This document defines key cost accounting terms and concepts. It discusses the objectives of cost accounting like ascertaining costs, determining selling prices, and assisting management decision making. It distinguishes between cost reduction and cost control and highlights their differences. The importance of cost accounting to businesses is outlined for decision making, cost control, budgeting, efficiency measurement, and price determination. Financial accounting is distinguished from cost accounting. Finally, it describes different bases for classifying costs like functions, controllability, normality, and relevance for decision making.

1. Basic Cost Concepts

2. Define Terms
1) Cost :
Expenditure incurred in producing a
product or in rendering a service
measurement, in monetary terms,
of the amount of resources used for
the purpose of production of goods
or rendering services.

3. 2) Costing :
The technique and process of
ascertaining costs.
3) Cost Accounting :
 Begins with recording of income
and expenditure
 ends with the preparation of
periodical statements and reports

4. 4) Cost Accountancy :
 The application of costing and cost
accounting principles, methods
and techniques
 practice of cost control
 the ascertainment of profitability

5. List the Objetives of Cost Accounting
The primary objective of study of cost is to
contribute to profitability through Cost Control
and Cost Reduction.
1. Ascertainment of Cost:
Collection of cost information
2. Determination of Selling Price
3. Ascertaining the profit of each activity
4. Assisting Management in decision-making
5. Cost Control and Cost Reduction

6. Distinguish between Cost Reduction and
Cost Control.
1) Permanence
Permanent, Real and genuine savings in
cost.
Temporary saving
2) Saving Focus
Saving in Cost per unit Saving either in Total Cost or Cost per unit
3) Product Quality
Retained Not a guarantee
4) Nature of Standards
Continuous process of critical examination
Control is achieved through compliance
with standards

7. 5) Dynamic
Full Dynamic Less Dynamic
6) Coverage
Universally applicable to all areas of
business. Does not depend upon
standards, though target amounts may be
set.
Limited applicability to those items of cost
for which standards can be set.
7) Nature of Costs
Partly on present costs and largely on
future costs.
present and past behavior of costs
8) Nature of Function
Corrective Action - operates even when
efficient cost control systems exist. There
is room for reduction in the achieved
costs.
Preventive Function - costs are optimized
before they are incurred.

8. 9) Tools & Techniques
(a) Value Engineering,
(b)Standardisation and
Simplification,
(c) Work Study,
(d) Variety Reduction,
(e) Quality Measurement &
Research,
(f) Operations Research,
(g) Market Research,
(h)Job Evaluation and Merit
Rating,
(i)Improvement in Product
Design,
(j)Mechanisation and
Automation, etc.
Budgetary Control and
Standard Costing.

9. Bring out the importance of Cost
Accounting to Business Concerns.
1. Decision Making:
Business decision-making requires analysis of
statements indicating the likely effect of various cost
control and revenue generation measures on the
profits.
2. Cost Control:
For example, Material Costs may be controlled by –
(a)ensuring un-interrupted supply of material and spares
for production,
(b) avoiding excessive locking up of funds / capital in stocks
of materials and stores, and
(c)use of techniques like Value Analysis, Standardization,
etc.

10. 3) Budgeting:
Budget Estimates are drawn up by Cost Accounting
Department, before the start of each activity, to ensure that
a practicable course of action is identified, and the actual
performance corresponds with the estimated.
4) Measuring Efficiency:
Cost Accounting Department can provide information about
standards and actual performance of the concerned activity.
5) Price Determination :
6) Curtailment of Loss during off-season:
7) Expansion:

11. Distinguish between Cost Accounting and
Financial Accounting.
1) Users of Information
Internal Management & External
Management
Internal Management for proper planning,
decision making & cost control
2) Statutory Compliance
Companies Act, Income Tax Act
Cost Accounting is voluntary, except in cases
where Cost Accounting Records Rules
mandatorily apply to the enterprise
3) Nature/Objectivity
Accounting Policies may differ from one
Firm to another Firm.
Techniques are generally uniform to all
Firms.
4) Focus
Recording the transactions. Control Cost

12. 5) Nature of Cost
Historical Cost
Historical Cost & Standard Cost i.e. Pre
determined cost
6) Stock Valuation
Cost or NRV whichever is less. Cost
7) Cost Analysis
Cost / Expenditure and Profits are
generally shown as a whole for the
period.
Costs are analysed product-wise,
department-wise, activity-wise, etc.
8) Time Period
F.S. are prepared at the end of the Year
Cost data & reports are prepared on
continuous basis.
9) Forecasting & Planning
Limited Use. Parameters like GP, NP, ROI,
EPS, etc. can be laid down.
Specific and detailed plan for each
product/Useful for Budgeting

13. 10) Utility for decisions
Helps only for future decisions with
respect to product pricing, make or buy,
asset retainment vs replacement, etc.
Helps current & future decisions, e.g.
product price reduction and higher
volume in order to earn target profit,
resource re-allocation, etc.
Note: Cost Accounting supplements Financial
Accounting for analysis and decision-making purposes,
as described above.
Financial Accounting suffers from
limitations of lack of analysis of
information, and absence of detailed
control and assessment parameters.
Better tools of control, analysis and
assessment are available. Some examples
are Variance Analysis, Budgetary Control,
& Marginal Costing.
11) Control & Assessement

14. Cost
Functions-based
Production
Administration
S&D
R&D
Pre Production
Conversion
Relationship
based
• Direct
• Indirect
Controllability based
• Controllable
• Non-Controllable
Normality based
Normal
AbnormalAttributability
based
• Product
• Period
Decision—making
based
• Relevant
• Irrelevant
Cause & Effect based
• Engineered
• Discretionary
Payment-based
• Explicit
• Implicit

15. List the various items of costs on the basis
of relevance to decision-making.
(A) Relevant Costs:
1) Marginal Cost:
Total Variable Cost,
Prime Cost plus Variable Overheads.
(Marginal Cost is relevant for decision-making, as this
cost will be incurred in future for additional units of
production.)

16. 2) Differential Cost:
•It is the change in costs due to change in the level of
activity or pattern or method of production.
•Where the change results in increase in cost it is called
Incremental Cost
•If costs are reduced due to decrease of output, the
difference is called decremental Costs.

17. 3) Opportunity Cost:
•The value of sacrifice made or benefit of opportunity
foregone in accepting an alternative course of
action.
•For example, a Firm may finance its expansion plan by
withdrawing money from its bank deposits. Then,
interest lost on the Bank Deposit is the opportunity
cost for carrying out the expansion plan.

18. 4) Out-of-pocket Cost:
•Current or near future outlays of cash for the
decision at hand
•relevant for decision-making
•short-run concept
•avoided or saved, if a particular proposal under
consideration is not accepted.

19. 5) Replacement Cost:
•It is the cost at which there could be purchase of an
asset or material identical to that which is being
replaced or revalued.
• It is the cost of replacement at current market price
and is relevant for decision-making.

20. 6) Imputed Costs:
• notional costs appearing in the cost accounts only
• e.g. notional rent charges, interest on capital for
which no payment has been made.
• Where alternative capital investment projects are
being evaluated, it is necessary to consider.

21. (B) Irrelevant Costs: Not useful for decision making
1) Sunk Cost:
• Has already been incurred or sunk in the past.
• It is not relevant for decision -making
• Firm has obsolete stock of materials originally
purchased for Rs.50,000 which can be sold as
scrap now for Rs.18,000 or can be utilised in a
special job, the value of stock already available
Rs.50,000 is a sunk cost and is not relevant for
decision-making.

22. 2) Absorbed Fixed Costs:
• Fixed Costs do not change due to increase or
decrease in activity
• Fixed Costs are absorbed in cost of production at a
normal rate, they are irrelevant for managerial
decision-making.
• However if Fixed Costs are specific, they become
relevant.

23. 3) Committed Costs:
• Cost in respect of which decision has already been
taken, and such decision cannot be altered.
• e.g. entering into irrevocable agreements for Rent,
Technical Collaboration, etc.
• should be contrasted with Discretionary Costs,
which are avoidable costs.

24. Cost Classification for
presentation purpose
Total Cost
Direct Cost i.e.
Prime Cost
Direct
Material
Direct
Labour
Direct
Expnese
Indirect Cost (OH)
Producti
on OH
Administr
ation OH
Selling
&
Distrib
ution
OH

25. Cost Sheet? What are its uses?
 Meaning:
1. shows the break-up and build-up of costs
2. document which provides the consolidation of the
detailed cost of a Cost Centre or a Cost Unit.
 Uses:
1. Presentation of Cost information.
2. Determination of Selling Price.
3. Ascertainment of profitability.
4. Preparation of Budgets.

26. 5) Inter-Firm and Intra-Firm Cost Comparison.
6) Preparing Cost Estimates for submitting tenders /
quotations.
7) Product-wise and Location-wise Cost Analysis.
8) Disclosure of operational efficiency for Cost Control

27. Items that are not regarded as "Cost" and
not included in the Cost Sheet
a) Non-Operating Incomes, e.g. Rent, Interest and
Dividends received.
b) Losses or Profits of capital nature, e.g. Profit or Loss on
sale of Investments, Plant and Equipment, etc.
c) Items not representing actual costs but dependent on
arbitrary decisions and policies of the management,
e.g. an unreasonably high salary to the Managing
Director, providing for depreciation at a rate exceeding
the economic rate.
d) Appropriation of Profits, e.g. Payment of Dividends,
Transfers to Reserves, etc.

28. e) Profit based Outflows, i.e. Income-Tax. [Note: Bonus
paid to workers is treated as Cost].
f) Amounts representing loss on account of inefficiency
of a particular activity, e.g. Bad Debts as a result of
inefficient credit management, Penalties & Fines due
to non-compliance with law, abnormal wastages and
losses, etc.
g) Items which may distort comparison, e.g. financial
items like interest, discount, etc. and other similar
items.
h) Imputed items that are not actually incurred by the
firm but constitute arbitrary charges against profit,
e.g. interest on own capital at an arbitrary rate.
i) Write-offs of Goodwill, Preliminary Expenses, etc.

29.  Particulars
 Production / Manufacturing A/c
 Cost Sheet
 1. Basis
 It is prepared on the basis of double-entry system of book-keeping.
 It is only a statement and hence double-entry system is not applicable.
 2. Purpose
 The primary objective of preparation is Reporting.
 The primary objective is decision-making.
 3. Parts
 It has two parts - one showing the cost of manufacture and the other part showing Sales and Gross Profit.
 It is a step-by-step presentation of total cost and shows Prime Cost, Works Cost, Cost of Production, Cost of
Goods Sold, Cost of Sales and Profit.
 4. Analysis
 Total Cost is shown in aggregate. Product-wise or Location-wise analysis is not generally given.
 Cost Sheet shows costs in a detailed and analytical manner, which facilitates cost comparison.
 5. Quotations
 This is not useful for preparing tenders or quotations.
 Estimated Cost Sheets can be prepared based on past experience, and useful for submitting quotations.

30. Production / Manufacturing A/c Cost Sheet
1) Basis
double-entry system of book-keeping only a statement and hence double-entry
system is not applicable.
2) Purpose
Reporting decision-making.
2) Purpose
Reporting decision-making.