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Financial accounting fails to ascertain item-wise cost /

Financial accounts merely record the expenses incurred, but

fails to control the cost.

The information available in the financial accounts is not useful

to the management to take decisions.

Difference between Financial Accounting and Cost Accounting

Financial accounting records, reports and analyses financial transactions of a

concern whereas cost accounting records, reports and analyses costs of each product, process, contract etc.

FA is used by outside entities for eg. investors, creditors, banks etc. whereas

CA is used only by the management of the concern.

FA uses the double -entry system for recording financial data whereas CA

does not use the double entry system for collecting cost data.

FA is for a specific period e.g. a financial year whereas CA concentrates on

cost of each product, contract, process etc & not on period.

FA discloses past data whereas CA discloses current data or future estimates FA cannot be used for managerial decisions whereas CA is used for making

decisions - pricing, how much to produce etc.

Cost means To estimate the amount of money needed to produce a product or perform a service. It is the value attributed to a resource. The 3 resources of a cost are MATERIAL, LABOUR and SERVICES for a manufacturing organization.

Accounting is a system of recording, classifying, summarizing, communicating the financial transaction (in terms of MONEY) of a business firm following the rules and regulations.

Cost Accounting is the process of classifying, recording and appropriate allocation of expenditure for the determination of the Costs of products or services and for the presentation of suitably arrange the data for the purpose of control and guidance of management.

1. Determining selling price 2. Controlling cost 3. Providing information for decision making 4. Ascertaining costing profit 5. Facilitating preparation of financial and other


Importance to Management Importance to Employees Importance to the Creditors Importance to the National Economy

Elements of Cost
Elements of Cost

Direct Indirect Material Material

Direct Labour Indirect Labour

Direct Expenses Indirect Expenses


Factory or works Overhead

Office & administrative

Selling Overheads

Distribution Overheads

Elements of Cost
I) MATERIAL: The substance from which the product is made is known as Material. It may be in raw or a manufactured state. It may be direct as well as indirect. i) Direct Material: Direct material is material that can be directly identified with each unit of the product. It can be conveniently measured and directly charged to the product. ii) Indirect Material: They are those materials which do not normally form a part of the finished product.

Elements of Cost (contd)

II) LABOUR : For conversion of materials into finished goods, human effort is Needed, such human effort is called Labour. It can be direct as well as indirect. i) Direct Labour / Direct Wages: Labour which takes an active and direct part in the production of a particular commodity is called Direct Labour. For e.g. Wages paid to carpenter, fees paid to tailor etc. ii) Indirect Labour / Indirect Wages: Labour employed for the purpose of carrying out tasks incidental to goods produced or services provided is Indirect Labour. For e.g. at factory level gatekeepers salary, at office level accountants salary, at selling &Y distribution level salesmans salary.

Elements of Cost (contd)

III) EXPENSES: Expenses may also be direct or indirect. i) Direct Expenses: Direct expenses are those expenses which can be directly allocated to particular job, process or product. For eg. freight charges, royalty, special hire charges etc. ii) Indirect Expenses: Indirect expenses are those expenses which can not be directly, conveniently and wholly allocated to particular job, process or product. For eg. Rent, lighting, insurance charges etc.

Elements of Cost (contd)

IV) OVERHEADS: The term overhead includes indirect material, indirect labour and indirect expenses. Thus all indirect costs are overheads. Overheads may be incurred in the factory or office or selling and distribution divisions. Overheads may be divided into following categories: i) Factory or works overheads: It is the aggregate of all the factory expenses in connection with manufacture of a product. These are incurred in connection with running of factory. It includes factory salary, factory repairs, rent of factory premises, depreciation of plant & machinery etc.

Elements of Cost (contd)

ii) Office and administrative overheads: It is the aggregate of all the expenses as regards administration. It is The cost of office service or decision making. It includes staff salaries, printing and stationery, postage & telegraph, rent of office premises, depreciation of office premises and furniture etc. iii) Selling and distribution overheads: It is the aggregate of all the expenses incurred in connection with sales and distribution of finished product and services. It includes advertisement, travelling expenses, salaries of sales staff, salary of deliveryman, commission on sales, after sales services , depreciation of sales office etc.

Classification of Cost
Cost classification is the process of grouping costs according to their common features or characteristics. Classification of cost is necessary for detailed recording and accurate cost ascertainment. The important bases are element, nature, function, behaviour, identifiability, controllability, normality, time, relevancy etc.

Methods of Cost Classification

Methods of cost classification

On the basis of elements of cost Material Labour Expenses Overheads

On the basis of On the basis On the basis On the basis On the Nature & Of function Of normality Of control- basis of variability time & ability period Production Administration Selling & distribution *Fixed cost *Semi-variable Variable Controllable Noncontrollable Normal cost Abnormal cost

On the basis of Decision making

Historical Predetermined

*Opportunity *Replacement Marginal Conversion

Methods & Techniques of Cost Accounting

Methods & Techniques of Cost Accounting

Methods of Cost Accounting : Job costing Batch costing Contract costing Single or output costing Process costing Operation costing Operating costing Departmental costing Multiple costing

Techniques of Cost Accounting: Historical costing Standard costing Marginal costing Absorption costing Uniform costing

Methods of Costing
Job costing:

Job costing is one of the most simple costing method. It refers to a system of costing where the items of direct costs are traced to specific jobs or orders. The main purpose of job costing is to ascertain profit Batch costing: This is an extension of job costing. A batch may represent a number of small orders passed through the industry in a batch & the costs are accumulated separately for it. This method is mainly used in biscuit, garment, drugs and medicines etc.

Methods of Costing contd..

Contract costing:

It represents cost of various operations which include the process of erecting or otherwise providing structures such as buildings, dams, roadways etc. Single or Output costing: This method is also known as Unit Costing. This is suitable for industries where production is continuous and units are identical. It is applicable to mines, oil drilling, cement, brick works etc. It is presented in the form of a cost sheet prepared for a particular period. Process costing: This method is used in industries where the input of raw material in the first process passes through different processes successively so that the output of one process becomes the input into the next process.

Methods of Costing contd..

Operation costing:

It is a further refinement of process costing. The system is used in industries where mass or repetitive production is carried out or where articles or components have to be stocked in semi finished goods. Operating costing: It is used where expenses are incurred for provision of services such as those rendered by bus companies, hotel organisation, hospital organisation etc.

Methods of Costing contd..

Departmental costing:

This method is used where factory is divided into number of departments. The main objective of this method is to find out the cost of output of each department. Multiple costing: Some products are so complex, that separate costs are compiled for the constituent parts and the total is ascertained by aggregating components costs. This method is known as multiple costing.

Historical Costing:

It means a cost of product can be calculated only after production. It takes into account the past figures. Hence it is called as historical costing. It is also known as traditional costing.
Standard Costing:

It refers to determination of standard costs and applying them for measuring the variations from the standard cost. The main purpose is to control cost.

Uniform Costing:

It is designed by trade associations and followed by all the business units. It facilitates interfirm comparison.
Marginal Costing:

It is a system in which total cost is classified into 2 categories i.e. Fixed and Variable. It helps the management in taking various policy decisions. It is also known as variable or direct costing.
Absorption Costing :

This is the traditional techniques as opposed to marginal or direct costing techniques. Here both the fixed and variable costs are changed in the same manner.

Cost Accounting is unnecessary and its duplication of work Cost Accounting is expensive The results of cost accounting are not always reliable Cost Accounting is monotonous

Cost Unit
A cost unit is a device used for the purpose of splitting total cost

into smaller sub-divisions attributable to a product or service.

Cost Centres
Cost Centres

Operation and Process cost centre

Production and Service cost centre

Personal and Impersonal cost centre

Cost Centres
Operation and process cost centre:

Operation cost centre consist of those machines which carry out the same operation. A Process cost centre is a cost centre in which a specific or a continuous process of operation is carried out. Production and service cost centre: A production cost centre is one where actual production process is carried out. Manufacturing and non-manufacturing costs are charged to production cost centre. A service cost centre is one which provides services to other cost centres. Only non-manufacturing costs are charged to service

Cost Centres (contd)

Personal and impersonal cost centre:

Personal cost centre consists of a person or group of persons. It follows the organizational structure of a factory or organization. Under this costs are analyzed according to factory manager, sales manager, store keeper etc. Impersonal cost centre consists of location of equipment. It may represent an area of sales, warehouse. Cost relating to an item of equipment could be a machine or group of machines.