Cost accounting involves classifying, recording, and allocating expenditures to determine the costs of products or services. It provides data to management for control and guidance. Cost accounting ascertains the cost of every order, job, contract, process, service, or unit. It deals with product costs as well as selling, distribution, and other costs. The goal is to determine total costs with reasonable accuracy and show how costs are constituted to control and reduce them.

1. COST
ACCOUNTING
Basics

2. Cost Accounting
Meaning:
• Cost Accounting is the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and for the
presentation of suitably arranged data for the purposes of control and guidance of
management.
• It includes the ascertainment of the cost of the every order, job, contract, process,
service or unit as may be appropriate.
• It deals with the cost of products, selling and distribution,
• It is thus the provision of such analysis and classification of expenditure as will
enable the total cost of any particular unit of products or services to be ascertained
with reasonable degree of accuracy and at the same time to disclose exactly how
such total cost is constituted so as to control and reduce its cost.
’

3. Definition:
According to Wheldon, ‘Cost accounting is the application of accounting and costing
principles, methods and techniques in the ascertainment of costs and the analysis of
saving/or excess cost incurred as compared with previous experience or with
standards
Costing:
It is a technique and process of ascertaining costs. This technique consists of
principles and rules which govern the procedure of ascertaining the cost of
products/services/ The process of costing includes routines of ascertaining costs by
historical or conventional costing, standard costing and marginal costing.

4. 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 ascertainment of
profitability.
• Thus cost accountancy is the science, art and practice of a cost accountant.
Scope of Cost Accountancy:
i. Cost Ascertainment : Collection and analysis of expenses, the measurement of
production of the different products at the different stages of manufacture and
the linking up of production with expenses
ii. Cost Accounting : the process of accounting for cost which begins with
recording of expenditure and ends with preparation of statistical data.
iii. Cost Control: Guidance and regulation by executive action of the costs of
operating of an undertaking. Standard costing, Budgetary control, proper
presentation and reporting of cost data and cost unit

5. Advantages of Cost Accountancy:
i. Profitable and unprofitable activities are disclosed
ii. Enables a concern to measure the efficiency and then to maintain and improve it
iii. Provides information upon which estimates and tenders are based
iv. Guides future production policies
v. Helps in increasing profits
vi. Enables periodical determination of profits and losses
vii. Reliable data for comparing costs
viii.Exact cause of a decrease or in an increase in profit or loss
ix. Attracts more investors
x. Helpful to the Government
xi. Helpful to the Consumers
xii. Efficiency of Public Enterprises

6. Financial Accounting and Cost Accounting:
• Both financial and cost accounting are the branches of accounting whose main object is
to provide information by recording the business transactions systematically and
scientifically so that it may serve the purpose of the management for policy formulation
and controlling and to provide necessary protection to the outsiders.
• Both are based on double entry system and their roles are supplementary.
• The ordinary trading account is a locked storehouse of most valuable information, to
which cost system is the key.
• In case of financial accounting stress is on the ascertainment and presentation of profits
earned or losses incurred in the business.
• Due to this reason, in financial accounting the transactions are recorded, classified and
analysed in a subjective manner, i.e., according to the nature of expenditure. They do not
provide the information on the relative effectiveness of products, processes, human
resources, equipments and other factors of production. The provision of accounting and
financial data at macro level does not provide tools for indepth analysis for performance
in terms of cost efficiency. Thus, Financial accounting treats costs very broadly, while
cost accounting does this in much greater detail.

7. Method of Costing:
Basic Methods:
1. Specific Order Costing (or Job/Terminal
Costing)
2. Operation Costing (or Process or Period
Costing)
a. Job Costing
b. Contract Costing
c. Batch Costing
d. Process Costing
e. One Operation (Unit or Output) Costing
f. Service (or Operating Costing)
g. Farm Costing
h. (Multiple) Operation Costing
i. Multiple Costing

8. Terms:
i. Direct Materials : Directly identified and charges
a. All raw materials
b. Materials specifically purchased for a specific job
c. Parts or components purchased or produced
d. Primary packing materials
ii. Direct Labour: Directly identifiable labour
a. Labour engaged on the actual production of the product
b. Labour engaged in aiding the manufacture by way of supervision,
maintanence
c. Inspectors, analysts etc.,
iii. Direct Expenses : Identifiable to particular cost centre directlhy
a. Royalty
b. Excise dury
c. Hire charges etc.,

9. iv. Overheads: Aggregate of indirect materials, indirect labour and other expenses including services as cannot
conveniently charges to specified cost units
a. Manufacturing or Production or Works Overhead
-- Depreciation, electricity charges, coal and fuel charges, rent, rates and taxes on works, office printing,
stationary, postage etc.,
b. Administration overhead
-- office rent, light, heat, salaries and wages of clerks, secretaries and accountants, credit approval, cash
collection and treasurer’s department
c. Selling overhead
-- Salesmen’s salaries,, showroom expenses, advertisement charges, fancy packing charges, samples and free
gifts.
d. Distribution overhead
--Warehouse rent, warehour staff salaries, insurance, expenses on transport, losses and dagames in transit,
repairing and reconditioning and wastage
e. Research and Development Expeneses:
-- new improved products, new application of materials or products, new implementation of decision

10. Overheads Classification:
i. Indirect materials
a. Stores used in maintenance of machinery,
buildings etc.,
b. Stores used by the service department
c. Materials which due to their cost being small
i. Indirect Labour
a. Supervisors
b. Maintenance workers
c. Departmental coolies
i. Indirect Expenses
a. rent, rates, municipal taxes, general
manager’s salary, canteen and welfare expenses.

11. Cost Sheet:
i. Statement designed to show the output of a particular
accounting period along with break-up costs
ii. The data are collected from various statements of
accounts which have been written in cost accounts
iii. It is a memorandum statement
Advantages:
i. Discloses the total cost and cost per unit
ii. Enables a manufacturer to keep a close watch and
control over cost of production
iii. Provides a comparative study with past results and
standard costs
iv. Formulate a definite useful production policy
v. Helps in fixing accurate selling price
vi. Minimise the cost production
vii. Submit quotations