Introduction: cost accounting, basic principles and difference between cost and financial accounting

1. Amity Business School
Cost Accounting
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2. Amity Business School
• In the initial stages cost accounting was merely
considered to be a technique for ascertainment
of cost of products or services on the basis of
historical data. In course of time due to
competitive nature of the market, it was realized
that ascertainment of cost is not as important as
controlling costs.
• Hence, cost accounting started to be considered
more as a technique for cost control as compared
to cost ascertainment.
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3. Amity Business School
• Due to technological development in all fields,
now cost reduction has also come within the
ambit of cost accounting.
• Cost accounting is thus concerned with
recording, classifying and summarizing costs
for determination of costs of products or
services, planning, controlling and reducing
such costs and furnishing of information to
management for decision making.
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4. Amity Business School
Definitions of Cost Accounting
• “Cost accounting is a quantitative method that
accumulates, classifies, summarizes and interprets
information for three major purposes: (in) Operational
planning and control ; (ii) Special decision; and (iii)
Product decision.” -Charles T. Horngren
• “Cost accounting is defined 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 therefore for the purposes of
managerial decision making. –Wheldon
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5. Amity Business School
Basic Cost Concepts
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Cost
• Generally cost may be explained as the amount of
expenditure, actual or notional, relating to a specific thing
or activity such as product, job, service, process etc. It
may also be expressed as a sacrifice which may be
defined in the terms of money means it is the amount of
resources given up in exchange for some goods and
services. Cost and expenses are different but relative
terms.
• Where ‘costs’ includes the cost of material and labour in
addition to expenses, the term expenses is widely applied
in financial accounts for various types of historical cost.
In cost accounting, it is used for costs other than cost of
raw material and wages.
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7. Amity Business School
• Costing:
• Costing is the technique and process of
ascertaining costs.
• Costing is classifying, recording and
appropriate allocation of expenditure for the
determination of the costs of the products and
services; the relation of these costs to sales
value and the ascertainment of profitability.
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8. Amity Business School
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• Cost Accounting:
• Cost accounting is the process of accounting
for the costs. It embraces the accounting
procedures relating to recording of all income
and expenditure and the preparation of
periodical statements and reports with the
object of ascertaining and controlling costs.
• It is thus the formal mechanism by means of
which costs of products or services are
ascertained and controlled.

9. Amity Business School
Cost Accounting vs. Financial
Accounting
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10. Amity Business School
Basis Cost Accounting Financial Accounting
Purpose Its main purpose is to guide the
management for proper planning,
controlling and decision-making etc.
It reveals the final results during the
particular period for every concern.
Coverage It deals with expenses related to or
identified with products.
This deals with whole organization
connected with manufacturing and also
other activities or areas.
Basis This deals with estimated and actual
data both.
This deals only with the actual
financial transactions and figures and
not on estimation.
Scope It is related to a particular product or
service.
It includes all commercial transaction
of organisation for a particular period
of time.
Parties
Involved
This deals with internal transactions
between departments within the
organisation.
This concern with external parties as
well as external transactions.
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11. Amity Business School
Basis Cost Accounting Financial Accounting
Final
Statement
Only one statement is prepared i.e.
statement of cost.
Profit & Loss A/c and balance
sheet both are prepared.
Valuation of
Stock
Stock is valued at cost Market value or cost whichever
is lower is considered as the
value of stock.
Nature It does not consider only
historical records but also
predetermined cost.
It is related to the historical
records.
Classification It is clearly classifies the cost into
fixed and variable cost.
In this cost is not classified
into fixed and variable cost.
Legal
Requirements
Generally these accounts are kept
to meet management requirements.
Now it has become obligatory.
It is required by companies act,
Income Tax Act, etc. to keep
these accounts.
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