What is cost accounting?
Cost accounting is the record of what it costs to make a product or provide a service. It collects materials, labour, and overhead so the business can see the cost of a job, a process, or an activity.
What does it record?
A direct cost is traced to the product, such as raw material and the labour that works on it. An overhead is a cost that is shared, such as rent of the works or supervision, and it is assigned to products by a method the business chooses and then applies consistently. The record is for decisions inside the business: whether a job recovered its cost, where the actual cost left the expected cost, and which product contributed to profit. It does not replace the financial statements.
Which methods are used?
| Method | What it collects |
|---|---|
| Job costing | Costs of one job or batch, used where each job is distinct |
| Process costing | Costs of a continuous process, averaged over the units of that process |
| Activity-based costing | Overheads assigned through the activities that cause them |
| Standard costing | A predetermined cost, compared later with the actual cost |
| Marginal costing | Variable costs on the product, with fixed costs treated as a cost of the period |
When is a cost audit required?
Section 148 lets the Central Government direct specified classes of companies to keep cost records and to have them audited by a cost accountant. A company that is not in a specified class does not file a cost audit. The statutory audit of the financial statements is a different audit, including for a small company, and it is explained on the company audit page.
How is inventory valued?
Accounting Standard 2 values inventories at cost or net realisable value, whichever is lower. Cost is assigned by first-in-first-out or by a weighted average. Last-in-first-out is not used. The same method is followed from year to year.
Frequently asked questions
Four questions cover the statutory audit, who needs a cost audit, inventory, and price.
Is cost accounting the statutory audit?
No. Cost accounting is the company’s own record of cost. The statutory audit is the auditor’s report on the financial statements, and every company has that audit.
Does every company need a cost audit?
No. Section 148 applies only to the classes of companies the Central Government specifies. A company outside those classes keeps cost information for its own decisions.
Can inventory be valued on LIFO?
No. Accounting Standard 2 allows first-in-first-out and weighted average. Last-in-first-out is not a permitted method.
Does cost accounting set the selling price?
It shows the cost. The price is still a commercial decision. The record does not require a particular margin.
Sources
A cost audit is section 148 of the Companies Act. Inventory is Accounting Standard 2. The statutory audit of financial statements is a separate requirement.