A Project Report On

“Recent Development In Cost Accounting”

A Project Submitted to Savitribai Phule Pune University for the

fulfillment of Master in commerce (M.Com)

Submitted by

Dipti Satish Ghare

Under the Supervision of

Dr. Abhay V. Patil

Pune District Education Association’s

ANANTRAO PAWAR COLLEGE
Pirangut, Tal-Mulshi, Dist- Pune.

2021-2022
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 Acknowledgment
To list who have helped me in difficult because they are so
enormous and the depth is so enormous. I would like to
acknowledgment the following as being idealistic channels and fresh
dimensions in the completion of the project.

I take this opportunity to thank the Savitribai Phule Pune University

for giving me an opportunity to do this project.

I would like to thank my college Principle Dr. Sharmila

Chaudhari, Vice Principle and Head of Commerce Department
Dr. Mahendra Awaghade for providing the necessary facilities
required for completion of this project.

I take this opportunity to thank our coordinator Dr. Abhay Patil for
moral support and guidance.

I would like to thank my college Library for providing various

reference books and magazines related to project.

Lastly, I would like to thank each and every person who directly or
indirectly or indirectly helped me in the completion of the project
especially my parents and peers who supported me throughout my
project.

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 Declaration
I acknowledge Miss. Ghare Dipti Satish hereby declare that the work
established in this project work that “Recent Development In Cost
Accounting” forms my own conclusions in the research work consist
and under the guidance of Dr. Abhay Patil is a result of my own
research work and has not been previously submitted in any where
University his any other degree/ Diploma to this of any other
university.

Wherever reference has been made by previous works of others, it

as been clearly indicated as which and included in the
bibliography.

I, hereby future declare that all information of this document has

been obtained and prescribed in accordance with academic rules
and ethical conduct.

Ghare Dipti Satish

Certified by

Dr. Abhay Patil.

Name and signature of the Guiding Teacher

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 Contents
Sr. No. Index

1. Introduction

2 Meaning and Definition

3 Importance of cost accounting

4 Objectives

5 Recent Types of cost accounting

6 Features of Current Cost Accounting

7 Recent Advantages of Cost Accounting

8 Recent Disadvantages of Cost Accounting

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 9 Current Characteristics of Cost Accounting

10 Recent Methods of Cost Accounting

11 Elements of Cost Accounting

12 Scope of Cost Accounting

13 Nature Of Cost Accounting

14 Functions of Cost Accounting

16 Cost Accounting Cycle

17 Classifications of Cost Accounting

18 Conclusion

19 Suggestion

20 Bibliography

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 Introduction
Jerome Lee Nicholson
Born in 1862, Jerome Lee Nicholson, often called the father of cost
accounting, entered the professional practice of accountancy in New
York in 1889, under his own name.

Cost and Works Accountants Act, 1959, and established a statutory

institute styled as – “Institute of Cost and Work Accountant of India”.
The Companies Act, 1956 has been amended and provision has been
made to make it obligatory to industries to maintain the Cost Accounting
records.

Cost accounting is the application of accounting and costing

principles, methods, and techniques in the ascertainment of costs and the
analysis of saving or excess cost incurred as compared with previous
experience or with standards.

The idea behind developing cost accounting was to negate the

limitations of the traditional accounting system. So cost accounting will
help the organization's control costs and maximize efficiency, something
financial accounting cannot offer. With time these scientific methods
lead to standards being formed.

Meaning & Definition

 Cost - Meaning:

Cost accounting is concerned: Cost means the amount of

expenditure (actual or notional) incurred on, or attributable to, a
given thing.

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  Cost -Definition:

The money that you have to pay for something.

 Cost Accounting - Meaning:

Cost accounting is concerned with recording, classifying and

summarizing costs for determination costs of products or services,
planning, controlling and reducing such costs and furnishing of
information to management for decision making.
It is thus the provision of such analysis and classification of
expenditure as will enable the total cost of any particular unit of
production or service to be ascertained with reasonable degree of
accuracy and at the same time to disclose exactly how such total cost is
constituted (i.e. the value of material used, the amount of labour and
other expenses incurred) so as to control and reduce its cost.

 Cost Accounting -Definition:

Cost accounting is a form of managerial accounting that aims to

capture a company's total cost of production by assessing its variable and
fixed costs.

Importance of Cost Accounting

The importance of cost accounting is very much useful to the

management of an organization.
Cost accounting is important for all activities (companies) and it is
not as is prevalent that cost accounting is limited in importance for
manufacturing companies only, cost accounting has a significant role in
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determining and controlling the services cost, and that the success factors
of any commercial activity is the use of cost accounting systems and
therefore the importance of cost accounting is as follows:

 Classification of Costs
Cost is a generic term that needs to be classified for further use.
Cost Accounting involves the recording and classification of all
such costs. Costs involve the prime cost, direct cost, factory cost,
selling cost and more other costs. Classification allows the
management of the costs and to ascertain the profitability of any
such processes and further activities. This also helps in calculating
the efficiency.
 Cost Control
This is efficient for the business to focus on controlling the cost of
the inventory, labor, and various other kind overhead costs. For
example, to achieve maximum efficiency in their inventory
management they can adopt the EOQ technique which is the
costing technique. Similarly, by analysing the costs of labour and
the capacity of machinery their efficiency can be improved also.
Cost accounting classifies the overheads into fixed and variable.
 Price Determination
Cost accounting makes the basic distinction between fixed and
variable costs. This is then used by the company or the business
unit to fix the prices of the products, according to their costs of the
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 product. The management here finds the most ideal price for the
product or the service, which is not too high and not too low. For
example, where the economy suffers a depression period.
The businessman lowers the prices of his products to survive the
depression circumstances in the economy. He can start this by
trying to control the variable costs and to allow him to fix the
product’s prices.
 Fixing of the Standards
The organizations use the standards to make the estimates and the
budgets for their future. They use this as the basis to measure the
actual efficiency of the process or about the department.
This is an entire branch of cost accounting which is known as
Standard Costing dedicated priorly to this process.

Objectives

Objectives of the Current Cost Accounting (CCA) Approach

Current Cost Accounting (CCA) aims to maintain the capital of a
business enterprise in terms of its operating capability. Operating
capability is denoted by the net operating assets of the enterprise in
terms of share-holders funds.
(1) The objective of the current cost accounting method is to report
the financial assets and liabilities of a company at their fair market
value rather than historical cost.
(2) To provide correct and reliable financial information based on
the current replacement cost.
(3) To calculate the profit without changing the historical profit.

(4) To protect the business in the event of a normal inflationary

situation.

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 (5) To keep the level of capital in a very balanced position by
making the valuation of assets in proper value based on
replacement value.
(6)To provide realistic information to the management, investors,
creditors, government, and to other interested parties.
(7) To prepare the financial statement at the end of the year on the
basis of the current value of such items.
(8) This approach is similar to those accounting requirements that
apply to certain classes of investments owned by companies such as
marketable securities held for trading purposes.
Current cost accounting is not a generally accepted
accounting principle for primary financial statements. A change in
the input prices of goods and services used and financed by the
business will affect the number of funds required to maintain the
operating capability of the business enterprise. Therefore,
maintaining the operating capability is the objective that is
attempted to be achieved under CCA while preparing a profit and
loss account and balance sheet.

Recent Types of Cost

Accounting
1. Standard Costing
Standard costing is the practice of estimating the expense of a
production process. It's a branch of cost accounting that's used by a
manufacturer, for example, to plan their costs for the coming year
on various expenses such as direct material, direct labor or
overhead.

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2. Activity-Based Costing
Activity-based costing (ABC) is a method of assigning overhead
and indirect costs such as salaries and utilities to products and
services. The ABC system of cost accounting is based on activities,
which are considered any event, unit of work, or task with a
specific goal.
3. Lean accounting
The term Lean accounting describes the financial reporting
practices used by a company that embraces Lean thinking: focusing
on the value delivered to the client and on waste elimination
through better workflow and material management.
4. Marginal Costing

Marginal Costing is a costing technique wherein the marginal cost,

i.e. variable cost is charged to units of cost, while the fixed cost for
the period is completely written off against the contribution.

Features of Current Cost Accounting

(1) The fixed assets are recorded at replacement cost value in the
balance sheet. Fixed assets are shown not at their depreciated
original cost but at their net replacement value.
(2) Inventory consumed is valued at the price at the date of
consumption. Inventories are shown at market value rather than
market or cost price whichever less as in the historical system is.
(3) Revaluation surplus is transferred to current cost accounting
reserve but not distributed as dividends to shareholders.
(4) Depreciation is calculated at the current value of assets. The
depreciation of fixed assets is to be calculated at replacement value.
(5) The difference between the current values and the depreciated
original cost of fixed assets and of stocks, the increased
requirements for monetary working capital, and the under the
provision of depreciation in the past years may be adjusted through
Revaluation Reserve Account.

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 (6) Two types of profit i.e. profit from operation and profit from
revaluation are calculated. The cost of goods sold during the year
has to be ascertained on the basis of prices prevailing at the date of
consumption and not at the date of purchase.
(7) Liabilities are recorded in their original value because there is
no change in the monetary unit.
(8) Stocks are shown at their net replacement value. Gain/ loss due
to the changes in the price level are shown in a separate statement.
(9) Net Realisable value is the estimated selling price in the
ordinary course of business less reasonably predictable costs of
completion and disposal.
(10) Economic value is the sum of the discounted future cash flows
expected from the use of an asset during its useful life.
The current cost accounting method is suitable when the
management is committed to the industry and is interested in
replacing the present plant with a new one at the end of its useful
life. Most businesses have other working capital besides stock
involved in their day-to-day operating activities. For example,
when sales are made on credit the business has funds tied up in
debtors.

Recent Advantages of Cost Accounting

1. Assistance to the management: Cost accounting is an aid to
management as it helps them to understand the pattern of the cost
incurred and how to control it. It also provides information about the
income earned during the whole process thus helping them to
forecast and manage the resources.
2. Helps in reducing costs: As we already discussed it give a
platform to management to forecast, evaluate and decide how to
control the cost, therefore cost is reduced to a much extent. Also,
reduced cost helps to earn more profit.
3. Helps in forecasting: The best part of cost accounting is it
helps to forecast and take decisions. Experts of accounting have to
make certain accounts to get through with the situation of the
organization and act accordingly. They can compare and provide
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 cost estimates that help management to make a decision and also
help in locating wasteful activities.
4. Helps in preparation of financial accounts: Proper
estimation of costs helps in preparing the final accounts and
estimates whether an organization has profit or loss. Profit and loss
accounts and balance sheets are prepared with the historical costs
thus financial accounts can easily be made.
5. Fraud can be reduced: As there is continuous assessment of
cost and management is involved to control the cost therefore
chances of fraud can be reduced. Cost accounting runs on a certain
principle if deviated the chances of fraud can be detected.
6. Helps the government: Government needs information on the
company’s financial statement to assess the tax and charge the tax
according to the profit gained by the company. If the government
finds any error in the company’s financial statement then it may
assess the financial statement again and find the fault or fraud
happening in the company.
7. Helps in determining loss or profit: Cost accounting helps in
determining the profit of the company. It’s very essential to
determine the profit and losses of the company not only to assess
tax but also to provide various pending payments to people whose
amount is due.

Recent Disadvantages of Cost Accounting

1. Only past performance can be recorded: Cost accounting
does not show the current stature of the company as all the data
recorded is a historical valuation of transactions taking place. The
structure of decision-making relies on the records of a company.
Thus only past performances are recorded.
2. Costs keep on changing every year: the cost of the raw
material, labour, and other materials keep on changing due to
different factors thus only estimation can be made regarding costs,
and accordingly managers have to make decisions. There are various
other variable factors like government policies, economy that make
these changes in the cost.

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3. Proper maintenance is required: To calculate the cost of the
company it is required ethical and proper maintenance is a must.
Without maintaining proper books of account like sales books,
purchase books no one could properly estimate the actual cost
incurred and income generated by the company.
4. Expertise is required to record: To record the books of
account one should have the proper knowledge and mastery in the
recording of transactions, identify and summarize in the best
possible way so that the user who requires the information from the
account can easily understand it. Therefore no person can easily
record the transaction if he/she does not have any proper knowledge
of the principles of accounting.
5. Complex system: The system to record the transactions is a
complex process. No one can easily understand the process if they
have not learned the steps or learned about accounting. Even for
experts it sometimes gets complex to estimate the correct cost.
6. Costly to maintain: It’s costly to maintain the books of accounts
and requires lots of clerical work to maintain various costing
records. For small-scale and medium-sized businesses maintaining
the costing account, books become an impossible task.

Current Characteristics of Cost Accounting

A high-quality cost accounting system in one that achieves the
objectives of costing in the best possible way and brings benefits to
the business. An ideal system of costing should possess the following
characteristics:

1. Simplicity
The costing system should be simple to operate and easy to
understand. The facts, figures, and other information revealed by cost
accounts should be presented in a way that makes them easy to grasp.
As such, the needless elaboration of costing records should be
avoided.

2. Suitability to the Business

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 The costing system should be devised so as to suit the conditions,
requirements, nature, and size of the business. A costing system that
serves the enterprise’s purposes and supplies necessary information
for running the business is an ideal system for that business.

3. Economy
For the costing system to become a profitable investment for the
business, the cost of installing and operating the system must be
within the organization’s financial capacity.

4. Elasticity
The costing system should be elastic and capable of adapting to
changing conditions. As such, it must not be rigid. It should, in
particular, be capable of handling a large volume of work and also
dealing with changes in the nature of business.

5. Accuracy
The costing system should ensure the accuracy of the records that are
maintained. If the costing records maintained are not correct or
accurate, the results or conclusions drawn from them are bound to be
inaccurate and misleading.

6. Comparability
Costing records must be presented in a standardized form, enabling a
comparative study of costing results across different periods.

7. Promptness
An ideal system of costing is one in which information necessary for its
functioning are promptly, easily, and punctually available.

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Promptness can be ensured if arrangements are made for the timely
supply of records from different business units (e.g., records concerning
materials, labor, or overheads) to the costing office.

Once the costing office receives the information, the obtained data
should also be analyzed and recorded in a timely way to ensure
promptness.

8. Reconciliation of Results
The costing system should be maintained so as to make the task of
reconciling cost accounts with financial accounts easy and simple. This
reconciliation is essential for checking the accuracy of cost accounts and
also for measuring the efficiency of the costing system.

Recent Methods of Cost Accounting

1. Job Costing:
Under this method costs are collected and accumulated for each job or
work order or project separately. Each job can be identified separately
and hence becomes essential to analyze the costs according to each job.
Normally production consists of distinct jobs or lots so that order number
can identify costs. A job card is prepared for each job for cost
accumulation. This method is suitable for Printers, Machine tool
manufacturers, Foundries, and general engineering workshops.

2. Contract Costing:
Contract costing does not in principle differ from job costing. When the
job is big and spread over long period of time, the method of contract
costing is used. A separate account is kept for each individual contract.
Civil engineering contractors, constructional and mechanical engineering
firms, builders, etc use this method. In contracts, when it is agreed to pay
an agreed sum or percentage to cover overheads and profit to the
contractors, it will be termed as ‘cost plus costing’. The term cost here
refers to the prime cost. Usually government contracts are assigned in
this basis.
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3. Batch Costing:
This is an extension of job costing. A batch may represent a number of
small orders or group of identical products passed through the factory in
batch. Each batch is treated as a cost unit and cost is ascertained
separately. The cost per unit is determined by dividing the cost of the
batch by the number of units produced in a batch. The manufacturers of
biscuits, garments, spare parts and components mainly use this method.

4. Process Costing:
A process refers here to a stage of production. If a product passes
through different stages, each distinct and well defined, then in order to
ascertain the cost at each stage or process, the process costing is used.
Under this method, a separate process account is prepared and all costs
incurred in that process are charged. Normally the finished product of
one process becomes the raw material of the subsequent process and a
final product is obtained in the last process. As the products are
manufactured in continuous process, this is also known as continuous
costing. Process costing method is generally followed in textile units,
chemical industries, refineries, tanneries, paper manufacture, etc.

5. Operation Costing:
It is a further refinement of process costing. It is suitable to industries
where mass or repetitive production is carried out or where the goods
have to be stocked in semi-finished stage, to enable the execution of
special orders, or for the convenient use in later operations. In this
method, the cost unit is an operation. It is used in cycle manufacturing,
automobile units, etc.

6. Unit Costing:
This is also known as single or output costing. This method is suitable
for industries where the manufacture is continuous and units are
identical. This method is applied in industries like mines, quarries,
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cement works, brick works, etc. In all these industries there is natural or
standard unit of cost, for example, tonne of coal in collieries, tonne of
cement, one thousands of bricks, etc. The object of this method is to
ascertain the cost per unit of output and the cost of each element of such
cost. Here the cost account takes the form of cost sheet or statement
prepared for a definite period. The cost per unit is determined by dividing
the total expenditure incurred during a given period by the number of
units produced during that period.

7. Operating Costing:
This is suitable for industries, which render services as distinct from
those, which manufacture goods. This is applied in transport
undertakings, power supply companies, gas, water works, municipal
services, hospitals, hotels, etc. It is used to ascertain the cost of services
rendered. There is usually a compound unit in such undertakings, for
example, tonne-kilometres or passenger-kilometres in transport
companies, kilo-watt-hour in power supply, patient-day in hospitals, etc.

8. Multiple Costing:
It is also called as composite costing. It represents the application of
more than one method of costing in respect of the same product. This is
suitable for industries where a number of component parts are separately
produced and subsequently assembled into a final product. In such
industries each component differs from others as to price, materials used,
and manufacturing processes. So it will be necessary to ascertain the cost
of each component. For this purpose process costing may be applied. To
ascertain the cost of the final product batch costing may be applied. This
method is used in factories manufacturing cycles, automobiles, engines,
radios, typewriter, aero plane and other complex products.

Elements of Cost Accounting

1. Direct Material

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It represents the raw material or goods necessary to produce or
manufacture a product. The cost of direct material varies according to the
level of output. For example, Milk is the direct material of ghee.

2. Indirect Material
It refers to the material which we require to produce a product but is not
directly identifiable. It does not form a part of a finished product. For
example, the use of nails to make a table. The cost of indirect material
does not vary in the direct proportion of product.

3. Direct Labour
It refers to the amount which paid to the workers who are directly
engaged in the production of goods. It varies directly with the level of
output.

4. Indirect Labour
It represents the amount paid to workers who are indirectly engaged in
the production of goods. It does not vary directly with the level of output.

5. Direct Expenses
It refers to the expenses that are specifically incurred by
the enterprises to produce a product. The production cannot take place
without incurring these expenses. It varies directly with the level of
production.

6. Indirect Expenses
It represents the expenses that are incurred by the organization to
produce a product. These expenses cannot be easily identified accurately.
For example, Power expenses for the production of pens.

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 7. Overhead
It refers to all indirect materials, indirect labour, or and indirect expenses.

8. Factory Overhead
Factory overhead or Production Overhead or Works Overhead refers to
the expenses which a firm incurs in the production area or within factory
premises.

Indirect material, rent, rates and taxes of factory, canteen expenses

etc.are example of factory overhead.

9. Administration Overhead
Administrative or Office Overhead refers to the expenses which are
incurred in connection with the general administration of the
organizations.

Salary of administrative staff, postage, telegram and telephone, stationery

etc.are examples of administration overhead.

10. Selling Overhead

All expenses that a firm incurs in connection with sales are selling
overheads. Salary of sales department staff, travelers’ commission,
advertisement etc.are example of selling overhead.

11. Distribution Overhead

It represents all expenses incurred in connection with the delivery or
distribution of finished goods and services from the manufacturer to the
consumer. F Delivery van expenses. loading and unloading, customs
duty, the salary of deliverymen are examples of distribution overhead.

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 Scope of cost
accounting

COST ASCERTAINMENT
The sphere of cost accounting comprises cost ascertainment firstly. Cost
ascertainment means determining the cost incurred in producing any
product. The cost ascertainment includes:

 Collection of expenses

 Analysis of expenses

 Measurement of production

The cost may be ascertained by following ways:

Activity Based Costing in which each activity is taken as

fundamental cost object.

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Unit costing which is adopted to ascertain the total cost and also per
unit cost by making a detailed analysis of different elements of cost.

Job Costing method as per which costs is ascertained for the particular
job or work.

Batch Costing which is used when products are produced in batches

and cost is ascertained for each batch separately.

Contract Costing is a method of cost ascertainment of a particular

contract which is non-recurring in nature. The person executing the
contract is known as ‘contractor’ and the person with whom the contract
is executed is known as the ‘Contractee’.

Process Costing is a method employed to ascertain the cost of

production in industries where a product passes through different
processes or stages.

Operation Costing represents the costing in which each cost of each

operation involved in an activity is ascertained separately.

Composite Costing is applied to ascertain the cost of complex

products manufactured by the manufacturing concerns where no single
method of ascertaining cost can be applied.

Departmental Costing is adopted where the factory is divided into

several departments and it is desired to ascertain the cost of each
department than the whole concern collectively.

COST RECORDING
The scope of cost accounting also includes the recording of the costs. It
is the process by which the costs regarding the manufacturing activities
are being recorded in the business accounting records. It is a formal
mechanism and involves the specialized skills and knowledge of the cost
and work accountants. From recording point of view, the costing is of
various types:

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Historical Costing: The recording of costs after they have been
incurred is known as historical costing. It provides the record to the
management what has happened and thus is a post-mortem of actual
costs.

Post Costing: Under this system, the cost is ascertained after

production is completed, by analyzing financial data in such a way as
will disclose the cost of the units which have been produced.

Continuous Costing: Under this system, cost is ascertained by

recording expenditure and allocating it to production as and when the
same is incurred, with the result that cost is ascertained as soon as the job
is completed or even in progress.

COST CONTROL
Cost control is the guidance and regulation of the costs by the
administration and management authorities. It guides the organization to
achieve the target of the undertaking for a given period. Cost control
involves the following steps:
 Setting up the targets for expenses and production performance
 Measurement of the actual performance
 Comparison of the actual performance with the standard
performance
 Finding out deviations, if any
 Taking corrective actions to remove all the deviations.
Cost control is done by following the various techniques:
Marginal Costing: It is a technique of cost accounting which pays
attention to the behavior of costs with changes in the volume of the
output.

Budgetary Control: It involves the establishment of budgets relating

to the responsibilities of the executives to the requirements of the policy
and the continuous comparison of the actual with the budgeted results,
either to secure by individual action of that policy or to provide a basis
for its revision.

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Standard Costing: Standard costing discloses the cost of deviations
from standards and classifies these as to their causes, so that management
is immediately informed of the sphere of operations in which remedial
action is necessary.

Variance Analysis: Variance analysis is a process of analyzing

variances by sub-dividing the total variance in such a way that the
management can assign the responsibility for off production
performance. The main cost variances are: direct material variance,
direct labor cost variance and overhead variance.

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 Nature Of Cost
Accounting

A BRANCH OF ACCOUNTING
Cost Accounting is a branch of accounting that deals specifically with
the determination of costs of the products and services being
manufactured. It deals with those techniques, tools, processes and
methods which are associated with the determination of costs, their
classification and analysis. It is an accounting which is done internally
to the organization and is optional.

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 BRANCH OF KNOWLEDGE
It is an important branch of knowledge and emerges as a discipline in
itself. It is an organize body of knowledge which has its own tools and
techniques like
 Job costing
 Process costing
 Standard costing
 Marginal costing
 Variance analysis
 Unit costing
 Batch costing
 Activity based costing
 Budgetary control
 Contract costing etc.

COST ACCOUNTING IS SCIENCE AND AN ART

Cost accounting is both science and an art but not a perfect science.
It is science as it is a body of systematic knowledge relating to not only
accounting but also to a wide variety of subjects such as law, office
practices, data processing, production and material control etc.
It is an art as it involves the use of the skills and experience of cost
accountant in collection, classification and analysis of the costs of the
products.

COST ACCOUNTING IS A PROFESSION

Cost accounting is not a pure profession by nature but it is emerging as a
profession. The set up of various specialized institutions like
 Institute of Cost and Management Accountants in UK
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  Institute of Cost and Work Accountants in India
Is a way long to make cost accounting as a profession.

BASED ON DOUBLE ENTRY SYSTEM

Cost accounting is based on the double entry system. It is follows the
rule of ‘every debit has equal credit.’ All transactions that are recorded in
the cost accounting records have two fold aspect.

A PROCESS IN NATURE
Cost accounting is a process in nature. It is a process that involves the
following steps:
 Identification of costs
 Recording of costs
 Classification of costs
 Analyzing the costs
 Interpreting the results
 Communicating the results to the management.
It is a forward looking approach that aims at improving the efficiency of
the manufacturing activities.

INTERNAL ACCOUNTING
Costing accounting is an internal accounting. There is no compulsion on
the organization to prepare the cost accounting records and publish them.
It is totally option to prepare the cost accounting records. These are
prepared to provide for the internal use by the management and
manufacturing departments.

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 TOOLS AND TECHNIQUES
Cost accounting has its own tools and techniques of standard costing and
variance analysis, contract costing, process costing, job costing, unit
costing, batch costing, marginal costing etc. cost accounting make use of
such techniques in preparing the accounting records with full accuracy
and also fix the standards of performance for future.

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 Functions of Cost
Accounting
 Ascertainment of cost.

Cost ascertainment: The primary objective of cost accounting is to

determine the cost of production of every unit, job, operation, process,
department or service. The technique of ascertaining cost is known as
„Costing‟. In order to determine cost, all the expenses are accumulated,
classified and analysed.

 Controlling cost.

Cost control is the practice of identifying and reducing

business expenses to increase profits, and it starts with the budgeting
process.

 Aid to management.

An Aid to Management basically means that cost accounting helps the

management in carrying out most of its functions. It provides basic cost
data and performs cost functions that provide the management will all the
information they require.

 Setting up selling prices.

A selling price is the amount that a customer will pay to buy a product. If
a retailer wants to earn a positive gross margin (or gross profit
percentage), the selling price must include an additional amount that is
added to the retailer's cost of the product.

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  Inventory control.

Inventory control can be defined as the system used in a manufacturing

concern to control the firms investment in Stock. The system involves
the recording and monitoring of various stock levels, forecasting future
demands and deciding when and how much quantity or order.

 Measurement of efficiency.

Efficiency can be expressed as a ratio by using the following

formula: Output ÷ Input. Output, or work output, is the total amount of
useful work completed without accounting for any waste and spoilage.
You can also express efficiency as a percentage by multiplying the ratio
by 100.

 Discloses profitable and non-profitable activities.

Since cost accounting minutely calculates the cost, selling price and
profitability of product, segregation of profitable or unprofitable items or
activities becomes easy.

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 Cost accounting cycle
The cost accounting cycle is a process performed during the accounting
period in recording data, classifying, determining total cost, determining
product cost, determining selling price, controlling cost and decision
making.

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(a) Recording cost data:
At the first step of cost accounting it ascertains and records the element
of cost for determining of the cost of production.

(b) Classification of cost:

At the Second step according to function, nature, and behavior cost
accounting classifies the cost.

(c) Determining total cost:

In this step under cost accounting cost of goods sold of a product is
calculated. Cost of goods sold means the sum of all items of expenditure
incurred in production for the goods which are sold.

(d) Unit cost:

At the fourth step Unit cost is obtained dividing the cost of goods sold
divided by a total number of unit sold.

(e) Selling price:

Selling price is obtained by adding a profit margin with the cost of sales.

(f) Cost Control and decision making:

At the last step of cost accounting by using standard costing and budget
and budgetary control system cost accounting control cost and make a
decision.

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 Classifications of cost
accounting
So basically there are three broad categories as per this classification,
namely Labor Cost, Materials Cost and Expenses. These heads make it
easier to classify the costs in a cost sheet. They help ascertain the total
cost and determine the cost of the work-in-progress.

Costs can be classified based on the following attributes:

By Nature
In this type, material, labor and overheads are three costs, which can be
further sub-divided into raw materials, consumables, packing materials,
and spare parts etc.

By Degree of Traceability of the Product

Direct and indirect expenses are main types of costs come under it.
Direct expenses may directly attributable to a particular product. Leather
in shoe manufacturing is a direct expenses and salaries, rent of building
etc. come under indirect expenses.

By Controllability
In this classification, two types of costs fall:

 These are controlled by management like material

Controllable -
labour and direct expenses.

 Uncontrollable -They are not influenced by management or any

group of people. They include rent of a building, salaries, and
other indirect expenses.

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 By Relationship with Accounting Period

Classifications are measured by the period of use and benefit. The

capital expenditure and revenue expenditure are classified under it.
Revenue expenses relate to current accounting period. Capital
expenditures are the benefits beyond accounting period. Fixed assets
come under category of capital expenditure and maintenance of assets
comes under revenue expenditure category.

By Association with the Product

There are two categories under this classification:

 Product cost is identifiable in any product. It includes

Product cost -
direct material, direct labor and direct overheads. Up to sale, these
products are shown and valued as inventory and they form a part
of balance sheet. Any profitability is reflected only when these
products are sold. The Costs of these products are transferred to
costs of goods sold account.

 Time/Period base cost - Selling expenditure and Administrative

expenditure, both are time or period based expenditures. For
example, rent of a building, salaries to employees are related to
period only. Profitability and costs are depends on both, product
cost and time/period cost.

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 By Functions

Under this category, the cost is divided by its function as follows:

 Production Cost - It represents the total manufacturing or production

cost.

 Commercial cost - It includes operational expenses of the business

and may be sub-divided into administration cost, and selling and
distribution cost.

By Change in Activity or Volume

Under this category, the cost is divided as fixed, variable, and semi-
variable costs:

 It mainly relates to time or period. It remains unchanged

Fixed cost -
irrespective of volume of production like factory rent, insurance,
etc. The cost per unit fluctuates according to the production. The
cost per unit decreases if production increases and cost per unit
increases if the production decreases. That is, the cost per unit is
inversely proportional to the production. For example, if the
factory rent is Rs 25,000 per month and the number of units
produced in that month is 25,000, then the cost of rent per unit will
be Rs 1 per unit. In case the production increases to 50,000 units,
then the cost of rent per unit will be Rs 0.50 per unit.

 Variable cost - Variable

cost directly associates with unit. It increases
or decreases according to the volume of production. Direct material
and direct labor are the most common examples of variable cost. It
means the variable cost per unit remains constant irrespective of
production of units.
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 Semi-variable cost - A specific portion of these costs remains fixed
and the balance portion is variable, depending on their use. For
example, if the minimum electricity bill per month is Rs 5,000 for
1000 units and excess consumption, if any, is charged @ Rs 7.50
per unit. In this case, fixed electricity cost is Rs 5,000 and the total
cost depends on the consumption of units in excess of 1000 units.
Therefore, the cost per unit up to a certain level changes according
to the volume of production, and after that, the cost per unit
remains constant @ Rs 7.50 per unit.

What is modern cost

accounting?
Therefore, modern. cost accounting methods are focused on

cost rationalization and cost reduction, since modern

manufacturing companies cannot effect on market prices

but can. effect on their costs. In current business conditions,

modern cost accounting methods.

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 Conclusion
Cost accounting is a system of recording and

analyzing the cost of products or services in

order to contribute towards strategic planning

and improve cost efficiency. It's important for

many parties involved in a business, including

management, employees, and consumers.

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 Suggestion

Cost of sales are to be calculated on the basis of

cost of replacing the goods at the time they are

sold. The important principle is that current costs

must be matched with current revenues.

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 Bibliography

 Text book:
Advanced cost accounting & Cost System.
 Newspaper
 Internet

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