Important Topics:
- Meaning and Definition of Cost Accounting
- Objectives of Cost Accounting
- Elements of Cost (Material, Labour, Expenses)
- Classification of Costs (Fixed, Variable, Semi-Variable)
- Cost Sheet – Preparation and Format
- Methods of Costing (Job, Batch, Contract, Process, Operating)
- Techniques of Costing (Marginal, Standard, Direct, Absorption)
- Budget and Budgetary Control – Meaning and Objectives
- Types of Budgets (Sales, Production, Cash, Flexible, Master)
- Advantages and Limitations of Budgetary Control
- Variance Analysis – Meaning and Types (Material, Labour, Overhead)
- Marginal Costing – Meaning, Features, Advantages
- Cost-Volume-Profit (CVP) Analysis
- Break Even Point – Meaning, Formula, Graphical Presentation
- Margin of Safety
- Applications of Marginal Costing (Pricing, Make or Buy, Sales Mix)
1. Meaning and Definition of Cost Accounting
Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, product, or service. It helps in determining the cost of production and controlling costs.
Definition: "Cost accounting is the process of accounting for costs from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units." – Institute of Cost and Management Accountants (ICMA)
Simple Explanation: Cost accounting is like keeping a detailed record of all expenses – how much you spend on materials, labor, and other things – to find out the exact cost of making a product and to control those costs.
Live Example 1: A bakery calculates the cost of flour, sugar, labor, and electricity to find the cost of making one cake.
Live Example 2: A car manufacturer tracks costs of steel, wages, and machine maintenance to determine the cost per vehicle.
Live Example 2: A car manufacturer tracks costs of steel, wages, and machine maintenance to determine the cost per vehicle.
💭 Think: Why is it important for a business to know the exact cost of its products?
Hints: To set the right selling price, to identify waste, to compare with competitors, to maximize profit.
Hints: To set the right selling price, to identify waste, to compare with competitors, to maximize profit.
Exam Practice (2 marks): Define cost accounting.
Answer Structure: Cost accounting is the process of recording, classifying, and allocating costs to determine the cost of products/services and control costs. (2 marks for complete definition)
Answer Structure: Cost accounting is the process of recording, classifying, and allocating costs to determine the cost of products/services and control costs. (2 marks for complete definition)
2. Objectives of Cost Accounting
- To ascertain the cost per unit of different products
- To control costs through cost reduction programs
- To provide cost information for pricing decisions
- To help in preparing budgets and setting standards
- To identify profitable and unprofitable activities
- To provide data for management decision-making (make or buy, outsourcing, etc.)
- To help in inventory valuation and financial reporting
3. Elements of Cost
Cost is classified into three main elements:
A. Material Cost
- Direct Material: Raw materials that become part of the finished product (e.g., wood for furniture, flour for bread)
- Indirect Material: Materials used indirectly (e.g., lubricants, cleaning supplies, stationery)
B. Labour Cost
- Direct Labour: Wages paid to workers directly involved in production (e.g., machine operator, assembly worker)
- Indirect Labour: Wages of support staff (e.g., supervisors, cleaners, security)
C. Expenses
- Direct Expenses: Expenses directly chargeable to production (e.g., royalty, design charges)
- Indirect Expenses (Overheads): All other expenses (e.g., rent, insurance, depreciation, selling costs)
Simple Explanation: Think of making a pizza – direct material is the dough and toppings, direct labour is the cook's wages, indirect costs are the shop rent and electricity.
4. Classification of Costs
- Fixed Costs: Costs that do not change with output (rent, salary, insurance)
- Variable Costs: Costs that vary directly with output (raw materials, direct wages)
- Semi-Variable Costs: Partly fixed and partly variable (telephone charges – fixed rental + variable call charges)
- Direct Costs: Directly traceable to a product (direct material, direct labour)
- Indirect Costs: Cannot be directly traced (factory rent, administrative expenses)
- Product Costs: Costs incurred to manufacture a product
- Period Costs: Costs not related to production (selling and administrative costs)
Live Example: A factory's rent is fixed (same whether they make 100 or 1000 units), but raw material cost is variable (more units = more material).
5. Cost Sheet – Preparation and Format
A cost sheet is a statement that shows the total cost and cost per unit of a product. It includes all elements of cost in a structured format.
| Cost Sheet for the period ended ______ | |
|---|---|
| Direct Materials Consumed | xxxx |
| Direct Labour | xxxx |
| Direct Expenses | xxxx |
| Prime Cost | xxxx |
| Add: Factory Overheads (Indirect Materials, Indirect Labour, Factory Rent, Depreciation, etc.) | xxxx |
| Factory Cost / Works Cost | xxxx |
| Add: Administrative Overheads (Office Salaries, Rent, etc.) | xxxx |
| Cost of Production | xxxx |
| Add: Selling & Distribution Overheads (Sales Salaries, Advertising, Delivery) | xxxx |
| Total Cost / Cost of Sales | xxxx |
| Add: Profit | xxxx |
| Sales | xxxx |
Exam Practice (5 marks): Prepare a cost sheet from the following: Direct materials ₹50,000, Direct labour ₹20,000, Direct expenses ₹5,000, Factory overheads ₹10,000, Administrative overheads ₹8,000, Selling overheads ₹6,000, Profit ₹15,000. Calculate Prime Cost, Factory Cost, Cost of Production, Total Cost, and Sales.
Answer: Prime Cost = 50,000+20,000+5,000 = 75,000; Factory Cost = 75,000+10,000 = 85,000; Cost of Production = 85,000+8,000 = 93,000; Total Cost = 93,000+6,000 = 99,000; Sales = 99,000+15,000 = 1,14,000.
Answer: Prime Cost = 50,000+20,000+5,000 = 75,000; Factory Cost = 75,000+10,000 = 85,000; Cost of Production = 85,000+8,000 = 93,000; Total Cost = 93,000+6,000 = 99,000; Sales = 99,000+15,000 = 1,14,000.
6. Methods of Costing
- Job Costing: Cost determined for each job or work order (printing press, repair shop)
- Batch Costing: Cost for a batch of identical products (pharmaceuticals, bakery)
- Contract Costing: Used for long-term contracts (construction, civil engineering)
- Process Costing: Used where production is continuous (chemicals, oil refining, cement)
- Operating Costing: Used for services (transport, hospitals, electricity)
Live Example: A construction company uses contract costing for building a bridge; a transport company uses operating costing for its buses.
7. Techniques of Costing
- Marginal Costing: Only variable costs are charged to products; fixed costs are treated as period costs
- Standard Costing: Costs are predetermined and compared with actual costs to find variances
- Direct Costing: Only direct costs are assigned to products
- Absorption Costing: All costs (fixed and variable) are absorbed into products
8. Budget and Budgetary Control
Budget: A budget is a quantitative expression of a plan of action prepared in advance for a defined period. It may be expressed in financial or physical terms.
Budgetary Control: The process of preparing budgets, comparing actual performance with budgets, and taking corrective action to achieve planned objectives.
Objectives of Budgetary Control
- To ensure planning for the future
- To coordinate different departments
- To control costs by comparing actual with budgeted
- To fix responsibility for deviations
- To motivate employees to achieve targets
- To optimize resource utilization
Types of Budgets
- Sales Budget: Estimated sales for the period
- Production Budget: Units to be produced
- Cash Budget: Estimated cash inflows and outflows
- Flexible Budget: Changes with output level
- Fixed Budget: Prepared for one level of activity
- Master Budget: Summary of all functional budgets
Simple Explanation: A budget is like a financial roadmap for the year – how much you plan to sell, spend, and earn. Budgetary control is checking if you're following that roadmap and making corrections.
Advantages of Budgetary Control
- Forces management to plan ahead
- Coordinates activities of different departments
- Provides standards for performance evaluation
- Helps in cost control and reduction
- Highlights areas of inefficiency
- Motivates employees through targets
Limitations of Budgetary Control
- Based on estimates which may be inaccurate
- Rigid application may cause problems
- Time-consuming and expensive
- Requires support from all levels
- May create conflict between departments
- Success depends on accuracy of forecasts
💭 Think: Why might a budget fail even if it is carefully prepared?
Hints: Unexpected market changes, inaccurate estimates, lack of employee cooperation, poor communication.
Hints: Unexpected market changes, inaccurate estimates, lack of employee cooperation, poor communication.
9. Variance Analysis
Variance analysis is the process of calculating and analyzing the differences between standard costs and actual costs.
Types of Variances:
- Material Variances: Difference in material cost, usage, and price
- Labour Variances: Difference in labour cost, efficiency, and rate
- Overhead Variances: Difference in overhead costs
- Sales Variances: Difference in sales revenue, price, and volume
Live Example: If a company budgeted ₹10 per kg for material but actually paid ₹12, there is an unfavorable material price variance of ₹2 per kg.
10. Marginal Costing
Marginal costing is a technique where only variable costs are charged to products. Fixed costs are treated as period costs and are written off in full against the contribution for the period.
Features:
- Costs are classified into fixed and variable
- Only variable costs are considered for product costing
- Fixed costs are treated as period costs
- Valuation of inventory is at marginal cost
- Profit is calculated using contribution margin
Advantages:
- Simplifies costing
- Helps in decision-making (make or buy, pricing, sales mix)
- Shows contribution of each product
- Useful for profit planning and cost control
11. Cost-Volume-Profit (CVP) Analysis
CVP analysis studies the relationship between costs, volume, and profit. It helps in understanding how changes in volume affect costs and profit.
Key concepts:
- Contribution = Sales – Variable Cost
- PV Ratio = Contribution / Sales × 100
- Break Even Point (BEP) in units = Fixed Cost / Contribution per unit
- BEP in sales = Fixed Cost / PV Ratio
- Margin of Safety = Actual Sales – Break Even Sales
Exam Practice (3 marks): Calculate BEP from: Fixed Cost ₹1,00,000, Selling Price per unit ₹50, Variable Cost per unit ₹30.
Answer: Contribution per unit = 50-30 = ₹20; BEP (units) = 1,00,000/20 = 5,000 units; BEP (sales) = 5,000 × 50 = ₹2,50,000.
Answer: Contribution per unit = 50-30 = ₹20; BEP (units) = 1,00,000/20 = 5,000 units; BEP (sales) = 5,000 × 50 = ₹2,50,000.
Margin of Safety
Margin of Safety (MOS) is the excess of actual sales over break-even sales. It indicates how much sales can fall before the company starts making losses.
MOS = Actual Sales – Break Even Sales
MOS Ratio = MOS / Actual Sales × 100
Live Example: If actual sales are ₹5,00,000 and BEP sales are ₹3,00,000, MOS = ₹2,00,000 (40% of sales). A higher MOS means lower risk.
12. Applications of Marginal Costing
- Pricing Decisions: Determining minimum price in special orders
- Make or Buy Decisions: Whether to produce internally or outsource
- Sales Mix Decisions: Which product to promote more
- Key Factor Analysis: Optimizing use of scarce resources
- Accepting Special Orders: Whether to accept orders below normal price
- Shut Down Decisions: Whether to temporarily close a plant
💭 Think: A company gets a special order at ₹40 per unit when its normal price is ₹50. Variable cost is ₹35. Should they accept?
Hints: Contribution from special order = ₹5 per unit. If there is idle capacity, they should accept as it adds to profit.
Hints: Contribution from special order = ₹5 per unit. If there is idle capacity, they should accept as it adds to profit.
യൂണിറ്റ് 5: കോസ്റ്റ് അക്കൗണ്ടിംഗും ബജറ്ററി കൺട്രോളും – പ്രധാന വിഷയങ്ങൾ:
- കോസ്റ്റ് അക്കൗണ്ടിംഗിന്റെ അർത്ഥവും നിർവചനവും
- കോസ്റ്റ് അക്കൗണ്ടിംഗിന്റെ ലക്ഷ്യങ്ങൾ
- ചെലവിന്റെ ഘടകങ്ങൾ (മെറ്റീരിയൽ, ലേബർ, എക്സ്പെൻസസ്)
- ചെലവുകളുടെ വർഗ്ഗീകരണം (സ്ഥിരം, വേരിയബിൾ, അർദ്ധ-വേരിയബിൾ)
- കോസ്റ്റ് ഷീറ്റ് – തയ്യാറാക്കലും ഫോർമാറ്റും
- കോസ്റ്റിംഗ് രീതികൾ (ജോബ്, ബാച്ച്, കോൺട്രാക്റ്റ്, പ്രോസസ്, ഓപ്പറേറ്റിംഗ്)
- കോസ്റ്റിംഗ് ടെക്നിക്കുകൾ (മാർജിനൽ, സ്റ്റാൻഡേർഡ്, ഡയറക്റ്റ്, അബ്സോർപ്ഷൻ)
- ബജറ്റും ബജറ്ററി കൺട്രോളും – അർത്ഥവും ലക്ഷ്യങ്ങളും
- ബജറ്റുകളുടെ തരങ്ങൾ (സെയിൽസ്, പ്രൊഡക്ഷൻ, ക്യാഷ്, ഫ്ലെക്സിബിൾ, മാസ്റ്റർ)
- ബജറ്ററി കൺട്രോളിന്റെ ഗുണങ്ങളും പരിമിതികളും
- വേരിയൻസ് അനാലിസിസ് – അർത്ഥവും തരങ്ങളും (മെറ്റീരിയൽ, ലേബർ, ഓവർഹെഡ്)
- മാർജിനൽ കോസ്റ്റിംഗ് – അർത്ഥം, സവിശേഷതകൾ, ഗുണങ്ങൾ
- കോസ്റ്റ്-വോളിയം-പ്രോഫിറ്റ് (CVP) വിശകലനം
- ബ്രേക്ക് ഈവൻ പോയിന്റ് – അർത്ഥം, ഫോർമുല, ഗ്രാഫിക്കൽ പ്രസന്റേഷൻ
- മാർജിൻ ഓഫ് സേഫ്റ്റി
- മാർജിനൽ കോസ്റ്റിംഗിന്റെ പ്രയോഗങ്ങൾ (വിലനിർണ്ണയം, മേക്ക് ഓർ ബൈ, സെയിൽസ് മിക്സ്)
1. കോസ്റ്റ് അക്കൗണ്ടിംഗിന്റെ അർത്ഥവും നിർവചനവും
ഒരു ഉൽപ്പന്നത്തിന്റെയോ സേവനത്തിന്റെയോ ഉൽപാദനവുമായി ബന്ധപ്പെട്ട ചെലവുകൾ രേഖപ്പെടുത്തുക, തരംതിരിക്കുക, വിശകലനം ചെയ്യുക, സംഗ്രഹിക്കുക, അനുവദിക്കുക എന്നീ പ്രക്രിയകളാണ് കോസ്റ്റ് അക്കൗണ്ടിംഗ്.
2. ചെലവിന്റെ ഘടകങ്ങൾ
- മെറ്റീരിയൽ: നേരിട്ടുള്ള (ഉൽപ്പന്നത്തിന്റെ ഭാഗമാകുന്നവ), പരോക്ഷമായ (ലൂബ്രിക്കന്റുകൾ, ക്ലീനിംഗ് സാമഗ്രികൾ)
- ലേബർ: നേരിട്ടുള്ള (ഉൽപാദന തൊഴിലാളികൾ), പരോക്ഷമായ (മേൽനോട്ടക്കാർ, ക്ലീനർമാർ)
- എക്സ്പെൻസസ്: നേരിട്ടുള്ള (റോയൽറ്റി, ഡിസൈൻ ചാർജുകൾ), പരോക്ഷമായ (വാടക, ഇൻഷുറൻസ്, ഡെപ്രിസിയേഷൻ)
3. കോസ്റ്റ് ഷീറ്റ്
ഒരു ഉൽപ്പന്നത്തിന്റെ ആകെ ചെലവും യൂണിറ്റ് ചെലവും കാണിക്കുന്ന പ്രസ്താവനയാണ് കോസ്റ്റ് ഷീറ്റ്.
| കോസ്റ്റ് ഷീറ്റ് | |
|---|---|
| പ്രൈം കോസ്റ്റ് (നേരിട്ടുള്ള മെറ്റീരിയൽ + ലേബർ + എക്സ്പെൻസസ്) | xxxx |
| ഫാക്ടറി ഓവർഹെഡുകൾ | xxxx |
| ഫാക്ടറി കോസ്റ്റ് | xxxx |
| അഡ്മിനിസ്ട്രേറ്റീവ് ഓവർഹെഡുകൾ | xxxx |
| ഉൽപാദന ചെലവ് (കോസ്റ്റ് ഓഫ് പ്രൊഡക്ഷൻ) | xxxx |
| സെല്ലിംഗ് & ഡിസ്ട്രിബ്യൂഷൻ ഓവർഹെഡുകൾ | xxxx |
| ആകെ ചെലവ് (ടോട്ടൽ കോസ്റ്റ്) | xxxx |
| ലാഭം | xxxx |
| വിൽപ്പന (സെയിൽസ്) | xxxx |
4. ബജറ്റും ബജറ്ററി കൺട്രോളും
മുൻകൂട്ടി തയ്യാറാക്കുന്ന പ്രവർത്തന പദ്ധതിയുടെ അളവ്പരമായ പ്രകടനമാണ് ബജറ്റ്. ബജറ്റ് തയ്യാറാക്കുക, യഥാർത്ഥ പ്രകടനവുമായി താരതമ്യം ചെയ്യുക, തിരുത്തൽ നടപടികൾ സ്വീകരിക്കുക എന്നിവയാണ് ബജറ്ററി കൺട്രോൾ.
5. ബ്രേക്ക് ഈവൻ പോയിന്റ് (BEP)
ആകെ വരുമാനവും ആകെ ചെലവും തുല്യമാകുന്ന വിൽപ്പന നിലവാരമാണ് BEP (നഷ്ടവുമില്ല ലാഭവുമില്ല).
BEP (യൂണിറ്റിൽ) = സ്ഥിര ചെലവ് / യൂണിറ്റ് കോണ്ട്രിബ്യൂഷൻ
BEP (വിൽപ്പനയിൽ) = സ്ഥിര ചെലവ് / PV റേഷ്യോ
കോണ്ട്രിബ്യൂഷൻ = വിൽപ്പന – വേരിയബിൾ ചെലവ്
PV റേഷ്യോ = കോണ്ട്രിബ്യൂഷൻ / വിൽപ്പന × 100
ഉദാഹരണം: സ്ഥിര ചെലവ് ₹1,00,000, വിൽപ്പന വില യൂണിറ്റിന് ₹50, വേരിയബിൾ ചെലവ് യൂണിറ്റിന് ₹30. BEP (യൂണിറ്റ്) = 1,00,000/20 = 5,000 യൂണിറ്റ്; BEP (വിൽപ്പന) = 5,000 × 50 = ₹2,50,000.
6. മാർജിൻ ഓഫ് സേഫ്റ്റി
യഥാർത്ഥ വിൽപ്പനയും BEP വിൽപ്പനയും തമ്മിലുള്ള വ്യത്യാസമാണ് മാർജിൻ ഓഫ് സേഫ്റ്റി. കമ്പനിക്ക് നഷ്ടം വരാതെ എത്രത്തോളം വിൽപ്പന കുറയാം എന്ന് ഇത് കാണിക്കുന്നു.
Important Exam Questions
- What is cost accounting? Explain its objectives.
- Prepare a cost sheet from the following: Direct materials ₹80,000, Direct labour ₹40,000, Direct expenses ₹10,000, Factory overheads ₹20,000, Administrative overheads ₹15,000, Selling overheads ₹12,000, Profit ₹25,000.
- Explain the different elements of cost with examples.
- What is a budget? Explain the types of budgets.
- What is budgetary control? State its advantages and limitations.
- Calculate BEP and Margin of Safety from: Fixed cost ₹2,00,000, Selling price per unit ₹100, Variable cost per unit ₹60, Actual sales ₹5,00,000.
- Explain marginal costing and its applications.
- What is variance analysis? Explain the different types of variances.
- Distinguish between fixed cost and variable cost.
- Write short notes on: a) PV Ratio b) Contribution c) Margin of Safety d) Flexible Budget
