Introduction to cost

accounting
 Accounting
 Accounting is a part of the information
system of a business enterprise
 It provides financial information concerning

the activities of an enterprise to a diverse

group of people such as shareholders,
managers, creditors, tax authorities, etc.
 Branches of Accounting
 Financial accounting
 Cost accounting
 Management accounting
Financial Accounting
 “The art of recording, classifying, and
summarizing in a significant manner and in
terms of money, transactions and events,
which are in part at least, of a financial
character and interpreting the results
thereof”.

 To present a true and fair view of a

company’s income , financial position and
funds at regular intervals of one year.
Management accounting
 It’s a tool of management.
 It provides information which is useful to

management.
 Acc. to CIMA, “the presentation of accounting

information in such a way as to assist

management in the creation of policy and in
the day-to-day operations of an undertaking.
 It helps in decision making, planning and

controlling.
 Cost Accounting
Cost accounting is the classifying, recording and
appropriate allocation of expenditure for the
determination of the costs of products and services, and
for the presentation of suitably arranged data for the
purpose of control and guidance of management.
process of ascertaining costs.”--------CIMA, London

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 Cost accounting is that accounting which
helps in ascertaining the cost of
manufacturing a product or service.
 It also helps in control or reduction of the

cost.
Natures/Features of cost accounting
Cost accounting has the following features:
(i) It is a process of accounting for costs.
(ii)It records expenditure relating to production of goods
and services.
(iii)It provides data on the basis of which future estimates
are prepared and quotations/tenders are submitted.
(iv)It is concerned with cost ascertainment, cost control
and cost records.
(v)It establishes budgets and standards so that actual cost
may be compared to find out deviations/variances.
 Scope of Cost Accounting
The scope of cost accounting is very wide.

There are lots of techniques, tools, procedures, processes, programs

are used in cost accounting for calculating cost and its control.

But basically, we divide its scope within three major parts.

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Scope of Cost Accounting
 Scope of cost accounting

 Ascertainment of cost
 Cost control and cost reduction
 Cost records
 Guide to business policy
 Determination of selling price
Objectives and functions of cost
Accounting
 Ascertainment of cost
 Cost control and cost reduction
 Guide to business policy
 Preparation of budgets
 Best use of limited resources
 Make or buy decision
 Determination of most profitable levels of accounting
 Determine whether the product should be exported or not
 Determine whether the company should operate at full

capacity
 Determine whether the investment in a particular assets

will be worthwhile
 Determination of selling price
 Measuring and improving performance
Use/Advantages of cost accounting
Use to management
 Reveals profitable and unprofitable activities
 Helps in decision making

 Helps in cost control

 Helps in inventory control
 Guides in fixation of selling price
 Aids in formulating policies
 Helps in cost reduction
 Reveals idle capacity
 Prevents frauds and manipulation

Use to workers
Use to Society
Use to government: ready figures for price control, price fixation
national plans for economic development.
Relationship between cost accounting
and financial accounting

Similarities

 Systematic recording
 Serve the purpose of management for policy

making
 Both are based on double entry system
Difference between cost accounting and financial
accounting

 Purpose
 Statutory requirement
 Periodicity of reporting
 Historical and pre determined costs
 Reporting of cost- aggregate, break down
 Fixation of selling price
 Figures- actual, estimates
 Format of presenting information
Limitations of cost accounting

 It is unnecessary
 It is expensive
 It is inapplicable
 It is a failure
 Classification of Cost

Cost Classification is the process of

 grouping costs according to some of their common
characteristics.
Cost Classification
1. By Nature or Elements
Elements of
cost

Other
Material Labour
expenses

Indirect Direct Indirect Indirec

Direct Direct
t

Production Selling and

Administrativ
or works distribution
e overheads
overheads overheads
 Classification of Cost
2. By Functions:
(a) Manufacturing and Production Cost
(b) Commercial Costs
3.By Degree of Traceability:
(a) Direct cost
(b) Indirect Cost

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 Classification of Cost
4. By Change in Activity or Volume/ Behavior
(a) Fixed Costs
(b) Variable Costs
(c) Semi-Variable Costs

5. By Controllability:
(a) Controllable Costs
(b) Non- Controllable Costs

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 Classification of Cost
6. By Normality:
(a) Normal Cost
(b) Abnormal Cost

8. By Time:
(a) Historical Costs
(b) Predetermined Costs

9. According to Planning and Control:

(a) Budgeted Costs
(b) Standard Costs

10. By association with the Product:

(a) Product Costs
(b) Period Costs
 Classification of Cost
11. For Managerial Decisions:
(a) Marginal Cost
(b) Differential Costs
(i) Incremental Costs
(ii) Decremental Costs
(c) Sunk Costs
(d) Imputed/Notional Costs
(e) Replacement Cost
(f) Avoidable and Unavoidable Costs

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