Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating current and prospective costs related to a product, service, or activity. It provides data to management for planning and control purposes and facilitates the preparation of financial statements. Cost accounting helps management determine product costs, control expenses, eliminate waste, and make decisions regarding pricing, outsourcing, and budgeting. It provides more detailed cost information than financial accounting.

2. COST
Cost means “the price
paid for something”
(or) “expenses made
to manufacture a
product”.

3. COST ACCOUNTING
MEANING:
Cost accounting is the process of 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 purposes of control and guidance
of management.

4. COST ACCOUNTING
DEFINITION:
According to Kohler, “Cost Accounting is a branch of
accounting dealing with the classification, allocation,
summarising and reporting of current and prospective
costs.

5. OBJECTIVES OF COST ACCOUNTING:
 Ascertainment of cost
 Determining selling price
 Controlling cost
 Providing information for decision making
 Guide to business policy such as make or buy,
introduction of new product etc.,
 Facilitating preparation of financial and other
statements

6. IMPORTANCE OF COST ACCOUNTING:
 TO THE MANAGEMENT:
 To determine product cost
 To facilitate planning and control of regular business
activities
 Elimination of wastage
 Helps in estimate
 Helps in identifying unprofitable activities
 To supply information for short and long run decisions.

7. IMPORTANCE OF COST ACCOUNTING:
 TO THE EMPLOYEES:
 Worker have an interest to efficient
costing systems benefits employees
through incentive plan.
 As a result both productivity and earning
capacity increase.

8. FINANCIAL ACCOUNTING
Financial Accounting is the branch
of accounting, which keeps the
complete record of all monetary
transactions of the entity and reports
them at the end of the financial
period in proper formats that
increases readability of the financial
statements among its users.

9. FINANCIAL ACCOUNTING VS COST ACCOUNTING :
BASIS FOR COMPARISON FINANCIALACCOUNTING COST ACCOUNTING
Purpose It provides information about
the business in a general way. It
tells about the profit and loss
and financial position of the
business to owners and other
outside parties.
It provides information to
management for proper
planning operation control
and decision making.
Recording It classifies, records and
analyses the transactions in a
subjective manner i.e. according
to the nature of expenses.
It records the expenditure in an
objective manner i.e. according
to the purposes for which the
costs are incurred.
Reporting of costs The costs are reported in
aggregate in financial accounts.
The costs are broken down on a
unit basis in cost accounts.
Form of accounts These accounts are kept in such
a way as to meet the
requirements of Companies Act
and Income Tax Act.
These accounts are generally
kept voluntarily to meet the
requirements of management.
But now Companies Act has
made it obligatory to keep costs
records in some manufacturing
industries.

10. FINANCIAL ACCOUNTING VS COST ACCOUNTING :
BASIS FOR
COMPARISON
FINANCIAL
ACCOUNTING
COST ACCOUNTING
Information Monetary information is only
used.
Non-Monetary information like
units is also used.
Fixation of Selling Price Financial accounts are not
maintained with the object of
fixing selling prices.
Cost accounting provides
sufficient data for fixation of
selling prices.
Figures Financial accounts deal mainly
with actual facts and figures.
Cost accounts deal partly with
facts and figures and partly
with estimates.
Stock Valuation Stocks are valued at cost or
market price which ever is less.
Stocks are valued at cost.
Control It lays emphasis on the
recording aspect without
attaching any importance to
control.
It provides a detailed system of
control for materials, labour
and overhead costs.

11. MANAGEMENT ACCOUNTING
 Management Accounting refers to the
preparation of financial and non-financial
information for the use of management of the
company. It is also termed as managerial
accounting. The information provided by it is
helpful in making policies and strategies,
budgeting, forecasting plans, making
comparisons and evaluating the performance of
the management.

12. MANAGEMENT ACCOUNTING VS COST ACCOUNTING :
BASIS OF COMPARISON COST ACCOUNTING
MANAGEMENT
ACCOUNTING
Deals with It deals with ascertainment,
allocation, apportionment and
accounting aspects of costs.
It deals with the effect and impact
of costs on the business.
Base It provides a base for
management accounting.
It is derived from both cost
accounting and financial
accounting.
Role It is helpful in collecting
costing data for the
management.
It has greater degree of relevance
and objectivity as the management
accountant has a clear idea of the
types of costs and items requiring
analysis and the states the specific
problems of business.
Status The status of cost accountant
comes after the management
accountant.
Management accountant is senior
in position to cost accountant.

13. MANAGEMENT ACCOUNTING VS COST ACCOUNTING :
BASIS OF COMPARISON COST ACCOUNTING
MANAGEMENT
ACCOUNTING
Outlook Cost accountant has a narrow
approach. He has to refer to
economic and statistical data for
analyzing cost effects.
Management accountant reports
the effect of cost on the
business along with cost
analysis.
Tools & Technique It has standard costing, variable
costing, break even analysis
etc., as the basic tools and
techniques.
Along with these, the
management accountant has
funds and cash flow statements,
ratio analysis etc., as this
accounting tools ad techniques.
Installation It can be installed without
management accounting.
It needs financial cost
accounting as its base for its
installations.

14. CLASSIFICATION OF COST :
 CLASSIFICATION OF COST means, the grouping of costs according to
their common characteristics. The important ways of classification of costs
are:
 BY NATURE OR TRACEABILITY: Direct Costs are Directly
attributable/traceable to cost object. Direct costs are assigned to Cost
Object.
 Indirect Costs are not directly attributable/traceable to Cost Object. Indirect
costs are allocated or apportioned to cost objects.
 BY FUNCTIONS: Production, Administration, Selling and Distribution,
R&D.
 BY BEHAVIOR: Fixed, Variable, Semi-variable. Costs are classified
according to their behavior in relation to change in relation to production
volume within given period of time. Fixed Costs remain fixed irrespective
of changes in the production volume in given period of time. Variable costs
change according to volume of production. Semi-variable costs are partly
fixed and partly variable.

15. CLASSIFICATION OF COST :
 BY CONTROLABILITY: Controllable, uncontrollable costs.
 Controllable costs are those which can be controlled or influenced by a
conscious management action.
 Uncontrollable costs cannot be controlled or influenced by a conscious
management action.
 BY NORMALITY: Normal costs and abnormal costs. Normal costs arise
during routine day-to-day business operations. Abnormal costs arise because
of any abnormal activity or event not part of routine business operations.
E.g. Costs arising of floods, riots, accidents etc.
 BY TIME: Historical cost and predetermined costs. Historical costs are
costs incurred in the past. Predetermined costs are computed in advance on
basis of factors affecting cost elements. EXAMPLE: Standard Costs.
 BY DECISION MAKING COSTS: These costs are used for managerial
decision making.

16. ELEMENTS OF COST:
ELEMENTS
OF COST
MATERIALS
DIRECT INDIRECT
LABOUR
DIRECT INDIRECT
OVERHEADS
PRODUCTION
ADMINISTR
ATION SELLING
OTHER
EXPENSES
DIRECT INDIRECT

17. MATERIAL COST :
Cost of commodities supplied to an
Undertaking
DIRECT MATERIALS COST:
Those costs which are incurred for
And conveniently identified with a particular cost unit,
Process or department.
Ex: Cost Of Raw Material
INDIRECT MATERIALS COST:
Those costs which cannot be
Conveniently identified with a particular cost unit, process
Or department.
Ex: Cost of material that are inexpensive but may or may not
Physically become part of the finished goods.

18. /LABOUR COST :
Cost of remuneration of the
Employees of an undertaking.
DIRECT LABOUR COST:
Wages paid to workers directly
Engaged in the production process.
Eg: wages of machine operator
INDIRECT LABOUR COST:
Those wages which cannot be
Conveniently identified with a particular cost unit,
Process or department

19. OTHER EXPENSES:
The cost of services provided to an undertaking
DIRECT EXPENSES:
Those expenses which can be identified
With and allocated to cost centers or units.
Eg: Royalty paid, depreciation of a plant used
INDIRECT EXPENSES:
All indirect costs other than indirect
materials and labor. They cannot be directly identified
with a particular job, process or work order and are
common to cost units or cost centers
Ex: Rent and rates, lighting and power

20. PRODUCTION OVERHEADS:
Production overheads are expenses made in the
factory for the production of a product
Ex: work manager’s salary, salary of factory office
staff, salary of inspector and supervisors,
watchman, sweeper etc.,

21. OFFICE AND ADMINISTRATION
OVERHEADS:
Administration overheads are the expenses made in
the office for the production of a product.
Ex: Administration office, postage, office rent,
insurance of office building, office lighting

22. SELLING AND DISTRIBUTION
OVERHEADS:
 Selling overheads are the expenses made for the
selling of a product
Ex: Oil For Delivery Vans ,Salary Of Sales Staff,
Salary Of MD, Directors, Advertising, Traveling
Expenses.

23. ADVANTAGES OF COST
ACCOUNTING:
 Adequacy or Inadequacy of Selling Prices.
 Disclosure of profitable Products.
 Control of Material and Supplies.
 Maintenance of Proper Investment in Inventories.
 Correct Valuation of Inventories.
 Whether to Manufacture or Purchase from Outsiders.
 Control of Labour Cost.
 Use of Company-wide Wage Incentive Plans.
 Controllable and Uncontrollable Cost.
 Use of Standards for Measuring Efficiency.
 Reduction of Losses Due to Seasonal Conditions.
 Budgeting.
 Reliable Check on General Accounting.

24.  The system is more complex.
 It is expensive.
 Inapplicability of costing method and technique.
 Not suitable for small scale units.
 Lack of Accuracy.
 Use of Secondary Data.
 Lack of cooperation of employees.
 Does not control Cost by itself.
 It is based on estimation and previous data.
 It only bring out the cost of goods or services.
 It serves the information need of the management.
 Not useful for determining the tax liabilities.

25. THE END