Accountants Concept of Cost

This is the cost incurred by a firm on the factors/inputs hired by

it from outside. This includes cost of material, labour,
depreciation, interests and other expenses. This is related with
production and selling of the organizations goods and services.

Economist Concept of Cost

Cost means price. Price means value expressed in terms of
money. According to economist cost is an opportunity cost. In
economics cost includes an adequate interest return on the capital
invested by the owners. Opportunity costs are the costs or
compensation for not exploited alternative opportunities.
Hence costs in an economical sense includes all those costs that
are necessary to keep the company in business including the
compensation for owners.

Costing
Costing is a technique and process of attaining the cost. This
involves systems, methods, classification, analysis & allocation of
expenditure in respect of a product or service.

Cost Accounting
Cost Accounting is the classifying, recording & appropriate
allocation of expenditure for the determination of the costs of
products or services,& for the presentation of suitably arranged
data for the purpose of control & guidance of Management.

Cost Accountancy
Cost accountancy is used to describe the principles, conventions
techniques and systems which are employed in a business to plan
and control the utilization of its resources.

OBJECTIVES & FUNCTIONS OF COST ACCOUNTING

1. Cost ascertainment
2. Cost control
3. Matching cost with revenue
4. Special cost studies & investigation
5. Decision-making
6. Preparation of financial statement & reports.

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ORIGIN AND GROWTH OF COST ACCOUNTING
Costing was practiced by the Sumerians in Mesupotumia in
5,000 B.C. It was developed in Florence in the middle ages.
First book relating to cost accounting “Factory Accounts” was
published by Emile Garcke and J.M. Fells in 1883.
Accounting Theory and practice was published by J.L.
Nicholson from New York in 1913.
The Institute of cost and works accountant was established in
U.K. in 1919.
In India Institute of cost and works accounting come into
existence through an act passed in the parliaments in 1959.

DIFFERENCE BETWEEN COST ACCOUNTING & FINANCIAL

ACCOUNTING
Points Financial Accounting Cost Accounting
1. Purpose To prepare P & L A/c To provide detailed cost
and B/S to Know the information to the
result of business management
2. Statutory Maintained as per the Maintenance is voluntary
requirement requirements of the
Companies Act &
Income tax Act
3. Nature Historical in nature It is estimated price
4. Costs are not classified Classified into direct and
Classification in detail indirect Or element wise
5. Profit Profit and loss are Shows the detailed Profit
ascertained as a whole and loss of each product,
during a particular departments ,Process etc.
period
6. Reporting Accounts are closed Continuous process
periodically (annual accounts are maintained
basis) and reporting is product wise, Process
done accordingly. wise, operation wise etc.
7. To all types of Applicable in businesses
Applicability business organizations engaged Either in
irrespective of size and manufacturing or in
nature Rendering services; where
cost per unit is to be
computed.

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INSTALLATION OF COST ACCOUNTING SYSTEM – STEPS
1. Nature of organization:
We should study whether cost accounting system is needed at all
to the organization. It should be financially viable & should lead
to results. Some concerns are working prosperously even without
cost Accounting system.

2. Co-operation and support of personnel:

For the introduction of costing system there must be support from
the existing staff. Staff may not be positive; generally they resist
change. So, efforts should be made to win their confidence
through proper counseling.

3. Simplicity:
The system of costing must be simple and easy to operate.
Unnecessary details should be avoided.

4. Maintenance of records:
For ascertainment of costs, proper records should be maintained.
Forms and records must be simple, economical and reduce
clerical work to the minimum. For this purpose printed forms
should be used.

5. Standardisation:
Records and forms used must be uniform in all cost data. Thus,
standardization helps for comparison, with historical data.

OVERCOMING RÉSISTANCE TO CHANGE:

 Stage by stage implementation
 Educating, convincing,& winning the confidence of the staff
 Proper training of Personnel
ADVANTAGES OF COST ACCOUNTING:
a. To Management:
1. It discloses profitability of activities
2. It helps in cost control
3. It helps in inventory control
4. It aids in formulating policies
5. It helps in decision making
6. It helps in price fixation
7. It discloses idle capacity
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b. To Employees:
1. It rewards the efficient workers
2. The scope for promotion and large earning
3. Better pay roll and job security

c. To Government:
1. It helps in preparing national plans for economic development
2. It facilitates the assessment of excise duty and income tax
and formulation of policies regarding industry, export, import
and taxation
3. It provides the cost data which will help the Govt. for fixing
wages, price control, granting of subsidy etc.
4. It provides the Govt. for evaluation of efficiency of public
sector undertakings and to take steps for improving the
performance of such undertakings.

d. To Creditors:
1. It helps the creditors and investors to judge the financial
position and creditworthiness of the business.
2. The cost reports are useful to the creditors for ascertaining
the future prospectus and profitability of the enterprise.

e. To the Society:
1. People will get better quality goods at cheaper price
2. Controls the inflation
3. Stability of industry ensures economic growth
4. Provides employment.

DISADVANTAGES OF COST ACCOUNTING:

1. Expensive
2. Absence of ready made system
3. Cost differences
4. It is not true or exact cost.
5. Not applicable to small firms

CLASSIFICATION OF COST CONCEPT

By Nature or Elements:
a. Materials
b. Labour
c. Expenses
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 There can be further sub-classification of each element; for
example, material into raw material components, spare parts,
consumable stores, packing material etc. This classification is
important as it helps to find out the total cost, how such total cost
is constituted and valuation of work-in-progress.

By Functions:
a. Administration cost – Cost of administration incurred in the
office

b. Selling and distribution cost - Costs incurred in creating

place and ownership utilities.
Note: Costs other than production are treated as Commercial
Costs.

By Time:
a. Historical Costs
The costs which are incurred in the past. Such costs are
available only when the production of a particular thing has
already taken place. They have historical value and not
helpful for cost control purposes.

b. Predetermined Costs
Such costs are estimated costs i.e., computed in advance of
production. They are based on previous periods costs and the
factors affecting such costs.

c. Standard cost
Predetermined costs on scientific basis become standard cost.
They are used for cost control purposes. Standard costs &
actual costs are compared, deviations are noted & corrective
actions are taken.

By Controllability
a. Controllable costs
It is the cost which can be controlled by managing properly at
a given organizational level. Example, Indirect Labour, Power
Costs.

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 b. Uncontrollable costs
These are the costs which cannot be influenced by the action
of a specified member of an undertaking, that is to say, which
are not within the control of management. Most of the fixed
costs are uncontrollable. Eg., Rent of the building,
Managerial salaries.

Managerial Concepts of Cost:

a. Relevant cost:
The costs which is appropriate to a specific management
decision is relevant cost

b. Implicit cost:
The implicit cost is the opportunity cost. It is the cost of one
opportunity that is sacrificed for the sake of another. Implicit
cost is the cost of one investment opportunity which is
sacrificed for getting another investment opportunity.

c. Opportunity cost:
It is the maximum possible alternative earning that might
have been earned if the productive capacity or services had
been put to some alternative use. In simple words, it is the
advantage, in measurable terms, which has been foregone
due to not using the facility in the manner originally planned.

d. Sunk cost:
A sunk cost is an irrecoverable cost and is caused by
complete abandonment of a plant. These costs are not
relevant for decision-making.
Sunk cost = written down value of the abandoned plant -
salvage value.

e. Imputed cost:
These are the costs which appear in cost accounts only e.g.,
notional rent charged on business premises owned by the
proprietor, interest on capital for which no interest has been
paid.