Cost Accountancy is the application of costing and cost accounting principles, methods and

techniques to the science, art and practice of cost control and the ascertainment of profitability. It
includes the presentation of information derived there from for purposes of managerial decision
making. Thus, cost accountancy is the science, art and practice of a cost accountant.

It is science because it is a body of systematic knowledge having certain principles which a cost
accountant should possess for proper discharge of his responsibilities. It is an art as it requires
the ability and skill with which a cost accountant is able to apply the principles of cost
accountancy to various managerial problems.

Scope of Cost Accounting

The terms ‘costing’ and ‘cost accounting’ are many times used interchangeably. However, the
scope of cost accounting is broader than that of costing. Following functional activities are
included in the scope of cost accounting:

1. Cost book-keeping: It involves maintaining complete record of all costs incurred from their
incurrence to their charge to departments, products and services. Such recording is preferably
done on the basis of double entry system.
2. Cost system: Systems and procedures are devised for proper accounting for costs.
3. Cost ascertainment: Ascertaining cost of products, processes, jobs, services, etc., is the
important function of cost accounting. Cost ascertainment becomes the basis of managerial
decision making such as pricing, planning and control.
4. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying
from the budgeted costs and fixation of responsibility for cost increases.
5. Cost comparisons: Cost accounting also includes comparisons between cost from alternative
courses of action such as use of technology for production, cost of making different products and
activities, and cost of same product/ service over a period of time.
6. Cost Control: Cost accounting is the utilisation of cost information for exercising control. It
involves a detailed examination of each cost in the light of benefit derived from the incurrence of
the cost. Thus, we can state that cost is analysed to know whether the current level of costs
is satisfactory in the light of standards set in advance.
7. Cost Reports: Presentation of cost is the ultimate function of cost accounting. These reports
are primarily for use by the management at different levels. Cost Reports form the basis for
planning and control, performance appraisal and managerial decision making.

The scope of any subject refers to the various areas of study included in that subject. As
regards the scope of cost accountancy is concerned, it has vast scope.
The following topics fall under the purview of cost accountancy:
(1) Costing, (2) Cost Accounting, (3) Cost Control Techniques, (4) Budgeting and (5) Cost
Audit.
1. Costing
The terminology of ICMA, London, defines costing as “the technique and process of
ascertaining the cost.” According to the revised terminology of ICMA, London, “Costing is the
process of determining the costs of products, services or activities.”
The above definition is very significant in as much as it carries the main theme of cost
accountancy. This definition emphasizes two important aspects, viz.

(a) The technique and process of costing: The technique of costing involves two distinct steps,
namely, (i) collection and classification of costs according to various elements and (ii) allocation
and apportionment of the expenses which cannot be directly charged to production. As a process,
costing is concerned with the routine ascertainment of cost with a formal procedure.

(b) Ascertainment of cost: It involves three steps, viz. (i) collection and analysis of expenses,
(ii) measurement of production at different stages and (iii) linking up of production with the
expenses. To achieve the first step, costing has developed different systems such as Historical,
Estimated and Standard Cost. For achieving the second step, costing has developed different
methods such as single or output costing. Job costing, contract costing, etc. Finally, for achieving
the last step costing has developed important techniques such as Absorption Costing, Marginal
Costing and Standard Costing.
The three terms indicated as ‘systems’, ‘methods’, ‘techniques’ are independent factors but co-
exist together. Ascertainment of cost of production is based on all these terms. For example,
continuous type of industries may use process costing as a method, using actual cost as a system,
under Standard Costing Technique.
2. Cost Accounting
Kohler in his dictionary for Accountants defines cost accounting as “that branch of accounting
dealing with the classification, recording, allocation, summarization and reporting of current and
prospective costs.”

Mr. Wheldon defines cost accounting as “the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, the relation of these costs
to sales values, and the ascertainment of profitability.”

The above definitions reveal the following aspects of cost accounting:

(a) Cost classification: This refers to grouping of like items of cost into a common group.
(b) Cost recording: This refers to posting of cost transactions into the various ledger maintained
under cost accounting system.
(c) Cost allocation: This refers to allotment of costs to various products or department.
(d) Cost determination or cost finding: This refers to the determination of the cost of goods or
services by informal procedure, i.e., procedures that do not carry on the regular process of cost
accounting on a continuous basis.
(e) Cost reporting: This refers to furnishing of cost data on a regular basis so as to meet the
requirements of management.

3. Cost Control
According to Kohler, cost control represents the employment of management devices in the
performance of any necessary operation so that pre-established objectives of quality, quantity
and time may be attained at the lowest possible outlay for goods and services. The terminology
published by ICMA, London, defines cost control as “The guidance and regulation by executive
action of the cost of operating an undertaking.” According to this definition, cost control aims at
guiding the actuals towards the lines of target and regulates the actuals if they deviate from the
targets. This guidance and regulation is done by the executive who is responsible for causing the
deviation. This process will become clear by enumerating the steps involved in any cost control
technique.
(a) Fixation of targets in terms of cost and production performance.
(b) Ascertaining the actual cost and production performance.
(c) Comparison of actuals with the targets.
(d) Analysing the variance by causes and the person responsible for it.
(e) Taking remedial steps to set right unfavourable variations.

Cost control is exercised through a variety of techniques such as inventory control, quality
control, budgetary control, standard costing, etc. The advantages of cost control are as follows:
(a) It helps in utilizing the resources to the full extent.
(b) It helps in reduction of prices which are benefited by customers.
(c) It helps in competing successfully in the market.
(d) It increases the profit earning capacity of the business.
(e) It increases the goodwill of the business.

4. Budgeting
Mr. Heiser in his book Budgeting—Principles and Practice, defines budget as “an overall blue
print of a comprehensive plan of operations and actions expressed in financial terms. According
to him budgeting process involves the preparation of a budget and its fullest use not only as a
devise for planning and co-ordinating but also for control.”

5. Cost Audit
The terminology of ICMA, London, defines cost audit, as “the verification of the correctness of
cost accounts and of the adherence to the cost accounting plan.”

NEED FOR COST ACCOUNTING

The need for cost accounting arises owing to the following:

To Overcome the Limitations of Financial Accounting

Financial accounting records in an overall manner the results of the operations of a business,
using conventional double entry book-keeping techniques. It suffers from the following
limitations:
(i) It provides only past data: Financial accounting provide out of date information to
management. But management is interested in current data but not past data as it does not serve
any purpose to it. Therefore it has been rightly pointed out that financial accounting provide only
a post-mortem analysis of past activities.

(ii) It reveals only over all result of the business: Financial accounting does not provide data for
each and every product, process, department or operation separately. Instead it provides the
financial information in a summary form for the entire organization as a whole.
(iii) It is static in nature: Modern business is dynamic but not static. Financial accounting does
not incorporate the changes that take place within the business.
(iv) It fails to take into account the impact of price level change: In the modern inflationary
conditions the price level has significant impact over financial statement. Under financial
accounting, assets are shown at the actual or historical cost. Consequently depreciation is also
charged on actual or historical cost. This under charging of depreciation will distort the profit
figure.
(v) Possibility of manipulation of financial accounting: Very often financial accounting is
manipulated at the whims and fancies of management so as to project better image in the minds
of prospective investors. The chief forms of manipulating the financial accounting assume the
form of over or undervaluation of inventory, excessive or inadequate provision for depreciation,
creation of secret reserves, etc.
(vi) It fails to exercise control over resources: Financial accounting fail to exercise control over
materials, labour and other expenses incurred in a business enterprise. As a results, avoidable
wastages and losses go unchecked under this system of accounting.
vii) It fails to provide adequate data for price fixation: Financial accounting fail to provide
adequate cost data on the basis of which selling price is fixed. In the absence of fixation of prices
in advance, it is not possible to supply quotations to the prospective customers. To that extent the
income from such sales diminish.
viii) It fails to provide adequate data for management in carrying out its functions: Management
of every organization relies heavily on adequate cost data for formulating policies and in
decision-making process. But financial accounting fails to provide such useful cost data to
management.
(ix) It does not provide a basis for cost comparison: Financial accounting does not help in cost
comparison over a period of time or between two jobs or two operations. Thus a basis for
judging the efficiency of an year with past year or worthfulness of two different jobs or
operations cannot be appraised.
(x) It does not make use of control techniques: Financial accounting fail to make use of certain
important cost control techniques such as budgetary control and standard costing. Thus financial
accounting does not facilitate measuring the efficiency of the business with the help of control
techniques.
(xi) It fails to ascertain break-even point: Financial accounting does not help in ascertaining the
break-even point, i.e., the sale or output where the revenue equals the cost. Hence, the point of
no-profit-no-loss cannot be made out under financial accounting.

Objectives of cost accounting

There is a relationship among information needs of management, cost accounting objectives, and
techniques and tools used for analysis in cost accounting. Cost accounting has the following
main objectives to serve:

1. Determining selling price,

2. Controlling cost
3. Providing information for decision-making
4. Ascertaining costing profit
5. Facilitating preparation of financial and other statements.

1. Determining selling price

The objective of determining the cost of products is of main importance in cost accounting. The
total product cost and cost per unit of product are important in deciding selling price of product.
Cost accounting provides information regarding the cost to make and sell product or services.
Other factors such as the quality of product, the condition of the market, the area of distribution,
the quantity which can be supplied etc., are also to be given consideration by the management
before deciding the selling price, but the cost of product plays a major role.

2. Controlling cost
Cost accounting helps in attaining aim of controlling cost by using various techniques such as
Budgetary Control, Standard costing, and inventory control. Each item of cost [viz. material,
labour, and expense] is budgeted at the beginning of the period and actual expenses incurred
are compared with the budget. This increases the efficiency of the enterprise.

3. Providing information for decision-making

Cost accounting helps the management in providing information for managerial decisions for
formulating operative policies. These policies relate to the following matters:
i. Determination of cost-volume-profit relationship.
ii. Make or buy a component
iii. Shut down or continue operation at a loss
iv. Continuing with the existing machinery or replacing them by improved and economical
machines.

4. Ascertaining costing profit

Cost accounting helps in ascertaining the costing profit or loss of any activity on an objective
basis by matching cost with the revenue of the activity.

5. Facilitating preparation of financial and other statements

Cost accounting helps to produce statements at short intervals as the management may require.
The financial statements are prepared generally once a year or half year to meet the needs of the
management. In order to operate the business at high efficiency, it is essential for management
to have a review of production, sales and operating results. Cost accounting provides daily,
weekly or monthly statements of units produced, accumulated cost with analysis. Cost
accounting system provides immediate information regarding stock of raw material, semi-
finished and finished goods. This helps in preparation of financial statements.

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON
 BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Meaning Cost Accounting is an Financial Accounting is an

accounting system, through accounting system that captures
which an organization keeps the records of financial
the track of various costs information about the business to
incurred in the business in show the correct financial position
production activities. of the company at a particular date.

Information Records the information Records the information which are

type related to material, labor and in monetary terms.
overhead, which are used in
the production process.

Which type of Both historical and pre- Only historical cost.

cost is used for determined cost
recording?

Users Information provided by the Users of information provided by

cost accounting is used only the financial accounting are
by the internal management internal and external parties like
of the organization like creditors, shareholders, customers
employees, directors, etc.
managers, supervisors etc.

Valuation of At cost Cost or Net Realizable Value,

Stock whichever is less.

Mandatory No, except for manufacturing Yes for all firms.

firms it is mandatory.

Time of Details provided by cost Financial statements are reported

Reporting accounting are frequently at the end of the accounting period,
prepared and reported to the which is normally 1 year.
management.

Profit Analysis Generally, the profit is Income, expenditure and profit are
analyzed for a particular analyzed together for a particular
product, job, batch or period of the whole entity.
process.

Purpose Reducing and controlling Keeping complete record of the

costs. financial transactions.
 BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Forecasting Forecasting is possible Forecasting is not at all possible.

through budgeting
techniques.

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING & MANAGEMENT

ACCOUNTING

BASIS FOR MANAGEMENT

FINANCIAL ACCOUNTING
COMPARISON ACCOUNTING

Meaning Financial Accounting is an The accounting system which

accounting system that focuses provides relevant information
on the preparation of financial to the managers to make
statement of an organization to policies, plans and strategies
provide the financial information for running the business
to the interested parties. effectively is known as
Management Accounting.

Is is compulsory? Yes No

Information Monetary information only. Monetary and non-monetary

information

Objective To provide financial information To assist the management in

to outsiders. planning and decision making
process by providing detailed
information on various matters.

Format Specified Not specified

Time Frame Financial Statements are The reports are prepared as per
prepared at the end of the the need and requirements of
accounting period which is the organization.
usually one year.
 BASIS FOR MANAGEMENT
FINANCIAL ACCOUNTING
COMPARISON ACCOUNTING

User Internal and external parties Only internal management.

Reports Summarized Reports about the Complete and Detailed reports

financial position of the regarding various information.
organization

Publishing and Required to be published and Neither published nor audited

auditing audited by statutory auditors by statutory auditors.

DIFFERENCE BETWEEN COST ACCOUNTING & MANAGEMENT

ACCOUNTING

BASIS OF MANAGEMENT
COST ACCOUNTING
COMPARISON ACCOUNTING

Meaning The recording, classifying The accounting in which the both

and summarizing of cost financial and non-financial
data of an organization is information are provided to
known as cost accounting. managers is known as
Management Accounting.

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of Providing information to

production. managers to set goals and forecast
strategies.

Scope Concerned with Impart and effect aspect of costs.

ascertainment, allocation,
distribution and accounting
aspects of cost.

Specific Yes No
Procedure

Recording Records past and present It gives more stress on the

 BASIS OF MANAGEMENT
COST ACCOUNTING
COMPARISON ACCOUNTING

data analysis of future projections.

Planning Short range planning Short range and long range

planning

Interdependency Can be installed without Cannot be installed without cost

management accounting. accounting.

Importance of Cost accounting

The limitation of financial accounting has made the management to realize the importance of
cost accounting. The importance of cost accounting is as follows:

1. Importance to Management
Cost accounting provides invaluable help to management. It is difficult to indicate where the
work of cost accountant ends and managerial control begins. The advantages are as follows:

a) Helps in ascertainment of cost

Cost accounting helps the management in the ascertainment of cost of process, product,
Job, contract, activity, etc., by using different techniques such as Job costing and Process
costing.

b) Aids in Price fixation

By using demand and supply, activities of competitors, market condition to a great extent,
also determine the price of product and cost to the producer does play an important role.
The producer can take necessary help from his costing records.

c) Helps in Cost reduction

Cost can be reduced in the long-run when cost reduction program and improved methods
are tried to reduce costs.

d) Elimination of wastage
As it is possible to know the cost of product at every stage, it becomes possible to check
the forms of waste, such as time and expenses etc., are in the use of machine equipment
and material.

e) Helps in identifying unprofitable activities

With the help of cost accounting the unprofitable activities are identified, so that the
necessary correct action may be taken.
 f) Helps in checking the accuracy of financial account
Cost accounting helps in checking the accuracy of financial account with the help of
reconciliation of the profit as per financial accounts with the profit as per cost account.

g) Helps in fixing selling Prices

It helps the management in fixing selling prices of product by providing detailed cost
information.

h) Helps in Inventory Control

Cost furnishes control which management requires in respect of stock of material, work
in progress and finished goods.

i) Helps in estimate
Costing records provide a reliable basis upon which tender and estimates may be
prepared.

2. Importance to Employees
Worker and employees have an interest in which they are employed. An efficient costing system
benefits employees through incentives plan in their enterprise, etc. As a result both the
productivity and earning capacity increases.

3. Cost accounting and creditors

Suppliers, investor’s financial institution and other moneylenders have a stake in the success of
the business concern and therefore are benefited by installation of an efficient costing system.
They can base their judgment about the profitability and prospects of the enterprise upon
the studies and reports submitted by the cost accountant.

4. Importance to National Economy

An efficient costing system benefits national economy by stepping up the government revenue
by achieving higher production. The overall economic developments of a country take place due
to efficiency of production.

5. Data Base for operating policy

Cost Accounting offers a thoroughly analyzed cost data which forms the basis of formulating
policy regarding day to day business, such as:
a) Whether to make or buy decisions from outside?
b) Whether to shut down or continue producing and selling at below cost?
c) Whether to repair an old plant or to replace it?

Both cost accounting and financial accounting are the parts of accounting. Both provide useful
information to the businessman for decision making. Both can be used for reducing cost and
increasing the profit and wealth of business. But there are lots of differences between cost
accounting and financial accounting. Financial accounting provides the information of expenses
on the basis of historical transactions. In cost accounting, we show the detailed information of
expenses.
For example: We have 5 products. Financial accounting's income statement will show just the
total material cost, direct expenses, indirect expenses, sale and net profit but it will not show the
each product's material cost, labour cost, overhead cost, sale and net profit. All these information
can be obtained through cost accounting.

Now, we are explaining the differences between cost accounting and financial accounting.

1. Meaning

Cost Accounting: Cost accounting is that part of accounting which is helpful to calculate the
cost and control the cost. In cost accounting, we deeply study the variable cost, fixed cost,
overheads and capital cost.

Financial Accounting: Financial Accounting is that part of accounting in which we record the
transactions and we make the financial statements. Through making the financial statement, it
provides information of profitability and financial position to the interested parties.

2. Objective

Cost Accounting: We can not take all decisions on the basis of information which have been
provided by financial accounting. After making the financial statements under financial
accounting, we calculate the cost of each unit and use the techniques of cost accounting for better
decision making.

Financial Accounting: Main objective of financial accounting is to show the financial statement
correctly.

3. Law

Cost Accounting: There is not any restriction on the cost accounts. It can be made according to
the need of company but some company must audit their cost accounts under cost audit.

Financial Accounting: In financial accounting, there are lots of law restrictions. For
example, company accounts and financial statements must be according to the format of
company law. It should also follow the rules of IFRS and income tax law.

4. Controlling

Cost Accounting: In cost accounting, we study the techniques of controlling the cost. All the
costs are calculated for the purpose of controlling the cost. For example, Company produces
product A, B and C. If product C is generating 30% but product A and B is generating just 5%.
We will try to control the cost of A and B product through different techniques of cost control.

Financial Accounting: In financial accounting, we just record the transactions correctly. We do

not care to control the cost.

5. Profit Analysis

Cost Accounting: In cost accounting, to find the profit per job or per batch or per service unit is
possible.
Financial Accounting: In financial accounting. we make the income statement which shows the
net profit or loss or whole organization not one job or batch.

6. Record

Cost Accounting: In cost accounting, both actual transactions record and estimations are used.
For example budgetary control and variance analysis, we set the standard cost which is based on
the estimations. These estimations may differ from actual cost.

Financial Accounting: In financial accounting, we use actual transaction for recording purpose.
We do not use the estimation for preparing income statements and balance sheet.

7. Valuation of Inventory

Cost Accounting: In cost accounting, inventory's valuation will be on cost.

Financial Accounting: In financial accounting, inventory's valuation will be on the cost or

market value which will be low.

8. Cycle

Cost Accounting: In cost accounting, we first calculate the raw material cost. Then,
we calculate the labour cost. Then, we calculate the direct material cost. After this,
we calculate the overhead cost. All these cost are added. A profit margin is added. An estimated
sale price is calculated. Its whole controlling cycle will be relating to control the cost of raw
material, labour cost and overheads.

Financial Accounting: In financial accounting, we pass the journal entries. Then, we make the
ledger accounts. Then, we prepare the trial balance. Then, we make the final accounts.
 Reconciliation of Cost and Financial Accounts
In integral system of accounting, we need not reconciliation of cost and financial accounts. But
when we keep our cost and financial accounts separately, we need to reconciliation of cost and
financial accounts like reconciliation of bank statements and cash book. With this, we can find
the difference in profit or loss which are shown as per cost accounts and financial accounts.

Meaning of Reconciliation of Cost and Financial Accounts

Reconciliation of Cost and Financial Accounts is process to find all the reasons behind
disagreement in profit which is calculated as per cost accounts and as per financial accounts.
There are lots of items which are shown in the profit and loss account only when we make it as
per financial accounting rules. There are lots of items which are shown in costing profit and loss
account only when we calculate profit as per cost accounting.

Suppose, we have taken the profit or loss as per financial accounts, we adjust it as per cost
accounts. In the end of adjustments, we see same profit as per cost accounts. If we have taken
profit as per cost account, we have to adjust items as per financial accounts. For this purpose, we
make reconciliation Statement

1st Case. When we have to adjust items as per financial accounts

(+) in Rs. (-) in Rs.

(A) Profit as per cost accounts XXXXX
Add XXXXX
1 Profit on sale of asset XXXXX
2 Dividend received XXXXX
3 Imputed Rent Charges XXXXX
4 Overvaluation of opening stock in cost accounts XXXXX
5 Undervaluation of closing stock in cost accounts XXXXX
Excess of material, Labour and overhead cost which is shown
as per cost accounts or Overcharge of Material, Labour
6 XXXXX
and overhead cost as per cost accounts or Over-absorption any
expense as per cost accounts
7 Interest Received on Investment XXXXX
8 Bank Interest Received XXXXX
9 Under valuation of Closing Stock as per cost accounts XXXXX
(B)
Less
1 Loss on Sale of Asset XXXXX
2 Dividend Paid XXXXX
Financial Expenses
a) discount (b) fine and penalties (c) bank interest (d)
3 XXXXX
underwriter's commission (e) Donations (f) interest paid on
capital
Undercharge or under absorption of any expense or loss as
4 XXXXX
per cost account
5 over valuation of closing stock as per cost accounts XXXXX
Profit as per Financial Accounts (A) - (B) XXXXX

2nd Case: When we have to adjust items as per cost accounts

In this, we take the profit as per financial accounts in the beginning, we add all the times which
we have shown in less in above 1st Case. We deduct all the items which we have shown above in
Add in 1st Case. After this, balance will be the profit or loss as per cost accounts.