Financial Accounting

The financial accounting records cash

and credit transaction of a business
according to the nature of expenditure
and income so at to enable the
perpetration of Profit and Loss Account
for a period and the Balance Sheet on a
specified date. The utility and
importance of financial account lie in
determining the gains and losses of the
business over a period and its state of
affairs as on a particular date.

(2) Cost Accounting

Cost accounting a system of accounting

for cost, originated only a century and
half ago. There is a mention of this
subject in “the Economy of Machinery
and Manufacture “ by Charles Babej,
published in 1932. A book “ Factory
Accounts” published by Emile Gareke
and I.M. Fells in 1987 included cost
accounting provisions, some of which
may reckon with the present day
working. With industrial revolution and
advent of factory system in the west,
concept of cost accounting started
developing in the last 20 years of the
19th Century. However, its proper
evolution and development can be
attributed to the 20th Century only.

The factory
responsible for the growth and
development of cost accounting are
Industrial Revolution, Scientific
Management, rationalization, World
wars, Fiscal Policies, Competitions, and
Price Control.

` “The application of costing and cost

accounting principles, methods and
techniques to the science, art and
practice of cost control and the
ascertainment of profitability. It
includes the presentation of information
derived therefore for the purpose of
managerial decision-making.

Cost Accounting

The Process of accounting for cost from

the point at which expenditure is
incurred or committed to the
establishment of its relationship with
cost center and cost units In this widest
usage it embraces the preparation of
statististical date the application of cost
control methods and the ascertainment
of the profitability of activities carried
out or planned

Difference between Cost & Financial

Accounting

The following are the main differences

between the two: -

Cost Accounts Financial Accounts

1. Kept by 1. Kept by all
businesses types of
engaged either in businesses
manufacturing or houses, big or
in rendering small whether
services where engaged in
the cost per unit trading
is to be manufacturing, or
ascertained. non-profit making
associations

2. Maintain full 2. Record all types

and detailed of expenses and
records incomes and also
pertaining to all items of profit
the three appropriation.
elements of cost- However, they do
viz. Materials, not keep detailed
labour and records of
expenses elements of cost.

3. Provide general
3. Provide data information to
 and reports to management and
management for outside parties in
cost- the form of Profit
ascertainment & Loss A/c and
planning, control, Balance Sheet, of
and decision- the business an
making. as whole.
4. Do not show
4. Ascertain the profit/Loss on
cost of each each product job,
product, job or or order
order and then individually.
show profit/loss
made on each.
5. Provide
5. Provide operating net
information to results and
management as financial position
and when at the end of
desired, daily, financial year.
weekly, monthly,
quarterly, etc.
6. Show historical
6. To calculate the costs, i.e. they
cost, the indirect include expenses
expenses having actually
included therein been incurred in
are based on the financial
estimates. year.

7. Greater control 7. Greater

is exercised on emphasis is laid
materials and on cash and
 stores, labour financial position.
and overhead They do not
costs by attach that
budgetary control importance to
and standard control of
costing, No materials, labour
emphasis is given and overheads.
to cash in-hand
and Bank
transactions. 8. No correct
tender prices can
8. As the cost is be quoted.
available, it is
easier to fix
selling price and 9. Such
quote for comparison of
tenders. costs of
individual
9. The production production is not
costs of a period easy.
can be compared
with pervious
corresponding
period and the 10 The relative
difference efficiency of
analyses. workmen plants,
etc., cannot be
10. Provide easily judged.
information on
the relative
efficiencies of 11 Stocks are
plant, machinery, valued at cost
labour and price or market
 departments. price which ever
is lower.
11. Stocks are 12 They form basis
valued at costs. for external
transactions
12. These accounts also, and record
are for internal receipts payment
transactions and and credit
do not form the transactions.
basis of receipts
and payment to 13 It is almost
outside parties. necessary to
maintain this
13. The Companies accounting to
Act has made it run business. To
obligatory for meet the
certain industries requirements or
to maintain Cost Companies Act,
accounting. and Income-tax
Otherwise it is Act, it is
voluntary to obligatory to
maintain cost keep them.
them.
14 Not much use is
14. Charts, graphs, made of such
diagrams, presentation in
statements etc. this system.
are much used in
this system for
informatory
report to
management.
 Techniques and Methods of Costing

Techniques are
different from Methods. A technique is
the way of doing a certain work. And in
the present case, the manner of
ascertaining cost is the technique of
costing. There are several techniques of
which any or all of them can be applied
to find out the costs but possibly with
different results. So wisdom lies in
choosing the most appropriate one for
better guidance. A student may choose
to solve a question or mathematics by
applying arithmetic or algebraical or
geometric formula or by drawing a
graph and reading the result from it.
Assuming these to be the different
techniques of solving a question, it is
open to the intelligence of the student
to choose the right one for a correct
solution.

The Methods of
ascertaining costs very from business to
business depending upon the nature of
industry. The proper selection of the
method of costing I dependent upon the
nature of the type of business and so
the undertaking engaged in similar
industry. Employ the same method of
costing appropriate to them. The Banks,
Insurance companies, Railways and the
ordinary traders keep their financial
accounts based on double entry
principle, but they do so in different
forms as the set of books used by one is
not suitable to the other owing to
difference in nature of the business.
Similarly, although the costing
principles are the same, yet the
methods of ascertaining costs are
different and their application depends
upon the nature of business.

Types and Techniques of Costing

1. Historical costing. “The

ascertainment of costs after they
have been incurred; - I.C.M.A
Historical costs are, therefore,
‘postmortem’ cost as under this
method all the expenses incurred on
the production are first incurred and
then the costs are ascertained.
2. Standard costing. “The preparation
and use of standard costs, their
comparison with actual costs and
the analysis of variances to their
causes and points or incidence. –
I.C.M.A.
Here the standards
are first set and then they are
compared with actual performances
the difference between the standard
and the actual is known as the
variance. The variances are analysed
to find out their causes and also the
points and variable costs - I.C.M.A

3. Marginal costing. “ The

ascertainment of marginal costs and
of the effect on profit of changes in
volume or type of output by
differentiating between fixed costs
and variable costs.’ – I.C.M.A
The fixed costs are
those, which do not change but
remain the same,
With the increase
or decrease in the quantum of
production. The variable costs are
those, which do change proportionately
with the change in quantum of
production.
The marginal
costing takes into account only the
variable costs to find out ‘marginal
cost’. The difference between Sales and
Marginal costs is known as
‘Contribution’ and contribution is an
aggregate of Fixed costs and Profit /
Loss. So the fixed costs are deducted
from the contribution to find out the
profits. Marginal costing is a technique
to ascertain the effect on profit by the
change in the volume of output or by
the change in the type of output.

4. Direct Costing “The practice of

charging all direct costs to
operations,
Processes or products
leaving all the indirect costs to be
written off against profit in the period in
which they arise – I.C.M.A
Here the direct costs
are they variable costs. This technique
is similar to ‘Marginal Costing except
that some fixed costs could be
considered to be the direct costs in
appropriate circumstances.

5. Absorption costing. “The practice of

charging all costs both variable and
fixed to operations p recesses or
products. “ – I.C.M.A.
This is the
traditional technique as opposed to
Marginal or Direct costing techniques.
Here both the fixed and variable costs
are charged in the same manner.

6. Uniform Costing – “The use by

several undertaking of the same costing
principles and/or practices’ – I.C.M.A
Here several similar
undertaking joins together to adopt a
common approach to costing problems.
They adopt the same method of costing
and the same set of books in order to
compare the performance of one with
the other and thus to derive the benefit
of one’s performances by the other.

Methods of Costing

The Methods of costing can be divided

into three main groups.
1. Job Costing
2. Process Costing and
3. Farm Costing.

1. Job Costing. The job costing methods

are applicable where the unit of
manufacture is one and complete in
it self. They include printer job
foundries tool manufactures,
contractors, etc. the following
methods are included in Job costing
(I) Contract Costing. These methods are
applied in undertaking erecting
 buildings or carrying out
constructional works, e.g., House
building ship Building. Civil
Engineering contracts here the cost
unit to one and completed in it self.
The cost unit is a contract, which
may continue for over more then a
year. It is also known as the
Terminal costing since the works are
to be completed within a specified
period as per terms of contract or
agreement executed by the
contractor and the contract.
Contracts can by differentiated
from jobs in as much as the
Contracts are carried out outside the
factory and generally are of a long-
term while jobs are carried out
inside the factory and are of a short
duration. If an order is placed with
the printers to Invitation cards, it is
a job one and complete in itself and
meant only of the person who has
placed the order. This job-order is
executed inside the press and the
completion of the order takes a
short time as against the contract,
which may take years.

(ii) Batch Costing. In this method a

batch of similar or identical
products is treated as a job. Here
the unit of cost is a batch or a
 group of products. Costs are
collected and analysed according
to batch numbers and the costs
are ascertained batch wise. This
method is applied in
pharmaceutical industries where
medicines or injections are
manufactured batch wise or in
general engineering factories
producing components in
convenient batches.

2. Process Costing, Process costing

method is applicable to those industries
manufacturing a number of units of
output requiring processing, Here an
article has to undergo two or more
processes for reaching the stage of
finished goods and so the finished
goods of the preceding process are
treated as raw material for the
succeeding process till completion. The
cost unit is per article. Per kg. Per ton
or the number comprising one unit, e.g.,
I M bricks etc,; and this method is
applicable to chemical industries
producing producing, for example soap,
vegetable ghee, edible or nonedible
oils, paints, varnishes, etc., or to
refineries or to gas and electricity
generating concerns.
 The following methods are included
in process costing:

(i) Single or Output costing. This

method is used where the
production is uniform and consists of
only a single product. The cost is
ascertained per unit of output. The
units are identical to each other and
are the standard ones. Where the
products manufactured are of
difference grades, the costs of
products are ascertained gradewise
and the cost per unit determined by
dividing the total cost of each grade
by the number of articles of that
grade. The method is applied o
industries like mining, quarries,
flourmills, steel works etc. where
the cost per unit is required to be
ascertained.

(ii) Operation Costing; in the operation

method, the cost of each operation
in the process of production is
ascertained. This method can
suitable by applied to such
industries where mass production of
repetitive nature goes on.
(iii) Operating Costing, This method is
applied to those undertaking which
do not manufacture goods but which
render services, e.g. the Transport
 companies, Railways, Hotels for
lodging, Canteens, Hospitals,
Electricity and Water supply
companies. The cost unit in case of
transport companies and Railway
can be per Passenger-km. Or per
ton-km., for Hotel- per room, for
canteens – per meal, for hospital –
per patient, and so on. The total
units divide the total cost of
providing service and thus cost per
unit is obtained.

(iv) Departmental Costing; this method

is applicable where the cost of a
department or a cost-centre is
required to be ascertained. This is
similar to operation costing. Here
the total cost of a department is
divided by the total unit
manufactured in that department to
know the cost per unit of the output.
This method is good for a
comparative study of the identical
costs of different departments.

(v) Composite or Multiple Costing.

Where more than one method are
used in conjunction, the method
becomes a Composite or Multiple
Costing Method, In the production of
radio, television, moter-car,
 aeroplanes, a variety of
components- some based on one
method and the others on a different
method of costing – are produced
and then assembled. Since more
than one method of costing have
been applied the method in such a
case is known by the name of
composite or Multiple Costing
Method.

3. Farm Costing. Agriculture is an

industry and its product has a cost
composed of material, Labour and
overheads But unlike secondary
industries, agriculture or or farming is
dependent upon factors like soil, sun air
and water besides the techniques
required to obtain the product from the
land. The fertility of soil nature of
seeds. Application of manures and
fertilizers, timely watering, immunity
from insects, pests and frosts make this
industry different from others and so
the method of costing applicable to
farming is different form other methods.
The method applied to ascertain the
cost of farm-products is known as Farm
costing.