Cost Accounting :An Overview

Introduction of Cost Accounting Cost accounting has been developed due to limitations of financial accounting. Financial accounting is concerned with record keeping directed towards the preparation of Profit and Loss

Account and Balance Sheet. It provides information regarding the profit and loss which is helpful for the management to control the major functions of business like finance , administration , production and distribution.But details regarding operating efficiency to these divisions are lacking in financial accounting. Cost accountancy is the application of costing and cost accounting principles , methods and techniques to the science , art and practice of cost control and the ascertainment of profitability.

Important Terms used in Cost Accounting:

Cost Center :- Cost Center is defi ned as, ‘a production or service, function, activity or item 
of equipment whose costs may be attributed to cost units. A cost center is the smallest organizational sub unit for which separate cost allocation is attempted’. To put in simple 
words, a cost center is nothing but a location, person or item of equipment for which cost 
may be ascertained and used for the purpose of cost control. For example, a production 
department, stores department, sales department can be cost centers. Similarly, an item of 
equipment like a lathe, fork-lift, truck or delivery vehicle can be cost center, a person like 
sales manager can be a cost center. The main object of identifying a cost center is to facilitate 
collection of costs so that further accounting will be easy. A cost center can be either personal 
or impersonal, similarly it can be a production cost center or service cost center. A cost center 
in which a specifi c process or a continuous sequence of operations is carried out is known as 
Process Cost Center.

 Profit Center :- Profi t Center is defined as, ‘a segment of the business entity by which both 
revenues are received and expenses are incurred or controlled’. (CEMA) A profi t center is 
any sub unit of an organization to which both revenues and costs are assigned. As explained 
above, cost center is an activity to which only costs are assigned but a profi t center is one 
where costs and revenues are assigned so that profi t can be ascertained. Such revenues 
and expenditure are being used to evaluae segmental performance as well as managerial 
performance. A division of an organization may be called as profi t center. The performance 
of profi t center is evaluated in terms of the fact whether the center has achieved its budgeted 
profi ts. Thus the profi t center concept is used for evaluation of performance

Costing System used in practice:

Historical Costing :- In this system, costs are ascertained only after they are incurred and that 
is why it is called as historical costing system. For example, costs incurred in the month of 
April, 2007 may be ascertained and collected in the month of May. Such type of costing system 
is extremely useful for conducting post-mortem examination of costs, i.e. analysis of the costs 
incurred in the past. Historical costing system may not be useful from cost control point of 
view but it certainly indicates a trend in the behavior of costs and is useful for estimation of 
costs in future.

Absorption Costing :- In this type of costing system, costs are absorbed in the product units 
irrespective of their nature. In other words, all fi xed and variable costs are absorbed in the 
products.It is based on the principle that costs should be charged or absorbed to whatever is 
being costed, whether it is a cost unit, cost center.

Marginal Costing :- In Marginal Costing, only variable costs are charged to the products and 
fi xed costs are written off to the Costing Profi t and Loss A/c. The principle followed in this 
case is that since fi xed costs are largely period costs, they should not enter into the production 
units. Naturally, the fi xed costs will not enter into the inventories and they will be valued at 
marginal costs only.

Uniform Costing :- This is not a distinct method of costing but is the adoption of identical 
costing principles and procedures by several units of the same industry or by several 
undertakings by mutual agreement. Uniform costing facilitates valid comparisons between 
organizations and helps in eliminating ineffi ciencies.