Cost accounting is the process of accounting for costs.

It includes the accounting

procedures relating to recording of all income and expenditure and preparation of
periodical statements and report with the object of ascertaining and controlling costs.
Such cost accounting is a good technique for ascertaining profitability and for decision
making.
According to Charles T. Horngren, cost accounting is a quantitative method that
accumulates, classifies, summarizes and interprets information for the following three
major purposes:
Operational planning and control
Special decisions
Product decisions
According to the Chartered Institute of Management Accountants, London, cost
accounting is the process of accounting for costs from the point at which its expenditure
is incurred or committed to the establishment of the ultimate relationship with cost
units. In its widest sense, it embraces the preparation of statistical data, the application
of cost control methods and the ascertainment of the profitability of the activities
carried out or planned.
In management accounting, cost accounting establishes budget and actual cost of
operations, processes, departments or product and the analysis of variances,
profitability or social use of funds. Managers use cost accounting to support decision-
making to cut a company's costs and improve profitability. As a form of management
accounting, cost accounting need not to follow standards such as GAAP, because its
primary use is for internal managers, rather than outside users, and what to compute is
instead decided pragmatically.
Costs are measured in units of nominal currency by convention. Cost accounting can be
viewed as translating the supply chain (the series of events in the production process
that, in concert, result in a product) into financial values.
A type of accounting process that aims to capture a company's costs of production by
assessing the input costs of each step of production as well as fixed costs such as
depreciation of capital equipment. Cost accounting will first measure and record these
costs individually, then compare input results to output or actual results to aid company
management in measuring financial performance.
While cost accounting is often used within a company to aid in decision making,
financial accounting is what the outside investor community typically sees. Financial
accounting is a different representation of costs and financial performance that includes
a company's assets and liabilities. Cost accounting can be most beneficial as a tool for
management in budgeting and in setting up cost control programs, which can improve
net margins for the company in the future.

Financial accounting has its focus on the financial statements which are distributed to
stockholders, lenders, financial analysts, and others outside of the company. Courses in
financial accounting cover the generally accepted accounting principles which must be
followed when reporting the results of a corporation's past transactions on its balance
sheet, income statement, statement of cash flows, and statement of changes in
stockholders' equity.

Managerial accounting has its focus on providing information within the company so
that its management can operate the company more effectively. Managerial accounting
and cost accounting also provide instructions on computing the cost of products at a
manufacturing enterprise. These costs will then be used in the external financial
statements. In addition to cost systems for manufacturers, courses in managerial
accounting will include topics such as cost behavior, break-even point, profit planning,
operational budgeting, capital budgeting, relevant costs for decision making, activity
based costing, and standard costing.


Some business professionals include cost accounting as a part of managerial accounting
and some think that cost accounting is a different functional area of accounting.
Whatever the case, cost accounting and managerial accounting surely overlap.
Cost accounting looks at the costs of production for a business firm by looking at
the fixed costs of the products they sell and their input costs. Input costs are compared
to output costs to measure the financial performance of the firm with regard to
production costs. Cost elements often used are indirect costs or overhead, raw materials,
and labor. Managers often use the information from cost accounting to set up cost
control programs for the business firm.


Classification of cost means, the grouping of costs according to their common
characteristics. The important ways of classification of costs are:
1. By Element: There are three elements of costing i.e. material, labor and expenses.
2. By Nature or Traceability:Direct Costs and Indirect Costs. Direct Costs are
Directly attributable/traceable to Cost Object. Direct costs are assigned to Cost
Object. Indirect Costs are not directly attributable/traceable to Cost Object.
Indirect costs are allocated or apportioned to cost objects.
3. By Functions: production,administration, selling and distribution, R&D.
4. By Behavior: fixed, variable, semi-variable. Costs are classified according to their
behavior in relation to change in relation to production volume within given
period of time. Fixed Costs remain fixed irrespective of changes in the production
volume in given period of time. Variable costs change according to volume of
production. Semi-variable Costs costs are partly fixed and partly variable.
5. By control ability: controllable, uncontrollable costs. Controllable costs are those
which can be controlled or influenced by a conscious management action.
Uncontrollable costs cannot be controlled or influenced by a conscious
management action.
6. By normality: normal costs and abnormal costs. Normal costs arise during
routine day-to-day business operations. Abnormal costs arise because of any
abnormal activity or event not part of routine business operations. E.g. costs
arising of floods, riots, accidents etc.
7. By Time: Historical Costs and Predetermined costs. Historical costs re costs
incurred in the past. Predetermined costs are computed in advance on basis of
factors affecting cost elements. Example: Standard Costs.
8. By Decision making Costs: These costs are used for managerial decision making.
Marginal Costs: Marginal cost is the change in the aggregate costs due to change
in the volume of output by one unit.
Differential Costs: This cost is the difference in total cost that will arise from the
selection of one alternative to the other.
Opportunity Costs: It is the value of benefit sacrificed in favor of an alternative
course of action.
Relevant Cost: The relevant cost is a cost which is relevant in various decisions of
management.
Replacement Cost: This cost is the cost at which existing items of material or
fixed assets can be replaced. Thus this is the cost of replacing existing assets at
present or at a future date.
Shutdown Cost:These costs are the costs which are incurred if the operations are
shut down and they will disappear if the operations are continued.
Capacity Cost: These costs are normally fixed costs. The cost incurred by a
company for providing production, administration and selling and distribution
capabilities in order to perform various functions.
Other Costs