Understanding cost accounting

1. Financial Accounting Presentation.
Topic:- Basics of Cost Accounting.
Presented by:
Nikit Chaudhary
Saurabh Jagtap
Vaibhav Mudaliar
Krutika Pachauri

2.  Contents
1. Meaning of Cost Accounting.
2. Objectives of Cost Accounting.
3. Functions of Cost Accounting.
4. Cost Sheet.
5. Proforma of Cost Sheet with
explanation.

3.  Meaning of C.A
o “Cost Accounting is a quantitative method that accumulates, classifies, summarises and
interprets information for three major purposes
i. Operational planning and control,
ii. Special decision, and
iii. Product decision.”
-Charles T. Horngren.
o ”Cost Accounting is the process of accounting for costs from the point at which the expenditure
committed to the establishment of an ultimate relationship with cost units”
-Chartered Institute of
Accountants, London.

4.  Objectives of Cost Accounting
The main objectives of cost accounting are as under:
1. Preparation of Cost Statement: Different elements of total costs are shown in a cost statement.This
statement shows total cost, unit cost, units produced and sold, closing stock in terms of units and value, etc.
Production process and other processes should be constantly reviewed to maintain efficiency.Cost
accounting presents information with proper analysis for different time periods ranging from daily basis to
yearly.Thus, a cost statement serves complete information tools for the management.
2. Ascertainment of Profitability:The determination of profits for the activities carried out or planned is one of
the important objectives of cost accounting.When a company enters into the new product market, the
important consideration is given to earning profit from that product. But the same consideration should also
be given on the current activities/performances at the factory.
3. Formulation of Base for Business Policy: Cost accounting objective helps in formulating of business policies
and assisting in decision making.The management deals with various crucial matters and for proper profit
planning, they have to analyze various factors such as gross-profit analysis, the cost-volume-profit
relationship, the break-even point of sales, and the differential costing method, etc.

5. 4. Determination of Selling Price:The demand and supply mechanism plays a crucial role for any business
in determining of tender price.The tender price concludes total cost plus a margin of profits and proprietors
have to set if after considering the demand and supply factors.

6.  Functions of cost Accounting
Cost accounting serves various functions which are as follows:
1. Ascertainment of Cost:The process of ascertainment of costs involves computation of costs which has been
incurred.The costs may be ascertained for different products, services or activities using various costing
methods.
2. Estimation of cost:While costs are ascertained after it has been incurred, the estimation of costs is done
before their actual incidence. For the purpose of estimation, an allowance is generally made for adjusting
deviations as various costs such as material costs, labor costs and overheads tend to fluctuate. Cost
estimation is useful for following purposes:
i. Cost estimation is important for the purpose of bidding & submitting quotations & tenders.
ii. It is also useful for preparing budgets.
iii. Cost estimation helps in evaluating projected performance.
iv. Cost estimation is useful for the purpose of financial statement projection.
v. It is important for cost control purpose.

7. 3. Control of cost: Cost control is related to controlling & reducing costs for the purpose of
improving efficiency.
Cost control can achieve this efficiency by utilization of O/P at minimum cost.Two main
techniques used
for this purpose are budgetary control and standard costing.
4. Reduction of cost:The ending of cost control function is the stating of cost reduction function. It
involves making actual and permanent reduction in the production costs of goods and services.

8.  Types of cost

9.  Cost Sheet
A cost sheet is a report on which is accumulated all of the costs associated with a product or production job. A cost
sheet is used to compile the margin earned on a product or job, and can form the basis for the setting of prices on
similar products in the future. It can also be used as the basis for a variety of cost control measures. Despite the
name, a cost sheet can be compiled and viewed on a computer screen, as well as being manually developed on
paper.The costs listed on the report are usually aggregated into the following categories:
•Direct materials
•Direct labor
•Allocated factory overhead
In some situations, a cost sheet may also include a line item for allocated administrative overhead.
In addition, the following costs may also appear on a cost sheet in varying degrees of detail:
•Shipping and handling
•Supplies
•Outsourced costs
The costs listed on a cost sheet usually include charges for actual material and labor costs incurred. However, it is
also possible that these costs are only listed at their standard costs, which are obtained by backflushing; this is the
process of multiplying the number of units produced by bills of material and labor routings to arrive at the costs
that should have been associated with a product or job.
The development of a cost sheet can be a major production, especially if it is compiled by hand. Even if it is drawn
from a database of compiled costs, a cost accountant must still review it for duplicate, missing, or incorrect entries
before issuing it.A cost sheet is normally issued along with an explanatory page that points out any unusual costs
incurred or variances that management should be aware of..

10.  Proforma of Cost Sheet

11. Thank You!