Terminology of Cost Accounting

Lincy Rinil
 Cost Concept
Cost Object
Cost Unit
Cost Centre
Cost Allocation
&
Costing Methods
 Concept of Cost
• Cost is a measurement, in monetary terms, of the
amount of resources used for some purposes. Thus
cost represents the amount of resources given up to
obtain a given object or objective.

• In management accounting, cost data which are

relevant and useful in one situation may be quite
irrelevant and useless in another. Developing the data
on the required lines can be designated as “the
concept of cost relevancy”. The concept implies the
need of different sets of cost data for different
objectives, purposes and situations.
 Cost Object
• A cost object is an activity, a product or a
service, a customer, a project, a contract, a
process or a department of an organization for
which cost measurement is made.

• Eg: cost of a Maruti swift Dzire, cost towards

building a hostel, etc.
 Cost Unit
• It is a device for the purpose of breaking up or
separating cost into smaller sub-divisions
attributable to products or services. It is the unit
of product, service or time in relation to which
cost may be ascertained.

• Eg: Tonne in the case of coal, 1000 bricks in case

of bricks manufacturing, in case of goods
transport, the unit will be tonne – km (the effort
involved in carrying one tonne of goods for a
distance of one kilometre.
 Cost Centre
• A cost centre is the smallest segment of activity or area or
responsibility for which costs are accumulated. Typically
cost centres are departments, but in some instances, a
department may contain several cost centres.
• These cost centres are the departments or sub-
departments of an organisation with reference to which
cost is collected for cost ascertainment and cost control.

• Eg: An assembly department may be supervised by one

foreman, it may contain several assembly lines. Sometimes
each assembly line is regarded as a separate cost centre
with its own assistant foreman.
 Cost Accumulation
• Cost accumulation refers to a systematic
process engaged by the organizations to
collect cost data of its operations by using an
accounting system.

• Eg: Job Costing, Process costing

 Cost Allocation
• It is the process of charging the entire amount
of cost object to cost unit or cost centre.

• Eg: The charges of repairing a photocopier can

be exclusively charged to the photocopying
section of the organization.
 Costing Methods
• The methods to be used for the ascertainment of
cost of production differ from industry to
industry.
• It primarily depends on the manufacturing
process and also on the methods of measuring
the departmental and finished products.
• Costing methods are broadly classified into two:
1. Job costing
2. Process costing
 Costing Methods
• Job Costing
– Contract Costing
– Batch Costing
– Multiple Costing

• Process Costing
– Service Costing
– Operation Costing
– Output Costing
 Job Costing
• Under this method, costs are collected and
accumulated for each job, work order, or project
separately . Each job is separately identified; so it
becomes essential to analyze the cost according to
each job.
FEATURES OF JOB COSTING:
• Production is undertaken after obtaining customer’s
order.
• Identity of each job is retained from start to finish.
• Cost information is collected from each job.
Examples of Job Costing:

Machine-tool
manufacturing
Foundries
Printing
Furniture-making
Repair-shops

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 Contract Costing
• When job is big and spread over long period of time,
the method of contract costing is used. A separate
account is kept for each individual contract.
• FEATURES OF CONTRACT COSTING:
The contract terminates on its completion.
Work is carried out at a site other than contractor’s
own premises

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SOME BUSINESSES WHERE CONTRACT
COSTING APPLIES-
 Builders
 Dams
 Bridges
 Ship building
 Aircraft manufacturing
other constructional work.

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 Batch Costing
• This is an extension of job costing. A batch may
represent a number of small orders passed
through the factory in batch. Each batch is treated
as a unit of cost and cost is separately calculated.
• FEATURES OF BATCH COSTING:
Reduces overall cost of the product if
components are manufactured in batches of large
quantity.
Costs are collected against each batch.

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SOME AREAS WHERE BATCH COSTING IS
USED:
Radio manufacturing
Television manufacturing
Watch manufacturing
Pen manufacturing
Computer manufacturing

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 Process Costing
• This is suitable for industries where production is continuous,
manufacturing is carried on by distinct and well defined processes,
the finished product of one process becomes the raw material of the
subsequent process.
• A separate account is opened for each process to which all
expenditure incurred thereon is charged.
• It is best suitable for organizations where the work cannot be
stopped and is continuously performed throughout the year (I.e.24
hours a day and 7 days a week) except for stoppage for maintenance
work. Thus it is also known as Continuous Costing.

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FEATURES OF PROCESS COSTING:
Production is done having a continuous flow of identical
products except where plant and machinery is shut down
for maintenance, etc.
Clearly defined process cost centres
Product of one process becomes input-material of
another process.
Avoidable and unavoidable losses arise at different
stages of manufacture for various reasons. Abnormal
gain also arises.
Continuous and Mass production, against particular
order
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PROCESS COSTING IS USED IN THE
FOLLOWING TYPES OF INDUSTRIES:
Manufacturing industries-
Iron and steel, textiles, chemicals, cement, paper,
flour mills, food products, toys making, milk
dairies, biscuit manufacturing, etc.

Mining industries-
Coal, Oil, etc.

Public utility services

Generation of Electricity, Gas,
Water Supply, etc.

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 Service (Operating) Costing
• This method applies to activities that provide a
service rather than producing goods.
• This method may be used for both services to outside
customers as well as internal use (in an manufacturing
unit, certain sections may provide ancillary services to
production department, such as canteen, maintenance,
etc.).
• In this method operating costs are collected
periodically.

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THIS METHOD IS USUALLY APPLIED TO:
Transportation services – road, rail, air, etc.
Utility services – hospitals, canteen, etc.
Distribution services – electricity, gas, etc.
Professional services – courier service,
management consultants, etc.

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 Operation Costing
• It is suitable for such organizations where the
output is not only homogeneous but also is the
outcome of a sequence of continuous or
repetitive operations or processes.
• Since the industries that use operation costing
recognize the output task in terms of operations,
operating costing ascertains cost per operation
rather than cost per unit.
• this method of costing is popular in industries
that are engaged in operations like mines or
drilling, dairies, cement works, etc.
 Output Costing
• This is suitable for industries that are engaged
in producing a single product on continuous
basis and units are identical.

• Eg: brick making, cement manufacturing,

mining, diary and flour mills, etc.
 Multiple Costing
• It represents the application of more than one method
of costing in respect of the same product.
• This is suitable for industries where a number of
component parts are separately produced and
subsequently assembled into a final product. In each
industries each component differs from the others as
to price, material used and process of manufacture
undergone. So it will necessary to ascertain the cost of
each component.
• For this purpose, process costing may be applied. To
ascertain the cost of the final product, batch cost may
be applied.
 THIS METHOD IS USUALLY
APPLIED TO:
• Factories manufacturing:
– automobiles
– Engines
– Radios
– Aero planes and other complex products
Thank you