Cost Accounting
1. Introduction and concept of cost accounting: Cost accounting is a special branch of
accounting. Cost accounting is a process or method of collecting, recording,
classifying, appropriate allocating and controlling cost of products and services. Cost
accounting is an internal reporting tool of a business.
2. Objectives, importance and advantages of cost accounting:
The basic objectives of cost accounting are to collect the information about cost and
control the cost. The cost accounting is important to minimize the cost and maximize
the profit of the company. The objectives, importance and advantages are as follows:
a. To estimate the cost: The main objective and importance of cost accounting is to
estimate the cost of product and service, cost per department, job and contract
which helps to develop cost standard.
b. To provide information for decision: Cost accounting collects records and provides
detailed information about cost of product, segment and service which helps to
make managerial decision.
c. To determination of price: Cost accounting estimates the cost per unit which helps
for fixing the price of finished good and inventory.
d. To analyze the profitability of operation: Cost accounting helps to estimate and
analyze the cost which helps to identify the profitable and unprofitable business
operation.
e. To plan and control the cost: Cost accounting helps to plan and control the cost by
minimizing the expenses and wastages.
3. Limitation of cost accounting:
Cost accounting is a branch of accountancy but it is not exact science which has
developed through theories, accounting practice and common sense.
a. Lack of uniform procedure: There are no uniform principles or procedures to
calculate cost, profit and selling price.
b. Not universally application: Costing system applied by one company may not be
applicable to another company so it is not uniform procedure.
c. Many formalities and estimations: Cost accounting requires many formalities for
estimations of future cost.
d. Expensive: A separate costing department with qualified accountant is required for
maintaining cost accounting which increases the management cost.
e. Ignores financial incomes and expenses: Cost accounting ignores financial incomes
and expenses, so it is difficult to calculate profit or loss for a product, services and
department.
4. Meaning of financial accounting: Financial accounting is historical in nature which is
science and art of recording, classifying, summarizing and analyzing the financial
, transactions to ascertain profit or loss and position of a business during a particular
period of time.
5. Limitations of financial accounting:
Financial accounting only gives overall idea about working efficiency of the business
but it doesn’t give working efficiency of particular department or unit.
a. Lack of detailed cost information: Financial accounting doesn’t provide detail cost
information for performance evaluation of departments and segments and for
decision making.
b. No classification of cost: Financial accounting doesn’t classify the cost in to direct,
indirect, variable, fixed cost which are essential for control of cost.
c. No price determination: Financial accounting fails to supply detailed information
about true or exact production cost, so price of the product or service can not be
determined.
d. Dials only with overall profitability: Financial accounting deals only with overall
profitability of a business but it doesn’t deal with product wise, process wise,
department wise profitability of a business.
e. Use of historical data: Financial accounting maintains historical data which can not
be used for planning and decision making.
6. Difference between cost and financial accounting:
Bases of difference Cost Accounting Financial Accounting
a. Objective The objective of cost The objective of financial
accounting is to calculate accounting is to communicate
total cost and fix price of the result in terms of profit or
products and services. loss and position of business.
b. Classification Cost accounting classifies Financial accounting doesn’t
of cost cost into direct, indirect, classify the cost
variable, fixed cost etc.
c. Users Its users mainly are Its users are owners, managers,
managers who use it for suppliers, banks, customers,
decision making. government etc.
d. Preparation It is optional requirement to It is legally requirement to
requirement prepare cost accounting. prepare financial accounting.
e. Inventory It valuates inventory on cost It valuates inventory either on
valuation basis. cost or market basis whichever is
lower.
7. Methods of costing:
The processes and techniques to estimate the cost of output, process or operation are
called methods of costing. Due to the difference in nature of businesses, the methods
of costing are also differed. Some important methods of costing are as follows:
1. Introduction and concept of cost accounting: Cost accounting is a special branch of
accounting. Cost accounting is a process or method of collecting, recording,
classifying, appropriate allocating and controlling cost of products and services. Cost
accounting is an internal reporting tool of a business.
2. Objectives, importance and advantages of cost accounting:
The basic objectives of cost accounting are to collect the information about cost and
control the cost. The cost accounting is important to minimize the cost and maximize
the profit of the company. The objectives, importance and advantages are as follows:
a. To estimate the cost: The main objective and importance of cost accounting is to
estimate the cost of product and service, cost per department, job and contract
which helps to develop cost standard.
b. To provide information for decision: Cost accounting collects records and provides
detailed information about cost of product, segment and service which helps to
make managerial decision.
c. To determination of price: Cost accounting estimates the cost per unit which helps
for fixing the price of finished good and inventory.
d. To analyze the profitability of operation: Cost accounting helps to estimate and
analyze the cost which helps to identify the profitable and unprofitable business
operation.
e. To plan and control the cost: Cost accounting helps to plan and control the cost by
minimizing the expenses and wastages.
3. Limitation of cost accounting:
Cost accounting is a branch of accountancy but it is not exact science which has
developed through theories, accounting practice and common sense.
a. Lack of uniform procedure: There are no uniform principles or procedures to
calculate cost, profit and selling price.
b. Not universally application: Costing system applied by one company may not be
applicable to another company so it is not uniform procedure.
c. Many formalities and estimations: Cost accounting requires many formalities for
estimations of future cost.
d. Expensive: A separate costing department with qualified accountant is required for
maintaining cost accounting which increases the management cost.
e. Ignores financial incomes and expenses: Cost accounting ignores financial incomes
and expenses, so it is difficult to calculate profit or loss for a product, services and
department.
4. Meaning of financial accounting: Financial accounting is historical in nature which is
science and art of recording, classifying, summarizing and analyzing the financial
, transactions to ascertain profit or loss and position of a business during a particular
period of time.
5. Limitations of financial accounting:
Financial accounting only gives overall idea about working efficiency of the business
but it doesn’t give working efficiency of particular department or unit.
a. Lack of detailed cost information: Financial accounting doesn’t provide detail cost
information for performance evaluation of departments and segments and for
decision making.
b. No classification of cost: Financial accounting doesn’t classify the cost in to direct,
indirect, variable, fixed cost which are essential for control of cost.
c. No price determination: Financial accounting fails to supply detailed information
about true or exact production cost, so price of the product or service can not be
determined.
d. Dials only with overall profitability: Financial accounting deals only with overall
profitability of a business but it doesn’t deal with product wise, process wise,
department wise profitability of a business.
e. Use of historical data: Financial accounting maintains historical data which can not
be used for planning and decision making.
6. Difference between cost and financial accounting:
Bases of difference Cost Accounting Financial Accounting
a. Objective The objective of cost The objective of financial
accounting is to calculate accounting is to communicate
total cost and fix price of the result in terms of profit or
products and services. loss and position of business.
b. Classification Cost accounting classifies Financial accounting doesn’t
of cost cost into direct, indirect, classify the cost
variable, fixed cost etc.
c. Users Its users mainly are Its users are owners, managers,
managers who use it for suppliers, banks, customers,
decision making. government etc.
d. Preparation It is optional requirement to It is legally requirement to
requirement prepare cost accounting. prepare financial accounting.
e. Inventory It valuates inventory on cost It valuates inventory either on
valuation basis. cost or market basis whichever is
lower.
7. Methods of costing:
The processes and techniques to estimate the cost of output, process or operation are
called methods of costing. Due to the difference in nature of businesses, the methods
of costing are also differed. Some important methods of costing are as follows:
