COST ACCOUNTING NOTES (Original & Unique
Content)
🔹 Meaning of Cost Accounting
Cost Accounting is a specialized branch of accounting that deals with identifying, recording,
classifying, analyzing, and controlling costs of production or operations.
Its main aim is to determine the cost of products, services, or processes and to assist
management in cost control and decision-making.
🔹 Objectives of Cost Accounting
1. Cost Ascertainment: To find out the cost per unit of product or service.
2. Cost Control: To keep costs within planned limits through budgetary control and
standard costing.
3. Decision Making: To provide relevant data for managerial decisions (e.g., make or
buy, pricing, product mix).
4. Performance Evaluation: To measure efficiency of departments, employees, or
processes.
5. Future Planning: To help management in preparing future budgets and cost
estimates.
🔹 Importance / Advantages
Helps in fixing selling price logically.
Detects wastage and inefficiency in production.
Facilitates budget preparation and variance analysis.
Provides data for cost reduction programs.
Serves as a tool for internal control.
🔹 Limitations
Expensive for small businesses to implement.
Based on estimated data, not all costs are precisely measurable.
Needs skilled staff and proper records.
Cannot replace financial accounting — it only supplements it.
🔹 Elements of Cost
1. Material Cost:
oDirect Materials → raw materials used directly in production.
oIndirect Materials → small items like lubricants, cleaning supplies.
2. Labour Cost:
o Direct Labour → wages paid to workers directly engaged in production.
o Indirect Labour → wages of maintenance staff, supervisors, etc.
3. Expenses / Overheads:
o All indirect costs like rent, depreciation, power, insurance, etc.
o Divided into:
Factory Overheads
Office & Administrative Overheads
Selling & Distribution Overheads
🔹 Cost Classification
Basis Types Example
Nature Material, Labour, Expenses Raw materials, wages, rent
Function Production, Admin, Selling Factory rent, office salaries
Fixed, Variable, Semi-
Behavior Rent, power, telephone
variable
Controllable,
Control Overtime (controllable), taxes (uncontrollable)
Uncontrollable
Decision Cost of new machine (relevant), sunk cost
Relevant, Irrelevant
Purpose (irrelevant)
🔹 Cost Sheet
A Cost Sheet is a statement showing total cost and cost per unit of a product for a particular
period.
It includes:
1. Prime Cost = Direct Materials + Direct Labour + Direct Expenses
2. Factory Cost = Prime Cost + Factory Overheads
3. Office Cost = Factory Cost + Office & Admin Overheads
4. Cost of Production = Office Cost + Opening/Closing WIP adjustments
5. Cost of Goods Sold = Cost of Production + Selling & Distribution Overheads
🔹 Types of Cost
Fixed Cost: Remains constant regardless of output (e.g., rent).
Variable Cost: Changes in proportion to output (e.g., materials).
Semi-variable Cost: Partly fixed, partly variable (e.g., electricity).
Opportunity Cost: Benefit foregone when one alternative is chosen.
Sunk Cost: Cost already incurred and cannot be recovered.
Differential Cost: Change in total cost due to change in activity level.
🔹 Cost Control vs. Cost Reduction
Aspect Cost Control Cost Reduction
Meaning Keeping costs within set standards Achieving permanent cost savings
Focus Prevention of wastage Elimination of wasteful elements
Approach Short-term (maintaining) Long-term (improving)
Example Monitoring material usage Replacing material with cheaper alternative
🔹 Techniques of Cost Accounting
1. Budgetary Control – Comparing actual with budgeted performance.
2. Standard Costing – Setting cost standards and analyzing variances.
3. Marginal Costing – Studying the impact of variable costs on profit.
4. Job Costing – Costing each job or order separately.
5. Process Costing – Used for continuous production (cement, sugar).
6. Activity-Based Costing (ABC) – Allocating overheads based on activities that drive
costs.
🔹 Difference Between Cost Accounting and Financial Accounting
Basis Cost Accounting Financial Accounting
Purpose Control and decision making Recording financial results
Users Internal management External stakeholders
Periodicity Continuous and detailed Periodic (usually yearly)
Nature of Data Estimated + Actual Historical only
Reports Cost reports, cost sheets Income statement, balance sheet
🔹 Role of Cost Accountant
Prepares cost statements and budgets.
Analyzes cost variances.
Advises management on pricing and profitability.
Implements cost control systems.
Ensures cost records comply with legal requirements (Cost Audit).
