Unit-I

Chapter -1

Nature and Scope of Cost

Accounting
Learning Objectives
At the end of the chapter, you will able to;
Identify the type of accounting
Difference between Cost Accounting , Cost
Accountancy and Costing
Understand the Management information needs
Identify the objectives of cost accounting
Difference between Cost Accounting Vs. Financial
Accounting
Identify the role of cost accountant

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Accountants
 Financial accountants provide information to external parties
 Investors
 Creditors
 Regulators

 Managerial accountants provide information to internal users

 Managers

 Cost accountants provide information to both internal and

external users
 Product cost information

“Accounting is the language of business”

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Relationship of Financial, Management,
and Cost Accounting
Product Costs

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTING ACCOUNTING

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Types of Accounting
Financial Management
 Meet external  Meet internal
information needs information
needs
 Comply with
 Does not have to
GAAP
comply with
GAAP

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Financial versus Cost /Managerial
Financial Cost /Managerial
 External focus  Internal focus
 Segments or divisions
 Whole organization
 Current/projected
 Historical  Quantitative/qualitative
 Quantitative  Monetary and non-
 Monetary monetary
 Verifiable
 Timely/reasonable
estimate
 GAAP
 Benefits exceed costs
 Formal recordkeeping  Formal and informal
recordkeeping
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COST ACCOUNTING - MEANING

 Cost accounting is concerned with recording,

classifying and summarizing costs for
determination of costs of products or services,
planning, controlling and reducing such costs
and furnishing of information to management
for decision making

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Cost Accounting and Cost
Accountancy
The term Cost Accountancy has a wider meaning as compared to the term
cost accounting.

Cost Accountancy includes the following:

 Cost Accounting : It is the process of accounting for costs.

 Costing : It is the technique and process of ascertaining costs.

 Cost Control: It aims at guiding the actual performance towards the line
of targets

 Cost Reduction: it is a planned positive approach to reduce expenditure

 Cost Audit: It is the verification of cost accounts and a check on the

adherence to the cost accounting plan.

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Scope of Cost Accounting
Cost Ascertainment

Cost Accounting

Cost Control

Cost Reduction

Cost Audit
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Nature
Cost accounting is a practice of cost control
which is as follows:-
(a) Cost accounting is a branch of systematic
knowledge that is a discipline by itself. It consist
its own principles, concepts and conventions
which may vary from industry to industry.
(b) Cost accounting is a science and arts both. It is
science because it is a body of systematic
knowledge relating to a wide variety of subject
and an art because without the efficiency and
experience of cost auditor it is not possible to
use costing techniques efficiently

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Objectives of Cost Accounting
 Ascertainment of cost : Involves computation of cost incurred
 Estimation of costs : As compared to 'what has been the cost' it
emphasizes on 'what is likely to be the cost' or 'what should be the cost'.
 Cost Control : Involves
i) determination of standard costs and
ii) analyzing the cause of variations between standard and actual cost.
 Cost Reduction
 Determining selling price
 Facilitates the preparation of financial and other statements :A
developed cost accounting system provides immediate information
regarding stock of raw materials, work-in- progress and finished goods. This
helps in speedy preparation of financial statements.
 Provides basis for decision making: ex. make or buy, shut down or
operate at loss etc.

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Advantages of Cost Accounting
 to the management:
 Planning, controlling, and decision making
 Evaluating performance
 controlling upstream and downstream costs
 to the employees: Cost accounting
 introduces wage scheme, bonus to the efficient & sincere employees which in turn increasing
productivity, profitability and lowering cost.
 to the creditors:
 The better management of finance through cost accounting leads to timely debt servicing by
company in the form of repayment of loan and payment of interest.
 To stay and grow in competition and for judging soundness of present and perspective
borrower and cost reports give better picture of efficiency, profit,and capacity.
 to the government:
 Cost accounting enables the Govt. to prepare plans for economic development of the
country, to make policies regarding taxation, excise duty, export, price, ceiling, granting
subsidy etc.
 to consumers/public:
 Cost accounting helps consumers in getting goods of better quality at reasonable price.

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 Financial Accounting Vs. Cost Accounting
Financial Accounting Cost Accounting
Aims at safeguarding the interest of the Renders information for guidance of the
business, its proprietors and others management for proper planning,
connected with it. operational control & decision making.

Financial Accounts are prepared according Maintenance of cost records are voluntary
to some accepted accounting concepts and and there are no statutory forms regarding
conventions. their presentation

Reveals the profit of business as a whole Reveals the profit made on each product,
job or process.

Prepared and submitted usually at the end Prepared more frequently, sometimes even
of the accounting period. weekly.

Provides information useful to outsiders, Provides information useful to insiders,

hence high degree . degree of accuracy is less.

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Installation of Cost Accounting
System
Essential Factors for Installing a Cost:
Accounting System
 Nature of Industry
 Organizational Factors – Size and type of organization, levels of
management, extent of delegation and responsibility, etc. are to be
considered while installing cost accounting.
 Cooperation from all departments is essential
 Flexibility and Uniformity – The cost accounting system to be install
must be flexible and uniform
 Authority and responsibility should be clearly defined
 The reports of cost data generated must be frequent , relevant and
prompt in cost accounting system.
 Manufacturing process helps in deciding the structure of cost
accounts

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 Essential of a Good Cost Accounting
System
A good cost accounting should possess the following essential
features:
i) It should be simple, practical and capable of meeting the business concern
requirements.
ii) Accurate data should be used by cost accounting system; otherwise it may
distort the output of the system.
iii) To develop a good system of cost accounting necessary co-operation and
participation of executives from various departments of the business is needed.
iv) The cost of installing and operating the system should be result oriented.
v) It should not sacrifice the utility by introducing unnecessary details.
vi) For the introduction of the system a carefully phased programmed should
be prepared by using network analysis.
vii) Management should have faith on costing system and works as a helping
hand for its development and success.

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 Methods
Depending upon the nature of the business and the types of its products, numbers of
methods of cost ascertainment are used in practice.The methods of costing are as
follows:
a) Job Costing: In this system the cost of each job is ascertained separately which is suitable in all
cases where work is undertaken on receiving a customer’s order. Like a printing press, motor work
shop etc.
b) Batch Costing: It is considered as the extension of job costing. It represents a number of small
orders passed through the factory in batch. Each batch here is treated as a separate unit of cost.
c) Contract Costing: It is suitable for the firms which are engaged in the work of construction of
bridges, roads, buildings etc.
d) Single or Output Costing: It is used in the business where a standard production is turned out
and it is desired to find the cost of a basic unit of production.
e) Process Costing: It is a method of costing used to ascertain the cost of a product which may
passes through various processes before completion.
f) Operating Costing: The cost of providing a service is known as operating cost and the methods
to ascertain the cost of such services is known as operating costing.
g) Multiple Costing: In multiple costing, a combination of two or more methods of costing is used
in conjunction to determine the cost of final product. This method is used by the industries where
different components are separately manufactured and subsequently assembled into the finished
product. For e.g.: Motor car, Television, Ships etc.

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Techniques
For ascertaining cost, following techniques of costing are usually used:-

a) Uniform Costing: The practice in which common methods of costing for different undertakings
in the same industry are used is known as uniform costing

b) Historical Costing: In this technique, ascertainment of cost is done after they have been
incurred but the utility of this technique is limited.

c) Direct Costing: The practice of charging all direct costs to operations, processes or products
leaving all indirect costs to be written off against profit’s in which they arise are called as direct
costing.

d) Absorption Costing: In this all costs, both variable and fixed are charged to production,
operations or processes

e) Marginal Costing: The method of ascertaining marginal cost by differentiating between fixed and
variable costs. This technique is used to ascertain effect of changes in volume or type of output over
the profits.

f) Standard Costing: The preparation of standard costs and applying them to measure the
variations from actual cost and analysing the causes of variations with a view to maintain maximum
efficiency in production is known as standard costing.

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Limitations of Cost Accounting
These are the following reasons for which cost accounting is
criticized by the different sections of society:

a) Not Reliable: Cost Accounting is based on estimates and so it is not reliable.

b) Failure of the System: Cost Accounting system has failed to produce desired
results in many concerns.

c) Unnecessary: it is not necessary in business concern as it involves

duplication of work.

d) Inapplicability: Modern methods of cost accounting are not applicable to

every type of industries.

e) Expensive: It is expensive because double set of account books has to be

maintained and its introduction involves considerable amount of expenditure.

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Role of Cost Accountant
Cost Accountant performs action as under:
 To analyse cost ,i.e.: material , labour and the
overhead expenses
 To reconcile daily productions with
accounting transaction
 To coordinate with R&D for production of
new items
 To assist the controller in developing cost
improvement opportunities
 To prepare the new product costing as well
as the gross profit analysis for the marketing

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Reference

 Readers are advised to read: Unit-I

Chapter–1: Nature and Scope of Cost Accounting of Cost
Accounting by:

S.P Jain
K.L Narang
Simmi Agrawal
Monica Sehgal
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