This document provides definitions and explanations of key concepts in cost accounting. It defines cost, costing, cost accounting, and cost accountancy according to the Chartered Institute of Management Accountants. It also defines and explains concepts like cost centers, cost units, profit centers, cost control, cost reduction techniques, and the differences between cost and profit centers. The document was prepared by Dr. R. Sridevi and provides an introduction to foundational cost accounting terminology and principles.

1. INTRODUCTION TO COST
ACCOUNTING
PREPARED BY
DR.R.SRIDEVI
ASSISTANT PROFESSOR
DEPARTMENT OF BCOM PA
SRI RAMAKRISHNA COLLEGE OF ARTS AND SCIENCE
COIMBATORE
TAMILNADU

2. DEFINITION OF COST
• AS PER THE DEFINITION OF INSTITUTE OF COST ACCOUNTANTS (ICMA), NOW IT IS KNOWN
AS CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS (CIMA),LONDON “COST” IS
AMOUNT OF:
(A)ACTUAL EXPENDITURE INCURRED ON A GIVEN THING AND
(B)NATIONAL EXPENDITURE ATTRIBUTABLE TO A GIVEN THING.

3. DEFINITION OF COSTING
• THE I.C.M.A, LONDON HAS DEFINED ‘COSTING’ AS THE ASCERTAINMENT OF COSTS. ”IT REFERS
TO THE TECHNIQUES AND PROCESSES OF ASCERTAINING COST AND STUDIES THE PRINCIPLES
AND RULES CONCERNING THE DETERMINATION OF COST OF PRODUCT AND SERVICES”.
• COST ASCERTAINMENT IS DONE BY VARIOUS METHODS AND TECHNIQUES SUCH AS JOB
COSTING, PROCESS COSTING, UNIT COSTING, HISTORICAL COSTING, MARGINAL COSTING,
UNIFORM COSTING,ETC.

4. DEFINITION OF COST ACCOUNTING
• IT IS A METHOD OF ACCOUNTING FOR COST. THE PROCESS OF RECORDING AND
ACCOUNTING FOR ALL ELEMENTS OF COST IS CALLED ‘COST ACCOUNTING’
• I.C.M.A HAS DEFINED COST ACCOUNTING AS, “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.IN ITS
WIDEST USAGE IT EMBRACES THE PREPARATION OF STATISTICAL DATA, THE APPLICATION OF
COST CONTROL METHODS AND THE ASCERTAINMENTS OF THE PROFITABILITY OF ACTIVITIES
CARRIED OUT OR PLANNED”.

5. DEFINITION OF COST ACCOUNTANCY
• IT IS AN AID TO MANAGEMENT FOR DECISION MAKING.
• I.C.M.A DEFINED COST ACCOUNTANCY AS, “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 THEREFROM FOR THE PROPOSE OF MANAGERIAL
DECISION MAKING”. THUS, THE TERM INCLUDES COSTING, COST ACCOUNTING, BUDGETARY
CONTROL, COST CONTROL AND COST AUDIT.

6. COST CENTRE
• COST CENTRE IS DEFINED AS “A LOCATION, PERSON OR ITEM OF EQUIPMENTS (OR GROUPS
OF THESE) FOR WHICH COSTS MAY BE ASCERTAINED AND USED FOR THE PURPOSE OF COST
CONTROL”
• COST CENTRE INCLUDES VARIOUS DEPARTMENTS – BOTH PRODUCTION AND SERVICES
DEPARTMENTS.
• TYPES OF COST CENTRE :-
• IMPERSONAL COST CENTRE - IS ONE WHICH CONSISTS OF A LOCATION OR ITEM OF
EQUIPMENT (OR A GROUP OF THESE)
• PERSONAL COST CENTRE – IS ONE WHICH CONSISTS OF A PERSON OR GROUP OF PERSONS
• OPERATION COST CENTRE – IS ONE WHICH CONSISTS OF THOSE MACHINES AND/OR
PERSONS CARRYING OUT SIMILAR OPERATIONS.
• PROCESS COST CENTRE – IS ONE WHICH CONSISTS OF A SPECIFIC PROCESS OR A
CONTINUOUS SEQUENCE OF OPERATION.

7. COST UNIT
• DEFINITION: THE CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON, DEFINES
A UNIT OF COST AS “A UNIT OF PRODUCT OR SERVICES IN RELATION TO WHICH COSTS ARE
ASCERTAINED”.
• TYPES OF COST UNITS: (2TYPES)
• SINGLE UNITS – THE OUTPUT IS IDENTICAL AND CAN BE EXPRESSED CONVERSION MEASURES
LIKE KGS, TONS, UNITS, ETC.
• COMPOSITE UNITS – COMPOUND AND COMPOSITE UNITS ARE THE COMBINATION OF TWO
OR MORE UNITS LIKE “PASSENGER MILES” , “TONS-KILOMETRES” AND “PATIENT-BED DAYS”.

8. PROFIT CENTRE
• IT IS A SEGMENT OF A BUSINESS RESPONSIBLE FOR ALL ACTIVITIES INVOLVED IN THE
PRODUCTION AND SALES OF PRODUCTS AND SERVICES. PROFIT CENTRE ARE RESPONSIBLE
FOR REVENUES AND COSTS. IT IS CREATED FOR EVALUATING PERFORMANCE DIVISION. PROFIT
CENTRE HAS AUTONOMY FOR DECISION CONCERNED WITH THE CENTRE.

9. DIFFERENCE BETWEEN COST CENTRE AND PROFIT CENTRE
• RESPONSIBILITY- COST CENTRE IS A SEGMENT OF ACTIVITIES OR AREA OF RESPONSIBILITY FOR
WHICH COSTS ARE ASCERTAINED. PROFITS CENTRE IS A SEGMENT OR ACTIVITY OF BUSINESS
FOR WHICH BOTH REVENUE AND EXPENSES ARE IDENTIFIED.
• PURPOSE- COST CENTRES ARE IDENTIFIED FOR ACCOUNTING CONVENIENCE AND COST
CONTROLS. PROFIT CENTRES ARE CREATED FOR DECENTRALISTION OF OPERATIONS.
• AUTONOMY- COST CENTRES ARE NOT AUTONOMOUS. PROFIT CENTRES ARE AUTONOMOUS.
• TARGETS-COST CENTRES DO NOT HAVE TARGETS. PROFIT CENTRES HAVE PROFITS TARGETS.
• NUMBER OF CENTERS- THERE MAY BE MANY COST CENTRES WHERE AS PROFIT CENTRES ARE
FEW IN NUMBERS.

10. COST CONTROL
• THE FUNDAMENTAL OBJECTIVES OF COST ACCOUNTING ARE ASCERTAINMENT OF COST,
CONTROL OF COSTS AND REDUCTION OF COST.
• MEANING OF COST CONTROL:-
THE CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON DEFINES COST
CONTROL AS, “THE REGULATION BY EXECUTIVE ACTION OF THE COST OF OPERATING AS
UNDERTAKING PARTICULARLY WHERE SUCH ACTION IS GUIDED BY COST ACCOUNTING”
COST CONTROL IS EFFECTED THROUGH SETTING STANDARDS AND COMPARING ACTUAL
PERFORMANCE TO ASCERTAIN DEVIATIONS AND TAKING CORRECTIVES STEPS TO ENSURE
FUTURE EFFECTIVE ACTUAL PERFORMANCE.

11. ELEMENTS OF COST CONTROL
THE MAJOR ELEMENTS OF COST CONTROL ARE:-
1. SETTING UP OF STANDARDS
2. RECORDING OF ACTUAL PERFORMANCE
3. COMPARISION OF STANDARDS WITH ACTUAL PERFORMANCE TO ARRIVE
DEVIATIONS/VARIANCES.
4.ANALYSING VARIANCE AND FIXING RESPONSIBILITY FOR VARIANCE.
5.INITIATION OF CORRECTIVE ACTION TO ELIMINATE CAUSES OF VARIANCE AND ENSURE
EFFECTIVE FUTURE PERFORMANCE.

12. COST CONTROL TECHNIQUES
• EFFECTIVE TOOLS UNDER COST CONTROL ARE AS UNDER:-
1. MATERIAL CONTROL
2. LABOUR CONTROL
3. OVER HEAD CONTROL
4. BUDGETARY CONTROL
5. STANDARD COSTING
6. MARGINAL COSTING AND
7. PRODUCTIVITY AND ACCOUNTING RATIOS

13. COST REDUCTION
MAIN OBJECTIVE OF ANY FIRM OR BUSINESS ENTITY IS EARNING PROFITS. PROFITS IS RESULT OF TWO
VARYING FACTORS VIZ SALES AND COST. PROFIT IS LARGER IF THE GAP BETWEEN SALES AND COST IS
WIDER. PROFIT CAN BE MAXIMIZED EITHER BY INCREASING THE SALES OR BY REDUCING COSTS. BUT IT MAY
NOT BE POSSIBLE TO INCREASE SELLING PRICES WITHOUT HAVING ADVERSE EFFECT ON THE SALES
VOLUME WHICH REDUCES PROFITS. BESIDES INCREASE IN PRICES OF PRODUCTS, THE PRICES OF RAW
MATERIALS, WAGES OF EMPLOYEES AND OTHER EXPENSES ALSO WILL INCREASE, WHICH RESULTS IN
INCREASE OF COST. THEREFORE, BUSINESS ENTITY, EXPLORES METHODS TO CUT DOWN EXPENDITURE
AND REDUCE THE COSTS OF PRODUCTS. HENCE COST REDUCTION IS THE BETTER ALTERNATIVE TO
MAXIMISE PROFITS, INSTEAD OF INCREASE OF SELLING PRICE.