Introduction and Context Setting

Cost Accounting

Session 1

Course Objective
To understand Generally Accepted Cost Accounting
Principles and Techniques for identification, analysis
and classification of cost components to facilitate
managerial decision making.

Learning Outcome
Students are expected to demonstrate knowledge,
understanding, application and analysis of concepts
relating to, cost accounting, preparation of cost
statements, techniques in cost accounting and use
of these techniques in business decision making.
Cost Accounting

Session 1

Topics
1. Business
2. Meaning of Profit
3. Various Functions in a Business
4. Financial Accounting
5. Cost Information
6. Meaning of Cost
7. Importance of Cost & Cost Information
8. Cost Accounting
9. Cost Accounting Features
10. Costing & Cost Accounting
11. Financial Accounting & Cost Accounting
12. The Institute of Cost Accountants of India ICAI
13. ICAI History
14. ICAI Objectives
15. Cost Audit
Cost Accounting

Session 1

Business
A commercial activity engaged in as a means of livelihood or profit, or an
entity which engages in such activities.
An organization or economic system where goods and services are
exchanged for one another or for money.
Every business requires some form of investment and enough customers to
whom its output can be sold on a consistent basis in order to make a profit.
Businesses can be either for profit or not-for-profit and these can either be
privately owned or state-owned. An example of a corporate business is
PepsiCo, while a family run catering business is a private enterprise.
For profit business have profit making as their objective.

Cost Accounting

Session 1

Meaning of Profit
A financial benefit that is realized when the amount of revenue gained from a
business activity exceeds the expenses, costs and taxes needed to sustain
the activity.
Any profit that is gained goes to the business's owners, who may or may not
decide to spend it on the business

Cost Accounting

Session 1

Various functions in a business

Materials i.e., Raw Materials sourcing, procurement, storing
Labour / Employee identification, selection, on boarding, engagement,
motivation, retention, reward, termination.
Manufacturing technology, machinery.
Maintenance
Research & Development
Marketing & Sales
Human Resource Management / Industrial Relations / Administration
Finance / Accounting Financial & Cost - / Company Secretarial
Information Technology / Technology
Top Management
Board of Directors.
Owners / Shareholders
Cost Accounting

Session 1

Financial Accounting
A process by which transactions of revenue, expenses, assets and
liabilities of the business are recorded. Recording is on accrual basis and in
a manner compliant with the accounting standards.
All recorded transactions are finally summarized in financial statements.
Components of financial statements are Balance Sheet, Statement of Profit
& Loss, Statement of Cash Flows, Statement of Changes in Equity and the
Notes comprising significant accounting policies and other mandatory
disclosures.
Financial Statements thus provide information about, financial performance,
financial position, cash flows of business.
Accounting Standards prescribes overall requirements for presentation of
financial statements and guidelines for their structure.
Cost Accounting

Session 1

Cost Information
Cost information is (generally) embedded in financial accounting process.
Cost information either needs to be recorded separately or culled out of
financial accounting information.
This is essential for managerial decision making.

Cost Accounting

Session 1

Meaning of Cost
Cost is a measurement, in monetary terms, of the amount of resources
used for the purpose of production of goods or rendering services Cost
Accounting Standard 1 Classification of Cost.
Manufacturing of goods or rendering services involves consumption of
resources. The type of cost often referred to in the costing system depends
on the purpose for which cost is incurred. For example, material cost is the
price of materials consumed for manufacturing a product or for rendering a
service.
An young business school graduate has passion for musical instruments and
would like to set up a manufacturing unit say, for manufacturing and selling
piano. What are the challenges (contextual) he has to face.

Cost Accounting

Session 1

Objectives of Cost Information / Cost Accounting

Determine Selling Price of Product (s) / Service (s)
Right Pricing is important as otherwise, profitability of the enterprise,
competitiveness, existence will be threatened.
Controlling Cost
Techniques such as budgetary control, standard costing, inventory control aid
cost control.
Providing information for managerial decision making.
Management needs data / information to decide whether to make or to buy,
impact of increase / decrease on profit at various volume of production / sales,
shut down or continue manufacturing at a loss, repair or replace.
Ascertaining costing profit
Matching cost and revenue per cost accounting helps to ascertain costing profit.
Facilitating in preparation of financial & other statements

Financial statements are generally prepared in certain periodicity say

monthly. Costing information can be made available at short notice.
Cost Accounting

Session 1

Importance of Cost Information

To Management
Helps ascertainment of cost, aids price fixation, helps cost reduction, waste
elimination, identifying unprofitable activities, helps preparation of tender
estimates.
To Employee
An effective cost information system helps workers / employees to fix a proper
incentive plan. This helps in increasing productivity and earnings.
To Creditors
Creditors can take a call to lend / not to lend based on the their judgement about
their profitability or otherwise.
To National Economy
Cost information helps in increasing Governmental Revenue thru higher
production and cost information helps Government formulating policies.

Cost Accounting

Session 1

Cost Accounting
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 Wheldon.
Cost accounting relates to the collection, classification, ascertainment of cost
and its accounting and control relating to the various elements of cost.
It establishes budgets, standard costs and actual cost of operations, processes,
departments or products and the analysis of variances, profitability and social
use of funds.

Cost Accounting

Session 1

Cost Accounting - Features

1. It is a process of accounting for costs Cost book keeping
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 of products, processes and jobs.
5. It establishes budgets and standards so that actual cost may be compared
to find out deviations or variances Cost Analysis
6. Cost control and cost reduction
7. 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 Cost Reporting

Cost Accounting

Session 1

Costing & Cost Accounting

S.No.
1.

2.

3.

Basis

Costing

Cost Accounting

Nature

It is a technique and process of Regarded as a specialized

ascertaining costs
branch of accounting

Scope

Costing
techniques
includes
Involves
classification,
principles and rules which govern
accumulation, assignment and
the procedure of ascertaining the
control of costs.
cost of product / services.

Process

Involves
establishment
of
The Process of Costing consists of
budgets, standard costs, actual
routines of ascertaining costs by
costs of operation, recording,
historical
costing,
standard
classification and allocation of
costing, marginal costing.
expenditure.

Cost Accounting

Session 1

Financial Accounting & Cost Accounting

S.No.

1.

2.

3.

Basis

Financial Accounting

Cost Accounting

Objective

Provides
information
about
financial performance, financial
position, cash flows and movement
in owner equity.

It
records,
classifies
and
interprets
in
a
significant
manner, material, labour and
overhead cost.

Nature

It classifies records, presents and Provides information on cost to

interprets transactions in terms of control cost and for decision
money.
making on cost.

Recording
Records historical data.
Of Data

Cost Accounting

Records
and
presents,
estimated / budgeted data.
Makes use of both historical
costs and predetermined costs.
Session 1

Financial Accounting & Cost Accounting

S.No.

Basis

4.

Analysis
of Costs
and
Profits

5.

Time
Period

Financial Statements are usually

Cost reports are prepared as
prepared for a definite period say
and when required.
one year.

6.

Formats

A specified format is used for

There are no set formats for
presentation
of
financial
presentation of information
statements.

7.

Users

Cost Accounting

Financial Accounting
Shows Profit
organisation.

All stakeholders

or

Loss

for

Cost Accounting
an

Provides details of cost and

profit for each product, process,
job, contract.

Internal
Management
Government.

&

Session 1

The Institute of Cost Accountants of India - ICAI

History of the Profession
World War II the driver.
Industrialisation & Government Policies
ICAI (formerly known as The Institute of Cost & Works Accountants of India) first formed in
1944 as a company under The Companies Act with the objective of promoting, developing and
regulating the profession of cost accountancy.
On 28 th May 1959, the Institute was established as a statutory body under an act of the
Parliament.
ICAI is the only recognised statutory professional organisation and licensing body in India
specialising exclusively in Cost and Management Accountancy.
A Cost Accountant is a person who offers to perform or perform services involving the costing
or pricing of goods and services or the preparation, verification or certification of cost
accounting and related statements.
The head office is situated at 12, Sudder Street, Kolkata 700 016 and operates through four
regional councils are Kolkata, Chennai, Delhi and Mumbai as well as through a number of
important chapters situated elsewhere in India and abroad.

Cost Accounting

Session 1

The Institute of Cost Accountants of India - ICAI

Objectives of ICAI
Inter alia

To develop the Cost and Management Accountancy function as a powerful

tool of management control in all spheres of economic activities.
To promote and develop the adoption of scientific methods in cost and
management accountancy.
To develop the professional body of members and equip them fully to
discharge their functions and fulfil the objectives of the Institute in the
context of the developing economy.
To exercise supervision for the entrants to the profession and to ensure strict
adherence to the best ethical standards by the profession.

Cost Accounting

Session 1

Cost Audit
The Central Government has prescribed certain class of companies to
maintain record of utilisation of material, labour and other items of cost (Cost
Records)
The Central Government has prescribed, companies for which cost records
have been prescribed and which have a certain net worth / turnover to have
the cost records audited by a Cost Accountant

Cost Accounting

Session 1

Thank You

Cost Accounting

Session 1