Cost accounting is the process of accounting for costs from when they are incurred until their relationship to cost centers and cost units is established. It involves preparing statistical data, applying cost control methods, and determining the profitability of activities. Cost accounting reveals profitable and unprofitable activities, helps with cost control using techniques like standard costing and budgetary control, aids decision making, assists with inventory control, helps reduce costs, and aids in formulating policies. It is important for management, workers, and creditors.

1. BY,
SOJI MATHEW

2. Definition:
“ Cost Accounting is the process of accounting
for costs from the point at which expenditure is
incurred or committed to the establishment of its
ultimate relationship with cost centres and cost units.
In it’s widest usage, it embraces the preparation of
statistical data, the application of cost control
methods and ascertainment of profitability of
activities carried out or planned”.
- CIMA (UK)

3. 1) Reveals Profitable and Unprofitable Activities:
 On this information management may take
steps to reduce or eliminate wastages and
inefficiencies.
 Occurring in any form such as Idle Time, Under
utilization of plant capacity, spoilage of materials
etc.
2) Helps in Cost Control:
 Using special techniques like Standard
Costing and Budgetary Control .

4. 3) Helps in Decision Making:
 Supplies cost data and other related information for
managerial decision-making.
 Such as ,
i. Introduction of a new product line.
ii. Determining export price of products.
iii. Make or buy etc.
4) Helps in Inventory Control:
 Perpetual Inventory System( which is an integral part
of Cost Accounting) – Helps in the preparation of interim
Profit and Loss.
 Other Techniques like ABC Analysis, Level setting etc
are also used in Cost Accounting.

5. 5) Helps in Cost Reduction:
 Helps in introduction of a cost reduction
programme.
 Find out new and improved ways to reduce cost.
6) Aids in formulating policies:
 Costing provides such information to
management that enables them to ,
i. Formulate production and pricing
policies.
ii. Preparing estimates of contracts and
tenders.

6. The limitation of financial accounting has
made the management to realise the importance of
cost accounting. The importance of cost accounting
are as follows:
 Importance to Management:
1) Helps in ascertainment of cost:
Ascertainment of cost of process, product, Job,
contract, activity, etc., by using different techniques such
as Job costing and Process costing.

7. 2) Aids in Price Fixation:
 Demand and supply, activities of competitors,
market condition play an important role in
determining the price of product and cost to the
producer.
 The producer can take necessary help from his
costing records.
3) Helps in Cost reduction:
 Cost can be reduced in the long-run when cost
reduction programme and improved methods are
tried to reduce costs.

8. 4) Elimination of wastage:
 As it is possible to know the cost of product at
every stage, it becomes possible to check the forms of
waste such as time, expenses, material etc .
5) Helps in identifying unprofitable activities:
 With the help of cost accounting the unprofitable
activities are identified, so that the necessary correct
action may be taken.

9. 6) Helps in checking the accuracy of financial account:
 Cost accounting helps in checking the accuracy
of financial account
 With the help of reconciliation of the profit as
per financial accounts with the profit as per cost
account.
7) Helps in fixing selling Prices:
 It helps the management in fixing selling prices
of product by providing detailed cost information.

10.  Importance to Workers:
 An efficient costing system benefits employees
through incentives plan in their enterprise, etc. As a
result both the productivity and earning capacity
increases.
 Importance to Creditors:
 Suppliers, investor’s financial institution and other
moneylenders have a stake in the success of the
business concern and therefore are benefited by
installation of an efficient costing system.