Page 96 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 5: Basic Cost Concepts

5.1 Meaning of Cost Accounting Notes

It is the process of classifying, recording and appropriate allocation of expenditure for the
determination of costs of products or services through the presentation of data for the purpose
to take decisions and guide the business organization.
The following table explains the differences between the cost accounting and management
accounting:
Table 5.1: Difference between Cost and Management Accounting

S.No. Point of Difference Cost Accounting Management Accounting
1. Objectives Its main purpose is to Its major objective is to take decisions
ascertain the cost and through supplement presentation of
control accounting information
2. Scope It deals only with the It not only deals with the cost but also
cost and related revenue. It is wider than the cost accounting
aspects
3. Utilization of Data It uses only It uses both qualitative and quantitative
quantitative information for decision making
information pertaining
to the transactions
4. Utility It ends only at the But it starts from where the cost accounting
presentation of ends; means that the cost information are
information major inputs for decision making
5. Nature It deals with the past But it deals with future policies and course
and present data of actions

5.2 Preparation of Cost Sheet

Cost sheet is a document that provides for the assembly of an estimated detailed cost in respect
of cost centers and cost units. It analyzes and classifies in a tabular form the expenses on different
items for a particular period. Additional columns may also be provided to show the cost of a
particular unit pertaining to each item of expenditure and the total per unit cost.

Cost sheet may be prepared on the basis of actual data (historical cost sheet) or on the basis of
estimated data (estimated cost sheet), depending on the technique employed and the purpose to
be achieved.

To find out the unit cost of the product, the statement of cost plays pivotal role in determining
the cost of production, cost of goods sold, cost of sales and selling price of the product at every
stage.
During the preliminary stage of preparing the cost statement of the product, there are two
things to be borne in our mind at the moment of classification:
1. Direct cost classification
2. Indirect cost classification.

5.2.1 Direct Cost Classification

Under this classification, the direct costs of the product or service are added together to know the
volume of total direct cost. The total volume of direct cost is known as “Prime Cost”
Direct Materials + Direct Labour + Direct Expenses = Prime Cost

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