Learning Objectives
·
Define cost accounting and distinguish it from
financial accounting.
·
Understand the objectives and importance of cost
accounting.
·
Identify key elements of cost.
·
Appreciate the role of cost accounting in
decision-making.
1. Introduction to Cost Accounting
Cost
accounting is the process of recording, classifying, analyzing, summarizing,
and allocating costs associated with a process, and then developing various
courses of action to control the costs.
“Cost
accounting is the technique and process of ascertaining costs. It is the formal
mechanism by means of which costs of products or services are ascertained and
controlled.” — Wheldon (1953)
2. Differences Between Cost Accounting and Financial Accounting
|
Feature |
Financial Accounting |
Cost Accounting |
|
Objective |
To show the financial position |
To compute cost and aid decision-making |
|
Users |
External (investors, government) |
Internal (management) |
|
Reports |
Income Statement, Balance Sheet |
Cost Sheets, Variance Reports |
|
Time Orientation |
Historical |
Past, present, and future |
3. Objectives of Cost Accounting
1.
Cost Ascertainment: To determine the cost of
products, services, or operations.
2.
Cost Control: To compare actual costs with
standards and find out variances.
3.
Cost Reduction: To identify wastage and
unnecessary expenditures.
4.
Decision Making: To support managerial decisions
on pricing, product mix, outsourcing, etc.
4. Importance of Cost Accounting
·
Helps in budgeting and cost control.
·
Assists in setting selling prices.
·
Aids in performance evaluation.
·
Supports strategic decision-making.
·
Ensures optimum utilization of resources.
5. Elements of Cost
The total cost of a product is composed of three main
elements:
·
a) Direct Costs
– Direct Material: Raw materials directly traceable to the
product.
– Direct Labor: Wages of workers directly involved in
production.
– Direct Expenses: Expenses specifically incurred for the
product.
·
b) Indirect Costs (Overheads)
– Factory Overheads: Indirect materials, labor, utilities.
– Administrative Overheads: Office salaries, rent,
depreciation.
– Selling & Distribution Overheads: Advertising,
delivery costs.
6. Cost Classification
Costs may be classified:
– By behavior: Fixed, Variable, Semi-variable
– By function: Production, Administration, Selling
– By traceability: Direct vs. Indirect
– By relevance: Relevant vs. Irrelevant
7. Cost Accounting Cycle
5.
Identifying costs
6.
Recording in cost sheets
7.
Classifying and analyzing
8.
Preparing reports
9.
Decision-making support
Example: Cost Sheet Format
|
Particulars |
Amount (Rs.) |
|
Direct Material |
40,000 |
|
Direct Labor |
25,000 |
|
Direct Expenses |
5,000 |
|
Prime Cost |
70,000 |
|
Add: Factory Overheads |
10,000 |
|
Factory/Works Cost |
80,000 |
|
Add: Administrative Overheads |
5,000 |
|
Cost of Production |
85,000 |
|
Add: Selling & Distribution Overheads |
10,000 |
|
Total Cost / Cost of Sales |
95,000 |
Summary
·
Cost accounting provides essential information
to internal management.
·
It differs from financial accounting in purpose
and scope.
·
Knowing cost elements is crucial for cost
control and pricing decisions.
References
1.
Horngren, C. T., Datar, S. M., & Rajan, M.
(2018). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson Education.
2.
Drury, C. (2013). Management and Cost Accounting
(8th ed.). Cengage Learning.
3.
Maheshwari, S. N., & Mittal, S. N. (2017).
Cost Accounting: Theory and Problems. Shree Mahavir Book Depot.
4.
ICMA Pakistan. (2020). Cost Accounting Manual.
Institute of Cost and Management Accountants of Pakistan.
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