Introduction to cost

accounting and cost

concepts
Interface of Financial Accounting with Cost
accounting
Cost Terminology
Meaning and Definition of Cost accounting
Objectives of cost accounting
Importance of Cost Accounting
Types of Costs
Cost Units
Cost Centers
Preparation of Cost Sheet



Financial Accounting:
-Record keeping
-Profit and Loss Statement
-Balance Sheet
-Financial Position of company

No clear idea of operating efficiency
Does not help in fixing the price
No classification of expenses and accounts
No control on cost
Does not provide standards to assess the
performance



COST: Cost means the amount of expenditure incurred on a
particular thing.
COSTING: Costing means the process of ascertainment of
costs.
COST ACCOUNTING: The application of cost control
methods and the ascertainment of the profitability of activities
carried out or planned.
COST CONTROL: Cost control means the control of costs by
management.

Cost accounting is concerned with recording,
classifying and summarizing costs for
determination of costs of products or
services, planning, controlling and reducing
such costs and furnishing of information to
management for decision making

COST ACCOUNTING: The Institute of Cost and
Management Accountant, England (ICMA) has defined Cost
Accounting as the process of accounting for the costs
from the point at which expenditure incurred, to the
establishment of its ultimate relationship with cost centers
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.

Cost Accounting = Costing + Cost Reporting + Cost Control.

Ascertainment of costs
Estimation of costs
Cost control
Cost reduction
Determining selling price
Facilitating preparation of financial and other statement
Providing basis for operating policy

Costing is an aid to Management
Costing is an aid to Creditors
Costing is an aid to employee
Costing is an aid to national economy
By Element
By Nature or Traceability
By Functions
By Behavior
By controllability
By Time
By Decision making Costs
Material

Labour

Expenses.
Direct Costs

Indirect Cost
Production

Administration

Selling and distribution

R&D.
Fixed

Variable

Semi-variable
Controllable costs

Uncontrollable costs
Normal costs

Abnormal costs.
Historical Costs

Predetermined costs /Standard Costs.
Marginal cost: This cost is the change in the aggregate costs due to change in the
volume of output by one unit.
Differential Costs: This cost is the difference in total cost that will arise from the
selection of one alternative to the other.
Opportunity Costs : It is the value of benefit sacrificed in favor of an alternative
course of action.
Relevant Cost: The relevant cost is a cost which is relevant in various decisions of
management.
Replacement Cost: This cost is the cost at which existing items of material or
fixed assets can be replaced. Thus this is the cost of replacing existing assets at
present or at a future date.
Shutdown Cost: These costs are the costs which are incurred if the operations are
shut down and they will disappear if the operations are continued.
Capacity Cost: These costs are normally fixed costs. The cost incurred by a
company for providing production, administration and selling and distribution
capabilities in order to perform various functions.
Other Costs

A unit of quantity of product, Service or Time
in relation to which costs may be ascertained
or expressed.

For Ex.
Automobiles in numbers
Brick works in per 1000 bricks
Cement/Steel/Sugar in tonne
etc
A location, person or item of equipment for
which costs may be ascertained or used for
the purpose of cost control



Variable Cost: A variable cost changes in total
in proportion to changes in the related level
of total activity or volume.

Fixed Cost: A fixed cost remains unchanged in
total for a given time period, despite wide
changes in the related level of total activity or
volume.
When costing information is set out in the
form of a statement, it is called Cost Sheet.
It is usually adopted when there is only one
main product and all costs almost are
incurred for that product only. The
information incorporated in a cost sheet
would depend upon the requirement of
management for the purpose of control.
Particulars Total Cost
Rs.
Cost per Unit
Rs.

Direct Materials xxx xxx
Direct Labour xxx xxx
Prime Cost xxx xxx
Add: Works Overheads/Factory Overhead xxx xxx
Work Cost/Factory Cost xxx xxx
Add: Administrative Overheads/Office Overheads xxx xxx
Cost of Production xxx xxx
Add: Selling and Distribution Overheads xxx xxx
Total Cost or Cost of Sales xxx xxx
Add: Profit xxx xxx
Sales xxx xxx