Cost accounting basics: its meaning, objectives, and differences from financial accounting.

Accounting

Financial accounting – financial accounting concerned with recording, classifying, and summarizing in term of money transactions and events which are in part at least of a financial character and interpreting the results thereof.
Management accounting – accounting designed for the management. It is concerned with presentation of accounting information in a manner which can assist the management in creation of policy and decision making.
Cost accounting – cost accounting concerned with recording, classifying and summarizing costs for determination of costs of products or service, planning, controlling and reducing such cost and furnishing the information to management for decision making.

Meaning and concept of cost

Meaning of Cost

Cost means “The amount of expenditure incurred on or attributable to a specific thing or activity” in other words Cost is the total amount of money spent to make or get something. it includes all types of spending of like materials, labour, packaging etc. that are needed to produce a product or service. for example, to make one shirt, cloth cost 50, stitching 30 and packaging 20 so the total cost is 100. so, in simple words cost means how much money it takes to makes something like a pen, skirt or services. but costing method used to find out how much it costs to make a product or give a service. different products need different costing methods like job costing for custom items or batch costing for mass production. for example, a factory use job costing to calculated the cost of a custom machine and batch costing for a group of 100 pens. so, in simple words when a bakery makes 1 cake and calculates its cost the method it uses is called costing.

Concept Cost

Cost refers to the amount of money spent or incurred to produce, acquire or provide a product, service or activity. It includes all expenses, expenditures or sacrifices made to achieve a specific objective. Cost can be classified into different types such as

Fixed cost – cost that remain the same even if the level of production or activity changes
Variable cost – costs that vary directly within the level of production or activity changes
Direct costs – costs that can be directly attributed to a specific product, service or activity.
Indirect cost – costs that cannot be directly attributed to a specific product, service or activity.

Meaning and definition of Cost Accounting

Meaning of cost accounting

Cost accounting is the specialized branch of accounting which involves classifying, recording and appropriate allocation of expenditure for the determination of the costs of products and services and for the presentation of suitably arranged data for purposes of control and guidance of management it includes the ascertainment of the cost of every order job contract, process service or unit as may be appropriate. It deals with the cost of production, selling and distribution.

It is thus the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production or service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted i.e., the value of material used the amount of labour and other expenses incurred so as to control and reduce its cost.

In layman language, Cost accounting means recording, analyzing, and controlling all the costs in a business. it helps track vs planned costs and control unnecessary expenses. for example, a company records raw material cost, labour cost and overhead cost separately for each department then analyses where costs are high. in simple words cost accounting helps the company understand how much is spent, where it is spent and how it can be reduced.

Define of cost accounting

According to I.C.M.A London “Cost accounting is the techniques and process of ascertainment of cost”
According to Walter W. Bigg “Cost accounting is the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and the same time to disclose exactly how such cost is constituted”

Concepts of Cost Accounting

Cost accounting is the process of identifying, measuring and reporting costs associated with producing a product providing a service or carrying out an activity it involves

Cost classifications – classifying costs into different categories such as fixed variable, direct and indirect costs.
Cost measurement – measuring the costs of production, including direct materials, direct labour and overhead costs.
Cost reporting – Reporting costs to management and other stakeholder to aid in decision making costs of productions including direct materials, direct labour and overhead costs.
Cost calculation – calculating the total costs of a product, service or activity.
Cost analysis – analyzing costs to identify areas for cost reduction and improvement

Nature and Feature of cost accounting

It involves systematic recording and analysis of costs associated with a company’s operation, product and services.
It is specialized branch of accounting
Cost accounting is both an art and science because it adheres to methodical guidelines and standards while also requiring the use of skill and aptitude in its application.
In involve identifying the different types of cost that becomes the components of total cost.
It provides the costing information to assist in setting the prices of goods and services
It is a fantastic tool for determining a units or process efficiency. It reveals the wastage of time and resources.
It is helpful to management by providing various information and measures for control and guidance.

Objective of Cost Accounting

Ascertainment of Cost
Estimation of cost
Cost control
Cost reduction
Determining selling price of product or services
Facilitating preparation of financial and other statements.
Ascertainment of profitability for each operation, process, department, center etc.
Provide basis for business policy and decision making
Compliance of statutory requirement

Limitation of cost accounting

The system is quite expensive
Preparation of reconciliation statement frequently is necessary
Costing system itself does not control costs.

Difference between financial accounting and cost accounting

	Financial Accounting	Cost Accounting
Objective	It provides information about the financial performance and financial position of the business.	It provides information of ascertainment of cost to control cost and for decision making about the cost.
Nature	It classifies records, presents and interprets transactions in terms of money.	It classifies records, presents and interprets in a significant manner the material, labour, and overhead cost.
Recording of data	It records historical data	It also records and presents the estimated or budgeted data. It makes use of both the historical costs and pre-determined cost.
Analysis of cost and profits	It shows the profits and loss of the organization.	It provides the details of cost and profit of each product, process, job, contract etc.
Time period	Financial statements are prepared for a definite period usually a year.	Its reports and statements are prepared as and when required.
Presentation of information	A set format is used for presenting financial information.	There are not any set formats for presenting cost information.

FAQ’s

What is Cost Accountancy?

Cost accountancy is the full subject that includes costing cost accounting, and using cost data for planning, control and decision making. It combines technical work like costing, record keeping like cost accounting and also giving advice to improve business decisions. For example, a cost accountant prepares costs reports, set budgets finds ways to reduce costs and advice management this is cost accountancy. In simple words it like the umbrella under which all cost related work is done from calculation to control to decision making.

Can small businesses benefit from Cost Accounting?

Yes. Even small businesses can use basic cost accounting principles to manage expenses, set prices, and maximize profits.

Is Cost Accounting mandatory?

No, it's not legally required like financial accounting, but it's highly recommended for effective internal management and cost control.

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