This document provides an introduction to cost accounting. It defines cost accounting, cost accountancy, and costing, and distinguishes between cost accounting and financial accounting. Cost accounting provides internal management with cost information to aid planning, control, and decision making, while financial accounting provides external parties with financial statements. The objectives of cost accounting are to determine product costs, facilitate business planning and control, and supply information for decisions. Management needs cost information for pricing, product mix, and profit-volume decisions. The role of the cost accountant is to analyze costs, reconcile production to accounting, assist in new product development, identify cost improvements, and prepare cost analyses.
2. Intended LearningOutcomes
• At the end of the chapter, you will able to
• 1.1 identify the type of accounting
• 1.2 difference between Cost Accounting , Cost Accountancy and Costing
• 1.3 understand the Management information needs
• 1.4 identify the objectives of cost accounting
• 1.5 difference between Cost Accounting Vs. Financial Accounting
• 1.6 identify the role of cost accountant
4. Introduction
• Business needs continuous information regarding costs of
business activities to plan accurately for the future ,to
control business results, and to make a proper appraisal of
the performance of persons working in an organization.
• The fulfillment of these goals requires details about the
costs incurred and benefits (revenue) obtained which are
provide by cost accounting and management accounting.
5. Definitionsof costaccounting
• Cost accounting as a tool of management, provides management
with detailed records of the costs relating to products, operations
or functions. It estimated future costs for planning purpose or
actual costs for evaluating performance.
• The establishment of budgets , standard costs and actual costs of
operations, processes, activities or products and the analysis of
variances ,probability or the social use of funds.( C.I.M.A)
6. CostAccountancy
• Cost accountancy is application of costing and cost
accounting principles, methods and techniques to the
science , art and practice of cost control and ascertainment
of profitability as well as presentation of information for the
purpose of managerial decision making. (ICMA)
• Above definition includes costing, cast
budgetary control , cost control and cost audit.
accounting ,
7. Costing
• Costing is the “techniques” and “processes” of ascertaining
costs.
• The “technique” refers to principles and rules which are applied
for ascertaining costs of products manufactured and services
rendered.
• The “process” includes the day to day routine of determine costs
within method of costing (either job or process) adopted by
business entrepreneurs.
8. Objectivesof cost accounting
I. To determine product costs :- The total product cost and cost
per unit of product are important in making inventory valuation,
deciding price of the product and managerial decision making.
I. To facilitate planning and control of regular business
activity:- creation of useful cost data and information for the
purpose of planning & control and to establish balance between
actual and budgeted performance
II. To supply information for decision:- To provide data and
special analyses for short and long run decisions of a non recurring
nature.
9. Whymanagementneedcostinformation.
1. Cost accounting helps in determination and analysis of
cost of departments ,processes, jobs, product , sales
territories, sales order.
2. Cost accounting helps management in controlling cost
through accumulating and utilization of cost data
regarding different product , activity and function.
3. Cost information helps to make revenue decisions.
10. Cont.….
There are 3 revenue decision
a) Pricing :- in pricing new product and to make a
decision as to whether to lower or raise a price
b) Product Mix :- to make short term and long term
product mix decisions. For short term cost data used
to determine which product to push market , long
run the question of increasing and decreasing
capacity
c) Profit Volume decision :- the profit is mainly the
result of a combination of 3 factors namely cost,
volume ,selling price.
11. Cont.…
4. Cost accounting helps in making special cost studies to
management in formulating policies and plans directed
towards profitable operations.
5. Cost accounting assists and participates in the
formulating and execution of budgets and standards.
12. FinancialAccounting
• Financial accounting is concerned with proving information
to external users such as shareholders , creditors , financial
analysts ,labour unions .
• It preparation of financial statement which summaries the
results of operations for selected periods of time and show
the financial position of the business at particular dates
comply with generally accepted accounting principles
(GAAP).
13. Costaccountingvs. financial accounting..
Characteristic Financial Accounting Cost Accounting
Nature Classifies , records, present
and interprets in terms of
money , transaction and
events that are of a financial
character
Classifies, records, present
and interprets in a
significant manner the
material, labour and
overhead costs involved in
product & Service
Primary users of
information
Financial accounting
statements use external party
of business
Provide information to the
internal party of the
business
Accounting
System
Follows the double entry
system for recording ,
classifying ,summarizing
business transaction
May not be based on the
double entry system
14. Cont..
Characteristic Financial Accounting Cost Accounting
Accounting
Principles
Comply with GAAP Not bound to use GAAP.
It can use any
accounting technique or
practice which generates
useful information
Analysis of Profit Disclose the net profit or loss
of the business as a whole
Disclose profit or loss of
each product , job
service or division
Unit of
measurement
All information under
Financial accounting is on
terms of money
Cost accounting applies
any measurement unit
beside the monetary
unit( Labour hour,
machine hour)
Time Span For a definite period Prepared whenever
needed
15. Roleof CostAccountant
• Cost Accountant performs action as under:
i. To analyze material,labour and the overhead expenses
ii. To reconcile daily productions with accounting transaction
iii. To coordinate with R&D for production of new items
iv. To assist the controller in developing cost improvement
opportunities
v. To prepare the new product costing as well as the gross
profit analysis for the marketing
