Cost Accounting Notes
Subject Overview
Cost Accounting is where B.Com students move from recording transactions to actually costing a product — figuring out what it costs to make something and using that to help managers decide. You'll build a cost sheet from the elements of cost, then work through material and labour cost control (stock levels, wage incentive plans, labour turnover) and the mechanics of overhead absorption using machine hour rates. The paper closes with reconciling cost and financial accounts, an introduction to process and contract costing, and a look at modern costing developments — activity-based costing, JIT, target costing, and total quality management. This is a 6-credit core paper across 4 units, and it's the direct foundation for Management Accounting and Cost & Management Accounting later in the program.
Subject at a glance
4
Units
35
Topics
6
Credits
4
Infographics
Unit-wise Syllabus
4 units — open any unit for detailed topic-wise notes, diagrams and important exam questions
- Meaning
- objectives
- nature and scope of cost accounting
- comparison with financial and management accounting
- cost classification
- cost unit and cost centre
- preparation of cost sheet
- tenders and quotations
- Cost of sales
Cost of production + selling and distribution overheads
- Cost of production
Works cost + office overheads
- Works (factory) cost
Prime cost + factory overheads
- Prime cost
Direct material + direct labour + direct expenses
Study guide
Cost accounting records and analyses the cost of producing goods and services. You learn its meaning, objectives and scope, how it differs from financial and management accounting, cost classification, cost units and cost centres, the preparation of a cost sheet and tenders and quotations. The cost sheet is the most frequent numerical problem, so practise it often.
- Purchase
- storage and control of material
- inventory control techniques
- methods of pricing material issues
- components of labour cost
- idle time and overtime
- wage payment and incentive plans
- labour turnover
- collection and absorption of overheads
- machine hour rate
Economic Order Quantity
EOQ = √(2AO / C)
A = annual demand, O = ordering cost, C = carrying cost
Reorder level
Maximum usage × maximum lead time
Halsey bonus
50% × time saved × rate
Rowan bonus
(Time saved / time allowed) × time taken × rate
Labour turnover
Separations / average workers × 100
Study guide
This unit follows the three elements of cost: material (purchase, storage, inventory control techniques such as EOQ and pricing of issues), labour (idle time, overtime, wage plans, incentive schemes, labour turnover) and overheads (collection, allocation, apportionment, absorption and the machine hour rate). Practise material issue pricing under FIFO, LIFO and weighted average.
- Need for reconciling cost and financial accounts
- reasons for differing profits
- preparation of reconciliation statements
- process costing
- contract costing
- marginal costing and cost-volume-profit analysis basics
Contribution
Sales − variable cost
P/V ratio
Contribution / Sales × 100
Break-even sales
Fixed cost / P/V ratio
Margin of safety
Actual sales − break-even sales
Sales for target profit
(Fixed cost + target profit) / P/V ratio
Study guide
Cost and financial books often show different profits, so you learn to reconcile them and prepare reconciliation statements. The unit also introduces process costing, contract costing, marginal costing and the basics of cost-volume-profit analysis. Learn the format of the reconciliation statement and the break-even formula.
- Budgetary control concept and classification
- cash and flexible budgets
- zero base budgeting
- activity-based costing
- Just-In-Time
- target costing
- life cycle costing
- value analysis
- Kaizen costing
- Total Quality Management
- back-flush costing
- Activity-based costing
- Overheads traced to activities that cause them
- Just-in-time
- Materials arrive exactly when needed
- Target costing
- Start from market price, work back to allowable cost
- Kaizen costing
- Small continuous cost reductions
- Life cycle costing
- Cost over the product's whole life
Study guide
Cost control relies on planning. You study budgetary control, cash and flexible budgets, zero base budgeting and modern techniques: activity-based costing, just-in-time, target costing, life cycle costing, value analysis, Kaizen costing, total quality management and back-flush costing. For the modern techniques, prepare one-line definitions with an example each.
Why Cost Accounting Matters
Cost accounting is central to manufacturing, pricing and profitability analysis, and is a key subject for CMA, CA and finance careers. Knowing how costs behave helps you answer pricing, budgeting and decision questions across business subjects.
How to Prepare for Cost Accounting
- Practise cost sheets, EOQ and overhead absorption problems regularly.
- Learn the break-even formulas and attempt CVP numericals.
- Prepare short definitions of the modern costing techniques.
Cost Accounting: Frequently Asked Questions
What is the difference between financial accounting and cost accounting?
Financial accounting reports the overall financial position to outsiders, while cost accounting analyses the cost of products and processes mainly for management control and decision making.
What is a cost sheet?
A cost sheet is a statement that shows the total cost and cost per unit of a product, broken down into prime cost, works cost, cost of production and cost of sales.