Today's question to solve is about COST ACCOUNTING!

During my MBA classes i found Accounting the most difficult subject and i found 6 out of 10 saying the same so i want to help the students of I.Com, B.COM, M.Com , M.B.A or who ever want to improve their understanding of accounting because after going through the courses i realized that it is only the understanding that troubles, if u could understand the basic things about accounting it is the best as it gives the advantage of 100% scoring in exams ;)

Lets Learn todays question " what is Cost Accounting why it is been used by managers?..what are its basic Approaches"?


"Cost accounting is the process of tracking, recording and analyzing costs associated with the products or activities of an organization. "'

Generally Accepted Accounting Principles (GAAP) are used to govern Financial Statements required by authorities such as governments , auditors and shareholders, cost accounting is governed exclusively by logic. GAAP reporting records historical events and assigns a monetary value to each event that has taken place.

Cost accounting could also be defined as:

"a kind of management accounting that translates the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values. "


  • Managers use cost accounting to support decision making to reduce a company's costs and improve its profitability.
  • In order to support decision-making by management it is fundamentally critical that cost accounting is built on systems that will yield relevant, useful data for decision-making (as opposed to GAAP which uses concepts such as historical costs which have no value for decision-making).


There are at least three approaches:

  • Standard Cost Accounting
  • Activity-based Costing
  • Marginal Costing

Standard Cost Accounting

The concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production.

  • This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.

For example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000/100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000/50)), a relatively minor difference.

Activity-based costing (ABC)

Activity-based costing (ABC) is as system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company. "Talking with customer regarding invoice questions" is an example of an activity performed inside most companies.

  • Each product or service is produced and delivered via the activities performed in the company. The accountant can then assign the different activities to the different products using an appropriate allocation method.

For example, a job based manufacturer may find that a high percentage of their workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a currency amount that will be associated with the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for the resolutions of this process deficiency. Activity-based management includes (but is not restricted to) the use of activity-based costing to manage a business.

Marginal Costing:

This method is used particularly for short-term decision-making. Its principal tenets are:

  • Revenue (per product) - Variable Costs (per product) = Contribution (per product)
  • Total Contribution - Total Fixed Costs = Total Profit or (Total Loss)

Thus it does not attempt to allocate fixed costs in an arbitrary manner to different products. The short-term objective is to maximize contribution per unit. If constraints exist on resources, then Managerial Accounting dictates that marginal cost analysis be employed to maximize contribution per unit of the constrained resource.

Other COSTING Methods:

More varieties of costing methods have been proposed in order to tailor for different aspects of the business. Some of the uprising ones include inventory costing method, process costing, average costing method, target costing method.

to be contd...

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