chapter 1 cost accounting PDF

Joseph Anbarasu
Basics of
Cost
Accounting
Cost Accounting

Joseph Anbarasu
CHAPTER 1
COST ACCOUNTING
INTRODUCTION
1. Why should there be costing in the field of business?
Costing is a branch of accounting. It helps us to classify, record, and
allocate the expenditure for the determination of costs of product.
Expenditure involved in business has to be ascertained to fix the price of a
product produced. The expenditure is to be understood in terms of
material, labour and other direct and indirect expenses. The major purpose
of such classification is to estimate the profit and to understand its
relationship with costs and price. The three elements of a transaction i.e.,
cost, profit and price are necessary components of any business activity.
Example:
A mobile phone factory introduces a new device. The factory
incurs Rs. 400 for material, Rs.400 for labour and Rs.200 for
overhead on every mobile phone produced and supplied in the
market. The total cost comes around Rs.1000. If the price of the
device is Rs. 1500, the profit per device is Rs. 500 (1500-1000).
The management requires all information as seen in the example for each
product produced. The above estimation is done for the purpose of
planning, cost control and decision-making. The existing system of
financial accounting does not provide the necessary information to do
similar estimation. Such deficiency of financial accounting has given rise to
the need of cost accounting.
2. Define cost accounting.
The word ‘Costing’ refers to the technique and process of ascertaining
costs. There have been certain rules and principles in the field of costing
developed over years by our forefathers. These rules and principles help us
to ascertain the cost of products produced. The term 'Cost Accounting’
refers to the recording of all incomes and expenditures and ends with the
preparation of periodical statements and reports for ascertaining and
controlling costs.
Definitions of Cost Accounting.
According to the Terminology used by the Institute of Cost and
Management Accountants, “Cost accounting is the 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.”
Cost Accounting

Joseph Anbarasu
3. What are the difference between financial accounting and cost
accounting?
Both accounting are complementary to each other. Preparation of both
accounts is helping the organisation to the smooth running of the
business. The difference between Cost Accounting and Financial
Accounting is given below:
Cost Accounting Financial Accounting
1) It helps us to ascertain the cost of
goods produced.
It helps us to know operational
results and financial position of
business.
2) It provides required information to
the management.
It provides information parties
involved in business internally
and externally.
3) It need not be followed by a
system of external audit
Audit is a statutory obligation
4) It classifies the costs into
material, labour, fixed overhead
and variable overhead.
Transactions are divided into
debit and credit terms.
5) Cost sheet is main format of cost
accounting
Trading and Profit & Loss Account
and Balance Sheet are two
consolidated financial statements.
6) It does not form a basis for tax
assessment.
It forms a basis for deciding the
tax liabilities of the business.
7) Variance analysis is to identify the
favourable and adverse difference
between standard cost and actual
cost.
It records only actual transactions
occurring in the course of
business operations
8) Cost accounting facilitates the
presentation of cost information
at regular intervals.
Financial statements are annually
presented.
9) Profit or loss is estimated on
specific product, branch,
department or job.
It presents operational results of
the entire business.
10) It is an effective control device Financial accounting is not a
control device. Rather, accounting
ratios can be computed with
financial accounting.
11) Unit wise accounting is also
prepared.
Monetary units alone are
yardstick of financial accounting.
4. Bring out the difference between financial and management accounting.
There are two broad types of accounting information:
Cost Accounting

Joseph Anbarasu
Financial Accounts: It is geared toward external users of accounting
information
Management accounts: It aims more at internal users of accounting
information
Although there is a difference in the type of information presented in
financial and management accounts, the underlying objective is the same -
to satisfy the information needs of the user.
Financial Accounts Management Accounts
Financial accounts describe the
performance of a business over a
specific period and the state of
affairs at the end of that period. The
specific period is often referred to as
the “Trading Period” and is usually
one year long. The period-end date
as the “Balance Sheet Date”
Management accounts are used to
help management record, plan and
control the activities of a business
and to assist in the decision-making
process. They can be prepared for
any period.
Companies that are incorporated
under the Companies Act 1956 are
required by law to prepare and
publish financial accounts. The level
of detail required in these accounts
reflects the size of the business with
smaller companies being required to
prepare only brief accounts.
There is no legal requirement to
prepare management accounts.
The format of published financial
accounts is determined by several
different regulatory elements:
 Company Law
 Accounting Standards
 Stock Exchange
There is no pre-determined format
for management accounts. They can
be as detailed or brief as
management wishes.
Financial accounts concentrate on
the business as a whole rather than
analysing the component parts of the
business. For example, sales are
aggregated to provide a figure for
total sales rather than publish a
detailed analysis of sales by product,
market etc.
Management accounts can focus on
specific areas of a business’
activities. For example, they can
provide insights into performance of:
 Products
 Separate business locations (e.g.
shops)
 Departments / divisions
Cost Accounting

Joseph Anbarasu
Financial Accounts Management Accounts
Most financial accounting information
is of a monetary nature
Management accounts usually
include a variety of non-financial
information. For example,
management accounts often include
analysis of:
- Employees (number, costs,
productivity etc.)
- Sales volumes (units sold etc.) Customer transactions (e.g.
number of calls received into a call
centre)
By definition, financial accounts
present a historic perspective on the
financial performance of the business
Management accounts largely focus
on analysing historical performance.
However, they also usually include
some forward-looking elements – e.g.
a sales budget; cash-flow forecast
5. Compare cost accounting with management accounting.
To manage a firm, the management requires lot of information. Such
information must be presented in an organised way. If it is in accounting form,
the management can use it as a tool. Management accounting is concerned
with all such information that is useful to the management. The Institute of
Cost and Management Accountants of England defines management
accounting as below:
“It is a presentation of accounting information in such a way as
to assist management in the creation of policy and in the day-to-
day operation of an undertaking”
Management accounting consists of some essential activities:
a. Estimation of cost is one of the basic tasks of management. If it is
estimated, the management will use the estimation in control
process and planning decisions.
b. Controlling the cost is another function of management. Here the
cost incurred is compared with task performed. Corrective
measures should be initiated when costs are excessive.
c. Performance evaluation is another part of management accounting.
Managers are often monitored. Their performance should be
consistent with the goals of the organisation. For which, a
comprehensive reporting system is required.
d. It supplies information to the management for planning and
decision-making.
The main emphasis in cost accounting is on cost control and cost
determination. Whereas the management accounting uses the principles
and practices of financial accounting and costing accounting in addition to
other managerial techniques for effective management. The examples of
these techniques are standard costing, budgetary control, uniform costing
and inter-firm costing, marginal costing, flow analysis, ratio analysis etc.,
Cost Accounting

Joseph Anbarasu
Therefore, the management accounting is an all inclusive package. It is an
application of managerial aspect of cost accounting.
6. List the advantages of cost accounting.
An effective and organised system of costing may have the following
advantages:
a. Providing information to the insiders and outsiders with respect to
production, cost, materials, labour, stores, plant capacity etc.,
which assist out planning
b. Revealing profitable and unprofitable activities which help the
management to reduce or eliminate wasteages and inefficiencies
such as under utilization, idle time, spoilage of material etc.,
c. Systematic management of cost which will lead to effective product
pricing.
d. Maintaining perpetual inventory system, this ensures preparation of
interim profit and loss account.
e. Aiding in formulation of policies related to product, price etc.,
f. Comparison of cost between different periods, products,
departments or firms.
g. Revealing idle capacity, this would help the management to deal
bottlenecks.
h. Ascertainment of cost and profit more frequently and examination
of their causes in details.
i. Taking decisions based on facts and formulation of suitable polices
for various matters. (Level of output, make or buy decision,
replacement of old equipment, shut down or continue, introduction
of new products or elimination, acceptance of a special order and
replacement of labour with machinery.)
The use of cost accounting is no more restricted to manufacturing
organisations. It is used by other organisatios too banks, educational
institutions, hospitals, local governments so on.
7. Define the term cost.
The terms ‘Cost’ and ‘expenditure’ are used interchangeably to mention
same thing in the field of business. Cost means the amount of expenditure
incurred on, or attributable to, a given thing.
According to the committee on Cost Concepts and
Standards of the American Accounting Association, “Cost is
foregoing, measured in monetary terms, incurred or
potential to be incurred to achieve a specific objective”
It may be an actual cost or estimated expenditure. It also indicates a direct
or indirect expenditure. It is also related to job, process, product or service.
Examples of costs are material, labour, factory overhead, administrative
overheads, and selling and distribution overheads.
8. What are ascertainment costs? How does it differ from cost estimation?
Cost Ascertainment:
Cost ascertainment is related to computation of actual costs incurred. It
means the methods and process employed in ascertaining costs. Different
methods are employed for ascertaining cost in different organisations. Job
Cost Accounting

Joseph Anbarasu
costing, contract costing, batch costing, process costing, unit costing and
multiple costing are some methods. (Refer the method of costing). Each
method is chosen according to its suitability with the organisation
concerned.
The ascertainment of actual cost has a small impact because of the
following possible reasons:
a. Actual cost cannot be used for the purpose of price quotations and
filing tenders.
b. Actual cost has practically no utility for control purposes.
c. Actual cost is ineffective as means of measuring performance
efficiency.
Ascertainment of actual costs proves to be important though there are
limitations as shown above. Ascertainment of actual costs tells us
unprofitable activities and losses and inefficiencies occurring in the form
idle time, excessive scrap etc.,
Uses of Cost Estimation:
Cost estimation is the process of predetermined costs of products or
services. The costs are prepared in advance of production and precede the
operations. Estimated costs are definitely the future costs. They are based
on the average of the past actual costs adjusted for anticipated changes in
future. The following are the uses of cost estimation:
i. Cost estimates are used in making price quotations and
bidding for contracts
ii. they are used in the preparations of budgets
iii. it helps in evaluating performance
iv. Projected financial statements are prepared with the help of
such estimations
v. It serves as targets in contoling costs
9. What is cost centre? How is it identified? List its uses.
Cost is generally ascertained by cost centres. Let us understand about cost
centre.
A cost centre is a location, person or item of equipment (or
group of these) for which costs may be ascertained and
used for the purposes of cost control. (I.C.M.A. London)
The entire organisation may be divided into specified cost centres, which
jointly contribute to the total cost. A cost centre is primarily identified in
two major ways. They are
a. Personal cost centre: It consists of a person or a group of persons.
b. Impersonal cost centre: It consists of a location or an item of
equipment or group of these.
Identification and establishments of cost centres depend on the nature and
type of industry. Cost centres may be of the following types.
i. Process cost centre (based on sequence of operation)
ii. Production cost centre(for regular production in a shop)
iii. Operation cost centre(where various operations are involved
in the production process)
iv. Service cost centre(for activities supporting the main
production)
Identification and establishment of cost centres help us in
i) ascertaining the centre-wise costs,
ii) comparing the centre-wise costs periodically,
Cost Accounting

Joseph Anbarasu
iii) finding out the major trends of variance,
iv) applying the techniques of control to check undue,
undesirable or unexpected movements in costs.
The concept of costing by cost centres may be applied to almost any
industry. The number of cost centres and the size of each vary from one
undertaking to another. The main purpose of identification of cost centres
is to fix responsibilities for every cost centres. A large number of cost
centres tend to be expensive but having too few cost centres defeat the
very purpose of control.
10. Describe about cost unit.
The cost centres help in ascertaining the costs by location, equipment or
person. Cost unit is an extension of identification of cost centres. Cost unit
helps in breaking up the cost into smaller sub-divisions. It also facilitates in
ascertaining the cost of saleable product or services.
According to I.C.M.A. London
A cost unit is a unit of product, service or time in relation to
which cost may be ascertained or expressed
Cost units are the ‘things’ that the business is setup to provide of which
cost is ascertained. Cost units will normally be the quantity of a product for
which price is quoted to the customers.
Cost units may be:
i. unit of product (e.g., cost per book)
ii. unit of time (e.g., cost of generating electricity per hour)
iii. unit of weight (e.g., cost per kilogram of sugar)
iv. unit of measurement (e.g., cost per square foot of
construction)
v. operating unit of service (e.g., cost of running a car per
kilometre)
Selection of a cost unit must be appropriate. Convenience is the first
criterion. Secondly, it should be easier to correlate expenses with cost
units. Thirdly, it should be according to the nature and practice of the
business.
A few more examples of cost units in various industries are given:
Industry Cost Unit
Cars Per Car
Cement Tonne
Chemicals Tonne, kilogram, litre, gallon
etc
Bricks 1,000 bricks
Shoes Pair or dozen pairs
Pencils Dozen or gross
Electricity Kilowatt hour
Transport Passenger Kilometre
Automobile Number
Printing
Press
Thousand copies
Cotton Bale
Timber Cubic foot
Mines Tonne
Cost Accounting

Joseph Anbarasu
Carpets Square yard
Hotel Room per day
11. Explain the components of total cost?
The total cost comprises of direct costs (also known as prime cost) and
indirect costs (known as overheads). The prime cost consists of direct
materials, direct labour and other direct expenses. Overhead consists of
factory overheads, office overheads, and selling and distribution
overheads.
Mechanism of Cost Build Up
Prime Cost
=
Direct Material
+
Direct Labour
+
Direct
Expenses
Works Cost
=
Prime Cost
+
Factory Overhead
Cost of Production
=
Works Cost
+
Office And Administrative
Overhead
Total Cost
=
Cost of Production
+
Selling And Distribution
Overhead
12. What are the various elements of cost?
There are three elements of Cost
a. Materials:
The word “Materials” refers to those commodities, which are used
as raw materials, components, or consumables for manufacturing
product. Materials can be direct or indirect.
Direct materials: All materials used as raw-materials or components
for a finished product are known as ‘direct materials’. Cotton for
textiles, tyres for car are few examples of direct material. It also
includes package material.
Indirect Materials: Consumable like lubricating oil, spare parts for
machinery are called as indirect materials. Such commodities do
not form part of the finished product.
b. Labour and
The workers are involved in converting raw material into finished
goods. Such involvement of workers forms the word ‘labour’. The
reward given to them for their involvement is called ‘wages’. Wages
can be direct or indirect.
Direct Labour: The workers who are directly involved in the
production of goods are known as ‘direct labour’. The reward paid
to them is called direct wages.
Indirect Labour: The workers employed for carrying out tasks
incidental to production of goods or those engaged for office work
Cost Accounting

Joseph Anbarasu
and selling and distribution activities are known as ‘indirect labour’.
The reward given to them is called indirect wages.
c. Expenses
All expenditures other than material and labour are termed as
‘expenses’. Expenses can also be direct or indirect.
Direct Expenses: Other expenses, which are incurred specifically for
a particular product, job or processes are termed as ‘direct
expenses’. Some examples are given below:
Direct Expenses
Carriage Inwards
Production royalty
Hire Charges of special equipment
Cost of special drawings
Indirect Expenses: All expenses other than indirect materials and
labour which cannot be directly attributed to a particular product,
job or service are termed as ‘indirect expenses’. Some examples
are given below:
Indirect Expenses:
Rent of building,
Repair of Machinery
Lighting and heating
Insurance
Concept of Overhead: All material, labour and expenses, which
cannot be identified as direct costs, are termed as ‘indirect costs’.
The three elements of indirect costs namely indirect materials,
indirect labour and indirect expenses are collectively known as
‘Overheads’ or ‘On costs”. Overheads are grouped into three
categories:
a. factory (or manufacturing) overheads,
b. office (or administrative) overheads, and
c. selling and distribution overheads
Conversion Cost: The cost of converting raw materials into
finished goods is termed as ‘conversion cost’. It includes direct
wages, direct expenses and factory overheads.
13. How will you classify costs? Explain
Costs have been classified according to various bases.
i. Classification based on functions
This is a traditional classification. The cost may have to be
ascertained according to the functions carried out by the
organisation. The functions generally are manufacturing,
administration, selling, distribution and research.
Manufacturing Costs refer to all expenditure incurred in the course of
production from purchasing of materials to packing of the finished
goods.
Cost Accounting

Joseph Anbarasu
Manufacturing Costs
Material
Labour
Factory Rent
Depreciation
Power & Lighting
Insurance
Store Keeping
Administration Costs are incurred for general administration of the
organisation and for the operational control.
Administration Costs
Accounts office expenses
Legal charges
Audit charges
Office Rent
Remuneration to Director
Postage Expenses
Selling Costs are incurred to create and stimulate the demand and
to secure the demand
Selling Costs
Salaries
Commission to Salesmen
Advertising and promotion Expenses
Samples
Travelling Expenses
Distribution Costs are incurred on dispatch of the finished goods to
customer including transportation.
Distribution Costs
Packaging costs
Warehousing Costs
Carriage outwards
Insurance
Upkeep of Vans
ii. Classification based on Variability or behaviour
Costs have a definite relationship with the volume of production.
They behave differently when volume of production rises or falls.
On this basis, costs are classified into fixed cost, variable costs and
semi-variable (semi-fixed) costs.
Fixed Cost: Costs, which remain unaffected by changes in volume
of production, are called as “fixed Costs”. For example, the rent and
manager’s salary will not change when you increase the units of
production from 1000 to 1200.
Cost Accounting

Joseph Anbarasu
Fixed Costs
Rent lease
Salary to Managers
Building Insurance
Salary and Wages
Taxes to local authority
Variable Cost: The cost that tends to vary in direct proportion to the
volume of production is called “variable cost”. For example, for 1000
units of output, cost of raw materials consumed comes to Rs. 10,000. If
the production is increased to 1200 units (20%) the cost of material
will increase to Rs.12,000 (increase of 20%).
Variable costs
Direct Material
Direct Labour
Power
Commission of Salesmen
Royalties
Semi-variable Costs: Costs, which increase or decrease with a
change in volume of production but not in the same proportion as
the change in the volume of production are called “semi-variable
costs”.
Semi-variable Costs
Supervision
Repairs
Maintenance
Telephone Charges
Light and Power
Depreciation
iii. Classification according to their identifiability with Cost
units:
Costs are classified into direct and indirect based on their
identifiability with cost units and jobs or processes:
Direct Cost: It refers to expenses, which can be directly identified
with the product, job or process. For example, in case of materials
used and labour employed we can easily ascertain as to which
product or job or process they relate.
Indirect Cost: It refers to those expenses, which cannot be easily
identified with a particular product, job or process. These are
general, common or collective nature, which are to be allocated to
various products manufactured in the factory. Few examples are:
wages paid to night watchman, salary to the production manager.
iv. Classification based on their association with product or
period.
Product Costs: These are those costs, which are necessary for
production and which will not be incurred if there is no production.
Direct material, direct wages and some of the factory overheads
are examples of this kind.
Cost Accounting

Joseph Anbarasu
Period Costs: Costs, which are not necessary for production and are
written off as expenses in the period in which these are incurred are
called period costs. Rent, salaries of company executives, travelling
expenses are some examples of period costs.
v. Classification based on their controllability :
Controllable Costs: These are the costs, which may be directly
regulated at a given level of authority. Variable costs are generally
controllable by department heads.
Uncontrollable Costs: Costs, which cannot be influenced by the
action of a specified member of an organisation, are called
uncontrollable costs. Factory rent is a good example.
14. Define cost control. What are the steps to be followed in cost control?
What are the advantages of cost control?
15. What are the limitations of cost accounting?
Cost Accounting suffers from certain inherent limitations.
i) There is not standard set of rules and regulations of cost accounting
applicable to all industries and even the firms in the same industry.
ii) The cost accounting principles themselves keep on changing.
iii) There are widely recognised cost concepts but understood and
applied differently by different concerns.
iv) Cost accounting is not an exact science and its postulates cannot
be verified by controlled experiment, but only by application in
actual practice.
16. Explain different methods of costing.
The methods of costing refer to the techniques and processes employed in
the ascertainment of costs. Many methods have been designed to suit the
needs of different industries. These methods can be summarised as
follows:
It should be noted that two basic methods of costing are (1) Job costing,
and (2) Process Costing. The other methods discussed below are simply
variants of these two methods.
Job Costing:
Under this method, costs are ascertained for each job separately. According to
I.C.M.A London
The method of job order costing applies where work is
undertaken to be a job or work
It is suitable for industries like car repairs, printing, foundries, painting and
interior designing, where each job has its own specification.
Contract Costing:
This method is used in case of big jobs described as ‘contracts’. Since this
is a variation of job costing, the principles of job costing are in general
applied. The contract work usually involves heavy expenditure, spreaded
over a long period. Each contract is treated as a separate unit for the
purpose of cost ascertainment. Shipbuilding, construction of premises,
roads and bridges are few examples suitable for contract costing.
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Joseph Anbarasu
Batch Costing:
This is also another version of job costing. The cost of batch or group of
uniform products is ascertained under this method. Each batch of products
is a unit of cost for which costs are accumulated. It is generally used in
industries like pharmaceuticals, readymade garments, shoes, toys, bicycle
parts, bakery, etc.
Process costing:
A product passes through various stages of production called ‘process’ in
some industries. Each process is different and well defined. The output of
one process is used as a raw material for the next process. Costs are
accumulated for each process. To arrive at the unit cost, the total cost of
the process is divided by the number of units. Textile mills, chemical
works, sugar mills and food products may be cited as examples of
industries which use this method.
Operating Costing:
This method is used in undertakings, which provide services instead of
manufacturing products. The unit cost is a service unit e.g., in case of
buses, the unit of cost is passenger kilometer, and in case of nursing
home, it is per bed per day. It is also called ‘service costing’.
Multiple costing:
This method is an application of more than one method of cost
ascertainment in respect of the same product. Where a produce comprises
many assembled parts as in case of motor car, typewriter etc., costs have
to be ascertained for each component as well as for the finished product.
This may involve use of different methods of costing for different
component. It is, therefore, called ‘multiple’ or ‘composite’ costing.
Single, output or unit costing:
This method of cost ascertainment is used when production is uniform and
consists of a single or two or three varieties of the same product. Where
the product is produced in different grades, costs are ascertained
gradewise. Since the units of output are identical, the cost per unit is found
by dividing the total cost by the number of units produced. This method is
used in mines, brick-kilns, steel production, floor mills, etc.
17. Describe the types of costing.
Method of costing refers to the process and practice of ascertaining costs
of product and services. The type of costing refers to the technique of
analysing and presenting costs for the purpose of control and managerial
decisions. The types of costing also known as techniques of costing
generally used are as follows:
Marginal costing:
Separation of costs into fixed and variable (marginal) is of special interest
and importance. Under marginal costing, cost of a product is estimated
with out considering fixed cost. This method allocates only variable costs
Cost Accounting

Joseph Anbarasu
(direct material, direct labour, direct expenses, and variable overheads) to
production. It is also known as ‘variable costing’.
Absorption costing:
It refers to the conventional technique of costing under which the total
costs (fixed and variable) are charged to products. It is considered to have
only a limited application today.
Historical Costing:
It refers to a system of cost accounting under which costs are ascertained
only after they have been incurred. The accounting is done in terms of
actual costs and not in terms of predetermined costs. It is widely applied
by many organisations today.
Standard Costing:
This technique connotes the setting up of definite standards of
performance in advance. These standards are expressed in monetary
terms. Actual performance is measured against these standards. The
differences are helping the management to initiate corrective actions. This
is believed to be a valuable tool in cost control.
Budgetary Control:
A budget is an estimated results expressed in numerical numbers.
Budgetary control is a technique applied to the control of total expenditure
on materials, wages and overhead by comparing actual performance with
planned performance. This technique is also believed to be another
valuable aid in cost control and coordination.
18. What are the preliminaries that are to be satisfied before installation of a
cost system?
There cannot be a ready-made costing system for every organisation. In
view of growing size and variety of organisations, a single system of
costing cannot suit every business. The installation of a costing system
requires a thorough study and understanding of all the aspects involved.
Otherwise the system may be a misfit and the organisation may not be
able to derive full advantage from it. In other words, it is only a properly
designed system of costing suitable to the undertaking, which can help its
successful operations.
The cost benefit analysis should be initiated to install a costing system.
The benefit of establishing cost system must exceed the amount spent on
it. The system should be justified because of its value to management.
Problem Areas:
The organisation must be aware of the difficulties in introducing the
system of costing. The following are some difficulties
i) Inadequate support from top management,
ii) Resistance to change from staff involved in the operation of the
financial accounting,
iii) Resentment at other levels in view of the additional work expected
due to the costing system,
iv) Shortage of trained and qualified staff to handle the new system,
v) Heavy costs involved in the process of installation.
Factors to be considered:
Cost Accounting

Joseph Anbarasu
The following factors should be considered before installation of a system
of costing:
i) Objective of the costing system
ii) Nature of business
iii) Quality of the management
iv) Size and type of organisation, scope of authority, sources of
information and reports to be submitted
v) Technical aspect of the business
vi) Attitude and behaviour of the staff in extending co-operation to the
system and the organisation
vii) Impact of different operations on variable expenses
Steps Involved in Installing a Costing System:
i) Management conducts a preliminary investigation. For example,
the nature of product and methods of production will help them to
identify the right cost system.
ii) The organisation structure should be studied to ascertain the scope
of authority of each executive.
iii) The system of material procurement, issue and storage should be
examined and changed as per the requirements.
iv) Method of remuneration to the labour should be altered to the new
system of remuneration.
v) Accounting system should be designed in such a way to involve
minimum clerical labour and expenditure.
vi) The layout of the factory should be studied.
vii) Costing system should be simple and easy to operate.
viii) The installation and operation of the system should be economical.
ix) The system should be initiated gradually.
19. What is cost sheet? Explain the components of cost Sheet with an
example.
A Cost Sheet is a presentation of cost data incorporating its various
components in a systematic way.
Cost Sheet or a cost statement is a document which
provides for the assembly of the detailed cost of a cost
centre or cost unit
In other words, a Cost Sheet is a statement consisting of various
components of total cost. It is used as a guide to pricing decisions and a
basis for cost control. It should be prepared properly. It is presented to the
management at regular intervals.
A cost sheet serves the following purposes:
a. it gives the break-up of total cost by elements and sub-divisions
b. it discloses total cost as well as the cost per unit
c. it helps the management to compare costs
d. it facilitates preparation of cost estimates for submission of tenders
e. it helps the fixation of selling price
f. it also facilitates cost control by disclosing operational efficiency.
The following are some important components incorporated in the Cost
Sheet.
Name of the cost centre
Period of Preparation
Cost Accounting

Joseph Anbarasu
Output for the period
Details of various cost components of total cost
Item-wise cost per unit
Changes in stock position
Cost of sales
Profit or loss status
Format of Cost Sheet is given in Figure 1.1
Figure 1.1 Format of Cost Sheet
COST SHEET OF ------------------------
For the month ending--------------------
Output ----------------------------unit
Total Per Unit
Raw Materials
Opening stock 0000
Add: Purchases 0000
0000
Less: Closing Stock 0000
0000 000
Direct Labour 0000 000
Other Direct Expenses 0000 000
PRIME COST 0000 000
Factory Overhead
F.O.1 0000
F.O.2 0000
F.O.3 0000 0000 000
WORK COST 0000 000
Office & Administrative Overheads
O & A .1 0000
O & A .2 0000
O & A .3 0000 0000 000
COST OF PRODUCTION 0000 000
Add: Opening Stock - Finished Goods 0000 000
Total 0000 000
Less: Closing Stock - Finished Goods 0000 000
COST OF GOODS SOLD 0000 000
Selling and Distribution Overheads
S & D 1 0000
S & D 2 0000
S & D 3 0000 0000 000
COST OF SALES 0000 000
PROFIT (LOSS) 0000 000
SALES/SELLING PRICE 0000 000
Prepare a cost sheet for the following data.
Rupee
s
Direct Material 50,000
Direct Wages 15,000
Cost Accounting
Example 1

Joseph Anbarasu
Factory Expenses 5,000
Office Expenses 1,000
Selling Expenses 500
(B. Com., Bharathidasan University, Nov 1993)
Cost Sheet for the period ending---------
Rupees
Direct Material 50000
Direct Wages 15000
PRIME COST 65000
Factory Expenses 5000
WORKS COST 70000
Office Expenses 1000
COST OF PRODUCTION 71000
Selling Expenses 500
COST OF SALES 71500
Prepare a cost sheet
Rupees
Stock of material on 1.1.2000 40000.00
Purchase of Material 1100000.0
0
Stock of Finished goods on 1.1.2000(5000 units) 50000.00
Productive wages 500000.00
Finished goods sold (1,74,000 units) 2436000.0
0
Works overhead 150000.00
Office expenses 100000.00
Selling and Distribution expenses 174000.00
Stock of material on 31.12.2000 140000.00
Stock of finished goods on 31.12.2000(6000 units) 60000.00
Note:
1. Work out the number of units produced during the
year first.
2. Then prepare the Cost Sheet
Number of units produced
Units
Closing stock 6000
Number of units sold 174000
180000
Less: Opening stock 5000
Number of units produced 175000
Cost Accounting
Example 2
Solution

Joseph Anbarasu
COST SHEET
For the year ending 31 Dec 2002
Total (Rs) Per
Unit
(Rs)
Raw Materials
Opening stock 40000.00
Add: Purchases 1100000.00
1140000.00
Less: Closing Stock 140000.00 1000000.00
Direct Labour 500000.00
PRIME COST 1500000.00
Works Overhead 150000.00
WORK COST 1650000.00
Office Overheads 100000.00
COST OF PRODUCTION (1,75,000 units) 1750000.00 10
Add: Opening Stock (5000 units) 50000.00
1800000.00
Less: Closing Stock (6000 units) 60000.00
COST OF GOODS SOLD (1,74,000 units) 1740000.00 10
Selling and Distribution Overheads 174000.00 1
COST OF SALES 1914000.00 11
PROFIT 522000.00 3
SALES 2436000.00 14
Review Questions
1. Why should there be costing in the field of business?
2. Define cost accounting.
3. What are the difference between financial accounting and cost
accounting?
4. Bring out the difference between financial and management accounting
5. Compare cost accounting with management accounting.
6. List the advantages of cost accounting.
7. Define the term cost.
8. What are ascertainment costs? How does it differ from cost estimation?
9. What is cost centre? How is it identified? List its uses.
10. Describe about cost unit
11. Explain the components of total cost?
12. How will you classify costs? Explain
13. What is cost sheet? Explain the components of cost Sheet with an
example.
14. Define cost control. What are the steps to be followed in cost control?
What are the advantages of cost control?
15. What are the limitations of cost accounting?
16. Explain different methods of costing.
17. Describe the types of costing.
18. What are the preliminaries that are to be satisfied before installation of a
cost system?
19. Prepare a cost sheet
Rupees
Stock of material on 1.1.2000 40000.00
Purchase of Material 1100000.0
0
Cost Accounting