MBA 1st sem | MBA 1104: Accounting for Managers | Dr.

Jyoti Singh |

Cost Accounting and Cost Records

Cost Accounting
In order to survive in this global economy, business must have competitive edge over others i.e. cost effectiveness
and quality consciousness.
Cost accounting is a branch of accounting that has been developed due to limitations of financial accounting.
Limitations of financial accounting
a. No control on cost
b. No standards to assess the performance
c. No analysis of losses
d. No classification of expenses and accounts
e. Not helpful in the price fixation

What is Costing?
Costing is a technique and process of ascertaining costs. The technique consists of principles and rules which
govern the procedure of ascertaining the cost of products and services. The process of costing includes routines of
ascertaining costs by following different techniques like historical or conventional costing, standard costing and
marginal costing.

What is Cost Accounting?

Cost accounting is the recording, classifying, and appropriate allocation of expenditure for the determination of the
costs of products or services, for the presentation of suitably arranged data for purposes of control and guidance of
management.
Costing- An Aid to Management
 Planning
 Decision making
 Controlling
Cost accounting has the following features:
(i) It is a process of accounting for costs.
(ii) It provides information on cost of every product, job work order, process or operation of the organisation.
(iii) It provides statistical data on the basis of which future estimates are prepared and quotations are submitted.
(iv) It is concerned with cost ascertainment, cost presentation, cost control and cost reduction.
(v) It establishes budgets and standards so that actual cost may be compared to find out deviations or variances.
(vi) It involves the presentation of right information to the right person at the right time so that it may be helpful to
management for planning, evaluation of performance, control and decision making.

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(vii) Ascertainment and analysis of cost and income by product, function and responsibility.

Advantages of cost accounting

a. Profitable and unprofitable activities are disclosed: to eliminate or reduce those activities
b. Guides future production policies
c. Helps in increasing profit
d. Helpful to consumers
e. Creditors and investors to judge financial strength

Distinction between Financial accounting and Cost accounting

a. Purpose
b. Form of accounts
c. Type of science
d. Fixation of selling price
e. Periodicity of reporting
f. Information
g. Control
h. Reporting of costs
i. Nature of transactions

Companies (Cost Records and Audit) Amendment Rules, 2019

Rule 3: “Cost records” means books of account relating to utilisation of materials, labour and other items of cost
as applicable to the production of goods or provision of services as provided in section 148 of the Act.
The Companies Act, 2013 empowers the Central Government to make the rules in the area of maintenance of cost
records by the companies engaged in the specified industries, manufacturing / providing such goods / services; and
for getting such cost records audited, vide Section 148.
It is the “subordinate legislative power” of the Central Government, to make rules for maintenance of cost records
and audit thereof in respect of specific industries. Accordingly, the Central Government made, from time to time,
several notifications / orders, ever since the provisions were made in the erstwhile Companies Act, 1956, as well
as under the current Act of 2013.
These rules may be called the Companies (Cost Records and Audit) Rules, 2014.

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Application/Scope of Cost Records

Two categories (regulated sectors and non-regulated sectors) have been retained and a general threshold of
turnover of ` 35 crores or more has been prescribed for companies covered. Micro enterprise or a small enterprise
as per MSMED Act, 2006 have been taken out of the purview.
Regulated sector includes Telecommunication, Electricity, Petroleum products, Drugs & Pharmaceuticals,
Fertilisers and Sugar & industrial alcohol. Non-regulated sector includes Defence, space & atomic energy, Arms &
ammunitions, Port services, Aeronautical services, Iron & Steel, Coffee & Tea etc.

Components of Cost Records:

The form categorises the requirement of maintaining proper details as per 30 headings.
The headings are as follows:
(1) Material Cost
(2) Employee Cost
(3) Utilities
(4) Direct Expenses
(5) Repair and Maintenance
(6) Fixed Assets and Depreciation
(7) Overheads
(8) Administrative Overheads
(9) Transportation Cost

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(10) Royalty and Technical Know-how

(11) Research and Development expenses
(12) Quality Control Expenses
(13) Pollution Control Expenses
(14) Service Department Expenses
(15) Packing Expenses
(16) Interest and Financing Charges
(17) Any other item of Cost
(18) Capacity Determination
(19) Work-in-progress and finished stock
(20) Captive Consumption
(21) By- Products and Joint Products
(22) Adjustment of Cost Variances
(23) Reconciliation of Cost and Financial Accounts
(24) Related Party Transactions
(25) Expenses or Incentives on Exports
(26) Production records
(27) Sales records
(28) Cost Statements
(29) Statistical Records
(30) Records of Physical Verification.

Maintenance of Records:
 Every company under these rules including all units and branches thereof, shall, in respect of each of its
financial year commencing on or after the 1st day of April, 2014, maintain cost records in form CRA-1.

 The cost records shall be maintained on regular basis in such manner as to facilitate calculation of per unit
cost of production or cost of operations, cost of sales and margin for each of its products and activities for
every financial year on monthly or quarterly or half-yearly or annual basis.

 The cost records shall be maintained in such manner so as to enable the company to exercise, as far as
possible, control over the various operations and costs to achieve optimum economies in utilisation of
resources and these records shall also provide necessary data which is required to be furnished under these
rules.

Rule 4: “Cost audit report” means the duly signed cost auditor’s report on the cost records examined and cost
statements which are prepared as per these rules, including attachment, annexure, qualifications or observations
attached with or included in such report.

Applicability of Cost audit:

a. Even for regulated sectors like Telecommunication, Electricity, Petroleum and Gas, Drugs and Pharma,
Fertilizers and Sugar, Cost audit requirement has been made subject to a turnover based threshold of ` 50 crores
for all product and services,

b. and ` 25 crores for individual product or services.

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For Non-regulated sector the threshold is ` 100 crores and ` 35 crores respectively

 Every company referred to in sub-rule (1) shall inform the cost auditor concerned of his or its appointment
as such and file a notice of such appointment with the Central Government within a period of thirty days of
the Board meeting in which such appointment is made or within a period of one hundred and eighty days of
the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2,
along with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.

 Every cost auditor appointed as such shall continue in such capacity till the expiry of one hundred and eighty
days from the closure of the financial year or till he submits the cost audit report, for the financial year for
which he has been appointed.

Related CRAs:
CRA-2: Form of intimation of appointment of cost auditor by the company to Central Government
CRA-3: Form of Cost Audit Report

Part-A General Information,

General Details of Cost Auditors,
Cost Accounting Policy,
Product/Service Details –for the company as a whole.

Part-B For Manufacturing Sector Quantitative Information, Abridged Cost Statement, Details of Materials
Consumed, Details of Utilities Consumed, Details of Industry Specific Operating Expenses.

Part-C For Service Sector Quantitative Information,

Abridged Cost Statement,
Details of Materials Consumed,
Details of Utilities Consumed,
Details of Industry Specific Operating Expenses.
Part-D Product and Service Profitability Statement, Profit Reconciliation, Value Addition and Distribution of
Earnings,
Financial Position and Ratio Analysis,
Related Party Transactions,
Reconciliation of Indirect taxes.
CRA – 4: Form for filing Cost Audit Report with the Central Government
(1) Corporate identity number (CIN) or foreign company Registration number (FCRN) of the company
(2) General Information
(3) Corporate identity number (CIN) or foreign company Registration number (FCRN) of the company
(4) Details of Industries/Sectors/Product(s)/Service(s) (CETA headling level, wherever applicable as per Rules for
Regulated and Non-regulated sector) for which the Cost Audit Report is being submitted
(5) Details of Industries/Sectors/Product(s)/Service(s) (CETA headling level, wherever applicable as per Rules for
Regulated and Non-regulated sector) not covered in the Cost Audit Report
(6) Details of the cost auditor(s) appointed
(7) Details of observation of the Cost Audit report
(8) Attachment

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- XBRL document in respect of the cost audit report and Company’s information and explanation on every
Qualification and reservation contained therein
- Optional attachment, if any.

Cost Accounting Standards

Cost Accounting Standards are principles based, deal with the principles of costing, and provide guidance on the
preparation of General Purpose Cost Statements which require attestation by the cost accounting profession,
wherever applicable. Cost Accounting Standard Board (CASB) has been set up by the Council of the Institute of
Cost Accountants of India (ICAI) to formulate the standards.

Cost Classification
1. By Nature or element
2. By Functions
3. As Direct and Indirect
4. By Variability
5. By Controllability
6. By Normality
7. By Capital or Revenue
8. By Time
9. According to Planning and Control
10. For Managerial Decisions

1. By nature or element: Materials, labor, and expenses. There may be an additional sub-classification of each item;
for example, material in material components and spare parts, consumables warehouses, packaging material, etc.
2. By functions: It leads to the grouping of costs according to the broad divisions or functions of a trading company,
that is, production, administration, sale and distribution.
3. As direct and indirect: According to this classification, the total cost is divided between direct costs and indirect
costs. Direct costs are those that are incurred and can be conveniently identified with a particular cost center or unit
of cost. Materials use labor involved in the manufacture of an item or in a particular production process common
examples of direct costs. Indirect costs or overheads are those costs that are incurred for the benefit of multiple cost
centers or cost units and cannot be conveniently identified with a particular cost center or cost unit. Examples of
undefined costs include building rental, management salaries, depreciation of machinery, etc.
It is necessary to find the right bases to distribute the overheads between the production and service departments and
then for the redistribution of the costs from the service departments to other service and production departments.

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there must be an adequate correlation between the expenses and the basis. Therefore, common expenses should be
prorated or distributed among departments on an equitable basis.
a. direct allocation: directly allocated to various departments on the basis of expenses for each department
respectively.
b. direct labour hours
c. direct wages : worker’s insurance etc.
d. number of workers
e. light points
f. kilowatt hours
g. capital values
4. By variability: costs are classified according to their behavior in relation to changes in the level of activity or
production volume. On this basis, the costs are classified into three groups, namely, fixed, variable, and semi-
variable.
(i) Fixed (or period) costs are commonly described as those that remain fixed in the total amount with an increase
or decrease in the volume of production or productive activity during a given period of time. Fixed cost per unit
decreases as production increases and increases as production decreases. Examples of fixed costs are rent, factory
construction insurance, factory manager's salary, etc. These fixed costs are constant in the total amount but fluctuate
per unit as production changes. These costs are known as period costs because they are time dependent and not
production dependent. Such costs remain constant per unit of time, such as factory rent of Rs. 10,000 per month
remain the same for each mone, regardless of each month's production.
(ii) Variable (or product) costs are those that vary in total in direct proportion to the volume of production. These
unit costs remain relatively constant with changes in production. Therefore, variable costs fluctuate in total quantity,
but tend to remain consistent per unit as production activity changes. Some examples are direct material costs, direct
labor costs, energy, repairs, etc. These costs are known as product costs because they depend on the amount of
production rather than time.
(iii) Semi-variable costs are those that are partly fixed and partly variable. For example, telephone charges include
a fixed portion of the annual charge plus a variable charge based on calls; therefore, total telephone expenses are
semi-variable. Our examples of such costs are depreciation, repairs and maintenance of buildings and plants, etc.

5. By controllability: On this basis, (i) Controllable costs are those that can be influenced by the action of a given
company, that is, costs that are, at least in part, under the control of management like direct material, direct labour
and some of the overheads.
(ii) Uncontrollable costs are those that cannot be influenced by the action of a specific member of a company, that
is, they are not under the control of the management. Most of the fixed costs are uncontrollable.
6. By normality: (a) Normal cost. It is the cost that is normally incurred at a given level of production under the
conditions in which that level of production is normally achieved. It is part of the cost of production.
(b) Abnormal cost. It is the cost at which a given level of production is not normally incurred under the conditions
in which that level of production is normally achieved. It is not a corresponding cost of production and is charged
to the Cost Profit and Loss Account.

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7. By capital and revenue classification: The cost that is incurred in purchasing assets, either to earn income or to
increase the earning capacity of the business, is called capital costs. If any expense is made in order to maintain the
income-generating capacity of the business, such as the cost of maintaining an asset or `running a business, it is an
income expense. Expense income are taken into consideration when calculating cost, while capital items are
completely ignored.

8. For Managerial decisions:

(i) Marginal cost- Marginal cost is the total of variable costs, that is, principal cost plus variable overhead. It is
based on the distinction between fixed and variable costs. Fixed costs are ignored and only variable costs are
taken into account in determining the cost of products and the value of work in process and finished products.
(ii) Out-of-pocket expenses- This is the part of the costs that the payment to third parties implies, that is, it gives
rise to cash expenses as opposed to costs such as depreciation, which do not involve any cash expenses.

(iii) Differential costs- The change in costs due to the change in the level of activity or the method of production is
known as differential cost. If the change increases the electronic cost, it will be called incremental cost. If there is
a decrease in cost resulting from a decrease in production, the difference is known as decreasing cost.
(iv) Sunk costs. A sunk cost is a sunk cost and is caused by the total abandonment of a plant. It is the amortized
value of the abandoned plant less its salvage value. These costs are not relevant for decision-making and are not
affected by increases or decreases in volume. These are historical costs and a decision made in the past has been
incurred.
(v) Avoidable and unavoidable cost. Avoidable costs are those that can be eliminated if a particular product or
department to which they are directly related is discontinued. For example, employee salary. Employees in a
particular department can be eliminated, if the department is discontinued. The unavoidable cost is that cost that will
not be eliminated with the discontinuation of a product or department.
(vi) Costs that are affected by management decisions are known as relevant costs and costs that are not affected are
treated as irrelevant costs.
(vii) Imputed cost is the cost incurred during the period when an asset is employed for a particular use, rather than
redirecting the asset to a different use. This amount is the incremental difference between the two options. For
example, a teacher decides to go back to school to earn a master's degree. During the period when she is at school,
the imputed cost of this decision is the wages she would otherwise have earned if she had continued to work as a
teacher.

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