Prof. V.

Ramachandran.
Times Business
School,Vashi,
Navi Mumbai,400703

Agenda
Introduction
Basic Definitions
Cost, Costing, Cost Accounting, cost Accountancy and cost unit.

Objective
Merits
Limitations
Distinction between cost Accounting, financial

Accounting and Management Accounting

Nature and classification of cost
Establishing Cost Accounting System
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Introduction
Cost Accounting involves a detailed

study of cost Viz

cost ascertainment,
cost reduction , cost control & Cost

Management

And to facilitate/aid the Management

In the decision making process

The emphasis is on historical costs as

well as future decision-making related

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to costs.

Basic Definitions - Cost

Cost

Normal sacrifice of resources in the

creation of product or services
In other words it includes all expenses

incurred and accrued excluding financial

but including notional expenses.
Therefore cost is the amount of
resources used for something which
are measurable in terms of money.
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Basic Definitions Costing The technique and process of ascertaining

Costing
cost

Costing involves
recording ,classification, allocation, appropriation of

expenses incurred to facilitate determination of the

cost of the product or service.

Weldon defines Costing is the classifying, recording, and

appropriate allocation of expenditure for the determination of

cost of products or services and for the presentation of
suitably arranged data for purposes of control and guidance
of management. It includes the ascertainment of every order,
job, contract, process, service units as may be appropriate. It
deals with cost of production, selling and distribution.
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Basic Definitions Cost Accounting

Cost Accounting - The Establishment of Budgets,

Standard costs and actual cost of operations,

processes, activities or products and the analysis of
variances, profitability or the social use of funds.
It primarily deals with collection, analysis of

relevant cost data for interpretation and

presentation on various problems of
management.
It is concerned with actual cost incurred and

estimation of future costs.

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Basic Definitions- Cost Accountancy

Cost accountancy The application of costing

and cost accounting principles, methods and

techniques for cost control and ascertainment
of profitability including presentation of
information for managerial decision making

Cost Accounting is the application of accounting

and costing principles, methods, and

techniques in the ascertainment of cost and
the analysis of savings and/ or excess as
compared with previous experience or with
standards.

Basic Definitions- Cost Unit

Cost Unit A quantitative unit of product

or service in relation to which cost are

ascertained.
It is a unit of quantity of product, service or time
or a combination of these in relation to which cost
is expressed or ascertained.
Some examples :
Industry/product/activity

Cost Unit

Brick Making

1000 bricks

Automobile

Automobile unit manufactured

Cement, Coal etc.

Tonne manufactured

Electricity

Kilowat Hour (KWh)

Professional service

Per Man Hour

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Objectives
Ascertainment of cost Products or services.
Analysis of cost Breakup into constituent parts and their scrutiny.
Control of cost Effective control of cost for optimum and efficient
use of resources.

Ascertain the cost and profitability of each division, unit,

activity, centre etc.

Reduction of cost Permanent reduction in cost without

compromising quality and intended use by innovative methods

and substitutes .

Help decision making process

Provide a basis for operating Policies.
To provide a basis for Comparative analysis through data

collection.
To facilitate cost estimation.

Merits
Basis for price fixation.
Aids formulation of policies.
Optimization of resource utilization.
Facilitates location of causes for profit/loss

variation.
Identifies areas for correction.
Provides information for decision making.
Provides information for comparison.
Promotes efficiency and cost control.

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Provides Information to Government for

policy making.
Helps the process of management by
exception.
Facilitates inventory valuation.
Aids fixation of responsibility centers.
Provides valuable information for preparing
Tenders/ Quotation.
Provides information for Budget preparation.

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Limitations
Cost accounting is not an exact science.
Biased as many judgments are dependent upon

the individual discretion.

Is based on various assumptions which could
lead to wrong conclusions.
It is only a means and not an end in itself.
Expensive.
Lacks uniformity in application.
Arbitrary in cost allocation and apportionment.
No standard basis, different formats and different
types of costs etc.
If the system is not updated regularly, the
system becomes ineffective.
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Cost Accounting & Financial Accounting

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Cost Accounting & Financial Accounting

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Cost Accounting & Management Accounting

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Cost Accounting & Management Accounting

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Nature and Classification

According to Elements
Material cost, Labour cost and other cost.
According to nature of expense or Traceability
Direct cost Material, Labour, Expenses.
Indirect cost Material, Labour, Expenses.
According to Functions
Manufacturing cost.
Administrative cost.
Selling and distribution cost.

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Nature and classification

(Contd.)
According to Behavior
Fixed cost.
Variable cost.
Semi variable cost.
According to Controllability
Controllable.
Un controllable.

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Nature and classification

Nature and classification

Nature and classification

COST SHEET
Cost Sheet is a statement prepared showing details

various elements of cost and total cost of production

of a job, operation or order.
It brings out the composition of total cost in a logical
order, under proper classifications and sub-divisions.
In case of multiple products a separate cost sheet is
normally prepared for each product.
Alternatively, separate columns for total cost and
unit cost may be provided for each product in the
same cost sheet.
A cost sheet may be prepared under output or unit
costing method.

Features of Cost Sheet

Cost sheet has the following features :
It relates to a particular product.
It relates to cost incurred during a particular period.
It may show total cost as well as per unit cost.
It may be based on actual data or estimated data.

Purposes of cost sheet

Cost sheet serves the following purposes :.

It gives the break up of total cost under different
elements.
`It shows total cost as well as cost per unit.
It helps comparison with previous years.
It facilitates preparation of tenders or quotations.
It enables the management to fix up selling price.
It controls cost.

Cost Sheet Proforma

Cos t Sheet

Essentials of Good Cost Accounting

System
A good costing system will consist of the following
characteristics:
The costing system adopted in a particular organization must suit

its nature and size of business and its information needs.

The costing system must be economical to the organization and
the benefits derived from the system should be more than its
cost of installation and operation.
The system should be more flexible enough to take care of
changing business situations and information needs of the
organization.
The system should be simple to understand and easy to
operate. The users of costing data should be convinced of the
costing system from which the data is derived.
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Essentials of Good Cost Accounting

System
The costing system should be devised with the coordinated efforts
of all the concerned departments and their staff. This will reduce
the difficulty in implementation of cost system.
The costing should ensure proper system of accounting for
materials, labor and overheads and proper classification
transactions should be done at the level of recording.
Adoption of activity based costing system will increase the accuracy
in allocation, apportionment and absorption of overheads, which leads
to correct ascertainment of cost per unit of product or service.
Integration of financial accounting and cost accounting
systems will avoid duplication of work. The financial and cost
accounts should interlocked together and should be reconciled
periodically.
The costing should clearly mention the details of records to be
maintained and the degree of accuracy of data should be
determined.
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Essentials of Good Cost Accounting

System
Before devising a costing system, the need and objectives of

the system should be identified.

Since the costing system is for internal control purpose, it
should meet the requirements of management and its
information needs.
The costing system should concentrate more on ascertaining
the significant variables of the manufacturing unit which are
amenable to control and affect the concern. For example,
wages are amenable for control whereas marketing cost
is situation oriented.
Before a costing system is devised and adopted, thorough
study should conducted on production process, methods
of work, wage system, input requirements, information
needs, financial accounting system etc.
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Essentials of Good Cost Accounting

System
Wherever possible, concepts like management by exception,

responsibility accounting etc. should be adopted into the

costing system.
All forms and proformas should be adopted to minimize
clerical work and formulate efficient system of material
control and adequate wage procedure.
The costing system must take care of the importance of
comparability of data, with previous period's data, with
competitors' data, with industry averages.
The costing should fix-up the duties and responsibilities of
costing department staff and the co-operation that can be
sought from other functions/ departments.

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Essentials of Good Cost Accounting

System
In designing and installation of a good cost accounting system the
following factors should give due consideration:
The information needs of the management and the level of details

needed.
The frequency of the information to be provided.
The factory layout and production process, method of production and
type of process.
The level of control to be exercised over production and cost
centers.
The nature of raw material and labor used in the process.
The organization structure and degree of decentralization.
The speed and accuracy in requirement of information.
The information needs of different cost centers.
The relative size of the cost units and cost centers.
The level of integration of cost and financial accounts desired.
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Essentials of Good Cost Accounting

System
The requirement of uniformity of accounting for comparability of

data with other units in the same industry.

The level of mechanization and computerization is needed.
Standardization of records and accounting procedures and control
systems.
The level of application of costing techniques viz, standard costing,
budgetary control and marginal costing.
Cost minimization without effecting the efficiency of information needs.
The management's intention and the co-operation of workers and staff in
installation of costing system.
Implementation of proper wage system and inventory valuation, stores
issues.
The cost behavior and element wise classification of costs and selection of
equitable basis for allocation, apportionment and absorption of overheads.
Cost accounting system should be simple and easy to operate.
The expenses of the costing should commensurate with the benefits
of installation.
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Practical Difficulties in Installation of Costing

System
The practical difficulties that are expected at the time of
installation of costing system, are summarised below:
Lack of Support from Top Management - The basic objectives of

cost accounting system is to provide necessary information to the

internal management for the purpose of problem solving, decision
making and control. Without necessary support and recognition from the
top management, the very purpose of cost system is vitiated.
Resistance from Existing Accounting Staff - The existing accounting
staff may resist the introduction of cost accounting system in the
organization due to fear of losing job recognition and importance after
the implementation of the system.
Lack of Co-operation from other departments- The employees of
other departments may not cooperate for the installation of cost
accounting system due to fear of increase in work load, bring out of
inefficiency etc.
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Practical Difficulties in Installation of Costing

System
Resistance from Operating Level Workers - The

foremen, supervisors, workers and other operating level

staff may resent the introduction of cost system on the
ground that it will increase their job responsibilities and
paper work and may fear that it may cause change in wage
structure.
Shortage of Trained Staff - The installation and
implementation of cost system requires trained, qualified
and experienced staff which may be shortage.
Uneconomical Cost System - Sometimes the detailed
cost system proposed to be installed may cause substantial
installation and operating cost.

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Suggestions to Overcome Practical

Difficulties
The steps to be taken to avoid the above said practical
difficulties while installation of a cost system in the
organization are as follows:
The management should be convinced of the benefits which

can derive by installation and operation of cost system.

Non-cooperation and resistance can be overcome by
explaining the simplicity and use of the system and should be
ensured that the system will benefit the organization and increase
its profitability. They should be given assurance that the system
will not reduce the importance of existing staff.
To overcome resistance, the existing staff should be properly
trained to take up the responsibilities of the costing
system.

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Suggestions to Overcome Practical

Difficulties
All levels of staff and managers in the organization should

be properly trained and made familiar with the

costing procedures.
The system should be simple to understand and easy
to operate.
The benefits derived from cost system should be
more than the costs incurred on its installation and
operation.

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Thank You

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