“Profitability is the sovereign criterion of
enterprise, and Cost Accounting greatly
promotes it.” Peter F. Drucker
Programme:Master of Finance and Control[MFC]
Total Lecture hour:36
Internal Evaluation: 50 marks
Evaluation: On going or continuous process
Final Examination: 50 Marks
Class hour:1.5 LH
Attendance: 80 % of LH to be qualified
Cost accounting is a fast growing discipline.
It developed mainly with the Industrial
Revolution from 1760 onwards.
It has a major resource for gaining
It is foundation of profitability.
Cost accounting is a cost information system
It records ,measures and reports information
about costs of some object.
Institute of Management Accountants,USA,Says
“Cost accounting is the system within an
organization that provides for the collection
and assignment of costs to cost objects.”
Thus, it is a process which
nd present cost data.
CIMA,London, “Cost accounting is defined as “ the
application of costing and costing principles,
methods and techniques to the science, art and
practice of cost control and the ascertainment of
profitability. It includes the presentation of
information derived there from for the purpose of
managerial decision making”.
Cost accounting is defined as a technique or
method for determining the cost of project,
process or thing .This cost is determined by direct
measurement, arbitrary assignment, or systematic
and rational allocation.
It provides information for two major purposes:
1. Valuing ending inventories and determining
cost of goods sold for financial reporting
2. Costing products and services for management
control purposes(planning, monitoring and
controlling operations and performance
To ascertain cost of production of every
service,and to develop cost standards.
To facilitate cost planning and control
To disclose profitable and unprofitable activities.
To facilitate decision making
To evaluate performance of operations.
To help determine cost and price of products.
To provide data for comparison of costs within the
firm and also between similar firms.
To indicate to the management any inefficiencies
and the extent of various forms of waste, whether
of material,time,expense or in the use of
machinery, equipment and tools. Analysis of the
causes of unsatisfactory results may indicate
Price Determination strategies
Help in cost control, cost reduction and inventory
Wastage control (wastage of labour,material and
Reveals profitable and unprofitable activities
Cost information can be used as a basis for
budgetary control and standard costing that leads
Provides cost data to outside Agencies(Govt,wage
tribunal, trade union etc).
Importance to Management(busi. policy,bid,use
of resources,st costing,budgetery control,)
Importance to Investors
Importance to Consumers
Importance to employees
Importance to Government(Tax policy,Industrial
Policy, Export-import policy, settle of disputes)
Functions of Cost Accounting
Financial Accounting is largely concerned with
financial statements for external use by
investors,creditors,labour unions, financial
analysts, government agencies, and other
interest groups. It involves recording,
classification and analysis of business transactions
in subjective manner so as to facilitate preparation
of profit and loss account, balance sheet and cash
flow statement for showing the results of the
business operation as a whole.
Gary A. Porter and Curtis L Norton:
“ Financial accounting is the branch of accounting
concerned with communication with outsiders
through financial statements.”
Financial accounting is oriented towards the
preparation of financial statements which
summarize the result of operations for selected
period of time and show the financial position of
the business at particular dates.
Contents:Income statement,Balance sheet and
Accounting System:Techniques and
procedures used by accountant in
measuring,describing and communicating
financial data to users.(Journal,ledgers,trial
balance,financial statements are prepared
using double entry accounting system)
Accounting Priciples :
GAAP(methods,procedures and techniques).
Users of Financial accounting Information
Systematic records of financial transactions are made in
financial accounting with the following advantages.
Explains profit and loss of a business for a specified period
Reasons leading to profit and loss can be located to take a
necessary action to increase profit
Discloses the financial status of a business enterprise
Regulates reminders for receivable amount to reduce bad
Arrangement for the amount payable to outsiders becomes
Preparation of a trial balance facilitates the checking of errors
toward maintaining an arithmetic accuracy of transactions
Discovers and facilitates preventing frauds
Guidance for the purpose of taking decisions
Evidence for making an assessment of income tax
Does not provide detailed cost information
Does not segregate cost:
Does not determine price:
No provision for standards:
Does not control cost
Does not explain losses on account of
stoppage of production and idle plant
Does not provide future information
Management accounting is a branch of
accounting concerned with providing internal
users(Management) with information to
facilitate planning ,control and decision
It is a system of collecting
reporting information that assists managers
in their decision making and control
Institute of Cost and Management
Accountants,UK,defines”Management Accounting is
the application of professional knowledge and skill in
the preparation of accounting information in such a
way as to assist management in the formulation of
policies and in the planning and control of the
operation of the undertaking.”
Assist in planning and formulation of future policies
Help in Interpretation of financial Information
Helps in controlling Performance.
Help in organizing
Help in the solution of strategic business problems
Help in Decision Making
Costs can be defined as money or monetary
value sacrificed to achieve goods or services.
The sacrifice may be in terms of cash
expenditure, property transfer, service
rendering and promises to pay in future.
Cost refers the amount of expenses spent to
generate product or services.
A manager of a manufacturing firm pays
money for materials, labour, electricity, rent,
repair, maintenance and so on. Payment of
money or money’s worth to get something is
very common and pervasive. This payment is
called expense or expenditure or cost.
Cost is the amount of resources given up in
exchange for some goods or services.
– Horngren, Sundem and Stratton
“Cost may be defined as the sacrifice or giving up
of resources for a particular purpose. Cost is
frequently measured by monetary units that
must be paid for goods and services. Costs are
initially recorded in elementary from. Then these
costs are grouped in different ways to help
managers make decisions. To aid decisions
managers want the cost of something. This
something is called a cost object, which may be
defined as any activity for which a separate
measurement of cost is desired.”
The cost of materials that is directly and conveniently
identifiable or traceable to each unit of product is
defined as direct material. Direct material, also known
as raw material, is the main ingredient of the finished
product. Finished products are the refined or value–
added forms of the direct material. A tangible product
is almost impossible without the direct material.
Direct Material Wood , Raw cotton, Crude oil, Textile
Finished Product Furniture, Textiles, Diesel, Garments
The labours that are paid with each piece of
marginal product are direct labours. Direct
labour costs can be directly traced to each unit
of product without any apportionment basis.
Direct labour is, therefore, defined as the
employment of those workers who are physically
engaged in the production of the output.
Examples of direct labour costs include the
wages of operatives who assemble parts into
finished products like sewing labour in a
garment factory that is paid per piece or the time
spent to make shirts, pants and trousers.
Any expenses other than the direct material
cost and direct labour cost which are directly
incurred on a particular product are direct
expenses. They can be directly identified with
each unit of product.
Examples of direct expenses are; cost of
product designing, product model, handling
from one process to the next process, cost of
patent and royalties, and so on.
All those expenses which cannot be directly
traced or identified with each unit of the
products are overhead costs. In fact, overhead
costs are indirect costs which cannot be directly
charged to a particular unit of a product without
allocating these on the basis of some appropriate
All expenses other than prime costs are overhead
costs or indirect costs.
Key elements of overhead costs are:
Indirect Materials: Items of indirect materials cannot be identified with
any one product. Oil and grease used to clean the machine are indirect materials.
Indirect Labour: salary of a factory supervisor
Indirect Expenses: Rent, stationery, heat, light, power, repair and
a. Variable costs
b. Fixed costs
c. Mixed costs.
Classification according to Behaviour of Costs
General and administration cost
Selling and Distribution
Research and Development..
Classification By Controllability..
Avoidable and Unavoidable costs
Relevant and Irrelevant costs
Product(Inventory) cost and Period costs
Common Cost and joint cost
Shut down cost