Introduction to Cost Accounting
Introduction to Cost Accounting supplies the vocabulary and the cost-sheet arithmetic that the rest of Paper 8 assumes. Questions are usually direct - classify a cost, distinguish cost accounting from financial accounting, identify a cost unit, or build the top half of a cost sheet. Marks are lost on definitions and on the sequence of cost totals, not on arithmetic.
Core rules
- Elements of cost: material, labour and expenses. Each splits into direct (traceable to the cost object) and indirect (overheads).
- Cost sheet ladder: Prime cost = direct material + direct labour + direct expenses. Works/factory cost = prime cost + factory overheads + opening work-in-progress − closing WIP. Cost of production = works cost + administration overheads. Cost of sales = cost of goods sold + selling and distribution overheads.
- Cost centre vs cost unit: a cost centre is a location, person or item of equipment for which costs are collected; a cost unit is the unit of product or service in relation to which cost is ascertained, such as a tonne-kilometre.
- Cost control keeps costs within targets; cost reduction seeks a permanent, genuine lowering of unit cost without impairing suitability or quality.
Worked example
Direct material ₹2,00,000; direct labour ₹1,00,000; direct expenses ₹20,000, so prime cost is ₹3,20,000. Factory overheads ₹60,000, opening WIP ₹10,000, closing WIP ₹15,000, so works cost is ₹3,75,000. Administration ₹40,000 gives cost of production ₹4,15,000. Opening finished goods ₹25,000 and closing ₹20,000 give cost of goods sold ₹4,20,000. Selling and distribution ₹30,000 gives cost of sales ₹4,50,000. Sales ₹5,40,000 therefore yield a profit of ₹90,000.
Traps
Adding closing WIP instead of deducting it; putting carriage outward into works cost when it belongs to distribution; treating depreciation on office equipment as factory overhead; and describing cost reduction as a one-off cost-cutting exercise rather than a permanent change in method.