cost accounting


It is better to review the basics concepts, costing  methods and techniques and elements of costing before we work out a costing for a spinning mill.

Cost accounting is a system of determining the costs of products or services. It has primarily developed to meet the needs of management.  It provides detailed cost information to various levels of management for efficient performance of their functions.

Financial accounting provides information about profit , loss, cost etc., of the collective activities of the business as a whole. It does not give the data regarding costs by departments, products, processes and sales territories etc. Financial accounting does not fully analyze the losses due to idle time, idle plant capacity, inefficient labour, sub-standard materials, etc. Cost accounting is not restricted to past. It is concerned with the ascertainment of past, present and expected future costs of products manufactured or services supplied. Cost accounting provides detailed cost information to various levels of management for efficient performance of their functions.

"A cost  is the value of economic resources used as a result of producing or doing the things costed"

Cost is ascertained by cost centres or  cost units or by both.

For the purpose of ascertaining cost, the whole organisation is divided into small parts of sections. Each small section is treated as a cost centre of which cost is ascertained.   A cost centre is defined as " a location, person, or item of equipment(or group of these) for which costs may be ascertained and used for the purpose of control.  A cost accountant sets up cost centres to enable him to ascertain the costs he needs to know. A cost centre is charged with all the costs that relate to it. The purpose of ascertaining the cost of  cost centre is cost control.  The person in charge of a cost centre is held responsible for the control of cost of that centre.

Cost unit  breaks up the cost into smaller sub-divisions and helps in ascertaining the cost of saleable products or services. A cost unit is defined as a " unit of product , service or time in relation to which cost may be ascertained or expressed."   For example in a spinning mill the cost per kg of yarn may be ascertained. Kg of yarn is cost unit.  In short  Cost unit is unit of measurement of cost.



Method of  costing refers to the techniques and processes employed in the ascertainment of costs. The method of costing to be applied in a particular concern depends upon the type and nature of manufacturing activity.   Basically there are two methods of costing

1.Job costing:   Cost unit in job order costing is taken to be a job or work order for which costs are separetely collected and computed.

2.Process costing:  This is used in mass production industries manufacturing standardised products in continuous processes of manufacutring. Cost are accumulated for each process or department. For spinning mills , process costing  is employed.


These techniques  may be used for special pupose of control and policy in any business irrespective of the method of costing being used there.

Standard costing:  This is the valuable technique to control the cost. In this technique, standard cost is predetermined as target of performance and actual performance is measured against the standard.  The difference between standard and actual costs are analysed to know teh reasons for the difference so that corrective actions may be taken.

Marginal costing: In this technique, cost is divided into fixed and variable and the variable is of special interest and importance. This is because, marginal costing regards only variable costs as the costs of products.  Fixed cost is treated as period cost and no attempt is made to allocate or apportion this cost to individual cost centres   or cost units.


Cost Ascertainment is concerned with computation of actual costs. Ascertainment of actual costs reveals unprofitable activities  losses and inefficiencies  .

Cost Estimation  is the process of predetermining costs of goods or services. The costs are determined in advance of production and precede the operations. Estimated costs are definitely the future costs and are based on teh average of the past  actual costs adjusted for future anticipated changes in future. Cost estimates are used in the preparation of the budgets. It helps in evaulating performance. It is used in preparing projected financial statements. Cost estimates may serve as targets in controlling   the costs.



Costs are classified into direct costs and  indirect costs on the basis of their identifiability with cost units or processesses or cost centres.

DIRECT COST: These are the costs which are incurred for and conveniently indentified with a particular cost unit, process or equipment. For a spinning mill, costs of rawmaterial used, packing material, freight etc are direct costs

INDIRECT COST: These are general costs and are incurred for the benefit of  a number of cost units, processes or departments. These costs cannot be conveniently identified with a particular cost unit or cost centre. In a spining mill, power cost, administrative wages, managerial salaries, materials used in repairs etc are indirect costs.

The terms direct and indirect should be used in relation to the object of costing. An item of cost may be direct cost in one case and the same may be indirect in the other case.It is the nature of business and the cost unit chosen  that  will determine whether a particular cost is direct or indirect.

FIXED AND VARIABLE COSTS; Costs behave differently when level of production rises or falls. Certain costs change in sympathy with production level while other costs remain unchanged. As such on the basis of behaviour or variability, costs are classifed into fixed, variable and sem-variable.

FIXEDCOSTS; These costs remain constant in "total" amount over a wide range of activity for a specified period of time. They do  not increase or decrease when the volume of production changes.

VARIABLE COSTS: These costs tend to vary in direct proportion to the volume of  output. In other words, when volume of output increases, total variable cost also increases and vice-versa.

ELEMENTS OF COST: A cost is composed of three elements i.e. material , labour and expense. Each of these elements  may be direct or indirect.

Direct material Indirect material
Direct labour Indirect labour
Direct expenses Indirect expenses


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