COST

ACCOUNTING
UNIT1: INTRODUCTION TO COST
ACCOUNTING
 Cost Accounting: Meaning
◦ In simple words, cost accounting stands for accounting for costs.

◦ Cost Accounting involves:

 Recording of costs.

 Analysis of costs

 Preparation of cost statements

 Targeted to internal users.

◦ A specialised branch of accounting which involves collection, classification, accumulation, assignment and control of costs.

◦ It is concerned with the measurement and communication of cost information. It starts with the recording of all costs related to the
manufacturing process and ends with the presentation of cost report to the management.

◦ It is the science, art and practice of cost accountants.

◦ The National Institute of Accountants, USA has defined it as “ a systematic set of procedures for recording and reporting measurements
of cost of manufacturing goods and performing services, in the aggregate and in detail. It includes methods for recognising, classifying,
allocating, aggregating and reporting such costs and comparing them with standard costs”
Objectives of Cost Accounting

◦ Ascertainment of costs
◦ Estimation of costs
◦ Fixation of selling price
◦ Cost control
◦ Cost reduction
◦ Preparation of cost statements and Cost reporting
◦ Managerial Decision making
 Advantages of Cost Accounting

◦ It helps in ascertainment as well as estimation of costs

◦ It helps in identifying losses, inefficiencies and unprofitable activities.
◦ Cost control and reduction.
◦ Fixation of price.
◦ Cost comparison.
◦ Decision making.
◦ The introduction of effective cost accounting system prevents manipulation and fraud.
 Comparison: Cost Accounting vs. Financial Accounting
Basis of Cost Accounting Financial Accounting
differentiation
i) Applicability Applicable to manufacturing Applicable to all types of
concerns accounting entity
ii) Scope of It measures cost of each It measures the financial
measurement product line, department, performance of the entity as a
process etc. whole during a particular
period.
iii) Requirements Cost Accounts are prepared as Financial Accounts are
served per the requirement of prepared according to the
management. requirements of Companies
Act and Income tax act.
iv) Periodicity of Cost accountants may issue Financial reports (P/L Account,
reporting reports at any time and with balance sheet)are prepared
any degree of frequency, periodically, usually at the
depending upon end of an accounting period.
management's need for the
information.
Comparison: Cost Accounting vs. Financial Accounting
Basis of Cost Accounting Financial Accounting
differentiation
v) Party to be served Provides detailed cost information standard set of reports prepared for an
to the management. Internal users outside audience, which may include
investors, creditors, government, credit
rating agencies and regulatory agencies.
vi) Nature of analysis It is mainly of forward looking It is a post mortem analysis i.e.,
aspect i.e., concerned not concerned with historical records
only with historical records
but also with pre determined
figures.
vii) Valuation of stock Stock is valued at cost. Stock is valued at cost or market
price whichever is lower.
Cost
 Cost is the amount of expenditure incurred on, or attributable to a specific thing or activity. It is the resources
sacrificed measurable in terms of money.

Features of cost

 It is a payment which can be linked with a commodity or service

 It results into a sacrifice of resources(in monetary terms)

 It is expected to yield a benefit in return.

 Involves an outflow of resources

 Measured on the basis of historical or pre-determined standard.

Classification of cost

(A) Element-wise
 Material
 Labour
 Expenses
B) Direct and Indirect Cost
C)Function-wise classification
 Manufacturing cost
 Administration cost
 Selling and Distribution cost
 Research and Development cost
Classification of cost

D)Behaviour-wise classification
 Variable cost
 Fixed cost
 Semi-variable cost
E)According to normality
 Normal cost
 Abnormal cost

F) Controllability-oriented classification

• Controllable costs
• Uncontrollable costs
FIXED AND VARIABLE COST

COST IN TOTAL PER UNIT

VARIABLE Changes as activity level increases Remains constant as
activity level increases
FIXED Remains constant as activity level Changes as activity level
increases increases
Example
Cost Centre

o It is a location or person or item of an equipment or a group of these in relation to which costs are
ascertained and used for the purpose of cost control.
o CIMA, London defines a cost centre as “a production or service location, function, activity or item of
equipment whose cost may be attributed to cost units”.
◦ Also known as responsibility centres.
◦ Cost centres may be subdivided as: a) Personal cost centre and Impersonal cost centre ; b) Production
cost centre and service cost centres.
COST UNIT

◦ A cost unit is a unit of product or service or time for which cost are ascertained or expressed.

◦ It s also defined as a form of measurement of volume of product or service.

◦ Examples: for a dress manufacturing business – cost per dress; textile industry – cost per meter ;

electricity company – cost per kilowatt hour.

Installation of a costing system
Basic considerations to be made or factors to be considered

◦ Nature of the product and organisation

◦ Workability

◦ Economy of cost

◦ Manufacturing Process

◦ Reporting ability

◦ Documents involved

◦ Scope of reconciliation

◦ Accuracy of Cost information

Installation of a costing system
The following procedures or steps are to be followed for installation of a cost accounting system:

◦ Study of the product/products

◦ Nature of the business and the organizational structure
◦ Purpose and goal of introducing the costing system
◦ Notification to concerned persons
◦ Planning
◦ Updation of knowledge
◦ Setting standards
◦ Scope of reconciliation
◦ Other aspects
◦ Workability and flexibility
Role of a cost accountant

◦ Collecting and validating data to determine both fixed and variable costs of business activity.
◦ Analysing changes in product design, raw materials, manufacturing methods or services provided, to
determine effects on cost
◦ Analysing actual manufacturing costs and preparing periodic reports comparing standard costs to actual
production costs.
◦ Recording cost information for use in controlling expenditures
◦ Recommending cost-saving options
◦ Performing ongoing reconciliations of various cost reports against software systems to ensure accuracy
◦ Providing management with reports specifying and comparing factors affecting prices and profitability
of products or services Initiating the month-end closing and reporting processes, which they in turn
submit to management.
◦ Performing physical inventory inspections and monitoring inventory management information systems
 LIST OF COST ACCOUNTING STANDARDS (CAS)
CAS 1 (Revised 2015) Classification of Cost
CAS 2 (Revised 2015) Capacity Determination CAS 14 Pollution Control Cost

Production and Operation Selling and Distribution

CAS 3 (Revised 2015) CAS 15
Overheads Overheads
CAS 3 (Revised 2011)
Overheads Depreciation and
CAS 16
Amortisation
Cost of Production for Captive
CAS 4 Interest and Financing
Consumption CAS 17
Charges
Average (Equalized) Cost of Research and Development
CAS 5 CAS 18
Transportation Costs
CAS 6 Material Cost CAS 19 Joint Costs
CAS 7 Employee Cost
Royalty and Technical Know-
CAS 20
CAS 8 Cost of Utilities How Fee

CAS 9 Packing Material Cost CAS 21 Quality Control

CAS 10 Direct Expenses CAS 22 Manufacturing Cost

CAS 23 Overburden Removal Cost

CAS 11 Administrative Overheads

CAS 12 Repairs and Maintenance Cost Treatment of Revenue in

CAS 24
Cost Statements
CAS 13 Cost of Service Cost Centre
Valuation of Closing Stock of Finished Goods

The methods applied to value closing stock of finished goods are:

◦ FIFO Method or First in First Out

◦ LIFO Method or Last in First Out

◦ Average Methods

• Simple Average Rate

• Weighted Average Rate

Note:
◦ Please refer to the word files uploaded in Google Classroom for Numerical Questions on Cost
Sheet.