CONTENT

SL No. TOPIC

1 ACKNOWLEDGEMENT

2 DECLARATION

3 CERTIFICATE

4 CONTENT

5 INTRODUCTION

6 OBJECTIVE

7 IMPORTANCE

8 CLASSIFICATION

9 CONCLUSION

10 BIBILOGRAPHY
 INTRODUCTION

Cost accounting is the process of accounting for costs. It beings with

the recording of income and expenditure & ends with the preparation of
periodical statement for ascertaining & controlling includes costing. It also refers
to the process of classifying, recording & appropriate allocation of expenditure
for the determination of cost. It consists of rules and principles for ascertaining
the cost of products manufactured and services rendered.
 OBJECTIVES OF COST ACCOUNTING
The main objectives of cost accounting are as follows 
(i) Ascertainment of Cost The primary objective of cost accounting is to ascertain cost of
each products, process, job, or operation.
(ii) Classification of costCost Accounting classifies total cost in to different elements i.e. material labour
and expenses.
(iii) Control of CostCost Accounting aims at controlling cost by setting standard and
making comparison.
(iv) Fixation of selling Price Cost Accounting guides management in fixation of selling price
or quotation of tenders.
(v) Reducing the Cost The Cost Accounting aims at controlling cost by setting standard and
market comparison.
(vi)Reporting to Management Cost Accounting reports to the management all information
relating to cost and helps management to take decision.
(vii) Identification of Causes of Wastages Cost Accounting analyses & identifies the
causes of wastage & help to take necessary steps to check the wastage.
(viii) Judging the Efficiency Cost Accounting evaluates the relative efficiency
departments, products, branches and plans so that necessary stems can be taken to improve
their efficiency.
Preparation of Cost Statement Cost Accounting prepares cost Statements as & when required by the
management for review of cost & to plan future activities.

IMPORTANCE FUNCTION, SCOPE OF COST ACCOUNTING

The advantages or Importance of Cost Accounting are as follows 
(1) Identifies un profitable activities Cost Accounting identifies un profitable activities.
Which need quick remedial action? It also revels wastages of resources in the form of
inadequate plant utilization & improper use of available resources.
(2) Facilitates decision-making Cost Accounting provides necessary information to the
management regarding production, cost materials labours, etc. which helps planning &
decision-making. This information helps management to take important decision such as- (a)
Whether to make or buy a particular component or (b) whether to sell the product below total
cost.
(3) Improve efficiency Cost Accounting measures the efficiency of operations, through
establishment of standards & analysis of various suitable remedial measure are taken to
improve efficiency of operations.
(4) Help in fixing prices Cost Accounting provides detail information about different cost of
product. It helps management in fixation of selling price of a product.
(5) Facilitates Cost Control Cost Accounting provides a system of control for materials,
labours& other expenses. Various techniques like budgetary control & standard costing also
facilitate Cost Control.
(6) Help in preparation of BudgetsA budget is a plan of action for a future period. Cost
Accounting provides information & helps in the preparation of budget.
(7) Helps inventory control Cost Accounting helps in controlling inventory by applying
different inventory control techniques. These techniques help in exercising control over raw
material, work-in –progress and finished goods.
(8) Prevents fraudAn efficient Cost Accounting system prevents frauds & manipulations. It
complies reliable & correct cost data.
(9) Provides ready figures for setting dispute Cost Accounting provides ready figures for
use by the management, government, authorities, wage tribunals &labour union for settings
issues such as fixation of price, price control, wages, level fixation etc.
LIMITATIONS OF COST ACCOUNTING

Cost Accounting is not free from limitations. The main limitations of Cost Accounting are as
follows 

(1) Not an exact Science Cost Accounting is not an exact science. The principles & practice of Cost
Accounting are static. They change with the change of line & circumstances.
(2) No uniform procedures & methodsThe procedures and methods of Cost Accounting followed by
different organisation are not uniform &there fore they provide different results from the same
information. There are different methods for pricing of material issues. There is also arbitrary
allocation of common costs.
(3) Based on estimations & conventions In Cost Accounting some elements of cost like indirect costs
are charged on the basis of estimation. Therefore, the actual costs may vary from estimated cost.
Moreover, members of formalities are to be observed in adopting costing system.
(4) Expensive  Cost Accounting is expensive to install & run. It involves a lot of clerical work, for
apportionment of cost & absorption of overheads. For a small or medium size concern the benefits
received from the installation of costing system may not justify the cost involved.
(5) Problem of reconciliation of Cost and Financial Accounting The analysis and results provided by
cost accounts and financial accounts may not be same. It is very difficult to reconcile these two types of
Accounts.

Functions and Scope of Cost Accounting

(i) Determination and Analysis of CostA major function of Cost Accounting is to ascertain
the cost of products & services. Cost & income of a business organisation are analyzed to judge the
relative efficiency of various departments, process, operations & plants.
(ii) Control of Cost A second function of Cost Accounting is the use of cost data for the purpose
of cost control. Different techniques like standard costing & budgetary control are used for
controlling costs. Costs are also analyzed & compared so as to maintain costs at the lowest point
consistent with the most efficient operation conditions.
(iii) Preparation of Cost Statement and Reporting to ManagementOne of the
functions of Cost Accounting is to prepare cost statements periodically e.g. monthly or quarterly. It
reports to the management all cost information & helps management to plan future activities & to
take decisions.
 Special Cost Studies & Investigations It helps Management to take different decisions and
formulate plan & policies. Such special studies include pricing of new products or services expansion or
modernization programme replacement of machinery etc.

COST, CONCEPT, CLASSIFICATION & ANALYSIS

Elements of cost are the primary classification of costs according to the factors upon
which, expenditure is incurred. In a manufacturing organisation expenditure is incurred on
material purchased, workers engaged & certain other services. Thus elements of cost for a
manufacturing concern are as follows.
(i) Material  (a) Direct Material (b) Indirect Material.
(ii) Labour (a) Direct Labour (b) Indirect Labour.
(iii) Expenditure  (a) Direct Expenses (b) Indirect Expenses.
(i) MaterialIt refers to those commodities supply to an organisation, which are used as
raw material, components or consumable for manufacturing a product. Material divided in to
two categories – (a) Direct Material and (b) Indirect Material.
(a) Direct Material – Direct material are those material which from a part of the finished
product & easily identified in the finished product. These are used as raw material, or
components for a finished product e.g. of direct material are- sugarcane for sugar, wood for
furniture, tyres for car etc. primary packing materials e.g. cartons, wrapping, cardboard boxes
also come under direct material.
(b) Indirect Material – Indirect materials are those materials, which cannot be traced as part
of the product. Consumable like lubricating oil, stationary, spare parts for machinery are
called as indirect materials.
(ii) LabourIn manufacturing organisation workers are employed for converting
materials in to finished products or for doing various add jobs in the organisation. These
workers are known as “labour”. Labour can be divided in to two categories – (a) Direct
Labour (b) Indirect Labour.
(a) Direct Labour- The workers who are directly involved in the manufacturing of goods are known
as “direct labour”. The wages paid to direct labour are known as “direct wages” or “manufacturing
wages”. These workers help in altering the contribution composition of the product manufactured.
Direct labour is also called as productive labour, process labour, operating labour& prime cost
labour.
(b) Indirect Labour – The workers who are indirectly involved in the manufacture of goods i.e. who
carry out task identical to production of goods are known as “indirect labour”. Those workers do
office work, selling & distribution activities. The wages paid to the indirect labour are known as
“indirect wages”.
(iii) ExpensesAll expenditure other than material &labour are termed as “expenses”.
Expenses can be divided in two categories – (a) Direct Expenses (b) Indirect Expenses.

(a) Direct Expenses – Direct Expenses are those, which are neither direct materials cost nor direct
wages but are incurred specifically for a particular product, job or operation. Direct expenses are
also known as chargeable expenses some e.g. of such expenses are – carriage inward, hire charges
of special equipment production royalty etc. and productive wages is a direct expenses.
(b) Indirect Expenses – Indirect Expenses are those which are neither indirect material cot nor
indirect wages & which cannot be directly attributed to a particular product, job or operation. Some
expenses of indirect expenses are – rant of building, insurance, hospital and dispensary expenses.
Cost Analysis

Raw MaterialF It is the total amount of raw material consumed during a year or period.

FormulaÊ

Particulars Amount
(Rs.)
¬¬¬¬
Opening stock of Raw Material ¬¬¬¬
Add -: Purchase of Raw Material ¬¬¬
Add -: Expenses Related to Purchase
¬¬¬¬
Less -: Closing Stock of Raw Material
¬¬¬¬

Raw Material Consumed

¬¬¬¬

Prime CostF It is the sum total of direct materials/ raw material consumed direct labour&
direct expenses.

Work Overhead/ Factory OverheadF Any indirect expenses is related to factory or incurred
in the factory are termed as factory/ works overhead for examples Ê

¯Indirect material ¯Oil and water

¯Indirect wages ¯Factory rent
¯Wages of foreman ¯Repairs and renewals of factory plants
¯Electric power ¯Factory lighting
¯Store keeper’s wages ¯Depreciation of factory plants
¯Carriage inwards ¯Consumable stores
Administrative Overhead / Office OverheadsF Any indirect expenses incurred for
formulating the policies directing the organisation and controlling the operation of an
undertaking which is not related directly to research, development, production or selling
activities. In other words, it consists of all indirect expenses incurred in the direction, control
and administration of an undertaking. For example Ê

¯Office rent ¯Depreciation of office premises

 ¯Office lighting ¯Repairs andrenewals of office -
¯Office heating :Buildi
¯Office stationery ng
¯Legal expenses :Furnit
¯Telephone charges ure
¯Telegrams and postage ¯Salaries of -
¯General expenses : clerks, accountants, secretaries,
:general managers, directors, executives and
other staff.
Selling and Distribution OverheadsFIt consist of indirect expenses to create & stimulate
demand securing orders, making the packing product available for dispatch. For example Ê

¯Carriage out word ¯Traveling expenses

¯Sales man’s salaries ¯Advertising expenses
Items not to be taken in Cost Sheet ðThe following items are not taken in the cost sheet Ê

¯Divided ¯Undertaking
¯Income tax ¯Debenture interest
¯Cash discount ¯Abnormal idle time
¯Interest on capital ¯Preliminary expenses (expenses
¯Writing of goodwill incurred in stanting of a business)
¯Appropriation of profit ¯Incomes which are not connected with
¯Abnormal wastage of material business (i.e. Transfer fees, Rent
received, interest received, dividend
¯Discount on issue of shares &
received capital expenditure.
debentures
¯Loss from sale of fixed asset or
investment
Factory overhead as a percentage on Direct Wages.
Administrative overhead as a percentage on Work Cost
Selling overhead on number of goods sold.
Gross profit = Sales - Cost of Goods Sold .
Scarp F Any amount released from sale of wastage item is called scrap. It represents small
amount & low value & is recoverable without further processing scrap may be of two types.
(a) Material Scrap ð This must be reduced from the value of raw material consumed.
(b) Factory Scrap ð This must be reduced from factory cost incurred.

Sales F

Sales ( Units )= Opening Stock ( Units )+ Produced ( Units ) Closing Stock ( Units)
 Valuation of closing StockF

Valuation of Closing Stock =[ {Cost of Production ÷ Units Produced}× Closing Stock units ]

Closing stock Rate per Unit =[ Total value of Closing Stock ÷ Closing Stock units ]
Factory Overhead(when Machine Hour rate & Machine Hour is given)F
Factory overhead = [Machine Hour ´ Rate per Hour]
Cost SheetFA Cost Sheet is a statement showing the total cost and cost per unit of a product
in periodic intervals. It shows various cost & its break up in detailed manner. The following
is the format of Cost Sheet Ê

Statement of Cost / Cost Sheet

Particulars Details Amount

(Rs.) (Rs.)
 Opening Stock of Raw Materials ¬¬¬¬
Add -: Purchase of Raw Materials
Add -: Expenses related to Purchase (Carriage inward, ¬¬¬¬
Octroi, etc.) ¬¬¬¬

Less-: Closing Stock of Raw Material

Raw Material Consumed
Add -: Direct Wages / Labour ¬¬¬¬
Add -: Direct Expenses/ Overheads
¬¬¬¬
PRIME COST
Add -: Work/ Factory Overheads ¬¬¬¬
Or
Percentage (%) of Direct Wages
Rate
×Direct Wages
100
FACTORY COST INCURRED
Add -: Opening Stock of Work-in-progress

Less -:Closing Stock of Work-in-progress

WORK COST
Add -:Administrative Overheads
Or
Rate
× Work cost
Percentage (%) of Work Cost 100
COST OF PRODUCTION
Add -: Opening Stock of Finished Goods

Less -:Closing Stock of Finished Goods

COST OF GOODS SOLD
Add -: Selling & Distribution Overheads (Units sold ´ rate
per unit)
TOTAL COST / COST OF SALES
Add/Less -: Profit / Loss (Find out)
SALES (Given)

Definition Material is a very important factor of production. It is the first and most
important element of cost. Material account for nearly 60% of the cost of production.
 MeaningMaterial Control is a systematic control over the purchasing, storing and using of
materials so as to have the minimum possible cost of material. The materials constitute such a
significant part of product cost and since this cost is controllable, proper planning, purchasing,
handling and accounting are of great importance.
Aspect of Material Control
(a) Accounting Aspect This aspect of material control is concern with maintaining documentary evidence
of movement of materials at every stage might from the time when materials are purchased and actually
used in production.
(b) Operational Aspect This aspect of material control is concerned with the maintenance of
material supplied at a level so as to ensure that material is available for the production.
Need for (Objectives) of Material Control
(1) Availability of MaterialsThere should be a continuous availability of all types of material
in the factory so that the production may not be held up for want of any material. Minimum
quantity of each material is fixed to permit production to move on schedule.
(2) No excessive investment in materialThere should be no excessive investment of stock.
Investments in materials must not lie of frauds that could be better used in other activities.
Overstocking should be avoided. Keeping in view the disadvantages it carries.
(3) Reasonable priceWhile purchasing materials it is seen that it is purchased at a reasonable
low price. Quality is not to be sacrificed at the cost of lower price. The material purchased
should be of that quality alone which is needed.
(4) Minimum Wastage  There should be minimum possible wastage of material while these
are being stored in the godown by store-keeper or used in the factory by the workers. Store-
keepers is to keep the stores neat and tidy to avoid the wastage due to rust, dust or dirt.
(5) Information about availability of material Information about availability of material
should be made continuously available to the management so that planning of production
may be done. The store-keeper can supply this information because he keeps an upto date
record of every item of stocks under a proper system of material control.
(6) Material cannot be easily misappropriated  Material cannot be easily misappropriated
by employees because generally misappropriation of such is considered to be more serious
that misappropriation in kind. Therefore they require an internal check on material, which is
a part of material control.
Different Levels of Material
(1) Minimum Level This represents the minimum quantity of material, which must be mentioned in
hands at all time.
Formula  Reordering Level – (Normal consumption  Normal reordering
period)
(2) Maximum Level it is the maximum quantity of material, which can be held in a store at
any time stock should not exceed the quantity.
Formula–
 (3) Reordering Level It is that level of material at which the order for fresh material is placed.

Maximum Consumption  Maximum Reordering period

Formula
Or

(4) Average Stock Level

Maximum Level + Minimum Level
Formula  2

Or

(5) Danger Level It is that level of material at which normal issue of material are stopped &
issues are made under specific instructions. It is the duty of the purchase officer to make
special arrangements to get the material so that the production may not hamper due to storage
of material.

Formula  (Average Consumption Max Reordering period for emergency

purchase)
Economic Ordering Quantity (EOQ)

Where -:
EOQ =
√ 2CO
I

C = Annual Consumption
O = Ordering Cost per order.
I = Annual Carrying Cost of 1 unit.

Rate
Cost of Raw Material ×
I= 100
Annual Carrying cost
(i) Cost of maintaining the material to avoid deteriotion.
(ii) Amount of interest payable on the money locked up in the materials.
(iii) Cost of spoilage in stores & handling.
(Reordering Level + Reordering Quantity) – (Minimum Consumption Minimum
(iv) Transportation cost in relation to stock.
reordering Period)
(v) Cost of obsolescence on account of some of the materials becoming absolute after sometime
of storage either due to change in the process of product.
(vi)Insurance cost.
(vii) Clerical cost etc.
 All these costs taken together in India amounts to somewhere near about 20-25
percent of the cost of material per year. So efforts should be made to reduce such alarming
rate of carrying cost.
Ordering Cost
It is the cost of placing order for the purchase of materials & includes –
(i) Cost of staff posted in the purchasing department inspection section & payment department.
(ii) Cost of stationery, postage & telephone charges.
Thus, this type of cost includes cost of floating tenders, cost of comparative
evaluation of quotation. Cost of paper work and postage involved in placing the order. Cost
of inspection and cost of accounting and making payments. In other words the cost varies
with the number of orders.
(1) FIFOFIFO means first in first out. Under this method materials, which are received, first
are issued first. This method is suitable in time of falling in prices. It is a slow moving
material.
(2) LIFOLIFO means last in first out. Under this method materials, which are received, first
are issued first. This method is suitable in times of falling in prices. It is a slow moving
material.
(3) Average Cost Method The principle on which the average cost method is based is that all
of the material in the store is so mixed that an issue cannot be made from any particular lot of
purchases. Average may be two type –
(i) Simple Average.
(ii) Weighted average.
(i) Simple Average Price is calculated by dividing the total of cost per unit of purchase of
different lots of the date of issue by the number of purchase mode without considering the
quantity.
For example  1000 unit purchase @ Rs.10.
2000 unit purchase @ Rs. 11.
3000 unit purchase @ Rs 12.
10+11+ 12 33
Therefore, the issue price under simple average = 3 = 3 = 11

(ii) Weighted Average A price which is calculated by dividing the total cost of material is that
stock on total quantity of material is that stock on date of issue is called weighted average
price.

(1000×10 )+(2000×11)+(3000×12)
Weighted Average Price = 1000+2000+3000 = 11.33

Advantages
(1) This method is systematic.
 (2) Average price method is considered to be the best method when price fluctuate.
(3) This method maintains the issue price as near to the market price as possible.

Disadvantages
(1) This method involves a lot of clerical errors.
(2) Issue price of material does not represent the actual cost of material.

Inflated price Method –

There are some materials which are subjected to natural wastage. E.g. are –
(1) Coal lost due to loading & unloading.
(2) Timber lost due to seasoning. In such cases, the materials are issued at an inflated price (A
price higher than the actual cost) so as to recover the cost of material wastage of material
from the production.
If 100 tones of coal are purchased at Rs 75 per tone& if it is expected that 5 tones of
coal will be lost due to loading & unloading, the inflated issue price in this case will be Rs
78.95 [(100  75) ÷ 95] per tone.
(a) Profit Centre A profit centre is that part of an organization which is responsible for
both revenue & expenses & discloses the profit of a particular activity. Profit centers are
created to delegate responsibility to individuals & measure their performance.
(b) Cost Centre Cost centre is defined as a location, persons or items of equipment for
which cost may be ascertained & used for the purpose of cost control. A cost center may
consist of either or a combination of the following 
(i) Location  Factory, office etc.
(ii) Person  Managers, foreman etc.
(iii) Equipment  Machine, truck, etc.
The type, size & number of cost centre of an organization may very from
organization to organization.
(c) Cost Unit Cost Unit is a Unit or quantity of product, services or unit in terms of which
costs are found out. One of the objectives of output. This means that output has to be
measured in identifiable units in relation to which costs may be ascertained. Thus, it is
necessary to express the output in terms of physical measurement like number, weight,
volume etc.
(d) he following are the difference between Cost Centre and Profit Centre
Cost Centre Profit Centre
(1) It is the smallest activity or area for which (1)It is that part of activity which is
costs is allocated. responsible for revenue and expenses and
disclosure of profits.
(2) It is created for cost control & recorded
purchase. (2)It is created to measure the efficiency of
various activities.
(3)Each profit target & enjoys authority to
(3) A cost centre does not have target cost,
apply such policy to achieve the target.
but tries to minimize cost.
(4) Cost centers are non autonomous. (4)Profit centers are autonomous.
(5) There may be a number of cost centre is a (5)A profit centre may be a subsidiary
profit centre. company.
The following are the difference between Cost Accounting and Financial Accounting 

DIFFERENCE BETWEEN COST AND FINANCIAL ACCOUNTING

Bases Cost Accounting Financial Accounting

(1) Purpose The main purpose of Cost The main purpose of Financial
Accounting is to analysis ascertain & Accounting is to record financial,
control cost. from-actions & prepare financial
statements.
(2) Periodicall Financial Accounting presents financial
y of Cost Accounting presents cost information at the end of the
Reporting information of frequent accounting period.
(3) Parties intervals.
served

(4) Audit Financial Accounting serves the

Cost Accounting serves the information needs of owners,
information needs of the creditors, employees & the society
management. at large.

(5) Accounts Financial Accounting needs a system

Cost Accounting need not be
prepared
followed by a system of
external audit.
(6) Tax
Assessmen Cost Accounting shows expenses
t through a cost sheet process
(7) Profit or Accounting contract Account etc.
Loss
(8) Actual & Cost Accounting does not from a
Standard basis for tax assessment.
(9) Units Cost Accounting determines the
profit or loss on each product,
process, job & department.
of independent audit of the financial
statement by an external audit.
Financial Accounting prepared two
statement consolidating all
transaction & i.e. Profit & Loss
account and Balance sheet.
Financial Accounting forms a basis
for determination tax liability of the
business.
Financial Accounting determines the
profit or loss of entire business.

Cost Accounting estimates standard Financial Accounting records only

(10)Relative
with the actual cost to financial actual transactions of a business
Efficiency
 variances. concern

(11)Stock Cost Accounting records both Financial Accounting records

valuation monetary & physical units such as only monetary units in the
labour hour, machine hour etc. books of accounts.

Cost Accounting provides Financial Accounting does not

information on relative efficiency of provide information on relative
different departments, units, efficiency of different departments
branches & plans. branches and plans.

Cost Accounting stocks are Financial Accounting stocks are

valued at cost. valued at cost or market price which
ever is lower/less.

CONCLUSION
 Cost accounting is the process of accounting for costs. It beings with the
recording of income and expenditure & ends with the preparation of periodical
statement for ascertaining & controlling includes costing. It also refers to the
process of classifying, recording & appropriate allocation of expenditure for the
determination of cost. It consists of rules and principles for ascertaining the cost
of products manufactured and services rendered.

BILOGRAPHY
Cost and management accounting – Jain and Narang
Costaccounting – Jain and Narang

www.icmai.org.in
www.icai.org.in