The document provides an overview of cost accounting concepts including the nature, scope, objectives, and elements of cost accounting. It defines key terms like cost, expense, loss and discusses the classification of costs based on identifiability, activity, control, time, and normality. It also covers cost accounting concepts, methods of costing including job, batch and process costing, and the advantages and limitations of cost accounting.

1. COST ACCOUNTING(BBAA204A52)
Unit -1 : Nature and Scope of Cost Accounting
Dr. J. Mexon ,
Department of Management,
Kristu Jayanti College, Bengaluru.

2. Contents
Introduction to Cost Accounting
Scope of Cost Accounting
Objectives of Cost Accounting
Cost Accounting Concepts
Classification of Cost
Classification of Cost for Decision Making
Elements of Cost
Methods of Cost
Advantages of Cost Accounting
Limitations of Cost Accounting
Cost Accounting Vs Financial Accounting
Cost Sheet

3. Introduction to Cost Accounting
• “Cost is the amount of expenditure incurred or attributable to a given
thing” - CIMA, UK
• Costing: Costing refers to the determination of cost using cost
accounting processes and techniques.
• Cost Accounting: The process of recording and accounting for all the
elements of cost.
• Cost Accountancy: “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 as well as
presentation of information for the purpose of managerial decision
making”. - CIMA, UK

4. Cost Vs. Expense Vs. Loss
• “Cost is a measurement, in monetary terms, of the amount of
resources used for the purpose of production of goods or rendering
services” - ICWA, India
• Expense is the money spent, or costs incurred, by a business in their
effort to generate revenues. It is also said to be the cost applied
against a revenue during a accounting period.
• Loss is defined as reduction in firm’s equity. It is also said to be a cost
resulting from the decline in the service potential of an asset and
results in no benefit to the business.

5. Differences between Cost, Expense and Loss:

6. Cost Accounting Concepts
• Cost center: According to CIMA UK, a cost center is defined
as " A location, person or item of equipment for which cost
may be ascertained and used for purpose of control“.
a.) Production cost center: Directly involve in the
manufacturing operations.
b.) Service cost center: Incidental to the production process
and do not produce products directly.

7. • Cost Unit: A cost unit is defined as “a unit of product or service in
relation to which costs may be ascertained or expressed.” A cost unit
may be expressed in terms of number, length, area, weight, volume,
time, or value.
Product / Service Cost Unit
Steel Tonne
Automobile Number
Textiles Metre of cloth
Paint Litre
Crude oil Barrel
Hotel Room rent / day

8. Scope of Cost Accounting
• Costing: concerned with ascertainment of cost of the product or
process or services.
• Cost bookkeeping: involves maintenance of complete record of all
cost.
• Cost analysis: books of accounts are analysed according to categories
of cost.
• Cost control: Effected through setting standards and comparing actual
performance to ascertain deviation and taking corrective steps.
• Cost reports: presentation of cost reports for managerial decision
making.
• Cost audit: Ascertains the accuracy of cost accounting records to
ensure that they are in conformity with cost accounting principles,
plans, procedures and objectives.

9. Objectives of Cost Accounting
• Ascertainment of cost: Cost information is the basis for
determination of the price of product or service. Thus, cost
accounting helps in determination of cost and helps to classify cost in
the various categories.
• Cost control: Cost accounting helps in channelizing its resources into
the most optimum and effective use, helps to control the cost.
• Cost reduction: Reduction of cost refers to permanent reduction in
the cost of production of a product or a service without
compromising on the quality and without affecting the purpose of the
product on service.
• Assisting management: Cost accounting helps to generate reports on
cost information that helps to take decisions.

10. Classification of Cost
1. Based on Identifiability
• DIRECT COST is directly related to a cost unit/ process or
department. (Example: direct labour, direct materials,
commissions and manufacturing supplies).
• INDIRECT COST is incurred for the benefit of direct cost
process / departments. (Examples: rent, insurance, and
depreciation.)

11. 2. Based on activity
• FIXED COST is the total cost remains the same irrespective of level
of production(Output). (Example: interest, rent and salary etc)
• VARIABLE COST is the cost that varies with the level of
activity(output). (Example: Commission on sales, credit card fees)
• SEMIVARIABLE COST Semi variable cost remains fixed for a certain
level of activity and increase with output. (Electricity)

12. 3. Based on Control
• CONTROLLABLE COST is cost that can be regulated by the
management authority. (Example: direct labour, direct
materials, donations, training costs, bonuses and
overhead costs)
• NON-CONTROLLABLE COST is cost that cannot be
influenced by the management authority. (Example:
depreciation, insurance, and rent allocated)

13. 4. Based on Time
• HISTORICAL COST is the actual cost incurred at the time the asset
was acquired (original cost of an asset), as recorded in an entity's
accounting records. For example, the historical cost of an office
building was $10 million when it was purchased 20 years ago, but
its current market value is three times that figure.
• PREDETERMINED COST - estimation which is made by a company
in advance; it is done even before the production of a product
starts. The calculation is done on the basis of various variables
affecting the production like raw material, labor, factory expense
and so on.

14. 5. Based on Normality
• NORMAL COST is cost that are normal for a given level of
output and are routine part of production cost.
(Example: repairs, maintenance, salaries paid to
employees.)
• ABNORMAL COST is cost that are not usual to occur at a
given level of output and is not a part of the routine
production cost. (Example: destruction due to fire, shut
down of machinery, lock outs, etc.)

15. Classification of Cost for Decision Making
• Sunk cost: A cost which is incurred in the past and is not relevant to
the current decision making. (Example: Spending on researching,
equipment or machinery buying, rent, payroll, marketing, or
advertising expenses)
• Differential cost: Differential cost is the difference in total costs
between two acceptable alternative courses of action. The
alternative actions may arise due to change in sales volume, price,
product mix, or such actions as make or buy or continue or stop
production, etc. Example of alternative decisions.

16. Classification of Cost for Decision Making
• Marginal cost: Marginal cost is the additional cost of producing an
additional unit of a product.
• Imputed cost: This is also known as notional cost. These are
hypothetical cost which are specially computed outside the
accounting system and calculated for the purpose of decision
making. (Example: Rent of own building, interest on own capital etc.
are not actually paid but may be taken as costs notionally)

17. • Opportunity cost: An opportunity cost may be defined as the
potential benefit that is lost or sacrificed when the selection of one
course of action.
• Replacement cost: Replacement cost is the correct market cost of
replacing an asset. It reflects present market price of such asset or
material.
• Conversion cost: Conversion cost is the total cost of converting a raw
material into a finished product. (aggregate of direct wages, direct
expenses and overheads) (exclude cost of direct material)

18. Elements of Cost
Elements of cost are classified into three – Material, Labour and other
expenses.

19. 1. MATERIAL COST
This is the cost of material or
the commodity used by the
organization for its
production purpose. Material
is the substance, from which
a product is made.
a. Direct Material
b. Indirect Material

20. a. Direct Material: It refers to material out of which a product
is to be produced or manufactured (part of finished product).
(Wood, fabric, nails and glue used by furniture manufacturing
and Leather used by a shoe manufacturing company.)
b. Indirect Material: It refers to material required to produce a
product but not directly form a part of a finished product.
(The cost of oil and grease used to lubricate moving parts of
machines used in a manufacturing operation.Protective
equipment like gloves, glasses, eyewear and hamlets etc. used
by factory workers.)

21. 2. LABOUR COST
This is the cost, incurred in
the form of remuneration
paid to the employees or
labours of the
organization(wages, salary
bonus, allowances etc.).
a. Direct Labour
b. Indirect Labour

22. a. Direct Labour Cost is the cost incurred on those employees
who directly take part in the manufacturing process and easily
identified with the individual cost centre.
b. Indirect Labour Cost is the cost incurred on those
employees who do not directly take part in the manufacturing
process and cannot identified with the individual cost centre.
Example: salary of foreman, salesmen, director’s salary, etc.

23. 3. EXPENSES
Expenses are the costs of services provided to the
organisation.
• Direct Expenses are the expenses which can be directly
identified with the individual cost centres. Example: hire
charges of machinery, cost of defective work for a job or
contract etc.
• Indirect Expenses are the expenses which cannot be
directly identified with the individual cost centres.
Example: rent, lighting, telephone expenses, etc.

25. Methods of Costing
• Job Costing: Ascertain the cost of each job separately and
any profit or loss thereon. Because each job requires
different mark and has separate identity. (Examples
include home builders who design specific houses for each
customer and accumulate the costs separately for each job)
• Batch Costing: Products are arranged in convenient batches
and each batch is treated as one job and cost is calculated
accordingly. (Example : readymade garments, drugs and
pharmaceuticals, spare parts, radios, TV's, refrigerators, etc.)

26. • Process Costing: Used where the Input is processed through
several distinct process to be converted into a finished
product. The cost is collected and accumulated according to
department or processes and separate account is maintained
for each process. (Example; paper, soap, textiles, chemicals,
sugar and food processing products)
• Operation Costing: This involves costing by every operation
instead of a process. Many operations are necessary to make
an article. This method has greater accuracy and control.

27. • Unit Costing: This method is applied where production is
uniform and consists of only a single product or two or three
types of similar products with variation only in size, shape or
quality.
• Operating Costing: This costing technique is applied to
service industry where the business renders some service,
the system of costing would be known as operating costing.
This is used to determine the costs of services rendered by
airways, railways, roadways, hospitals etc.

28. • Multiple Costing: This method is followed where the final
product consists of a number of separate parts, e.g., radio
set, motor car, bicycle etc. The cost of the final product will
consist of the cost all the parts plus the cost of assembling
them.
• Uniform Costing: When a number of firms in an industry
agree to use the same costing principles, it is known as
uniform costing. This method provides benefits to all the
participating units.

29. Advantages of Cost Accounting
1. Basis for fixing the price
2. Framing policies
3. Utilisation of resources
4. Information for decision making
5. Cost audit
6. Quotations and tenders
7. Preparation of budgets

30. 1. Basis for fixing the price:
Cost forms a basis for fixing
the price of a product or
service. If the price is already
decided in the market, then
cost becomes a challenge to
meet with.

31. 2. Framing policies:
Cost accounting helps the
management to frame several
policies specially regarding
production and sales.

32. 3. Utilisation of resources:
Cost accounting helps in
optimal utilisation of
resources such as labour,
machine, material etc.

33. 4. Information for decision
making:
Cost accounting provides
suitable inputs for taking
decisions such as make or
buy; accept an order or reject;
continue with a product or
discontinue etc.

34. 5. Cost audit:
Cost accounting facilitates in
the audit of cost information
and also helps management
to reduce the cost associated
with its activities.

35. 6. Quotations and tenders:
Cost accounting helps in the
common business practice of
preparation of quotation or
tenders for job orders or work
orders.

36. 7. Preparation of budgets:
Preparation of budget is the
basis to exercise budgetary
control in an organization cost
accounting helps in providing
the basis for preparation of
budgets.

37. Limitations of Cost Accounting
1. Lack of uniform procedures
2. Varies from industry to industry
3. Cost accounting practices are costly
4. Too many concepts and conventions
5. Data centric subject

38. 1. Lack of uniform
procedures:
Cost accounting lacks uniform
practices and processes unlike
financial accounting.

39. 2. Varies from industry to
industry:
Practices of cost accounting
vary from industry to
industry.
Example: manufacturing firms
costing practices are different
from service cost practices.

40. 3. Cost accounting practices
are costly:
Implementation of the
practises – its process,
procedures and methods of
cost accounting is a costly
affair for the business.

41. 4. Too many concepts and
conventions:
Cost accounting has too many
concepts and conventions
making it difficult for a
common person to
understand

42. 5. Data centric subject:
The practises of cost
accounting depends on the
huge volumes of information
and with which the process
cannot be carried out.

43. Financial Accounting & Cost Accounting
• Financial accounting: Financial accounting is responsible for
computation of the profit earned or loss sustained by the business
during an accounting period, the financial position of the business at
the end of the accounting period and provide the financial
information required by the management and other stake holders.
Financial account must keep a record of all financial transactions.
• Cost Accounting: The purpose of cost accounting is to analyse the
expenditures and ascertain the cost of various products
manufactured by the firm. This is vital to decide the prices of the
product or service. It also helps in controlling the costs and providing
necessary costing information to management for decision-making.

44. COST ACCOUNTING
1. It provides information to the
management for proper planning,
operation, control and decision-
making.
2. These accounts are generally kept
voluntarily to meet the requirements
of management. But now Companies
Act has made it obligatory to keep
cost records in some manufacturing
industries.
3. It records the expenditure in an
objective manner i.e. according to the
purpose for which the costs are
incurred.
FINANCIAL ACCOUNTING
1. 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.
2.These accounts are kept in such a way
as to meet the requirements of
Companies Act and Income Tax Act.
3. It classifies records and analyses the
transactions in a subjective manner i.e.
according to the nature of expenses.

45. COST ACCOUNTING
4. It provides a detailed system of
control for materials, labour and
overhead costs with the help of
standard costing and budgetary control.
5.It gives information through cost
reports to management as and when
desired.
6.Cost Accounting is only a part of the
financial accounts and discloses profit or
loss of each product, job or services.
7.The costs are broken down on a unit
basis in cost accounts.
FINANCIAL ACCOUNTING
4.It lays emphasis on the recording aspect
without attaching any importance to
control.
5.It reports operating results and financial
position usually at the end of the year.
6.Financial accounts are the accounts of
the whole business. They are independent
in nature and disclose the net profit or
loss of the business as a whole.
7.The costs are reported in aggregate in
financial accounts.

46. COST ACCOUNTING
8.Relate to transactions connected with
the manufacture of goods and services
and include only those expenses which
enter into the production.
9.Non-monetary information like units is
also used (i.e. it deals with monetary as
well as non monetary information.)
10.Cost Accounts deal partly with facts
and figures and partly with estimates.
11.Cost Accounts provide valuable
information on the relative efficiencies
of various plants and machinery.
FINANCIAL ACCOUNTING
8.Relate to commercial transactions of
the business and include all expenses viz.,
manufacturing, office, selling &
distribution etc.
9.Monetary information is only used (i.e.
only monetary transactions are recorded)
10.Financial accounts deal mainly with
actual facts and figures.
11.Financial accounts do not provide
information on the relative efficiencies of
various workers, plants and machinery.

47. Cost Sheet
• A cost sheet is a statement which represents the various
costs incurred at different stages of business operations, in a
tabular format. It determines the total cost or expenditure
made by the organization, along with the cost incurred on
each unit of a product or service in a period. It shows the
various elements of cost and is prepared at regular intervals.

49. Items excluded from Cost Sheet:
• Cash discount
• Interest paid
• Preliminary expenses written off
• Goodwill written off
• Provision for taxation
• Provision for bad debts
• Transfer to reserves
• Donations
• Income tax paid
• Dividend paid
• Profit or loss on sale of fixed assets