Introduction to Cost Accounting

Hardik Gandhi
 Meaning of Cost Accounting
• Costing is “the technique and process of ascertaining costs.”

• According to CIMA
“ It involves the classification, recording and appropriate
allocation of expenditure for the determination of the costs of
products or services; the relation of these costs to sales
values; and the ascertainment of profitability.”
 Contd.
• Cost Accounting is a specialized branch of accounting which
involves classification, recording, analyzing, standardizing,
comparing, reporting and recommending.

• According to CIMA
“The establishment of budgets, standard costs, and actual
costs of operations, processes, activities or products; and
analysis of variances, profitability or the social use of funds.”
 Objectives of Cost Accounting
• Ascertainment of costs
• Estimation of costs
• Cost control and cost reduction
• Providing necessary information to the management in time
• Facilitate price fixation and offering quotations
• Provide basis for making decision
• Facilitating preparation of financial and other statement
• Assist budgetary control
 Advantages of Cost Accounting
• Helps in adverse time
• Price fixations, floating tenders, quotations etc.
• Eliminates wastages
• Maximizes profit
• Facilitates comparisons
• Preparation of final accounts
• Inventory control
• Increase in productivity and enhancing efficiency
 Limitations of Cost Accounting
• It presents the base for taking the best decisions, but it does
not give outright solution to the problem.
• Cost varies with purpose. Therefore, cost called for a certain
purpose will not be suitable for other purposes.
• Cost Accounting is not an exact science. It involves inherent
elements of judgment.
• It lacks a uniform procedure.
• A suitable system is to be devised for each individual concern
and it would be time consuming and expensive.
• Existence of numerous may lead to cost differences and it is
difficult to ascertain true cost of product or service.
Contd.
• Most of Cost Accounting Techniques are based on some
presumed notions.
• (Different views are held for inclusion of certain items of cost
in ascertainment of total cost.
• Many formalities are to be observed to obtain benefit from
Costing System. Small and medium concerns may not be in a
position to install a costing system.
• If the system is not revised as per the changing circumstances,
it will become a matter of routine forms and statements.
 Classification of Costs
• Classification on the basis of time:
Historical Costs and Predetermined costs
• Classification by Traceability:
Direct Cost and Indirect Cost
• Classification by Elements:
Material, Labor and Overheads
• Classification by behavior:
Variable cost, Fixed Cost and Semi variable Cost
• Costs in their relation to Product:
Prime Cost, Conversion cost, Product Costs, Period Costs, Joint
Costs
Contd.
• Costs for Planning and Control:
Controllable cost, Uncontrollable cost, Budget Cost, Standard
Cost
• Costs for Decision Making Purposes:
• Opportunity cost, Sunk Cost, Differential Cost, Imputed Cost,
Relevant Cost, Marginal Cost
 Role of a Cost Accountant
• He establishes a cost accounting department in his concern.
• He ascertains the requirement of cost information which may
be useful to organizational managers at different levels of the
hierarchy.
• He develops a manual, which specifies the functions to be
performed by the cost accounting department. The manual
also contains the format of various forms which would be
utilized by the concern for procuring and providing
information to the concerned officers. It also specifies the
frequency at which the cost information would be supplied to
a concerned executive.
• He plays a key role in the preparation of cost reports.
Functions of Cost Accounting Dept.
• Cost Ascertainment

• Cost Comparison

• Cost Analysis

• Cost Reports
 Methods of Costing
(A) Specific Order Costing:
Job Costing
Contract Costing
Batch Costing
(B) Process Costing
 Techniques of Costing
• Historical Costing
• Marginal Costing
• Cost-volume-profit analysis
• Budgetary Control
• Standard Costing and Variance Analysis
• Direct Costing
• Absorption Costing
• Uniform Costing
 Elements of Cost
• Prime Cost:
Direct Material + Direct Labor + Direct expenses
• Factory Cost:
Prime Cost + Factory overheads
• Office Cost:
Factory Cost + Administration Overheads
• Total Cost
• Office Cost + Selling & Dist. Overheads