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UNIVERSITY INSTITUTE OF LEGAL STUDIES
PANJAB UNIVERSITY, CHANDIGARH
PROJECT
ACCOUNTANCY
Topic:- Introduction to Cost Accounting- Meaning,
Nature, Scope, Significance, Objectives, Advantages,
Disadvantages, Steps and Difference between Cost
Accounting and Financial Accounting.
Submitted By:- Submitted To:-
Name:- Jiya Beniwal Ms. Abha Sethi
Roll No.:- 191/19
Course:- B.Com.LL.B.(Hons.)
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ACKNOWLEDGMENT
I would like to express my special thanks of gratitude to my teacher Ms.
Abha Sethi for her able guidance and support in completing my project.
I would also like to extend my gratitude to the director of the
department Prof. Dr. Rajinder Kaur, for providing me with all the
facilities that was required.
Jiya Beniwal
B.Com.LL.B.[Hons.]
Roll no.- 191/19
Section- D
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CERTIFICATE
This is to certify that this Constitution project is my original work
performed under the guidance of Ms. Abha Sethi. I affirm that none of
the sections of the project have been submitted earlier.
Jiya Beniwal
B.Com.LL.B.[Hons.]
Roll no.- 191/19
Section- D
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INDEX
Sr.No. PARTICULARS PAGE NO.
1 Meaning of Cost Accounting, Nature, 5-6
Significance, Meaning of cost accountancy.
2 Scope of Cost Accounting. 7
3 Objectives of Cost Accounting. 8-9
4 Advantages and Disadvantages of Cost 9-13
Accounting.
5 Steps of Cost Accounting. 13-16
6 Difference Between Cost And Financial 16-18
Accounting.
7 Bibliography 19
INTRODUCTION TO COST
ACCOUNTING
MEANING OF COST ACCOUNTING:-
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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. 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.
SIGNIFICANCE:-
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.
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.
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MEANING OF COST ACCOUNTANCY:-
Cost Accountancy is the is 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 is the science, art
and practice of the of a cost accountant. Cost accountancy has a wider
meaning as compared to the term cost accounting. It includes:-
1) Cost Accounting:- It is the process of accounting foe costs.
2) Costing:- It is the process and technique of ascertaining costs.
3) Cost Control:- It aims at guiding the actual performance towards
the line of targets.
4) Cost Reduction:- It is a planned positive approach to reduce
expenditure.
5) Cost Audit:- It is the verification of cost accounts and a check on
the adherence to the cost accounting plan.
NATURE OF COST ACCOUNTING:-
Cost Accounting is a practice of cost control which is as follows:-
1) Cost Accounting is a branch of systematic knowledge that is
discipline by itself. It consists it’s own principles, concept and
conventions which may vary from industry to industry.
2) Cost Accounting is a science and arts both. It is science because it
is a body of systematic knowledge relating to a wide variety of
subject and an art because without the efficiency and experience
of cost auditor it is not possible to use costing techniques
efficiently.
SCOPE OF COST ACCOUNTING:-
The term scope here refers to field of activity. Cost accounting
refers to the process of determining the cost of a particular
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product or activity. It provides useful data both for internal and
external reports reporting. Internal reporting presents details of
cost data in a summarized and aggregate form. For instance, in
case a company manufacturing electrical goods cost of each
product. In order that cost accounting satisfies the requirements
of both internal and external, the following are different activities
which are undertaken under cost accounting system:-
1) Cost Determination: This is the first step in the cost accounting
system. It refers to determining the cost for a specific product
or activity. This is a critical activity since the other three
activities, explained below, depend on it.
2) Cost Recording: It is concerned with recording of costs in the
cost journal and their subsequent posting to a ledger. Cost
recording may be done according to integral or non-integral
system a separate set of books is maintained for costing and
financial transactions.
3) Cost Analyzing:- It is concerned with critical evaluation of cost
information to the assist the management in planning and
controlling the business activities. Meaningful cost analysis
depends upon the clear understanding of the cost finding
methods used in cost accounting.
4) Cost Reporting:- It is concerned with reporting cost data both
for internal and external reporting purpose. In order to use cost
information intelligently it is necessary for the managers to
have good understanding of different cost accounting concepts.
OBJECTIVES OF COST ACCOUNTING:-
1) To ascertain the cost per unit of the different products
manufactured by a business concern.
2) To provide a correct analysis of cost both by process or operations
and by different elements of cost.
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3) To disclose sources of wastage whether of material, time or
expense or in the use of machinery, equipment and tools and to
prepare such reports which may be necessary to control such
wastage.
4) To provide requisite data and severe as a guide for fixing prices of
products manufactured or services rendered.
5) To ascertain the profitability of each of the products and advise
management as to how these profits can be maximised.
6) To exercise effective control of stocks of raw materials, work in
progress, consumable stores and finished goods in order to
minimise the capital locked up in these stocks.
7) To reveal sources of economy by installing and implementing a
system of cost control for materials, labour and overheads.
8) To advise management on future expansion policies and proposed
capital projects.
9) To present and interpret data for management planning,
evaluation of performance and control.
10) To help in the preparation of budgets and the
implementation of budgetary control.
11) To organise an effective information system so that different
levels of management may get the required information at the
right time in right form for carrying out their individual
responsibilities in an efficient manner.
12) To guide management in the formulation and
implementation of incentive bonus plans based on productivity
and cost savings.
13) To supply useful data to management for taking various
financial decisions such as introduction of new products,
replacements of labour by machine, etc.
14) To help in supervising the working of data processing
through computers.
15) To organise the integral audit system to ensure effective
working of different departments.
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16) To organise cost reduction programmes with the help of
different departmental managers.
17) To provide specialised services of cost audit in order to
prevent the errors and frauds and to facilitate prompt and reliable
information to management.
18) To find out costing profit or loss by identifying with revenues
the costs of those products or services by selling which the
revenues have resulted.
ADVANTAGES OF COST ACCOUNTING:-
1)Disclosure of profitable and unprofitable activities:-
Since cost accounting minutely calculates the cost, selling price and
profitability of product, segregation of profitable or unprofitable items
or activities becomes easy.
2)Guidance for future production policies:-
On the basis of data provided by costing department about the cost of
various processes and activities as well as profit on it, it helps to plan
the future.
3)Periodical determination of profit and losses:-
Cost accounting helps us to determine the periodical profit and loss of
a product without a resort of stocktaking.
4)To find out exact cause of decrease or increase in profit:-
With the help of cost accounting, any organization can determine the
exact cause of decrease or increase in profit that may be due to higher
cost of product, lower selling price or may be due to unproductive
activity or unused capacity.
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5)Control over material and supplies:-
Cost accounting teaches us to account for the cost of material and
supplies according to department, process, units of production, or
services that provide us a control over material and supplies.
6)Relative efficiency of different workers:-
With the help of cost accounting, we may introduce suitable plan for
wages, incentives, and rewards for workers and employees of an
organization.
7)Reliable comparison:-
Cost accounting provides us reliable comparison of products and
services within and outside an organization with the products and
services available in the market. It also helps to achieve the lowest cost
level of product with highest efficiency level of operations.
8)Helpful to government:-
It helps the government in planning and policy making about import,
export, industry and taxation. It is helpful in assessment of excise,
service tax and income tax, etc. It provides readymade data to
government in price fixing, price control, tariff protection, etc.
9)Helpful to consumers:-
Reduction of price due to reduction in cost passes to customer
ultimately. Cost accounting builds confidence in customers about
fairness of price.
10)Classification and subdivision of cost:-
Cost accounting helps to classify the cost according to department,
process, product, activity, and service against financial accounting
which give just consolidate net profit or loss figure of any organization
without any classification or sub-division of cost.
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11)To find out adequate selling price:-
In tough marketing conditions or in slump period, the costing helps to
determine selling price of the product at the optimum level, neither
too high nor too low.
12)Proper investment in inventory:-
Shifting of dead stock items or slow moving items into fast moving
items may help company to invest in more proper and profitable
inventory. It also helps us to maintain inventory at the most optimum
level in terms of investments as well as variety of the stock.
13)Correct valuation of inventory:-
Cost accounting is an accurate and adequate valuation technique that
helps an organization in valuation of inventory in more reliable and
exact way. On the other hand, valuation of inventory merely depends
on physical stock taking and valuation thereof, which is not a proper
and scientific method to follow.
14)Decision on manufacturing or purchasing from outside:-
Costing data helps management to decide whether in-house
production of any product will be profitable, or it is feasible to
purchase the product from outside. In turn, it is helpful for
management to avoid any heavy loss due to wrong decision.
15)Reliable check on accounting:-
Cost accounting is more reliable and accurate system of accounting. It
is helpful to check results of financial accounting with the help of
periodic reconciliation of cost accounts with financial accounts.
16)Budgeting:-
In cost accounting, various budgets are prepared and these budgets
are very important tools of costing. Budgets show the cost, revenue,
profit, production capacity, and efficiency of plant and machinery, as
well as the efficiency of workers. Since the budget is planned in
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scientific and systemic way, it helps to keep a positive check over
misdirecting the activities of an organization.
DISADVANTAGES OF COST ACCOUNTING:-
1. Only past performances are available in the costing records but the
management is taking decision for future.
2. The cost of previous year is not same in the succeeding year. Hence,
cost data are not highly useful.
3. The cost is ascertained on the basis of full utilization of capacity. If
capacity is partly utilized, the cost may not be true.
4. Financial character expenses are not included for cost calculation.
Hence, the calculated cost is not correct always.
5. In cost accounting, costs are absorbed on pre-determined rate. It
leads to over absorption or under absorption of overheads.
6. Cost Accounting fails to solve the problems relating to work study,
time and motion study and operation research.
7. Installation of Cost Accounting System requires the maintenance of
many costing records. If results in heavy expenditure.
8. Delay in receiving costing information does not result in taking
quality decision by the management.
9. Rigid Cost Accounting System does not serve all purposes.
STEPS OF COST ACCOUNTING:-
The steps to be taken in installing a costing system are given below:
1. Objective to be Achieved through the Costing System:
The costing system will be simple if the objective is only to determine
cost but it will have to be elaborate if the objective is to have
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information which will help management in exercising control and
taking decisions.
2. Studying the Existing Organisation and Routine:
In this connection the points to be noted are—the nature of the
business and of the operations or process carried on, extent of
responsibility and authority attached to the various functionaries, the
lay-out of the factory with particular reference to the manufacturing
departments, the methods of dealing with wastage of materials, the
system of time recording and the methods of computing and paying
wages, the system of issuing orders for production to the factory and
the amount of fixed, semi-variable and variable overheads.
3. Deciding the Structure of Cost Accounts:
What system of cost accounting is suitable and the extent of details
required can be decided after a thorough study of the manufacturing
process and their ancillary services. The structure of cost accounts
should follow the natural production line; the sequence can be simple,
analytical or synthetic. The designing of the system should be such that
there is a gradual build up of the cost at each significant stage of
production as the product proceeds to completion.
4. Determining the Cost Rates:
This entails a thorough study of factory conditions and decisions are to
be made about classification of cost into direct and indirect, grouping of
indirect costs into production, selling, administration etc., treatment of
wastes of all kinds, methods of pricing issues, methods of recovering
overheads and calculation of overhead rates. A complete cost
accounting code should be drawn up so that expenditure may be
quickly classified in the office as to both source and cause.
5. Introducing the System:
No costing system can be expected to function effectively unless co-
operation of all the officials could be obtained. Before the system is put
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into effect, the implications of the system should be explained to all
indicating to them the benefits that will accrue to each and to the
business as a whole.
However, complete the system is, it should be introduced only by
stages and the existing routines and practices should be utilised unless
there are good grounds to supersede them. For example, a start could
be made with the stores by introducing proper accounts of receipts and
issues, opening of bin cards, stores ledgers etc.
6. Organising the Cost Office:
It is always better that the cost office is situated adjacent to the factory
so that delay in routing out documents or in clearing up discrepancies
and doubts, is avoided. The costing staff must be allowed to have
access to the works if they are to perform their duties properly.
The size of staff would depend on the volume of work involved. A
costing organisation is not worth its existence if it cannot present
figures with speed and accuracy and observe simplicity in the
presentation of results.
The duties of cost office fall into the following spheres:
(i) Stores Accounts:
Posting of materials receipts and stores issues in stores ledgers,
preparing material abstracts.
(ii) Labour Accounting:
ADVERTISEMENTS:
Evaluation of time sheets, job cards etc., preparing labour abstracts. In
some cases preparation of actual pay rolls.
(iii) Cost Accounts:
Posting of all cost accounts whether job or process or service accounts.
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(iv) Cost Control:
Posting cost control accounts from data supplied from sections (i) to (ii)
above.
Preparation of special statistical and other information for management
for carrying out special investigation and preparation of periodical
trading statements.
7. Relationship of Cost Office to Other Departments:
The cost department should function independently, the cost
accountant being made directly responsible to the General Manager or
Managing Director. The costing system should be designed to serve
management at all levels.
The cost accountant, therefore, should design his whole system of
records and reports etc., with this end in view. He must know and
understand the problems faced in the process of production, and try to
translate them into financial implications so that correct decision may
be taken.
8. Authority and Responsibility:
Authority and responsibility should be clearly defined if the costing
system is to be successful. There should be no ambiguity, everything
should be clear.
To sum up, a cost system should be perfected in a manner that will
enable cost of sales to be computed; provide means for valuing
inventories; aid in the control and management of a company, measure
the efficiency of men, materials and machines, identify wastes collected
by cost codes so as to pave the way for cost reduction, make possible
inter-firm comparison, provide data for pricing and policy decision and
form a basis for the preparation of various analytical report.
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DIFFERENCE BETWEEN COST AND FINANCIAL
ACCOUNTING:-
BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON
Meaning Cost Accounting is an Financial Accounting is an
accounting system, accounting system that
through which an captures the records of
organization keeps financial information about the
the track of various business to show the correct
costs incurred in the financial position of the
business in company at a particular date.
production activities.
Information Records the Records the information which
type information related are in monetary terms.
to material, labor
and overhead, which
are used in the
production process.
Which type of Both historical and Only historical cost.
cost is used for pre-determined cost
recording?
Users Information provided Users of information provided
by the cost by the financial accounting are
accounting is used internal and external parties
only by the internal like creditors, shareholders,
management of the customers etc.
organization like
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BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON
employees, directors,
managers,
supervisors etc.
Valuation of At cost Cost or Net Realizable Value,
Stock whichever is less.
Mandatory Not mandatory for It is mandatory for all firms.
the firms, except for
manufacturing firms.
Time of Details provided by Financial statements are
Reporting cost accounting are reported at the end of the
frequently prepared accounting period, which is
and reported to the normally 1 year.
management.
Profit Analysis Generally, the profit Income, expenditure and profit
is analyzed for a are analyzed together for a
particular product, particular period of the whole
job, batch or process. entity.
Purpose Reducing and Keeping complete record of
controlling costs. the financial transactions.
Forecasting Forecasting is Forecasting is not at all
possible through possible.
budgeting
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BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON
techniques.
BIBLIOGRAPHY
1) Difference between Financial and Cost Accounting available
at:- https://keydifferences.com/difference-between-cost-
accounting-and-financial-accounting.html
2) Steps involved for installation of costing system available at:-
https://www.accountingnotes.net/cost-accounting/costing-
system/7-main-steps-for-installation-of-a-costing-system/
7514
3) Advantages and Disadvantages of Cost Accounting available
at:-https://accountlearning.com/advantages-disadvantages-
cost-accounting/
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4) Advantages and Disadvantages of Cost Accounting available
at:-https://accountlearning.com/advantages-disadvantages-
cost-accounting/
5) Significance of Cost Accounting available
at:-https://www.quora.com/What-is-the-significance-of-
cost-accounting
6) Scope of Cost Accounting available
at:-https://theintactone.com/2019/11/13/nature-and-
scope-of-cost-accounting/#:~:text=Cost%20accounting
%20refers%20to%20the,a%20summarized%20and
%20aggregate%20form.
