AFM - MBA0905 COST ACCOUNTING 1

Accounting for managers

UNIT-3

COST ACCOUNTING

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COST ACCOUNTINGBASIC CONCEPTS AND TERMS

AGENDA:MeaningConceptsTypesDifferencesMethodsTechniques

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Meaning:

Cost Accounting is a quantitative method that

accumulates,classifies,summarizes and interprets financial

and non-financial information for three major purposes:

* ascertainment of cost of a product or service;

* operational planning and control; and

* decision-making.

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Definition:

According to Chartered Institute of Management Accountants- Cost accounting as that part of management accounting which establishes budgets and standard costs

and actual costs of operations,processes,departments or

products and the analysis of variances, profitability or

social use of funds.

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Cost Concept:

Cost concepts supports the view that business cost is

a release of value for the acquisition or creation of

economic resources and is measured in terms of monetary

sacrifice involved.

Resources sacrificed or foregone to achieve a specific

object.

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Types of costs:

Historical cost: It is measured by actual cash payments for acquiring assets,or

goods and services. Estimated cost: It is a predetermined cost. Standard cost: Most scientifically predetermined cost. Average cost: It is the unit cost which is computed by dividing the total cost by

the volume involved. Marginal cost: Measured by the change in cost due to change in output by one

unit.

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Types of costs contd.,

Replacement cost: This is the current cost of replacing an asset. Opportunity cost: Measurable cost of the alternative uses of resources. Sunk cost: It represents historical cost which is irrecoverable in a given

situation. Controllable cost: These are the costs which can be influenced by the action of an

individual in an enterprise within a given time span. Relevant costs: Costs appropriate to aiding the making of specific management

decisions are called relevant costs.

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Differences between Financial and Cost Accounting:

Purpose

Form of Accounts

Recording

Control

Periodicity of Reporting

Analysis of Profit

Reporting of Costs

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Nature of Transactions

Information

Fixation of selling price

Figures

References

Relative efficiency Stock valuation

Type of Science

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Methods of costing:

Job Costing- To ascertain cost and profit or loss in respect of each job undertaken:-

Batch costing Contract costing/terminal costing. Process Costing- To costing of process or operation

involved in converting materials into finished goods. Farm Costing- The main of accounting carried out in

one or more fields.

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Techniques of costing:

In each of the costing methods,various techniques may be used in ascertaining costs. These techniques may be grouped according to their approaches as follows:

1. Absorption costing2. Standard costing3. Marginal costing4. Life cycle costing5. Target costing