Accounting

Accounting is an art of recording, classifying, summarizing financial transactions and

interpreting the results to end users. Accounting can be divided in three branches including the
followings
i. Financial accounting
ii. Cost and managerial accounting
iii. Tax accounting

Cost accounting
Cost accounting is a method of accounting in which all costs that are involved in carrying out
any activity are collected, recorded and summarized. The data is being analyzed to arrive at a
selling price or cost of product.

Cost accounting is that branch of accounting that involves the techniques for:

1. determining the costs of products, processes, projects, etc. in order to report the correct
amounts on the financial statements

2. Assisting management in making decisions and in the planning and control of an

organization.

For example, cost accounting is used to compute the unit cost of a manufacturer's products in
order to report the cost of inventory on balance sheet and cost of goods sold on income
statement.

Difference between cost accounting and financial accounting

I. The objective of financial accounting is to provide information regaridng financial

position and financial performance of a company while cost accounting is meant to
provide information regarding the ascertainment of cost, controlling cost and making
decisions regarding cost.
II. Financial accounting records historical data while cost accounting also presents
budgeted data.
III. Users of financial accounting information are shareholders, potential investors,
creditors and government etc. while cost accounting users include internal
management
IV. Financial accounting presents profit/loss of the organization while cost accounting
provides details regarding cost and profit of each product, process or job etc.
V. Financial statemnets are prepared usually at the end of accounting period while cost
accounting prepare reports and statements when required by management
 VI. Financial statements are prepared using a set format while in cost accounting there is
no standard format for preparing cost accounting reports or statements.

Cost accounting use in sectors

Cost accounting had its roots in manufacturing businesses, but today it extends to service
businesses. For example, a bank will use cost accounting to determine the cost of processing a
customer's check and/or a deposit. This in turn may provide management with guidance in the
pricing of these services.

Scope of cost accounting

The scope of cost accounting is very wide. There are lots of techniques, tools, procedures,
processes; programs are used in cost accounting for calculating cost and its control. But
basically, we divide its scope within three major parts.

Cost Ascertainment

In this region of cost accounting, cost accounting collects product's material, labor and overhead
cost and try to calculate total and per unit cost of product.
2. Cost Records

In this part of cost accounting, cost accountant maintains cost books, vouchers, ledgers, reports
and other cost related documents for future comparison and reference. It will also be under the
scope of cost accounting. 

3. Cost Control

This is the end boundary of cost accounting scope. In this division, cost accountant used different
techniques and methods for controlling the cost. Cost accountant uses budgetary control,
standard costing, break even point analysis and many other techniques for controlling the cost.

Uses of cost accounting

1. It helps in optimum utilization of men, material and machines.

2. Cost Accounting identifies the areas that require corrective action.
3. It helps management in the formulation of policies
4. It provides appropriate solution to the various problems of management.
5. Costing helps management in making short term decisions, by the use of techniques like
marginal costing, standard costing etc.
6. It provides useful data for the preparation of final accounts by giving cost of closing
stock of raw materials, work-in-progress and finished goods.
7. It helps in fixing prices of product and services
8. It helps the implementation of incentive wage plans for workers.
9. It employs the system of budgetary control and standard costing for efficiency planning
control
10. It provides specialized service of cost audit
11. Cost records are the base for Management Information System.

Cost

Cost is a forgoing measured in monetary terms incurred or potentially to be incurred to achieve a

specific objective

Cost is defined as a exchange price, a foregoing or a sacrifice made in order to secure benefits.

Difference between cost and expense

Cost includes money spent on both the expenses and assets.

Classification of cost

i. Natural classification
a. Manufacturing cost ( direct labor, material and overhead)
 b. Commercial expenses (admin and marketing expense)
ii. Cost with respect to accounting period
a. Capital expenditure
b. Revenue expenditure
iii. Cost in tendency to vary with volume
a. Fixed cost e.g. depreciation, rent
b. Variable cost e.g. fuel,spoilage
c. Semi variable cost e.g. inspection, heat light etc.
iv. Cost in relation to product
a. Prime cost ( direct material + direct labot)
b. Conversion cost ( Direct labor + FOH)

Direct material is material that can be included directly into calculating cost of product e.g. wood
to make furniture, glue and polish will be indirect material

Direct labor is the labor applied directly to materials comprising the finished products e.g. cost of
faculty member is direct labor while that of guard or cafeteria salesman will be indirect labor.

FOH is also called as manufacturing overhead and they are the cost of indirect material, indirect
labor and all other manufacturing costs that cant be conveniently charged to specific units, jobs
or products.

v. Cost in relation to manufacturing department

a. Producing department
b. Service department ( which is not directly engaged in production of goods but
assist the producing dept
c. Cost centers= when two or more different types of machines perform different
operations on a product within the same dept it would be called as cost center.
E.g. in manufacturing cotton yarn and cloth producing dept carding can be broken
into cost centers like opening cotton bales, picking, carding, drawing etc.
vi. Common and joint costs
a. Cost of facilities or services employed in two or more accounting periods,
operations or services e.g. capital expenditure and depreciation
b. Joint cost occurs when the production of a product becomes possible only with
the production of other products like oil and gas industry, meat industry etc.
vii. Cost for planning and control
a. Standard cost: It is the predetermined cost for direct material, labor and overheads
viii. Cost for analytical process
a. Opportunity cost: The cost of foregoing one thing in favor of any other thing
b. Out of pocket cost: An expense incurred and paid for by an individual for
personal use, or relating to one's employment or business. This can also relate to
ongoing costs of operating a fixed asset e.g. repair and maintenance expense of a
machine or building etc.