Cost Accounting refers to that branch of accounting which deals with costs incurred in the production of units of an

organization. On the other hand,financial accounting refers to the accounting concerned with recording financial data of an
organization, in order to exhibit exact position of the business.

Cost accounting generates information so as to keep a check on operations, with an aim of maximizing profit and efficiency of
the concern. Conversely, Financial accounting ascertains the financial results, for the accounting period and the position of the
assets and liabilities on the last day of the period. There is no comparison between these two because they are equally important
for the users. This article presents you the difference between cost accounting and financial accounting in tabular form.

Content: Cost Accounting Vs Financial Accounting

BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Meaning Cost Accounting is an accounting system, Financial Accounting is an accounting system that
through which an organization keeps the track captures the records of financial information about the
of various costs incurred in the business in business to show the correct financial position of the
production activities. company at a particular date.

Information type Records the information related to material, Records the information which are in monetary terms.
labor and overhead, which are used in the
production process.

Which type of cost is Both historical and pre-determined cost Only historical cost.
used for recording?

Users Information provided by the cost accounting is Users of information provided by the financial
used only by the internal management of the accounting are internal and external parties like
organization like employees, directors, creditors, shareholders, customers etc.
managers, supervisors etc.

Valuation of Stock At cost Cost or Net Realizable Value, whichever is less.

Mandatory No, except for manufacturing firms it is Yes for all firms.
mandatory.

Time of Reporting Details provided by cost accounting are Financial statements are reported at the end of the
frequently prepared and reported to the accounting period, which is normally 1 year.
management.

Profit Analysis Generally, the profit is analyzed for a particular Income, expenditure and profit are analyzed together
product, job, batch or process. for a particular period of the whole entity.

Purpose Reducing and controlling costs. Keeping complete record of the financial transactions.

Forecasting Forecasting is possible through budgeting Forecasting is not at all possible.

techniques.

management accounting :

management accounting is the type of accounting which assist management in planning and decision-making and thus
known as decision accounting.
 BASIS OF
COST ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

Meaning The recording, classifying and summarising The accounting in which the both financial and non-
of cost data of an organisation is known as financial information are provided to managers is known
cost accounting. as Management Accounting.

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of production. Providing information to managers to set goals and
forecast strategies.

Scope Concerned with ascertainment, allocation, Impart and effect aspect of costs.
distribution and accounting aspects of cost.

Specific Procedure Yes No

Recording Records past and present data It gives more stress on the analysis of future projections.

Planning Short range planning Short range and long range planning

Interdependency Can be installed without management Cannot be installed without cost accounting.
accounting.

Cost concepts:

1.odering cost: Ordering costs are the expenses incurred to create and process an order to a supplier. These costs are
included in the determination of the economic orderquantity for an inventory item. Examples of ordering costs are: ... Cost of
the labor required to inspect goods when they are received

2.Pre production cost:

Pre-production Costs on Long-term Supply Arrangements Pre-productionengineering, research and

development costs related to products made for customers under long-term supply agreements are expensed as incurred.

3.travelling cost:

In general, you should expect it to cost between $20,000 to $30,000 per person to travel around the world for a year. This
rough estimate comes from reading travel budgets of other bloggers, varioustravel planning resources, and our own
experience

4.expired cost

An expired cost is a cost that has been recognized as an expense. This happens when an entity fully consumes or receives
benefit from a cost (sometimes resulting in the generation of revenue). An expired cost may also be construed as the total
loss in value of an asset.

5.Urgent Care Cost

the Annals of Internal Medicine study found that the average cost of an urgent care visit for three common illnesses — middle
ear infection, pharyngitis and urinary tract infection — was $155. Other estimates place the average urgent care visit at
anywhere from $71 to $125

6. Cost policy

policy cost. a fixed cost, such as advertising cost, which is governed by the management's policy on the amount of
advertising to be done. undercharge.
 7.out of stock cost

Stock-out Costs is the cost associated with the lost opportunity caused by the exhaustion of the inventory. The exhaustion
of inventory could be a result of various factors. The most notable amongst them is defective shelf replenishment practices.

8.carrying cost

n marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of holding inventory. This
includes warehousing costssuch as rent, utilities and salaries, financial costs such as opportunity cost, and
inventory costs related to perishability, shrinkage (leakage) and insurance

9.added value cost

A value added cost is incurred when an asset is consumed in order to increase thevalue of goods or services to the
consumer. Examples of value added costs are the direct materials, direct labor, and installation costs associated with a sale

Which are the techniques in Cost Accounting?

The techniques of costing facilitate managerial decision making. The different types are

Marginal Costing

As per this technique, the management may decide the number of units to be produced. Suppose a toy unit is already
producing 100 units of ‘Dancing Monkey’ toy, this technique will help the management understand that if the production is
increased to 150, will it be profitable. In this technique, only the variable costs for additional units produced will be considered.
Fixed costs are not taken into consideration as they do not vary with changes in production.

Standard Costing

In this technique of costing the costs incurred are compared to the predetermined cost of the product, process or project. The
variances are analyzed to bring about cost-effectiveness.

Direct Costing

In this technique all the direct costs incurred for a particular product, process or project are charged to it and the indirect costs
are written off to profit and loss.

Historical Costing

It is comparison of all costs incurred after the process is performed.

Uniform Costing

In this technique same costing practices are followed across certain units to facilitate comparison.

Costing Methods & Important Cost Terms

1. Fixed cost:

Fixed costs are those costs that do not vary with respect to changes in output and would accrue even if no output was
produced. E.g. Rent, interest payments, property taxes and employee salaries. However, fixed costs are restricted to specific
time frame, since over the long run fixed costs can vary. For example, a manufacturer may decide to expand capacity in
tandem to the increase in demand for its product, requiring a higher level of expenditure on plant and equipment.

2. Variable Cost:

Variable cost changes proportionately to the level of output. For manufacturers, the key variable cost is the cost of materials.

3. Total Cost:

It is defined as the sum of fixed, variable and semi variable costs.

4. Direct and Indirect cost:

Direct costs typically include the major components for manufacturing goods and the labor directly required to produce those
goods. Direct costs are also referred to as prime costs. On the other hand, indirect costs include plant-wide costs such as those
resulting from the use of energy and fixed capital. Indirect costs are also referred to as overhead.

5. Incremental cost:

It is mainly the extra cost associated with manufacturing one additional unit of production. It is also referred to as differential
cost.
6. Opportunity Cost:

It is defined as the cost of an alternative that is forgone (benefit, profit, value given up) in order to pursue a certain action.

7. Sunk Cost:

It is the cost that is already incurred and cannot be recovered.

Cost Accounting - Classification of Cost

By Nature

In this type, material, labor and overheads are three costs, which can be further sub-divided into raw materials, consumables,
packing materials, and spare parts etc.

By Degree of Traceability of the Product

Direct and indirect expenses are main types of costs come under it. Direct expenses may directly attributable to a particular
product. Leather in shoe manufacturing is a direct expenses and salaries, rent of building etc. come under indirect expenses.

By Controllability

In this classification, two types of costs fall:

 Controllable - These are controlled by management like material labour and direct expenses.

 Uncontrollable - They are not influenced by management or any group of people. They include rent of a building,
salaries, and other indirect expenses.

By Relationship with Accounting Period

Classifications are measured by the period of use and benefit. The capital expenditure and revenue expenditure are classified
under it. Revenue expenses relate to current accounting period. Capital expenditures are the benefits beyond accounting period.
Fixed assets come under category of capital expenditure and maintenance of assets comes under revenue expenditure
category.

By Association with the Product

There are two categories under this classification:

 Product cost - Product cost is identifiable in any product. It includes direct material, direct labor and direct overheads.
Up to sale, these products are shown and valued as inventory and they form a part of balance sheet. Any profitability
is reflected only when these products are sold. The Costs of these products are transferred to costs of goods sold
account.

 Time/Period base cost - Selling expenditure and Administrative expenditure, both are time or period based
expenditures. For example, rent of a building, salaries to employees are related to period only. Profitability and costs
are depends on both, product cost and time/period cost.

By Functions

Under this category, the cost is divided by its function as follows:

 Production Cost - It represents the total manufacturing or production cost.

 Commercial cost - It includes operational expenses of the business and may be sub-divided into administration cost,
and selling and distribution cost.

By Change in Activity or Volume

Under this category, the cost is divided as fixed, variable, and semi-variable costs:

 Fixed cost - It mainly relates to time or period. It remains unchanged irrespective of volume of production like factory
rent, insurance, etc. The cost per unit fluctuates according to the production. The cost per unit decreases if production
increases and cost per unit increases if the production decreases. That is, the cost per unit is inversely proportional
to the production. For example, if the factory rent is Rs 25,000 per month and the number of units produced in that
month is 25,000, then the cost of rent per unit will be Rs 1 per unit. In case the production increases to 50,000 units,
then the cost of rent per unit will be Rs 0.50 per unit.

 Variable cost - Variable cost directly associates with unit. It increases or decreases according to the volume of
production. Direct material and direct labor are the most common examples of variable cost. It means the variable
cost per unit remains constant irrespective of production of units.

 Semi-variable cost - A specific portion of these costs remains fixed and the balance portion is variable, depending
on their use. For example, if the minimum electricity bill per month is Rs 5,000 for 1000 units and excess consumption,
if any, is charged @ Rs 7.50 per unit. In this case, fixed electricity cost is Rs 5,000 and the total cost depends on the
consumption of units in excess of 1000 units. Therefore, the cost per unit up to a certain level changes according to
the volume of production, and after that, the cost per unit remains constant @ Rs 7.50 per unit.