Chapter 4.

Cost Accounting
Meaning of Cost Accounting
 Cost Accounting is concerned with recording, classifying
and summarizing costs for determination of costs of
products or services ;planning, controlling and reducing
such costs and furnishing information to management for
decision making.
 According to Chartered Institute of Management
Accountants, London, cost accounting is ‘the process of
accounting for costs from the point at which the
expenditure is incurred or committed to the
establishment of its ultimate relationship with cost units.
In its widest sense, it embraces the preparation of
statistical data , the application of cost control methods
and the ascertainment of the profitability of the activities
carried out or planned.’

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Cost Accounting Activities
Cost accounting provides useful data for both internal and
external reporting. Internal report presents details of cost
information regarding cost of specific products or services
while external reports contain cost data in a summarized
and aggregate form.
To satisfy requirements of both internal and external reporting,
the following activities are undertaken by cost accounting :
 Cost Determination for specific product or activity.
 Cost Recording
 Cost Analysis : concerned with the critical evaluation of
cost information to assist the management in planning and
controlling the business activities.
 Cost Reporting :Concerned with reporting cost data both
for internal and external reporting purposes.
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 Financial Accounting Vs. Cost

Accounting 
Aims at safeguarding the Renders information for
interest of the business, its guidance of the management
proprietors and others for proper planning,
connected with it. operational control & decision
making.
 Financial  Maintenance of cost records
Accounts are
prepared according to some are voluntary and there are
accepted accounting concepts no statutory forms regarding
and conventions. their presentation.
 Reveals the profit of business  Reveals the profit made on
as a whole each product, job or process.
 Prepared  Prepared more frequently,
and submitted
usually at the end of the sometimes even weekly.
accounting period.
 Provides information useful to  Provides information useful to
outsiders, hence high degree insiders, degree of accuracy is
of accuracy less.
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Cost Accounting and Management
Accounting
Management Accounting has a wider scope as compared to cost
accounting. Cost Accounting deals primarily with cost data
while management accounting involves the consideration
of both costs and revenue. Management accounting is an
all inclusive accounting information system which covers
financial accounting, cost accounting and all aspects of
financial management. But it is not a substitute for other
accounting functions. It involves a continuous process of
reporting cost, financial and other relevant data in an
analytical and informative way to the management.

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Cost Accounting and Cost
Accountancy
The term Cost Accountancy has a wider meaning as compared to
the term cost accounting. According to CIMA, London, cost
accountancy means ‘the application of costing and cost
accounting principles, methods and techniques to the
science, art and practice of cost control. It includes the
presentation of information there from, for the purpose of
managerial decision making’. Cost accountancy is thus the
science, art and practice of the cost accountant.
Cost Accountancy includes the following:
 Cost Accounting : It is the process of accounting for costs.
 Costing : It is the technique and process of ascertaining costs.
 Cost Control
 Cost Reduction
 Cost Audit: It is the verification of cost accounts and a check
on the adherence to the cost accounting plan.
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Objectives of Cost Accounting
i. Ascertainment of cost : Involves computation of cost
incurred
ii. Estimation of costs : As compared to ‘what has been the cost’
it emphasizes on ‘what is likely to be the cost’ or ‘what
should be the cost’.
iii. Cost Control : Involves i) determination of standard costs and
ii) analyzing the cause of variations between standard and
actual cost.
iv. Cost Reduction
v. Determining selling price
vi. Facilitating preparation of financial and other statements: A
developed cost accounting system provides immediate
information regarding stock of raw materials, work-in-
progress and finished goods. This helps in speedy
preparation of financial statements.
vii. Provides basis for operating policy: ex. make or buy, Shut
down or operate at loss etc. 7
Importance of Cost Accounting
To the Management:
 Aids in price fixation
 Costing makes comparison possible.
 Provides data for periodical profit and loss account.
 Wastages are eliminated: Cost of the article can be known at
every stage and hence it is possible to check various forms of
waste.
 Aids in determining and enhancing efficiency: Losses due to
wastage are minimized thus enhancing efficiency.
 Helps in Inventory Control
 Helps in determining break even point:
Break Even Point = Fixed Costs / Contribution per unit
where, Contribution = Selling price – Variable cost.
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Importance of Cost Accounting
( Contd. )
vii. Helps in determining the level of output for a desired profit :
Level of Output = (Fixed Cost + Desired Profit)/ Contribution
per unit

viii. It helps in periods of trade depression and competition: In

periods of depression, a firm may have to sell its product
even below the total cost. While deciding whether to shut
down or sell, the firm should keep operating as long as the
fixed costs are being recovered.
To the Employees:
Workers are benefited indirectly through increase in
consumer goods and directly through continuous
employment and larger remuneration.

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Installation of Costing System
Practical Difficulties
 Lack of Support from Top Management: This due to
resistance to the additional work involved. The difficulty
can be overcome by instilling a sense of cost
consciousness in the minds of the top management.
 Resistance from the existing staff : They should be
explained that the costing system would not replace but
strengthen the existing system and open to them new
areas of development.
 Non-cooperation at other levels
 Heavy Costs: Unnecessary sophistication and formalities
should be avoided .

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Installation of Costing System
( Contd )
Main Considerations
 The product : Nature of product determines the type of
costing system to be adopted e.g a product requiring
high value of material content requires an elaborate
system of material control.
 The organization :The existing organization should be
disturbed as little as possible.
 The objective : The objective and information that the
management wants to acquire should also be cared for
while adopting a costing system.
 The technical details : The system should be adopted
after a detailed study of the technical aspect of the
business.
 Informative and simple
 Elastic : Should be capable of adapting to changing
requirements of the business.
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Functions of the Cost Accountant
 Determining cost and analyzing income: Analyses and
classifies costs according to different cost elements viz.
material, labour and expenses. Advises the
management about the profitability or otherwise of
each job, product or process.
 Providing cost data for planning and control: Collects,
classifies and presents in appropriate form, suitable
data to the management for planning and controlling
the operations of the business.
 Undertaking special cost studies for managerial decision
making : Studies regarding -
i. Introduction of new products, replacement of manual
labour with machines etc.
ii. Make or buy decisions, accepting orders below cost etc.
iii. Expansion plans, Utilization of idle capacity etc.
iv. Installation of cost audit system
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Cost Accounting and Other
Departments
Relationship of Cost department with other departments is
summarized below :
 Manufacturing Department : Cost Accounting
department is concerned with ascertaining, controlling
and reducing costs of each of the manufacturing
departments.
 Research and Design Department: Cost department
provides information to decide whether a particular
design or result of the research activity should be
accepted or rejected.
 Personnel Department :Cost department prepares the
wages abstract on the basis of the information provided
by the time or job cards maintained by the personnel
department.

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Cost Accounting and Other
Departments
 Finance and Accounts Department: This department has
to depend heavily on cost accounting department for
preparing various budgets, cash flow statement, income
statements etc.
 Marketing Department: This department provides
information regarding the price at which the product
should be positioned in the market. Information about
the cost of the product is pre requisite for this.
 Public relations Department : Cost accounting
department provides information regarding the costs of
the products manufactured, wages paid to employees
and the profitability of different products or processes.
This information definitely improves the relations
between the company and different sections of the
public.

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