Cost Accounting: The Basics

This article is primarily intended for students at the postgraduate level but may be of use to others as well. A detailed description of cost accounting is beyond the scope of this article. Therefore, this article will limit itself to providing an overview of cost accounting as a modern management technique.

Background Information:

Cost: The amount of resource given up in exchange for some services or goods.

A more formal definition of cost is “the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity” (Chartered Institute of Management Accountants [CIMA]).

A cost must always be studied in relation to its purpose and conditions.

Since costs may be of different types, it is necessary to specify the exact meaning of ‘cost’.

Cost Classification:

  1. By Nature or Elements
    • Materials
    • Labour
    • Expenses
  2. By Functions
    • Manufacturing and Production Costs
    • Commercial Costs
  3. By Degree of Traceability to the Product
    • Direct Costs
    • Indirect Costs
  4. By changes in Activity or Volume
    • Fixed Costs
    • Variable Costs
    • Semi-variable Costs
  5. By association with the product
    • Product Costs
    • Period Costs
  6. By Controllability
    • Controllable Costs
    • Non-controllable Costs
  7. By Normality
    • Normal Costs
    • Abnormal Costs
  8. By relationship with Accounting Period
    • Capital Cost
    • Revenue Expenditure
  9. By Time
    • Historical Costs
    • Predetermined Costs

Costing: The techniques and processes of determining costs, costing aims at ascertaining the total cost and per unit cost.

Cost accounting: A specialised branch of accounting which involves classification, accumulation, assignment and control of costs.

CIMA, London defines cost accounting as “the establishment of budgets, standard costs and actual costs of operations, processes, activities or products, and the analysis of variances, profitability or the social use of funds”.

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