The document provides an introduction to cost accounting, including basic definitions, objectives, importance, and the need for cost accounting systems. It discusses key aspects of installing a cost accounting system, such as ensuring the system is informative, simple, accurate, and supported by management. The system should be tailored to the technical, physical, and procedural aspects of the organization. Overall, the summary establishes that cost accounting is important for management decision making, cost control, and determining the profitability of individual products, contracts, and processes.

1. Introduction to Cost
Accounting
By : Mrs. Soni Singh
[PET, M.Phil , B.Ed , PDPET , M.Com , B.Com]

2. Contents to
be Covered
• Basic Definitions
• Objectives and Scope
• Importance and Advantages
• Objections/ Criticisms
• Need for Cost Accounting
• Exhibit 1: Financial Accounting vs Cost
Accounting
• Installation of Costing system
• Classification/Purposes of Costs

3. Basic Definitions
• Cost:
1.Cost is a measurement, in monetary terms, of the amount of resources used for the
purpose of production of goods or rendering services.
2. Manufacturing of goods or rendering services involves consumption of resources.
3.Cost is measured by the sacrifice made in terms of resources or price paid to acquire
goods and services. For example, material cost is the price of materials acquired for
manufacturing a product.

4. Basic Definitions
Contd...
• Costing:
1. Costing means the technique and process of ascertainment of costs.
2.Costing involves the following steps: (i) Ascertaining or collecting costs (ii) Analyzing or
classifying costs into basic elements such as Material, Labour, Expenses etc. and (iii)
Allocating total costs to a 'particular thing' i.e. a product. a contract or a process.
3.Thus cost can now be defined as the total expenditure: duly classified into Materials,
Labour, Expenses etc., allocated to a particular product or contract or process.

5. Basic Definitions
Contd...
• Cost Accounting:
1.ICMA: The institute of Cost and Management Accountant, England (I CMA) has defined
Cost Accounting as- "the process of accounting for the costs from the point at which
expenditure is incurred to the establishment of its ultimate relationship with cost and
cost units. In its widest sense, it embraces the preparation of statistical data, the
application of cost control methods and the ascertainment of the profitability of
activities carried out or planned"
2.Wheldon: Wheldon has defined Cost Accounting as "classifying, recording and
appropriate allocation of expenditure for determination of costs of products or services
and for the presentation of suitably arranged data for the purpose of control and
guidance of management." [H. J. Wheldon, Cost Accounting and Costing Methods,
Macdonald and Evans,1948.]

6. Basic Definitions
Contd...
• Cost Reporting and Control:
1.Cost Accountancy or Cost Reporting includes the presentation of in formation derived from Cost
Accounting for the purpose of management decision-making (ICMA).
2.Cost figures may be presented to the management in the form of Accounts (Cost Sheet, Contract
A/c, Process A/c, Costing Profit and Loss Account etc.) or Statistics.
3.The management can then use the cost figures for various purposes .To fix the selling price, to
make comparison with other competing concerns, to reduce avoidable costs, to control
wastages and losses in production and so on.
4.The cost data can be used by the management in controlling the costs of production or operation,
for taking decisions, and planning for the future. Cost Control is the guidance and regulation by
executive action of costs of operating an undertaking (ICMA).

7. Objectives and
Scope
• Costing:
Costing has the following basic objectives (or 5 'A's): Ascertain, Analyse, Allocate, Apportion and Absorb.
1. Ascertain Costs : Ascertain or collect all the expenses relating to a particular period.
2. Analyse Costs: Analyse or classify the expenses under different heads of account such as
Material. Labour, Costs: Allocate or charge in full the Direct Expenses or the specific costs such as
Raw Materials, Labour to relevant product, contract or process.
3. Allocate Costs: Allocate or charge in full the Direct Expenses or the specific costs such as Raw
Materials, Labour to relevant product, contract or process.
4. Apportion Costs: Apportion or distribute Common Expenses to each product, contract or process on
a suitable basis.
5. Absorb Costs: Absorb the total expenses of a department over its products. So, in this final step.
the individual cost of each product is determined. This product cost is then reported to
management.

8. Objectives and Scope
Contd...
• Cost Reporting:
1.What to Report: What is the nature of information to be presented? The information
should be relevant and precise.
2.Whom to Report: Whom is the report to be presented ? This will determine the scope
of report. The report to be submitted to the Top Management will be short, while the
report to the Cost Accountant will be detailed.
3.When to Report: When is the report to be presented whether Daily. Weekly. Month By
Quater or Yearly etc. The scope and format of the report will depend upon the
frequency of reporting.
4.How to Report: How or in what format is the report to be presented ? The format will
dene upon the factors mentioned above. Once the cost report is received,
management can take action to control the costs

9. Objectives and Scope
Contd...
• Cost Control:
Cost Control has been defined by ICMA London as "the guidance and regulation by executive action of the costs of
operating an undertaking" Thus, Cost Control means the control of costs management. Following are the aspects
or stages of Cost Control:
1. Set Targets: Set up targets for Cost, Production. Profits etc. for each period
2. Measure Actual Performance Measure the actual figures of performance relating to cost production. profits etc.
for
the period concerned.
3. Compare Targets with Actuals: The figures of actual performance are to be compared with the figures of targets
to find out the variations.
4. Analyse Variations: The causes for variation s whether favorable or adverse are to be investigated. While adverse
variations denote wastages and losses, favorable variations may indicate that the targets fixed are very low. In
both the cases it is important to know the exact reason for the variations.
5. Take Action: Once the causes are known, immediate action has to be taken to eliminate avoidable losses etc.

10. Objectives and Scope
Contd...
• Other Objectives:
1.Provide required data for fixing Sales Price, for submitting Tenders, Quotations.
2.Assist the management in controlling inventory of raw materials, goods in process,
finished goods, spares and consumables etc.
3. Advise management on future policies regarding expansion, growth, capital
investment
etc.
4. Install Labour incentive System for getting maximum productivity from Labour cost.
(5) Advise management in deciding optimum product-mix, merits and demerits
of alternative courses of actions (make or buy etc.), introduction of
automation, mechanization, rationalization of system of production etc.
6) Maintain Cost Accounting Records as per law. e.g. the Companies Act.

11. Importance and
Advantages
• Management and Owners:
1) Ascertaining Cost/Profitability of Each Product : Cost Accounting enables the management of the concern to ascertain the cost
and profitability of each individual product/service/contract process/di vision/branch separately. The cost of production of each
product so determined is also used for valuation of closing stock of goods at the end of the year.
(2)Cost Control: Cost Accounting helps the management of the concern in controlling costs, reducing avoidable expenditure, and
minimize wastages and losses. Comparison with Industry Standards or past data helps the management in judging and
improving its performance.
(3)Quantitative Reconciliation :Cost Accounting ensures the reconciliation of quantity of input with the quantities of output.
wastages and scrap The management is thus able to regulate and monitor the movement of materials right from the Raw
Materials Store to the Finished Goods Warehouse. This prevents theft and loss of material during processing and handling.
(4)Decision Making and Budgetary Control: Cost Accounting is a great help to the management in taking serval decisions such as
which products to produce more. how much to produce. whether to make or buy a component, what price to charge. or quote in
a Quotation or Tender, and so on. Thus Cost Accounting is an invaluable aid to decision making. Further, Cost Accounting
facilitates preparation of Budgets and implementation of Budgetary Control in the organization.
5) Maximization of Profits and Net Worth: The end result of all the above advantages of Cost Accounting is the maximization of
profits of the concern. This benefits the owners by increase in the Net Worth or the Share prices. higher dividends and so on.

12. Importance and Advantages
Contd...
• Workers:
Cost Accounting has an elaborate system assessing the performance of workers and rewarding them suitably
through incentives and bonus. The increase in profits due to a Cost Accounting System also leads to higher
remuneration and bonus to the workers.
• Government/Consumers/Public:
1. Fixing Fair Prices : In case the products e.g. drugs or fertilizers are under price control. Cost Accounting furnishes
the data required by the Government for fixing fair prices. Consumers benefit since the prices fixed on the basis
of cost data are just and reasonable and cannot be too high.
2. Efficiency and Prosperity: Cost Accounting leads to efficiency and productivity in the Industrial sector. Cost
Accounting ensures optimum utilization of the scarce economic resources of the country. This leads to
overall prosperity and economic growth of the nation and the people at large.
3. Taxes and Welfare: Cost Accounting leads to maximum profits for an organization. Naturally the Government
also gains by way of more taxes on production (Excise), income (Income Tax) and sales (Sales Tax, Custom
Duties) etc. The higher revenue is used by the Government for public welfare and economic development.

13. Objections/Criticism
s
1.Duplication: It is argued that Cost Accounting is a duplication when a good Financial Accounting
System is already in operation. Cost Accounting takes its basic data from books of accounts and
just rearranges it in a different way.
2.Inapplicable: In a concern producing a single product involving no complex processes, Cost
Accounting is inapplicable. It is also of no use in non-profitable organizations or in agriculture
etc.
3.Not Useful for Decision Making: In many cases, the decisions of the management are not based
on Cost Accounting data. Thus the decision regarding which item to produce and how much to
produce depends upon the license given by the government and the market forces t demand and
supply.
4.Expensive and Routine : A Cost Accounting Systems is quite expensive to install and opera
standard reports. Non-cooperation from staff also may lead to failure of the system in
many concerns.

14. Need for Cost
Accounting
• Ascertaining item-wise cost/profitability:'
1.If a concern is manufacturing a number of products, its Profit and Loss Account shows the lumpsum amount of net profit or loss
from all products taken together. The profits from some products are set off against losses. if any. from other products and only
the net result is shown in the Profit and Loss Accounts thus fail to give a product-wise break-up of profit or loss.
2.In case of a construction company, the Profit and Loss Account shows the net profit or loss from all contracts taken together.
The Financial Accounts do not indicate the profit or loss made on each contract separately.
3.Similarly, if a concern has a number of processes, divisions or branches, the Profit and Loss Account shows the net profit or loss
from all processes, divisions or branches taken together. Financial Accounts do not show the profit or loss made by each process,
division or branch separately.
4.Financial Accounts fail to ascertain the individual cost/ profitability of each product or contract or process etc. separately. Cost
Accounting grew out of this serious limitation of Financial Accounting. The management of any concern is interested in identifying
products which are profitable so that it can concentrate upon the profitable activities and discontinue the loss-making products.
Each product, contract, process, division or branch is known as a cost. Cost Accounting fulfils this objective by ascertaining the
individual costs of each product, contract, process or division.

15. Need for Cost Accounting
Contd...
• Cost Control:
1.Financial accounts merely record the expenses incurred. The management, however, is more
interested in guiding and regulating the expenses themselves, i.e. in Cost Control. Thus
Financial Accounts show the expenses paid for purchase of Raw Material and stop at that.
2. Financial Accounts fail to show whether the raw materials have been used efficiently; whether the
output is normal or whether there is any abnormal waste during the process of production and so on.
3.Cost Accounting has evolved effective techniques to assist management in Cost Control at every step.
Thus, Cost Accounting helps the management to control the cost of Materials, Labour and Expenses by
means of an elaborate system of recording. classification and reporting of costs to the management.
4. Cost Accounting techniques such as Standard Costing compare the operating results of the concern
with Industry Standards or with past data to judge the efficiency or productivity of the concern.

16. Need for Cost Accounting
Contd...
• Quantitative Reconciliation:
Financial Accounts report data in terms of Rupees only. They ignore the quantitative aspects of Input and Output. Efficiency
or productivity of a concern depends upon obtaining the maximum quantity of output from a given quantity of input. Cost
Accounting provides useful data regarding Quantity of Input. Quantity of Wastage or Serap and Quantity of Output. Cost
Accounting helps in Quantitative Reconciliation and controlling the movement, leakage and wastage of materials.
• Decision making and planning:
Financial Accounting is based on past records. Further, the Final Accounts (Profit and Loss Account and Balance Sheet) are available
generally well atter the accounting year is over. The information in the Financial Accounts is thus historical as well as stale which
is not at all useful for the management for taking decisions in time, or tor planning the future activities of the organization. Cost
Accounting Techniques such as Forecasting, Marginal Costing. Budgets etc. were developed to help the management in making
decisions or planning for future such as
(1) fixing the price of a product or submitting tenders or quotations.
(2) taking decisions about how much to produce. whether to make a component or buy it from outside, and )preparing Budgets tor
future and monitoring variance of the actual figures from the budgeted figures of Cost, Profit etc.

17. Exhibit 1:
Financial
Accountin
g v/s. Cost
Accountin
g
Feature Financial Accounting(FA) COST ACCOUNTING [CA]
[1] NATURE FA records ,reports and analyses
financial transactions of a concern
CA records ,reports and analysis costs of
each cost of a concern [product, contract
,process etc.]
[2]USE FA is used by outside entities investors,
creditors, banks etc.
CA is used only by the management of
the concern
[3]SYSTEM FA uses the double –entry system
for recording financial data
CA does not use the double- entry
system for collecting cost data
[4]SCOPE FA covers all items of income
and expenses whether related
to the cost or not
CA covers only income and expense
related to cost
[5]PERIOD FA is for specific period e.g. a financial
year.
CA concentrates on cost and not on
period
[6]REPORTS FA results are shown in p & L a/c
and balance sheet
CA results are shown in cost sheets
/costing profit &loss a/c /process A/C
[7]UNIT FA is expressed in rupees only CA record receipts ,issues and stock
of materials ,in terms of quantities
[9]DATA FA IS discloses past data. It is a post
- mortem
CA discloses current data or
future estimates
[DECISIONS FA cannot be used for
managerial decisions
CA is used for making decisions –pricing,
product mix, how much to produce etc.

18. Installation of
Costing system
• Features:
1. informative and Simple: Cost Accounting System should be tailor-made, practical, simple and capable
of meeting the requirements of a business concern.
2. Accuracy: The data to be used by the cost accounting system should be accurate; otherwise it may
result
in wrong reports.
3. Support from Management: Necessary co-operation and participation of executives from
various departments of the concern is essential for developing a good system of cost
accounting
4. Cost Benefit: The cost of installing and operating the system should justify the results.
5. Precise Information: The system of costing should not require meticulous and unnecessary details.
6.Procedure: A carefully planned program should be prepared by using network analysis for the
introduction of the system. 7. Trust: Management should have faith in the costing system and should
also provide a helping hand its development and success

19. Installation of Costing system
Contd...
• Aspects:
1.Technical Aspects: The Costing System should be designed after studying the technical aspects of
the industry and the organization. Thus, a thorough study has to be made of the nature of the
product, the process of production, the complexity of methods of production, the degree of control
required at each stage of production, and so on. Which element of cost -material, labor, or
overheads -is more important, depends on the nature of the product.
2.Physical Aspects: The physical layout of the factory, the movements of material on the shop floor
and between the warehouses are to be studied before installing the Cost System.
3.Procedural Aspects: The procedures followed by the organization for purchase, receipt, storage
and issue of Materials; for recruitment, training and remuneration of Labour, and for payment of
Expenses etc. are to be studied before designing the costing system

20. Installation of Costing system
Contd...
4. Operational Aspects:
a.Simple: The systems should be simple to operate and run. The Forms and reports should be so designed as to be
simple to fill in and maintain.
b.Integrated with Financial Accounts: The final reports from the costing systems should be capable of being
reconciled with the financial accounts. As far as possible, there should be no duplication of work. An integrated
system of maintaining both Cost Accounts and Financial accounts should be developed to save time and costs and
to avoid duplication and errors.
c. Timely and Accurate Reports: The system should generate timely and accurate reports so that corrective
actions can be taken by the management in time.
d. Co-operation from staff: The system should gain ready cooperation from the staff. If the system is simple to
operate and well-designed, there will be no resistance from the staff to the installation of the costing system.
e. Financial Aspects: The cost of designing, installing, and operating the costing system has to be reasonable. The
benefits from the costing system should be, in the long run, more than its cost. Management should consider the
cost of a good costing system as a long-term investment rather than a write-off and provide enough funds
therefor.

21. Classification/Purpose
s of Costs
• Cost Classification:

22. Thank
You!!!