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Cost Accounting: Definition and Types With Examples

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What Is Cost Accounting?

Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.

Cost accounting is not GAAP-compliant , and can only be used for internal purposes.

Key Takeaways

• Cost accounting is used internally by management in order to make fully informed business decisions.
• Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the particular needs of management.
• As such, cost accounting cannot be used on official financial statements and is not GAAP-compliant.
• Cost accounting considers all input costs associated with production, including both variable and fixed costs.
• Types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing.

Investopedia / Theresa Chiechi

Understanding Cost Accounting

Cost accounting is used by a company's internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions. There are many types of costs involved in cost accounting , each performing its own function for the accountant.

Types of Costs

• Fixed costs are costs that don't vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs.
• Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up its floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center.
• Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation.
• Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.
• Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products.

Cost Accounting vs. Financial Accounting

While cost accounting is often used by management within a company to aid in decision-making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company's financial position and performance to external sources through financial statements , which include information about its revenues , expenses , assets , and liabilities . Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost-control programs, which can improve net margins for the company in the future.

One key difference between cost accounting and financial accounting is that, while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to the information needs of the management. Cost accounting, because it is used as an internal tool by management, does not have to meet any specific standard such as  generally accepted accounting principles (GAAP) and, as a result, varies in use from company to company or department to department.

Cost-accounting methods are typically not useful for figuring out tax liabilities, which means that cost accounting cannot provide a complete analysis of a company's true costs. 

Types of Cost Accounting

Standard costing.

Standard costing assigns "standard" costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. The standard costs are based on the efficient use of labor and materials to produce the good or service under standard operating conditions, and they are essentially the budgeted amount. Even though standard costs are assigned to the goods, the company still has to pay actual costs. Assessing the difference between the standard (efficient) cost and the actual cost incurred is called variance analysis.

If the variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines the actual costs are lower than expected, the variance is favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost of the input, such as the cost of labor and materials. This is considered to be a rate variance.

Additionally, there is the efficiency or quantity of the input used. This is considered to be a volume variance. If, for example, XYZ company expected to produce 400 widgets in a period but ended up producing 500 widgets, the cost of materials would be higher due to the total quantity produced.

Activity-Based Costing

Activity-based costing (ABC) identifies overhead costs from each department and assigns them to specific cost objects, such as goods or services. The ABC system of cost accounting is based on activities, which refer to any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. These activities are also considered to be cost drivers , and they are the measures used as the basis for allocating overhead costs .

Traditionally, overhead costs are assigned based on one generic measure, such as machine hours. Under ABC, an activity analysis is performed where appropriate measures are identified as the cost drivers. As a result, ABC tends to be much more accurate and helpful when it comes to managers reviewing the cost and profitability of their company's specific services or products.

For example, cost accountants using ABC might pass out a survey to production-line employees who will then account for the amount of time they spend on different tasks. The costs of these specific activities are only assigned to the goods or services that used the activity. This gives management a better idea of where exactly the time and money are being spent.

To illustrate this, assume a company produces both trinkets and widgets. The trinkets are very labor-intensive and require quite a bit of hands-on effort from the production staff. The production of widgets is automated, and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good. It would not make sense to use machine hours to allocate overhead to both items because the trinkets hardly used any machine hours. Under ABC, the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use.

Lean Accounting

The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which has the stated intention of minimizing waste while optimizing productivity. For example, if an accounting department is able to cut down on wasted time, employees can focus that saved time more productively on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-based pricing  and lean-focused performance measurements. Financial decision-making is based on the impact on the company's total value stream profitability. Value streams are the profit centers of a company, which is any branch or division that directly adds to its bottom-line profitability.

Marginal Costing

Marginal costing (sometimes called cost-volume-profit analysis ) is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit. This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.

The  break-even point —which is the production level where total revenue for a product equals total expense —is calculated as the total fixed costs of a company divided by its contribution margin. The contribution margin , calculated as the sales revenue minus variable costs, can also be calculated on a per-unit basis in order to determine the extent to which a specific product contributes to the overall profit of the company.

History of Cost Accounting

Scholars believe that cost accounting was first developed during the  industrial revolution  when the emerging economics of industrial supply and demand forced manufacturers to start tracking their fixed and variable expenses in order to optimize their production processes.

Cost accounting allowed railroad and steel companies to control costs and become more efficient. By the beginning of the 20th century, cost accounting had become a widely covered topic in the literature on business management.

How Does Cost Accounting Differ From Traditional Accounting Methods?

In contrast to general accounting or financial accounting, the cost-accounting method is an internally focused, firm-specific system used to implement  cost controls . Cost accounting can be much more flexible and specific, particularly when it comes to the subdivision of costs and inventory valuation. Cost-accounting methods and techniques will vary from firm to firm and can become quite complex.

Why Is Cost Accounting Used?

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. Even though companies cannot use cost-accounting figures in their financial statements or for tax purposes, they are crucial for internal controls.

Which Types of Costs Go Into Cost Accounting?

These will vary from industry to industry and firm to firm, however certain cost categories will typically be included (some of which may overlap), such as direct costs, indirect costs, variable costs, fixed costs, and operating costs.

What Are Some Advantages of Cost Accounting?

Since cost-accounting methods are developed by and tailored to a specific firm, they are highly customizable and adaptable. Managers appreciate cost accounting because it can be adapted, tinkered with, and implemented according to the changing needs of the business. Unlike the  Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting need only concern itself with insider eyes and internal purposes. Management can analyze information based on criteria that it specifically values, which guides how prices are set, resources are distributed, capital is raised, and risks are assumed.

What Are Some Drawbacks of Cost Accounting?

Cost-accounting systems ,and the techniques that are used with them, can have a high start-up cost to develop and implement. Training accounting staff and managers on esoteric and often complex systems takes time and effort, and mistakes may be made early on. Higher-skilled  accountants  and  auditors  are likely to charge more for their services when evaluating a cost-accounting system than a standardized one like GAAP.

The Bottom Line

Cost accounting is an informal set of flexible tools that a company's managers can use to estimate how well the business is running. Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company's cost structure allows management to improve the way it runs its business and therefore improve the value of the firm. These are meant to be internal metrics and figures only. Since they are not GAAP-compliant, cost accounting cannot be used for a company's audited financial statements released to the public.

Fleischman, Richard K., and Thomas N. Tyson. "The Economic History Review: Cost Accounting During the Industrial Revolution: The Present State of Historical Knowledge." Economic History Review , vol. 46, no. 3, 1993, pp. 503-517.

• Accounting Explained With Brief History and Modern Job Requirements 1 of 51
• What Is the Accounting Equation, and How Do You Calculate It? 2 of 51
• What Is an Asset? Definition, Types, and Examples 3 of 51
• Liability: Definition, Types, Example, and Assets vs. Liabilities 4 of 51
• Equity Meaning: How It Works and How to Calculate It 5 of 51
• Revenue Definition, Formula, Calculation, and Examples 6 of 51
• Expense: Definition, Types, and How Expenses Are Recorded 7 of 51
• Current Assets vs. Noncurrent Assets: What's the Difference? 8 of 51
• What Is Accounting Theory in Financial Reporting? 9 of 51
• Accounting Principles Explained: How They Work, GAAP, IFRS 10 of 51
• Accounting Standard Definition: How It Works 11 of 51
• Accounting Convention: Definition, Methods, and Applications 12 of 51
• What Are Accounting Policies and How Are They Used? With Examples 13 of 51
• How Are Principles-Based and Rules-Based Accounting Different? 14 of 51
• What Are Accounting Methods? Definition, Types, and Example 15 of 51
• What Is Accrual Accounting, and How Does It Work? 16 of 51
• Cash Accounting Definition, Example & Limitations 17 of 51
• Accrual Accounting vs. Cash Basis Accounting: What's the Difference? 18 of 51
• Financial Accounting Standards Board (FASB): Definition and How It Works 19 of 51
• Generally Accepted Accounting Principles (GAAP): Definition, Standards and Rules 20 of 51
• What Are International Financial Reporting Standards (IFRS)? 21 of 51
• IFRS vs. GAAP: What's the Difference? 22 of 51
• How Does US Accounting Differ From International Accounting? 23 of 51
• Cash Flow Statement: What It Is and Examples 24 of 51
• Breaking Down The Balance Sheet 25 of 51
• Income Statement: How to Read and Use It 26 of 51
• What Does an Accountant Do? 27 of 51
• Financial Accounting Meaning, Principles, and Why It Matters 28 of 51
• How Does Financial Accounting Help Decision-Making? 29 of 51
• Corporate Finance Definition and Activities 30 of 51
• How Financial Accounting Differs From Managerial Accounting 31 of 51
• Cost Accounting: Definition and Types With Examples 32 of 51
• Certified Public Accountant: What the CPA Credential Means 33 of 51
• What Is a Chartered Accountant (CA) and What Do They Do? 34 of 51
• Accountant vs. Financial Planner: What's the Difference? 35 of 51
• Auditor: What It Is, 4 Types, and Qualifications 36 of 51
• Audit: What It Means in Finance and Accounting, and 3 Main Types 37 of 51
• Tax Accounting: Definition, Types, vs. Financial Accounting 38 of 51
• Forensic Accounting: What It Is, How It's Used 39 of 51
• Chart of Accounts (COA) Definition, How It Works, and Example 40 of 51
• What Is a Journal in Accounting, Investing, and Trading? 41 of 51
• Double Entry: What It Means in Accounting and How It's Used 42 of 51
• Debit: Definition and Relationship to Credit 43 of 51
• Credit: What It Is and How It Works 44 of 51
• Closing Entry 45 of 51
• What Is an Invoice? It's Parts and Why They Are Important 46 of 51
• 6 Components of an Accounting Information System (AIS) 47 of 51
• Inventory Accounting: Definition, How It Works, Advantages 48 of 51
• Last In, First Out (LIFO): The Inventory Cost Method Explained 49 of 51
• The FIFO Method: First In, First Out 50 of 51
• Average Cost Method: Definition and Formula with Example 51 of 51

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Cost Accounting Fundamentals

• First Online: 19 November 2021

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• Teddy Steven Cotter 6  

Part of the book series: Topics in Safety, Risk, Reliability and Quality ((TSRQ,volume 39))

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Whereas managerial accounting tracks financial performance relative to strategic plans and budgets, cost accounting estimates costs, allocates overhead costs, and develops standard product costs. This chapter will provide an overview of cost accounting fundamentals. First, the chapter will define the different types of costs and cost purposes. Next, cash flow diagram conventions and uses are discussed in terms of breakeven, profit, and loss. Finally, the fundamentals of cost accounting for materials and components, labor, and overhead allocation are presented.

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Cotter, T.S. (2022). Cost Accounting Fundamentals. In: Engineering Managerial Economic Decision and Risk Analysis. Topics in Safety, Risk, Reliability and Quality, vol 39. Springer, Cham. https://doi.org/10.1007/978-3-030-87767-5_3

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Cost Accounting

Understanding Cost Accounting: A Comprehensive Guide to Cost Management and Decision Making

Introduction to Cost Accounting

Definition and Purpose: Cost accounting refers to the process of recording, classifying, analyzing, and summarizing costs associated with the production or service provision. Its primary purpose is to provide detailed information for decision-making, cost control, and performance evaluation.

Importance in Business Management: In the business landscape, cost accounting plays a crucial role in budgeting, pricing strategies, and profitability analysis. It assists management in making informed decisions that align with organizational goals.

Historical Background: Cost accounting has evolved over time, adapting to changes in industrial practices and economic conditions. Its origins can be traced back to the industrial revolution when the need for accurate cost information became vital. 

Experience the future of cost accounting today with Wafeq's advanced tools that offer precision, compliance, and real-time insights tailored to your market.

Types of Costs

 Fixed Costs : These are expenses that remain constant regardless of the level of production or service provision. Examples include rent, salaries, and insurance.

 Variable Costs : Unlike fixed costs, variable costs change with the level of production. These include costs of raw materials, packaging, and transportation.

Direct Costs: Direct costs are associated specifically with the production of a product or delivery of a service. They include labor costs, material costs, and manufacturing overhead.

Indirect Costs: Indirect costs are general expenses that support the overall business operations but cannot be directly linked to a specific product or service. These include administrative expenses, utilities, and advertising.

Opportunity Costs: This refers to the potential benefits that an individual or business misses out on when choosing one alternative over another. It's the value of the best alternative forgone, and it plays a vital role in decision-making.

Read more: Inventory Management: A Comprehensive Understanding of Periodic and Perpetual Inventory. 

Methods of Cost Accounting 

In the intricate realm of business finance, cost accounting is a pivotal component. Understanding the cost structure is vital for making informed decisions that align with the company’s strategic goals. Here's an exploration of various cost accounting methods: 

Total Cost Method:

This traditional approach includes all costs, aligning with general accounting principles. Its main drawback is the lack of specific cost identification. 

Partial Cost Method:

Dividing the costs into different categories, this method discerns between fixed and variable costs, direct and indirect costs, and further classifies into: 

• a. Variable Costs: Separates fixed and variable costs, mainly focusing on variable ones. 
• b. Direct Costs: Differentiates between direct and indirect costs, charging the product with direct costs only. 
• c. Exploited Costs: Combines variable costs with a portion of fixed costs, known for its simplicity. 
• d. Standard Costs: Based on planned budgets, it allows for the comparison between predefined and actual costs to find variances. 

Other Costing Methods: 

• Actual Cost/Actual Output Method: Examines all the recorded costs in a project.
• Average Cost Method: Works on assigning inventory costs by calculating the moving average.
• First-In-First-Out (FIFO) Method: A widely recognized formula that follows the first item's entry and exit pattern.
• Cost-to-Cost Formula: Incorporates all costs in a process, considering both direct and indirect expenses.

Read more: Cost Competitiveness In Business: How To Win The Race. 

Cost Accounting in Different Industries 

Cost accounting methodologies are not confined to a specific sector; they permeate through various industries, each with unique requirements and challenges: 

Manufacturing:

Cost accounting in manufacturing deals with allocating direct and indirect costs to produce goods. Methods like Activity-Based Costing (ABC) are commonly used to identify the cost drivers in production, enabling more accurate pricing and profitability analysis. 

In the service industry, cost accounting emphasizes labor and overhead costs. It helps in understanding the cost structure of delivering specific services and creating pricing strategies that reflect value and competitiveness. 

Retail businesses often employ cost accounting to manage inventory and identify the optimal markup. Techniques such as the First-In-First-Out (FIFO) method help in tracking inventory costs, thus enhancing decision-making in stock control and pricing. 

Healthcare:

Cost accounting in healthcare involves analyzing the expenses related to patient care, including medical supplies, staff wages, and administrative costs. It provides insights into cost efficiency and aids in determining areas for improvement and cost containment.

Example of Cost Accounting:

Challenges in Cost Accounting 

Cost accounting, despite its fundamental role in financial management, faces several challenges that can impact the accuracy and efficiency of the process: 

Accuracy in Estimation:

Estimating costs accurately is critical for budgeting, pricing, and overall financial planning. A minor error can lead to significant misjudgments in financial decisions. The difficulty in predicting future costs and the variability of certain expenses make this a daunting task. 

Complexity of Allocation:

Allocating costs between different departments or products can become highly complex, especially when dealing with indirect costs. It requires a deep understanding and analysis of cost drivers, leading to potential conflicts and misconceptions. 

Changes in Technology and Practices:

The rapidly evolving technological landscape and changes in industrial practices necessitate continuous adaptation in cost accounting methods. This ever-changing environment can create uncertainty and necessitate constant updates to methodologies and systems. 

Compliance with Regulations:

Different jurisdictions have different regulations and standards for cost accounting. Compliance with these regulations is paramount but can be complicated, time-consuming, and costly, especially for businesses operating in multiple regions like in Saudi Arabia.

Role of Cost Accounting in Decision Making 

Cost accounting plays a vital role in strategic decision-making within businesses. Its influence permeates various aspects of financial planning and control, shaping the future of the company. Here's an insight into how cost accounting affects different areas: 

Pricing Strategies: 

Informed Decisions: Cost accounting allows businesses to determine accurate product costs, aiding in the formulation of competitive pricing strategies.

Saudi Market Example: Saudi businesses, including those in the manufacturing and retail sectors, utilize cost accounting to set prices that align with market demands and their overall business goals.

Budgeting and Forecasting: 

Strategic Planning: Budgeting and forecasting tools in cost accounting offer a roadmap for financial planning, enabling companies to allocate resources efficiently.

Real-world Application: In Saudi Arabia, many organizations use cost accounting for better planning of their yearly budgets, capital expenditures, and revenue forecasts.

Cost Control and Reduction: 

Operational Efficiency: Cost accounting promotes efficiency by identifying areas for potential savings and implementing cost control measures. 

Performance Evaluation: 

Employee Assessment: Cost accounting helps in evaluating the performance of various departments and employees, ensuring alignment with organizational objectives. 

Read more: Cost Centers: An In-Depth Guide to Understanding and Managing Costs 

Cost accounting, a multifaceted and critical component in various business operations, drives pricing strategies, budgeting, forecasting, cost control, and performance evaluation. In a complex and evolving business landscape, including in the Saudi market, it enables companies to make informed decisions in alignment with market needs. The field is expected to evolve further with technological advancements and a focus on data-driven insights. Practitioners must embrace the latest technologies, strive for accuracy, stay compliant with changes in regulations, and continuously monitor performance. In Saudi Arabia, the integration of artificial intelligence and other modern tools will likely shape the future of cost accounting, allowing for more precise and real-time analysis.  

Are you ready to transform your cost accounting practice with modern technology? Wafeq's cutting-edge solutions align with global best practices and are designed to streamline your accounting needs.

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Management and Cost Accounting

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Cost Accounting Notes | PDF, Syllabus, Book | BBA, BCOM (2024)

• Post last modified: 11 January 2023
• Reading time: 29 mins read
• Post category: BBA Study Material / BCOM Study Material

Download Cost Accounting Notes PDF for BBA , BCOM 2024. We provide complete cost accounting notes . Cost Accounting study material includes cost accounting notes , cost accounting book , courses, case study, syllabus , question paper , MCQ, questions and answers and available in cost accounting pdf form.

Cost Accounting subject is included in B COM and BBA, so students can able to download cost accounting notes for b.com 2nd sem and cost accounting bba 2nd sem.

Table of Content

• 1 Cost Accounting Syllabus
• 2 Cost Accounting PDF
• 3.1 What is Cost Accounting?
• 4 Cost Accounting Question and Answer
• 5 Cost Accounting Question Paper
• 6 Cost Accounting Books

Cost Accounting Notes can be downloaded in  cost accounting pdf  from the below article.

Cost Accounting Syllabus

A detailed  cost accounting syllabus  as prescribed by various Universities and colleges in India are as under. You can download the syllabus in  cost accounting pdf  form.

Nature and Scope of Cost accounting: meaning, importance & limitations of cost accounting, Costing- An Aid to management, distinction between Cost and Financial accounting, Costing system- characteristics of an ideal costing system, steps for installation, difficulties while installation and how to overcome these difficulties, role of cost accountant.

Cost : Analysis, Concepts, Cost Classification, cost sheet and One unit costing.

Material Control: techniques of material control i.e. Level Setting, Economic Order Quantity, JIT Inventory System, ABC Analysis, VED Analysis, Perpetual Inventory System and FNSD Analysis. Material Purchase and Storage.

Methods of valuing Material Issues: Cost Price Methods- FIFO, LIFO, Average Cost, Inflated Price, Specific Price, Base Stock and HIFO. Market Price Method- Replacement Price, Realisable Value. Standard Price Methods- Current Standard Price and Base Standard Price.

Labour Cost: meaning, labour turnover, Job Analysis, Job Evaluation, Merit Rating, Time Keeping, Idle Time and Overtime.

Remuneration and Incentives : methods of wage payment and incentives plan- Time Wage System, Piece Rate System, Taylor’s Differential Piece Rate System, Merrick’s Multiple Piece Rate System, Gant’s Task and Bonus Plan, Halsey Premium Plan and Rowan Plan.

Overhead : Classifications, Overhead Accounting- allocation, apportionment, re-apportionment and absorption of Overheads. Job, Batch & Contract costing.

Process Costing : features, application of process costing, process losses-normal loss, abnormal loss and abnormal gain, inter-process profits and evaluation of different processes through practical problems.

Equivalent production in Process Costing : meaning, calculation of Equivalent production and evaluation of Equivalent production through practical problems, Joint Product and By- Product Costing.

Cost Accounting PDF

Cost accounting notes, what is cost accounting.

Cost accounting is a form of managerial accounting that aims to capture a company’s total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.

Cost Accounting Question and Answer

Some of the  cost accounting questions and answers  are mentioned below. You can download the QnA in  cost accounting pdf  form.

• Briefly explain the concept and scope of cost accounting. Differentiate between: a) Cost and Financial Accounting. b) Cost and Management Accounting.
• Explain material control. Describe any two basic problems which arise in connection with material control system.
• Define Overheads and write short notes on Allocation, Apportionment and Absorption of Overheads.
• Explain Contract Costing, Marginal Costing and Standard Costing.
• Explain the concept of Budget and differentiate between Fixed and Flexible Budgets.
• What are cost plus contracts ? What are the advantages available with it?
• Describe the managerial use of Standard Costing.
• What do you mean by abnormal effectiveness? How it is calculated in Process accounts?
• Describe the various functional budgets prepared by a business organization.
• Give any four methods of reallocating service department overhead to production departments.

Cost Accounting Question Paper

If you have already studied the cost accounting notes , then its time to move ahead and go through previous year cost accounting question paper .

It will help you to understand question paper pattern and type of cost accounting question and answer asked in mba cost accounting exam. You can download the syllabus in cost accounting pdf form.

Cost Accounting Books

Below is the list of cost accounting book recommended by the top university in India.

• Cost Accounting – Theory and Problems, Maheshwari, S.N and Mittal, S. N. (2009)
• Cost Accounting, Rajasekaran, (2010), 1st ed, Pearson Education.
• Cost Accounting Principles and Practice, Jain, I. C & Nigam, B.M.L
• Cost Accounting Text and Problems by M. C. Shukla, T. S .Grewal and M. P. Gupta – S Chand

Below is the top  cost accounting book  that can be bought from Amazon.

Cost Accounting – Theory & Problems

• Author: Dr. S.N. Maheshwari, Dr. S.N. Mittal
• Publisher:  Mahavir Publications; 26th Ed.
• Amazon Bestsellers Rank : #23 in Cost Accounting.

Cost Accounting: Principles and Practice

• Publisher:  Pearson; 1 ed.
• Author : B.M Lall, Nigam
• Amazon Bestsellers Rank : #60 in Cost Accounting #46 in Managerial
• Customer Rating: 4.2 out of 5

Cost Accounting: Texts and Problems

• Publisher:  S Chand & Company
• Author : Shukla M.C, Grewal T.S, Gupta M.P
• Amazon Bestsellers Rank : #11 in Cost Accounting #6 in Managerial

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Term Paper on Cost Sheet | Cost Accounting

Here is a term paper on ‘Cost Sheet’ for class 9, 10, 11 and 12. Find paragraphs, long and short term papers on ‘Cost Sheet’ especially written for school and college students.

Term Paper on Cost Sheet  

Term Paper Contents:

• Term Paper on the Important Points to be Remembered during the Preparation of Cost Sheet

Term Paper # 1. Meaning and Definition of Cost Sheet :

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The expenses of a product are analysed under different heads in the form of statement. This statement is called cost sheet.

Walter & Bigg define, “The expenditure which has been incurred upon production for a period is extracted from the financial books and the store records, and set out in a memorandum or a statement. If this statement is confined to the disclosure of the cost of the units produced during the period, it is a termed as a cost sheet”. In other words cost sheet is a statement showing the total cost under proper classification in a logical order.

A cost sheet is a statement prepared to show the different elements of cost. Preparation of cost sheet is one of the functions of cost accounting. It is used to compile the margin earned on a product or job, and can form the basis for the setting of prices on similar products in the future. It can also be used as the basis for a variety of cost control measures. Despite the name, a cost sheet can be compiled and viewed on a computer screen, as well as being manually developed on paper.

Term Paper # 2. Purpose of Preparing Cost Sheet :

1. It provides details of total cost under logical classification.

2. It provides cost per unit in difference stages.

3. It helps in comparison and control of cost.

4. Cost sheet is helpful in estimation of cost for preparation of tender and quotations.

5. It acts as basis for fixation of selling price.

Term Paper # 3. Specimen of Cost Sheet :

Prime Cost:

This is also called direct cost. It is the aggregate of direct materials direct labour and direct expenses, which are easily identifiable with the product.

i. Work Cost:

It consists of the total of all items of expenses incurred in the manufacturing of a product, viz., prime cost plus factory expenses. It is also known as factory cost or manufacturing cost.

ii. Cost of Production:

This includes work cost and administration expenses. Production is not deemed to be complete without the managerial and facilitating costs.

Cost of Sales:

It represents cost of production plus selling and distribution cost incurred. Thus, the cost of sales is the aggregate of all the direct and indirect costs connected to the goods sold.

When profit is added to the cost of sales, sales can be found. Usually, selling prices are fixed on the basis of the cost of sales. It ensures that all the costs are recovered and any desired profit is also obtained.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Term Paper # 4. Cost Sheet and Production Account :

Cost sheet is a statement of total cost under different classifications of costs. The classification of cost is done on the basis of elements of cost, functions and behaviour of cost. The total cost in the form of cost of sales and cost per unit is revealed.

On the other hand, the cost, sales, and profits presented in the form of a ledger account is known as production account or manufacturing account. The debit side of the account is shown with opening stock, expenses and the credit side is shown with closing stock and sales. The balancing figure is either profit or loss.

Term Paper # 5. Cost Sheet and Production Statement :

The cost of output can be ascertained from the statement known as cost sheet. The items of various costs are extracted from financial books and presented in logical order. Thus, total cost of a cost centre or cost unit is shown in the cost sheet.

When sales, stocks and profits are included in the cost sheet it is called production statement. Bigg has defined it as “The expenditure which has been incurred upon production for a period is extracted from the financial books and stores records and set out in a memorandum statement. If the statement is confined in the disclosure of the cost of the units produced during the period it is termed as cost sheet, but where the statement records, cost, sales and profit it is usually known as production or output statement or account”.

However the modern practice is to extend the cost sheet to show profit and sales also and call it “statement of cost and profit”.

Term Paper # 6. Treatment of Stocks while Preparing Cost Sheet :

Stock requires special treatment while preparing a cost sheet stock may be of:

1. Raw materials,

2. Work-in-progress and

3. Finished goods.

1. Stocks of Raw Materials :

When opening stock of raw materials, purchase of raw materials and closing stock of raw materials are given, raw materials consumed can be calculated as follows:

2. Stock of Work-in-Progress:

‘Work-in-progress’ means a unit of production on which work has been done but is not yet completely finished. Work-in-progress is valued on prime cost or works cost basis but the latter is preferred.

The opening and closing work in-progress are adjusted as given below:

3. Stock of Finished Goods:

If opening and closing stocks of finished goods are given they are to be adjusted to find out cost of production of goods sold.

Specimen of Cost sheet, with inventories Statement of Cost and Profit (with stocks):

Term Paper # 7. Estimation of Tenders and Quotations during the Preparation of Cost Sheet :

Frequently the manufacturers of consumer durables and capital goods are asked to quote the price at which they can supply their output. The price at which the items of output are offered for sale is known as ‘tender’ or ‘quotation’ price. The tender has to be prepared carefully since it may be accepted and goods have to be supplied in future at the quoted rate.

In order to prepare the tender the following items are to be analysed:

1. Raw materials

2. Direct labour.

3. Chargeable expenses

4. Works overhead

5. Office overhead

6. Selling overhead

7. Estimated profits.

Estimation of different elements of cost has to be made.

The following are the accepted norms:

(A) Direct material and direct labour cost is generally estimated on the basis of ‘cost per unit’ of preceding period, subject to fluctuations in the marked price of materials and labour rates.

(B) Overhead is estimated on the basis of past experience as a percentage as given below:

1. Percentage of Factory Overheads to Direct Wages: