INTRODUCTION OF COST

ACCOUNTING
 Intended Learning Outcomes
• At the end of the chapter, you will able to

• 1.1 identify the type of accounting

• 1.2 difference between Cost Accounting , Cost Accountancy and Costing

• 1.3 understand the Management information needs

• 1.4 identify the objectives of cost accounting

• 1.5 difference between Cost Accounting Vs. Financial Accounting

• 1.6 identify the role of cost accountant

 Accounting

Management
Financial Accounting
Accounting

Cost Accounting
Introduction
• Business needs continuous information regarding costs of

business activities to plan accurately for the future ,to

control business results, and to make a proper appraisal of
the performance of persons working in an organization.

• The fulfillment of these goals requires details about the

costs incurred and benefits (revenue) obtained which are

provide by cost accounting and management accounting.
Definitions
COST
I:CMA, London:
“The amount of expenditure ( actual or notional)
incurred on, or attributable to, a given thing”
Thus cost is refers to something that must be
sacrificed to obtain a particular thing
COSTING:
ICMA, London:
"The technique and process of ascertaining cost".
It consists of principles and rules for ascertaining cost.

In the words of Harold J. Wheldon:

"Costing is the classifying, recording and appropriate
allocation of expenditure for the determination of the
cost of products or services and for presentation of
suitably arranged data for the purpose of control and
guidance of the management".
COST ACCOUNTING
CIMA, UK:
"The process of accounting for cost from the point at
which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost
centers and cost units“
According to C. Gilleapic:
"Cost accounting is a set of procedure for determining
the cost of a product and various activities involved in
its manufacture and sales and for planning and
measuring performance"
Definitions of cost
accounting
• Cost accounting as a tool of management, provides management

with detailed records of the costs relating to products, operations

or functions. It estimated future costs for planning purpose or
actual costs for evaluating performance.

• The establishment of budgets , standard costs and actual costs of

operations, processes, activities or products and the analysis of

variances ,probability or the social use of funds.( C.I.M.A)
Cost
Accountancy
• Cost accountancy is application of costing and cost

accounting principles, methods and techniques to the

science , art and practice of cost control and ascertainment
of profitability as well as presentation of information for the
purpose of managerial decision making. (ICMA)

• Above definition includes costing, cast accounting ,

budgetary control , cost control and cost
audit.
 Costing
• Costing is the “techniques” and “processes” of ascertaining
costs.
• The “technique” refers to principles and rules which are applied

for ascertaining costs of products manufactured and services

rendered.

• The “process” includes the day to day routine of determine costs

within method of costing (either job or process) adopted by

business entrepreneurs.
 Objectives of cost accounting
I. To determine product costs :- The total product cost and cost
per unit of product are important in making inventory valuation,
deciding price of the product and managerial decision making.

I. To facilitate planning and control of regular business

activity:- creation of useful cost data and information for the
purpose of planning & control and to establish balance between
actual and budgeted performance

II. To supply information for decision:- To provide data and

special analyses for short and long run decisions of a non recurring
nature.
Significance & Advantages of Cost
Accounting
 Control of material cost
 Control of labor cost
 Control of overheads
 Measuring efficiency
 Budgeting
 Price determination
 Curtailment of loss during the off-season
 Expansion
 Arriving at decisions
 Limitations of Cost Accounting
 Based on estimates
 Lack of uniformity
 Many conventions
 Expensive
 Result requires reconciliation
 Dependent
 Does not include all items of
expense and income
 Not an exact science
Why management need cost information.
1. Cost accounting helps in determination and analysis of
cost of departments ,processes, jobs, product , sales
territories, sales order.

2. Cost accounting helps management in controlling cost

through accumulating and utilization of cost data
regarding different product , activity and function.

3. Cost information helps to make revenue decisions.

Cont.
…. are 3 revenue decision
There
a) Pricing :- in pricing new product and to make a
decision as to whether to lower or raise a price

b) Product Mix :- to make short term and long term

product mix decisions. For short term cost data used
to determine which product to push market , long
run the question of increasing and decreasing
capacity

c) Profit Volume decision :- the profit is mainly the

result of a combination of 3 factors namely cost,
volume ,selling price.
Cont.
…
4. Cost accounting helps in making special cost studies to
management in formulating policies and plans directed
towards profitable operations.

5. Cost accounting assists and participates in

the formulating and execution of budgets and standards.
Financial Accounting
• Financial accounting is concerned with proving information
to external users such as shareholders , creditors , financial
analysts ,labour unions .

• It preparation of financial statement which summaries the

results of operations for selected periods of time and show
the financial position of the business at particular dates
comply with generally accepted accounting principles
(GAAP).
 Cost accounting vs. financial
accounting..
Characteristic Financial Accounting Cost Accounting
Nature Classifies , records, present Classifies, records, present
and interprets in terms of and interprets in a
money , transaction and significant manner the
events that are of a financial material, labour and
character overhead costs involved in
product & Service
Primary users of Financial Provide information to the
information accounting statements use internal party of the
external party of business business
Accounting Follows the double entry May not be based on
System system for recording , the double entry system
classifying
,summarizing business
transaction
Cont.
.Characteristic Financial Accounting Cost Accounting

Accounting Comply with GAAP Not bound to use GAAP.

Principles It can use any
accounting technique or
practice which generates
useful information

Analysis of Profit Disclose the net profit or loss
of the business as a whole
Unit of All information under
measurement Financial accounting is on
terms of money
Time Span For a definite period
Disclose profit or loss of
each product , job
service or division
Cost accounting applies
any measurement unit
beside the monetary
unit( Labour hour,
machine hour)
Prepared whenever
needed
 Role of Cost
• Accountant
Cost Accountant performs action as under:
i. To analyze material,labour and the overhead expenses

ii. To reconcile daily productions with accounting transaction

iii. To coordinate with R&D for production of new items

iv. To assist the controller in developing cost

improvement opportunities

v. To prepare the new product costing as well as the

gross profit analysis for the marketing
 ELEMENTS OF COST

OTHER
MATERIAL LABOUR
EXPENNSES

INDIREC INDIREC
DIRECT INDIREC DIRECT
T DIRECT T
MATERIA T EXPENS
MATERIA EXPENS
L LABOUR ES
L LABOUR ES

OVERHEADS

SELLING &
FACTORY ADMINISTRATIO
DISTRIBUTION
OVERHEAD N OVERHEAD
OVEHEAD
 Components of Cost
Prime Cost
Works Cost
Cost of Production
(Administration & Office Cost)
Total Cost