Illustrate the Cost accounting in a brief. different elements of costs, wavs of Classification of costs, Cost sheet

 Cost accounting information is designed for managers. Since managers are taking decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, the important criterion is that the information must be relevant for decisions that managers operating in a particular environment of business including strategy make. Cost accounting information is commonly used in financial accounting information, but first we are concentrating in its use by managers to take decisions. The accountants who handle the cost accounting information add value by providing good information to managers who are taking decisions. The cost-accounting system is the result of decisions made by managers of an organization and the environment in which they make them.

 Cost accounting is regarded as the process of collecting, analysing, summarising and evaluating various alternative courses of action involving costs and advising the management on the most appropriate course of action based on the cost efficiency and capability of the management.

 The organizations and managers are most of the times interested in and worried for the costs. The control of the costs of the past, present and future is part of the job of all the managers in a company. In the companies that try to have profits, the control of costs affects directly to them. Knowing the costs of the products is essential for decision­making regarding price and mix assignation of products and services.

 The cost accounting systems can be important sources of information for the managers of a company. For this reason, the managers understand the forces and weaknesses of the cost accounting systems, and participate in the evaluation and evolution of the cost measurement and administration systems. As a result, there is a wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.

 The following are different cost accounting approaches:

 ·                     standardized or standard cost accounting

·                     lean accounting

·                     activity-based costing

·                     resource consumption accounting

·                     throughput accounting

•         marginal costing/cost-volume-profit analysis Classical cost elements are:

 1.         Raw materials

2.       Labor

3.       Indirect expenses/overhead

 Origins:

Cost accounting has long been used to help managers understand the costs of running a business. Modem cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions. In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes. Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early twentieth century, these costs were of little importance to most businesses. However, in the twenty-first century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.

 Q. List down the different elements of costs. Ans.:

The elements of costs are as:

·         Material (Material is a very important part of business)

·                    Direct material

·         Labor

·                     Direct labor

·         Overhead (Variable/Fixed)

·                     Indirect material

·                     Indirect labor

·                     Maintenance & Repair

·                     Supplies

·                     Utilities

·                     Other Variable Expenses

·                     Salaries

·                     Occupancy (Rent)

·                     Depreciation

·                     Other Fixed Expenses

(In some companies, machine cost is segregated from overhead and reported

Separate element)

They are grouped further based on their functions as,

·                     Production or works overheads

·                     Administration overheads

·                    Selling overheads

·                                         Distribution overheads

 

Q. What are the wavs of Classification of costs? Ans.

 

Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are:

·                     By nature or element: materials, labor, expenses

•         By functions: production, selling, distribution, administration, R&D, development,

·                     By traceability: direct and indirect

·                     By variability: fixed, variable, semi-variable

·                     By controllability: controllable, uncontrollable

·                     By normality: normal, abnormal

·                     By Decision making Costs

·                     Time of Occupation

Q. What is Cost sheet? Discuss it uses. Ans.:

A document that reflects the cost of the items and services required by a particular project or department for the performance of its business purposes. For example, a

departmental cost sheet might include the material costs, labor costs and overhead costs incurred over a given time frame by a department and it therefore provides a

record of costs that are chargeable to that department.

The main uses of cost sheet are:

1. It discloses the total cost and the cost per unit of the units produced during the given period.

2. It enables a manufacture to keep a close watch and control over the cost of production.

3. By providing a comparative study of the various elements of current cost with the past results and standard costs, it is possible to find out causes of variation in costs and to eliminate the adverse factors and conditions which go to increase the total cost.

 

4. It acts as guide to the manufacturer and helps him in formulating a definite useful production policy.

5. It helps in fixing up the selling price more accurately.

6. It helps the businessman to minimize the cost of production when there is a cut throat competition.

7. It helps the businessman to submit quotations with reasonable degree of accuracy against tenders for the supply of goods.

 

Ch.-Cost of Goods sold statement

 

Problem: The following data are from the accounts of M & H Company:­

Particulars	July 1, 2011		June 30, 2012
Inventories
	Taka		Taka
Finished goods	20,000		28,000
Work in progress	60,000		25,000
Material	40,000		48,000

 

Particulars	Taka
Sales discount	8,000
Purchase discount	3,200
Sales	18,00,000
Purchase return and allowances	20,000
Depreciation-factory Machinery	1,60,000      _
Factory Insurance	50,000
Freight-out	8,000
Other Factory Expenses	16,000
Bond Interest Ex.enses	50,000                       _
Sales Salaries	1,00,000
Freight-in	12,000
Direct Factory labor	8,00,000
Material Purchases	4,00,000 _
Advertising Expenses	12,000

 

Required: Prepare a cost of goods Manufactured statement for the year ended June 30, 2012

Solution:

Particulars	Amount	Amount	Amount
Raw Materials:
(1) Beginning Raw materials		40,000
(2) Add-Raw materials purchase (3) Less-Raw materials returns (4) Less-Purchase discount	4,00,000 20,000 3,200
Net purchase Add-Freight in	3,76,800 12,000
Net Raw materials add                              3,88,800
Raw Materials available for use                4,28,800
Less- Closing stock of Raw materials          48,000

 

 

Raw Materials consumed			3,80,800
Add, Direct labor			8,00,000
Prime cost			11,80,800
Add, Factory overhead	1,60,000 50,000 16,000
Depreciation on Factory machinery Factory Insurance factory expenditure -Other
Total Factory overhead                                                2,26,000
manufacturin_ cost _Total		14,06,800
Add- Opening work in process		60,000
		14,66,800
Less- Closing work in process		(25,000)
Cost of goods manufactured		14,41,800
Add- Opening finished goods		20,000
Cost of Goods available for sale		14,61,800
Less-Closing finished goods		(28,000)
Cost of goods sold		14,33,800

 

Income statement for the ^,ear ended 30`" June 2011

Particulars	Amount	Amount
Sales Less- sales discount		18,00,000 8,000
Net sales		17,92,000
Less-Cost of goods sold		14,33,800 3,58,200
Gross margin
Less- Operating and Administration
Freight out Bond interest Sales salaries Advertising expenses	8,000 50,000 1,00,000 12,000
Total operating expenses                _		1,70,000
Net income		1,88,200