Fundamentals of Cost Accounting

Cost Accounting, Cost and Costing

Cost Accounting is a business practice in which we record, examine, summarize, and study the company’s cost spent on any process, service, product or anything else in the organization. This helps the organization in cost controlling and making strategic planning and decision on improving cost efficiency. Such financial statements and ledgers give the management visibility on their cost information. Management gets the idea where they have to control the cost and where they have to increase more, which helps in creating a vision and future plan. There are different types of cost accounting such as marginal costing, activity-based costing, standard cost accounting, lean accounting. In this article, we will discuss more objectives, advantages, costing and meaning of costs.

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Cost Accounting

It is a process via which we determine the costs of goods and services. It involves the recording, classification, allocation of various expenditures, and creating financial statements. This data is generally used in financial accounting.

This helps us calculate the costs of the various goods. It also involves a suitable presentation of this data for the purposes of cost control and guidance to the management.

It deals with the cost of every unit, job, process, order, service, etc, whichever is applicable and includes the cost of production, cost of selling and cost of distribution.

Features of Cost Accounting

  • It is a sub-field in accounting. It is the process of accounting for costs
  • Provides data to management for decision making and budgeting for the future
  • It helps to establish certain standard costs and budgets.
  • provides costing data that helps in fixing prices of goods and services
  • Is also a great tool to figure out the efficiency of a unit or a process. It can disclose wastage of time and resources

Types and Classification of Cost Accounting

  • Activity Based Costing
  • Lean Accounting
  • Standard Accounting
  • Marginal Costing

Cost Accounting

Standard Accounting

Standard costing is a technique where the firm compares the costs that were incurred for the production of the goods and the costs that should have been incurred for the same.

Marginal Costing

This type of costing is based on the principle of dividing all costs into fixed cost and variable cost.

Fixed costs are unrelated to the levels of production. As the name suggests these costs remain the same irrespective of the production quantities.

Variable costs change in relation to production levels. They are directly proportionate. The variable cost per unit, however, remains the same.

Importance and Objectives of Cost Accounting

  • Classification of Cost
  • Cost Control
  • Price Determination
  • Fixing of Standards

Advantages

  • Measuring and Improving Efficiency
  • Identification of Unprofitable Activities
  • Fixing Prices
  • Price Reduction
  • Control over Stock
  • Evaluates the Reasons for Losses
  • Aids Future Planning

Meaning of Cost

How does one define with the cost of something? It is the amount to be paid for a good or service or the resources given in exchange for such good or service.

In commercial terms, the cost is the monetary valuation of the effort, materials, risks and opportunity costs all put together.

Cost is also defined as by the expenditure incurred to produce a given good or service. The cost will be the expenditure that is attributable to something.

Value is measured in terms of the usefulness of the product, the cost is measured strictly in monetary terms.

While cost is a very generic term, it can be classified further. All costs can be qualified as prime cost, sunk cost, factory cost, direct cost, indirect cost, etc. It is advisable to classify costs as it gives more information about it.

Meaning of Costing

Costing is essentially a technique via which we assign or costs to various elements of the business. It is a system of ascertaining costs.

We follow certain rules and principles to guide us in this ascertaining of costs. Some such methods of costing to ascertain these costs are historical costing, standard costing, etc.

  • Assigning variable costs according to the activity levels is direct costing
  • And assigning fixed costs irrespective of activity levels is known as absorption costing

Learn more about Different Sub-fields of Accounting here in detail.

Solved Question for You

Q: Define cost accountancy?

Ans: Cost accountancy is the application of the principles of costing and accounting. It is the science, art, and practice with which a cost accountant practices cost ascertainment and cost control.

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