BBA SEM 5 PPT 1 PSMDCBSDKB GNMF VCSDVSDV VHV

COST ACCOUNTING
UNIT 1
INTRODUCTION
PREPARED BY:- NISHANT MODHA

MEANING OF COST:-
The word cost does not have a definite meaning
for common people, cost means the amount spent
on purchasing an article. According to the Oxford
dictionary cost means the price paid for
something

MEANING OF COST ACCOUNTING
Cost accounting is the science of recording AND presenting
business transaction pertaining to the production of goods and
services; whereby these records become a method of measurement
and a means of control.
(Prof. Van sickle)
Costing is the classifying recording and appropriate allocation of
expenditure for the determination of the cost of product or service
and for the presentation for suitably range data for the purpose of
control and guidance of the management.
(Harold j.Wheldon)

DIFFERENCE BETWEEN FINANCIAL
AND COST ACCOUNTING
FINANCIALACCOUNTIG COST ACCOUNTING
a) Financial accounting records
transactions relating to outsiders of
the business.
a) Cost accounting record internal
transactions.
b) Financial accounting provides
information regarding the profit and
loss as well as the financial position
to owners and the required authorities
b) Preparation of cost account is to
provide information to the
management for decision making,
planning and control
c) Preparation of financial account is
compulsory
c) Compulsory only for certain
industries and it is optional for other
industries

d) In financial accounting the
operating result will be provided
usually at the end of the year
d) In cost accounting the information
will be provided to the management
as and when required
e) There is no distinction between
fixed & variable costs & controllable
and uncontrollable costs.
e) Distinction is made between fixed
& variable costs & controllable and
uncontrollable costs.
f) The Overall result of the business
can be revealed and the result of each
department cannot be known.
f) The Analysis of the profitability of
each department is made and if any
department found unprofitable
corrective measures can be taken
AND COST ACCOUNTING

g) The stocks are valued at cost or
market price whichever is lower
g) Stocks are always valued at cost
h) Financial accounting is
independent and its worked in the
absence of cost accounting
h) But cost accounting depends on
financial accounting as it requires the
basic data
i) Financial accounting reveals the net
profit or net loss of a business as a
whole
i) Cost accounting reveals the cost,
profit or loss of each product, job
process, contract etc.
AND COST ACCOUNTING

j) In financial accounting control is
not given much importance and its
mainly concern with the recording of
transaction
j) In cost accounting a detailed system
of control for material, labour and
overheads is made with the help of
various tools and techniques like
budgetary control and standard
costing
k) Financial accounting is historic in
nature it is uses the figures relating to
the past
k) Cost accounting is historic and
futuristic therefor, actual and
estimates are used in the cost
accounting.
l) In financial accounting records are
maintain according to the companies
act income tax act etc.
l) In cost accounting records are
prepared to meet the requirements of
the management
AND COST ACCOUNTING

m) It analysis the expenditure under
different type of expand like wages
salaries etc.
m) It analysis expenditure under
different head likes direct material
direct labour etc
n) In financial accounting wastages,
shortages normal losses and abnormal
losses etc are not considered
n) In cost accounting wastages,
normal losses and abnormal losses
etc, are considered to eliminate losses
o) It records classified summaries and
interprets the accounting result with
the help of various business
transaction
o) It records the expenditure
according to the purpose for which
the cost are incurred
AND COST ACCOUNTING

NATURE OF COST ACCOUNTING
1. Cost accounting is a branch of knowledge : Though considered
as a branch of financial accounting , cost accounting is one of the
important branch of knowledge , i.e. , a discipline by itself . It is an
organized body of knowledge consisting of its own principles ,
concepts and conventions . These principles and rules vary from
industry to industry .
2. Cost accounting is a science : Cost accounting is a science as it is
a body of systematic knowledge relating to not only cost
accounting but relating to a wide variety of subjects such as law ,
office practice and procedure , data processing , production and
material control , etc. It is necessary for a cost accountant to have
intimate knowledge of all these field of study in order to carry on
his day - to - day activities . But it is to be admitted that it is not a
perfect science as in the case of natural science

3. Cost accounting is an art : Cost accounting is an art in the sense
it requires the ability and skill on the part of cost accountant in
applying the principles , methods and techniques of cost accountancy
to various management problems . These problems include the
ascertainment of cost , control of costs , ascertainment of
profitability , etc.

4. Cost accounting is a profession : In recent years cost accounting
has become one of the important professions which has become
more challenging . This view is evident from two facts . First , the
setting up of various professional bodies such as National
Association of Accountants ( NAA ) in USA . The Institute of Cost
and Management Accountants in UK , the Institute of Cost and
Works Accountants in India and such other professional bodies both
in developed and developing countries have increased the growing
awareness of costing profession among the people . Secondly , a
large number of students have enrolled in these institutes to obtain
costing certificates and memberships for earning their livelihood

SCOPE OF COST ACCOUNTING
Cost Analysis
Cost Audit
Cost Report
Cost Ascertainment
Cost Book Keeping
Cost System
Cost Comparison
Cost Control
Cost Computation
Cost Reduction

Cost Analysis: Cost accounting determines the deviation of the actual
cost as compared to the planned expense, along with the reason for
such variation.
Cost Audit: To verify the cost sheets and ensure the efficient
application of cost accounting principles in the industries, cost audits
are done.
Cost Report: Cost reports are prepared from the data acquired through
cost accounting to be analyzed by the management for strategic
decision making.
Cost Ascertainment: To determine the price of a product or service, it
is essential to know the total cost involved in generating that product or
service.

Cost Book Keeping: Similar to financial accounting; journal entries,
ledger, balance sheet and profit and loss account is prepared in cost
accounting too. Here, the different cost incurred is debited, and income
from the product or service is credited.
Cost System: It provides for time to time monitoring and evaluation of
the cost incurred in the production of goods and services to generate cost
reports for the management.
Cost Comparison: It examines the other alternative product line or
activities and the cost involved in it, to seek a better opportunity for
generating high revenue.

Cost Control: Sometimes, the actual cost of a product or service
becomes higher than its standard cost. To eliminate the difference
and control the actual cost, cost accounting is required.
Cost Computation: When the company is engaged in the
production of bulk units of a particular product or commodity, the
actual per-unit cost is derived through cost accounting.
Cost Reduction: It acts as a tool in the hands of management to
find out if there is any scope of reducing the standard cost involved
in the production of goods and services. Its purpose is to obtain
additional gain.

OBJECTIVES OF COST ACCOUNTING
Control and Reduce Cost
Determine Selling Price
Assist Management in Decision Making
Ascertain Closing Inventory
Ensure Profit from Each Activity
Budgeting
Setting Performance Standards
Business Expansion
Minimizing Wastage
Improves Efficiency

Control and Reduce Cost: Cost accounting continuously focuses on
managing the cost of production per unit to improve profitability without
compromising with the quality of the product.
Determine Selling Price: It provides the total cost incurred in the
product or service, which is the base for fixing an appropriate selling
price.
Assist Management in Decision Making: The reports and cost sheets
generated based on cost accounting back the managerial decisions of the
organization.
Ascertain Closing Inventory: It determines the closing inventory value
at the end of the financial year.

Ensure Profit from Each Activity: Cost accounting reviews the cost
and takes corrective actions at each level to ensure profitability from
all business activities.
Budgeting: It generates the estimated cost of products or services to
assist in budget planning, implementation and control.
Setting Performance Standards: It provides a standard cost of goods
or services to sets a level for the future course of action.
Business Expansion: It estimates the cost of production at different
stages, based on this analysis, the management can plan for expansion
of the business.

Minimizing Wastage: Cost control and reduction so attained helps in
reducing the wastage during the manufacturing process.
Improves Efficiency: Cost accounting assures cost management, profit
appreciation and less wastage which ultimately enhances the overall
production and manufacturing process of products.

ADVANTAGES OF COSTING
( 1 ) Ascertaining Cost : Cost of production of each unit of goods or
service can be exactly ascertained with the help of cost accounts . It is
possible to know the exact expenditure on each element of cost
( 2 ) Price Fixation : Since cost accounts provide information relating
to exact cost of production , it facilitates the work of price fixation
considerably Cost of production is perhaps the most important factor
affecting the price
( 3 ) Preparing Tenders : Tenders have to be prepared on the basis of
reliable information provided by the costing records . If proper price for
tenders is determined , it reduces the chances of tender being rejected or
the loss being incurred due to unduly low quotation

( 4 ) Eliminating Wastage : Costing records do not only tell what the
exact cost is , but it also shows what the cost should be It throws light
on the areas where wastages in materials , labour etc occur , so that
corrective steps can be taken to remove wastages and reduce cost
( 5 ) Data for Comparison : Costing data provide useful information
for comparison purposes Costing figures of the current month are
compared with those of previous month or year and also with
standards laid down for various expenses . The comparison so made
provides management with data on the basis of which corrective steps
can be taken for controlling wastages and inefficiency
( 6 ) Locating Unprofitable Activities : A costing system brings to
light those activities which are not profitable , or which result into
wastages Comparison with standard and with figures of other units in
the same industry helps in this matter and the coveted goal of
maximization of profit can be achieved

( 7 ) Ascertaining Causes of Profit or Loss : The financial accounts
reveal the total profit or loss of business , whereas the cost accounts helps
in ascertaining causes of profit or loss . For example , a department may
be running into losses not because of high cost of production , but because
the production may be much below the capacity . This information is
revealed only by cost accounts
( 8 ) Benefits Whole Industry : Uniform costing principles may be
adopted by all units of the same industry All units may send their costing
data to the central office , without disclosing the name of the business unit
. The information so available is extremely useful in improving overall
efficiency of the whole industry

( 9 ) Information for Decision - making : Cost accounts furnish
information to the management which would help management in taking
important decisions and formulating operating policies such as
( i ) Determination of cost - volume - profit relationship .
( ii ) Whether to shut down or operate at a loss.
( iii ) Whether to make or buy from outside suppliers .
( iv ) Whether to produce by means of manual labour or install machine
or continue with old and existing machinery or to replace them by
improved and economic one .

LIMITATIONS OF COST ACCOUNTING
( 1 ) It is unnecessary in the sense that trade and industry have
developed in the past without the aid of cost accounting . The
argument shows the ignorance of the benefits of cost accounting ,
particularly in the context of the present - day cut - throat competition
. The selling price should neither be too high so as to drive away
customers , nor too low to incur losses . It is here that the cost
accounting helps the management in arriving at the correct selling
price . Secondly , cost accounts are necessary to effect economies ,
avoid wastages etc. which help to reduce the cost . Hence , cost
consciousness must be cultivated by all industrial enterprises , if they
want to survive and prosper in cut throat competition

( 2 ) Expensive : Another important argument against costing is that it
is expensive . Again this argument does not stand the test of logic .
Expenses do increase when a costing system is introduced . But the
benefits available would far exceed the cost of introducing and
operating the system . If the peculiar problems of business are studied
in detail and advice and assistance of technical staff is obtained , then it
would not be expensive , but would prove to be a profitable investment.
( 3 ) Complicated : A costing system is complicated and not easily
understood by the common man . An average employee does not
understand the cost accounts and hence , the system would not prove to
be profitable . However , it must be said that this difficulty can be
easily removed if only proper training is given to employees before
introducing the system and the forms and statements are designed as
simple as possible .

( 4 ) The system is of no use to a monopolist , as he does not have to fix
his selling price on the basis of cost of production . He is free to charge
his monopolistic price . It is argued against this that a monopolist has also
certain limitations and if he raises his price beyond a particular level ,
there would be a tendency to replace his products by substitutes
( 5 ) The cost arrived at by a cost system is not exact and it includes
a number of estimates e.g. , allocations of overheads to cost units is
always arbitrary . Use of standard cost method is based on estimates .

BBA SEM 5 PPT 1 PSMDCBSDKB GNMF VCSDVSDV VHV

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