1

Cost Accounting
Adolph Matz
Milton F. usry
2 What is Accounting????

Accounting is a specialized information

system that provides economic information
to different group of people.
3 Branches of Accounting…

 Financial Accounting

 Cost Accounting

 Management Accounting
4 Financial Accounting..

 Primary function of financial accounting is to record in

a systematic way money transactions between an
economic entity and third parties such as suppliers,
customers, employees, bankers etc.

 Financial accounts provide information to “inside users

(Management)” and “Outside users (shareholders,
investors, trade unions, general public etc.)”
5 Definition:

Committee on Terminology of American institute of Certified Public

Accountants

 Accounting is the art of recording, classifying and summarizing in a

significant manner and in terms of money, transactions and events
which are in part at least of a financial character and interpreting
the results thereof.

 Financial accounting (or financial accountancy) is the field of

accounting concerned with the summary, analysis and reporting of
financial transactions pertaining to a business.
6 Cost Accounting:

Institute of Cost and Management Accountants of U.K.

 “The application of accounting and costing principles, methods

and techniques in the ascertainment of costs and analysis of
savings or excesses as compared with previous experience or
with standards”.

It can also be defined as

 Determining the costs of products, processes, projects, etc. in

order to report the correct amounts on the financial statements.
7 Management Accounting:

 The application of professional knowledge and

skill in the preparation and presentation of
accounting information in such a way as to assist
management in the formulation of policies and
in the planning and control of operations of the
undertaking.
8 Tracing the Roots of Cost Accounting:

 The practice of costing is as old as the business activity level itself.

 After Industrial Revolution (1780) due to vast production,

quantitative information became the need of management

 During world war 1st (1914-1918) huge quantities of weapons were

produced and sold at cost plus profit contracts.

 The great Depression (1930s) also increased the need to determine

cost more precisely.
9 Contributions of Cost Accounting:

 Planning
 Controlling
 Evaluation of Alternatives
 Inventory Management
 Pricing
 External Reporting
 Analysis of Financial Statements
10 Planning:

 Process of setting objectives and steps needed to attain

them

 The plans are numerically expressed in the form of

budgets

 Budgeting is the area where contribution of cost

accounting is most visible.
11 Controlling:
 it is the process by which management makes sure that intended and
desired results are consistently and continuously achieved. It consists of
three steps:
i. Establishment of standards
ii. comparison of results against standards
iii. correction of deviation

Performance Report… Department A

Item Budgeted Actual cost Variance Explanation
cost
001 - - - -
002 - - - -
12 Evaluation of Alternatives:

 whether it is less expensive to make or Buy a product

 whether to continue or discontinue a product

 cost accounting provides information as to how future

costs and revenues will be affected under each
alternative and help management to take decisions.
13 Inventory Management:

 complete record of material from entering time to the time they

are sold in the form of finished product

 Stock Evaluation

 valuation of work in process inventory

 quantitative models for material planning and management

developed by cost accounting
14 Pricing of products and Services:

 determination of price of new products as well as

adjustment of price of existing products

 determination of bid price

15 External Reporting:

 Detailed cost reports are prepared and presented in

front of users

For example:
Reports prepared and presented in front of Assembly and
Government regulatory agencies.
16 Analysis of Financial Statements:

 Financial statements are analyzed by external

users and management

 Analysis helps to take decisions regarding

profitability, financial strength and trend etc.
17 Comparison of Financial and Managerial
Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance

versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on

timeliness precision timeliness

5. Subject Primary focus is on Focuses on segments

the whole organization of an organization

6. GAAP Must follow GAAP Need not follow GAAP

and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
18 Cost vs Financial Accounting:

Financial Accounting Cost Accounting

Information to external users Information to internal users

General purpose financial statements Special purpose statements

Conform to generally accepted Conform to information needs of

accounting principles management

Provides accounting data in monetary Monetary and non-monetary terms

terms

Financial statements are prepared on Cost statements and reports are

yearly or half yearly basis prepared more frequently i.e. weekly and
daily basis.