Definition of Cost

Cost may be define as the price of any asset when one company purchases it or it may
the expenses for getting services. So, we can say that cost is total amount which is
sacrificed for getting the goods, services and assets.

Definition of Costing

Costing is technique to determine the cost. It involves the process and method to
classify and analysis of different expenditures.

Definition of 'Cost Accounting’:-

A type of accounting process that aims to capture a company's costs of production by

assessing the input costs of each step of production as well as fixed costs such as
depreciation of capital equipment. Cost accounting will first measure and record these
costs individually, then compare input results to output or actual results to aid company
management in measuring financial performance

Explains 'Cost Accounting’:-

While cost accounting is often used within a company to aid in decision making,
financial accounting is what the outside investor community typically sees. Financial
accounting is a different representation of costs and financial performance that includes
a company's assets and liabilities. Cost accounting can be most beneficial as a tool for
management in budgeting and in setting up cost control programs, which can improve
net margins for the company in the future.

Types of cost accounting

1 Standardized or standard cost accounting

2 Lean accounting

3 Activity-based costing

4 Resource consumption accounting

5 Throughput accounting

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1. Standard cost accounting

In modern cost accounting, the concept of recording historical costs was taken further,
by allocating the company's fixed costs over a given period of time to the items
produced during that period, and recording the result as the total cost of production.
This allowed the full cost of products that were not sold in the period they were
produced to be recorded in inventory using a variety of complex accounting methods,
which was consistent with the principles of GAAP (Generally Accepted Accounting
Principles). It also essentially enabled managers to ignore the fixed costs, and look at
the results of each period in relation to the "standard cost" for any given product.

2. Lean accounting

Lean accounting has developed in recent years to provide the accounting, control, and
measurement methods supporting lean manufacturing and other applications of lean
thinking such as healthcare, construction, insurance, banking, education, government,
and other industries. Lean Accounting does not require the traditional management
accounting methods like standard costing, activity-based costing, variance reporting,
cost-plus pricing, complex transactional control systems, and untimely & confusing
financial reports.

3. Activity-based costing

Activity-based costing (ABC) is a system for assigning costs to products based on the
activities they require. In this case, activities are those regular actions performed inside
a company. "Talking with customer regarding invoice questions" is an example of an
activity inside most companies. Accountants assign 100% of each employee's time to
the different activities performed inside a company (many will use surveys to have the
workers themselves assign their time to the different activities). The accountant then
can determine the total cost spent on each activity by summing up the percentage of
each worker's salary spent on that activity.

4. Resource consumption accounting

Resource Consumption Accounting (RCA) is formally defined as a dynamic, fully

integrated, principle-based, and comprehensive management accounting approach that
provides managers with decision support information for enterprise optimization. RCA

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is a relatively new, flexible, comprehensive management accounting approach based
largely on the German management accounting approach Grenz plan kostenrechnung
(GPK) and also allows for the use of activity-based drivers.

5. Throughput accounting

As business became more complex and began producing a greater variety of products,
the use of cost accounting to make decisions to maximize profitability came into
question. Management circles became increasingly aware of the Theory of Constraints
in the 1980s, and began to understand that "every production process has a limiting
factor" somewhere in the chain of production. As business management learned to
identify the constraints, they increasingly adopted throughput accounting to manage
them and "maximize the throughput dollars" (or other currency) from each unit of
constrained resource. Throughput accounting aims to make the best use of scarce
resources (bottle neck) in a JIT environment.

Objective of Cost accounting:-

1. To determine the cost

It is the objective of cost accounting that cost accountant has to determine the cost
because, after this cost per unit, price per unit can be calculated and product can be sold
in market.

2. To analyze of cost

Under this objective, cost is calculated after analyze which is done in cost sheet by
knowing different elements and writing in specific head.

3. To reduce the Wastage

Cost accounting’s main objective is to reduce the wastage, Wastage may be in material,
labour cost or overhead cost. Cost accountant makes cost sheet and after this he
compares it with standard cost and with this can find at where wastage are incurred and
after this he can reduce it by making proper control.

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4. Provide cost data

there are large no. of previous records of cost of different products are available, if cost
accounting is maintained by accounting department. It can be given to other department
for taking decision. It is another objective of cost accounting.

5. Ascertain the profitability

We know that cost accounting is to determine cost and with this cost we can find profit
margin.

6. Control the cost

Cost accounting’s objective is to control the cost. For example Over stocking and under
stocking is loss of money by using cost control techniques in stock maintaining, we can
keep optimum level of stock to control the cost of stock.

7. Advising the management

Cost accountant can advice to management for achieving the objectives of cost
accounting.

♠ At what cost, should any asset show in books of company?

♠ He will suggest how many cost centers are needed for effective control over
cost.

♠ He can solve different cost related problems in the company.

THE NATURE OF COST ACCOUNTING

In the planning phase cost accounting deals with the future. It helps management the
budget the future of predetermined materials cost wages and salaries and the other cost
of manufacturing and marketing products. These costs might be used to assist in setting
price and disclosing the profit that will the result considering competition and other
economics conditions. Cost information is also providing to add management with the
problem such as capital expenditure decision expansion facilities for increased sales or
production nake-or-buy decision or purchase-or-less decision.

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In the control phase cost accounting deals with the present accounting current results
with predetermined standards and budget cost control to be effective depends up on
proper cost planning for each activity function and condition. Via the cost accounting
media management is informed frequently of those operating functions that fail to
contribute their share to the total profit or that perform inefficiently thereby leading to
profit erosion.

Periodically generally and the end of the fiscal period cost accounting deal with the past
cost of the purpose of the profit determination and thereby with the allocation of
historical cost to period of time. At this point cost accounting procedure is particularly
concerned with the application manufacturing cost to units of product to be capitalized
in the ending inventory and transferred to cost of goods sold as shipments are made.

Scope of cost accounting:-

The scope of cost accounting is very wide. There are lots of techniques, tools,
procedures, processes; programs are used in cost accounting for calculating cost and its
control. But basically, we divide its scope within three major parts.

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1. Cost Ascertainment

In this region of cost accounting, cost accounting collects product's material, labor and
overhead cost and try to calculate total and per unit cost of product. This total cost
calculation will be based on historical or standard or estimated basis. After this, cost
accountant will use any method of costing like specific order costing, operation costing,
and direct costing technique. These techniques and methods may be used for
calculating different nature products in same organization.

2. Cost Records

In this part of cost accounting, cost accountant maintains cost books, vouchers, ledgers,
reports and other cost related documents for future comparison and reference. It will
also be under the scope of cost accounting.

3. Cost Control

This is the end boundary of cost accounting scope. In this division, cost accountant
used different techniques and methods for controlling the cost. Save One Rupees in the
cost of product means we have earned one rupees in the production of goods. So, Cost
accountant uses budgetary control, standard costing, break even point analysis and
many other techniques for controlling the cost.

Classification of Costs

Cost classifications are needed for the development of cost date that is useful to
management. Hence costs are being classified:

1) By nature. 2) By product.

3) By period. 4) By behavior.

5) By departments. 6) Common or joint costs.

7) For planning and control 8) For analytical processes.

1. Natural Classification of Costs

The process of classifying costs and expenses begin with total cost, which may be
thought of as all costs or deduction from sales before income tax calculation. In a

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manufacturing concern, total operating cost is divided into (a) manufacturing cost and
(b) commercial cost. Manufacturing cost, also named as production cost or factory cost,
is the sum of three elements; direct material, direct labor and factory overhead (FOH).
Commercial expenses are further classified into two categories; marketing expenses
and administrative expenses.

2. Classification by Product:

The elements of manufacturing costs are direct material, direct labor and factory
overhead.

Direct material and direct labor are combined into another classification called prime
cost. Direct labor and factory overhead can be combined into a classification named as
conversion cost, representing the cost of converting direct materials into finished
products. Direct materials are all those materials that form an integral part of the
finished product and can be directly included in calculating the cost of the product.
Direct labor is the labor applied directly to the materials comprising the finished
products. Factory overhead may be defined as the cost of indirect materials, indirect
labor and all of the other manufacturing costs that cannot be charged to specified units,
products or jobs.

3. Classification with respect to Accounting Period:

In this format, expenditures can be divided into two broad classes; (a) Capital
expenditures and (b) Revenue expenditures.

A capital expenditure is intended to benefit future periods and is classified as an asset.

On the other hand, revenue expenditure benefits the current period and is known as
expense. An expenditure classified originally as an asset will ultimately flow into the
expense when the asset is either consumed or charged off.

4. Classification by Behavior:

Some costs vary directly in relation to changes in volume of output while others, as
they incurred in relation to time, remain more or less fixed in amount. Unless a cost
system pays due regard to this distinction, costs accumulated and reported for planning
the company’s strategy or for costing individual products or services will not be of
material value to management.

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5. Classification by Departments:

A factory is generally organized along departmental lines for production purposes. This
factory departmentalization is the basis for the important classification and subsequent
accumulation of costs by department to achieve (a) cost budgeting with responsibility
accounting and (b) a great degree of reliable costing. The departments of a factory
generally falls in two categories (1) Producing departments and (2) Service
departments.

6. Common or Joint Costs:

Considerable confusion exists with regard to the correct usage of these two costs
classifications. Common costs are costs of facilities or services employed in two or
more accounting periods, operations, commodities or services, For example, a capital
expenditure, intended to benefit future periods is classified as an assert. Subsequently,
the cost of the asset flows into the expense stream as the asset is consumed or charged
off. Since the asset benefits several accounting periods, the cost must arbitrarily be
allocated or shared among the periods. Depreciation of a building is a good example.

7. Costs for Planning & Control:

A company cost information system provides the data required for the preparation and
operation of the budget and for establishing standard costs. In many companies,
predetermining or estimating factory overhead constitutes the initial step towards a
budget program. Standard costs constitute the basic accounting tool which aids in the
solution of managerial problems. The measurement of variances provides management
with necessary information and to complete standard costs services to management
should include systematic, day by day reports relaying deviation information which
requires the attention of the management.

8. Costs for Analytical Purposes:

Costs as the basis for the analysis are the estimated costs which may be incurred if any
one of several alternative courses of actions is adopted. Different type of costs involves
varying kinds of considerations in managerial analysis for decision making. When
management is faced with the problem of abandoning one product and substituting
another, the decision will demand the consideration of opportunity costs.

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Cost Classification diagram