COST ACCOUNTING
- concept
- Objectives and importance of cost accounting
- Differences btw cost accounting and financial accounting
- Cost classification
- Breakeven point (B.E.P)
- Cost for manufacturing enterprise
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Simple cash budget
- Concept of cash budget
- Importance of preparing cash budget
- Compute and prepare a simple cash budget for a business
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CONCEPT OF COST
This refers to the value of economic resources used as the result of production of any commodity
For example;
100’000/= spent for producing 100 units of mobile phones. That amount of money used is known as cost.
Cost accounting
- It is concerned with the ascertainment and allocation of cost
- In order to produce products or provide any services, some amount of money are spent by an organization. This amount is regarded as cost
- This cost must be recorded properly and charged to the relevant jobs/ activities
- This cost are presented to management for decision making and evaluating a performance of an organization
- The main objective of cost accounting are to establish budget and standard cost and to analyze the differences between budgeted and actual performance.
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Objectives of cost accounting
i.) Cost ascertainment
-The cost of producing products/ providing services must be ascertain accurately. This cost consist of raw materials, labor
-The cost must be kept at minimum possible level
-The detailed information about cost help the management to make some decisions and to evaluate the performance of an organization.
ii.) Disclosure of wastes
–The cost incurred for the production of any commodity can be determined in advance in view of the past experience.
That is; cost accounting is an important aid to disclose waste
iii.) Decision making
–Cost accounting provides necessary information to the management for making decision
iv.) Cost control
-When we talk about cost control we mean material cost, labor cost and other must be obtained at desirable levels. Cost accounting principles are used to eliminate unnecessary cost.
v.)Planning
–The management prepare plans for the expansion of business activities.
–The installation of new machine and plant is needed to increase t he production capacity of manufacturing concern in view of greater demand of its products. Thus the past experience and cost data are used to prepare.
vi.)Measurement of efficiency
–Cost data are used to measure the efficiency of a company
–if there are various department/division of business enterprises then it is important to determine the relative performance of this department.
vii.)Setting selling price
–It is more advisable that a business concern should ascertain its cost and then add its profit into cost of sales to obtain selling price.
–The cost data are also helpful to set a selling price.
COST CLASSIFICATION
Cost may be classified under three categories;
i.) Fixed and variable cost
ii.) Direct and indirect cost
iii.) Cost classification by function
FIXED AND VARIABLE COST. (FIXED COST)
FIXED COST:
Is the cost which remains the same at various level of output. This cost does not change with the change in output i.e. Remain the same even at Zero level of output
-This cost incurred mostly in periodic basis
e.g.; – Rent of premises and salaries of permanent employees
VARIABLE COST
Is the cost which changes with the level of production or output.
When production increases, variable cost also increases
Example of variable cost is raw materials, direct wages and other related.
DIRECT AND INDIRECT COST.
DIRECT COST
Is that cost which can be identified on the production of some ‘specific’ products. Example of direct cost is raw material and labor cost. Since they can be charged and identified to the production of some specific outputs, this is why we say raw materials and labour cost are good examples of direct cost.
Cost associated directly with the production of goods/outputs.
INDIRECT COST.
Is the cost which cannot be identified to the production of some specific products or outputs. Examples of this are; water charges, interest rate, indirect
Materials, communication charges etc.
Cost classification by function
Cost may be classified by its functions or activities such as that or consist of production cost, administration cost and selling and nglish-swahili/distribution” target=”_blank”>distribution cost
-Production cost consists of raw materials, labor, rent of factories etc.
-Administration cost involves office cost such as office rent, postage, telephone, electricity etc
-Selling and nglish-swahili/distribution” target=”_blank”>distribution cost; this consist of cost which are incurred to promote the selling of goods and delivery these goods to the customers E.g. Advertisement, salesmen commission, depreciation of delivery van, carriage outward, carriage inward.
ANALYSIS OF COST
The cost (total) incurred by the manufacturing firm may be analyzed by cost accountant as under such that;
-Direct raw materials (D.R.M) xx
-Direct labor/Direct wages xx
-Direct any other cost xx
Total direct cost = prime cost xx
Add;
Production overhead (manufacturing overhead)
- Indirect wages xx
- Indirect factory wages xx xx
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Manufacturing/production cost xxx
In case of profit or loss
COST STATEMENT FOR THE YEAR ENDED
| Total Direct Cost | |
| Raw materials (R.M) | xx |
| Direct labor ( D.L) | xx |
| Prime cost of production | xxx |
| Add ; Manufacturing over head | |
| Factory rent xx | |
| Power xx | |
| Supervision expenses xx | xxx |
| Production cost of goods produced | xxx |
| Add ;Administration cost and nglish-swahili/distribution” target=”_blank”>distribution | |
| Office rent xx | |
| Depreciation office xx | |
| Promotion xx | |
| Advertisement xx | |
| Carriage outward xx | xxx |
| Cost of goods sold | xxx |
| Add ; Profit margin | xx |
| Total sales | xxx |
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Selling price ─ total costs = profit/loss on production
-Direct raw materials involves cost of raw materials, opening stock of raw materials, closing stock of raw materials, carriage inwards of raw materials etc.
ILLUSTRATION 1
Prepare a cost statement from the following information;
Raw material 300,000
Direct labor 80,000
Factory rent 15,000
Supervision salary 20,000
Administration expenses 40,000
Selling and nglish-swahili/distribution” target=”_blank”>distribution expenses 15,000
NOTE; Profit margin is 50% on cost, calculate selling price.
COST STATEMENT FOR THE YEAR ENDED
| Total Direct Cost | |
| Raw material | 300,000 |
| Direct labor | 80,000 |
| PRIME COST | 380,000 |
| Total M.O.H (Total Manufacturing overhead) | |
| Factory rent 15,000 | |
| Supervision salary 20,000 |
35,000 |
| Production cost of goods produced | 415,000 |
| Administration expenses 40,000 | |
| Selling and nglish-swahili/distribution” target=”_blank”>distribution 15,000 | 55,000 |
| Cost of goods sold | 470,000 |
| Add 50% margin | 235,000 |
| Selling price | 705,000 |
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Since profit = cost x 50%
= 470,000 x 50%
= 235,000
Cost of goods sold = 470,000
Add; profit margin = 235,000
Selling price 705,000
ILLUSTRATION 2
From the following information prepare a cost statement
R.M 80,000
D.L 35,000
Factory rent 5,000
Power 3,000
Indirect wages 2,000
Administration expenses 4,000
Selling and nglish-swahili/distribution” target=”_blank”>distribution expenses 3,000
Profit is 25% on sales
COST STATEMENT FOR THE YEAR ENDED
| materials | 80,000 | |
| Direct labor | 35,000 | |
| PRIME COST | 115,000 | |
| MOH / FOH | ||
| Factory rent | 5,000 | |
| Power | 3,000 | |
| Indirect wages | 2,000 | 10,000 |
| Production cost of goods produced |
125,000 | |
| Distribution expenses | 4,000 | |
| Selling &nglish-swahili/distribution” target=”_blank”>distribution expenses | 3,000 | 7,000 |
| Cost of goods sold | 132,000 | |
| Add; profit margin | 33,000 | |
| Total sales | 165,000 |
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NOTE; 1.WIP- Is the cost of those items which remain incomplete at the end of the specific period
2. These are semi-finished goods
3. WIP may be valued at prime cost or factory cost
ILLUSTRATION 3
From the following information prepare a cost statement
Stock on 1st. 1 2006 R.M 45,000
W.I.P 22,000
Stock on 31st.12.2006 R.M 65,000
W.I.P 19,000
Purchases of R.M 670,000
Carriage inward 25,000
Returns of R.M 15,000
Direct wages 280,000
Factory rent 60,000
Factory power 48,000
Depreciation of plant 15,000
Supervision salary (factory) 55,000
Office salaries 70,000
Office expenses 12,000
Depreciation of office equipment 5,000
Salesman salaries 68,000
Delivery van expenses 27,000
Depreciation of delivery van 18,000
Advertisement 12,000
NOTE
i.) If there is office salary and supervisor’s salary here normally supervisor’s salary is for factory
ii.) If the question is silent then the amount of W.I.P is very little compare to R.M
or purchase of R.M then it means it is in the final stage so should be finalized in the factory overhead level
iii.) But another time you may be informed if W.I.P is in prime level (early stage) or factory overhead level (final stage)
SOLUTION FOR ILLUSTRATION 3
COST STATEMENT FOR THE YEAR ENDED 31.12.2006
| Opening stock of (R.M) | 45,000 | |
| Add : Purchases of (R.M) | 670,000 | |
| Add: Carriage inwards | 25,000 | |
| 695,000 | ||
| Less: Returns outward (R.M) | 15,000 | 680,000 |
| Cost of R.M available for use | 725,000 | |
| Less : Closing stock of (R.M) | 65,000 | |
| Cost of R.M used/consumed | 660,000 | |
| Add : Direct wages | 280,000 | |
| Prime cost | 940,000 | |
| Add :Manufacturing over head (M.O.H) | ||
| Factory Rent | 60,000 | |
| Factory power | 48,000 | |
| Supervision salary | 55,000 | |
| Depreciation of plant | 15,000 | 178,000 |
| 1,118,000 | ||
| Add : W.I.P (opening) | 22,000 | |
| 1,140,000 | ||
| Less : W.I.P (closing) | 19,000 | |
| PRODUCTION COST | 1,121,000 | |