Cost Accounting Fundamentals
Domain 4 introduces cost accounting as an internal reporting system: cost concepts, classification, cost centres and cost units, and the preparation of a cost sheet. The exam tests whether you can build cost in the correct sequence and separate cost from financial expense.
Elements and cost sheet
Direct material + direct labour + direct expenses = prime cost. Prime cost + factory/works overhead = works cost. Works cost + administration overhead = cost of production. Cost of production + selling and distribution overhead = cost of sales. Cost of sales + profit = sales.
Classification
By nature: material, labour, expenses. By behaviour: fixed, variable, semi-variable. By function: production, administration, selling, distribution. By traceability: direct and indirect. A cost unit is the unit for which cost is ascertained; a cost centre is a location or function for which costs are collected.
Worked example: direct material Rs. 40,000; direct labour Rs. 20,000; direct expenses Rs. 5,000 → prime cost Rs. 65,000. Factory overhead Rs. 15,000 → works cost Rs. 80,000. Administration Rs. 10,000 → cost of production Rs. 90,000. Selling and distribution Rs. 8,000 → cost of sales Rs. 98,000. Profit Rs. 12,000 → sales Rs. 110,000. If opening WIP is Rs. 4,000 and closing WIP Rs. 6,000, works cost becomes 65,000 + 15,000 + 4,000 − 6,000 = Rs. 78,000.
Traps: including interest on loan, discount on issue of shares or income tax in cost; treating office rent as factory overhead; forgetting WIP adjustment; confusing cost of production with cost of sales; charging abnormal wastage as a normal cost instead of treating it separately.