COST ACCOUNTING

 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 accountancy” as the application of costing and cost accounting principles, method and
techniques to the science, art and practice of cost control and the ascertainment of profitability

COST TERMINOLOGY
 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. Following are the aspects
or stages of cost control.
 JOB COSTING: It helps in finding out the cost of production of every order and thus helps in
ascertaining profit or loss made out on its execution. The management can judge the profitability of
each job and decide its future courses of action.
 BATCH COSTING: Batch costing production is done in batches and each batch consists of a number
of units, the determination of optimum quantity to constitute an economical batch is all the more
important.

COST CLASSIFICATION
Classification On basis of:
 Nature
 Function
 Direct & indirect
 Variability
 Controllability
 Normality
 Financial accounting classification
 Time
 Planning and control
 Managerial decision making

ON THE BASIS OF NATURE:

 Materials, Labor, Expenses

ON THE BASIS OF FUNCTION

 Manufacturing costs and Commercial costs (ADM and S&D Costs)

ON THE BASIS OF DIRECT AND INDIRECT

 Direct costs and indirect costs

ON THE BASIS OF VARIABILITY

 Fixed costs, Variable costs, Semi variable costs

ON THE BASIS OF CONTROLLABILITY

 Controllable costs, Uncontrollable costs

ON THE BASIS OF NORMALITY

 Normal costs, Abnormal costs

ON THE BASIS OF FINANCIAL ACCOUNTS:

 Capital costs, Revenue costs, Deferred revenue costs

ON THE BASIS OF TIME:

 Historical costs, Pre-determined costs

ON THE BASIS OF PLANNING AND CONTROL:

 Budgeted costs, Standard costs

Cost - amount of resource given up in exchange for some goods or services. The resources given up are money or money’s
equivalent expressed in monetary units.

Chartered Institute of Management Accountants, London - defines cost as “the amount of expenditure (actual or notional) incurred
on, or attributable to a specified thing or activity”.
The process of ascertaining the cost is known as costing.
Costing - costing is the analysis of financial records, so as to subdivide expenditure and to allocate it carefully to selected cost
centers, and hence to build up a total cost for the departments, processes or jobs or contracts of the undertaking. the techniques
and processes of ascertaining costs.

WHAT IS COST ACCOUNTING?

1. Chartered Institute of Management Accountants – CIMA (The Costing terminology of C.I.M.A. London)
That part of management accounting which establishes budgets and standard costs and actual costs of
operations, processes, departments or products and the analysis of variances, profitability or social use of
funds

2. Letricia Gayle Rayburn

That which identities, defines, measures, reports and analyses the various elements of direct and indirect
costs associated with producing and marketing goods and services. Cost accounting also measures
performance, product quality and productivity

3. Horngren C.T.
A systematic process of collecting, summarizing and recording data regarding the various resources and
activities in a firm so as to calculate the basis of production costs used in financial accounting or making
other relevant decisions in a firm

4. A specialised branch of accounting which involves classification, accumulation, assignment and control of
costs.

5. `Wheldon
“Classifying, recording and appropriate allocation of expenditure for determination of costs of products or
services and for the presentation of suitably arranged data for purposes of control and guidance of
management”. It is thus, a formal mechanism by means of which costs of products or services are ascertained
and controlled.

Cost Accountancy
“the application of costing and cost accounting principles, methods and techniques to the science, art and
practice of cost control and the ascertainment of profitability. It includes the presentation of information
derived there from for the purpose of managerial decision making”.

The main objective of cost accounting is communicating financial information to management for planning,
evaluating and controlling performance, and also to assist management to make more informed decisions. Its
data is used by managers to guide their decisions.

Financial Accounting:
This is the analysis, classification, and recording of financial transactions and the ascertainment of how such
information will be reported to the various users. It involves the development of general- purpose financial
statements largely for external reporting. These statements are developed in accordance with standards
imposed by the public (through the professional accounting bodies such as the Institute of Certified Public
Accountants of
Kenya – ICPAK and the International Accounting Standards Board – IASB) as well as the requirements of the
Companies Act Chapter 486.

Management Accounting:
This is the part of accounting that provides special-purpose statements and reports to management and other
persons inside the organization. The information generated by management accounting is therefore for
internal uses and is not guided by any standards or legal requirements.
Management Accounting, unlike financial accounting, is proactive i.e. it is future- oriented. It is required in
making decisions that affect the organization.

accounting is a part of management accounting.

CIMA defines management accounting as <provision of information required by the management for such
purposes as formulation of policies, planning and controlling the activities of the enterprise, decision taking
on the alternative courses of action, disclosure to those external to the entity (shareholders and others),
disclosure to employees and safeguarding assets. Cost accounting and management accounting have
basically the same functions.

The difference between cost and financial accounting may be highlighted using a number of questions
namely;
a) Are there any unifying concepts to which enterprises will adhere?
 For financial accounting: YES. There are a number of accounting standards that are followed in
producing accounting information. These are procedures established by the accounting profession to
standardize and improve accounting methods and disclosure. For example, the International
Accounting Standard No. 1 singles out for mention fundamental accounting concepts namely going
concern, accruals and consistency.
 For cost accounting and management accounting the answer is NO. However, there are a number of
techniques, which are widely used e.g. budgeting, standard costing, marginal costing and cost-
volume-profit analysis.

b) May management choose whether or not to use the discipline?

 The Companies Act requires a number of accounting records which by statute must be kept and made
available. For a limited company, financial statements must be produced which in the opinion of the
auditors, provide a true and fair view of the company’s affairs and comply with the Companies Act,
Cap 486, 1962.
 In the case of cost and management accounting, the management of an enterprise may choose
whether or not to create a cost and management accounting department and the extent to which any
such department will be used.

c) To what extent is the focus on segments of the enterprise?

 In financial accounting, the main emphasis is on the performance of the business entity. The
statement of financial position is viewing the state of the business at a specific point in time expressed
in monetary terms. The profit and loss account is comparing the revenue and expenses of the business
for a specific period.
 Cost and management accounting will focus analysis by segments of the business in order to allow
examination by job, process, product or service.

d) To what extent does the analysis of information incorporate non-monetary measures?

 In financial accounting the monetary base is predominant. Non-monetary measures are used in the
interpretation of accounting statements. For example, expressing net profit as a percentage of sales
revenue.
 In cost and management accounting there will be greater use of non-monetary measures. Quantitative
information may be useful in areas such as material losses (kilos or as a percentage input), machine
efficiency (as a percentage of a predetermined standard).

e) To what extent is the emphasis on future trends?

 In financial accounting there is the statutory requirement for provision of historical data from which
accounting statements may be prepared. Such statements may be used in the forecasting of future
trends for use by potential investors or investment analysts
 Cost and management accounting will tend to focus more on the future although analysis of historical
information will be used. For example, budgeting will focus on future plans but to some extent will use
past performance as a guide to the structure of such plans.

f) What Degree of accuracy is required in the information analysis?

 Basic financial accounting records must record transactions involving cash to the nearest cent. There
will be an element of judgment however in areas such as provision for depreciation of fixed assets or
valuation of stock and debtors.
 Cost and management accounting information will tend to be as accurate as required in a given
situation e.g. Management Reports may summarize figures to the nearest thousand shilling whereas
the labor cost per product may be expressed to four decimal places.

g) Is accounting a means to an end or an end in itself?

 Financial accounting is an end in itself in so far as it fulfils the statutory requirements in relation to
accounting records and the publication of financial accounting statements. It is also a means to an
end in that it provides an overview of the business which may be interpreted by the various users of
accounting information which the Companies Act seeks to protect.
 Cost and management accounting is a means to an end. It may be used to assist management in
future planning, control and decision making required for the efficient implementation of the
objectives of the enterprise and the strategies which will best lead to achievement of these objects.
Cost Accountant
Is a member of chief accounting officers department. He is responsible for collecting product costs and
preparing accurate and timely reports to evaluate and control company operations. Cost accountants
assemble, classify and summarize financial and economic data on the production and pricing of goods and
services.

THE ROLE OF A COST ACCOUNTING DEPARTMENT IN AN ORGANIZATION

As part of their jobs, cost accountants interpret results, report them to management and provide analysis that
assist decision- making in the following departments:
a) Manufacturing
Cost accountants work closely with production personnel to measure and report manufacturing costs. The
efficiency of the production departments in scheduling and transforming materials into finished units is
evaluated for improvements.
b) Engineering
Cost accountants and engineers translate specifications for new products into estimated costs; by comparing
estimated costs with projected sales prices, they help management decide whether manufacturing a product
will be profitable.
c) Systems design
Cost accountants are becoming more involved in designing computer integrated manufacturing (CIM) systems
and databases corresponding to cost accounting needs. The idea is for cost accountants, engineers and
system designers to develop a flexible production process responding swiftly to market needs.
d) Treasury/Finance
The treasurer uses budgets and related accounting reports developed by cost accountants to forecast cash
and working capital requirements. Detailed cash reports indicate where there are excess funds to invest or
where cash deficits exist and need to be financed.
e) Financial accounting
Cost accountants work closely with financial accountants who use cost information in valuing inventory for
external reporting and income determination purposes.
f) Marketing
Marketing involves the cost accountant during the product innovation stage, the manufacturing planning
stage and the sales process. The marketing department develops sales forecast to facilitate preparing a
products manufacturing schedule. Cost estimates, competition, supply, demand, environmental influences
and the state of technology determines the sales price that the product will be offered and will command in
the market.
g) Personnel
Personnel department administers the wage rate and pay methods used in calculating each employees pay.
This department maintains adequate labour records for legal and cost analysis purposes.
At this point, it cannot be over-emphasized that cost accounting is simply an information system designed to
produce information to assist the management of an organization in planning and controlling the
organisation9s activities. It also assists the management to make informed decisions so as to enable the
organization to operate at maximum effectiveness and efficiently.

What does Cost and Management Accountant do?

Cost and Management Accountant is responsible for Planning, Studying, and collecting data to determine
costs of business activity such as raw material purchases, inventory, and labour. Their duties also involve
pricing of goods and services, verification or certification of Cost Records and Taxation, especially in Indirect
Taxation.

 Constructing structures and controls to analyse systems for data collection and reporting
 Coordinate and examine variances in cycle counts and fix problems
 Collect and apply overhead costs as needed
 Decide and execute cost accounting methods and procedures.
 Gather historical cost data to predict existing or potential product costs
 Consult with clients, suppliers, other departments' personnel, or construction foremen to analyse and
prepare estimates and address difficulties.
 Prepare calculations utilised by management for planning, coordinating, and scheduling purposes.
 Examine blueprint and other documents to prepare estimates of time, cost, supplies and labour
 Conferring improvements and modifications to cost estimates with owners, engineers, architects,
contractors and subcontractors
 Evaluate the cost-effectiveness of goods, projects or facilities, and actual document costs relative to
bids as the project evolves.
 Formulate estimates for use in vendor or subcontractor selection
 Develop cost monitoring and reporting procedures and systems
 Establish and sustain tendering processes, and carry out negotiations
 Prepare and preserve a directory of contractors, suppliers and subcontractors.
 Evaluate the material, and labour needs to determine whether manufacturing or buying components
is more cost-effective.
 Carry out special studies to create and define standard hour and associated cost data or to reduce
costs
 Prepare cost and expense statements and other required documents for the duration of a project at
regular intervals.
 Go to the site and record drainage, access and topography information, and the availability of facilities
like electricity and water.