Cost accounting and management is important for several reasons: 1) To ascertain accurate product costs for costing, pricing, and decision making. Costs are classified and allocated to products and processes. 2) To estimate costs for bidding on contracts or jobs. 3) To match costs to revenues for determining profits. Profits equal revenues minus cost of goods sold. 4) To identify areas for cost reduction and control costs through variances. This aids management and improves decision making. The key considerations for installing an effective cost accounting system include understanding the business, organization, production methods, management needs, and ensuring the system is simple, standardized, accurate, flexible, and has benefits exceeding costs. Cost centers

1. .Need/Importance/Objectives of cost accounting and cost management
1) Cost ascertainment-For ascertaining the cost of a product, process or operation
Costs are classified according to the purposes for which they are incurred and these are
allocated and apportioned over products processes or departments. Cost accounting lays down
the principles based on which expenses are analysed and related to the product produced
2) Basis of estimating-Used in the jobbing industry or in contract business where
quotations/tenders need to be submitted
3) Matching costs with revenue-The matching concept demands that costs that relate to the goods
sold be matched against revenue from such sales. Profit is actually Sales-COGS
4) Cost reduction-Achievement of real and permanent reduction in the unit cost of goods
manufactured or services rendered without impairing their suitability for the use intended or
diminution in the quality of product
5) Cost Control-This may be a temporary measure and must be understood as distinct from cost
reduction. Cost control may be at the cost quality.
6) Directs management attention to areas where corrective action is required
7) Identification of unprofitable activities
8) Basis for budgeting
9) Enables price fixation
10) Managerial decision making is aided
11) Enables variance analysis(standard costing)
12) Cost comparison-inter firm, between different time periods and between geographic locations
13) Identifies reasons for increase/decrease in profitability
14) Helps to find new and improved methods of production
15) Marginal costing aids in short term decision making

2. Installation of a costing system
The preliminary considerations governing the installation of a cost accounting system are
1) Nature of business-It should be suitable to the nature of business. The person designing the
system should be thoroughly acquainted /familiar with the technical aspects of the method of
production. The same system cannot be applicable to all types of manufacturing activity. The
system requirement may be different when there are a variety of products/processes etc
2) Nature of organization-Nature, size and structure of the organization needs to be studied
carefully
3) Methods and procedures-The procedures followed in the organization needs to be carefully
studied
4) Technical aspects of production to be fully understood by the cost accounting team
5) The system should be designed to suit the management policies and expectations
6) Simplicity-The system should be simple and should avoid ambiguity. It should not result in
output of unnecessary details
7) Co-operation of personnel A system becomes successful only with the involvement and co-
operation of its users
8) Standardisation of forms-Since costing involves considerable clerical work, the system should be
designed to accept inputs in a standardized form so that instructions are clear to all.
9) Accuracy of data
10) prompt reporting-Sytem should ensure reporting without delay to ensure timely action
11) Flexibility-Should be flexible to accommodate changing data requirements
12) Cost –benefit tradeoff-The system should result in a benefit which is substantially more that the
cost of installing and operating it

3. 13) The objective of the system should be clearly spelt out by the management
14) The data output/reports should be accurate, relevant, timely and effective
COST CENTRE
A large scale business may be divided into a number of departments such as production, marketing and
finance. These departments represent the basic functions of any business organization and each of
these functions consist of different activities. For the purpose of accumulating costs and charging the
same to cost units, these departments are further divided into smaller sections each known as a cost
centre
Eg-In an oil milling industry, production activity may be divided into crushing, refining and finishing so
that the cost of each activity can be ascertained
Cost centre may be technically defined as a location, person or item of equipment for which cost may be
ascertained.
Cost may be personal or impersonal-Personal cost centre refers to a person or group of persons and an
impersonal cost centre refers to a location of an item/equipment
A cost centre could also be a production cost centre or a service cost centre-A production cost centre is
a cost centre where raw material is handled for conversion. Eg-crushing refining etc given above
A service cost centre is a cost centre which serves as an ancillary unit to a production cost centre. Eg-
Powerhouse, plant maintenance centre
COST UNIT

4. It is a unit of product, service or time or a combination of these in relation to which costs may be
ascertained or expressed. These are usually the units of physical measurement. These are units in terms
of which costs can be expressed- eg cost per ton of steel, cost per cubic meter of gas, cost per passenger
kilometer(for transportation costs-this is a complex/combined unit)
RESPONSIBILITY CENTRE
It is defined as an activity centre of a business organization entrusted with a special task. Under modern
budgeting and control, financial executives tend to develop responsibility centres for the purpose of
control. Responsibility centres can be classified into cost centres, profit centres and investment centres
a) Cost Centre-As discussed above
b) Profit Centres-Centres which have the responsibility of generating and maximizing profits are
called profit centres
c) The centres which are concerned with earning an adequate return on investment are called
investment centres
COSTING METHODS AND TECHNIQUES
METHODS
Different industries follow different methods of costing because of the differences in their work.
The various methods are as follows:
1) Job Costing-In this case, the cost of each job is ascertained separately. It is suitable in cases
where work is undertaken on receiving a customers order eg-Printing press, motor
workshop
2) Batch costing-This is an extension of job costing. A batch may represent a set of orders and
may consist of the production of several similar units. A batch itself can be used as a cost
unit and cost may be represented as cost per batch. Cost per unit will therefore be the cost
of the batch divided by the no of units in the batch
3) Contract Costing-Here the cost of each contract is ascertained separately. It is suitable for
firms engaged in construction of buildings/roads/bridges etc

5. 4) Process costing-This method is necessitated where production consists of different
processes. The final output should include the relevant cost resulting from each process.
This is also called operation costing
5) Operating Costing-This is used mostly by concerns rendering services such as transport/
water supply etc
6) Multiple costing-Refers to a method of using two or more of the methods above
COSTING TECHNIQUES
1) Marginal Costing-It is defined as the ascertainment of marginal cost by differentiating
between fixed and variable cost-detailed discussion in the relevant module
2) Standard Costing and variance analysis-A technique where pre determined costs are
compared with actual. This is for cost control and corrective action.
3) Absorption costing-Where all costs-both fixed and variable are charged to the cost of
operations, products or processes
4) Uniform costing-This is defined as the use by several undertakings of the same costing
system ie the same methods principles and techniques. This enables comparison
5) Differential costing-This is defined as “the difference in total costs between alternatives
calculated to assist decision making”. This is a technique for cost ascertainment, analysis and
cost presentation to management to aid in decision making
6) Direct Costing- It is the technique of charging all direct costs to production and leaving the
indirect costs to be written off against profits when they arise
VARIOUS COST CONCEPTS AND TERMS
a) Cost object-This refers to anything for which a separate measurement of cost is required eg-a
product, a service, a customer
b) Direct costs-Are costs that are related to the cost object and which CAN be traced to the cost
object in an economically feasible way
c) Indirect Costs- Are costs that are related to the cost object BUT which CANNOT be traced to the
cost object in an economically feasible way
d) Pre determined cost- A cost which is computed in advance before production or operations start

6. e) Standard Cost- is a predetermined cost which is calculated from the managements “expected
standard of efficient operation”
f) Marginal Cost-The amount at any given volume of output by which aggregate costs are changed
if volume of output is increased or decreased by one unit
g) Cost of sales-The costs which are attributable to the sales made. This includes selling and
distribution overheads
h) Cost Centre
i) Cost Unit
j) Responsibility Centre
k) Profit Centre
l) Investment Centre
m) Explicit and implicit costs-Explicit costs are also known as out of pocket costs and refer to costs
which involve actual payment. Implicit costs are not actually paid but are only incurred eg-
interest lost when money is paid. Implicit costs are also called economic costs
n) Sunk costs/Historical costs- These are costs which have been incurred in the past. These are
irrelevant in decision making
o) Opportunity costs-This cost refers to the value of sacrifice made or benefit lost or opportunity
forgone in accepting an alternative course of action.
p) Cost allocation-Assignment of indirect costs to chosen cost objects
q) Cost absorption-It is defined as the process of absorbing all indirect costs allocated to or
apportioned over a particular cost centre or production department by the units produced.
INVENTORY/MATERIAL CONTROL (Discussed in class-Refer the internet/other books)
----Purchases - Purchase requisition, Purchase order-observe and understand the form and
contents of these
-----Stores/Issue control;-Goods received Note (GRN), Material Requisition Note (MRN)-Observe
and understand the form and contents
----Recording process-Stores ledger-stock records
Prepare a self learning note on Material Control-Need, objective and Methods

7. Techniques of inventory management
a) Economic Order Quantity
b) Fixation of Stock levels
c) ABC Analysis
d) Two Bin System
e) Perpetual Inventory System
f) Control Ratios
IMPORTANT QUESTIONS
1) Need /objectives/importance of cost management/cost accounting
2) Explain the various elements of cost with examples
3) Inventory management techniques
4) Installation of a costing system-Requirements

8. 5) Cost accounting methods
6) Material / Inventory control
7) Inventory valuation and pricing of issues under FIFO, LIFO and Weighted average cost basis