St.

Joseph’s College of Commerce, Bangalore (Autonomous)

COST ACCOUNTING - I

MODULE -1: BASIC CONCEPTS

Meaning – Cost accounting – Cost accountancy – Costing – Cost accounting and management
– Objectives of Cost Accounting – Cost accounting v/s Financial Accounting – Cost Accounting
v/s Management Accounting – Advantages of cost accounting – Methods of costing –
Techniques (types) of costing – Cost centres (Meaning and purpose) – Cost units (Meaning
and importance) – Cost accounting departments–Brief note on Cost Audit Records and Report
Rules. Social responsibility in Performance and TBL

Introduction: Cost Accounting has emerged mainly because of certain limitations of financial
accounting. They are as follows:

a) It shows only the overall performance of the business. It does not give data of individual
products, departments, etc.
b) It gives only historical data.
c) There is no system of performance appraisal in financial accounting.
d) There is no material control system.
e) There is no system of labour cost control.
f) No proper classification of costs.
g) No proper analysis of profits and loss of an organization.
h) The information supplied is insufficient to determine prices of products, services, etc.
i) There is no system of cost comparison.
j) It fails to supply useful data to management for decision making.

Meaning of Cost accounting: Cost Accounting is the classifying, recording and appropriate
allocation of expenditure for the determination of the cost of the product or service and for the
presentation of suitably arranged data for the purpose of control and guidance to
management.

Meaning of Costing: Costing is the techniques and processes of ascertaining costs.

Meaning of 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 are known as Cost Accountancy. It includes the presentation of information
derived there-from for the purpose of decision-making. It is more comprehensive term and
includes ‘costing’ and ‘cost accounting’.

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Meaning of Management Accounting: Management Accounting is an accounting which

provides information which is not obtainable from the financial accounting. In other words, it is
an accounting which helps the management in making the right decision.

With Cost and Management Accounting, the organization is looking forward. It is gathering and
analyzing information which will be used as a basis for making future decisions affecting the
performance and profitability of the firm.

Objectives of Cost Accounting:

1. To ascertain and analyse costs: The primary objective of cost accounting is to ascertain
and analyse costs incurred on the production of various products, jobs and services, etc.
2. To control costs: Cost accounting has developed various techniques such as standard
costing and budgetary control for controlling costs.
3. To fix the selling price: Cost accounting provides reliable data on the basis of which selling
prices can be fixed.
4. To reduce costs: Under the cost reduction plan, products, processes, procedures,
organization and methods are continuously scrutinized to improve efficiency and reduce
costs. Value analysis, time and motion study, standardization, simplification, etc., are
important techniques of cost reduction.
5. To prepare monthly or quarterly cost statements for periodic review of operating results.
6. To provide useful information for planning and control and for taking various decisions
regarding increase in production, installation or replacement of a machine, the making or
buying of a component, continuing or closing down of a business, etc.

Differences between Costing Accounting and Financial Accounting:

Cost Accounting Financial Accounting

1. It is concerned with the ascertainment It is concerned with ascertainment of profit or
of cost of a product or a service. loss of an organization and also ascertaining
the financial position of a concern.
2. It provides information about costs to It provides information both to internal and
internal users for the purpose of external users regarding the working results
planning, controlling and decision- and the financial position of a business.
making.
3. It focuses on individual products, It focuses on the entire business.
services and departments, etc., of a
business.
4. The determination of the cost of It does not provide cost of various inventories.
various types of inventories is possible
through cost accounting.
5. It helps in determining the selling price It does not help in determining the selling

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of various products. price.

6. It is the management’s option to
introduce cost accounting system or
not. However, in the case of certain
industries, the Central Government has
made it compulsory to maintain cost
records.
7. It is exceedingly useful for managerial
decision-making.
8. No uniform formats. Formats are tailor
made to suit the needs of
management.
9. It records both internal and external
transactions. Examples of internal
transactions are: inter-departmental
transactions, issue of materials to
production department, etc.
10. Cost reports are a continuous process.
It may be prepared daily, weekly,
monthly, etc.
11. It gives importance not only
determining the cost but also on its
control.
Financial accounts are kept to meet the
requirements of the Companies Act, Income-
tax and Sales-tax acts, etc.
It is not of much use for purposes of
managerial decision-making.
It has a single uniform format of presenting
financial statements.
It records only external transactions like sales,
purchases, receipts, payments, etc with
outside parties.
Financial reports are prepared periodically,
usually on an annual basis.
It gives importance on recording financial
transactions and not on control aspect.

Difference between Cost Accounting and Management Accounting

Both Cost Accounting and Management Accounting involve collection and presentation of
accounting information in a manner that will be useful to the management for its task of
prudent planning, correct decision making and effective controlling of the day-today
operations.
The objectives of both cost accounting and management accounting are similar. Both cost
accounting and management accounting are concerned with units and segments of activities
rather than the business as a whole. Both reports not only the historical data, but also the
estimate for the future. The techniques employed in both are more or less the same. Even the
periodicity of reporting of data is the same in both the systems.
Again, Management Accounting draws data heavily from cost accounting. In the absence of a
suitable cost accounting system, management accounting will not be effective. Cost
Accounting and Management Accounting are complementary to each other.
Despite the similarities and inter-relationship, there are many differences which are given
below:

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Basis Cost Accounting Management Accounting

Functions It is primarily concerned with It is concerned with all such matters
ascertainment of cost and profitability, in a wider perspective which would
and control of cost with the help of go to assist the management in the
techniques, such as standard costing, formulation of policies,
budgetary control and responsibility improvement of productivity,
accounting. profitability, etc.
Scope Cost accounting primarily deals with It has a wider scope when compared
cost data. to Cost Accounting. It considers
both cost and revenue data.
Decision Cost Accounting takes into account It takes into consideration the cost
making mostly the cost factors. It suggests to as well as non-cost factors, while
the management the best of the deciding upon the alternatives.
alternatives by the use of differential
costing technique.
Interpretation Cost Accounting just reports cost data.It not only reports financial and cost
data, but also interprets such data in
the light of other relevant
information.
Parties Both internal and external parties are Only internal parties are interested
interested interest in the data provided by Cost in the data provided by
Accounting. Management Accounting.

Advantages of Cost Accounting:

1. It is very helpful in controlling expenditure and minimizing the cost of manufacture of

products.
2. It provides useful data not only about product costs but also about production efficiency
and performances.
3. It helps the management to initiate action to rectify delays, inefficiencies and wastage.
4. Centralisation of purchasing is facilitated by the use of cost accounting. This results in
economical purchasing.
5. Maintenance of time and job records for workers reveals losses incurred due to idle time.
Such records assist in taking steps to minimize these losses.
6. It helps the management in appraising the performance of various units and managers.
7. It provides useful information to the management for planning various activities.

Methods of Costing:

There are different methods of costing for different industries depending on their nature of
work. They are as follows:

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1. Job Costing: This refers to a method of costing where the items of direct costs are traced to
specific jobs or orders. Each job or order is specific and involves different operations. The
objective is to ascertain the cost of each job or order. A job cost card is prepared for each
job to accumulate costs. The cost of the job may be determined by adding all costs against
the job when it is completed. Job costing method is used in re-pairing a television set, re-
pairing a house, servicing a motor car, printing, interior decoration, advertising, etc.
2. Contract Costing: This method is used where a job is very big and takes a long time to
complete. In this the cost of each contract is ascertained separately. It is suitable for firms
which are engaged in the construction of bridges, roads, buildings, factories, etc., on a
contract basis.
3. Batch Costing: Where small components of the same kind are required to be manufactured
in large quantities, Batch costing method is used. In this, a batch of similar products is
treated as a job and the costs are accumulated in respect of a batch. In a bicycle producing
factory, if rims are produced in batches of 5,000 each, costs will be determined in relation
to a batch of 5,000 rims.
4. Process and Operation Costing: Process is a distinct stage in manufacturing or production,
wherein Raw Material is converted from one identifiable form into another, before it is
finally converted into the saleable final product. For example: In the production of oil, the
different process involved are: Crushing Process, Refining Process and Finishing Process.

Process Costing is a method of costing used to ascertain the cost of a product at each
process or stage of manufacture. In this method, the costs of materials, wages and
overheads are accumulated for each process separately, for a given period, and then carried
forward cumulatively from one process to the next process till the last process is completed.
This method is used in steel, sugar, textiles, chemicals, soap, etc., manufacturing concerns.

Operation Costing is an extension of process costing. This method of costing can be applied
to all those process industries where a process comprises a number of distinct operations.
In such industries, the cost of each operation is determined instead of a process.
5. Unit or Single output costing: This method is applied in undertaking which produce only
one product. Examples of such undertakings are mines, quarries, collieries and breweries.
The cost is determined per unit of measurement with which the ultimate production is
measured.
6. Operating Costing: Operating Costing is a method of ascertaining cost of providing or
operating a service. Service rendering undertaking follow this method of costing. For
example, transport, telephone services, hospitals, nursing homes, etc., use this method of
costing.
7. Multiple or Composite Costing: In some cases two or more methods of costing are used to
determine the cost of the final product. This happens when a product consists of a number

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of parts and requires an assembly. For example, in bicycles, the cost of the components will
be determined through the batch costing method. But to arrive at the cost of assembling
the product, the unit or single output method of costing will be used. The same is true of
automobiles and aero plane industries.
8. Uniform Costing: When various undertakings, under the same or under different
managements in the same industry, use the same principles and/or practices of costing,
they are said to be using the method of uniform costing. In such a situation all costing
information is dealt with in a similar manner. The use of uniform costing facilitates inter-
firm comparison.

Techniques (Types) of Costing:

1. Historical Costing: In this, product cost (material, labour and overheads) are ascertained
after they have been incurred.
2. Normal Costing: In this, product cost can be ascertained even before all the costs have
been incurred. This is done by using historical cost of material and labour and
predetermined rates for overhead costs. Thus normal costing differs from historical costing
only in the treatment of overheads.
3. Standard Costing: It involves the preparation and use of standard costs, their comparison
with actual costs and the analysis of variances to their causes and points of incidence.
4. Absorption Costing: This follows the practice of charging all costs, both variable and fixed
to operations, process or products.
5. Marginal Costing: In this, only variable costs are charged to products, processes or
operations while fixed costs are written off against the profits for the period in which they
arise. In the U.S., the term ‘direct costing’ or ‘variable costing’ is used for marginal costing.
6. Differential Costing: A technique of costing which uses differential costs and/or differential
revenues for ascertaining the acceptability of an alternative is called differential costing.
The technique may be termed as incremental costing when the difference is increase in
costs and decremental costing when the different is decrease in cost.

Meaning and Purpose of Cost Centre:

A cost centre is a production or service location, function, activity or item of equipment for
which costs can be ascertained.

Examples of cost centres:

• a department

• a machine

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• a project

• a ward (in a hospital).

Purposes of Cost Centres:

• The main purpose of a cost centre is to track actual expenses for comparison to the
budget.
• Cost centres help management improve operational efficiency and maximize profit by
controlling costs and allocating resources.
• Cost centres also indirectly contribute to revenue generation by providing services or
enhancing product value. For example, a marketing department may increase sales by
creating effective campaigns, or a research and development department may create
innovative products that attract customers. However, it is difficult to measure the exact
revenue generated by these cost centres.
Meaning and purpose of Cost Unit:

A cost unit is a unit of product or service in relation to which costs are ascertained.

Examples of cost units:

• a room (in a hotel)

• a litre of paint (paint manufacturers)

• in-patient (in a hospital).

Importance of Cost Units:

The importance of cost units is that they help to:

• Break down or separate costs into smaller sub-divisions that are attributable to products
or services.
• Compare the costs of different products or services and determine their profitability.
• Control and reduce costs by identifying the sources of inefficiencies or wastages.
• Set prices for products or services based on their costs and market conditions.
• Budget and forecast future costs and revenues based on historical data.
A few more examples of cost units in various industries are given below:

Industry (I) / Service (S) / Method of Unit of Cost

Activity (A) Costing
Advertising S Job Per job
Automobile I Multiple Per Number

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Bicycle I Multiple Per unit or per batch

Breweries I Process Per barrel
Brick works I Single / Unit Per 1000 bricks
Bridge Construction I Contract Per contract
Cement I Unit Per tonne
Chemicals I Process Per litre, gallon, kg, tonne, etc
Coal mining I Single / Unit Per tonne
Credit Control (in bank, sales A Not applicable Per account maintained
dept., etc.)
Education Services S Operating Per course, per student, etc.
Electronic Items I Multiple Per unit or per batch
Engineering works I Contract Per job, per contract, etc.
Furniture I Multiple Per unit
Hospital / Nursing Home S Operating Per patient-day, room-day
Hotel / Catering S Operating Per guest-day, room-day, per
meal
Interior Decoration S Job Per job
Oil refining I Process Per barrel, per tonne, per litre,
etc.
Professional Services S Job Per chargeable hour, per job,
Power / Electricity I Operating Per kilo-watt hour
Road transport S Operating Per Tonne-Km, per passenger-
Km.
Ship Building I Contract Per ship
soap I Process Per unit
Steel I Process Per tonne
Sugar I Process Per tonne, per quintal
Toy Making I Batch Per batch

Cost Accounting Departments:

Cost accounting departments are the units within an organization that are responsible for
keeping records and analyzing the costs of production, marketing, and administration. Cost
accounting departments help management in making informed business decisions by providing
information on the cost of goods sold, the profitability of products or services, the budgeting
and forecasting of future costs and revenues, and the control and reduction of costs. Cost
accounting departments also help in complying with the legal and regulatory requirements
related to cost accounting standards and reporting.

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Some of the functions of cost accounting departments are:

• Estimating the various costs involved in the manufacturing process, such as material
cost, labour cost, and overhead cost.
• Allocating the costs to different cost centres and cost units based on their activities and
outputs.
• Applying different methods of costing, such as standard costing, activity-based costing
or marginal costing, depending on the nature and purpose of the business.
• Preparing cost statements and reports for internal and external users, such as
management, shareholders, creditors, customers, suppliers, etc.
• Evaluating the performance of different departments, products, or services based on
their costs and revenues.
• Identifying the sources of inefficiencies or wastages and suggesting ways to improve
operational efficiency and maximize profit.
• Coordinating with other departments, such as finance, marketing, production, etc., to
ensure accurate and timely cost information and analysis.
Cost Audit Reports and Report Rules:

Cost Audit Records and Report Rules are the rules issued by the Ministry of Corporate Affairs
(MCA) under Section 148 of the Companies Act, 2013, to regulate the maintenance of cost
accounting records and the audit of such records by qualified cost accountants. The rules
specify the following:

• The companies that are required to maintain cost accounting records for their products
or services based on their turnover and industry sector.
• The format and structure of the cost accounting records and the cost statements to be
prepared by the companies.
• The procedure and criteria for the appointment, removal, and remuneration of the cost
auditor by the companies.
• The format and structure of the cost audit report to be submitted by the cost auditor to
the company and to the MCA.
• The time limit and fees for filing the cost audit report and the intimation of appointment
of cost auditor with the MCA.
• The penalty for non-compliance with the rules by the companies or the cost auditors.
The main objectives of the Cost Audit Records and Report Rules are to:

• Ensure that the companies keep proper and accurate records of their costs and
revenues for different products or services.

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• Provide reliable and relevant cost information to the management, shareholders,

creditors, customers, suppliers, regulators, and other stakeholders for decision making,
planning, control, and evaluation purposes.
• Promote cost consciousness, efficiency, and competitiveness among the companies by
identifying and eliminating wastages, inefficiencies, or leakages in their operations.
• Protect the interests of investors, consumers, taxpayers, and society at large by ensuring
transparency, accountability, and fairness in the pricing and taxation of products or
services.
Social responsibility in Performance and TBL:

Social responsibility in performance and TBL is based on the triple bottom line framework,
which evaluates a company's performance and impact on three dimensions: profit, people, and
planet. This framework encourages businesses to look beyond the financial bottom line and
consider the social and environmental costs and benefits of their activities. TBL is also linked to
corporate social responsibility (CSR), which is the voluntary practice of ethical and sustainable
business conduct.

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