Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, and then developing various courses of action to control the costs.

1. EVOLUTION OF COSTING & MANAGERIAL DECISION
MAKING (TRADITIONAL & MODERN)

2. LET US UNDERSTAND THE TERM “COST” IN A BROAD WAY
 Cost - sacrificed resource to achieve a specific objective
 Actual Cost - a cost that has occurred
 Budgeted Cost - a predicted cost
 Cost Object - anything of interest for which a cost is desired
 Cost Accumulation - a collection of cost data in an organized manner
 Cost Assignment - a general term that includes gathering accumulated costs to a cost object.
This includes:
Tracing accumulated costs with a direct relationship to the cost object and
Allocating accumulated costs with an indirect relationship to a cost object

3. CLASSIFICATION OF COST
 BY NATURE
 BY ACCOUTING PERIOD
 BY DEGREE OF CONTROL
 BY TYPE

4. COST ACCOUNTING
 Cost accounting is a process of collecting, analysing, summarizing and evaluating various
alternative courses of action.
 Its goal is to advise the management on the most appropriate course of action based on the
cost efficiency and capability.
 Cost accounting provides the detailed cost information that management needs to control
current operations and plan for the future.

5. ELEMENTS OF COST ACCOUNTING
1- Material (Material is a very important part of business)
 Direct material/Indirect material
2- Labour
 Direct labour/Indirect labour

6. 3- Overhead (Variable/Fixed)
 Production or works overheads
 Maintenance & Repair
 Supplies and Utilities
 Other Variable Expenses
 Depreciation
 Other Fixed Expenses

7. FUNCTIONS OF COST ACCOUNTING
 Cost computation: This is the main function of cost accounting and this is the source of all
other functions of cost accounting.
 Cost control: The first function of cost accounting is to control the cost within the budgetary
constraints management has set for a particular product or service. This is important since
management allocates limited resources to particular projects or production processes.
 Cost reduction: Cost computation helps the company reduce costs on projects and
processes. Reduction in costs means more profits since the margin will naturally increase.

8. HOW COST ACCOUNTING HELPS IN TAKING MANAGERIAL
DECISIONS

9. LET US UNDERSTAND HOW CALCULATION OF
COSTING EVOLVED IN MANUFACTURING
INDUSTRIES

10. TRADITIONAL SYSTEMS
 Actual Costing
The actual costs of all resources used in production are included in determining
product costs
 Two major disadvantages
 Delays in collecting (or determining) actual overhead costs impedes producing unit cost
data on a timely basis, e.g. electricity, gas bills, property tax & outside services
 Substantial fluctuations result in the calculated monthly unit costs of product
 Note: Both these disadvantages are caused by the process of assigning actual overhead
costs to products
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11.  Normal Costing
 Normal costing is a method of costing that is used in the derivation of cost.
 The components used for the normal costing to derive the cost are actual costs of
material, actual costs of labor and standard overhead rate that are used for allocation
purpose
 Standard Costing
 Standards are used for costs and revenues for the purpose of control through variance
analysis
 Standard is a s pre-determined measurable quantity set in defined conditions against
which actual performance can be compared, usually for an element of work, operation
or activity.
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TRADITIONAL
SYSTEMS

12. COST ACCOUNTING APPROACHES MORDERN
 Standardized or standard cost accounting
 Lean accounting
 Activity-based costing
 Resource consumption accounting
 Throughput accounting
 Life cycle costing
 Environmental accounting
 Target costing

13. MODERN COSTING SYSTEMS
Target costing – focuses on target cost per unit, which is the estimated unit cost of a product
that, when sold at the target price, enables organization to earn the target profit per unit.
- locked in = designed in costs
- cost incurrence

14. TARGET COSTING INVOLVES FIVE STEPS
1. Determine the market price (MP);
2. Determine the desired profit (DP);
3. Calculate the target cost (TC) at market price less desired profit
(TC = MP – DP);
4. Use value engineering to identify ways to reduce cost;
5. Use kaizen costing and operational control to further reduce costs

15.  Department costing – instead of a single allocation base, uses separate indirect-cost rates
for each department. It supposes that each department has different allocation base.

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Activity-based costing – The collection of financial and operational performance
information tracing the significant activiites of the firm to product costs
ACTIVITY
RESOURCES
COST OBJECT
(PRODUCT, CUSTOMER...)

17. CONCLUSION
 To understand management accounting or take managerial decisions it is imperative that you
understand cost accounting well. That’s why it is important to understand the contrast
between cost accounting and management accounting.