Introduction to Cost

Accounting
Unit - 1
 Basic Concepts

• As a Noun: The amount of expenditure incurred on or

attributable to a specified thing or activity
• As a Verb: To ascertain the cost of specified thing or
Cost activity
• As per ICWA: Measurement in monetary terms, of the
amount of resources used for the purpose of
production of goods or rendering services

• As per CIMA, London: It is the technique and process

Costing of ascertaining costs.

• Consist of principles and rules for determining costs.
 Basic Concepts
• Process of Accounting for Costs
• Begins with incurrence of cost and ends with control of
Cost
cost
Accounting
• Formal System of accounting for cost ascertainment
and cost control

• As per CIMA, London: It is the application of costing

and cost accounting principles, methods and
Cost techniques to the science, art and practice of cost
Accountancy control and the ascertainment of profitability
• Includes presentation of information derived for the
purpose of managerial decision making.
 Origin of Cost Accounting
Allocating Fixed Costs
became important for
managers for decision-
‘Fixed Costs’ increased making, pricing and
in comparison to the product development.
‘Variable Costs’ –
Started during the Became more
Industrial Revolution important for large
– To help the scale industries like
businessmen to keep a railroads, steel, etc..
track of their costs and
expenses
 Traditional Financial Accounting was not sufficient.
 Cost Accounting developed to overcome the limitations.
 Cost Accounting standards were formed to maintain uniformity.
 Cost Audit was developed to review the operations.
 Objectives of Cost Accounting

To Provide
To Ascertain
To Control Costs Information for
Costs
Decision-Making

To Determine To Ascertain
Selling Price Costing Profit
 Advantages of Cost Accounting

Helps in Cost
Helps in Helps in Decision-
Reduction and
Ascertainment and Making and Price
Measurement of
Control of Cost Fixation
Efficiency

Helps in Budget
Preparation and
Helps in Cost
Identification of
Comparison
Unprofitable
Activities
 Limitations of Cost Accounting

Unnecessary and Expensive as

involves installation Inapplicable to
duplication of requires many industries
work additional cost

May differ from

Results in failure
results shown by
in some
Financial
industries
Accounting
 Difference between Financial Accounting and Cost Accounting
Point Financial Accounting Cost Accounting
To provide information about To ascertain and control cost and to
Objective overall financial performance and provide information for decision-
financial position making.
Analysis of It shows detailed costs and profit for
Costs and It shows the profit/loss of the each product, process, job, contract,
Profits entire organization etc.
Emphasis Emphasis is on Reporting Emphasis is on Reporting
Responsibility Not helpful Effectively helps in fixation
Fixation
Focus Focus is on Historical Data Focus on present and future data
Reports Generate General Reports Generates Specialized Reports
Legal Compliance with Accounting Voluntary in nature – No fixed
Requirements Standards, Companies Act, Income format
Tax Act
 Difference between Financial Accounting and Cost Accounting

Point Financial Accounting Cost Accounting

Interested External Stakeholders Internal Management as well as

Parties External Stakeholders

Format may differ as per

Format Follows a uniform format requirement

Access Anybody can access Generally outsiders will not access

Monetary /
Non- Only monetary information is Monetary as well as non-monetary
Monetary recorded information is recorded
 Cost Center

For cost ascertainment, organization is divided into small parts or sections

Each section is treated as a cost center

As per 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.

It may be a location (department or sales area), an item or equipment (machine,

delivery van), a person (salesman, machine operator) or a group of these.
 Types of Cost Centers

Personal Cost Center

Impersonal Cost Center

Production Cost Center

Service Cost Center

 Cost Unit

Breakup of cost in smaller sub-divisions, helping in

ascertaining the cost of saleable products

As per CIMA, London, “A unit of product or

service, in relation to which costs are ascertained”

Generally adopted on the basis of convenience

and practice of the industry concerned.

Eg: Tonne, Kilogram, Litre, Nos., Dozen, Kilowatt,

Square Foot, Kilometer, etc...
 Assignment Questions:

Q.1: Define Cost and Cost Accounting. Explain

the objectives of Cost Accounting.

Q.2: Differentiate between Financial

Accounting and Cost Accounting

Q.3: Write Short Notes on Cost Centre and Cost

Unit.