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Cost Accounting | What is Cost Accounting | Concept of Cost Accounting

Published on: August 14, 2021

Concept of cost accounting includes direct material, indirect material, direct labour, indirect labour, direct overhead, indirect overhead

Keep in Mind (KIM)

General principles of cost accounting Cost accounting is based on estimation before starting the production or service. Cost should be include or charged only after incurred. Cost accounting statement should give fact data; if there is any contingency or reserve, it should be shown separately. Past losses should not be recovered from present or future profit. Principle of the double-entry system of bookkeeping should be followed if possible.

Materials
Raw materials	woods, rubber, glass, iron, steel, paper, cloth, leather, cotton etc
Components	accessory (extra pieces of equipment) etc
Consumable materials	soap, detergent, cleaning brush, cotton waste etc
Maintenance materials	spare parts, tools etc

Some cost units under manufacturing or service
Vehicle		per unit
Gas		per cubic meter
Gas cylinder		Per unit
Screws manufacturing		per 1,000
Brick work		per 1,000
Transport		per passenger km or per ton km
Electricity		per megawatt, kilo watt or unit
Textile		per meter or per pound weight (Ib)
Collieries		per tone
Petroleum or water		per cubic liter
Electrical/electronic		per unit

Concept of Cost

Cost accounting is based on estimation.

In cost accounting, something release for obtaining something.

The amount is released for a specific activity.

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

A cost is compound of three elements; they are material, labour, expenses or overhead.

(A) MATERIALS

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

The expenses incurred for the material is termed as material cost.

It also includes all those costs related to the purchase and storing of material.

There are two types of materials; they are direct materials and indirect materials.

Direct material

A large part of materials in finished goods is known as direct materials.

These material costs can be identified easily from the finished product.

Sometimes the value of direct materials may be less than labour cost.

Indirect material

A small part of materials in finished goods is known as indirect materials.

Without indirect materials, finished goods cannot be completed.

Sometimes the value of indirect materials cannot be directly identified from a particular product.

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Cost Reconciliation Statement	http://tiny.cc/prvhuz
Unit Costing (Output Costing)	http://tiny.cc/srvhuz

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(B) LABOUR

Wages paid for workers are known as labour cost.

It includes wages, salaries, bonus, provident fund etc.

There are two types of labour in production; they are direct labour and indirect labour.

Direct labour

The wages paid to the workers directly engaged in manufacturing process goods in knows as direct lab our cost.

Such a wage can be easily identified from job or process cost.

Indirect labour

The labour who does not directly engage with production is known as indirect labour.

But he plays important role in the production.

Sometimes indirect labour cannot be easily identified from a job or process cost.

(C) OVERHEAD

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

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

There are two types of expenses; they are direct expenses and indirect expenses.

Direct overhead

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 the cost of plant hire, cost of designing, royalty, excise duty, cost of rectifying defective work etc.

Indirect overhead

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.

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