PDEA’s Prof.

Ramkrishna More ACS College Akurdi Pune, Department of Commerce

Prepared By: Prof. Ramdas Lad

S.Y.B.Com.
Cost and Works Accounting Paper – I
Cost Concepts
A) COST
B) COSTING
C) COST ACCOUNTING
D) COST ACCOUNTANCY

A) COST
Chartered Institute of Management Accounts London (CIMA)
“Cost is the amount of expenditure (actual or notional) incurred on, or attributable
to, a specified thing or activity”.
Oxford Dictionary
“Cost is the price paid for something”.
B) COSTING
Institute of Cost and Management Accountants London (ICMA)
“Costing is the technique and process of ascertaining costs”.
Wheldon
Costing is the classifying, recording and appropriate allocation of expenditure for the
determination of the costs of products or services and for the presentation of
suitably arranged data for the purpose of control and guidance of the management.
It includes the ascertainment of the cost every order, job, contract, process, service
or unit as may be appropriate. It deals with the cost of production, selling, and
distribution.
C) COST ACCOUNTING
Kohler
“Cost accounting is that branch of accounting dealing with the classification,
recording allocation, summerisation and reporting of current and prospective costs”.
Wheldon
Cost accounting is the classifying, recording appropriate allocation of expenditure for
the determination of the costs of product or services, the relation of these costs to
sales values and the ascertainment of profitability.
D) COST ACCOUNTANCY
Cost accounting is mainly concern with the presentation of costing data to the
management in a precise form so that vital decisions can be taken by the
management.
ICMA, England
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. It
includes the presentation of information derived there from for the purpose of
managerial decisions making.

Points of Costing Cost Cost Accountancy

Differentiation Accounting
Scope It is broader in It is narrow in It is broadest in its scope
its scope its scope
Function It is concerned It is concerned It is concern with

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with with recording formulation of costing

ascertainment of cost principles, methods and
of cost techniques to be
adopted by a business.
Periodicity of It begins where It begins It is a starting point
functioning cost where costing
accountancy ends
ends
Persons Cost Accountant Cost Clerks Expert in the field of cost
involved accountancy
Management
Accountants.

LIMITATIONS OF FINANCIAL ACCOUNTING

There are three main branches of accounting viz. Financial Accounting, Cost
Accounting and Management Accounting.
All these are concerned with presentation of business data to the internal and
external users. (Management, Employees) (Investors, Suppliers)
Shows only overall performance

Provides historical data

Static in nature
Fails to provide information for price fixation
Fails to control cost
No proper classification of cost
Does not provide proper system for performance appraisal
Fails to analyse losses
Does not provide a basis of cost comparison
Fails to provide adequate information for reports
Fails to provide adequate data to management
Possibility of manipulation of financial accounts
Does not make use of control techniques
Fails to ascertain Break Even Point

OBJECTIVES OF COST ACCOUNTING

Ascertainment of cost
Control of cost
Determination of selling price
Provide a basis for operating policy
Frequent preparation of accounts and other reports
To provide data for cost reduction
Preparation of cost estimates
Standards for measuring efficiency

ADVANTAGES OF COST ACCOUNTING

Helps in decision making

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Supplies detailed cost information

Guides in price fixation
Reveals operating efficiency
Facilitates planning
Reveals ideal capacity
Helps in inventory control
Helps in cost control
Helps in cost reduction
Checks the accuracy of financial accounts
Facilitate cost comparison
Prevents fraud and manipulation

LIMITATIONS OF COST ACCOUNTING

Highly expensive
More complex
Limited applicability
Not applicable to small concerns
Lack of uniformity
Lack of accuracy
Confusion regarding non cost items
Not useful for handling futuristic situation
Failure in many cases
Fails in considering social obligations

COST UNIT AND COST CENTRE

COST UNIT
MEANING:
Cost Unit is a quantitative unit of a product or a service or time in relation to which
cost are ascertained or expressed.
Cost Unit differ from industry to industry. The cost unit selected should be the most
natural to the businesses and accepted by all concerned. It should be neither too
small nor too large. If the unit is too small it may necessitate detailed and expensive
clerical work.
DEFINITION:
C.I.M.A., London has defined Cost Unit as, “a unit of product or service in relation to
which cost are ascertained”.
For example:
In Cement Factory the cost per ton of cement is found out; in cloth mill the cost per
meter is ascertained.

TYPES OF COST UNIT

Single Cost Unit
Composite Cost Unit

SINGLE COST UNIT

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It is a cost unit in which only one characteristic is used in measurement of cost.

For example: per kilogram, per litre, per passenger etc.
COMPOSITE COST UNIT
It is the cost unit in which two characteristics are used simultaneously in
measurement of cost.
For example: per ton per kilometre, per passenger-kilometre, per kilowatt per hour,
per patient per bed.

COST CENTRE
MEANING:
For the purpose of administrative control the entire organisation is divided into a
number of subunits which may be in the form of departments, branches, processes
etc., for ascertaining and controlling costs. Because, the cost incurred will be charged
initially to the subunits which are known as Cost Centre.
A Cost Centre is therefore, a sub unit of the organisation for which costs may be
collected separately and used for cost ascertainment and control.
DEFINITION:
C.I.M.A., England has define cost centre as “a location, person or item of equipment
(or group of these) for which costs may be ascertained and used for the purpose of
control”.

Cost centre may be in the form of

a location (such as department division section or process) or
An item of equipment (like machine) or
A person (for example salesman) or a group of these.

TYPES OF COST CENTRES

Production Cost Centre
Service Cost Centre
Personal Cost Centre
Impersonal Cost Centre
Operation Cost Centre
Process Cost Centre

TYPES OF COST CENTRES

Production cost centre
It is connected with production that is machine shop, welding shop, assembly shop
etc. The manufacturing and non manufacturing costs are charged to product cost
centres.
Service cost centre
It is one which provides services to the other cost centres. Only non manufacturing
costs are charged to service cost centre. For example canteen, machinery
maintenance, office service etc.
Personal cost centre
It consists of a person or group of persons. It follows the organisational structure of a
factory. The costs are analysed and accumulated by works manager, sales manager,
store keeper, foreman etc.

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Impersonal cost centre

It consists of a location or item of equipment. A cost centre relating to location may
represent a region of sales, a warehouse, or store room.
Operation cost centre
it is a cost centre which consists of machines or persons carrying out similar
operations that is machines and operations engaged in welding, turning or matching.
Process cost centre
It is a cost centre which consists of a specific process or continuous sequence of
operations.

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