Introduction to Cost

Accounting
 Introduction

➢ Cost Accounting is a branch of accounting & has been

developed due to limitations of Financial accounting
➢ Cost Accounting is one of the branches of Accounting & is
predominantly meant for meeting the informational needs of
the management
➢ Cost Accounting is a quantitative method that accumulates,
classifies, summarizes and interprets financial and non-
financial information for three major purposes.
❖Ascertainment of cost of a product or service
❖Operational planning and control
❖Decision making
 Meaning of Cost
➢ Cost is the amount of expenditure, actual (incurred)
or notional (attributable), relating to a specific thing
or activity
➢The specific thing or activity may be a product, job,
service, process or any other activity
➢Cost is the amount of resources given up in exchange
for some goods or services
➢The resources given up are generally in terms of
money, or if not in terms of money, they are always
expressed in monetary terms
Meaning of Costing and Cost Accounting
➢ Costing is defined as the technique and process of
ascertaining costs
➢ The technique consists of principles and rules which are
applied for ascertaining costs of products manufactured and
services rendered
➢ Cost Accounting is classifying, recording and appropriate
allocation of expenditure for the determination of the costs of
products or services
➢ And also for the presentation of suitably arranged data for
purposes of control & guidance of management
➢ It deals with the cost of production, selling & distribution
➢ It includes the ascertainment of the cost of every order, job,
contract, process, service or unit
Cost Accountancy, Cost Control & Cost Audit

• Cost Accountancy: Cost Accountancy is defined as ‘the

application of Costing and Cost Accounting principles,
methods and techniques to the science, art and practice of
cost control and the ascertainment of profitability’.
• Cost Control: It is the process of regulating the
action so as to keep the element of cost within the set
parameters.
• Cost Audit : Cost Audit is the verification of correctness
of Cost Accounts and check on the adherence to the Cost
Accounting plan.
Its purpose is not only to ensure the arithmetic accuracy of
cost records but also to see the principles and rules have
been applied correctly.
 Objectives of Cost Accounting
➢ The objectives of Cost Accounting are ascertaining of cost, fixation of
selling price, proper recording and presentation of cost data to
management for measuring efficiency & for cost control.
➢ 1. To determine product costs - The objective of determining the cost of
products is of main importance in cost accounting.
• The total product cost and cost per unit of product are important in making
inventory valuation, deciding price of the product & managerial decision
making
➢ 2. To facilitate planning & control of regular business activities – The
creation of useful cost data & information for the purposes of planning &
control by management
• The management control over business operations aims to establish
balance between actual and budgeted performances
➢ 3. To supply information for short and long–run decisions - Cost
accounting helps the management in providing information for managerial
short and long–run decisions for formulating operative policies
 Comparison between Cost Accounting and
Financial Accounting

➢ Both Financial & Cost Accounting are the branches of accounting

whose main object is to provide information
➢ Financial Accounting accumulates & presents data primarily for the use
by investors, creditors & other external parties
➢ Financial Accounting is designed to meet external information needs &
to comply with GAAP, main objective is the ascertainment &
presentation of profit earned or losses incurred in the business
➢ Financial Accounting do not provide tools for in-depth analysis for
performance in terms of cost efficiency
➢ Cost Accounting focuses primarily on accounting for the flows of costs
& is concerned with the development of systems for relating costs to the
products or services produced by an organization
➢ Financial Accounting treats costs very broadly, while Cost Accounting
does this in much greater detail
 Comparison between Cost Accounting and
Financial Accounting
Financial Accounting Cost Accounting
1. Purpose – It provides general 1. It provides general information to
information - P&L , B/S to owners management for proper planning,
& other outside parties operation, control & decision making
2. Form of Accounts - These 2. Generally Cost Accounts are kept
accounts are kept in such a way to voluntarily to meet the requirements
meet the requirements of Companies of the management, only in some
Act as per Sec 128 & Income Tax industries Cost Accounting records
Act Sec 44AA are kept as per the Companies Act
3. Recording – It classifies, records 3. It records the expense according to
& analyses the transactions the purposes for which the costs are
according to the nature of expense incurred
4. Control – It lays emphasis on 4. It provides detailed system of
recording aspect without attaching control for materials, labour &
any importance to control overhead costs with the help of
standard costing & budgetary control
 Comparison between Cost Accounting and
Financial Accounting
Financial Accounting Cost Accounting
5. Analysis of Profit – Financial 5. Cost Accounting is only a part of
Accounts are accounts of the whole the Financial Accounts &
business, disclose the net profit or discloses profit or loss of each
loss of the business as a whole product, job or service
6. Nature of Transactions – It 6. Cost Accounting relates to
records all the commercial transactions connected with the
transactions of the business & manufacture of goods & services,
include all expenses i.e include expenses which enter into
Manufacturing, Office, Selling etc. production
7. Information –Only transactions 7. Non-monetary information like
which can be measured in monetary No. of units/ Hours etc. are used
terms are recorded
8. Cost Accounting provides
8. Fixation of selling price – sufficient data for fixation of
Financial Accounting are not selling price
maintained with the object of fixing
selling price
 Comparison between Cost Accounting and
Financial Accounting
Financial Accounting Cost Accounting
9. Stock Valuation – Stocks are 9. Stocks are valued at cost
valued at cost or market price which only
ever is lower
10. Primary users of information –
10. Information used by
Users are mainly external,
management for proper
shareholders, creditors, stock
planning , operation, control
exchange, govt authorities etc.
& decision making
11. Accounting system – Follows the
11. May not be based on the
double entry system
double entry system
12. Accounting principles – The
12. Is not bound to use GAAP,
GAAP are important and are used
can use any Accounting
extensively while recording,
practice which generates
classifying, summarizing, and
useful information
reporting business transactions
 Comparison between Cost Accounting and
Financial Accounting
Financial Accounting Cost Accounting
13. Periodicity of reporting -It 13. It gives information through
reports operating results & financial cost reports to management
position at the end of the year as & when desired
14. Figures – It deals with actual facts 14. It deal partly with facts and
and figures only figures and partly with
estimates/ standards
15. External/ Internal transactions -
Financial Accounts are concerned 15. Cost Accounts are
with external transactions i.e. concerned with internal
between business concern and third transactions, which do not
party involve any cash payment or
receipt
16. Financial Accounting do not
provide information on efficiencies 16. Cost Accounts provide
of various workers/ Plant & valuable information on the
Machinery efficiencies of employees and
Plant & Machinery
 Comparison between Cost Accounting and
Management Accounting

➢ Management Accounting is the presentation of accounting information

in such a way as to assist management in the creation of policy & the
day-to-day operation of an undertaking
➢ Cost Accounting and Management Accounting both have the same
objectives of helping management in planning, control & decision
making
➢ Both are internal to the organization & use common tools & techniques
like Standard Costing, Variable Costing, Budgetary control etc.
➢ Cost Accounting is limited to product costing procedures & related
information processing, where as Management Accounting is not
confined to the area of product costing, cost and price data
➢ Management Accounting helps management in the total situation and
in accomplishing all managerial functions
 Comparison between Cost Accounting and
Management Accounting
Cost Accounting Management Accounting
1. Meaning – The recording, 1. The accounting in which both the
classifying & summarizing of financial & non-financial
cost data of an organization is information are provided to
known as Cost Accounting managers is known as Management
2. Deals with - Deals with Accounting
ascertainment, allocation, 2. Deals with the effect and impact of
apportionment & accounting costs on the business
aspect of costs
3. Derived from both Cost
3. Base – Provides a base for Accounting & Financial
Management Accounting Accounting
4. Role – Helpful in collecting data 4. Has greater degree of relevance &
for management objectivity
5. Scope – Does not include 5. Includes Financial & Cost
Financial Accounting and Tax Accounting, and Tax Planning
Planning
 Comparison between Cost Accounting and
Management Accounting
Cost Accounting Management Accounting
6. Outlook - Cost Accountant has 6. Management Accountant reports
a narrow approach, has to refer to the effect of cost on the business
economic and statistical data for along with cost analysis
analyzing cost effects
7. Needs Financial and Cost
7. Installation – Can be installed Accounting as its base for its
without Management Accounting installation
8. Objective – Ascertainment of 8. Providing information to managers
Cost of Production to set goals and forecast strategies
9. Recording – Records past and 9. It gives more stress on the analysis
present data of future projections
10. Tools & Techniques – Has 10. Along with these, has Fund Flow
Standard Costing, Variable & Cash Flow Statements, Ratio
Costing, Break even Analysis Analysis etc. as accounting tools &
etc. as the basic tools & techniques
techniques
 Methods of Costing
➢ The term Costing refers to the techniques & processes of
determining costs of a product manufactured or service
rendered
➢ Different methods are applied in business enterprises to
ascertain costs depending upon -
• the nature of the product
• production method &
• specific business conditions
➢ There are two methods of costing
• Job Costing( Specific Order Costing)
• Process Costing ( Operation or Period Costing)
 Methods of Costing
1. Job Costing – Costs are collected & accumulated for each
job, work order or project separately.
➢ Job costing is used in those business concerns where
production is carried out as per specific order and customer
specifications, each job (product) is separate & distinct from
the other jobs or products.
➢ This method is applicable to printers, machine tool
manufactures, foundries, general engineering workshops etc.
2. Contract costing – When the job is big & spread over long
periods of time, the method of Contract costing is used
➢ A separate account is kept for each individual contract
➢ This method is used by builders, civil engineering contractors,
constructional & mechanical engineering firms etc.
 Methods of Costing
3. Batch Costing – A batch may represent a number of small
orders passed through the factory in batch
➢ Each batch is treated as a unit of cost & separately costed.
➢ The cost per unit is determined by dividing the cost of the
batch by the number of units produced in a batch.
➢ This method is used to determine the cost of a group of
identical or similar products
➢ The batch consisting of similar products is the unit and not the
single item with in the batch
➢ This method is mainly applied in biscuits manufacture,
garments manufacture, spare parts & components
manufacture, medicines and other items which are
manufactured in distinct batches
 Methods of Costing
4. Process Costing – This costing method is used in those
industries where production is done continuously,
manufacturing is carried on by distinct and well defined
processes
➢ The finished product of one process becomes the raw material
of the subsequent process
➢ It is necessary to ascertain not only the cost of each process but
also cost per unit at each process, at the end of each process
➢ Sometimes total cost & per unit cost is calculated at each stage
of production for control process
➢ The cost per unit is obtained by averaging the expenditure
incurred on the process during a certain period
➢ Process Costing is generally followed in Textile Industries,
Chemical Industries, Paper manufacture, oil, gas etc.
 Methods of Costing
5. Unit or Output Costing – This method is used where a
single item is produced & the final production is composed
of homogenous units
➢ The objective of this method is to ascertain the cost per unit
of output & the cost of each item of such cost
➢ The per unit cost is obtained by dividing the total cost by
the total number of units manufactured
➢ This is suitable for industries where manufacture is
continuous and units are identical
➢ This method is applied in industries like mines, oil drilling,
breweries, collieries, cement works, brick works etc.
➢ There is natural or standard unit of cost in all these
industries
 Methods of Costing

6. Service or Operating Costing – This method is used to

ascertain the cost of services rendered
➢ This is suitable for industries which render services as
distinct from those which manufacture goods
➢ There is usually a compound unit in such undertakings,
such as tonne- kilometre for transport undertaking, kilowatt
– hour for power supply, patient day for hospitals etc.
➢ This is applied in transport undertakings, power supply
companies, municipal services, hospitals, hotels etc.
➢ The cost units differ among these service organizations
depending upon the nature of service being rendered
 Methods of Costing
7. Operation Costing –
➢ Multiple Operation method of manufacture consists of a
number of distinct operations
➢ It refers to conversion cost, i.e. cost of converting the raw
materials into finished goods
➢ This costing method aims at ascertaining the costs of each
operation in place of each process
➢ In this method the assumption is that output is achieved
through a number of different operations
➢ The cost per unit is determined with reference to final
output
➢ The different operations in machine screw are stamps,
knurl, thread and trim
 Types or Techniques of Costing
➢ Types or Techniques refer to the manner of ascertaining costs
of a product, job or activity
➢ These Types or Techniques also necessarily indicate what
types of costs are being ascertained such as historical cost,
standard cost, marginal cost
➢ The term “Methods of costing” is being used to determine
costs without indicating the types of costs ( historical,
standard or marginal), which are ascertained under the two
methods of costing ( Job or Process costing)
➢ Following are the main types or techniques of costing for
ascertaining costs:
1. Uniform Costing – It is the use of same costing principles
or practices by several undertakings for common control or
comparison of costs
 Types or Techniques of Costing
2. Marginal or Variable Costing – It is the ascertainment of
marginal cost by differentiating between fixed and variable
cost
➢ It is used to ascertain the effect of changes in volume or types
of output on profit
➢ Variable Costing technique charges only variable production
costs to products or jobs, the fixed production costs are written
off against profits in the periods in which they arise
3. Standard Costing – A comparison is made of the actual cost
with a pre-arranged standard cost & the cost of any deviation
(called variances) is analyzed by causes
➢ This permits management to investigate the reasons for these
variances and to take suitable corrective action
➢ Standard costs are the predetermined costs
 Types or Techniques of Costing
4. Historical Costing – It is ascertainment of costs after they have
incurred, and aims at ascertaining costs actually incurred on work done in
the past
➢ It has a limited utility, though comparisons of costs over different periods
may yield good results
5. Direct Costing – It is the practice of charging all direct costs,
variable and some fixed costs relating to operations, processes or
products leaving all other costs to be written off against profits in which
they arise
6. Absorption or Full Costing –
➢ Under this costing technique, all manufacturing costs, both fixed and
variable, are charged to products, jobs, processes, etc. and are included in
total cost
➢ This differs from marginal costing where fixed costs are excluded