WHAT IS COST

• COST – ‘Cost’ may be defined as

i. the amount of expenditure (actual or
notional) incurred on or attributable to a
given thing; or
ii. to ascertain the cost of a given thing.
• Cost represents the resources that have been
or must be sacrificed to attain a particular
objective.
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 WHAT IS COSTING
• Costing involves in classification, recording,
allocation, appropriation of expenses incurred to
facilitate the determination of cost of the product
or service.
• Costing is the classifying, recording and appropriate
allocation of expenditure for the determination of
cost of products or services and for the
presentation of suitably arranged data for purposes
of control and guidance of management.

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 WHAT IS COST ACCOUNTING
• Cost Accounting primarily deals with
collection, analysis of relevant cost data for
interpretation and presentation for various
problems of management
• Cost Accounting accounts for the costs of a
product, a service or an operation

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 WHAT IS COST ACCOUNTANCY
• Cost Accountancy is the application of
Accounting and Costing principles,
methods and techniques in the
ascertainment of costs and the analysis of
savings and/or excess as compared with
previous experience or with standards.

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 OBJECTIVES OF COST ACCOUNTING
• To ascertain the cost per unit of production
• To help in determining the selling price
• To help in cost control and cost reduction
• To ascertain the cost and profitability of each division, unit,
activity, centre, etc.
• To assist the management in decision making
• To provide a basis for operating policies
• To inform about inefficiency and carelessness
• To inform the real situation of production activity
• To provide the principles and procedures to be followed in
costing system
• To provide basis for comparative analysis through data collection
• To09/21/2020
facilitate cost estimation Soumendra Roy 6
NECESSITY FOR COST ACCOUNTING SYSTEM
• Analysis of profitability of individual products, services or jobs
• Analysis of profitability of different departments or operations
• Analysis of cost behaviour of various items of expenditure in
the organization.
• Locates differences between actual results and expected
results.
• Setting the prices so as to cover costs and generate an
acceptable level of profit.
• Effect on profits of increase or decrease in output or
shutdown of a product line or department can be analyzed.
• Analyze the financial statements of a company to know
sources
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of profit or loss. Soumendra Roy 7
LIMITATIONS OF A COST ACCOUNTING SYSTEM
• It presents the base for taking the best decisions,
but it does not give outright solution to the problem
• Cost varies with purpose
• Cost Accounting is not an exact science. It involves
inherent elements of judgment.
• It lacks a uniform procedure
• A suitable system is to be devised for each
individual concern and it would be time consuming
and expensive.
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LIMITATIONS OF A COST ACCOUNTING SYSTEM
• Existence of numerous methods for apportionment and
absorption of overheads, valuation of stocks, provision for
depreciation etc. may lead to cost differences and it is difficult
to ascertain true cost of product or service
• Most of Cost Accounting techniques are based on some
presumed notions
• Different views are held for inclusion of certain items o cost in
ascertainment of total cost
• Many formalities are to be observed to obtain benefit from
Costing System. Small and medium concerns may not be in a
position to install a Costing System
• If the system is not revised as per the changing circumstances, it
will become a matter of routine
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 METHODS OF COSTING
Costing
Methods

Continuous Operation
Specific Order Costing
Costing

Job Contract Batch Process Operation Unit Service

Costing Costing Costing Costing Costing Costing Costing

Joint and by-

product Costing

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 Techniques of Cost Accounting
• Marginal Costing
• Direct Costing
• Absorption Costing
• Uniform Costing
 CLASSIFICATION OF COSTS
• Costs may be classified into variety of ways, according
to the decision needs of the management.
• The important classifications of cost are as follows:
 Classification by Nature – Material, Labour, Expenses.
 Classification in Relation to Cost Center – Direct
material, Direct labour, Direct expenses, Indirect
material, Indirect labour, Indirect expenses.
 Classification by Functions/Activities – Production
cost, Administration cost, Selling cost, Distribution
cost and Research and Development expenditure.
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 CLASSIFICATION OF COSTS
• Classification by Time – Historical cost, Predetermined
cost, Standard cost, Estimated cost.
• Classification for Management Decision Making –
Marginal cost, Differential cost, Opportunity cost,
Replacement cost, Relevant cost, Imputed cost, Sunk
cost, Normal cost, Abnormal cost, Avoidable cost,
Unavoidable cost, etc.
• Classification by Nature of Production Process – Batch
cost, Process cost, Operation cost, Operating cost,
Contract cost, Joint cost.
• Classification by Behaviour – Fixed cost, Variable cost
and Semi-variable cost. Soumendra Roy
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Cost sheet