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The basic object of accounting is to provide information to the interested parties. Accounting information is required by the persons inside the organisation and also by the outsiders, such as government, creditors, bankers, customers etc. On the basis of information based on accounting, important decisions are taken. The decisions of economic resource allocation is primarily based on the accounting information. The financial accounting system provides the basic information useful to the businessman.

Accounting may be classified as follows:


1.  Financial Accounting

2. Cost Accounting

3.   Management Accounting

Financial accounting provides information about the income, expenditure, profits, losses and the financial position of the Organisation. This information is helpful to the management to control the major function of the business i.e. finance, production distribution etc. However, financial statements are historical because they belong to past. Management is interested in future. The management has to prepare budgets for the future. The budgets are to be prepared considering the present. For that, another branch of accounting is helpful i.e. Cost Accounting. The, actual performance is compared with budgeted and the variances are found out. It helps for control. Another type of accounting is Management Accounting which is mainly useful for decision making.

So the limitations of financial accounting has developed the cost accountancy. The areas covered by cost accounting are wide and expanding everyday. It has become possible to evaluate the performance and take proper decisions for the future.


Cost means total of all expenses. Cost is the total expenditure incurred on a given thing. To obtain something, expenditure is incurred and the total of expenditure is called cost. The something may be a product, service, job, operation ,and process etc. The cost of an article consists of actual outgoings incurred in its production and sale. Anthony and welsch has defined Cost as follow 

“Cost is a measurement,in monetary terms, of the amount of resources used for some purpose. Cost is different from value. Cost is measured in terms of money whereas value is in terms of usefulness or utility of an article. Cost is also different from of price includes cost and profit (or loss). It can shown as follows.

                  Materials                                XXX

         + Labour                                          XXX

         + Indirect Expenses                       XXX

                Cost                                    ______________


              + Profit                                 X


                 Price                                xxx



Cost Accountancy is the application of costing and accounting principles for ascertaining the profitability. It is the application of costing methods, techniques and principles to the art, science and practice of cost control and ascertainment of profitability. It includes presentation of information which is useful to the management for decision making. So we can say Cost Accountancy is the art, science and practice of cost accountant.

It is science because it includes body of systematic knowledge. Practice means continuous efforts to achieve the excellence. Art means skill and ability. The cost accountant should possess knowledge and he should make efforts to get excellence in his job. At the same time he should acquire skill and ability to apply the knowledge in actual life. So cost accountancy is an art, science and practice of cost accountant.

Cost Accountancy includes Costing and Cost Accounting. So it is essential to see what is mean by Cost Accounting.

 1. Costing

Costing is a technique and process of ascertaining the cost. There are rules and principles which are to be followed to calculate the cost of any product or service. The rules are Flexible. They change according to change in time and circumstances. The costing process is a routine work.

The Institute of Cost and Management Accountant of England has defined costing as “the ascertainment of cost” Different types of costing techniques are used in different industries, such as, historical costing, absorption costing, marginal costing, standard costing etc. In other words, it is an aid to management for various management purposes.

2. Cost Accounting

It is the process of accounting for cost which begins with recording of income and expenditure and ends with the preparation of statistical data. Cost Accounting is the mechanism by which cost is ascertained and controlled. The costs are analysed and classified as per the convenience. The cost incurred at each stage of production is ascertained. The cost incurred an each element of cost is important. That means expenditure on material, labour and overheads must be known to the management. So it enables management to control and reduce the Cost  Accounting is the method that collects, classifies, summarises, and interprets information for product costing, control and decision making.

I.C.M.A. England defines Cost Accounting as “an application of accounting and costing principals, methods and techniques in the ascertainment of cost.”

Wheldon defines Cost Accounting as “Cost Accounting is the classifying, recording and appropriate allocation of expenditure for the determination of cost of product or service, the relation of these cost to sales values and the ascertainment of profitability.”

So Cost Accounting is a process or mechanism by means of which cost of product or service are ascertained with reasonable degree of accuracy. In broader sense, cost accounting is concerned with advising management in historical and future costs and thereby helping planning, control and decision making. It provides management with variety of information to plan and control the business.


The limitations of financial accounting has given rise to the new branch of accounting i.e. cost accountancy. The following are major limitations of financial accounting.

(1)    Financial accounting gives us the net result of the business as a whole. It does not show  division-wise profits or losses. It does not indicate result of each department, job, process or operation. Further it shows only the numerical result but does not give the reasons for that.

(2)    Financial accounting does not can not give cost of each product or unit which is necessary for determining the price of product, job, service or line of production.

(3)    Financial accounting does not provide any system by which data can be classified according to each department or division. Data is required for each division, line of product, territory, service etc. For taking proper decisions. But financial accounting fails to provide such information.

(4)    It dose not provide any mechanism by which control can be kept over each element of cost i.e. material, labour and  overheads.

(5)    Financial accounting does not classify the expenses into direct and indirect groups and also as to controllable and uncontrollable expenses. So this limitation gives rise to lack of control over expenses.

(6)    In Financial Accounting there is no proper system of standards. So one cannot compare the actual cost with the standard cost. The performance according to the standards can not be judged for appraisal of the efficiency. There must be standard for each stage of cost, for each division and process. But financial accounting fails to supply such service.

(7)    Financial accounting is historical. It is about the past performance. It does not provide cost incurred on day to day to day operation. Financial data is  summarised  at the end of the year. So there is no proper control over the day to day cost.

(8)    This system of accounting does not provide the causes of losses, such as defective material or idle time or excessive usage of material or unnecessary expenditure etc. So management is unable to know exact cause of the loss and not able to correct the situation.

(9)    It does not provide proper system of reporting to the inside and outside interested parties. The parties like government, creditors, banks, trade associations, insurance companies are interested in the information about the business. But they do not get proper information.

(10)  There is no useful reporting system for financial decision making. Management has to take some decisions about new products, mechanism, computerization, pricing policy, sales area, marketing strategy, production, investment, priority of priority of products and sales area etc. For such decisions feed  back data is not provided by the financial accounting.

(11)  Financial accounting cannot help in taking decision in number of areas such as: diversification of production, sale or buy, make or buy, discarding any line of product, continuation of product running into losses, wage rate increase etc.

(12)  Financial accounting fails of depict a clear picture of operating efficiency when prices go up or come down on account of inflation or depression.

(13)  Cost reduction is not possible under financial accounting system as it fails to analyse the cost according to department or job or process.


 The following are the main objectives of Cost Accounting:

(1)    To ascertain the cost of product and service under different circumstances by using different methods and techniques.

(2)    To fix the selling price under different circumstances and cases.

(3)    To determine the and control the efficiency by setting standards for various elements of cost, such as material, labour and overheads.

(4)    To calculate the amount of stock and inventory at any given period of time, so that financial statements can be prepared quickly.

(5)    To provide proper base for taking important operative decisions like make or buy, cost volume ratio, close or continue at the stage of loss, change or continue the existing method or production etc.


Cost Accounting serves various purposes which justify its introduction in a business. The following are the purposes of functions of cost accounting.

➤ 1)      Ascertainment of Cost: The cost of product or service is ascertained by cost accounting technique. For that various costing methods are used.

➤ 2)      Fixing Selling Price: The business unit has to determine the selling price of his product. The cost of the product should be recovered by the price. While fixing the price, other factors are to be taken into account such as, market conditions, consumers demand, supply etc.

➤ 3)      Classification of Cost: Cost Accounting helps to analyse and classify cost. It helps to out wastage of material and labour. Such analysis helps for taking corrective action so that better utilization of resources can be done.

➤ 4)      Preparation of Tenders: Information is provided about the cost so that estimates and tenders can be prepared. It provides scope for price adjustment to meet the market conditions.

➤ 5)      Control of Efficiency : It is a management tool to indicate the inefficiency at various levels. The weak areas of operation can be identified and proper action can be taken to efficiency.

➤ 6)      Preparation of Budgets and Standards: Cost Accounting provides data for preparation of various budgets and standard costs. The comparison of standards and actuals gives the variances. The causes for variances can be found out and correctives action can be taken to increase the efficiency.

➤ 7)      Preparation of Financial Statements: It is useful for preparing final accounts at any stage of time because financial and cost data is available immediately. It also provides a perpetual inventory of stores and other materials and hence it is possible to prepare final accounts at any given time.

➤ 8)      Future Expansion: It gives advise to the management on future expansion policies and proposed capital projects.


The importance of cost accounting is to the following parties.

1)      To Management

2)      To Workers

3)      To Creditors

4)      To Government

5)      To Public Enterprises

6)      To General Public

Let us consider each case.

➤ 1)     To Management: Cost Accounting helps immensely to the management in carrying out its function i.e. planning, decision-making, organizing, control etc. Useful information is provided by it that helps in operational efficiency. It processes the information by way of collecting, analysis, standarding, comparing and reporting.

Cost Accounting is tool to the management. It provides data about cost of product, operation, service, service, job and process. It also provides data about alternative choices under different circumstances. It helps management in taking decisions in the area of financial planning, production policy and capital investment etc.

➤ 2)      To Workers: Cost Accounting reveals the relative efficiency of group of workers. It becomes possible to introduce various wage and incentive plans to the workers. So adequate reward is given to workers and their efficiency is enhanced.

➤ 3)      To Creditors: With the help of cost accounting the creditors and the investors can judge the financial position of the business. The creditworthiness of the business is judged. It attracts the investors.

➤ 4)      To  Government: Cost Accounting is useful to the government in many areas. It can prepare national plan, decide priority sector, formulate industrial policy, taxation policy and excise duty etc. It provides figures to the government for price fixation, price control, wage level, dividend and settlement of disputes.

➤ 5)      To Public Enterprises: A good costing system ensures efficient and effective control over the enterprise. It provides graded financial control. It measures efficiency and profitability of the enterprise so that decision can be taken and about continuation of it.

 ➤  6)  To General Public: The object of cost accounting is to reduce the cost and maximise the profits of the business. When the cost is reduced the ultimate benefit goes to the customers in the form of lower prices. The installation of costing system in the business gives confidence to the public about the firmness of business.


Cost Accounting renders the following advantages to the business unit.

1)      Cost Accounting system provides the data about profitable and unprofitable products. So management can take corrective action to improve the situation in inefficient units.

2)      Production methods can be improved and changed to increase the productivity and thereby profits can be increased.

3)      Data regarding each element cost helps management to reduce wastages, idle time etc.

4)      It becomes possible to fix competitive price of the product as the cost data available is correct and reliable.

5)      Standards can be set and actual can be compared with it. So the variances are found out. The causes for variances are analysed and reported to the management. The corrective action is taken to remove the unfavourable things.

6)      The inefficiencies in plant occur due to wastage of materials, use of old machinery, wrong man power etc. Such inefficiencies cause a great damage. Proper cost accounting may remove such inefficiencies.

7)      Cost accounting aids the management to know the best course of action i.e. selecting the most suitable alternative. The decisions about make or buy, continue or drop the product line, operate or shut etc. Can be taken properly with the help of costing methods.

8)      Final accounts can be prepared quickly as the inventory data is available at any time. The data is acurate and reliable. The continuous stock taking system also helps in keeping check and control over the inventory.

9)      The sound costing system in the business prevents frauds and manipulation. At the same time it reduces the chances of mistakes in data preparation.

10)   It ensures maximum utilisation of available resources so that maximum profits can be made.


Cost Accounting is the art, science and practice of cost developed  over a period of time through practice. The theories are basel logic and reasoning. The theories have been tested in different circumstances and have been accepted over the time. However, costing is not full-proof system.

It is not pure science. The techniques may change according to change in time.It suffers from some limitations. The following are some of the limitations of cost accounting.


1)      Lack  of Uniformity: There is no uniform procedure in cost accounting and this is the greatest drawback of it. No costs can be said to be exact, because conventions influence the things. For example, in pricing the issue of materials to the production, various methods are used, such as, LIFO, FIFO etc. So in each case the material cost and ultimately the total cost will be different. There is no uniformity in the use of a single method.

2)      Large Number of Convention: There are different conventions for different cost allocation. So each case gives different result. The cost ascertained by costing system may not be accurate and it may be only the estimate.

3)      Applicability: Costing is costly but it is more perfect. But in small size industries, it becomes expensive to install a costing system.


The cost Accounting system includes the function of collecting the data relevant to the cost, further, the data is to be analysed and classified according to the need of business. The data is to be presented to the management in the required manner so that management can take proper decisions. So the costing system in the business house should be such that it will help the needs of the management. Costing System is costly but it is more perfect than any other system. So it should be treated as investment and not the unnecessary expenditure. The business has to develop its own costing system according to its needs. The requirements of the business should be take into account and accordingly the costing system should be set in.

When a costing system is to be installed in the business, the following points should be considered carefully as pre-requisites of a good costing system.


1)      It should be correctly decided that as to why costing system is to be installed. That means the purpose of system should be fixed first and then only the proper system con be set in.

2)      The techniqualities of the business should be taken into account while setting the costing system. For example layout of the factory, process of production, stages in each process, simplicity or complexity of production etc.

3)      Material cost is important unit of cost. So for material control proper systems should be choosen for material requisition, purchase requisition, receipt of material storage of material issue of material, pricing of issue of material etc.

4)      The costing system should be easy to operate and simple to understand, so that it will run smoothly and the purpose can be achieved.

5)      It should be seen that there will be minimum documentation and less clerical work involved. The maximum use of computers should be made. The system should be set in such a technical way that maximum work would be done on computers.

6)      Standard printed forms may be provided with clear instructions as to their use. The number of forms in the system should be kept minimum so far as it become possible.

7)      The costing system should provide data in time so that cost can be ascertained accurately and immediately.

8)      The system should be set in such way that there remains no loophole and cost can be controlled at each and every cost centre.

9)      While installing the costing system the financial accounting system in the business should be studied. The system should be such that reconciliation with each other becomes possible.

10)   It is very important to fix the cost centres where the cost is collected. According to the cost centre fixation, the costing system should be installed.

11)   The determination of cost unit is also very important because accordingly the system is channelised.

The costing system installed in the business should be fall proof. It should be perfect. It should serve the purpose for which it is set in.

The following are characteristics of Ideal Costing Systam.

1)    It should provide accurate and reliable data of the business so that the management can rely upon it and can take valuable decisions.

2)    The data collected should be presented in a systematic  manner so that required information can be drawn from it.Computers can be of great use for presentation of the data.

3)    The information should be provided regularly, systematically and promptly.

4)   The information should be complete in nature from all points of view so that correct idea of state of affairs can be had at any time.



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