Introduction to Cost Accounting Study Material

List of Topic discussed you can learn in Introduction of Cost Accounting

 Terminology of cost Accounting
 Meaning of Cost unit and Cost Object
 Distinction between Cost Accounting and Financial Accounting
 Distinction between Cost Accounting and Management Accounting
 Need for Cost Accounting System
 Essentials Good Cost Accounting System
 Practical Difficulties in Installation of Costing System
 Categories of Cost Centers
 Types of Costing System
Short note of Introduction to Cost Accounting
It is imperative for business concerns engaged in the provision of various services and
production of goods to continuously strive to reduce costs and enhance the quality of their goods
or services so that the discerning customers can receive better intrinsic value for money. Since
competition, either domestics or global, provides customers with a much wider choice that under
condition of monopoly/semi-monopoly, only those entities which enhance customer satisfaction
and afford better value to customer can hope to hold on to or increase their market share. The
emphasis of industry in general has very rightly turned to reduction in cost while improving
internal efficiencies and product quality. This focus has become essential in today’s globally
competitive business environment, and particularly in the context of emerging economies, where
greater market access is a direct effect of the cost factor. Real cost reduction holds the key to
transforming indigenous industry into a global supply hub for its industrial production and
services. The industry should adopt strategies to effectively include in cost reduction while at the
same time maintaining the level of excellence in the production and services. There has been a
misconception for quite some time that quality and cost or minimize the cost for a given quality.
This trade –off itself will have to be sensitized from situation to situation. Strategic cost
management has gained utmost importance in view of spiraling costs of inputs that go into
manufacturing. This burden of rising costs coupled with the effect of reducing selling prices due
to better technology, cut- throat competition etc. are squeezing sales volumes and or profit
margins. In the current scenario it becomes difficult in the industry to sustain and survive unless
the cost are correctly accounted for, controlled and reduced so as to sustain and remain in the
industry. In time of trade depression, the costing information will help the management to know
the areas where economies may be sought, wastage to be eliminated and efficiency to be
increased. The cost accounting facilitates distinction of costs into fixed costs and variable costs,
which can be used to determine the prices in period of trade depression, by selling the product
even at price below the total cost. In period of severe competition, the costing information
provides sufficient ground in location of inefficiencies, wastage etc. to exercise cost control and
cost reduction programs. This will help in reduction of selling prices to meet trade competition.
Simultaneously it helps in survival and growth of the concern even in situations of unfavorable
economic conditions.

Terminology of Cost Accounting

1. Cost

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Cost may be defined as (1) the amount of expenditure (actual or notional) incurred on or
attributable to a given thing; or (2) to ascertain the of a given thing. Cost represents the resources
that have been or must be sacrificed to attain a particular object. Sacrifice may be direct or
indirect. In other words, cost is the amount of expenditure, actual or notional, incurred on or
attributable to a given product or services. cost is the amount of resources used for something,
which must be able to be measured in terms of money.

2. Costing

Costing may be defined as ‘the techniques and process of ascertaining costs. Costing involves is
classification, recording, allocation, appropriation of expenses incurred to facilitate the
determination of cost of the product or service;

Weldon defines ‘costing is the classifying, recording and appropriate allocation of expenditure
for the determination of cost of products or services and for the presentation of suitably arranged
data for purposes of control and guidance of management. It includes the ascertainment of every
order, job, contract, process, service units as may be appropriate. it deals with the cost the cost of
production, selling and distribution.

3. Cost Accounting

Chartered institute of management accountants, London (CIMA) defines cost accounting as ‘the
establishment of budget, standard costs and actual costs of operations, processes, activities or
product; and the analysis of variances, profitability or the social use of funds’’.

Cost accounting primarily deals with collection analysis of relevant cost data for interpretation
and presentation for various problems of management. cost accounting accounts for the costs of
a product, a service or an operation. It is concerned with actual costs incurred and the estimation
of future costs.

4. Cost Accountancy

CIMA defines cost accountancy as ‘the application of costing and cost accounting principles,
methods and techniques to the science, art and practice of cost control and the ascertainment of
profitability as well as presentation of information for the purpose of managerial decision
making. Cost accounting is the application of accounting and costing principles, methods and
techniques in the ascertainment of costs and the analysis of savings and or excess as compared
with previous experience or with standards.

5. Cost Unit

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CIMA defines cost unit as ‘a quantitative unit of product or service in relation to which costs are
ascertained’. A cost unit is a unit of product or unit of service to which costs are ascertained by
means of allocation, apportionment and absorption. It is a unit of quantity of product, service or
time or combination of these in relation to which costs are expressed or ascertained. For
example, specific job, contract, unit of product like fabrication job, road construction contract, an
automobile truck, a table, 1000 bricks, etc. the relation between cost centre and cost unit is that
the costs of a function or activity are classified to cost centre. The cost unit which pass through
the cost centre, the direct and indirect costs of the cost centre are charged to the units of
production by means of an absorption rate. The unit of output in relation to which cost incurred
by a cost centre is expressed is called ‘cost unit’. It is a useful measurement of costs for
comparative purposes. Cost unit can be anything for which it is possible to ascertain the cost.
The cost unit selected in each situation will depend on a number of factors including the purpose
of cost ascertainment exercise and the amount of information available. Cost units can be
developed for all kinds of organisations, whether manufacturing, commercial or public utility
services. Some of the examples of cost unit are given below:
Industry/Product /Activity                                                  Cost Unit

Brick making                                                                         – 1000 bricks

Automobile                                                                            – Automobile unit manufactured

Cement                                                                                  – Tonne of cement

Coal                                                                                       – Tonne of coal

Electricity                                                                               – kilowatt-hour(kwh.)

Professional service                                                               – chargeable hour

Education                                                                               – enrolled student

Spinning                                                                                – kg. of yarn spun

Textiles                                                                                  – metre of cloth produced

Oil refining                                                                            – per tonne

Passenger transport                                                                – passenger-kilometer

Cargo transport                                                                      – tonne-kilometer

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 Toy making                                                                           – per sip

Ship building                                                                         – per ship

Gas                                                                                        – cubic feet or cubic metre

Mines                                                                                     – tonne of mineral extracted

Hospital                                                                                 – patient day

Sugar                                                                                     -tonne of sugar manufactured

Credit control                                                                         – account maintained

Selling                                                                                    – customer call

In case of service organisation composite cost unit is used such as tonne-kilometre ,  kilowatt-
hour , patient day etc. to be more  meaningful .

BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of
Cost
Cost Object

Colin Dury defined cost object as ‘any activity for which a separate measurement of costs is
desires’. Sometimes the uses of accounting information are interested in knowing cost of
something , which is called as ‘cost object;  For example , ascertainment of cost of a particular
branded product, particular function in production process, particular area of sales, servicing a
particular customer, operating a particular account, maintaining a particular item of stoke in
stories, manufacturing a particular items of product etc. Cost object requires all costs relating to
it to be traced and accumulated.

Objective of Cost Accounting 

The important objective of cost accounting

 To ascertain the cost per unit of production.

 To help in determining the selling price.
 To help in cost control and cost reduction.
 To ascertain the cost and profitability of each division, unit, activity, centre etc.
 To assist the managements in decision making.
 To provide a basis for operating policies.

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 To inform about inefficiency and carelessness.
 To inform the real situation of production activity.
 To provide the principles and procedures to be followed in costing system.
 To provide basis for comparative analysis through data collection.
 To facilitate cost estimation.

Accounting Distinguishing Features of Financial Accounting and Cost Accounting are Given
below:

Cost Accounting
1. It is an internal reporting system for an organization’s own management for decision
making.
2. It is more concerns with short – term planning and its reporting period is much lesser
than financial accounting.
3. It not only deals with historic data but also futuristic in approach.
4. Cost accounting system cannot be installed without proper financial accounting
system.
5. In cost accounting, the major emphasis on functions, activities, products, processes
and on internal planning and control and information needs of the organization.
6. Each organization can develop a costing system best suited to its individual needs.
7. It primarily emphasizes on cost and it deals with collection, analysis, relevance,
interpretation and presentation for managerial decision making on various business problem.
It is concerned more with the ascertainment, allocation, distribution and accounting aspects
of costs.
8. It uses with both monetary , as well as non-monetary (quantitative) information.
9. It provides a detailed system of cost control with the help of standards and budgets.
10. Items of cost are analysed, classified in order to ascertain the cost per unit of product
or services.
Financial Accounting
1. It is more attached with reporting the results and position of business to persons and
authorities other than management like government, creditor, investor, owner etc.
2. The periodicity of reporting in financial accounting is much wider.
3. The financial accounting data is historical in nature.
4. Financial accounting system can be installed without proper cost accounting system.
5. In financial accounting, the major emphasis is in cost classification based on type of
transaction e.g. salaries, repairs, insurance, stories etc.
6. It classifies an entity’s transactions in money terms, in accordance with established
concept, principles, accounting standards and legal requirements.
7. It aims to present ‘true and fair view ‘ of overall results of the transactions, and events
for the enterprise as a whole. It does note trace the path of the event within the enterprise.

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 The financial statements like profit and loss account, balance sheet and flow statements
reveal the overall performance and position of the enterprise.
8. Monetary information is only used in financial accounting.
9. It emphasizes only on recording of transactions and presentation of data in the form
of financial statements. It does not give importance to control aspect.
10. The items of cost are expressed in totals.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of
Cost Accounting and Management Accounting
Cost Accounting and Management Accounting

The scope of management accounting is broader than the scope of cost accounting. In cost
accounting, primary emphasis is on cost and it deals with collection, analysis, relevance,
interpretation and presentation for various problems of management.  Management accounting
utilizes the principles and practices of financial accounting and cost accounting in addition to
other modern management techniques for efficient operation of a company. The main thrust in
management accounting is towards determining policy and formulating plans to achieve desired
objective of management. Management accounting makes corporate planning and strategy
effective and meaningful. Both cost accounting and management accounting are internal to the
organization. Both have the same objectives of assisting management in its functions of
planning, decision making, controlling and techniques like budgetary control, standard costing,
marginal costing. There is a good deal of overlapping in the functions of cost accounting and
management accounting. However, the two systems can be differentiated on the following
grounds:

Cost Accounting
1. It is concerned more with the ascertainment, allocation, distribution and accounting
aspects of goods.
2. The cost accounting data generally serves as a base to which the tools and techniques
of management accounting can be applied to make it more purposeful and management
oriented.
3. Its scope of cost accounting is narrow than management accounting. A cost
accountant can be helpful in collecting costing data for management accountant.
4. The primary emphasis of cost accounting is to deal with collection, analysis,
relevance, interpretation and presentation for various problems of management
5. In organizational set – up, cost accountant is placed at a lower level of hierarchy.
6. It does not include financial accounting and has nothing to do with tax accounting.
7. It is more concerned with short – term planning.
8. It is concerned merely with assisting in management function and performance of
management.
9. It is mostly historical in its approach and it projects the past.
10. Cost and accounting system can be installed without management accounting.

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11. It is concerned with money as a measure of economic performance.
12. It is basically concerned with collection, classification and analysis of cost data.
13. Cost accounting system is generally kept voluntary, but at present is has been
obligatory to keep cost accounting records in certain selected industries.

Management Accounting
1. It is concerned more with impact and effect aspects of costs.
2. The management accounting data is derived, both from the cost accounts and
financial accounts.
3. The scope of management accounting is broader than cost accounting. The
management accountant places the data in a wider perspective than the cost accountant. The
management accountant is supposed to have a clear idea regarding the items and type of
costs required to analyse and decide specific business problems and effect of such costs on
alternative solution.
4. The main thrust in management accounting is towards determining policy and
formulating plans to achieve deserved objective of management. Management accounting
makes corporate planning and strategy effective and meaningful.
5. Management accounting is generally placed at a higher level of hierarchy than the
cost accountant.
6. It includes both financial accounting as well as cost accounting. It also embraces tax
planning and tax accounting.
7. It concerned equally with short – range and long – range planning and uses highly
sophisticated techniques, like sensitivity analysis, probability structure etc. in planning and
forecasting process. Evaluation of capital investment projects is the specialty of management
accountant.
8. It is concerned both with assisting management in its functions, as well as evaluating
the performance of the management as an institution.
9. It is futuristic in its approach and predictive in nature.
10. Management accounting system cannot be installed without proper cost accounting
system.
11. It looks at all situations including non – monetary economic events from a
management view point.
12. It directs its attention to various divisions, departments of the business and report
about profitability, performance etc. of each of them.
13. The business concern is free to install management system.

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