.
• Costs of the productive cost centres together with cost transferred
from service cost centres are finally charged to all cost unit handled by
the respective productive cost centres.
• There is no prescribed rule for the number of cost centres to be set up
or created.
 Unit – I Introduction to Cost Accounting
Classification of Cost
• Classification of cost refers to grouping of costs according to their
common characteristics.
• Following are some of the important bases of classification of cost :
a. By Nature of Elements
b. By function
c. By Variability or Behaviour
d. By Controllability
e. By Normality
f. By Costs for Management Decision Making
 Unit – I Introduction to Cost Accounting
Cost Classification By Nature of Elements

Elements of Cost are shown in above diagram

 Unit – I Introduction to Cost Accounting

Cost Classification By Function

• Prime Cost
• Factory Cost
• Cost of Production
• Cost of Goods Sold
• Cost of Sales

Cost Classification By Variability or Behaviour

• Fixed Cost
• Variable Cost
• Semi – Variable Cost
 Unit – I Introduction to Cost Accounting

Cost Classification By Controllability

• Controllable Cost
• Uncontrollable Cost

Cost Classification By Normality

• Normal Cost
• Abnormal Cost
 Unit – I Introduction to Cost Accounting

Cost Classification By Management Decision Making

• Pre - determined Cost
• Standard Cost
• Marginal Cost
• Estimated Cost
• Differential Cost
• Imputed Cost
• Capitalized Cost
• Product Cost
 Unit – I Introduction to Cost Accounting

Following are excluded from Costs

• Expenses related to Capital Assets
• Capital losses
• Expense of Pure Financial Nature
Examples of exclusions from Costs
• Payment / Receipt of Dividend
• Income Tax
• Interest on Loan / Capital
• Discount on issue of Shares / Debentures
• Bad debts
 Unit – I Introduction to Cost Accounting
COST SHEET
• Cost Sheet is Statement Showing Element wise breakup of Cost of
Production and Cost of Sale
• Data recorded in cost sheet is derived from financial accounting, if
separate cost record is not maintained.
• There is no standard format of cost sheet. However, generally it is
prepared in columnar form.
• Number of columns may be increased to show total cost and per unit
cost for current year, previous year and the budget for the next year as
per requirement.
 Unit – I Introduction to Cost Accounting
COST SHEET ( Specimen of Condensed form of Cost Sheet)
 Particulars Total Cost Per Unit Cost
Rs. Rs.
Direct Materials XXXX xx
Direct Labor XXXX xx
Other Direct Expenses XXX xx
Prime Cost XXXX xxx
Add: Works Overheads XXX xx
Works Cost XXXX xxx
Add: Administration Overheads XXX xx
Cost of Production XXXX xxx
Add: Selling & Distribution Overheads XXX xx
Total Cost or Cost of Sale XXXX xxx
 Unit – I Introduction to Cost Accounting
COST SHEET ( Specimen of Detailed form of Cost Sheet)
Cost Sheet

Opening Raw Material Stock XXX

Add: Materials Purchased XXX
Freight / Carriage Inward XXX
----------
XXXX
Less: Purchase Returns XX
Closing Raw Material Stock XX
----------- Material
Consumed XXXX
Direct Labor XXXX
Other Direct Expenses XXXX
--------

PRIME COST XXXX

 Unit – I Introduction to Cost Accounting
COST SHEET ( Specimen of Detailed form of Cost Sheet)
Cost Sheet … Cont’d……
PRIME COST XXXX
Add: Factory Overheads
Indirect Labor XXX
Repairs and Maintenance – factory XXX
Heat, Light and Power XXX
Rates and Taxes XXX
Misc. factory Expenses XXX
Depreciation – Plant & factory building XXX
--------- XXXX
--------
Gross Works Cost XXXX
Add: Opening Stock of Work in Progress XX
Less: Closing Stock of Work in Progress XX
--------
WORKS COST XXXX
 Unit – I Introduction to Cost Accounting
COST SHEET ( Specimen of Detailed form of Cost Sheet)
Cost Sheet … Cont’d……
WORKS COST XXXX
Add: Administrative Overheads
Office Salaries and Expenses XXX
Office Rent XXX
Depreciation – Office Building and furniture XXX
Rates and Taxes XXX
-------- XXXX
--------
COST OF PRODUCTION XXXX
Add: Opening Stock of Finished Goods XX
Less: Closing Stock of Finished Goods XX
--------
COST OF GOODS SOLD XXXX
 Unit – I Introduction to Cost Accounting
COST SHEET ( Specimen of Detailed form of Cost Sheet)
Cost Sheet … Cont’d……
COST OF GOODS SOLD XXXX
Add: Selling and Distribution Overheads
Sales Commission XXX
Advertisement & Sales Promotion XXX
Sales – Travel & Conveyance XXX
-------- XXXX
--------
TOTAL COST XXXX
PROFIT XXX
--------
SALES XXXX
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 Home Assignment - 2

Q 1. Explain in brief the term Cost Unit and Cost Centre

Q 2. Elaborate in detail different basis of Cost Classification

Q 3. What do you mean by Cost Sheet ?

Q 4. Give Three Examples each of Expenses and Income which are not
considered for preparation of Cost Sheet

IMPORTANT NOTE : SUBMIT YOUR ASSISGNMENTS IN TIME, AS THE SAME SHALL BE

CONSIDERED AS YOUR ATTENDANCE AND ALSO FOR YOUR OVERALL EVALUATION OF
YOUR ACADEMIC PERFORMANCE FOR THIS ACADEMIC YEAR