Cost Accounting

By: Dr. Aakanksha Singhal

 Meaning
• Cost accounting is a branch of accounting,
which deals with the accumulation,
classification, analysis, recording, allocation,
summarization, interpretation, reporting, and
control of current and prospective cost.
• It includes determination of forecasted future
cost and standard cost of products and
services.
• Costing: “The technique and process of
ascertaining costs”.
• Cost Accounting: The process of accounting
for cost.
• Cost accountancy: the application of costing
and cost accounting principles, methods and
techniques.
 Need of cost accounting
Following are the limitations of financial accounting:
• It does not provide classified cost figures for products to
ascertain cost.
• Does not fix selling price.
• Not possible to ascertain the reason for variation in cost
• Does not classify expenses into direct and indirect,
controllable and uncontrollable expenses.
• Does not analyze losses owing to wastage of materials,
ideal time etc.
 Objective of cost accounting
• To ascertain and analyze costs
• To control cost
• To fix the selling price
• To reduce cost
• To provide information
 Advantages of cost accounting
• Help in controlling cost
• Provides useful data about production
efficiency
• Avoids delay
• Reveals losses due to idle time
• Provides information about cost of resources
• Identifies normal/abnormal losses and gains
• Helps in decision making
 Cost unit
• The cost unit is defined as the unit of product,
service, time, activity, or combination in relation to
which cost is estimated.
• At the time of preparing the cost statements and
accounts, a particular unit is required to be selected.
• It helps to identify the cost accurately and allocate
the various expenses.
• The cost unit of the hotel industry is a room and the
cost unit of the steel industry would be a ton.
 Cost centre
• According to the Institute of Cost and Management
Accountants (ICMA), A cost centre is a location,
person, or item of equipment (or a combination of
these) for which costs can be determined and
utilized for cost control.
• Eg. The research and development wing (R&D) is
responsible for developing new techniques and
products for the organization. This department incurs
a lot of expenses while coming up with new ideas,
technologies, and products.
Cost Unit
A unit of product for which cost is
ascertained
The concept is based on ascertain cost
Cost of a unit is arrived at by dividing the
total cost accumulated in a cost centre by
the total number of units produced
therein
A cost unit is a physical measurement like
a number, weight, area, volume, length
etc. which may be single as a tonne or
compound as tonne kilometre
A cost unit may be job, a batch of a single
order
Cost center
It is a segment of an organization for
which costs are accumulated
The concept is based on accumulation
and control of cost
Cost of various cost centres are
accumulated by the process of allocation
and apportionment
A cost centre consisting of a person is
called personal cost centre and a cost
centre consisting machine is called
impersonal cost centre
Various department may consist of cost
centre
 Cost classification

Cost classification

According to
According According According According
controllable
to Elements to functions to behavior costs to normality
 According to elements
• Direct cost: direct material, direct labour,
direct expenses.
• Indirect cost: also known as overheads such as
machinery upkeep, wages of supervisor etc.
 According to functions
• Production cost such as direct material, direct
labor, manufacturing overheads.
• Administration cost such as staff salary, rent,
electricity, audit fee, maintenance of office
equipment.
• Selling and distribution cost: expenses on
advertisement, distribution, warehouse etc.
• Research and development cost
 According to behavior
• Fixed costs: rent.
• Variable cost: direct material
• Semi variable cost: change with the change in
volume of production such as repair and
maintenance.
 According to controllability
• Controllable cost:
• Uncontrollable cost
 According to normality
• Normal cost: incurred for the production of
normal output in a routine manner in normal
circumstances.
• Abnormal cost: incurred over and above
normal costs in abnormal circumstances to
achieve desired output.
 Elements of cost

Elements of total cost

Direct Direct Direct

Overheads
Material labour expenses

Manufacturi Selling and

Administrati
ng distribution
ve overheads overheads
overheads
 Elements of cost
• Direct material cost
• Direct labour cost
• Direct expenses: rent, cost of patent, royalty,
license fee, travelling expense
• Overheads: Manufacturing overheads,
administrative overheads and selling and
distribution overheads.