Cost Accounting

Cost Accounting is a process of accounting for costs.

It embraces the accounting procedures relating to
recording of all income and expenditure and the
preparation of periodical statements and reports
with the object of ascertaining and controlling costs.
It is thus the formal mechanism by means of which
costs of products or services are ascertained and
controlled.
 Meaning of costing
By CIMA London, “ the techniques and
processes of ascertaining costs”

The proper allocation of expenditure

and involves the collection of costs
for every order, job, process, service
or unit”.
 Objectives of Cost Accounting
• Determining selling price

•Measuring and increasing efficiency

• Facilitating the preparation of financial and other

statements

•Providing basis for operating policy

• cost control and cost reduction.

Cost accunting vs. financial Accounting
Basis Financial Accounting Cost Accounting

Objectives To provide information to all To provide information to

management

Mode of Based on concepts and No policies followed

presentatio conventions
n
Recording Transactions are recorded in Transactions are recorded
subjective manner in objective manner

Analysing Reveals the business profit Reveals only product

profit profit

Periodicity Yearly reporting Reported as per the

of reporting requirement of the
management
Importance of Cost Accounting
• Helps in periods of depression & trade
competition
• Facilitates price fixation
• Helps in channelising production on right
lines
• Eliminates wastages
• Provides data for periodical P & L account
• Helps in inventory control
• Assists in increasing productivity
 Meaning of Cost
It is the price paid for something

Cost is the amount of expenditure

incurred or attributable to a given
thing, by CIMA London
 Cost Vs. Expense and
Loss
Expense is an expired cost resulting
from a productive usage of an asset.
 Cost Centre
According to CIMA London, “a location,
person or item of equipment(or group
of these) for which costs may be
ascertained and used for the purpose
of control.”
 Cost Unit
A unit of product or service in relation
to which costs are ascertained.
A cost unit goes up a step further by
breaking up the costs into smaller
sub-divisions, thereby helping in
ascertaining the costs of saleable
products or services
Elements to cost
• Material: Direct & indirect
• Labour : Direct & indirect
• Expenses : Direct & indirect
• Overheads : Direct & indirect
Elements of total cost
Prime cost
Factory cost
Office cost
Total Cost
Cost reduction and cost control
Cost control Cost Reduction
Aims at maintaining cost in It aims at reducing the cost
accordance with standard costs

It seeks to attain the lowest It brings profits by challenging

possible standard through research

It is a static function It is dynamic function

Emphasises on past and present Emphasises on present and future and

present

It is preventive function It is corrective function

Classification of costs
• Fixed, variable and semi variable
• Product cost and period cost
• Direct and indirect cost
• Relevant and irrelevant costs
• Shut-down costs and sunk costs
• Controllable and uncontrollable cost
• Avoidable and unavoidable costs
• Out of pocket costs
• Opportunity costs
• Traceable, untraceable or common costs
• Conversion costs
• Production, selling and office costs
PROBLEMS IN INSTALLATION OF
COSTING SYSTEM
• Lack of support from top management
• Resistance from existing staff
• Non cooperation at other levels
• Shortage of trained staff
• Heavy costs