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Cost Accounting
Adolph Matz
Milton F. usry

What is Accounting????
Accounting is a specialized information
system that provides economic information
to different group of people.

Branches of Accounting
Financial Accounting

Cost Accounting
Management Accounting

Financial Accounting..
Primary function of financial accounting is to record in
a systematic way money transactions between an
economic entity and third parties such as suppliers,
customers, employees, bankers etc.
Financial accounts provide information to inside users
(Management) and Outside users (shareholders,
investors, trade unions, general public etc.)

Definition:
Committee on Terminology of American institute of Certified Public
Accountants

Accounting is 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.
Financial accounting (or financial accountancy) is the field of
accounting concerned with the summary, analysis and reporting of
financial transactions pertaining to a business.

Cost Accounting:
Institute of Cost and Management Accountants of U.K.

The application of accounting and costing principles, methods

and techniques in the ascertainment of costs and analysis of
savings or excesses as compared with previous experience or
with standards.
It can also be defined as
Determining the costs of products, processes, projects, etc. in
order to report the correct amounts on the financial statements.

Management Accounting:

The application of professional knowledge and

skill in the preparation and presentation of
accounting information in such a way as to assist
management in the formulation of policies and
in the planning and control of operations of the
undertaking.

Tracing the Roots of Cost Accounting:

The practice of costing is as old as the business activity level itself.
After Industrial Revolution (1780) due to vast production,
quantitative information became the need of management
During world war 1st (1914-1918) huge quantities of weapons were
produced and sold at cost plus profit contracts.
The great Depression (1930s) also increased the need to determine
cost more precisely.

Contributions of Cost Accounting:

Planning
Controlling
Evaluation of Alternatives
Inventory Management
Pricing
External Reporting
Analysis of Financial Statements

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Planning:
Process of setting objectives and steps needed to attain
them

The plans are numerically expressed in the form of

budgets
Budgeting is the area where contribution of cost
accounting is most visible.

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Controlling:
it is the process by which management makes sure that intended and
desired results are consistently and continuously achieved. It consists of
three steps:
i.

Establishment of standards

ii.

comparison of results against standards

iii. correction of deviation

Performance Report Department A
Item

Budgeted
cost

Actual cost

Variance

Explanation

001

002

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Evaluation of Alternatives:
whether it is less expensive to make or Buy a product
whether to continue or discontinue a product
cost accounting provides information as to how future
costs and revenues will be affected under each
alternative and help management to take decisions.

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Inventory Management:
complete record of material from entering time to the time they
are sold in the form of finished product
Stock Evaluation
valuation of work in process inventory

quantitative models for material planning and management

developed by cost accounting

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Pricing of products and Services:

determination of price of new products as well as
adjustment of price of existing products

determination of bid price

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External Reporting:
Detailed cost reports are prepared and presented in
front of users

For example:
Reports prepared and presented in front of Assembly and
Government regulatory agencies.

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Analysis of Financial Statements:

Financial statements are analyzed by external
users and management

Analysis helps to take decisions regarding

profitability, financial strength and trend etc.

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Comparison of Financial and Managerial

Accounting
Financial Accounting

Managerial Accounting

External persons who

make financial decisions

Managers who plan for

and control an organization

Historical perspective

Future emphasis

3. Verifiability
versus relevance

Emphasis on
verifiability

Emphasis on relevance
for planning and control

4. Precision versus
timeliness

Emphasis on
precision

Emphasis on
timeliness

5. Subject

Primary focus is on
the whole organization

Focuses on segments
of an organization

6. GAAP

Must follow GAAP

and prescribed formats

Need not follow GAAP

or any prescribed format

Mandatory for
external reports

Not
Mandatory

1. Users
2. Time focus

7. Requirement

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Cost vs Financial Accounting:

Financial Accounting

Cost Accounting

Information to external users

Information to internal users

General purpose financial statements

Special purpose statements

Conform to generally accepted

accounting principles

Conform to information needs of

management

Provides accounting data in monetary

terms

Monetary and non-monetary terms

Financial statements are prepared on

yearly or half yearly basis

Cost statements and reports are

prepared more frequently i.e. weekly and
daily basis.