INTRODUCTION TO COST ACCOUNTING

WHAT IS COST ACCOUNTING?
The Chartered Institute of Management Accountants (CIMA) define Cost accounting as “The application of costing and cost accounting principles, methods and techniques in the ascertainment of costs and the analysis of savings and/or excesses as compared with previous experience or with standard” (CIMA 2000). It includes the presentation of information derived therefrom for the purpose of managerial decision making. 
In Summary, cost accounting is “the techniques and processes of ascertaining costs”

THE USES OF COST ACCOUNTING
1. It provides information for use in the planning and control of routine jobs and other major
plans and policies: e.g. a management decision of discount depends on information on the cost and
benefit of such a policy.
2. It provides information for decision making situations, particularly those that involve cost
minimization. By providing cost information of different alternatives like whether to buy or produce
a part within the factory and whether or not to mechanise, production costs are minimized in order to
ensure that profit is maximized.
3. Cost Accounting is very useful for costing products for stock valuations, planning and control.
The importance of this service lies in the fact that decisions on stock valuation methods affect the net
income.
4. It helps in the preparation of estimates which form a guide to policy making decision and
control purposes. In order to achieve the desired return on investment, reasonable selling prices must
be fixed with greater level of certainty.
5. The comparison of actual cost with standard cost or estimated cost of jobs, processes or
activity, losses and wastes are pinpointed during and after an operation. When provided in an

operation, corrective measures can be taken to minimize further waste.

TERMINOLOGIES
1) COST:
This may be defined as: “the amount of expenditure (actual or notional) incurred on, or attributable to, a specified thing or activity (CIMA, 2000). In a simplified manner, cost includes two components, quantity used multiplied by price.

2) COST UNITS
A cost unit is a unit of quantity of product or service in relation to which costs may be ascertained or
expressed.

3) COST CENTRE
A cost centre is a production or service, location, function, activity or item of equipment for which costs are accumulated.

4) DIRECT COST
Direct costs are those which are readily identifiable to a cost unit. Direct labour, direct materials and direct expenses collectively form the prime cost.

5) INDIRECT COST
All costs that are not identifiable as direct are termed indirect. Indirect labour, indirect material and indirect expenses are collectively known as overheads.

6) CONVERSION COST
This is the term used to describe the cost of converting purchased materials into finished or semi-finished products

7) COST ALLOCATION
The process of assigning a whole item of cost, or of revenue to a single cost unit centre, account or time period is known as cost allocation.

8) COST APPORTIONMENT
It is the process of spreading revenues or cost over two or more cost units, centres, accounts or time periods.

9) OVERHEAD ABSORPTION
This is the process of sharing out costs that cannot be directly related to cost unit (overheads) among the entire cost unit produced in some equitable manner.

10) TOTAL COST
Total cost is defined as the summation of prime cost (Direct material, direct labour and direct expense) and overheads (indirect material, indirect labour and indirect expense).

DIFFERENCES BETWEEN COST ACCOUNTING AND FINANCIAL ACCOUNTING

BASIS FOR COMPARISON	COST ACCOUNTING	FINANCIAL ACCOUNTING
Meaning	Cost Accounting is an accounting system, through which an organization keeps the track of various costs incurred in the business in production activities.	Financial Accounting is an accounting system that captures the records of financial information about the business to show the correct financial position of the company at a particular date.
Information type	Records the information related to material, labor and overhead, which are used in the production process.	Records the information which are in monetary terms.
Which type of cost is used for recording?	Both historical and pre-determined cost	Only historical cost.
Users	Information provided by the cost accounting is used only by the internal management of the organization like employees, directors, managers, supervisors etc.	Users of information provided by the financial accounting are internal and external parties like creditors, shareholders, customers etc.
Mandatory	No, except for manufacturing firms it is mandatory.	Yes for all firms.
Time of Reporting	Details provided by cost accounting are frequently prepared and reported to the management or prepared at the discretion of the management	Financial statements are reported at the end of the accounting period, which is normally 1 year.
Profit Analysis	Generally, the profit is analyzed for a particular product, job, batch or process.	Income, expenditure and profit are analyzed together for a particular period of the whole entity.
Purpose	Reducing and controlling costs.	Keeping complete record of the financial transactions.
Forecasting Article by: Monday Desmond	Forecasting is possible through budgeting techniques.	Forecasting is not at all possible.