MEANING OF COST ACCOUNTING

Cost accounting is the classifying, recording and appropriate allocation of expenditure for the
determination of the costs 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 the cost of every order, job, contract, process, service or unit as may be
appropriate. It deals with the cost of production, selling and distribution.

It is thus the provision of such analysis and classification of expenditure as will enable the
total cost of any particular unit of production or service to be ascertained with reasonable
degree of accuracy and at the same time to disclose exactly how such total cost is constituted
(i.e. the value of material used, the amount of labour and other expenses incurred) so as to
control and reduce its cost.

According to Wheldon, Cost accounting is the application of accounting and costing

principles, methods and techniques in the ascertainment of costs and the analysis of saving/or
excess cost incurred as compared with previous experience or with standards. Thus, cost
accounting relates to the collection, classification, ascertainment of cost and its accounting
and control relating to the various elements of cost.

COSTING AND COST ACCOUNTING

Costing should not be confused with cost accounting. They are two different terms. Costing,
simply, means finding out cost, by any process or technique. It can be:

a) Cost of manufacturing a product e.g. mobile, television, chemical etc.

b) Cost of providing a service e.g. transport by a specific mode, electricity etc.

Cost Accounting is the formal system for recording costs. However, both the terms costing
and cost accounting are often used, interchangeably. Costing is defined as the technique and
process of ascertaining costs by Chartered Institute of Management Accountants (CIMA).
The terminology of Cost Accountancy published by the Institute of Cost and Management
Accountants, London gives the following definition to Cost Accounting: The process of
accounting for cost which begins with recording of income and expenditure and ends with the
preparation of periodical statements and reports for ascertaining and controlling costs.

Thus, cost accounting has the following features:

1
1. It is a process of accounting for costs.

2. It records income and expenditure relating to production of goods and services.

3. It provides statistical data on the basis of which future estimates are prepared and
quotations are submitted.

4. It is concerned with cost ascertainment, cost control and cost reduction.

5. It establishes budgets and standards so that actual cost may be compared to find out
deviations or variances.

6. It involves the presentation of right information to the right person at the right time so that
it may be helpful to management for planning, evaluation of performance, control and
decision making.

OBJECTIVES OF COST ACCOUNTING:

Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper
recording and presentation of cost data to management for measuring efficiency and for cost
control and cost reduction, ascertaining the profit of each activity, assisting management in
decision making and determination of break-even point.

The aim is to know the methods by which expenditure on materials, wages and overheads is
recorded, classified and allocated so that the cost of products and services may be accurately
ascertained; these costs may be related to sales and profitability may be determined. Yet with
the development of business and industry, its objectives are changing day by day.

Following are the main objectives of cost accounting:

1. To ascertain the cost per unit of the different products manufactured by a business concern;

2. To provide a correct analysis of cost both by process or operations and by different

elements of cost;

2
3. To disclose sources of wastage whether of material, time or expense or in the use of
machinery, equipment and tools and to prepare such reports which may be necessary to
control such wastage;

4. To provide requisite data and serve as a guide for fixing prices of products manufactured or
services rendered;

5. To ascertain the profitability of each of the products and advise management as to how
these profits can be maximised;

6. To exercise effective control if stocks of raw materials, work-in-progress, consumable

stores and finished goods in order to minimise the capital locked up in these stocks;

7. To reveal sources of economy by installing and implementing a system of cost control for
materials, labour and overheads;

8. To advise management on future expansion policies and proposed capital projects;

9. To present and interpret data for management planning, evaluation of performance and
control;

10. To help in the preparation of budgets and implementation of budgetary control;

11. To organise an effective information system so that different levels of management may
get the required information at the right time in right form for carrying out their individual
responsibilities in an efficient manner;

12. To guide management in the formulation and implementation of incentive bonus plans
based on productivity and cost savings;

13. To supply useful data to management for taking various financial decisions such as
introduction of new products, replacement of labour by machine etc.;

14. To help in supervising the working of punched card accounting or data processing
through computers;

15. To organise the internal audit system to ensure effective working of different departments;

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16. . To organise cost reduction programmes with the help of different departmental
managers;

17. To provide specialised services of cost audit in order to prevent the errors and frauds and
to facilitate prompt and reliable information to management; and

18. To find out costing profit or loss by identifying with revenues the costs of those products
or services by selling which the revenues have resulted.

GENERAL PRINCIPLES OF COST ACCOUNTING:

Following are the main principles of Cost Accounting:

1. Cause-Effect Relationship:

Cause-effect relationship should be established for each item of cost. Each item of cost
should be related to its cause as minutely as possible and the effect of the same on the various
departments should be ascertained. A cost should be shared only by those units which pass
through the departments for which such cost has been incurred.

2. Charge of Cost Only after its Incurrence:

Unit cost should include only those costs which have been actually incurred. For example
unit cost should not be charged with selling cost while it is still in factory.

3. Past Costs Should not Form Part of Future Costs:

Past costs (which could not be recovered in past) should not be recovered from future costs as
it will not only affect the true results of future period but will also distort other statements.

4. Exclusion of Abnormal Costs from Cost Accounts:

All costs incurred because of abnormal reasons (like theft, negligence) should not be taken
into consideration while computing the unit cost. If done so, it will distort the cost figures and
mislead management resulting in wrong decisions.

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5. Principles of Double Entry Should be Followed Preferably:

To lessen the chances of any mistake or error, cost ledgers and cost control accounts, as far as
possible, should be maintained on double entry principles. This will ensure the correctness of
cost sheets and cost statements which are prepared for cost ascertainment and cost control.

CHARACTERISTICS OF COSTING

An ideal system of costing is that which achieves the objectives of a costing system and
brings all advantages of costing to the business. Following are the main characteristics which
an ideal system of costing should possess or the points which should be taken into
consideration before installing a costing system.

(i) Suitability to the Business:

A costing system should be tailor-made, practical and must be devised according to the
nature, conditions, requirements and size of the business. Any system which serves the
purposes of the business and supplies necessary information for running the business
efficiently is an ideal system.

(ii) Simplicity:

The system of costing should be simple and plain so that it may be easily understood even by
a person of average intelligence. The facts, figures and other informations provided by cost
accounting must be presented in the right form at the right time to the right person in order to
make it more meaningful.

(iii) Flexibility:

The system of costing must be flexible so that it may be changed according to changed
conditions and circumstances. The system without such flexibility will be outmoded because
of fast changes in business and industry. Thus, the system must have the capacity of
expansion or contraction without much change.

(iv) Economical:

A costing system is like other economic goods. It costs money just like economic goods. If
the system is too expensive, management may be unwilling to pay as buyers are not willing
to pay for the goods if these are expensive as compared to their utility. A costing system

5
should not be expensive and must be adapted according to the financial capacity of the
business.

The benefits to be derived from the system must be more than its costs as management will
be willing to install the system when its perceived expected benefits exceed its perceived
expected costs. In short, the system must be economical taking into consideration the
requirements of the business. The cost of installing and operating the system should justify
the results.

(v) Comparability:

The costing system must be such so that it may provide facts and figures necessary to
management for evaluating the performance by comparing it with the past figures, or figures
of other concerns or against the industry as a whole or other department of the same concern.

(vi) Capability of Presenting Information at the Desired Time:

The system must provide accurate and timely information so that it may be helpful to
management for taking decisions and suitable action for the purpose of cost control.

(vii) Necessary cooperation and participation of executives from various departments of the
concern is essential for development of a good system of cost accounting. Moreover,
management should have faith in the costing system and should also provide a helping hand
for its development and success.

(viii) The system of costing should not sacrifice the utility by introducing meticulous and
unnecessary details.

(ix) A carefully phased programme should be prepared by using network analysis for the
introduction of the system.

(x) Minimum Changes in the Existing Set Up:

The existing system of delegation and division of authority and responsibility must not be
disturbed with the costing system. As far as possible the system must be such so that it may
least disturb the existing organisational set up.

(xi) Uniformity of Forms:

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All forms and proformas etc necessary to the system should be uniform in size and quality of
paper. Higher efficiency can be obtained by using colour of the paper to distinguish different
forms. Printed forms should contain instructions as to their use and disposal. Forms should be
suitably designed for collection and dissemination of cost data.

(xii) Minimum Clerical Work:

The filling of the forms by foremen and workers should involve as little clerical work as
possible as most of workers are not well educated. To ensure reliable statistics, every original
entry should be supported by an examiners signatures.

(xiii) Efficient System of Material Control:

There should be an efficient system of stores and stock control as materials usually account
for a greater proportion of the total cost. A good method of pricing material issued to
production should be followed.

(xiv) Adequate Wage Procedure:

There should be a well defined wage procedure for recording the time spent by workers on
different jobs, for preparing the wage sheets and for the payment of wages. Thus the
introduction of well defined wage system will help to control the cost of labour.

(xv)Departmentalization of Expenses:

A sound plan should be devised for the collection, allocation, apportionment and absorption
of overheads in order to ascertain the cost accurately.

(xvi) Reconciliation of Cost Accounts and Financial Accounts:

If possible the Cost accounts and financial accounts should be interlocked into one integral
accounting scheme. If this is not possible the systems should be so devised that the two sets
of accounts are capable of easy reconciliation.

(xvii) External Factors:

The installation of a costing system mainly depends on internal factors of a firm, but external
factors may also affect the structure of the system. For example, cost accounting rules
applicable to certain industries as notified by the Central Government require certain cost

7
information to be developed and included in the books of accounts. Therefore, an ideal
system of costing should take care of internal as well as external factors.

(xviii) Duties and Responsibilities of the Cost Accountant:

Under a good system of cost accounting the duties and responsibilities of the cost accountant
should be clearly defined. The cost accountant should have access to all works and
departments.

The fundamental factors that a Cost Accountant should consider while introducing a
system of costing are:

(i) The existing organisation should be disturbed as little as possible.

(ii) There should be a gradual and smooth introduction of the system.

(iii) While over-elaboration of records should be avoided, it would be false economy to prune
out essentials and impair efficiency.

ELEMENTS OF COST

A cost is composed of three elements Materials, Labour and Expenses. Each of these can be
direct or indirect.

Material Cost: This is the cost of inputs supplied to an undertaking. For example, cotton
used in a cotton mill is a direct material. However, in many cases, though material forms part
of the finished product, yet it is not considered direct material. For example, nails used in
furniture, thread used in stitching garments are indirect material. The value of these materials
is so small that it is difficult and futile to count or measure them.

Labour Cost: This is the cost of remuneration (wages, salaries, commission, bonus etc).
Direct labour consists of wages paid to workers, directly, engaged in converting raw materials
into finished products. These wages can be identified with a particular product. Wages paid to
a machine operator is an example of direct wages. Indirect wages is of a general character
and cannot be, conveniently, identified with a particular cost unit. In other words, indirect
labour is not, directly, engaged in the production operation, but to assist or help in production
operation. Labour engaged in cleaning the workshop is an example of indirect labour.

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Expenses: All costs other than materials and labour are termed as expenses. Direct expenses
are those, which can be identified with and allocated to cost centres or units.

COST CENTRE AND COST UNIT

Cost Centre: A cost centre is a location, person or item or equipment (or group of these) for
which costs may be ascertained and used for purpose of control. Cost centre may be

1. a location (department like production department, sales department)

2. a person (salesman, foreman)
3. an item of equipment (a lathe machine or delivery van)
4. a group of those equipments (two automatic machines operated by one workman).

Importance: The determination of cost centre is very important for ascertainment of cost and
cost control. Cost accountant sets up cost centres to enable him to ascertain the costs, he
needs to know. The manager incharge of cost centre is held responsible for the purpose of
cost control. The size and number of cost centers are dependent upon the amount of
expenditure and requirements of management for cost control.

Cost Unit: Cost centre helps in ascertaining the cost by location, equipment or person. Cost
unit is a further step, which breaks up the cost into smaller sub-divisions and helps in
ascertaining the cost of a saleable product or service. A cost unit is a unit of product, service
or time in relation to which cost may be ascertained or expressed. For example, the cost of
steel is ascertained in terms of cost per tonne, cost of carrying a passenger in terms of per
kilometer.

A few examples of cost units in different industries are given below:

Industry Cost Unit

Cement Per Tonne
Textile Per Metre
Chemical Per Kg or Per
Tonne
Power Per Kilo watt/hour

IMPORTANCE OF COST ACCOUNTING

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The limitation of financial accounting has made the management to realize the importance of
cost accounting. The importance of cost accounting is as follows:

Importance to Management

Cost accounting provides invaluable help to management. It is difficult to indicate where the
work of cost accountant ends and managerial control begins. The advantages are as follows:

o Helps in ascertainment of cost

Cost accounting helps the management in the ascertainment of cost of process, product, Job,
contract, activity, etc., by using different techniques such as Job costing and process costing.

o Aids in Price fixation

By using demand and supply, activities of competitors, market condition to a great extent,
also determine the price of product and cost to the producer does play an important role. The
producer can take necessary help from his costing records.

o Helps in Cost reduction

Cost can be reduced in the long-run when cost reduction programme and improved methods
are tried to reduce costs.

o Elimination of wastage

As it is possible to know the cost of product at every stage, it becomes possible to check the
forms of waste, such as time and expenses etc., are in the use of machine equipment and
material.

o Helps in identifying unprofitable activities

With the help of cost accounting the unprofitable activities are identified, so that the
necessary correct action may be taken.

o Helps in checking the accuracy of financial account

Cost accounting helps in checking the accuracy of financial account with the help of
reconciliation of the profit as per financial accounts with the profit as per cost account.

o Helps in fixing selling Prices

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It helps the management in fixing selling prices of product by providing detailed cost
information.

Importance to Employees

Worker and employees have an interest in which they are employed. An efficient costing
system benefits employees through incentives planning their enterprise, etc. As a result both
the productivity and earning capacity increases.

Importance to creditors

Suppliers, investors financial institution and other moneylenders have a stake in the success
of the business concern and therefore are benefited by installation of an efficient costing
system. They can base their judgment about the profitability and prospects of the enterprise
upon the studies and reports submitted by the cost accountant.

Importance to National Economy

An efficient costing system benefits national economy by stepping up the government

revenue by achieving higher production. The overall economic developments of a country
take place due to efficiency of production.

Data Base for operating policy

Cost Accounting offers a thoroughly analyzed cost data which forms the basis of formulating
policy regarding day to day business

ADVANTAGES OF COST ACCOUNTING

The importance and advance of cost accounting are presented below:

1. Helps in controlling cost: cost accounting helps in controlling cost by applying some
techniques such as standard costing and budgetary control.

2. Provides necessary cost information: it provides necessary cost information to the

management for planning, implements and controlling.

3. Ascertains the total per unit cost of production: it ascertains the total and per unit cost of
production of goods and services that helps to fix the selling prices as well.

11
4. Introduces cost reduction programs: it helps to introduce and implement different cost
reduction programs.

5. Discloses the profitable and non profitable activities: it discloses the profitable and non
profitable activities that enable management to decide to eliminate or control unprofitable
activities and expand or develop the profitable activities.

6. Provides information for the comparison of cost: it provides reliable data and information
which enable the comparison of cost between periods, volume of output, determent and
processes.

7. Checks the accuracy of financial accounts: it helps checking the accuracy of financial
accounts. This is done by preparing cost reconciliation statement.

8. Helps invests and financial institutions: it is also advantageous to investment and

financial institutions since it discloses the profitability and financial position in which
they intend to invest.

9. Beneficial to workers: it is beneficial to workers as well since it emphasizes the efficient

utilization of labor and scientific systems of wages payment.

LIMITATIONS OF COST ACCOUNTING

Besides a number of advantages, cost accounting sufferers from a number of limitations.

Some of them are mentioned below:

1. Lack of uniformity: cost accounting lacks a uniform procedure. It is possible that two
equally competent cost accountants may arrive at different results from the same
information. Keeping this limitation in view, all cost accounting results can be as mere
estimates.

2. Conceptual diversity: there are a large number of conventions and flexible factors such as
classification of cost into its elements, issue materials on average or standards price,
apportionment of overhead expenses, arbitrary allocation of joint costs, division of
overhead into fixed and various and variable costs, division of cost into normal and
abnormal and controllable and non-controllable and adoption of marginal and standard
costs due to which it becomes difficult to have exact costs. In which a contacts, the
reliable of cost accounting might be low.

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3. Costly: there are many formalities which are to be observed by a small and medium size
concerned due to which the establishment and running costs are so much that it becomes
difficult for their concerned to afford us cost. Thus it can be used only by big concerned.

4. Ignorance of futuristic situation: the contribution of cost accounting for heading futures
situation has not been much for example, it is has not evolved so far any tool for heading
inflation situation.

5. Lack of double entry systems: under cost accounting. A double entry system is not
adopted that does not enable to checks the arithmetic's accuracy of the transaction and
locate the errors.

6. Developing stage: cost accounting is to development stage since its principle concepts
and conversions are not fully developed.

METHODS OF COSTING
Methods to be used for the ascertainment of cost of production differ from industry to
industry. It primarily depends on the manufacturing process and also on the methods of
measuring the departmental output and finished products. Different industries follow different
methods to establish the cost of their product. This varies by the nature and specifics of each
business. There are different principles and procedures for performing the costing. However,
the basic principles and procedures of costing remain the same. Some of the methods are
mentioned below:

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 Unit
costing
Unifor
Job
m
costing
costing

METHO
Multipl Contra
DS OF
e ct
COSTIN
costing costing
G

Proces
Batch
s
costing
costing
Operati
ng
costing

Different Methods of Costing

Here's a breakdown of each different method of costing:

Unit costing: This method is also known as "single output costing." This method of
costing is used for products that can be expressed in identical quantitative units. Unit
costing is suitable for products that are manufactured by continuous manufacturing
activity: for example, brick making, mining, cement manufacturing, dairy operations, or
flour mills. Costs are ascertained for convenient units of output. Hence, the simplest way
to describe unit cost is the amount of money it takes to produce one unit of whatever
you're talking about.

Job costing: Job costing involves the accumulation of the costs of materials, labour,
and overhead for a specific job. This approach is an excellent tool for tracing specific
costs to individual jobs and examining them to see if the costs can be reduced in later
jobs. An alternative use is to see if any excess costs incurred can be billed to a
customer. Job costing is used to accumulate costs at a small-unit level. For example,
job costing is appropriate for deriving the cost of constructing a custom machine,
designing a software program, constructing a building, or manufacturing a small batch
of products. Under this method, costs are ascertained for each work order separately
as each job has its own specifications and scope. Job costing is used, for example, in

14
 painting, car repair, decoration, and building repair. Job costing involves the following
accounting activities:

Materials. It accumulates the cost of components and then assigns these costs
to a product or project once the components are used.

Labour. Employees charge their time to specific jobs, which are then assigned
to the jobs based on the labour cost of the employees.

Overhead. It accumulates overhead costs in cost pools, and then allocates

these costs to jobs.

Job costing results in discrete buckets of information about each job, that the cost
accountant can review to see if it really should be assigned to that job. If a job is
expected to run for a long period of time, then the cost accountant can periodically
compare the costs accumulated in the bucket for that job to its budget, and give
management advance warning if costs appear to be running ahead of projections. This
gives management time to either get costs under control over the remainder of the
project, or possibly to approach the customer about a billing increase to cover some or
all of the cost overrun.

Contract costing: Some firms such as builders, construction contractors, civil

engineering firms, construction and mechanical engineering firms are engaged in
construction works such as construction of buildings, bridges, roads and so on. A
firm engaged in the construction works requires to know the total cost of the
construction work done. The total costs of the work help to find out the profit earned
from these works. The cost information about construction works helps to monitor and
evaluate the performance of contract work and to determine the total contract cost. Such
information is provided by a costing method known as contract costing.

Contract costing is the costing method applied to determine the cost of construction
work performed as per a customer's specification. Contract costing is also
called terminal costing as it terminates with the discharge of contract work. The
construction work is undertaken at the site allotted by the client. The contract sites vary
and are always outside the premises belonging to the clients. A separate code number is
allotted to each site where a number of contract works are undertaken. A contract

15
 account is maintained for each contract work to record the contract costs under contract
costing. Maintaining a contract account helps to find out the amount of profit earned
during a particular period since financial books do not report it separately. Normally, a
contract account is prepared at every year-end to determine the profit for the specified
period.

Difference between job costing and contract costing:

Batch costing: Batch costing is a form of specific order costing. Job costing refers to
costing of jobs that are executed against specific orders whereas in batch costing
items are manufactured for stock. A finished product may require different
components for assembly and may be manufactured in economical batch lots.

When orders are received from different customers, there are common products
among orders; then production orders may be issued for batches, consisting of a
predetermined quantity of each type of product. Batch costing method is adopted in
such cases to calculate the cost of each such batch.

Cost per unit is ascertained by dividing the total cost of a batch by number of items
produced in that batch. In order to do that a Batch Cost Sheet is prepared. The
preparation of Batch Cost Sheet is similar to that of Job Cost Sheet. This method is
mainly applied in biscuits manufacture, garments manufacture, spare parts and
component manufacture, pharmaceutical enterprises etc.

16
 This method of costing is used where units produced in a batch are uniform in nature
and design. For the purpose of costing, each batch is treated as an individual job or
separate unit. Industries like bakeries and pharmaceuticals usually use the batch
costing method.

Operating costing or service costing: CIMA defines the method Operating costing
applies where standardized services are provided by an undertaking.

Such undertakings are: transport concern (shipping, air, railways and motor transport
etc.), catering establishments (hotels, hostel, canteen etc.) and public utility
undertakings like gas, electricity, steam generating, hospitals, theatres, schools,
laundries etc. In many factories utility services like motor transport, power house,
hospital and canteen are departmentally run divisions which provide services to the
producing departments of the factory.

Operating costing is used by concern running diverse nature of activities, the cost
system is obviously different from that for manufacturing concerns. In this system a
suitable cost-unit is adopted, which is not a job or process but is related to service
rendered e.g. ton-kilometer, passenger-kilometer of transport services, unit of
electricity or kilowatt hour, cubic meter of gas etc.

Operating or service costing is used to ascertain the cost of particular service-oriented

units, such as nursing homes, busses, or railways. Each particular service is treated as
a separate unit in operating costing. In the case of a nursing home, a unit is treated as
the cost of a bed per day, while, for busses, operating cost for a kilometer is treated as
a unit.

Process costing: This kind of costing is used for products that go through different
processes. For example, the manufacturing of clothes involves several processes. The
first process is spinning. The output of that spinning process, yarn, is a finished product
which can either be sold on the market to weavers, or used as a raw material for a
weaving process in the same manufacturing unit. To find out the cost of the yarn, one
needs to determine the cost of the spinning process. In the second step, the output of the
weaving process, cloth, can also can be sold as a finished product in the market. In this
case, the cost of cloth needs to be evaluated. The third process is converting the cloth to

17
 a finished product, for example a shirt or pair of trousers. Each process that can result in
either a finished good or a raw material for the next process must be evaluated
separately. In such multi-process industries, process costing is used to ascertain the cost
at each stage of production. There are three types of process costing, which are:

Weighted average costs. This version assumes that all costs, whether from a
preceding period or the current one, are lumped together and assigned to produced
units. It is the simplest version to calculate.

Standard costs. This version is based on standard costs. Its calculation is similar to
weighted average costing, but standard costs are assigned to production units, rather
than actual costs; after total costs are accumulated based on standard costs, these
totals are compared to actual accumulated costs, and the difference is charged to a
variance account.

First-in first-out costing (FIFO). FIFO is a more complex calculation that creates
layers of costs, one for any units of production that were started in the previous
production period but not completed, and another layer for any production that is
started in the current period.

There is no last in, first out (LIFO) costing method used in process costing, since the
underlying assumption of process costing is that the first unit produced is, in fact, the
first unit used, which is the FIFO concept.

Multiple costing or composite costing: When the output is comprised of many

assembled parts or components, as with television, motor cars, or electronics gadgets,
costs have to be ascertained for each component, as well as with the finished product.
Such costing may involve different methods of costing for different components. As
various components differ from each other in a variety of ways such as price, materials
used and manufacturing process, a separate method of costing is employed in respect of
each component. It is multiple costing in the sense that more than one method of costing
is employed. Therefore, this type of costing is known as composite costing or multiple
costing.

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 Uniform costing: This is not a separate method of costing, but rather a system in
which a number of firms in the same industry use the same method of costing, using
agreed-on principles and standard accounting practices. Uniform costing is not a
particular method of costing. It is adoption of common accounting principles and in
some cases common methods by member companies in the same industry so that their
cost figures may be comparable. Uniform costing can be defined as the use by several
undertakings of the same costing principle and practices.

In other words, it is a technique or method of costing by which different firms of a field

or industry apply similar costing system so as to produce cost data which have
maximum comparability. Standard costs may be developed and cost-control is secured in
firm through mutual comparison.

Relative efficiency and inefficiencies in production may be identified and suitable steps
may be suggested to control and reduce the cost. The objectives of uniform costing are
to standardize accounting methods and to assist in determining suitable prices of
products of firms which adopt this method.

APPROACHES TO COST ACCOUNTING (TYPES/ TECHNIQUES OF

COSTING)
Method of costing is the process and practice of ascertaining cost. But types of costing is the
technique of analyzing and presenting cost in such a manner that helps in controlling cost and
taking managerial decision. Different cost accounting techniques are used in different
industries to analyze and present costs for the purposes of control and managerial decisions.
The generally-used types of costing are as follows:

19
 TECHNIQU
E OF
COSTING

ABSORPTI
MARGINAL STANDARD HISTORICA
ON
COSTING COSTING L COSTING
COSTING

Marginal costing: Marginal costing entails the allocation of only variable costs, i.e.
direct materials, direct labour and other direct expenses, and variable overheads to the
production. It does not take into account the fixed cost of production. This type of
costing emphasizes the distinction between fixed and variable costs. Marginal costing
technique divides cost into fixed cost and variable cost. It calculates cost of a product or
job only by taking variable cost into account. Fixed costs do not form a part of the total
cost. It allocates variable cost, i.e., direct material, direct labour, direct expenses and
variable overheads to the product or job. This is also known as 'variable costing'.

Absorption costing: In absorption costing, the full costs (that is, both fixed and variable
costs) are absorbed into production. Absorption Costing requires that a company
expense (write off) any selling & administrative costs for the period and the cost of
goods sold, which includes direct material, direct labor, and both variable and fixed
manufacturing overhead. The cost of goods sold per unit is all the variable production
costs per unit, but also added to the total fixed cost per unit sold. Absorption Costing
produces the highest income out of the three costing methods when the number of units
sold is less than the number of units produced because more costs are deferred to
inventory instead of being expensed immediately. Conversely, that means that
Absorption Costing has the lowest income when the number of units sold is greater than
the number of units produced. This is because the company will have to sell units that
are in inventory, meaning that the total fixed cost that they are assigning to their sales is
for all their production for the period and for some fixed costs from a previous period.

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 Absorption Costing has a glaring flaw: all else the same, increasing production will
increase net income. This is true because the fixed cost will be divided among more
units, lowering the cost of goods sold per unit. Absorption Costing is the standard
method of costing under GAAP because it follows the Matching Principle, all costs go
with their respective revenues. Another advantage of using Absorption Costing is that
you can set prices that cover the cost of goods sold per unit because it includes fixed
cost.

Standard costing: In standard costing, a cost is predicted in advance of production,

based on predetermined standards under a given set of operating conditions. Cost of a
product or job determined in advance on the basis of certain pre determined standard is
known as standard costing. This is the cost under a given set of operating conditions.
Periodical comparison of standard cost with the actual cost is made to detect variance, if
any, between the two and causes are analyzed for remedial measures. Standard costs are
compared with actual costs periodically, and revised to avoid losses due to outdated
costing.

Historical costing: Historical costing, unlike standard costing, uses actual costs,
determined after they have been incurred. Almost all organizations use the historical
costing system of accounting for costs. It refers to that system of cost accounting where
cost of a product or service is ascertained only after the cost has actually been incurred.
It implies determination of cost on the basis of actual cost and not on the basis of
standard or pre-determined cost. This system of accounting for cost is used by most of
the organisations.

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 CONCLUSION

The main object of traditional cost accounts is the analysis of financial records, so as to
subdivide expenditure and to allocate it carefully to selected cost centers, and hence to build
up a total cost for the departments, processes or jobs or contracts of the undertaking. The
extent to which the analysis of expenditure should be carried will depend upon the nature of
business and degree of accuracy desired. The other important objective of costing are cost
control and cost reduction. Cost Accounting may be regarded as a specialized branch of
accounting which involves classification, accumulation, assignment and control of costs.
The costing terminology of C.I.M.A, London defines cost accounting as the process of
accounting for costs from the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centers and cost units. In its widest usage,
it embraces the preparation of statistical data, the application of cost control methods and the
ascertainment of profitability of activities carried out or planned.

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 REFERENCES

College, Kathy Schwalbe, Ph.D., PMP, Augsburg (2012). Information technology project
management (Seventh edition. ed.). Boston, MA: Course Technology. ISBN 9781133526858.
Rad, P.F. (2002). Project Estimating and Cost Management. Management Concepts.
ISBN 9781567261448. Retrieved 17-11-2016.
"Magic Quadrant for IT Project and Portfolio Management". gartner.com. Retrieved
2015-09-14.
"Practical Project Cost Management with Twproject | Twproject's blog".
web.archive.org. Retrieved 17-11-2016.
http://www.mymanagementguide.com/project-cost-management-%E2%80%93-
definition-process-and-software/.
* Kathy Schwalbe (2014). Information Technology Project Management = Cengage
Learning. ISBN 978-1-285-84709-2..

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