Module I The costing terminology of CIMA, London defines

costing as the “the techniques and processes of

Chapter 01: INDRODUCTION TO COST ascertaining costs”.
ACOUNTING.
Definition of Cost Accounting
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Cost Accounting may be regarded as “a specialized
Cost Accounting is a branch of accounting and has branch of accounting which involves classification,
been developed due to limitations of financial accumulation, assignment and control of Costs.”
accounting. Financial accounting is primarily
Definition of Cost Accountancy
concerned with record keeping directed towards
the preparation of Profit and Loss Account and CIMA, Landon defines cost accountancy as “ the
Balance Sheet. It provides information regarding application of costing and cost accounting principles,
the profit and loss that the business enterprise is methods and techniques to the science, art and practice
of cost control and the ascertainment of profitability as
making and also its financial position on a
well as presentation of information for the purpose of
particular date.
managerial decision making”.
A manufacturer has to fix the selling price of the
Difference between Costing and Cost Accounting
product he manufactures. To fix selling price, he
require information about cost per unit of the Costing Cost Accounting
product. The cost per unit of product is ascertained It is concerned with It is concerned with
ascertainment of cost recording of cost
by dividing the total cost of production by the total
It has narrow scope It has broader scope
quantity of products manufactured. It involve It involve analysis of
classification of cost for the preparation
LIMITATIONS OF FINANCIAL expenses according to of necessary
ACCOUNTING cost elements information.
It is done by cost It is done by cost
• It provides only past data accountant clerks
• It does not show profit of each job or process
• It fails to measure control over resources
• It does not measure organizational efficiency SCOPE OF COST ACCOUNTING
• It fails to provide adequate data for price fixation
• It does not provide data for comparison of costs 1. Cost Recording: Recording of cost transaction in
• It fails to take into account the price level various books.
changes 2. Cost Allocation: Distribution of cost to various
• It cannot disclose controllable & uncontrollable departments or products on predetermined basis.
costs
It is the charging of costs to cost units or cost
• It provide only limited information for
management for decision making costing centers.
• 3. Cost Ascertainment: it is the ascertainment of
MEANING AND DEFINITION OF COSTING cost of products/jobs/processes etc.
4. Cost Analysis: detailed investigation into the
Costing simply means finding out the cost of a product cause of actual cost varying from the budgeted
or service by any method or technique. cost.
5. Cost comparisons: comparisons between cost of Financial accounting are concerned with Cost
different products and activities, and cost of same concerned with external accounting are concerned
product or service over a period of time. transactions. with internal
6. Cost Control: it is the regulation of cost o transactions.
Only historical costs are Both historical and
products or operations.
recorded. predetermined costs are
7. Cost Audit: it is the verification of cost accounts. recorded.
8. Cost Reporting: This involves presentation of Valuation of stock at cost Valuation of stock at cost
cost information to management for decision or market price price.
making. It emphasizes the It aims at ascertainment
measurement of of cost
OBJECTIVES/ PURPOSES OF COST profitability.
ACCOUNTING It records only actual cost It records both actual and
estimated cost.
1. To ascertain cost per unit of different products. It does not guide the It provides adequate data
2. To control cost formulation of pricing for formulating pricing
policy. policy.
3. To determine selling price.
4. To ascertain the profit of each activity.
5. To measure efficiency. DIFFERENCE BETWEEN COST ACCOUNTING
6. To assist management in decision making. AND MANAGEMENT ACCOUNTING
7. To provide correct analysis of costs.
8. To advise management on future expansion Cost Accounting Management Accounting
policies It is used for cost control It is used for managerial
and cost reduction decision making
9. To provide a perpetual inventory of stores and
The scope of cost The scope of management
other materials. accounting is narrow accounting is broader
10. To analyze and classify all expenditure with Statutory audit is No statutory audit
reference to the cost. mandatory for big requirement.
business
ADVANTAGES OF COST ACCOUNTING It is used for management, It is only for management
shareholders and vendors
1. To management It considers only considers both
2. To employees quantitative data quantitative and
3. To creditors qualitative data
4. To government It. Only cost accounting Principles of cost
5. To society principles are used accounting and financial
accounting are used
DIFFERENCE BETWEEN FINANCIAL Cost accounting is It uses financial as well as
ACCOUNTING AND COST ACCOUNTING restricted to cost related cost accounting data
data
Financial Accounting Cost Accounting It deals with both present It deals with future
These are accounts of It is only a part of whole and future transactions transactions.
whole business. accounts.
These are accounts of It is only a part of whole
METHODS AND TECHNIQUES OF COSTING
whole business. accounts.
It discloses net profit and It discloses profit and Basically, there are two principal methods of costing,
loss of the business. loss of each product, job
namely (i) Job costing, and (ii) Process costing.
or service.
1. Job costing: It refers to a system of costing in which 6. Uniform Costing: It is not a distinct method of
costs are ascertained in terms of specific jobs or orders costing by itself. It is the name given to a common
which are not comparable with each other. Job Costing system of costing followed by a number of firms in the
includes the following methods of costing: same industry. This helps in comparing performance of
one firm with that of another.
a) Contract Costing: The term is usually
applied to the costing method adopted where large scale 7. Departmental Costing: When costs are ascertained
contracts at different sites are carried out, as in the case department by department, the method is called
of building construction. “Departmental Costing”. Elements

b) Batch Costing: A batch of similar products TYPES OF COSTING

is regarded as one job and the cost of this complete
batch is ascertained. It is then used to determine the unit 1. Absorption Costing/ Full Costing: It is the
cost of the articles produced. process of charging all cost both fixed and
variable to products, services, jobs or process.
c) Terminal Costing: This method is also a 2. Marginal Costing/Variable costing: Only
type of job costing. This method emphasizes the variable costs are charged products, operations
essential nature of job costing, i.e., the cost can be and process.
properly terminated at some point and related to a 3. Direct Costing: Charging all direct cost to
particular job. products, services and jobs.
4. Differential Costing: Comparing cost of two
d) Operation Costing: This method is adopted alternatives for the purpose of deciding which
when it is desired to ascertain the cost of carrying out alterative is the best.
an operation in a department, for example, welding 5. Uniform Costing: It is the use of same costing
2. Process Costing: Where a product passes through principles, practices and methods by several
distinct stages or processes, the output of one process undertaking for common control or
comparison
being the input of the subsequent process, it is
6. Historical Costing: Ascertainment of cost after
frequently desired to ascertain the cost of each stage or
they have been incurred.
process of production. This is known as process
costing. 7. Standard Costing: It is the system of
comparing actual cost with standard cost and
3. Unit or single or output or single output costing: finding variances and taking remedial action if
This method is used where a single article is produced necessary.
or service is rendered by continuous manufacturing 8. Activity Based Costing:
activity. 9. Life Cycle Costing:
10. Target Costing:
4. Operating Costing: This method is applicable where
services are rendered rather than goods produced. The
procedure is same as in the case of single output
costing.

5. Multiple or Complete Costing: Some products are

so complex that no single system of costing is
applicable. It is used where there are a variety of
components separately produced and subsequently
assembled in a complex production.