m Institute of Cost and Works Accountants, London defines Cost as ³the

amount of expenditure (actual or notional) incurred on or attributable to a

given thing.´ Thus, cost refers to something that must be sacrificed to
obtain a particular thing.
m The committee on Cost Concepts and Standards of the American
Accounting Association wrote: ( Cost is a forgoing, measured in monetary
terms, incurred or potentially to be incurred to achieve specific objective.
Costing is the technique and process of
ascertaining costs. It consists of the
principles and rules which are used for
ascertaining the costs of products &
services.
m Cost accounting is concerned with recording, classifying
and summarizing costs for determination of costs of
products or services, planning, controlling and reducing
such costs and furnishing of information to management
for decision making.
m Institute of Certified Management Accountants
(I.C.M.A), London defines cost accounting as ³the
process of accounting for cost from the point at which
expenditure is incurred or committed to the
establishment of its ultimate relationship with cost
centers and cost units.
m In its widest usage, it includes the preparation of
statistical data, the application of cost control methods
and the ascertainment of the profitability of activities
carried out or planned.
. To ascertain the cost per unit of the different products
manufactured by a business concern.
2. To provide a correct analysis of cost both by process or
operations and by different elements of cost.
3. To disclose sources of wastage whether of material, time or
expense or in the use of machinery, equipment and tools and to
prepare such reports which may be necessary to control such
wastage.
4. To provide requisite data and serve as a guide to price fixing of
products manufactured or services rendered.
5. To ascertain the profitability of each of the products and advise
management as to how these profits can be maximized.
ð. To exercise effective control of stocks of raw materials, work-
in-progress, consumable stores and finished goods in order to
minimize the capital locked up in these stocks.
7. To reveal sources of economy by installing and implementing a
system of cost control for materials, labor and overheads.
8. To advise management on future expansion policies and
proposed capital projects.
9. To present and interpret data for management planning,
decision-making and control.
 . To help in the preparation of budgets and implementation of
budgetary control.
. To guide management in the formulation and implementation
of incentive bonus plans based on productivity and cost
savings.
2. To supply useful data to management for taking various
financial decisions such as introduction of new products,
replacement of labor by machine etc.
3. To organize the internal audit system to ensure effective
working of different departments.
4. To organize cost reduction programs with the help of different
departmental managers.
5. To provide specialized services of cost audit in order to prevent
the errors and frauds and to facilitate prompt and reliable
information to management.
ð. To find out costing profit or loss.
The above objectives can be re-grouped under three heads:
. Ascertainment and analysis of cost and income by product,
function and responsibility.
2. Providing useful data to management for planning, making
sound decisions.
3. Accumulation and utilization of cost data for control purposes to
have the minimum possible cost consistent with maintenance of
quality. This objective is achieved through fixation of targets,
ascertainment of actuals, comparison of actuals with targets,
analysis of reasons of deviations between actuals and targets and
reporting deviations to management for taking corrective action.
v (very type and kind of activity, regardless of size, in
which monetary value is involved should consider the
use of cost accounting concepts and techniques.
v Manufacturing firms, wholesale and retail business,
banks and other financial enterprises, insurance
companies, transportation companies, railroads,
airlines, shipping companies, schools, colleges and
universities, hospitals, governmental units, and
welfare organizations should employ cost accounting
in order to operate efficiently.
m
 
m 
. It enables a concern and public enterprises to measure the
efficiency and then to maintain and improve it. This is done with
the help of valuable data made available for the purpose of
comparison.
2. It provides information upon which estimates and tenders are
based.
3. It guides future production policies.
4. It enables a determination of profits or losses on a periodical
basis, as well as per product, department and/or cost center.
Thus, it helps in improving profits. The exact cause of a decrease
or increase in profit or loss can be detected. Cost Accounting
discloses the relative efficiencies of different workers.
ð. It furnishes reliable data for comparing costs in different period, in
different departments and processes
7. Helpful to the Government in price fixation, price control, tariff
protection, wage level fixation, etc.
'
 
m 
. Cost Accounting lacks a uniform procedure as different cost
accountants can give different interpretations according to their
judgment. There are a large numbers of estimates based on
assumptions leading to arbitrary profits.
2. It will supply future estimates but future is always uncertain.
3. It is an expensive system which is suitable only to the very large
industries.
4. It involves unnecessary paper work.
. Financial Accounting provides information about the business in a general way
.i.e. its profit and loss & financial position to owners & outsiders. Cost Accounting
provides information to management for proper planning, control and decision-
making.
2. FA lays focus on the recording aspect without attaching any importance to
control. 3. CA provides a detailed system of control for materials, labor &
overhead costs with the help of standard costing & Budgetary Control.
3. Financial Accounts are the accounts for the whole business & disclose net profit
or loss at the end. Cost Accounting can be done even for one part, division or
unit of the business and discloses profit or loss of each product, job or service.
4. Financial Accounts relate to commercial transactions and include all expenses
(manufacturing, selling & distributing, and administrative). Moreover Financial
Accounts are concerned with third party transactions which form the basis for
payment or receipt of cash. Cost accounts relate to transactions of manufacture
only and includes only expenses for production, as well as Cost Accounts are
concerned with internal transaction which do not form part of payment or receipt
of cash.
5. In FA, only monetary information is used. In addition, FA is not maintained with
the object of fixation of selling prices. In CA, Non-monetary information is also
used. Further, CA provides sufficient data for the fixation of selling prices.
ð. FA do not provide information on efficiency of various workers, plants and
machinery. In FA, Stocks are valued at cost or market price whichever is less.
CA provide valuable information on the relative efficiencies of various plants
and machinery. In CA, Stocks are valued only at costs.
v (lements of cost are materials, labor, and other
expenses.
v MAT( IAL: The substance from which the finished
product is made is known as material.
v LABOU : The human effort required to convert the
materials into finished product is called labour.
v OTH( (
(S(S: are those expenses other
than materials and labour.
v Classification of cost means, the grouping of costs
according to their common characteristics. The important
ways of classification of costs are:
1. By the nature of the item(a natural classification):
Manufacturing (production or factory cost) and
nonmanufacturing (commercial) costs. Commercial
expenses fall into two large classifications:
i. Marketing (distribution or selling) expenses: They begin at the
point where the factory costs end. Marketing expenses cover the
expenses of making sales and delivering products.
ii. Administrative ( general & administrative) expenses: They include
expenses incurred in the direction and control, administration of the
organization.
 2. With respect to the accounting period to which they apply: based
on this way, costs are divided into two broad classes:
i. Capital expenditure is intended to benefit future periods and
is classified as an asset.
ii. Revenue expenditure benefits the current period and is termed
an expense.
3. By their relation to the product: They are classified as direct and
indirect (overhead) cost.
i. Direct materials are all materials that form an integral part of
the finished product and that can be included directly in
calculating the cost of the product, such as the timber to make
furniture, and the steel to make automobile bodies.
ii. Direct labor is one which can be conveniently identified or
attributed wholly to a particular job, product or process.
E.g.: wages paid to carpenter, fees paid to tailor.
iii. Overhead is the cost of indirect materials, indirect labor, and all
other costs that cannot conveniently be charged to specific units,
jobs, or products.
Ë Indirect material is one which cannot easily be identified in the
product.
Ë Indirect labor is one which cannot conveniently be identified or
attributed wholly to a particular job, product or process.
v At factory level ± lubricants, oil, consumables, etc.
v At office level ± rinting & stationery, Brooms,
Dusters, etc.
v At selling & dist. level ± acking materials, printing
& stationery, etc.
v At factory level ± foremen¶s salary, works
manager¶s salary, gate keeper¶s salary,etc
v At office level ± Accountant¶s salary, GM¶s salary,
Manager¶s salary, etc.
v At selling and dist.level ± salesmen salaries,
Logistics manager salary, etc.
 ELEMENTS COST
OF
COST

OTHER EXPENSES
MATERIALS LABOUR

DIRECT INDIRECT
DIRECT INDIRECT INDIRECT
DIRECT

OVERHEADS

SOH DOH
FOH AOH
4. By variability (their tendency to vary with volume or activity:
fixed, variable, semi-variable.
Ë Variable cost are costs that vary directly in relation to change
in the volume of output or activity.
Ë Fixed cost is fixed in amount i.e. does not vary with change
in the volume of output or activity.
Ë Semi-variable cost containing both fixed and variable
elements.
v At factory level ± factory rent, factory insurance,
lighting, etc.
v At office level ± office rent, office insurance, office
lighting, etc.
v At sales & dist.level ± advertising, show room
expenses like rent, insurance, etc.
v Carriage

v ackaging expenses
v ature
v Function
v Direct & indirect
v Variability
v Controllability
v ormality
v Financial accounting classification
v Time
v lanning and control
v Managerial decision making
v MAT( IALS

v LABOU

v (
(S(S
v MAUFACTU IG COSTS

v COMM( CIAL COSTS ± ADM AD S&D COSTS

v DI (CT COSTS

v IDI (CT COSTS

v FI
(D COSTS

v VA IABL( COSTS

v S(MI VA IABL( COSTS

v COT OLLABL( COSTS

v UCOT OLLABL( COSTS

v O MAL COSTS

v ABO MAL COSTS

v CAITAL COSTS

v (V(U( COSTS

v D(F( (D (V(U( COSTS

v HISTO ICAL COSTS

v  ( D(T( MI(D COSTS

v BUDG(T(D COSTS

v STADA D COSTS
v MA GIAL COSTS
v OUT OF OCK(T COSTS
v SUK COSTS
v IMUT(D COSTS
v OO TUITY COSTS
v (LAC(M(T COSTS
v AVOIDABL( COSTS
v UAVOIDABL( COSTS
v (L(VAT AD I (L(VAT COSTS
v DIFF( (TIAL COSTS
v COST UIT
v COST C(T (
v COST (STIMATIO
v COST ASC( TAIM(T
v COST ALLOCATIO
v COST AO TIOM(T
v COST (DUCTIO
v COST COT OL
v „OB COSTIG
v COT ACT COSTIG
v BATCH COSTIG
v  OC(SS COSTIG
v UIT COSTIG
v O( ATIG COSTIG
v O( ATIO COSTIG
v MULTIL( COSTIG
v UIFO M COSTIG
v MA GIAL COSTIG
v STADA D COSTIG
v HISTO ICAL COSTIG
v DI (CT COSTIG
v ABSO BTIO COSTIG