Presentation on theme: "Introduction of cost accounting Lecture-1 By Main Ahmad Farhan (ACA)"— Presentation transcript:
1 Introduction of cost accounting Lecture-1 By Main Ahmad Farhan (ACA)
2 AccountingIt is a language about financial information (which is measurable interms of money) commonly used in business.
3 Branches Of Accounting For externalreportingFor internalreportingFed byfinancial andcost accounting
4 User Group Investors Managers Lenders Directors Govt Agencies SuppliersManagementEmployees
5 Branches Of Accounting Financial Accounting is an art of recording (Journal), classifying (Ledger), summarizing (Trial balance), reporting (Profit & Loss A/c & Balance Sheet) and analysis (Interpretation) the financial information.Cost Accounting deals with ascertainment, measurement, accumulation, budgeting and evaluating cost structure of the entity.Management Accounting deals with decisions relating to the generation and effective utilization of the financial resources of an entity.
6 Cost Accounting Cost Accounting means: Accounting for cost. Question arises what is cost?cost is expenditure incurredNext question arises expenditure incurred for what ?Expenditure incurred for a productNext question arises what is product?Production of a articleRendering of services
7 Cost AccountingSo Cost accounting is a specialized branch of accounting which provide processed set of information / statements to the management which assist them in decision making.In cost accounting cost of product or a process is;AscertainedMeasuredAccumulated
8 Management Accounting Management is central coordinating body in an entityManagement is concerned with the maximization of wealth throughMinimization of costMaximization of profitFor this purpose information provided by cost accounting is analyzed by the management for decision making and management control function.
9 Management Accounting Reports generated through management accounting are used internally.Major function of management accounting:Planning & ForecastingControllingDecision makingPricingMake or BuyShut down or Continued operationEquipment Replacement
10 Purpose Of Cost Accounting Provides information relating to cost of production.Determines the appropriate selling price.Discloses profitable products, areas and activity level.Helps in make or buy decision.Budgeting relating to production function.Controls production variances.Provides information to financial accountant.
12 Direct CostCost that can be traced in full to the product or services is direct cost
13 Types Of Direct CostDirect material costs are those cost of material that are traceable in full in the cost of a product or servicesDirect labor cost is specific cost of the worker in producing a product or serviceFor example wood in manufacturing of tableFor example labor involved in cutting wood
14 Royalty on production, Cost of jigs / moulds Types Of Direct CostOther Direct Expenses These are expenses other than direct material and direct labor which have been incurred in full as direct consequences of producing product or servicesRoyalty on production, Cost of jigs / moulds
15 Indirect CostThe cost that is incurred in producing product or services but which can not be traced in fullFOH means all expenses of factory other than direct material, direct labor and other direct production expenses.Factory overhead (FOH)Indirect materialIndirect LaborDeprecation of machineryFactory utility bills
16 Cost classificationDirect Material + Direct Labor + Other Direct Cost = Prime costDirect Labor + Other Direct Cost + FOH = Conversion costPrime Cost + FOH = Total factory cost
17 SummaryMaterial cost Labor cost Other production Total productioncostcostDirect=Prime costDirectDirectFOH costIndirectIndirectIndirect=Total FactoryCostTotalTotalTotal=
18 Cost classification Direct material Rs 12,000 Direct labor 8,000 Other direct costPrime cost ,000FOHIndirect material 3000Indirect laborElectricity billRent of factoryDepreciation 100011000Total factory cost
20 Fixed costFixed cost is a cost that do not vary with the level of production. Simple means the variation in production has no impact on fixed cost. For example rent of building and accountant salary etc3000Fixed cost20001000100200300No. of units
21 Fixed Cost Per Unit Reaction Fixed cost per unit decreases as the number of units produced increases and vice versaFor example rent of building is Rs. 10,000 and number of units produced is 5000.If the number of units produced increases to 10000Per unit fixed cost = / 5000 = 2 per unitPer unit fixed cost = / = 1 per unit
22 Step Fixed CostCosts which are constant for a relevant range of activity and rise to new constant level once that range exceeded.For example rent.Fixed costNo. of units
23 Variable CostThe expenses that vary in direct proportion to volume of product. For example Prime cost.Variable costNo. of units
24 Variable Cost Per Unit Reaction Variable cost per unit remain constantUnits of Labor Total wages Per labor wage rate,000 1,000,000 1,000
25 Semi Variable CostThe cost that is partly fixed and partly variable cost. For example electricity bills, salesman salary.3000Semi variablecost20001000100200300No. of units
26 Summary If the production volume increases Total Per unit Constant Fixed costDecreasesConstantIncreasesVariable costIncreasesTotal costDecreases
27 Summary If the production volume decreases Total Per unit Constant Fixed costIncreasesConstantVariable costDecreasesTotal costIncreasesDecreases
28 As VC added in FC shifts upward Total costTotal cost include both fixed cost and variable costAs VC added in FC shifts upwardTotal costVariable cost3000Total cost2000Fixed cost1000100200300No. of units