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In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to cut a company's costs and improve profitability. As a form of management accounting, cost accounting need not follow standards such as GAAP, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically.

Direct Material Costs

Introduction to direct material costs:

Material cost is the first and the most important element of cost. The material cost forms a very significant portion of the overall cost of production. The term material refers to all commodities which are consued in the production process. The material which can be consumed in the production process can be basically classified  as

i)  Direct materials

(ii) Indirect materials


Elements of Costs-direct Material Costs:

Costs can be broadly divided into three elements namely


  • Material
  • Labour
  • Expenses

Material

This is the cost of commodities and materials used by an organization. It can be again direct or indirect.

Direct material indicates that material which   can be identified with the individual cost center and which becomes an integral part of the finished goods. It basically consists of all raw material, either purchased from outside or manufactured in-house.

Indirect material indicates that material which cannot be identified with the individual cost center. This material assists the manufacturing process and does not become an integral part of the finished goods. The examples of this type of material may be consumable stores, cotton waste, oils and lubricants, stationery material etc.

Labour

This is the cost of remuneration paid to the employees of the organisation. It can again be direct or indirect.

Expenses

This is the cost of services provided to the organization. It can be direct or indirect.

Direct Material Costs Accounting:


The basic objective of cost accounting is the ascertainment of cost and control of cost. This is applicable to material cost as well. The ascertainment of material cost is made from basically   two documents namely (i) the invoice of the supplier of material and (ii) material requisition slip specifying material issued from stores department to production department. A lot of organizational procedures are also involved in this process, which affects the material cost, either directly or indirectly. For example, purchases from improper sources of   supply may be expensive, non-availability of material in time may result into hold ups and so on. A proper study of the various procedures involved in the case of the movement of materials and a proper control thereon enables an organisation to exericise the control on a sizeable manufacturing cost.


Variable Production Costs


Introduction to variable production costs:

Production costs are the costs of production of a firm. These are money costs or expenses of production. These costs are paid by the producer and are also known as entrepreneur's costs. The production costs are the explicit costs and they enter the account books of the organization. The production costs include

(i) wages to labour

(ii) interest on borrowed capital

iii) rent or royalty paid to the owners of land or building

iv) cost of raw materials

v)  replacement and repair charges of machinery

vi) depreciation of capital goods and

vii) normal profits of the firm



Classification of Costs in Variable Production Costs


Costs may be classified as

a) Production costs

b) Selling costs and

c) Other costs

Production costs include material costs, wage cost and interest cost. Selling costs include cost of advertising and Other costs include insurance charges, taxes etc. These accounting costs are important from the producer's point of view and the firm should make sure that the price of the product must cover these costs and normal profits or the firm cannot afford to continue prodcution.


Variable Production Costs Classification


The costs of production can be broadly classified   as fixed production costs and variable production costs. This distinction between fixed and variable production costs is relevant in the short period only. Costs on fixed factors like capital, machinery, land , management etc are fixed costs.

Factors like wages, electricity, raw materical etc are variable. Costs on variable factors of production are termed as variable production costs. Variable costs are those costs that varies  with the level of output and variable costs change with the change in production whereas fixed costs do not change with change in production. The sum of the fixed and variable costs gives the total cost of production.

Labour especially from unorganised sectors comes under variable costs. The firm can take as much as it wants and retrench as much as it wants, when there is no written contract. For example, labour for gardeners of   a huge property, sweepers or watchmen can be paid differently on different days according to the wishes of the employer. Payment to these people are considered a simple decision with no heavy complexities in most cases.

In the long period, however all factors are variable and so all costs are variable. The difference between the fixed and variable costs disappears in the long period.



Business Accounting


Introduction to business accounting tutors:

Business is an activity carried out with the intention of earning profits. A person carrying out business is interested in two facts basically about his business.

  • What is the profit or loss in his business?
  • Where does his business stand?

Answers to the above questions is possible only if the transactions relating to the business are recorded in a systematic manner. Here the process of business accounting comes into picture. by a tutor

Process by Business Accounting Tutor:


The process of recording the business transactions in a defined set of records, which in technical words are called as Books of Accounts, is referred to as Book Keeping. Business accounting refers to the process of analysing and interpreting the information already recorded in the books of accounts. This is done by preparing financial statements. The financial statements prepared by organization are basically in two forms :

  • Profitability statement - indicates the amount of profit earned or the amount of loss incurred.
  • Balance sheet - indicates the financial status of the business at any given point of time in terms of its assets and liabilities.

Business Accounting Divisions by Tutor into three:


  • Financial accounting
  • Cost accounting
  • Management accounting

Financial accounting

The process of systematic recording of business transactions in the various books of accounts maintained by the organization with the intention of preparing the financial statements is called financial accounting.

Cost accounting

Cost accounting refers to the process of classifying and recording of the expenditure in a systematic manner. This is prepared with the intention of ascertaining the cost and controlling the cost.

Management accounting

This is the process of analysis and interpretation of financial data collected with the help of financial accounting and cost accounting. This is done with the intention of drawing certain conclusions in order to assist the management in the process of decision making.


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