1. Introduction of cost accounting Lecture-1 By Main Ahmad Farhan (ACA)

2. Accounting
It is a language about financial information (which is measurable in
terms of money) commonly used in business.

3. Branches Of Accounting
For external
reporting
For internal
reporting
Fed by
financial and
cost accounting

4. User Group Investors Managers Lenders Directors Govt Agencies
Suppliers
Management
Employees

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 incurred
Next question arises expenditure incurred for what ?
Expenditure incurred for a product
Next question arises what is product?
Production of a article
Rendering of services

7. Cost Accounting
So 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;
Ascertained
Measured
Accumulated

8. Management Accounting
Management is central coordinating body in an entity
Management is concerned with the maximization of wealth through
Minimization of cost
Maximization of profit
For 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 & Forecasting
Controlling
Decision making
Pricing
Make or Buy
Shut down or Continued operation
Equipment 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.

11. Classification Of Cost

12. Direct Cost
Cost that can be traced in full to the product or services is direct cost

13. Types Of Direct Cost
Direct material costs are those cost of material that are traceable in full in the cost of a product or services
Direct labor cost is specific cost of the worker in producing a product or service
For example wood in manufacturing of table
For example labor involved in cutting wood

14. Royalty on production, Cost of jigs / moulds
Types Of Direct Cost
Other 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 services
Royalty on production, Cost of jigs / moulds

15. Indirect Cost
The cost that is incurred in producing product or services but which can not be traced in full
FOH means all expenses of factory other than direct material, direct labor and other direct production expenses.
Factory overhead (FOH)
Indirect material
Indirect Labor
Deprecation of machinery
Factory utility bills

16. Cost classification
Direct Material + Direct Labor + Other Direct Cost = Prime cost
Direct Labor + Other Direct Cost + FOH = Conversion cost
Prime Cost + FOH = Total factory cost

17. Summary
Material cost Labor cost Other production Total production
cost
cost
Direct =
Prime cost
Direct
Direct
FOH cost
Indirect
Indirect
Indirect =
Total Factory
Cost
Total
Total
Total =

18. Cost classification Direct material Rs 12,000 Direct labor 8,000
Other direct cost
Prime cost ,000
FOH
Indirect material 3000
Indirect labor
Electricity bill
Rent of factory
Depreciation 1000
11000
Total factory cost

19. Behavior Of Cost Step fixed cost Fixed cost Semi variable cost

20. Fixed cost
Fixed 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 etc
3000
Fixed cost
2000
1000
100
200
300
No. of units

21. Fixed Cost Per Unit Reaction
Fixed cost per unit decreases as the number of units produced increases and vice versa
For example rent of building is Rs. 10,000 and number of units produced is 5000.
If the number of units produced increases to 10000
Per unit fixed cost = / 5000 = 2 per unit
Per unit fixed cost = / = 1 per unit

22. Step Fixed Cost
Costs which are constant for a relevant range of activity and rise to new constant level once that range exceeded.
For example rent.
Fixed cost
No. of units

23. Variable Cost
The expenses that vary in direct proportion to volume of product. For example Prime cost.
Variable cost
No. of units

24. Variable Cost Per Unit Reaction
Variable cost per unit remain constant
Units of Labor Total wages Per labor wage rate
,000 1,000
,000 1,000

25. Semi Variable Cost
The cost that is partly fixed and partly variable cost. For example electricity bills, salesman salary.
3000
Semi variable
cost
2000
1000
100
200
300
No. of units

26. Summary If the production volume increases Total Per unit Constant
Fixed cost
Decreases
Constant
Increases
Variable cost
Increases
Total cost
Decreases

27. Summary If the production volume decreases Total Per unit Constant
Fixed cost
Increases
Constant
Variable cost
Decreases
Total cost
Increases
Decreases

28. As VC added in FC shifts upward
Total cost
Total cost include both fixed cost and variable cost
As VC added in FC shifts upward
Total cost
Variable cost
3000
Total cost
2000
Fixed cost
1000
100
200
300
No. of units