Cost accounting intro

C0ST ACCOUNTING
MADE BY: POOJA YADAV
COURSE : B.COM(HONS)
SECTION : A
ROLL NO - 2008

COST
ACCORDING TO ICWAI, THE AMOUNT OF EXPENDITURE (ACTUAL OR
NOTIONAL) INCURRED ON, OR ATTRIBUTABLE TO A SPECIFIED THING OR
ACTIVITY.

DEFINITION OF COST ACCOUNTING
• COST ACCOUNTING IS THE CLASSIFYING, RECORDING, AND
APPROPRIATE ALLOCATION OF EXPENDITURE FOR THE
DETERMINATION OF THE COSTS OF PRODUCTS OR SERVICES, AND FOR
THE PRESENTATION OF SUITABLY ARRANGED DATA FOR PURPOSES OF
CONTROL AND GUIDANCE OF MANAGEMENT.

FEATURES OF COST ACCOUNTING
1. IT IS A PROCESS OF ACCOUNTING FOR COSTS;
2. IT RECORDS INCOME AND EXPENDITURE RELATING TO
PRODUCTION OF GOODS AND SERVICES ;
3. IT PROVIDE STATISTICAL DATA ON THE BASIS OF WHICH FUTURE
ESTIMATES ARE PREPARED AND QUOTATIONS ARE SUBMITTED;
4. IT IS CONCERNED WITH COST ASCERTAINMENT, COST CONTROL,
AND COST REDUCTION;
5. IT ESTABLISHES BUDGETS AND STANDARDS;

6. IT GIVES RIGHT INFORMATION TO RIGHT PERSON AT THE RIGHT TIME
7. IT IS BOTH A SCIENCE AND AN ART;
8. IT IS COMPLEMENTARY/SUPPLEMENTARY TO FINANCIAL ACCOUNTING;
9. IT USES ACCOUNTING PRINCIPLES AND PROCEDURES WHILE
RECORDING INCOME AND EXPENDITURE;
10. IT IS CONCERNED WITH CLASSIFICATION, ACCUMULATION,
DISTRIBUTION AND CONTROL OF COSTS.

OBJECTIVES OF COST
ACCOUNTING
• TO ASCERTAIN THE COST PER UNIT.
• TO PROVIDE A CORRECT ANALYSIS OF COST.
• TO DISCLOSE SOURCES OF WASTAGE OF TIME, MATERIAL , MACHINE
ETC.
• TO FIX PRICE.
• TO ASCERTAIN THE PROFITABILITY.
• TO EXERCISE EFFECTIVE CONTROL OF STOCKS.
• TO ADVICE MANAGEMENT ON FUTURE EXPANSION

• TO PRESENT INTERPRET FOR MGT. PLANNING.
• TO HELPS IN PREPARATION OF BUDGETS
• TO PROVIDE INFORMATION TO RIGHT PERSON AT RIGHT TIME.
• TO ORGANISE INTERNAL AUDIT SYSTEM.
• TO FORMULATE & IMPLEMENT INCENTIVE BONUS PLANS.
• TO ORGANISE COST REDUCTION PROGRAMMES
• TO FIND OUT COSTING & PROFIT AND LOSS .

1. PROFITABLE AND UNPROFITABLE ACTIVITIES ARE DISCLOSED.
2. IT ENABLES A CONCERN TO MEASURE THE EFFICIENCY AND THEN TO MAINTAIN
AND IMPROVE IT.
3. IT PROVIDES INFORMATION UPON WHICH ESTIMATES AND TENDERS ARE
BASED.
4. IT GUIDES FUTURE PRODUCTION POLICES.
5. IT HELPS IN INCREASING PROFITS.
6. IT ENABLES A PERIODICAL DETERMINATION OF PROFITS OR LOSSES.
ADVANTAGES OF COST ACCOUNTING

• IT FURNISHES RELIABLE DATA FOR COMPARING COST.
• THE EXACT CAUSE OF A DECREASE OR INCREASE IN PROFIT AND LOSS.
• IT DISCLOSES THE RELATIVE EFFICIENCIES OF DIFFERENT WORKERS.
• A GOOD COSTING SYSTEM CAN ATTRACT MORE INVESTORS.
• HELPFUL TO THE GOVERNMENT.
• EFFICIENCY OF PUBLIC ENTERPRISES.
• HELPFUL TO THE CONSUMERS.

DIFFERENCES BETWEEN FINANCIAL &
COST ACCOUNTING
Point of
Distinction
Financial Accounting Cost Accounting
1.Purpose It provide information about
the in a general way.
It provides information
for proper planning,
operation control.
2.From of
Accounts or
legal
requirement
These are kept to meet
requirement of Companies Act
and Income Tax Act
It is prepared as per
management
requirements .But now
Companies Act has made
obligatory.
3.Recording It records in a subjective
manner (nature)
It records in a objective
manner.

4.Control It lays emphasis on recording
not on control
It give importance to
control
5.Periodicity of
reporting
It reports usually at the end of
the year.
It reports when mgt.
desired.
6.Analysisof
profit
It disclose the net profit or
loss as a whole.
It disclose profit or loss for
each job, product etc.
7.Reporting of
costs
The cost are reported in
aggregate manner.
The cost reported in broken
down basis.
8.Nature of
transaction
It relates to commercial
transaction
It relates to manufacturing
transaction

9.Information Monetary information is
used.
Non Monetary information is
also used .
10.Fixation of
selling price
It is not maintained for fixing
selling price.
It provide data for fixing
selling price.
11.Figures It deals with actual facts &
figure .
It deals partly with actual
facts & figure and partly with
estimates.
12.Stock
valuation
Cost price or market price
which ever is less.
Stocks are valued at cost
only.
13.Types of
Science
It is positive science. positive and normative
science.

14.Reference It can be used as reference
purpose.
No such reference is
possible.
15.Relative
Efficiency
It does not provide It provide efficiency
16.Approach External parties Internal parties
17.Comparisio
n
Data are not sufficient for
comparison
Comparison of two result
periods is made in cost acct.
18.Material
Control
Can not possible. Can possible.
19.Labour
Control
Can not possible. Can possible.
20.Cost
Analysis
Item wise classification Department wise and
element wise

LIMITATIONS OF COST ACCOUNTING
• COST ACCOUNTING LACKS A UNIFORM PROCEDURE
• THERE ARE A LARGE NUMBER OF CONVENTIONS, ESTIMATES AND
FLEXIBLE FACTORS.
• MANY FORMALITIES ARE TO BE OBSERVED FOR GETTING BENEFIT OF
COST ACCOUNTING.
• IT IS NOT SUITABLE FOR HANDLING FUTURISTIC SITUATION.

CLASSIFICATION OF COSTS
1. BY NATURE OR ELEMENTS:
A) MATERIALS ; B) LABOUR C) EXPENSES.
2. BY FUNCTIONS :
A) PRODUCTION COST; B)COMMERCIAL COST.
3. BY NORMALITY:
A) NORMAL COST; B) ABNORMAL COST.
4. BY CONTROLLABILITY:
A) CONTROLLABLE COSTS B) UNCONTROLLABLE COSTS

5. BY DEGREE OF TRACEABILITY TO THE PRODUCT:
A) DIRECT COSTS B) INDIRECT COSTS.
6. BY CHANGES IN ACTIVITY OR VOLUME:
A) FIXED COSTS B) VARIABLE COSTS C) SEMI VARIABLE COSTS
1.COMMITTED COST,
2.POLICY AND MANAGED COST,
3.STEP COST,
4.DISCRETIONARY COST EXAMPLES OF FIXED COST.
7. BY RELATION WITH ACCOUNTING PERIOD :
A) CAPITAL COST B) REVENUE COST.

8. BY TIME:
A) HISTORICAL COST; B) PREDETERMINED COST.
9. ACCORDING TO PLANNING & CONTROL:
A) BUDGETED COST; B) STANDARD COST.
10.BY ASSOCIATION WITH THE PRODUCT:
A) PRODUCTS COSTS; B) PERIOD COSTS.
11. FOR MANAGERIAL DECISIONS:
A) MARGINAL COST; B) OUT OF POCKET COSTS;
C) DIFFERENTIAL COST D) SUNK COST;
E) IMPUTED COST OR NOTIONAL COST;
F) OPPORTUNITY COST ; G) REPLACEMENT COST
H) AVOIDABLE & UN AVOIDABLE COST.

ELEMENTS OF COSTS - MATERIALS
• MATERIAL COST : COST OF COMMODITIES SUPPLIED TO AN UNDERTAKING
• DIRECT MATERIALS COST : THOSE COSTS WHICH ARE INCURRED FOR AND
CONVENIENTLY IDENTIFIED WITH A PARTICULAR COST UNIT, PROCESS OR
DEPARTMENT.
EX: COST OF RAW MATERIAL
• INDIRECT MATERIALS COST : THOSE COSTS WHICH CANNOT BE CONVENIENTLY
IDENTIFIED WITH A PARTICULAR COST UNIT, PROCESS OR DEPARTMENT.
EX: COST OF MATERIAL THAT ARE INEXPENSIVE BUT MAY OR MAY NOT
PHYSICALLY BECOME PART OF THE FINISHED GOODS

ELEMENTS OF COSTS – LABOUR COST
• LABOUR COST : COST OF REMUNERATION (WAGES, SALARIES,
COMMISSIONS, BONUSES, ETC ETC) OF THE EMPLOYEES OF AN
UNDERTAKING
• DIRECT LABOUR COST : WAGES PAID TO WORKERS DIRECTLY ENGAGED
IN THE PRODUCTION PROCESS.
EG: WAGES OF MACHINE OPERATOR
• INDIRECT LABOUR COST: THOSE WAGES WHICH CANNOT BE
CONVENIENTLY IDENTIFIED WITH A PARTICULAR COST UNIT, PROCESS
OR DEPARTMENT

ELEMENTS OF COSTS – EXPENSES
• EXPENSES: THE COST OF SERVICES PROVIDED TO AN UNDERTAKING
• DIRECT EXPENSES: THOSE EXPENSES WHICH CAN BE IDENTIFIED WITH
AND ALLOCATED TO COST CENTERS OR UNITS.
EX: ROYALTY PAID, DEPRECIATION OF A PLANT USED
• INDIRECT EXPENSES: ALL INDIRECT COSTS OTHER THAN INDIRECT
MATERIALS AND LABOR. THEY CANNOT BE DIRECTLY IDENTIFIED WITH
A PARTICULAR JOB, PROCESS OR WORK ORDER AND ARE COMMON TO
COST UNITS OR COST CENTERS
EX: RENT AND RATES, LIGHTING AND POWER

COMPONENTS OF TOTAL COST
• 1 PRIME COST
• 2. WORKS COST OR FACTORY COST
PRIME COST + FACTORY OVERHEADS
• COST OF PRODUCTION
WORK COST + ADMINISTRATION OVERHEADS
• TOTAL COST OR COST OF SALES
COST OF PRODUCTION + SELLING AND DISTRIBUTION OVERHEAD

Cost accounting intro

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Cost accounting intro