Meaning of cost

Accounting
ccounting is the classifying,
and appropriate allocation of
e for the determination of the
roducts or services, and for the
on of suitably arranged data for
of control and guidance of
ent. It includes the ascertainment
st of every order, job, contract,
unit as may be appropriate. It
the cost of production, selling
ution.
 COST

Cost Accounting is a special wing of

Management accounting. It involves
calculation of the cost of products and
helps management in fixing a fair selling
price.
 METHODS OF COSTING:

1.Job Order Costing

2.Contract OR Terminal costing
3.Batch costing
4.Process costing
5.Operation costing
6.Single out or Unit costing
7.Operating or Service costing.
8.Multiple or composite costing.
 Classification (process) of
costs
 Direct cost
 Indirect cost
 Fixed cost
 Variable cost
 Semi variable cost
 ELEMENTS OF COST
Direct Cost  INDIRECT COSTS

Direct Material Indirect Material

Direct labor Indirect
Direct Labor
Expenses Indirect
Expenses
 Dm
Direct Material : CIMA -”the cost of
commodities supplied to an undertaking –D
OR ID
Eg. Clay in bricks, leather in shoes, steel in
machines, cloth in garments, timber in
furniture – part of the finished product.
Indirect materials:
These are those materials which cannot
be conveniently identified with individual
cost units (Minor).
Eg. Lubricating oil, sand paper, nuts and
bolts, coal, small tools, office stationery.
 Labour cost- the cost of remuneration (wages,
salaries, commissions, bonuses etc, of the
employees of an undertaking-CIMA

Direct Labor: DL Cost consist of wages

paid to workers directly
engaged in
converting raw materials into
finished
products. Easily identified with a
particular product job, process.

Eg. Machine operator, shoe-maker,

carpenter, weaver, tailor.
 Indirect Labour:
It is of general character and cannot be
conveniently identified with a
particular cost unit. Indirect labour is
not directly engaged in the production
operations but only to assist or help in
production operations.

Eg. Supervisor. Inspector, cleaner,

clerk peon, watchman.
 Expenses-All costs other than
M & L are termed as expenses
 Direct Expenses: -CIMA- Direct
.
expenses are those expenses which
can be identified with and allocated to
cost centers or units. DE are also
known as chargeable expenses.

Eg. hire of special plant for particular

job.
Cost of patent rights, experimental
costs, royalty paid in mining etc.
 INDIRECT EXPENSES.
All indirect costs, other than indirect
materials and indirect labor costs, are
termed as indirect expenses. These
cannot be conveniently identified with
a particular job, process, or work order
and a common to cost units or cost centers.

Eg. Rent and rates, depreciation, lighting and

power, advertising. Insurance, repairs.
By grouping the cost elements-the
divisions of cost are obtained.
1.Prime cost=DM+DL+DE
2.Works or Factory cost=PC+W/FOH
3.Cost of production=Works cost+
Admin.OH
4.Total cost or cost of sales=cost of
production+ selling & distribution OH.

The difference between the cost of sales

and selling price represents profit and loss.
 Ascertain the prime cost, works cost, cost of
production, total cost and profit from the
following.
DM-5000; DL-3500;FE-
1500;Admn.exp.800; selling exp.700 &
sales 15000.
PC=DM+DL=
5000+3500=8500
Work Co.=Pro.C+F.EXP=
8500+1500=10000
Co. of Pro.=
wc+admn.exp=10000+800=10800
Total cost or cost of sales=Cost of
production+Selling
 BEA
1.Break Even Analysis
2.BEA POINT
3.BEA CHART
4.MARGIN SAFETY (M.S)
 BEA
due to many reasons, such as
competition, introduction of
new product, trade
depression or boom,
increased demand for the
product, scare resources,
change in the selling prices of
products etc.
 BEA
Meaning: The term BEA is termed in the
Narrower as well as Broader Sense.
In the narrower sense – it is Concerned
with finding out the BEP i.e., Total Cost
equals Total Selling Price.
In the Broader sense - it is concerned
with the system of analysis determines
the probable profit at any level of
production.
 BEA
 TheBreak Even Analysis establishes
the relationship of Cost volume out put
and profit, so this analysis is also
known as “COST VOLUME PROFIT
ANALYSIS”.
 BREAK EVEN POINT:
Break Even Point is the base of
Break Even Analysis. This is that
point where there is no profit no
loss. It can be defined as follows:
“Break Even Point is that activity
(Sales) where Total Revenues and
Total Expenses are equal; it is the
point of Zero Profit ands Zero
Loss.
 BEP
Computation of Break Even Point:
There are 2 approaches can be
uses to compute the break even
point:
1. The Formula Approach
2. The Chart Approach.
 BEP- Break Even
Formula:
The Break-Even-Point (BEP) can be
computed in terms of units, or in terms
of
money value (Rupee, dollars, or Pounds)
of
sales volume or as a percentage of
estimated capacity.
Total Fixed Expenses
1) BEP (in Units) = -------------------------------------------------
Selling price per unit – Marginal cost
per unit.
 BEP (in sales)
= Fixed cost x Selling prices F
XS
Selling price – V. Cost S
-V
OR

2) BEP (in Sales) = Fixed Costs F

P/V Ratio P/V

 BEP as a % of full
capacity
= Break Even sales Volume
Full or normal capacity sales
volume
BEP (in Rs. ) = Fixed Cost = F
1- V.C0st/profit 1-
V/P
 a) Profit/volume Ratio
(analysis) OR P/V ratio OR C/S
ratio :
Ratio can be calculated as follows:
P/V ratio = Contribution i.e.,
C
Sales
S

= Fixed Expenses + profit

F +P
Sales
 P/V Ratio
= Change in profits or
Contribution
changes in Sales

This ratio can also be shown in the

form of a % if the formula is
multiplied by 100.
 Application of P/V ratio
The P/V ratio is useful for the
Determination of BEP and level
of output or Sales to earn a
desired amount of profit. This
ratio can also be used for the
calculation of variable costs
and profit for any volume of sales.
 P/V Ratio
BEP = Fixed Cost F
P/V RATIO P/V Ratio
Value of sales to earn a desired amount
of
Profit: = Fixed cost + profit F+P
P/V Ratio P/V
ratio
Variable cost = Sales (1-P/V R atio)
 BEA CHART
Break Even Chart is a pictorial
representation of the cost
volume profit relationship. “It
is a graph showing the amounts
of fixed and variable costs and
the
sales revenue at different
volumes of
operations”.
 MARGIN OF SAFETY
M.S. is the range of sales over and
above the ‘Break Even Sales’. M.S.
is the difference between the
actual sales and the sales at BEP.
M.S. = Present Sales – B.E. Sales
M.S. = Profit
P/V ratio
Thank you…………….

 dip kumar dey