Cost accounting

SEMESTER: V
SUBJECT CODE: 19UCO5C13
TITLE OF THE PAPER: COST ACCOUNTING
Objectives:
*To know the concepts of Costing
*To familiarize with the Costing procedures
UNIT I
Cost Accounting-Definition, Meaning and Scope – Relationship of Cost accounting with
Financial accounting - Need for Cost Accounting- Limitations of financial Accounting –Costing
as an aid to management – Limitations and objections against Cost Accounting – Activity Based
Costing . Cost analysis, concepts and Classification, elements of cost, Preparation of Cost Sheet and
Tender.
UNIT II
Materials – Purchase, Stores & Issue control- Procedure and documentation involved in
the control of materials. Fixation of stock levels – Maximum, Minimum, Reordering Levels, Economic
Ordering Quantity, Methods of valuing material issues – LIFO, FIFO, Base stock, Simple Average,
Weighted Average.
 COST ACCOUNTING

UNIT III
Labour – Systems of Wage payment, idle time, overtime, Labour turnover,
methods of Remuneration and incentives.
UNIT IV
Overhead – Classification of overhead –Allocation & absorption of Overheads,
Primary & Secondary distribution of Overheads – Machine hour rate.
UNIT V
Process Costing – Normal loss, abnormal loss, abnormal gain (excluding inter
process profits and equivalent production) - Costing of Joint products & By-
products – Reconciliation of Cost & Financial accounts.

Note: Distribution of marks Theory and Problems is 40% & 60% respectively.
TEXT BOOK
Jain & Narang, Cost Accounting, Kalyani Publishers, 2015.
 BOOKS FOR REFERENCES:
1. Dr.PC.Tulsian,Introduction to Cost Accounting,S.Chand & Company Ltd.,2011.
2. S.P.Iyengar, Cost Accounting, Sultan Chand & Sons, New Delhi, 2010.
3. Khanna, Ahuja & Pandey, Practical Costing, Sultan Chand & Company Ltd,
2003.
4. R.S.N.Pillai & Bhagavathi, Cost Accounting, Sultan Chand & Company Ltd,
2010.
5. Bhattacharyya Ashik.K, Principles & Practice of Cost Accounting, Phi
Learning Publications,2004.
Assignments:
1. Problems
2. Preparation of Bin card & Stores ledger
3. Visit to an organization to study the costing system employed and to submit
a report on it.
 COST ACCOUNTING
INTRODUCTION
• Cost Accounting is a branch of accounting
• Developed due to the limitations of financial accounting
• What is the aim of Financial Accounting?
⮚Preparation of Profit & Loss Account
⮚Preparation of Balance Sheet
• The information concerning the business enterprise is helpful to
management to control the major functions of business such as
Finance
Administration
Production and Distribution
• Operating efficiency is lacking
 LIMITATIONS OF FINANCIAL ACCOUNTING
• No clear idea of operating efficiency
• Weakness not spotted out by collective results
• Not helpful in price fixation
• No Classification of expenses and accounts
• No data for comparison and decision making
• No control on cost
• No standards to assess the performance
• Provides only historical information
• No analysis of losses
• Inadequate information for reports
 MEANING OF COSTING
• Costing is a technique and process of
ascertaining cost
• This technique consists of principles and rules
which govern the procedure of ascertaining
the cost of product/services
• The process of costing includes routines of
ascertaining costs by historical or conventional
costing, standard costing or marginal costing
• HISTORICAL COSTING
A historical cost is a measure of value used in accounting in
which the value of an asset on the balance sheet is
recorded at its original cost when acquired by the company.

• Conventional costing or Traditional costing is the allocation

of factory overhead to products based on the volume of
production resources consumed. Under this method,
overhead is usually applied based on either the amount of
direct labor hours consumed or machine hours used.
• Standard costing is an important subtopic of cost
accounting. Standard costs are usually associated
with a manufacturing company's costs of direct
material, direct labor, and manufacturing
overhead. ... If actual costs are less than standard
costs the variance is favorable.
• Marginal Costing is a costing technique wherein the
marginal cost, i.e. variable cost is charged to units of
cost, while the fixed cost for the period is completely
written off against the contribution.
 MEANING OF COST ACCOUNTING
• Cost accounting is the classifying, recording and appropriate allocation
of expenditure for the determination of the costs of products or
service, and for the presentation of suitably arranged data for the
purposes of control and guidance of management.
• It includes the ascertainment of the cost of every order, job, contract,
process, service or unit as maybe appropriate.
• It deals with the cost of production, selling and distribution.

• It is thus the provision of such analysis and classification of

expenditure as will enable the total cost of any particular unit of
production or service to be ascertained with reasonable degree of
accuracy and at the same time to disclose exactly how such total cost
is constituted (i.e. the value of material used, the amount of labor and
other expenses incurred) so as to control and reduce its cost.
 MEANING OF COST ACCOUNTING
• According to Wheldon, “Cost accounting is the
application of accounting and costing
principles, methods and techniques in the
ascertainment of costs and the analysis of
saving/or excess cost incurred as compared
with previous experience or with standards”.
Thus, cost accounting relates to the collection,
classification, ascertainment of cost and its
accounting and control relating to the various
elements of cost. It establishes budgets and
standard costs and actual cost of operations,
processes, departments or products and the
analysis of variances, profitability and social use
of funds.
 FEATURES OF COST ACCOUNTING
• Process of accounting for costs
• Records income and expenditure relating to production of goods
and services
• Provides statistical data for future estimates
• Concerned with cost ascertainment, cost control and cost
reduction
• Establishes budgets and standards
• Preparation of right information to the right person at the right
time
• Helpful to the management for planning, evaluation of
performance, control and decision making
MEANING OF COST ACCOUNTANCY
• Cost accounting 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 therefrom for the purposes of
managerial decision-making.
• Thus, cost accountancy is the science, art and
practice of a cost accountant.
 SCOPE OF COST ACCOUNTANCY
• COST ASCERTAINMENT
• COST ACCOUNTING
• COST CONTROL
 COST ASCERTAINMENT
• Cost ascertainment is the process of
determining costs on the basis of actual data.
Hence, the computation of historical cost is
cost ascertainment while the computation of
future costs is cost estimation. Both cost
estimation and cost ascertainment are
interrelated and are of immense use to the
management.
 COST CONTROL
• Cost control is the practice of identifying and
reducing business expenses to increase
profits, and it starts with the budgeting
process. ... As an example, a company can
obtain bids from different vendors that
provide the same product or service, which
can lower costs.
 DIFFERENCE BETWEEN FINANCIAL
ACCOUNTING &COST ACCOUNTING
Point of Differences Financial Accounting Cost Accounting

Recoding of transactions is part of

Cost accounting is used to calculate
financial accounting. We make
cost of the product and also helpful
financial statements through these
in controlling cost. In cost
Meaning transactions. With the help of
accounting, we study about variable
financial statements, we analyze the
costs, fixed costs, semi-fixed costs,
profitability and financial position of
overheads and capital cost.
a company.

Purpose of the financial statement is To calculate cost of each unit of

Purpose to show correct financial position of product on the basis of which we can
the organization. take accurate decisions.

In cost accounting, we book actual

transactions and compare it with the
Estimation in recording of financial
estimation. Hence costing is based
Recording transactions is not used. It is based
on the estimation of cost as well as
on actual transactions only.
on the recording of actual
transactions.
 DIFFERENCE BETWEEN FINANCIAL
ACCOUNTING &COST ACCOUNTING
Cost accounting done with the
Correctness of transaction is purpose of control over cost with
Controlling important without taking care of the help of costing tools like
cost control. standard costing and budgetary
control.
Reporting under cost accounting is
Period of reporting of financial
done as per the requirement of
Period accounting is at the end of
management or as-and-when-
financial year.
required basis.
In cost accounting, minute
In financial accounting, costs are
Reporting reporting of cost is done per-unit
recorded broadly.
wise.
Cost accounting provides sufficient
Fixation of selling price is not an
Fixation of Selling Price information, which is helpful in
objective of financial accounting.
determining selling price.
 DIFFERENCE BETWEEN FINANCIAL ACCOUNTING &COST ACCOUNTING
Point of Differences Financial Accounting

Relative efficiency of workers, plant, and

Relative Efficiency Valuable inform
machinery cannot be determined under it.

Valuation basis is ‘cost or market price

Valuation of Inventory Cost accountin
whichever is less’

Journal entries, ledger accounts, trial Cost of sale of

Process
balance, and financial statements price of the pro

Information Monetary information is only used Both monetary

 DIFFERENCE BETWEEN FINANCIAL ACCOUNTING &COST ACCOUNTING
Point of Differences Financial Accounting Cost Accounting

These accounts are kept in These accounts are generally

such a way to meet the kept voluntarily to meet the
Form of Accounts
requirements of Companies requirements of
Act and Income Tax Act management

Financial accounts are the

accounts of whole business. Cost accounting is only a part
They are independent in of the financial accounts and
Analysis of Profit
nature and disclose the net discloses profit or loss of
profit or loss of the business as each product, job or service
a whole

Cost accounts relate to

transactions connected with
Financial accounts relate to
the manufacture of goods
Nature of Transactions commercial transactions of the
and services and include
business
those expenses which enter
into production
 OBJECTIVES OF COST ACCOUNTING
1. Ascertainment of cost
2. Accumulation of cost
3. Estimation of cost
4. Cost control
5. Cost reduction
6. Determination of selling price
7. Facilitating preparation of financial and other
statements
8. Provides basis for operating policy
9. Fixation of selling price
10.Data to management to take decisions
 ADVANTAGES OF COST ACCOUNTING
1. Disclosure of profitable and unprofitable activities
2. Guidance for future production policies
3. Periodical determination of profit and losses
4. To find out exact cause of decrease or increase in profit
5. Control over material and supplies
6. Relative efficiency of different workers
7. Reliable comparison
8. Helpful to government
9. Helpful to consumers
 ADVANTAGES OF COST ACCOUNTING
10. Classification and subdivision of cost
11.To find out adequate selling price
12.Proper investment in inventory
13.Correct valuation of inventory
14.Decision on manufacturing or purchasing from
outside
15.Reliable check on accounting
16.Budgeting