Notes on Cost Accounting Concepts
Cost Concepts
Semester II
Basic Terms
• Cost is the amount of expenditure, actual (incurred) or notional (attributable), relating to a specific thing or activity. The specific thing or activity may be a product, job, service, process or any other activity
• Expenses are expired costs, incurred and totally used up in generation of revenue
• Loss is lost cost. The term ‘loss’ is used to describe mainly two accounting events. In traditional financial accounting it is used to denote a situation where expenses exceed revenues for an accounting period.
Secondly, a loss arises due to the cost of an asset being more than the sale proceeds when the asset is sold.
Loss is unrelated to revenue generation and is only offset against revenue of the period in which the loss occurred Classification of Costs
• The achievement of the objectives of cost accounting requires that cost should be ascertained, classified and grouped • Cost classification may be defined as the process of grouping costs according to their common characteristics • There are many objectives of cost classifications depending on the requirements of managementDetermining product costs for stock valuation and profit measurement
Planning
Decision Making
Control
Natural classifications of costs
1. Direct material refers to the cost of materials which are conveniently and economically traceable to specific units of output. Examples of direct materials are: raw cotton in textiles, crude oil to make diesel, steel to make automobile bodies.
Items, such as import duties, dock charges, transport cost of materials, storing of materials, cost of purchasing and receiving materials are properly added to their invoiced price and thus, the materials are charged out at this increased cost.
• Direct labour - Direct labour is defined as the labour of those workers who are engaged in the production process. Examples are the labour of machine operators and assemblers.
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Semester II
Basic Terms
• Cost is the amount of expenditure, actual (incurred) or notional (attributable), relating to a specific thing or activity. The specific thing or activity may be a product, job, service, process or any other activity
• Expenses are expired costs, incurred and totally used up in generation of revenue
• Loss is lost cost. The term ‘loss’ is used to describe mainly two accounting events. In traditional financial accounting it is used to denote a situation where expenses exceed revenues for an accounting period.
Secondly, a loss arises due to the cost of an asset being more than the sale proceeds when the asset is sold.
Loss is unrelated to revenue generation and is only offset against revenue of the period in which the loss occurred Classification of Costs
• The achievement of the objectives of cost accounting requires that cost should be ascertained, classified and grouped • Cost classification may be defined as the process of grouping costs according to their common characteristics • There are many objectives of cost classifications depending on the requirements of managementDetermining product costs for stock valuation and profit measurement
Planning
Decision Making
Control
Natural classifications of costs
1. Direct material refers to the cost of materials which are conveniently and economically traceable to specific units of output. Examples of direct materials are: raw cotton in textiles, crude oil to make diesel, steel to make automobile bodies.
Items, such as import duties, dock charges, transport cost of materials, storing of materials, cost of purchasing and receiving materials are properly added to their invoiced price and thus, the materials are charged out at this increased cost.
• Direct labour - Direct labour is defined as the labour of those workers who are engaged in the production process. Examples are the labour of machine operators and assemblers.
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