Cost accounting

MODULE 1

Meaning, Nature, and Scope of Cost Accounting in Easy Language

Meaning of Cost Accounting

Cost accounting is like keeping track of how much money is spent on making a product or
providing a service. It helps businesses understand where their money is going, so they can make
better decisions about pricing, spending, and saving.

Nature of Cost Accounting

1. Detailed Tracking: It involves keeping a close eye on all the costs involved in production or
service delivery, from raw materials to labor and overheads.

2. Analysis and Reporting: It breaks down these costs and reports them in a way that helps
managers understand and manage expenses better.

3. Decision-Making Tool: It provides vital information that helps managers decide on pricing,
budgeting, and cost control.

Scope of Cost Accounting

1. Cost Determination: It helps determine the exact cost of producing a product or delivering a
service.

2. Cost Control: It identifies areas where costs can be controlled or reduced, helping businesses
save money.

3. Budgeting: It aids in creating budgets by providing detailed cost data.

4. Performance Measurement: It helps measure the efficiency of different departments and

processes by comparing actual costs with budgeted costs.
5. Cost Reduction: It finds ways to cut unnecessary expenses without compromising quality.

By keeping track of all the costs, businesses can make informed decisions that enhance their
profitability and efficiency.
Management accounting is a type of accounting that helps managers inside a business make
important decisions. It provides detailed financial and non-financial information about the
company's operations. This information is used to plan, control, and evaluate how well the
business is doing
Objectives of Management Accounting

1. **Decision Making**: Helps managers make informed decisions by providing relevant

financial data.
2. **Planning and Controlling**: Assists in setting budgets and monitoring performance to keep
the business on track.
3. **Performance Evaluation**: Measures the effectiveness of different departments and
employees, aiding in performance reviews and improvements.

Utility of Management Accounting

1. **Better Decisions**: Provides accurate data that helps managers choose the best course of
action.
2. **Efficiency**: Identifies areas where the company can save money and improve processes.

3. **Strategic Planning**: Helps in creating long-term plans by giving a clear picture of the
company's financial health.

Limitations of Management Accounting

1. **Subjectivity**: Involves estimates and judgments, which can vary from person to person.

2. **Historical Data**: Often relies on past information, which might not always predict future
trends accurately.

3. **Time-Consuming**: Gathering and analyzing data can take a lot of time and resources.
Differences Between Cost acc, Management Acc, and Financial Accounting

Cost Accounting:

Focus: Tracks and analyzes the costs of producing goods or services.

Purpose: Helps in controlling and reducing costs.

Users: Mainly used by internal management to make cost-related decisions.

Reports: Detailed cost reports, such as cost sheets and budgets.

Example: Calculating the cost of manufacturing a single product.

Management Accounting:

Focus: Provides financial and non-financial information for internal decision-making.

Purpose: Aids in planning, controlling, and evaluating business operations.

Users: Exclusively used by internal management.

Reports: Custom reports, budgets, performance evaluations, and forecasts.

Example: Analyzing the profitability of different business segments to decide where to invest
more resources.

Financial Accounting:

Focus: Records and summarizes all financial transactions of a business.

Purpose: Provides an accurate picture of the company's financial position for external
stakeholders.

Users: External stakeholders like investors, creditors, and regulators.

Reports: Standardized financial statements, including the balance sheet, income statement, and
cash flow statement.

Example: Preparing the annual financial statements for shareholders.

Summary

Cost Accounting: Focuses on internal cost control and reduction.

Management Accounting: Provides a broad range of information for internal management

decisions.

Financial Accounting: Prepares standardized reports for external stakeholders.

Differentiate Cost, Costing, Cost Accounting, Costing method.

Cost: This is the amount of money spent to produce or purchase something. For example, if a
company spends $10 to make a toy, the cost of the toy is $10.

Costing: This is the process of determining the cost of a product or service. It involves figuring
out all the expenses related to production, including materials, labor, and overheads.

Cost Accounting: This is a type of accounting that focuses on recording, analyzing, and
reporting costs associated with producing goods or services. It's used to help businesses control
their costs and improve profitability.

Costing Method: This is the approach or technique used to calculate the costs of products or
services. Different methods include job costing (costs assigned to specific jobs or batches),
process costing (costs assigned to processes or departments), and activity-based costing (costs
assigned based on activities that drive costs).

In summary, cost is the expense itself, costing is figuring out what those expenses are, cost
accounting is the accounting practice that deals with costs, and costing methods are different
ways to calculate costs.

Elements of Cost

Material Pricing:

Definition: Material pricing is about determining the cost of the raw materials used in
production.

Importance: Knowing the exact cost of materials helps in setting the right price for the final
product and ensures profitability.

Methods:

First-In, First-Out (FIFO): The oldest materials are used first.

Last-In, First-Out (LIFO): The newest materials are used first.

Weighted Average Cost: The average cost of all materials is used.

Material Control:

Definition: Material control involves managing and monitoring the use of materials to minimize
waste and ensure they are used efficiently.

Importance: Proper material control helps reduce costs, avoid stockouts, and ensure smooth
production.
Methods:

Inventory Management: Keeping track of materials in stock to prevent overstocking or running

out.

Just-In-Time (JIT): Ordering materials only when needed to reduce storage costs.

Perpetual Inventory System: Continuously updating inventory records to reflect real-time

material usage and stock levels.

In simple terms, material pricing is about figuring out how much raw materials cost, while
material control is about making sure those materials are used wisely and efficiently.

MODULE 2

difference between methods and techniques of costing is:

Methods of costing are the overall approaches or systems used to calculate the cost of producing
goods or services. For example, job costing, process costing, and activity-based costing are
methods of costing.

Techniques of costing are specific tools or ways used within those methods to calculate costs
more precisely. For example, using a standard cost technique to estimate the cost of materials for
a particular job within the job costing method.

In summary, methods are the broad ways of calculating costs, while techniques are the specific
tools or methods used within those broad approaches to get more accurate cost calculations.

Contract costing is a way of calculating and keeping track of the costs related to a specific
project or contract. It's commonly used in industries like construction, engineering, and
manufacturing where work is done based on contracts. Here's a simple explanation:

Definition: Contract costing is used to calculate the total cost of a specific project or contract. It
helps in determining the profitability of each project and tracking costs accurately.

Features:

Separate Accounts: Each contract has its own account to track costs separately.

Direct and Indirect Costs: Direct costs (materials, labor, etc.) specific to the contract are
tracked, along with indirect costs (like overheads) allocated to the contract.

Progress Billing: Payments are often based on the progress of the contract, so tracking costs
helps in billing accurately.
Example:

Suppose a construction company takes on a project to build a house. They will track all costs
related to this project separately from other projects.

Direct costs would include materials like bricks and cement, labor costs for workers specifically
working on this project, and equipment rental for this project.

Indirect costs would include things like supervision, insurance, and utilities that are shared
among multiple projects.

In short, contract costing helps businesses keep track of costs for each project or contract,
ensuring they can manage their finances and price their work accurately.

Process costing is a way for companies to calculate the cost of making a product by looking
at the costs involved in each stage of production. This helps them understand how much it costs
to make each unit of the product.
When there is an abnormal loss or gain in the production process, meaning that more or fewer
units are produced than expected, companies need to account for this in their costing.
For abnormal loss, the cost of the lost units is spread out over the remaining units produced. This
means that the cost per unit of the remaining units goes up because the total cost is now divided
by fewer units.

For abnormal gain, the extra units produced are accounted for by reducing the cost per unit of all
units produced. This is because the total cost is spread out over more units, so the cost per unit
goes down.

In both cases, the goal is to accurately calculate the cost per unit so that the company can set a
price that covers its costs and makes a profit.

Marginal costing is a way for companies to understand how their costs change as they
produce more or fewer units of a product. It helps them make decisions about pricing and
production levels.
In marginal costing, costs are divided into two types: fixed costs and variable costs.

Fixed costs are costs that stay the same no matter how many units are produced. For example,
rent for a factory is a fixed cost because it stays the same whether the factory produces 100 units
or 1,000 units.

Variable costs are costs that change as the number of units produced changes. For example, the
cost of materials used to make a product is a variable cost because it increases as more units are
produced.
By separating costs into fixed and variable costs, companies can calculate the marginal cost of
producing one more unit. This helps them understand how much it will cost to produce
additional units and make decisions about pricing and production levels based on this
information.

MODULE 3

Ratio analysis
IT is a way for companies to evaluate their financial performance by comparing
different financial numbers. It involves calculating ratios that show the relationship
between different items in the financial statements, such as the balance sheet and
the income statement. Here's an explanation in easy language:
1. Nature and Interpretation: Ratio analysis helps to understand how well a
company is performing financially. It involves calculating ratios like the
current ratio (which shows if a company can pay its short-term debts), the
profit margin (which shows how much profit a company makes for every
dollar of sales), and the return on equity (which shows how well a company
is using its shareholders' money). By looking at these ratios, analysts can
interpret if a company is doing well or facing financial difficulties.
2. Utility of Ratios: Ratios are useful because they provide a quick snapshot of
a company's financial health. They can help in comparing a company's
performance over time or against competitors. They also help in identifying
trends and areas of improvement. For example, if a company's current ratio
has been decreasing over time, it may indicate that the company is struggling
to pay its short-term debts.
3. Limitations of Ratios: While ratios are useful, they have limitations. Ratios
can be influenced by accounting practices, making it hard to compare ratios
between companies that use different accounting methods. Also, ratios only
provide a snapshot and may not give the full picture of a company's financial
health. For example, a company may have a high current ratio, but it may be
due to excessive inventory, which is not a good sign.
Short-term and long-term financial ratios
are used to assess different aspects of a company's financial health over different time frames.
Here's an explanation in easy language:

1. Short-term Financial Ratios: These ratios help understand a company's ability to meet
its short-term financial obligations, usually within a year. They include:

• Current Ratio: This ratio compares a company's current assets (like cash and
inventory) to its current liabilities (like short-term loans and bills due). It shows if
a company can pay its short-term debts. A ratio above 1 indicates the company
can cover its short-term obligations.

• Quick Ratio: Also known as the acid-test ratio, this ratio is similar to the current
ratio but excludes inventory from current assets. It provides a more conservative
measure of a company's ability to pay its short-term debts.

• Cash Ratio: This ratio measures a company's ability to pay off its current
liabilities with its cash and cash equivalents alone, without needing to sell
inventory.

2. Long-term Financial Ratios: These ratios focus on a company's long-term financial

health and stability. They include:

• Debt-to-Equity Ratio: This ratio compares a company's total debt to its total
equity, showing the proportion of debt and equity used to finance the company's
assets. A lower ratio indicates less reliance on debt financing.
• Interest Coverage Ratio: This ratio shows how many times a company can cover
its interest payments with its earnings before interest and taxes (EBIT). A higher
ratio indicates a company is more capable of meeting its interest obligations.
• Return on Equity (ROE): This ratio measures how effectively a company is
using its shareholders' equity to generate profit. It shows the return earned on
shareholders' equity investment in the company.

Short-term ratios focus on immediate financial health, while long-term ratios provide insight into
the company's financial strategy and stability over time. Both types of ratios are important for
understanding a company's overall financial picture.
Profitability Ratios: Profitability ratios are used to assess a company's ability to generate profits
relative to its revenue, assets, and equity. They include:

• Gross Profit Margin: This ratio shows the percentage of revenue that exceeds the cost of
goods sold. It indicates how efficiently a company is producing goods or services.

• Net Profit Margin: This ratio measures the percentage of revenue that remains as profit
after all expenses, including taxes and interest, have been deducted. It indicates how well
a company is controlling its costs.
• Return on Assets (ROA): ROA measures how efficiently a company is using its assets to
generate profit. It shows the percentage of profit earned relative to the total value of
assets.

• Return on Equity (ROE): ROE measures how effectively a company is using its equity
to generate profit. It shows the percentage of profit earned relative to the total equity of
the company.

Proprietary and Yield Ratios: These ratios focus on the return to shareholders and include:

• Earnings Per Share (EPS): EPS is a measure of the company's profit allocated to each
outstanding share of common stock. It indicates how much profit a company is making
per share.

• Dividend Yield: Dividend yield is the annual dividend income per share divided by the
price per share. It indicates the return on investment from dividends.

Turnover Ratios: Turnover ratios measure how efficiently a company is using its assets or
liabilities to generate revenue. They include:

• Inventory Turnover: This ratio measures how many times a company's inventory is sold
and replaced over a period. It indicates how effectively inventory is managed.
• Accounts Receivable Turnover: This ratio measures how many times a company's
accounts receivable are collected and replaced over a period. It indicates how efficiently
credit is being managed.
Market Ratios: Market ratios are used to evaluate a company's performance in the stock market.
They include:

• Price-Earnings (P/E) Ratio: This ratio compares a company's stock price to its earnings
per share. It indicates how much investors are willing to pay for each dollar of earnings.

• Market-to-Book (M/B) Ratio: This ratio compares a company's market value per share
to its book value per share. It indicates how the market values the company relative to its
accounting value.
Other Capital Ratios: These ratios focus on a company's capital structure and include:

• Debt-to-Equity Ratio: This ratio compares a company's total debt to its total equity. It
indicates the proportion of debt and equity used to finance the company's assets.

• Interest Coverage Ratio: This ratio measures how many times a company can cover its
interest payments with its earnings before interest and taxes. It indicates the company's
ability to meet its interest obligations.

MODULE 4

Cash flow and funds flow are both ways to track the movement of money in a business, but they
focus on different aspects of a company's finances. Here's a simple explanation of the difference:
Cash Flow:

• Focus: Cash flow focuses on the actual movement of cash in and out of a business over a
specific period, usually a month, quarter, or year.

• Purpose: It helps in understanding how much cash is available to the business at any
given time and how cash is being used for operations, investments, and financing.

• Components: Cash flow includes cash from operating activities (like sales revenue and
expenses), cash from investing activities (like buying or selling assets), and cash from
financing activities (like issuing or repurchasing stock, or borrowing and repaying loans).

Funds Flow:

• Focus: Funds flow focuses on the overall change in a company's financial position
between two specific points in time.

• Purpose: It helps in understanding how funds (which include both cash and non-cash
items like depreciation and changes in working capital) are being generated and used in
the business.
• Components: Funds flow includes changes in working capital, long-term investments,
and financing activities. It also takes into account non-cash items like depreciation.
In essence, cash flow focuses on the actual movement of cash, while funds flow focuses on the
overall change in a company's financial position, including both cash and non-cash items. Both
are important for understanding a company's financial health, but they provide different
perspectives on its financial activities.
Accounting Standard III (AS-3) issued by the Institute of Chartered Accountants of India
(ICAI) deals with the preparation and presentation of financial statements. Here's a simplified
explanation:

1. Objective: The objective of AS-3 is to ensure that the financial statements provide
information about the cash flows of an entity, which is useful for assessing its liquidity,
solvency, and financial flexibility.

2. Scope: AS-3 applies to all entities preparing and presenting financial statements under the
historical cost convention. It requires the presentation of a statement of cash flows as part
of the financial statements.

3. Key Requirements:

• The statement of cash flows should report cash flows during the period classified
into operating, investing, and financing activities.

• Cash flows from operating activities should be reported using either the direct
method (where major classes of gross cash receipts and payments are disclosed)
or the indirect method (where net profit or loss is adjusted for non-cash items and
changes in working capital).

• Cash flows from investing and financing activities should be reported separately
to provide information about the entity's investing and financing activities.

4. Benefits:

• Helps users of financial statements in assessing the entity's ability to generate

cash and cash equivalents.

• Provides information about the entity's investing and financing activities, which is
useful for predicting future cash flows.
In summary, AS-3 ensures that entities disclose relevant information about their cash flows,
helping users of financial statements make informed decisions about the entity's financial
position and performance.
Module 5
A budget in accounting is a plan that outlines how much money you expect to earn and spend
over a specific period, such as a month, quarter, or year. It's like a financial roadmap that helps
you manage your income and expenses to ensure you don't spend more than you earn.

Here’s a simple breakdown of a budget:

1. Income: This is the money you expect to receive. It can come from various sources such
as salary, business profits, or investments.

2. Expenses: This is the money you plan to spend. Expenses can be categorized into
different types, like fixed expenses (rent, loans) and variable expenses (groceries,
entertainment).

Creating a budget involves listing all your expected income and expenses and making sure your
total expenses do not exceed your total income. This helps in planning for savings and avoiding
debt.

Budgeting in accounts is the process of creating a plan to manage your money. It involves
estimating how much money you will earn and how much you will need to spend over a certain
period, like a month or a year. This helps you make sure you have enough money for essential
expenses and can plan for savings or investments.

Types of Budgets:

1. Operating Budget:

• This budget covers the day-to-day expenses of running a business.

• It includes costs like salaries, utilities, rent, and supplies.

• It also includes expected revenue from sales or services.

2. Capital Budget:
• This budget is used for long-term investments, such as buying equipment,
buildings, or machinery.
• It helps businesses plan for big expenditures that will benefit them in the long run.

3. Cash Flow Budget:

• This budget tracks the cash that comes in and goes out of a business.

• It helps ensure that a business has enough cash to pay its bills and avoid cash
shortages.
4. Sales Budget:
 • This budget estimates the amount of revenue a business expects to generate from
sales.

• It helps businesses set sales targets and plan marketing strategies.

5. Production Budget:

• This budget outlines the number of products a company needs to produce to meet
sales goals.

• It includes costs related to manufacturing, such as raw materials and labor.

6. Marketing Budget:

• This budget allocates funds for marketing activities like advertising, promotions,
and public relations.

• It helps businesses plan how to attract and retain customers.

7. Project Budget:
• This budget is specific to individual projects within a business.

• It includes all the costs and resources needed to complete the project.

8. Flexible Budget:

• This budget can be adjusted based on changes in business activity levels.

• It allows businesses to adapt to fluctuations in revenue or expenses.

By using these different types of budgets, individuals and businesses can better manage their
finances, plan for future growth, and make informed financial decisions

Budgetary control is a financial management technique that involves comparing actual financial
performance with the budgeted figures to monitor and control operations. It's about making sure
that an organization's spending and income stay within the planned budget, helping to guide
decision-making and ensure financial stability.

Objectives of Budgetary Control:

1. Planning:

• Ensures that resources are allocated efficiently.

• Helps set financial goals and establish priorities.

2. Coordination:
• Aligns the activities of different departments towards common objectives.
 • Facilitates communication and collaboration across the organization.

3. Control:

• Monitors actual performance against the budget.

• Identifies variances (differences between actual and budgeted figures) and takes
corrective actions.

4. Efficiency:

• Promotes efficient use of resources.

• Reduces waste and prevents overspending.

5. Accountability:
• Assigns responsibility to managers and departments for their financial
performance.

• Encourages managers to be responsible for their budgets and financial decisions.

6. Motivation:

• Sets clear targets and goals for employees.

• Provides incentives for meeting or exceeding budgetary goals.

7. Evaluation:
• Measures financial performance and productivity.

• Helps assess the effectiveness of strategies and operations.

8. Decision-Making:

• Provides accurate and timely financial information.

• Supports informed decision-making by management.

9. Financial Stability:

• Helps maintain financial health and stability of the organization.

• Ensures that the organization can meet its financial obligations.

10. Forecasting:

• Aids in predicting future financial conditions.

• Helps in preparing for potential financial challenges or opportunities.

Standard costing is an accounting method used to estimate the expected costs of production. It
involves setting predetermined costs for materials, labor, and overhead, which are then used to
compare against actual costs. This helps businesses manage their expenses, control budgets, and
improve efficiency.
Here’s a simple breakdown of standard costing:

1. Setting Standards:

• Material Costs: Estimating the cost of raw materials required for production.

• Labor Costs: Estimating the cost of labor needed to produce a product.

• Overhead Costs: Estimating the indirect costs associated with production, such
as utilities and rent.
2. Comparing Costs:

• Actual Costs: The real costs incurred during production.

• Standard Costs: The estimated costs set in advance.

• The difference between actual costs and standard costs is called a variance.
3. Analyzing Variances:

• Favorable Variance: When actual costs are lower than standard costs, indicating
cost savings.

• Unfavorable Variance: When actual costs are higher than standard costs,
indicating overspending.
• Analyzing these variances helps identify areas where the business is performing
well and where improvements are needed.
4. Benefits of Standard Costing:

• Cost Control: Helps keep production costs within budget.

• Performance Measurement: Provides a way to measure efficiency and

productivity.

• Budgeting: Assists in setting realistic budgets and financial plans.

• Decision Making: Supports management in making informed decisions by

providing detailed cost information.

• Efficiency: Encourages more efficient use of resources.

.
Budgetary Control vs. Standard Costing:

Both budgetary control and standard costing are financial management techniques, but they serve
different purposes and are used in different ways. Here’s a simple explanation of the differences
between them:

Budgetary Control

1. Purpose:

• Overall Financial Planning: Budgetary control is used for planning and

controlling an organization's overall financial activities.

• Monitoring Performance: It helps in monitoring and comparing the actual

financial performance against the budgeted figures.
2. Scope:

• Broad Scope: It covers all aspects of an organization’s finances, including

revenues, expenses, capital expenditures, and cash flows.

3. Time Frame:

• Periodic: Budgets are usually prepared for specific periods, such as monthly,
quarterly, or annually.

4. Focus:

• Financial Goals: Focuses on achieving financial goals and maintaining financial

discipline.

5. Components:

• Income and Expenses: Includes estimates of income and expenses for the entire
organization.
6. Usage:

• Decision-Making: Helps in strategic decision-making and resource allocation.

• Control Mechanism: Acts as a control mechanism to ensure financial activities
are within the planned limits.
Standard Costing

1. Purpose:

• Cost Management: Standard costing is used specifically for managing

production costs.
 • Performance Evaluation: It helps in evaluating the efficiency of production
processes.

2. Scope:

• Narrow Scope: It focuses specifically on the costs of materials, labor, and

overhead related to production.

3. Time Frame:

• Continuous: Standards are set for each product or service and are used
continuously to compare actual costs.

4. Focus:

• Cost Control: Focuses on controlling production costs and improving operational

efficiency.

5. Components:

• Cost Standards: Includes predetermined costs for materials, labor, and overhead.

6. Usage:
• Variance Analysis: Used for variance analysis to compare standard costs with
actual costs and identify discrepancies.
• Operational Decisions: Supports operational decision-making to enhance
efficiency and reduce costs.

Summary
• Budgetary Control: A comprehensive financial planning tool used for managing an
organization’s overall finances, setting financial goals, and monitoring performance
against budgeted figures.
• Standard Costing: A cost management tool used for controlling production costs by
setting cost standards and comparing them with actual costs to identify variances and
improve efficiency.

Both techniques are essential for effective financial management but are applied in different
areas to achieve specific objectives.
Module 6

Activity-Based Costing (ABC):

Activity-Based Costing (ABC) is a method used by businesses to allocate costs to products or

services based on the activities that are needed to produce them. It provides a more accurate way
of determining the true cost of a product or service by taking into account the various activities
involved in the production process.

Here’s a simple explanation of ABC:

1. Identifying Activities:

• ABC starts by identifying all the activities that are involved in producing a
product or providing a service. These activities can include things like setup,
production, and quality control.

2. Assigning Costs to Activities:

• Once the activities are identified, the next step is to assign costs to each activity.
This involves determining how much each activity contributes to the overall cost
of producing a product or providing a service.

3. Determining Cost Drivers:

• Cost drivers are factors that cause costs to be incurred in relation to the activities.
For example, the number of setups required may drive setup costs, or the number
of machine hours may drive production costs.
4. Allocating Costs to Products or Services:

• After determining the cost of each activity and its cost drivers, costs are allocated
to products or services based on the amount of each cost driver that is associated
with the production of each product or service.
5. Benefits of ABC:
• More Accurate Costing: ABC provides a more accurate picture of the costs
associated with producing a product or providing a service compared to
traditional costing methods.

• Better Decision Making: It helps businesses make better decisions about pricing,
product mix, and resource allocation by providing a clearer understanding of
costs.

• Cost Reduction: By identifying activities that are not value-adding, ABC can
help businesses identify areas where costs can be reduced.
ABC is especially useful in industries where there is a wide variety of products or services that
require different levels of resources to produce. It provides a more detailed and accurate way of
allocating costs, leading to better decision-making and cost management.

Target Costing:

Target costing is a method used by businesses to determine the target cost of a product or service
based on the price at which it can be sold in the market, while still ensuring a desired profit
margin. It involves setting a target cost and then working to reduce the costs of production to
meet that target. Target costing is often used in industries where competition is high and price is
a key factor in consumer choice.

Kaizen Costing:

Kaizen costing is a cost reduction technique that focuses on continuously improving processes
and reducing costs. It involves setting incremental cost reduction targets and encouraging
employees at all levels of the organization to contribute ideas for reducing costs. Kaizen costing
is based on the principle that small, incremental changes can lead to significant cost savings over
time.

Life Cycle Costing:

Life cycle costing is a method used to determine the total cost of owning a product or service
over its entire life cycle, from design and development to disposal. It takes into account not just
the initial cost of the product, but also the costs associated with operating, maintaining, and
disposing of it. Life cycle costing helps businesses make more informed decisions about which
products or services to invest in, based on their total cost over time.

Responsibility Accounting:

Responsibility accounting is a system of accounting in which costs and revenues are assigned to
individuals or departments based on their responsibility for the incurrence of those costs or
generation of those revenues. It helps in evaluating the performance of individuals or
departments by comparing actual costs and revenues against budgeted or expected amounts.
Responsibility accounting helps businesses allocate resources more efficiently and hold
individuals or departments accountable for their performance.