Module I- (Introduction to costing)

Cost
Cost refers to the total expense incurred on the production and sale
of articles.
Costing
Costing simply refers to the techniques and process of ascertaining
costs.
Cost Accounting
Cost accounting maybe defined as a formal accounting system set up
for recording, analysing and estimating costs.
General principles of cost accounting
 A cost should be related to its causes.
 A cost should be charged only after it has been incurred.
 The convention of prudence should be ignored.
 Abnormal costs should be excluded from cost accounts.
 Past costs not to be charged to future period.
 Principles of double entry should be applied wherever necessary.
Objectives/ Purpose of cost accounting
 To ascertain the cost.
 To control cost.
 To determine selling price.
 To measure efficiency.
 To control and reduce wastage.
 To provide cost data for fixation of selling price.
 To ascertain profitability of each product.
 To advise management on future expansion policies.
 To provide a perpetual inventory of stores and other materials.
Functions of cost accounting
 It helps ascertainment of accurate cost of each job, product and
process.
 It helps in management in decision making.
 It helps in management in formulation of policies.
 It helps in optimum utilization of resources.
 It helps in fixing prices of goods or services.
 It helps in cost control.
 It helps in inter firm and intra firm comparison.
 It helps in implementation of incentive wage system.
 To provides cost data to government and trade union.
Scope of cost accounting
 Cost classification
 Cost recording
 Cost allocation
 Cost ascertainment
 Cost comparison
 Cost control
 Cost audit
 Cost reporting
Difference between Financial accounting and Cost accounting
Financial Accounting Cost Accounting
The purpose of financial The purpose of cost accounting
accounting is to keep complete is reducing and controlling cost.
record of the financial
transactions.
These are accounts of whole It is only a part of whole
business. accounts.
Valuation of stock at cost or Valuation of stock at cost price.
market price.
Financial accounting are Cost accounting are concerned
concerned with external with internal transactions.
transactions.
Only historical costs are Both historical and
recorded. predetermined costs are
recorded.
It discloses net profit and loss of It discloses profit and loss of
the business. each product, job or service.
Forecasting is not at all possible Forecasting is possible through
budgeting techniques.
It emphasises the measurement It aims at ascertainment of cost.
of profitability.
It records only actual cost. It records both actual and
estimated cost.
It does not guide the It provides adequate data for
formulation of pricing policy. formulating pricing policy.
These are guided by GAAP. No specific guidance.
Only monetary information is Non-monetary informations like
provided. physical unit is also used.
It does not guide the It provide adequate data for
formulation of pricing policies. pricing policies.
It report operating results and It gives information to
financial position at the end of management as and when
the accounting year. desired.
Difference between Cost accounting and Management accounting
Cost Accounting Management Accounting
It is used for cost control and It is used for managerial decision
cost reduction. making.
The scope of cost accounting is The scope of management
narrow. accounting is broader.
Statutory audit is mandatory for No statutory audit requirement.
big business.
It is used for management, It is only for management.
shareholders and vendors.
It considers only quantitative It considers both quantitative
data. and qualitative data.
Only cost accounting principles Principles of cost accounting and
are used. financial accounting are used.
Cost accounting is restricted to It uses financial as well as cost
cost related data. accounting data.
It deals with both present and It deals with future transactions.
future transactions.
Importance / Merits/ Advantages of cost accounting
 It helps in making estimates.
 It eliminates wastage.
 It makes comparison possible.
 It helps in inventory control.
 It provides data for periodical profit and loss account.
 It helps in determining efficiency.
 It provides continuous employment and high remuneration to
employees.
Limitations/ Demerits/ Disadvantages of cost accounting
 It lacks uniform procedure.
 It is very costly.
 It cannot affordable to small business.
 Modern methods of costing is inapplicable to many industries.
 It is based on certain conventions and assumptions.
 Confusion regarding non-cost items.
Criticism or objections against cost accounting
 It is expensive
 It is unnecessary
 It is not suitable for all types of industries
 It is a failure as regards bringing desired results.
 It is mechanical
 It is stereotyped
Methods of costing (PY ESSAY)
 Job Costing
It refers to a system of costing in which cost are ascertained in terms
of specific jobs or orders which are not comparable with each other.
 Batch costing
It is a special type of job costing. It is used in factories where articles
are manufactured in definite batches.
 Contract costing
It is a method of costing mainly used in construction type of
industries such as buildings, roads, bridges, dams etc.
 Process costing
It is a method of costing used mainly in manufacturing where units
are continuously mass produced through one or more processes.
 Unit / Single costing
The unit cost is the price incurred by a company to produce, store
and sell one unit of a particular product.
 Operating costing
It is the mix of job costing and process costing. This method is
applicable where services are rented rather than goods produced.
 Operation costing
It refers to the determination of cost operations in place of
processes. It is used in industries like toy making, leather etc.
 Multiple costing
It is a method of costing used in industries where large number of
components are separately produced and assembled into a final
products.
Types/ Techniques of costing
 Marginal costing
Marginal costing means the additional cost to produce each
additional unit.
 Uniform costing
It is a system of costing under which several undertakings use the
same cost principles and practices.
 Direct costing
It is a method where only the variable manufacturing costs are
assigned to inventory and cost of goods sold.
 Absorption costing
This is the technique of costing where in the total cost is charged to
cost unit.
 Standard costing
It is defined as a benchmark measurement of resource usage, set in
defined conditions.
 Budgetary costing
A process of preparation, implementation and operation of budget is
called budgeting.
 Historical costing
It is the ascertainment of costs after they have been incurred. It aims
at ascertaining cost actually incurred on work done in the past.
 Departmental costing
When costs are ascertained by department, the method is called
departmental costing.
Cost unit
The unit cost is the price incurred by a company to produce, store
and sell one unit of a particular product.
Cost Centre
It is the smallest organisational sub unit for which separate cost
collection is attempted.
Profit centre
It is a business unit or segment that generates revenues and incurs
cost.
Difference between profit centre and cost centre
Profit Centre Cost Centre
These are autonomous. These are not autonomous.
It is created because of It is created for accounting
decentralisation of operations. convenience of cost and their
control.
Profit centres has a profit target. Cost centres does not have
target cost.
Cost Classification
 Direct Cost
Direct costs are those costs which are incurred for a particular
product which can be identified with a particular cost centre to cost
unit.
 Indirect cost
Indirect costs are those costs which are incurred for the benefit of a
number of cost centre and cannot be identified with a particular cost
centre.
 Fixed Cost
Fixed costs are predetermined costs that remains same throughout a
specific period.
 Variable cost
It is a cost that changes the quantity of goods and services that
business produces changes.
 Semi variable cost
These are costs which are partly fixed and partly variable.
 Product cost
These are those costs which are traceable to the product.
 Period cost
These are those costs which are incurred for a period and treated as
expense.
Difference between product cost and period cost
Product cost Period cost
It is charged to product or It is not charged to product or
services. services.
It is a variable cost. It is a fixed cost.
It is a manufacturing cost. It is non-manufacturing cost.
Sunk cost
Sunk cost means cost which was incurred in the past and not
relevant for decision making.
Opportunity cost
It is the value of a benefits scarified in favour of an alternative course
of action.
Elements of costing
1. Direct material
It refers to the raw materials that are directly used in the production
process of goods and services of the company.
2. Indirect material
Indirect material are those material that are used in the production
process but that are not directly traceable to the product.
Eg: Glue, oil, tape, cleaning supplies, etc.
3. Direct labour
It is the amount of effort exerted by employees to convert raw
materials into finished goods.
4. Direct expenses
It is the expense that is related to the purchase of product.
5. Overhead
It is the aggregate of the cost of indirect material, indirect labour and
such other expenses.
Factors considered before installation of costing system (PY ESSAY)
 History of business unit
 Nature of business unit
 Object of business unit
 Range of the product
 Area of control to be exercised
 Responsibility accounting
 Organizational factors
 Technical considerations
 Selling and distribution methods
 Uniformity
 Practical considerations
 Reporting
 Types and methods of costing
 Cost records and cost books

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