Lecture 1

Introduction
Financial accounting provides information regarding profit or loss and the financial position of a
business at the end of the financial year. It does no provide any detailed information as to why
such profit or loss occurred or why balance sheet shows a particular position of inventories. It
also does not provide information on the method of valuing inventories. In general sense,
financial accounting does not provide detailed information regarding the operational cause of
profit or loss and the balance sheet position and the end of financial year. This mandates the
requirement of cost accounting as it tries to provide various operational information and the
causes behind the value of inventories. Through cost accounting anyone can get detailed
information regarding the working of business and its production process.
The information provided by cost accounting is vital in nature and can reveal the secrets of
business to the competitors, hence, the cost accounting data is never shared in public domain. It
is used only by the top management to analyze and control any deviations in the production
process.
Cost accounting is limited to production only as it provides cost details and hence, it provided
backend information. It provides the structure of cost and is various constituents. It does not deal
with what happens to a product after its production, whether it is sold or not or how it is sold. It
ends up as soon as production is completed and goods are ready for sale. Thus it is the process of
recording and accounting for all the elements of the cost.
Meaning of Cost Accounting

Costing is referred to “as classifying, recording and appropriate allocation of expenditure for the
determination of the costs of products or services”
Costing is the technique and process of ascertaining cost.
The ICWA, UK define Cost Accounting as “the process of accounting for cost from the point at
which expenditure is incurred or committed to the establishment of its ultimate relationship with
cost centres and cost units”
The ICWA, India define “Cost Accounting is the technique and process of ascertaining of costs.
Cost accounting is the process of accounting costs, which begins with recording of expenses or
the bases on which they are calculated and ends with preparation of statistical data.”
I.C.M.A., has defined cost accountancy as “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
the purpose of managerial decision making”.
Nature of Cost Accounting
1. Specialized Branch of Knowledge: Cost Accounting has its own principles, rules and
conventions. It is a separate branch of knowledge requiring specific knowledge and skills.
2. It is a Profession: Cost Accounting is regarded as separate profession due to its

specialized knowledge and skills. It has a separate and organized body for the working of
cost accountants.
3. Both Science and Art: Cost Accounting is considered as science because it has sound
theory base and its own principle and regulations. Cost Accounting is considered as an art
because application of cost accounting prefers from business and from person to person.
Everyone has its own set of skill and way of applicability and of cost accounting
principle.
4. Helpful to Management: Cost Accounting and Cost Accountants are helpful to

management by the way of providing vital information regarding cost of production, cost
of labour and profit margin.
Scope of Cost Accounting

1. Cost Analysis: Cost accounting determines the deviation of the actual cost as compared
to the planned expense, along with the reason for such variation.
2. Cost Audit: To verify the cost sheets and ensure the efficient application of cost
accounting principles in the industries, cost audits are done.
3. Cost Report: Cost reports are prepared from the data acquired through cost accounting to
be analyzed by the management for strategic decision making.
4. Cost Ascertainment: To determine the price of a product or service, it is essential to

know the total cost involved in generating that product or service.
5. Cost System: It provides for time to time monitoring and evaluation of the cost incurred
in the production of goods and services to generate cost reports for the management.
6. Cost Comparison: It examines the other alternative product line or activities and the cost
involved in it, to seek a better opportunity for generating high revenue.
7. Cost Control: Sometimes, the actual cost of a product or service becomes higher than its
standard cost. To eliminate the difference and control the actual cost, cost accounting is
required.
8. Cost Computation: When the company is engaged in the production of bulk units of a
particular product or commodity, the actual per-unit cost is derived through cost
accounting.
9. Cost Reduction: It acts as a tool in the hands of management to find out if there is any
scope of reducing the standard cost involved in the production of goods and services. Its
purpose is to obtain additional gain.
Objectives of Cost Accounting

1. Control and Reduce Cost: Cost accounting continuously focuses on managing the cost
of production per unit to improve profitability without compromising with the quality of
the product.
2. Determine Selling Price: It provides the total cost incurred in the product or service,
which is the base for fixing an appropriate selling price.
3. Assist Management in Decision Making: The reports and cost sheets generated based
on cost accounting back the managerial decisions of the organization.
4. Ascertain Closing Inventory: It determines the closing inventory value at the end of the
financial year.
5. Ensure Profit from Each Activity: Cost accounting reviews the cost and takes
corrective actions at each level to ensure profitability from all business activities.
6. Budgeting: It generates the estimated cost of products or services to assist in budget

planning, implementation and control.
7. Setting Performance Standards: It provides a standard cost of goods or services to sets

a level for the future course of action.
8. Business Expansion: It estimates the cost of production at different stages, based on this
analysis, the management can plan for expansion of the business.
9. Minimizing Wastage: Cost control and reduction so attained helps in reducing the
wastage during the manufacturing process.
10. Improves Efficiency: Cost accounting assures cost management, profit appreciation and
less wastage which ultimately enhances the overall production and manufacturing process
of products.

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Introduction

Meaning of Cost Accounting

Costing is the technique and process of ascertaining cost.

2. It is a Profession: Cost Accounting is regarded as separate profession due to its

4. Helpful to Management: Cost Accounting and Cost Accountants are helpful to

Scope of Cost Accounting

4. Cost Ascertainment: To determine the price of a product or service, it is essential to

Objectives of Cost Accounting

6. Budgeting: It generates the estimated cost of products or services to assist in budget

7. Setting Performance Standards: It provides a standard cost of goods or services to sets

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