COST AND COST ACCOUNTING

Presneted By:
Vikash Barnwal
Asst, Professor
Commerce and Management
COST
 Cost an amount that has to be paid or spent to buy or
obtain something.
 the amount or equivalent paid or charged for
something 
 The cost of something is the amount of money that is 
needed in order to buy, do, or make it.
WHEN YOU MANUFACTURING A GOODS

FACTOR OF PRODUCTION
LAND- RENT
LABOUR-WAGES
CAPITAL-INTEREST
ENTERPRISE- PROFIT

Fixed cost Variable Cost

(Fixed ( change with Total Cost
always ) output)
 COST ACCOUNTING

. Accounting means identifying, analysing,interpreting,communicating the

business transactions are known as Accounting

Cost accounting is a form of managerial accounting that aims to capture a

company's total cost of production by assessing the variable costs of each
step of production as well as fixed costs, such as a lease expense.
DEFINITION

According to I.C.M.A. London – “Cost Accounting is the

technique and process of ascertainment of cost.”

According to Walter W. Bigg has defined cost accounting as

follows: - “Cost Accounting is the provision of. such analysis
and classification of expenditure as will enable the total cost of
any particular unit.
FEATURE OF COST ACCOUNTING

1. It is a process of accounting for costs.

2. It records income and expenditure relating to production of goods
and services.
3. It provides statistical data on the basis of which future estimates are
prepared and quotations are submitted.
4. It is concerned with cost ascertainment, cost control and cost reduction.
5. It establishes budgets and standards so that actual cost may be
compared to find out deviations or variances.
OBJECTIVES OF COST ACCOUNTING:
 1. To ascertain the cost per unit of the different products
manufactured by a business concern;
 2. To provide a correct analysis of cost both by process or
operations and by different elements of cost;
 3. To disclose sources of wastage whether of material, time or
expense or in the use of machinery, equipment and tools and
to prepare such reports which may be necessary to control
such wastage;
 4. To provide requisite data and serve as a guide for fixing
prices of products manufactured or services rendered;
 5. To ascertain the profitability of each of the products and
advise management as to how these profits can be maximized;
 6. To exercise effective control if stocks of raw materials, work-in-
progress, consumable stores and finished goods in order to
minimize the capital locked up in these stocks;
 7. To reveal sources of economy by installing and implementing a
system of cost control for materials, labour and overheads;
 8. To advise management on future expansion policies and proposed
capital projects;
 9. To present and interpret data for management planning,
evaluation of performance and control;
 10. To help in the preparation of budgets and implementation of
budgetary control;
 11. To organize an effective information system so that different
levels of management may get the required information at the
right time in right form for carrying out their individual
responsibilities in an efficient manner;
 12. To guide management in the formulation and implementation
of incentive bonus plans based on productivity and cost savings;
 13. To supply useful data to management for taking various
financial decisions such as introduction of new products,
replacement of labor by machine etc.;
 14. To help in supervising the working of punched card
accounting or data processing through computers;
 15. To organise the internal audit system to ensure effective
working of different departments;
 16. . To organise cost reduction programmes with the help of
different departmental managers;
 17. To provide specialized services of cost audit in order to prevent
the errors and frauds and to facilitate prompt and reliable
information to management; and
 18. To find out costing profit or loss by identifying with revenues
the costs of those products or services by selling which the revenues
have resulted.
ADVANTAGES OF COST ACCOUNTING
 1.  Facilitates Price Fixation: Cost accounting helps to fix optimum level
of selling price of the products and services by providing information about
cost of production and other related costs. It also guides to set quotation. 

 2. Facilitates Wastage Control: Cost accounting system helps to monitor

wastage of raw materials, labor and other resources by maintaining proper
record of materials and supplies. It assists the management to control
wastage.
 3. Cost Control: Cost accounting helps to control several costs such as
production expenses, job costs, administrative expenses, process costs,
departmental costs etc. by using advance costing techniques modern
methods of production. 

 4. Assures Optimum Efficiency: Cost accounting assures optimum

efficiency with the help of  different methods like standard costing and
budgetary control.
 5. Locating Cause: Cost accounting helps to find out the causes of
losses or weakness of the business. It help the management to take
appropriate action to improve the profitability.
 6. Assists Decision Making: Cost accounting is very useful in the
decision making process of the management. It provides
information regarding cost, labor, materials, operation process,
inventory level etc. to the management. So, the top level
management can make proper decision and future planning with the
help of cost accounting.
 7. Inventory Management: Cost accounting maintains proper
inventory system in the organization. It keeps up-to-date record of
materials and supplies. It helps to maintain optimum level of
inventory. 

 8. Checking Financial Accounting: Cost accounting is also used to

check and analyze the results obtained from financial accounting. 

 9. Suitable For Large Business: Cost accounting is scientific and

systematic method of recording cost related data.So,it is suitable for
large business firms with large number of production and modern
technology. 
DISADVANTAGES OF COST
ACCOUNTING
 1. Lack Of Fixed Principles Generally, cost accounting system is practiced on
presumed notions. It does not follow fixed accounting principles. So, there is a lack of
uniformity in this system.

 2. Costly System: This is another major drawback of cost accounting. There is a need
of highly skilled and qualified manpower and resources to maintain cost accounting
system in the organization. A lot of clerical works and various procedure make cost
accounting more expensive.

 3. Complex System: It is very complicated system of accounting. It requires various

formulas to record cost related data. It needs specific knowledge to prepare different
reports. Due to numerous steps and rules, it is considered as complex system of
accounting.

 4. Not Suitable For Small Business: Small business firms with less number of
production or transactions do not prefer cost accounting because of higher cost and
complexity. 

 5. Ignores Financial Items: Actual profit or loss of the business cannot be ascertained
by cost accounting because it ignores income and expenses of financial nature.
 5. Ignores Financial Items: Actual profit or loss of the business cannot be
ascertained by cost accounting because it ignores income and expenses of
financial nature.
 6. Lack Of Accuracy: Cost accounting avoids financial character expenses
at the time of cost calculation. It does not follow double entry system to
check the accuracy. So, result obtained from cost accounting may lack
accuracy.

 7.  Not Helpful In Decision Making: Only cost related past data and
information can be obtained from cost accounting. So, top level management
cannot be benefited from cost accounting to make future decision and plans.
Delay in data and information may also hamper decision making process.

 8. Dependent: Cost accounting cannot be installed and maintained without

other accounting system. It is totally dependent with other branches of
accounting, especially with financial accounting. 
BASIS FOR COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON
Meaning Cost Accounting is an accounting Financial Accounting is an
system, through which an organization accounting system that
keeps the track of various costs captures the records of
incurred in the business in production financial information about
activities. the business to show the
correct financial position of
the company at a particular
date.
Information type Records the information related to Records the information
material, labor and overhead, which which are in monetary terms.
are used in the production process.

Which type of Both historical and pre-determined Only historical cost

cost is used for cost
recording?
BASIS FOR COMPARISON COST ACCOUNTING FINANCIAL
ACCOUNTING

Valuation of Stock At cost Cost or Net Realizable

Value, whichever is less.

Mandatory No, except for Yes for all firms.

manufacturing firms it is
mandatory.

Time of Reporting Details provided by cost Financial statements are

accounting are frequently reported at the end of the
prepared and reported to accounting period, which is
the management. normally 1 year.

Profit Analysis Generally, the profit is Income, expenditure and

analyzed for a particular profit are analyzed together
product, job, batch or for a particular period of
process. the whole entity

Purpose Reducing and controlling Keeping complete record

costs. of the financial
transactions.
COST ACCOUNTING V/S FINANCIAL ACCOUNTING
BASIS FOR COST ACCOUNTING FINANCIAL
COMPARISON ACCOUNTING
Users Information provided by Users of information
the cost accounting is provided by the financial
used only by the internal accounting are internal
management of the and external parties like
organization like creditors, shareholders,
employees, directors, customers etc.
managers, supervisors
etc.
Forecasting Forecasting is possible Forecasting is not at all
through budgeting possible.
techniques.
 COST ACCOUNTING V/S MANAGEMENT ACCOUNTING
BASIS FOR COMPARISON COST ACCOUNTING FINANCIAL
ACCOUNTING
Meaning The recording, classifying The accounting in which
and summarizing of cost the both financial and non-
data of an organization is financial information are
known as cost accounting. provided to managers is
known as Management
Accounting.

Information Type Quantitative. Quantitative and

Qualitative.
Objective Ascertainment of cost of Providing information to
production. managers to set goals and
forecast strategies.
Scope Concerned with Impart and effect aspect of
ascertainment, allocation, costs.
distribution and accounting
aspects of cost.
COST ACCOUNTING V/S MANAGEMENT ACCOUNTING

BASIS FOR COST ACCOUNTING FINANCIAL

COMPARISON ACCOUNTING
Specific Procedure Yes No

Recording Records past and present It gives more stress on

data the analysis of future
projections.

Planning Short range planning Short range and long

range planning

Interdependency Can be installed without Cannot be installed

management accounting. without cost accounting.
CLASSIFICATION OF COST
In order to ascertain , control, manage, forecast and
interpret cost, the element of cost must be classified .the
element of cost are ;

 Material
 Labor
 Other Expenses
 CLASSIFICATION OF COST

According to Nature and According to identifiable (cost center According to Behavior

Function and production) (Variability)

Fixed cost
Direct Cost
Nature Function Variable
Indirect cost cost
Production
Material;
cost

Labor Selling Cost

Administrative
cost
Other
Expenses Research and
Development
cost
ACCORDING TO NATURE
 Material
 Labor
 Other Expense (wages, Salaries, Depreciation, Utility etc.)

Material Costs: cost of material used for manufacture of a product ,a

particular work order , or provision of a service . All Raw material are
material cost.
 Example : Cloth for Making a Dress :
Wood for making the furniture
 Labor cost: Labor costs represent the total expenditure
incurred by employers for the employment of employees
. Direct wages means the wages of labor which can be
identified wholly to particular job product or process in
converting the raw materials into finished goods .
 Other expenses: Expenses is defined as a money
expended or cost incurred in a firm`s effort to generate
revenue representing cost of doing business.
Example : Rent, Telephone expenses, Insurance,
Lighting and heating, oil and gas, Fees paid to consultant
etc.
CLASSIFICATION BY FUNCTION

Research And
Development
Product
cost
Function
ion Cost
Classificat
ion

Selling and
Administr
Distributio
ation Cost
n Cost
 Production Cost: The cost of the sequence of operations which
begins with supplying materials, labour and services and ends with
primary packing of the product. Thus it includes the cost of direct
materials, direct labour, direct expenses and factory overheads.
 Selling Cost & Distribution cost: The cost seeking to create and
stimulate demand (sometimes termed „marketing‟) and of securing
orders and Distribution cost sequence of operations which begins
with making the packed product available for dispatch and ends
with making the reconditioned returned empty package, if any
available for re-use.
Administration Cost: The Cost of formulating the policy, directing
the organization and controlling the operations of an undertaking
which is not related directly to a production, selling and distribution,
research or development activity or function.
Research And Development cost:
RESEARCH COST: The cost of researching for new or improved
products, new applications of materials, or improved methods.
DEVELOPMENT COST: The cost of the process which begins with
the implementation of a decision to produce a new or improved
product or to employ a new or improved method and ends with
commencement of formal production of that product or by that
method.