CHAPTER 1 – COST

ACCOUNTING
FUNDAMENTALS
OUTLINE

• Definition of cost accounting

• Goal of cost accounting
• The value chain
• Cost accounting in the value chain
• Financial accounting vs managerial accounting
DEFINITION OF COST ACCOUNTING

• Cost accounting is defined as "a systematic set of

procedures for recording and reporting measurements of
the cost of manufacturing goods and performing services
in the aggregate and in detail. It includes methods for
recognizing, classifying, allocating, aggregating and
reporting such costs and comparing them with standard
costs." (IMA)
GOAL OF COST ACCOUNTING

• Valuation of inventory of cost of goods sold

• Aid in adding value to the organization by aiding managers in
decision-making
THE VALUE CHAIN
A set of activities that transforms raw resources into the goods and services that
end users purchase and consume and the treatment of disposal of waste
generated.
1. Research and development
2. Design of products, services, or processes
3. Production
4. Marketing
5. Distribution
6. Customer service
COST ACCOUNTING IN THE VALUE CHAIN

Research and development

• Develop cost-effective designs
• Help in making informed decision regarding alternative materials
COST ACCOUNTING IN THE VALUE CHAIN

Design
• Very critical stage because a large part of a product’s cost is locked
in once a design is chosen
• Cost-accounting helps designers to understand the effects of
design-modifications to the behavior of costs.
COST ACCOUNTING IN THE VALUE CHAIN

Purchasing
• Aid in evaluating the performance of suppliers
COST ACCOUNTING IN THE VALUE CHAIN

Production
• Aids in valuation of inventory and cost of goods sold
• Aids in developing the ideal inventory policies
• Facilitates in planning capacity
COST ACCOUNTING IN THE VALUE CHAIN

Marketing
• Used in evaluating the profitability of customer-groups
COST ACCOUNTING IN THE VALUE CHAIN

Distribution
• Helps in choosing the best way to deliver the goods to the
customers.
COST ACCOUNTING IN THE VALUE CHAIN

Customer-service
• Helps in tracking quality costs and warranty
FINANCIAL ACCOUNTING VS MANAGEMENT
ACCOUNTING

• Cost accounting serves both financial accounting and management

accounting.
• Subfield of both fields
• Reports such as balance sheets and income statement are
common to both fields.
Financial Accounting vs Managerial
Accounting
Financial Accounting
• Reports for external users
• Objective and verifiable financial information
• Precision is required
• Historical orientation
• Reports on overall firm performance
• Generally embraces accounting concepts only
• Follows IFRS
Managerial Accounting
• Reports for internal users
• Financial and non-financial; more subjective in nature;
relevance is more emphasized
• Timeliness is required
• Future oriented
• Reports about departments, product lines, and sub-
units.
• Embraces other branches of knowledge like economics,
industrial engineering, and management sciences.
• Need not follow IFRS
SCOPE OF MODERN COST ACCOUNTING

1. Cost accumulation – organized collection of cost data

2. Cost assignment – designating costs to cost objects
3. Application of mathematical and statistical techniques
4. Examination of the motivational impact of accounting
5. Impact on finance, economics, and operations management