675 Views

Estimated reading time : 34 Minutes

Cost Accounting Theory

Arjun EP

Published on: June 26, 2020

What is cost accounting?

Accounting theory of cost accounting for the board exam.

Briefly write the meaning of cost accounting.

Clarify the meaning of cost accounting.

In five to six sentences, write what do you understand about cost account?

MEANING OF COST ACCOUNTING

Cost accounting is based on estimation. In cost accounting, something release for obtaining something.

Generally, raw materials are converted into work in progress or finished goods in cost accounting.

It is applied in manufacturing company.

The amount is released for specific activity.

The specific activity may be a product, job, service, process or other activity.

Cost account is compound of three elements.

They are material, labour, expenses or overhead.

What are the elements of cost?

ELEMENTS OF COST ACCOUNTING

In cost accounting, there are three elements.

Material

Materials are the most important parts in manufacturing company.

All types of goods that are used in the process of production are called material.

The expenses incurred for material is termed as material cost.

There are two types of materials i.e. direct materials and indirect materials.

Labour

To convert raw materials into finished goods, manpower is essential.

Such manpower needs expenses.

Wages paid for workers are known as labour cost.

These expenses are wages, salary, bonus and provident funds etc.

There are two types of labour i.e. direct labour and indirect labour.

Expenses or overhead

All the expenses other than materials and labour costs are known as expenses or overhead.

They are royalty, rent, training expenses of new employees etc.

There are two types of expenses i.e. direct expenses and indirect expenses.

###########

Click on link for YouTube videos

SHARE (ACCOUNTING FOR SHARE) http://tiny.cc/889jkz

SHARE IN Nepali http://tiny.cc/k99jkz

DEBENTURES http://tiny.cc/yeakkz

FINAL ACCOUNT: CLASS 12 http://tiny.cc/e89jkz

FINAL ACCOUNT IN NEPALI http://tiny.cc/w89jkz

WORK SHEET http://tiny.cc/579jkz

RATIO ANALYSIS (ACCOUNTING RATIO) http://tiny.cc/4fakkz

FUND FLOW STATEMENT http://tiny.cc/wiakkz

CASH FLOW STATEMENT http://tiny.cc/8gakkz

THEORY ACCOUNTING XII http://tiny.cc/nfakkz

THEORY: COST ACCOUNTING http://tiny.cc/tfakkz

COST ACCOUNTING http://tiny.cc/p29jkz

LIFO−FIFO http://tiny.cc/dgakkz

COST SHEET, UNIT COSTING http://tiny.cc/w49jkz

COST RECONCILIATION STATEMENT http://tiny.cc/829jkz

###########

Mention any four objectives of cost accounting.

Mention any two objectives of cost accounting.

State three objectives of costing accounting.

Write three objectives of costing accounting.

What are the functions of cost accounting?

Write briefly any three functions of cost accounting.

Write any two functions of cost accounting.

OBJECTIVES AND FUNCTIONS OF COST ACCOUNTING

Cost comparison

The main objectives of cost accounting are to find out total cost and cost per unit.

Cost account helps to find out cost at different level of production.

Such as prime cost, work cost, cost of production and total cost.

Elements of cost

Cost accounting is totally based on material, labour and overheads.

There are two types of materials i.e. direct materials and indirect materials; two types of labour i.e. direct labour and indirect labour; two types of overheads i.e. direct overhead and indirect overhead.

Cost control

Cost is ascertained at different level in cost accounting. It will help to control the cost.

Cost can be controlled by comparison budget cost, standard cost and actual cost.

Cost control generates more profit.

Price fixation

It helps to fixation the selling price.

There are two types of profits in cost accounting.

They are profit on cost and profit on sales.

It also helps for tender or quotation price for bid.

Classification

It helps to classify the cost according to department, process, product, activity and service. It also helps for classification or sub-division of cost.

Discuss the advantages of cost accounting.

Give any three advantages of cost accounting.

Mention any three advantages of cost accounting.

Write in brief any two advantages of cost accounting.

State the importance of cost accounting.

ADVANTAGES OF COST ACCOUNTING

Classification of cost

Cost is most important for manufacturing company.

Company wants to know the cost of production at different level such as prime cost, work cost, cost of production, cost of goods sold and total cost.

Cost comparison

Cost accounting helps to compare total cost or unit cost at different level of production in different departments, jobs and process.

For this purpose, cost sheet or unit costing is prepared.

Price fixation

It helps to fixation the selling price.

Selling price is calculated from cost sheet or unit costing.

It can be calculated by two methods such as by adding profit on cost or profit on sales.

It also helps for tender price.

Cost control

It helps to control the cost at different levels.

These costs may be about materials, labour and overhead.

Cost can be controlled by various techniques.

They are budgetary control, standard costing and inventory control system etc.

Cost reduction

During the depression period, the prices of the goods or service have to reduce. In some cases prices may be less than total cost of the product. Cost accounting helps to survive in depression period.

State any three limitations of cost accounting.

Write in short any two limitations of cost accounting.

LIMITATIONS OF COST ACCOUNTING

It has its limitation. The major limitations of cost accounting are:

Lack of uniform costing

There are different costing procedures in different manufacturing company.

Therefore, same product has different cost.

Thus, there is lack of uniform in cost accounting.

Expensive

There are many formalities to perform standard cost system.

It is very expensive.

Therefore, it is not suitable for small industry.

Based on estimation

Cost accounting is based on estimation.

Financial accounting is based on actual.

It may be difference than financial accounting.

No transaction for income or gain

There are some incomes in financial accounting that are not included in cost accounting.

Such as received interest, dividend, rent, discount, commission etc; profit on sales of assets and investment etc.

What do you mean by functional classification of cost?

Write about the cost which belongs to functional classification of cost.

FUNCTIONAL CLASSIFICATION

According to this classification, costs are classified into three functions. They are factory cost, administrative cost and selling and distribution cost.

Factory cost, production cost, manufacturing cost or work cost

It is the total of prime cost and factory cost.

It includes indirect materials, indirect labour, indirect expenses which are incurred inside the work place where production is carried-on.

In other words, all manufacturing expenses are recorded in this heading.

Administrative expenses or office expenses

It is the total of factory expenses and office expenses.

Such as administrative, planning, coordinating, staffing and controlling.

All the office and administrative expenses are recorded in office overhead.

Selling and distribution expenses

These expenses are necessary for sales promotion.

It includes all the expenses related to selling of goods such as advertisement, commission to sales staff and agents,

All expenses related warehouse and delivery van such as rent, insurance, repairs and maintenance etc.

Write the meaning of controllable cost with suitable examples

Write about controllable cost with suitable (appropriate) examples.

CONTROLLABLE COST AND UNCONTROLLABLE COST

Under this classification, costs are classified into two groups.

Controllable cost

This type of costs can be controlled by management.

It can be changes or alter by action but time should be long.

If there is short time, it is difficult to control.

Generally, these are variable cost in nature.

Some controllable costs are direct materials, direct labour, direct overhead, indirect materials, indirect labour, indirect overhead, power cost, repairs and maintenance etc.

Uncontrollable cost

There are some kinds of cost that cannot be controlled by management.

It cannot be changed or altered.

Generally, these are fixed cost in nature.

Some uncontrollable costs are rent, salary to permanent staff, annual insurance, management salary etc.

Differentiate between direct cost and indirect cost.

DIRECT COST AND INDIRECT COST

Direct expenses or cost

Expenses other than direct material and direct labour are known as direct expenses.

It is also known as chargeable expenses, prime cost, process expenses or productive expenses.

Some direct expenses are cost of plant hiring, cost of designing, royalty, excise duty, cost of rectifying defective work etc.

Indirect expenses or cost

Expenses other than indirect material and indirect labour are known as indirect expenses.

These expenses cannot be identified for a particular job or product.

Indirect expenses are rent of building, insurance premium, depreciation, repairs and maintenance, welfare and medical expenses etc.

Differentiate between Direct Cost & Indirect Cost

Bases	direct cost	Indirect cost
Meaning	Direct cost is directly engaged in product.	Indirect cost cannot be allocated in particular product.
Aggregate	All direct costs are adjusted in prime cost.	All indirect costs are adjusted in factory cost.
Classification	They are direct material, direct labour and direct overhead.	They are indirect material, indirect labour and indirect overhead.

Define fixed cost with suitable examples.

Define semi-variable cost. Why is it so called?

Define variable and semi-variable cost.

Define variable cost and give at least one example of variable cost.

Define variable cost and write any two features of it.

Write the meaning of fixed cost and variable cost with examples.

Write two feature of variable cost.

Differentiate between fixed and variable cost.

Classification of cost by behavior or variability

FIXED COST

It is also called capacity cost, periodic cost and burden cost.

These expenses are not changed according to output.

This level is pre fixed. It is never be zero.

Generally, it is uncontrollable and unavoidable cost.

Some fixed costs are rent, depreciation, salary for permanent staff, taxes, insurance etc.

VARIABLE COST

It is also called changeable cost, marginal cost, direct cost and running cost.

It is affected according to output or production.

There is close relationship between total variable cost and volume of output.

When output is zero then total variable cost is also zero but variable cost per unit never is zero.

SEMI VARIABLE COST, MIXED COST OR SEMI FIXED COST

It is the mixed of fixed cost and variable cost.

Neither total amount nor per unit cost of semi variable cost remains constant.

If level of production increase, total semi variable cost decrease but never be zero and vice versa.

Differentiate between Fixed Cost & Variable Cost

Bases	Fixed cost	Variable cost
Nature	It is time related and remains constant upto certain level.	It is volume related and changes according to output.
Incurred	It is incurred even output is nil.	It is increased or decreased on according to output.
Examples	Rent, salary to permanent staff, insurance etc.	Direct materials, commission, taxes etc.