Cost Accounting: Definition, Features, and Objectives

UnitDefinition 1: Introduction toof Cost Accounting

1.

Cost IntroductionAccounting is an advanced field of accounting that focuses on the meticulous and accurate analysis, standardization, forecasting, and comparison of relevant costing data. It extends beyond basic costing to Accounting

interpret

Accountingand providesreport various areas of concern to management. The primary aim of cost accounting is to ascertain the cost of a product or service, enhance operational efficiency, and provide detailed financial information relatedthat assists management in decision-making. It involves the application of accounting and costing principles to theidentify activitiescost-saving methods, techniques, and any excess costs incurred through a comparative analysis with previous experiences or standards.

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Features of aCost business. This information is provided to shareholders, management, creditors, debenture holders, bankers, etc.

Accounting can be divided into:

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• FinancialCost Accounting:Classification: ItCost isaccounting mainlyinvolves concernedcategorizing withcosts recordingbased businesson transactionstheir innature, behavior, and relevance to the booksdecision-making ofprocess. accountsThis inclassification ordercan toinclude prepare:direct
  vs.
  1. indirect P&Lcosts, A/c:fixed Showsvs. thevariable netcosts, profit/loss.
  and
  2. product Balancevs. Sheet:period Shows the financial position of the company.
  costs.
• Cost Accounting:Analysis: It is a branch of accounting that specializes inentails the ascertainmentexamination and evaluation of the different elements of cost to understand their behavior and impact on the overall cost of goodsthe andproduct services.or service.
• ManagementCost Accounting:Recording: Systematic recording of cost data in a manner that aligns with the costing methodology adopted by the organization. This facilitates easier tracking, analysis, and reporting of cost information.
• Decision Support: Cost accounting provides crucial data that supports managerial decisions relating to pricing, budgeting, expansion, and cost control measures.
• Budgeting and Forecasting: It isincludes the modern conceptpreparation of accountingfinancial plans and actsforecasts asthat aguide guidingthe toolorganization in achieving its financial goals. Budgeting and forecasting are essential for management.resource Itallocation isand concernedfinancial with all such accounting information that is useful to management.planning.

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2.Objectives Keyof TerminologyCost 📝Accounting 🎯

• Cost: The price paid for something.
• Costing: The techniques, methods, and practices to ascertain a cost.
• Cost Accounting: The process of recording, classifying, summarizing, analyzing, interpreting, and communicating information to management in order to control the cost.
• Cost Accountancy: This is a wider term. It includes principles, conventions, techniques, and systems which are used in business to plan and control the utilization of resources. It is a science, art, and practice.
  • Science: It is a systematic body of knowledge.
  • Art: It requires the skills of a cost accountant.
  • Practice: It is an ongoing process.

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3. Difference Between Financial Accounting & Cost Accounting

Basis	Financial Accounting	Cost Accounting
1. Purpose	To prepare an Income Statement & Balance Sheet for external users.	To prepare a cost statement (for goods & services) to provide to management for internal usage.
2. Statutory Requirement	These accounts are obligatory to be prepared according to the legal requirements of the Companies Act & Income Tax Act.	Maintenance of these accounts is optional, except in certain industries where it is obligatory under the Companies Act.
3. Periodicity of Report	Financial reports are prepared at the end of the financial year.	Costing reports are a continuous process and are prepared anytime (daily, weekly, monthly, etc.).
4. Control Aspect	It focuses on recording financial transactions and does not attach the cost control aspect.	It provides detailed information about the cost control aspects (budgetary control, marginal costing, etc.).
5. Historical vs. Predetermined	It is concerned with historical records.	It is concerned with both historical and predicted costs.
6. Fixation of Selling Price	Financial accounts are not maintained with the object or purpose of fixing the selling price.	Cost accounting provides sufficient data for the fixation of the selling price.
7. Analysis of Profit	Financial a/cs are prepared for the whole business and disclose the net profit or loss of the business as a whole.	Cost accounting discloses the profit or loss of each product, department, and job.
8. Facts and Figures	Financial a/c deals mainly with actual facts and figures.	Cost accounting deals partially with facts and figures and also deals with estimates.

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4. ElementsAscertainment of Cost 🧱

Per

The elements of cost can be broken down as follows:

• Prime CostUnit: = Direct Material + Direct Labour + Direct Expenses
• Overhead Cost = Indirect Material + Indirect Labour + Indirect Expenses

Material Cost

This isDetermining the cost of commodities supplied to an undertaking.

• Direct Material: Cost of material which is directly attributed to a cost object. It is the physical appearance of the product.
  • Examples: Clay in a manufacturing pot, batteries in a radio.
• Indirect Material: Cost of material which cannot be directly attributed to a cost object. It is not present in the final product.
  • Examples: Hand gloves used in manufacturing, lubrication used in machines.

Labour Cost

This is the cost of remuneration (wages, salary, incentives) paid to employees.

• Direct Labour Cost: Cost of labour who are directly involved in the conversion of raw materials into finished products.
  • Example: Labour engaged in the actual production.

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5. Cost Sheet Format

The cost sheet is a statement designed to show the total cost and cost per unit of adifferent productproducts manufactured to understand the cost structure and aid in pricing strategies.

Cost Analysis for a given period.

7. Practical Problem Example ⚙️

Bharat Engineers & Company manufacturedOperations and soldProcesses: 1000Providing sewinga machinesdetailed analysis of costs incurred in 2021.various Theoperations or processes to identify areas of efficiency and inefficiency.

Identification of Wastage: Revealing wastage of time, expenses, and materials to improve profitability of products and advising management on corrective measures.

Effective Control of Stocks: Aiming to minimize the capital locked in stocks of raw materials, work in progress, consumables, and finished goods through efficient inventory management.

Revelation of Sources of Economy: Identifying and implementing cost detailscontrol weremeasures across materials, labor, and overheads to achieve economies in operations.

Advising on Expansion and Capital Projects: Providing insights to management on future expansion policies and the feasibility of proposed capital projects based on cost-benefit analysis.

Budget Preparation Assistance: Helping in the preparation of budgets to forecast and plan for future financial activities effectively.

Formulation of Incentive Plans: Guiding management in the development of incentive bonus plans that encourage cost saving, enhanced productivity, and efficiency.

Internal Audit System: Organizing an internal audit system to ensure the efficient operation of different departments by monitoring and evaluating their financial activities and performance.

Managerial Decision Making: Serving as follows:

a

basis
• Costfor ofmanagerial Materials:decision-making ₹80,000
by
• Wagesproviding Paid:detailed ₹1,20,000
cost
• Manufacturinginformation Expenses:that ₹50,000
helps
• Salaries:in ₹60,000
strategizing,
• Rent,planning, Ratesand &controlling Insurance:organizational ₹10,000
• Selling Expenses: ₹30,000
• General Expenses: ₹20,000
• Sales: ₹4,00,000activities.

The company plans to make 1200 sewing machines in 2022. You are asked to submit a statement. (The task is to prepare a cost sheet for 2021 and an estimated cost sheet for 2022).