Introduction to Cost Accounting and Cost Concepts
Domain focus
CHSE Odisha Cost Accounting tests whether you can separate cost accounting from financial accounting and classify costs correctly before you prepare any statement. Expect definitions, objectives and cost classification.
Core rules
- Cost accounting records, classifies and analyses cost to ascertain cost per unit and provide control information; financial accounting reports profit for external users.
- Cost is a resource sacrificed; an expense is a cost consumed in earning revenue; a loss is an unrecovered cost with no benefit.
- Elements: direct material, direct labour and direct expenses form prime cost; production overheads make works/factory cost; administration, selling and distribution overheads follow.
- Classify by behaviour: fixed, variable, semi-variable; by traceability: direct and indirect; by relevance: relevant, sunk, opportunity.
- A cost unit is the unit of product/service (e.g. per tonne, per passenger-km); a cost centre is a location/function/person for cost collection.
Worked example
Direct material ₹5,000; direct labour ₹3,000; factory rent ₹1,000; office salary ₹1,500; sales commission ₹500. Prime cost = 5,000+3,000 = ₹8,000. Works cost = 8,000+1,000 = ₹9,000. Cost of production = 9,000+1,500 = ₹10,500. Cost of sales = 10,500+500 = ₹11,000. Rent is production overhead; salary is administration; commission is selling overhead.
Traps
Do not put direct expenses under overheads; do not call a sunk cost relevant; do not mix cost of production with cost of sales; remember cost accounting is not official financial reporting.