Gives an idea regarding cost accounting, its nature , objectives, limitations. Also helps to understand the requirements of a good costing system.

1. Module 1 – Introduction to
cost accounting
Chapter 1 – Cost Accounting –
Nature and Objectives

2. Introduction of Cost Accounting
• Accounting is the language of business. Accounting information
must be provided to the interested parties and the management.
The needs of the majority of the interested parties can be
satisfied with financial statements such as profit & loss a/c and
Balance Sheet. But the management requires far more information
than what is available from conventional financial statements.
• The main interest of the management is to know about the future
than the past. It is concerned with planning, budgeting and fixing
responsibility.

3. Definitions
• Cost
Cost represents the resources that have been or must be sacrificed
to attain a particular objective.

4. Costing
• “It is the technique and process of ascertaining cost”.
• It involves systems, methods, classification, analysis and
appropriate allocation of expenditure incurred in respect of a
product or service.

5. Cost Accounting
• “It is the process of accounting for cost from the point at which
expenditure is incurred or committed to the establishment of its
ultimate relationship with cost centers and cost units”
• “ Cost Accounting is the process of recording, classifying,
allocating and reporting the various costs incurred in the
operations of an enterprise”

6. Cost Accountancy
• “It is the application of costing and cost accounting 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”.

7. Objectives and Functions of Cost Accounting
• Cost ascertainment
• Cost estimation
• Cost presentation
• Cost control
• Planning, Control and Decision making

8. Advantages of Cost Accounting –
A) To Management
• It enables the management to ascertain the true cost of
production
• It provides information for the preparation of estimation and
tenders
• It reveals the source of economy in production
• It helps management in cost control and cost reduction
• It facilitates cost comparison
• It facilitates inter firm comparison
• It helps in planning and decision making

9. B) To Workers
• Discloses efficiency of workers and introduces suitable wage plans
• Ensures security and adequate reward to workers

10. C) To creditors and Investors
• Helps the creditors and investors to judge the financial strength
and credit worthiness of the business
• A business concern with good cost system can attract more
investors

11. D) To Government
• It facilitates assessment of excise duty and Income Tax and the
formulation of policies regarding industry, export, import etc.
• Helps in the preparation of national plans for economic
development

12. E) To Public
• Costing removes all types of wastage and inefficiencies, so it helps
to produce quality products at reasonable price
• Public feels fairness of price based on a costing system
• Brings stability to industry which helps to increase balanced and
steady economic growth.

13. Limitations
• It is not an exact science and involves inherent element of
judgement
• Cost varies with purpose
• It presents base for taking best decisions
• Does not give outright solution to the problem
• It is too expensive to be adopted by small concerns
• No uniform system of cost accounting
• It cannot be applied to all types of industries.

14. Distinction between Financial Accouting and
Cost Accounting
Financial Accounting
• Financial accounts are accounts
of whole business
• Costs are reported in total
• Relate to all commercial
transaction of the business
• Deal with actual facts and
figures
• Concerned with external
transactions
Cost Accounting
• Cost accounts are only part of
financial accounts
• Costs are broken down on units
basis
• Relate to transactions connected
with the manufacture of goods
and services
• Concerned with internal
transactions

15. • Disclose net profit or net loss of
business as a whole
• Stock is valued at cost or market
price whichever is less
• Postmortem analysis as historical
costs are uses
• Does not reveal material
wastage and idle time
• Prepared on annual basis
• Purely independent
• Disclose profit or loss of each
product, unit etc.
• Stock is valued at cost
• It is not a postmortem analysis
as estimates and standards are
used
• Reveals wastage and idle time
• Cost reporting is continuous and
maybe daily, weekly, monthly
annually etc.
• Dependent on financial
accounting

16. Essential Characteristics of a Good Costing
System
• Suitable to the firm
• Simplicity
• Flexibility
• Economical
• Comparability
• Less clerical work
• Minimum changes to the existing one
• Efficient system of material control
• Effective wage system
• Duties and responsibility of cost accountant

17. Factors to be considered before setting up a
cost system
• Objectives
• Organisational structure of the business
• Nature of product and business
• Methods and techniques of costing
• Technical aspects
• Control system
• Collection of data
• Co-operation of staff
• Cost records and books
• Organising the cost office
• Standardisation of forms
• Relationship of cost office to other departments

18. Practical difficulties in installing a costing
system
• Absence of cost consciousness
• Cost of installation
• Lack of support from senior executives and managers
• Shortage of trained staff
• Resistance from employees and workers.

19. Measures for successful implemntation
• Provide proper training for existing staff
• The proposed costing system should be easy to follow
• Management and employees should be given adequate information
about benefits of costing system
• Implementation and operating cost should be kept minimum
• Management should make it clear to the staff that they would not
be replaced
• Proper supervision and review must be conducted