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Introduction

To Cost Accounting

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The term Accounting refers RECORDING of financial transactions

and PRESENTING them in a particular format.

Financial accounting involves preparation ofProfit and loss account

and Balance sheet, to determine the profit or loss earned by a firm in

a given year,

It shows the financial position of the firm as on the day of

preparation of Balance sheet.

Financial accounting helps us give a over all view of the profit orloss made by the firm.

Meaning and scope of Financial Accounting:

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Limitations of Financial Accounting :

Financial accounting is not sufficient For several purposes,For example:

Product selection, addition or dropping any product combination in

case of a multi-product company.

Measuring the output level of a product or products.

Determining the price of the product, If it should be revised, The price

of a product should be increased or decreased.

Finding out the profit made by a particular product is sufficient as

compared to earlier years.

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The term COSTrefers to The amount ofexpenditure, actual or notional,

incurred on a product or service, or for attainment of a objective.

Cost can be any expense incurred, or a price paid for attaining the

objective .

Cost accounting refers to recording of Cost.

Cost accounting refers to recording and appropriate allocation of

expenditure for determining costs of product or services.

Meaning of COST AND COST ACCOUNTING:

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Historical

costing

Standard

costing

Uniform

costing

Marginal

costing

Types of costing :

Meaning of costing:

Costing refers to rules and principles we apply

for ascertainment of costs.

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Historical costing:

It refers to determining the costs after they have actually incurred.

So in this method of costing the cost of production can be determined only after the

production is complete.

It refers to past data of expenditure.

Standard costing:

It refers to determining of standard costs and applying them and measuring the

variations to control the cost of production.

Uniform costing:In this method the trade associations fix a system followed by all the business units.

It helps in interfirm comparisons.

Marginal costing:

In this method of costing, total cost is classified into two categories fixed and variablecost.

Fixed cost is not treated as product cost. Only variable cost is charged to the product.

It helps the management in taking various policy making decisions. This method is also

called Direct or variable costing.

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Basis Financial Accounting Cost accounting

(i) Objective It provides information

about

the financial performance

and

financial position of the

business.

It provides information of

ascertainment of cost to

control

the cost and for decision

making

about the cost.

(ii) Nature It classifies records,

presents and interprets

transactions in terms of

money.

It classifies, records,

presents, and interprets in a

significant manner the

material, labor and

overheads cost.

iii) Recording ofdata

It records Historical data. It also records and presentsthe

estimated/budgeted data. It

makes use of both the

historical

costs and pre-determined

costs..

Difference between financial accounting and cost accounting

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(iv) Users of Information The users of financial

accounting statements

are

shareholders, creditors,financial analysts and

government and its

agencies etc.

The cost accounting

information is used by

internal management at

different levels.

(v) Analysis of costs and

profits

It shows the profit/ loss

of the organization.

It provides the details of

cost and profit of each

product, process job,

contracts, etc.

(vi) Time period Financial Statements are

prepared for a definite

period, usually a year.

Its reports and

statements are prepared

as and when required

(vii) Presentation of

information

A set format is used for

presenting financial

information.

There are not any set

formats for presenting

cost information

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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 ofthe 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.

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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 expensesincurred

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.

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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 orderto 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

finishedand finished goods. This helps in preparation of financial statements.