What is Cost Accounting?

Cost Accounting may be defined as “Accounting for costs classification and analysis of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted”. Thus Cost Accounting is classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for the purposes of control and guidance of management.

Cost Accounting can be explained as follows:

  1. Cost Accounting is the process of accounting for cost which begins with recording of income and expenditure and ends with the preparation of statistical data.
  2. It is the formal mechanism by means of which cost of products or services are ascertained and controlled.
  3. Cost Accounting provides analysis and classification of expenditure as will enable the total cost of any particular unit of product / service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted. For example it is not sufficient to know that the cost of one pen is Rs. 25 but the management is also interested to know the cost of material used, the amount of labour and other expenses incurred so as to control and reduced its cost.
  4. It establishes budgets and standard costs and actual cost of operations, processes, departments or products and the analysis of variances, profitability and social use of funds. Thus cost accounting is a quantitative method that collects, classifies, summarises and interprets information for product costing, operation planning and control and decision making.

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