Cost accounting

Cost Accounting is an art or process of recording,
analyzing and classifying of expenditure for the
purpose of product costing or service costing,
ascertainment of profitability, operational planning
and cost control. It is a forward looking approach
which is related to the recording, analyzing and
classifying of expenditure with the objective of
ascertaining the total and per unit cost of product or
service.

“Cost accounting is the process of accounting for
cost from the point at which expenditure is
incurred or committed to the establishment of its
ultimate relationship with cost centers and cost
units. In its widest usage, it embraces the
preparation of statistical data, the application of
cost control methods and ascertainment of the
profitability of activities carried out or planned.”

“Cost accounting is a system of
recording in accounts the materials
used and labor employed in the
manufacture of certain commodity or on
a particular job.”

“Cost Accounting is defined as the body of concepts,
methods and procedures used to measure, analyze or
estimate the costs, profitability and performance of
individual products, departments and other segments
of a company’s operations, for either internal or
external use or both and to report on these questions
to the interested parties.”

“Cost Accounting is a method of recording accurately
the facts of manufacture or other undertakings in
such a way that necessary information thereon
maybe available in the form required at the earliest
possible moment.”

NATURE OF
COST
ACCOUNTING
BRANCH OF
ACCOUNTING
BRANCH OF
KNOWLEDGE
COST
ACOUNTING
IS SCIENCE
AND AN ART
COST
ACCOUNTING
IS A
PROFESSION
BASED ON
DOUBLE
ENTRY
SYSTEM
PROCESS IN
NATURE
INTERNAL
ACCOUNTING
TOOLS AND
TECHNIQUES

Cost Accounting is a branch of accounting
that deals specifically with the
determination of costs of the products and
services being manufactured. It deals with
those techniques, tools, processes and
methods which are associated with the
determination of costs, their classification
and analysis. It is an accounting which is
done internally to the organization and is
optional.

It is an important branch of knowledge and emerges as a
discipline in itself. It is an organize body of knowledge
which has its own tools and techniques like
 Job costing
 Process costing
 Standard costing
 Marginal costing
 Variance analysis
 Unit costing
 Batch costing
 Activity based costing
 Budgetary control
 Contract costing etc

Cost accounting is both science and an art but
not a perfect science.
It is science as it is a body of systematic
knowledge relating to not only accounting but
also to a wide variety of subjects such as law,
office practices, data processing, production
and material control etc.
It is an art as it involves the use of the skills
and experience of cost accountant in
collection, classification and analysis of the
costs of the products.

Cost accounting is not a pure profession by
nature but it is emerging as a profession.
The set up of various specialized
institutions like
Institute of Cost and Management
Accountants in UK
Institute of Cost and Work Accountants in
India
is a way long to make cost accounting as a
profession.

Cost accounting is a process in nature. It is a
process that involves the following steps:
 Identification of costs
 Recording of costs
 Classification of costs
 Analyzing the costs
 Interpreting the results
 Communicating the results to the management.
It is a forward looking approach that aims at
improving the efficiency of the manufacturing
activities.

Cost accounting has its own tools and
techniques of standard costing and
variance analysis, contract costing, process
costing, job costing, unit costing, batch
costing, marginal costing etc. cost
accounting make use of such techniques in
preparing the accounting records with full
accuracy and also fix the standards of
performance for future.

COST
ASCERTAINMENT
COST RECORDING
COST CONTROL

The sphere of cost accounting comprises cost ascertainment firstly. Cost
ascertainment means determining the cost incurred in producing any product.
The cost ascertainment includes:
Collection of expenses
Analysis of expenses
Measurement of production
The cost may be ascertained by following ways:
Activity Based Costing
Unit costing
Job Costing
Batch Costing.
Contract Costing
Process Costing
Operation Costing
Composite Costing
Departmental Costing

The scope of cost accounting also includes the
recording of the costs. It is the process by which the
costs regarding the manufacturing activities are being
recorded in the business accounting records. It is a
formal mechanism and involves the specialized skills
and knowledge of the cost and work accountants.
From recording point of view, the costing is of various
types:
Historical Costing
Post Costing
Continuous Costing

Cost control is the guidance and regulation of the costs by the administration
and management authorities. It guides the organization to achieve the target
of the undertaking for a given period. Cost control involves the following
steps:
Setting up the targets for expenses and production performance
Measurement of the actual performance
Comparison of the actual performance with the standard performance
Finding out deviations, if any
Taking corrective actions to remove all the deviations.
Cost control is done by following the various techniques:
Marginal Costing
Budgetary Control
Standard Costing
Variance Analysis

LACK OF PROVISION FOR MATERIAL CONTROL
NO DETAILED INFORMATION ABOUT LABOR COST
IRRELEVANCE OF CLASSIFICATION OF ACCOUNTS IN GENERAL MANNER
IMPROPER CLASSIFICATION OF COSTS
CANNOT ASCERTAIN TRUE COST OF PRODUCTION
LACK OF SYSTEM OF STANDARDS
NO RECORDS FOR WASTAGES
LACK OF ASSISTANCE IN COST CONTROL
NO ASSISTANCE IN DECISION MAKING OR PLANNING

The traditional accounting provides the amount of opening
stock and closing stock of materials and the cost of the
materials consumed by preparing manufacturing and
trading account. But it fails to provide the information
about
How much units are issued to various departments?
What is the value of raw materials used in the production
process?
How much cost has incurred in each process individually?
All these questions can be answered by preparing the cost
accounting records.

Labor is an integral part of the business. The success of the
business depends highly upon the efficiency and inefficiency of
the labor. Financial accounting records the total amount of
wages or salaries provided to the labor and nothing more than
that in the accounting records. It fails to provide the following
information:
How many workers are employed in the organization?
How many workers are efficient or inefficient?
How many workers are employed on various jobs, processes
etc.?
What are the varied rates of wages and salaries paid to
various categories of labor?
What is the number of working hours of the labor?
All this detailed can be getting from the cost accounting. This

The financial accounting classifies the accounts into
three parts on traditional basis: Real accounts,
personal accounts and nominal accounts. And on
modern basis, the accounts are classified into five
categories such as asset account, capital account,
liability account, expense account and income account.
This classification is of no use in determining the cost
unit-wise, job-wise, process-wise, batch-wise. Thus the
need for cost accounting emerges.

There is no proper classification of costs in the
traditional accounting. There was no record of direct
cost, indirect cost or overheads, material cost, labor
cost etc. the information regarding these costs can be
made available to the management by preparing the
cost accounts. This makes the task of cost control
easier. Thus, it was necessary to emerge cost
accounting as separate branch.

The true cost of production can be ascertained by
taking into consideration the cost of raw materials
consumed, cost of labor, cost of normal or abnormal
loss, cost of various operations, and cost of each
process. However, the financial accounting records cost
of materials consumed which does not provide the
clear view of the each element of cost. This can only be
ascertained by following the cost accounting.

To accomplish a goal, the standards should be set in
advance. In accounting, the standards are set
regarding the overall performance of the business
concern. No target is set regarding
How many units are to be produced?
What will be estimated hours of working?
The standard cost involved in each task?
Only the cost accounting facilitates the setting of
targets for such issues and analyzing the deviations
and then taking steps to correct them.

Cost accounting is needed to take into account the
records regarding the wastage of materials, man-
hours, and machine-hours taking place during the
course of production. These wastages are not recorded
and communicated by preparing the financial accounts
like trading account, profit and loss account and
balance sheet.

Financial accounting has no system of cost control. It
records the expenses when they have already been
incurred. So it was just a post-mortem analysis of the
records. There is no system to fix the responsibility for
not achieving the set standards. So cost accounting is
needed to provide a framework for cost control. This is
facilitated by the cost accounting through the use of its
tools and techniques of marginal costing, breakeven
analysis, standard costing and variance analysis and
budgetary control etc.

Financial accounting system does not provide any
information or guidance to take the decisions regarding
the following issues:
Evaluation of profitability of alternative methods of
production.
Open or shut down decisions.
Continue or discontinue any product line or product
category.
Manufacture or buy decision.
Determination of break-even point and margin of safety
etc.

ASCERTAINMENT OF COST
DISCLOSURE OF PROFITABLE AND UNPROFITABLE ACTIVITIES
HELPS IN FIXATION OF SELLING PRICE
CALCULATION OF TENDER OR QUOTATION PRICE
DISCLOSES THE COMPONENTS OF COSTS
COST COMPARISON
HELPS IN COST CONTROL
HELPFUL IN PLANNING AND DECISION MAKING
CHECK ON THE ACCURACY OF FINANCIAL ACCOUNTS

The accounting records prepared on the basis of cost
accountancy discloses the cost incurred of each job,
process or operation. It provides the data to make a
decision regarding the profitable and unprofitable
activities of the concern. This information provides a
base to make a decision regarding which activity is to
be contracted or eliminated and which activity is to be
expanded.

Cost accounting provides all the details regarding the
actual cost incurred in the production of the
commodity. It provides the businessman with the
sound basis for fixing the selling price of the
commodity. This protects the businessman from taking
the wrong decision of charging fewer prices and
incurring losses.

Tenders or quotations are made to provide the rate
which will be charged to supply the manufactured
goods in future times. The cost data provides a useful
base to set the tender price. If the tenders are based on
the actual cost data, they are bound to be competitive
and sure to be accepted by the prospective customer.

To manufacture a product, the cost is incurred on
material, labor and overheads. Cost accounting
records
Wage rate payable to efficient or inefficient employees
Material ordering costs
Material carrying costs
Overtime cost, etc
All this minute information assist the manufacturer to
ascertain the importance of each element of cost and

The accounting records of cost of one year can be
compared with the records of another year. The cost
accounting system provides the reliable information to
compare the costs of different periods, for different
volumes of output, in different departments or
processes and in different establishments.

The various cost records maintained under the cost
accounting system provide valuable information for
the purpose of future planning and for decision
making. The costing records assist the management in
making the following decisions:
Manufacture or buy decision.
Selection of the profitable product mix
Operate or shut down decisions
Selection of profitable method of production
Fixation of the selling price.

NOT AN EXACT SCIENCE
NO UNIFORM PROCEDURES AND METHODS
CONCEPTUAL DIVERSITY
EXPENSIVE
LACK OF DOUBLE ENTRY SYSTEM
NOT AN INDEPENDENT BRANCH
DOES NOT DEPICT THE FINANCIAL POSITION OF CONCERN

Cost accounting is not an exact science.
Although it has its own body of knowledge,
principles, tools and techniques, yet it is not
as rigid as other sciences like physics,
chemistry, biology etc. The cost accounting
has emerged due to the limitations of financial
accounting. The principles and theories
developed in the light of convention and basic
principles are not static but changing with the
passage of time. This makes the cost
accounting an inexact science.

There are numerous tools and techniques
of the cost accounting. Various
organizations employ various techniques
and the results are different. This proves to
a serious limitation of cost accounting as
this makes the results incomparable.

There are large number of conventions and flexible
factors such as
Classification of cost into its elements.
Issue materials on average or standard price.
Apportionment of overheads expenses.
Arbitrary allocation of joint costs.
Division of overhead into fixed and variable costs.
Division of cost into normal and abnormal cost.
Division of costs into controllable and uncontrollable
costs.
Adoption of marginal or standard costs.
All this make the calculation of actual cost very difficult.
It proves as the serious limitation of cost accounting.

The maintenance of cost accounting
records is optional. There is no legal
obligation to prepare the cost accounts. At
the same time, for the preparation of cost
accounting records, the cost and work
accountants are required which proves to a
costly affair for the business. So, the cost
accounting system can be adopted or
installed in large business organizations
only.

Cost accounting is not an independent
branch. It depends largely upon the
financial accounting for all the information
and data. Also it takes the help of
management accounting tools and
techniques to provide the useful
information to serve the interests of the
management. This makes the cost
accounting dependent which proves as its
limitation.

Cost accounting is associated with cost
ascertainment, cost recording and cost
control. It provides no information
regarding the liquidity, solvency and
profitability position of the concern. This
makes it an incomplete accounting.

Cost accounting

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