UNIT 1.

BASIC CONCEPT IN COST

 MEANING &
TERMINOLOGY
 COST
 ‘Cost’ may be defined as
The amount of expenditure (actual or notional) incurred

on or attributable to a given thing; or

To ascertain the cost of a given thing.

Cost represents the resources that have been or must be

sacrificed to attain a particular objective. In other words,
cost is the amount of expenditure, actual or notional,
incurred on or attributable to a given product or service.
 MEANING &
TERMINOLOGY
 COSTING
 Costing may be defined as “The techniques & process of
ascertaining costs”.
Costing involves in classification, recording, allocation,
appropriation of expenses incurred to facilitate the determination
of cost of the product or service.

 COST ACCOUNTING
 Cost accounting is the process of accounting for cost. It is
regarded as a specialized branch of accounting, which involves
classification, accumulation, assignment & control of costs.
 MEANING &
TERMINOLOGY
 COST ACCOUNTANCY
 Cost Accountancy is the application of accounting & costing
principles, methods & techniques in the ascertainment of costs & the
analysis of savings & excess as compared with previous experience
or with standards.

 COST UNIT
 CIMA defines as “a quantitative unit of product or service in relation
to which costs are ascertained”. A ‘cost unit’ is a unit of product or
unit of service to which costs are ascertained by means of allocation,
apportionment & absorption. It is a unit of quantity of product,
service or time or a combination of these in relation to which cost are
expressed or ascertained. For Ex. Specific job, contract, unit of
product like fabrication job, road construction contract, etc.
 Some of the examples of Cost Units
Industry/ Product/ Activity Cost Unit

Brick making 1000 bricks

Automobile Automobile unit manufactured

Cement Tonne of cement

Coal Tonne of coal

Electricity Kilowatt-hour (Kwh.)

Professional service Chargeable hour

Education Enrolled Students

MEANING &
TERMINOLOGY
 COST OBJECT
 Costobject is defined as “any activity for which a separate
measurement of costs is desired”

 For example, ascertainment of cost of a particular branded

product, particular area of sales.
 COMPARISON
Cost Accounting Financial Accounting
 It is an internal reporting  Related with reporting the
system for an organization’s results & position of business to
decision making. persons & authorities other than
management like government;
creditors, etc.

 It is concerned with short-term

planning & its reporting
period is much lesser than  The periodicity of reporting in
Financial Accounting. Financial Accounting is much wider.
 It not only deals with historic
data but also futuristic in  The Financial Accounting data is
historical in nature.
approach.
 COMPARISON
Cost Accounting Financial Accounting
 Cost Accounting system  Financial Accounting System
cannot be installed without can be installed without
proper Financial Accounting proper Cost Accounting
System. System.

 It aims at ascertainment of  It emphasizes the

costs & accumulates data for measurement of profitability.
this very purpose.
 It deal partly with facts &  It deal mainly with actual
figures & partly with facts & figures.
estimates.
 The costs are reported in
 Costs are broken into unit aggregate.
basis.
 COMPARISON
Cost Accounting Financial Accounting
 It renders information for the  It aims at safeguarding the
guidance of the management interests of the business & its
for proper planning, operation, properties & others
control & decision making. connected with it.

 It uses with both monetary, as  Monetary information is only

well as non-monetary
used in Financial
(quantitative) information.
Accounting.

 The items of costs are

analyzed, classified in order to
 The items of costs are
ascertain the cost per unit of expressed in totals.
product or service.
 OBJECTIVES OF COST ACCOUNTING
 To ascertain the cost per unit of production.
 To help in determining the selling price.

 To help in cost control & cost reduction.

 To ascertain the cost & profitability of each division, unit, activity,

center, etc.
 To assist the management in decision making.

 To provide a basis for operating policies.

 To inform about inefficiency & carelessness.

 To inform the real situation of production activity.

 To provide basis for comparative analysis through data collection.

 To facilitate cost estimation.

 PRACTICAL DIFFICULTIES IN
INSTALLATION
 Lack of Support from Top Management:- The basic objective of
Cost Accounting System is to provide necessary information to
the internal management for the purpose of problem solving,
decision making& control. Without necessary support from top
management, the very purpose of Cost System is vitiated.

 Resistance from Existing Accounting Staff:- The existing

accounting staff may resist the introduction of Cost Accounting
System in the organization due to fear of loosing job recognition
& importance after the implementation of the system.

 Uneconomical Cost System:- Sometimes the detailed cost system

proposed to be installed may cause substantial installation &
operating cost.
 PRACTICAL DIFFICULTIES IN
INSTALLATION
 Lack of Cooperation from other Departments:- The employees of
other departments may not cooperate for installation of Cost
Accounting System due to fear of increase in work load, bring-
out inefficiency etc.

 Resistance from Operating Level Workers:- The foreman,

supervisors, workers & other operating level staff may resent the
introduction of cost system on the ground that it will increase
their job responsibilities and paper work & may fear that it may
change in wage structure.

 Shortage of Trained Staff:- The installation & implementation of

cost system requires trained, qualified & experienced staff which
may be shortage.
 LIMITATIONS OF COST ACCOUNTING
a) It is the base for taking best decisions, but it does not give
outright solution to the problem.
b) Cost varies with purpose.
c) Cost Accounting is not an exact science, it involves inherent
elements of judgment.
d) It lacks a uniform procedure.
e) Existence of numerous methods which may lead to cost
differences & it is difficult to ascertain true cost of product or
service.
f) Based on some presumed notions.
g) Small & medium concerns may not be in a position to install a
costing system.
HAPPY LEARNING

END