Cost Accounting – Complete Notes for Competitive Exams (JKSSB, UGC NET)
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1. Introduction to Cost Accounting
Cost Accounting is the branch of accounting that records, classifies, analyses, and controls costs involved in producing goods or services.
It helps management determine the actual cost of production and make decisions regarding pricing, cost control, and profit planning.
Definition
Cost Accounting is the process of ascertaining, controlling, and analyzing costs to help management improve efficiency and profitability.
Objectives of Cost Accounting
To determine the cost of products or services.
To control and reduce costs.
To assist management in decision making.
To fix selling prices.
To measure efficiency of production.
To provide information for planning and budgeting.
2. Difference Between Financial Accounting and Cost Accounting
| Basis | Financial Accounting | Cost Accounting |
|---|---|---|
| Purpose | Shows overall profit or loss | Determines cost of production |
| Users | External users | Internal management |
| Time | Historical information | Both historical and future |
| Scope | Entire business | Specific product/process |
| Regulation | Governed by accounting standards | No strict standard |
Important Point for Exam
Financial accounting shows overall profit, while cost accounting shows cost per unit of product.
3. Meaning of Cost
Cost means the amount of money spent to produce goods or services.
Example:
If a factory spends ₹50,000 on materials, ₹20,000 on labour and ₹10,000 on overhead, total cost = ₹80,000.
4. Elements of Cost
Cost is divided into three main elements.
| Element | Meaning | Example |
|---|---|---|
| Material | Raw materials used to produce goods | Steel in car manufacturing |
| Labour | Wages paid to workers | Salary of machine operator |
| Expenses | Other production expenses | Electricity of factory |
Classification
Total Cost = Material + Labour + Expenses
5. Types of Cost (Very Important for Exams)
Cost can be classified in many ways.
5.1 Fixed Cost
Fixed costs remain constant regardless of production level.
Examples
Factory rent
InsuranceSalaries of managers
Example for Understanding
If factory rent is ₹20,000 per month
Production 100 units → cost ₹20,000
Production 1000 units → cost ₹20,000
Rent remains same.
Important Point
Fixed cost does not change with output in short run.
5.2 Variable Cost
Variable costs change according to production.
Examples
Raw materials
Direct labourPower used in production
Example
Material per unit = ₹50
| Units Produced | Total Variable Cost |
|---|---|
| 100 | ₹5,000 |
| 200 | ₹10,000 |
Variable cost increases with production.
5.3 Semi-Variable Cost
These costs are partly fixed and partly variable.
Example
Electricity bill:
Fixed charge = ₹1,000
Variable charge = ₹5 per unit consumed
5.4 Direct Cost
Direct costs are directly identifiable with a specific product.
Examples
Raw material
Direct labourMachine used for product
Example
Wood used to make a chair.
5.5 Indirect Cost
Costs not directly linked to a single product.
Also called Overheads.
Examples
Factory rent
LightingSupervisor salary
5.6 Product Cost
Costs incurred to manufacture a product.
Includes:
Direct material
Direct labourManufacturing overhead
Example
Cost of producing a mobile phone.
5.7 Period Cost
Costs that are charged to a particular accounting period.
Examples
Office salary
AdvertisingAdministrative expenses
5.8 Opportunity Cost
The benefit lost when one alternative is chosen over another.
Example
A person invests ₹1 lakh in business instead of bank.
Bank interest = ₹6,000
Opportunity cost = ₹6,000.
5.9 Marginal Cost
Cost of producing one additional unit.
Formula:
Marginal Cost = Change in Total Cost / Change in Quantity
Example
Cost for 100 units = ₹10,000
Cost for 101 units = ₹10,080
Marginal cost = ₹80
6. Cost Sheet
A Cost Sheet is a statement showing total cost and cost per unit.
Example Cost Sheet
| Particular | Amount (₹) |
|---|---|
| Direct Material | 50,000 |
| Direct Labour | 20,000 |
| Direct Expenses | 10,000 |
| Prime Cost | 80,000 |
| Factory Overheads | 15,000 |
| Factory Cost | 95,000 |
| Office Expenses | 5,000 |
| Total Cost | 1,00,000 |
7. Important Cost Formulas
| Formula | Explanation |
|---|---|
| Prime Cost = Direct Material + Direct Labour + Direct Expenses | Basic production cost |
| Factory Cost = Prime Cost + Factory Overheads | Total manufacturing cost |
| Cost of Production = Factory Cost + Admin Expenses | Total production cost |
| Cost of Sales = Cost of Production + Selling Expenses | Total selling cost |
8. Important Points for Competitive Exams
Cost accounting helps in cost control and decision making.
Fixed cost remains constant irrespective of output.
Variable cost changes with production level.
Direct cost can be easily traced to product.
Indirect cost is called overhead.
Prime cost includes material, labour, and direct expenses.
Marginal cost means cost of producing one more unit.
Opportunity cost represents sacrificed alternative benefit.
9. MCQ Questions for Competitive Exams
MCQ 1
Cost accounting mainly helps in:
A. Profit distribution
B. Cost control
C. Tax payment
D. Share issue
Answer: B
MCQ 2
Which cost remains constant irrespective of production?
A. Variable cost
B. Direct cost
C. Fixed cost
D. Marginal cost
Answer: C
MCQ 3
Prime cost includes:
A. Direct material + Direct labour
B. Direct material + labour + direct expenses
C. Indirect expenses
D. Factory overheads
Answer: B
MCQ 4
Cost of producing one additional unit is called:
A. Average cost
B. Marginal cost
C. Standard cost
D. Fixed cost
Answer: B
MCQ 5
Which of the following is an indirect cost?
A. Raw material
B. Direct labour
C. Factory rent
D. Machine used in product
Answer: C
10. Previous Year Questions (JKSSB / SSC Pattern)
PYQ 1
Which of the following costs does not vary with output?
A. Direct material
B. Variable cost
C. Fixed cost
D. Labour cost
Answer: Fixed Cost
PYQ 2
Prime cost consists of:
A. Direct material
B. Direct labour
C. Direct expenses
D. All of the above
Answer: All of the above
PYQ 3
Opportunity cost refers to:
A. Historical cost
B. Future cost
C. Cost of next best alternative
D. Fixed cost
Answer: Cost of next best alternative
11. One-Line Revision Points
Cost accounting focuses on cost determination and control.
Prime Cost = Direct Material + Direct Labour + Direct Expenses.Fixed cost does not change with output.
Variable cost changes with production.
Marginal cost is cost of one additional unit.
Opportunity cost is benefit sacrificed.
Indirect costs are called overheads.
Additional Types of Cost (Very Important for JKSSB Exams)
1. Sunk Cost
Sunk Cost is a cost that has already been incurred in the past and cannot be recovered.
Such costs should not affect future decision-making.
Example
A company buys a machine for ₹5,00,000.
After two years the machine becomes outdated and cannot be sold.
The ₹5,00,000 already spent is a sunk cost.
Important Exam Point
Sunk cost cannot be changed or recovered.
2. Relevant Cost
Relevant Cost is the cost that changes when a decision changes.
It is important for management decisions.
Example
A company must choose between two machines.
Machine A operating cost = ₹10,000
Machine B operating cost = ₹8,000
The difference in cost is relevant cost.
Important Point
Relevant costs are future costs that differ between alternatives.
3. Irrelevant Cost
Costs that do not affect decision-making.
Example
Historical cost of a machine when deciding about future production.
4. Differential Cost
Differential cost is the difference in total cost between two alternatives.
Example
| Production | Total Cost |
|---|---|
| 100 units | ₹10,000 |
| 150 units | ₹13,000 |
Differential Cost = ₹3,000
5. Incremental Cost
The additional cost due to increase in production.
Example
Cost for 100 units = ₹10,000
Cost for 120 units = ₹11,500
Incremental cost = ₹1,500
6. Decremental Cost
The reduction in cost due to decrease in production level.
Example
If production decreases from 100 units to 80 units, and cost decreases by ₹2,000, then this reduction is decremental cost.
7. Opportunity Cost
The benefit lost by choosing one option instead of another.
Example
A shop owner uses his building for business instead of renting it.
Rent he could earn = ₹20,000 per month
Opportunity cost = ₹20,000
8. Imputed Cost (Notional Cost)
Costs that do not involve actual cash payment but are considered for decision-making.
Example
Owner uses his own building for factory.
No rent is paid, but estimated rent is treated as cost.
9. Controllable Cost
Costs that can be controlled or influenced by management.
Examples
Labour efficiency
Raw material usage
Production manager can control these.
10. Uncontrollable Cost
Costs that cannot be controlled by a specific manager.
Examples
Government taxes
Factory rent fixed by agreement
11. Shutdown Cost
Costs incurred even when production is temporarily stopped.
Examples
Security salary
Equipment maintenance
Depreciation
12. Conversion Cost
Costs incurred to convert raw material into finished goods.
Formula
Conversion Cost = Labour Cost + Factory Overheads
13. Avoidable Cost
Costs that can be avoided if a particular activity is stopped.
Example
Closing a department saves electricity and labour cost.
14. Unavoidable Cost
Costs that cannot be eliminated even if a decision changes.
Example
Factory rent.
Important Table for Quick Revision (Exam Focus)
| Type of Cost | Meaning | Example |
|---|---|---|
| Sunk Cost | Past cost not recoverable | Old machine purchase |
| Opportunity Cost | Benefit sacrificed | Lost bank interest |
| Relevant Cost | Affects decision | Cost difference between options |
| Differential Cost | Difference between alternatives | Cost change between outputs |
| Incremental Cost | Extra cost due to increase | Producing more units |
| Imputed Cost | Hypothetical cost | Rent of own building |
| Controllable Cost | Managed by manager | Labour usage |
| Uncontrollable Cost | Cannot be controlled | Taxes |
| Conversion Cost | Labour + overhead | Manufacturing process |
MCQs on These Costs (Important for JKSSB)
MCQ 1
A cost that has already been incurred and cannot be recovered is called:
A. Marginal cost
B. Sunk cost
C. Opportunity cost
D. Differential cost
Answer: B
MCQ 2
The benefit lost by choosing one alternative over another is:
A. Fixed cost
B. Opportunity cost
C. Standard cost
D. Conversion cost
Answer: B
MCQ 3
Labour cost plus factory overhead is called:
A. Prime cost
B. Conversion cost
C. Differential cost
D. Period cost
Answer: B
MCQ 4
Which cost is hypothetical and not actually paid?
A. Variable cost
B. Imputed cost
C. Direct cost
D. Fixed cost
Answer: B
MCQ 5
Cost difference between two alternatives is called:
A. Differential cost
B. Marginal cost
C. Standard cost
D. Historical cost
Answer: A