Cost Accountancy envisages application of costing and cost accounting in a business setup.

It includes
determination of selling price and profitability in addition to forecasting of expenses and future probable
incomes. It facilitates management with cost control initiatives, ascertainment of profitability and informed
decision making. Besides, costing and cost accounting, the following areas are also covered under cost
accountancy: Cost Reduction is aimed at achieving real and permanent reduction in the unit cost of goods
produced or services rendered without compromising the quality or suitability Cost Control refers to search
for better and more economical ways of completing the current operations. It simply identifies and
prevents waste within the existing environment. Cost Audit includes the verification of cost accounts and a
check on their adherence to the cost accounting principles, plans, procedures and objectives

COST ACCOUNTING Vs FINANCIAL ACCOUNTING

Financial Accounting and Cost Accounting rest on the same basic principles and
use the same
records, but each deals with matters specially pertaining to itself. Financial
Accounting discloses
the profit/loss of business as a whole during a particular period while cost
accounting makes
available the unit costs and profits and/or losses of different product lines. The
importance of both, cost accounting and financial accounting cannot be
undermined. The
two are different from each other on the basis of meaning, objectives, mode of
presentation,
recording, analyzing profit, periodicity of reporting, degree of accuracy and
method of valuation
of stock
IMPORTANCE OF COST ACCOUNTING
The management of the company requires detailed information with respect to
cost of operations
so as to equip the executives with relevant information required for planning,
scheduling,
controlling and decision making. This is facilitated by Cost Accounting. By cost
management,
waste elimination, utilization of idle capacity, cost accounting helps to increase
the overall
productivity of an organization.
The importance of cost accounting can be summarized by categorizing the
major parties
benefiting and the respective benefits accruing as follows:
Management
1.Aids in price fixation
2. Helps in preparing estimate
3. Supports channelising production on right lines
4.Assists in elimination of wastages
5.Makes comparison possible across periods and across product lines
6.Provides data for periodical profit and loss accounts
1.Aids in determining and enhancing efficiency
2.Helps in inventory control
3.Facilitates cost reduction
4.Assists in increasing productivity
Employees
1.Makes available systems of incentives, bonus plans etc.
2.Indirectly benefits through increase in consumer goods and directly
through continuous employment and higher remuneration
Creditors
1.Provides a base for judgement about the profitability and further prospects of the
company
Economy
1.Facilitates control of costs, elimination of wastages and inefficiencies, thus, leading to
the progress of the industry and in consequence of the nation as a whole

COST CENTRE
According to the Chartered Institute of Management Accountants, England, cost centre means
―a location,person or item of equipment or group of these for which costs may be ascertained
and used for the purpose ofcost controlǁ. It can be a department or a sub-departmentor an item of
equipment or machinery or a group of persons.
PROFIT CENTRE
A profit center is a business unit or department within an organization that generates revenues
and profits or losses. Here, both the inputs and outputs are measured in monetary terms, and
accounting for both costs and revenues results in automatic computation of profit with respect to
this centre, termed as profit centre.
ELEMENTS OF COST
The basic elements of cost can be illustrated as follows:
TECHNIQUES OF COSTING
In addition to the above stated methods, the following techniques of costing
are used by
management for the purpose of managerial decision making and controlling
costs.
MARGINAL COSTING
Marginal costing has been defined as ‗the accounting system in which variable
costs are charged
to cost units and the fixed costs of the period are written-off in full against the
aggregate
contribution.‘Fixed overheads are excluded on the ground that in cases where
production varies,
the inclusion offixed overheads may give misleading results.
COST-VOLUME-PROFIT (CVP) ANALYSIS
CVP analysis examines the interaction of a firm’s sales volume, selling price,
cost structure, and
profitability. It is a powerful tool in making managerial decisions including
marketing, production,
investment, and financing decisions.
 How many units of its products must a firm sell to break even?
 How many units of its products must a firm sell to earn a certain amount of
profit?
 Should a firm invest in highly automated machinery and reduce its labor
force?
 Should a firm advertise more to improve its sales?
CVP Model – Assumptions
Key assumptions of CVP model
 Selling price is constant
 Costs are linear and can be divided into variable and fixed elements.
 In multi-product companies, sales mix is constant
 In manufacturing companies, inventories do not change
Assists in establishing prices of products.
Assists in analyzing the impact that volume has on short-term profits.
Assists in focusing on the impact that changes in costs (variable and fixed)
have on
profits.
Assists in analyzing how the mix of products affects profits
Cost-Volume-Profit Graph
CVP graphs can be used to gain insight into the behavior of expenses and
profits. The basic CVP
graph is drawn with Revenues in Rs. term on the vertical axis and unit sales
on the horizontal axis.
Total fixed expense is drawn first and then variable expense is added to the
fixed expense to draw
the total expense line. Finally, the total revenue line is drawn. The total profit
(or loss) is the vertical
difference between the total revenue and total expense lines. The break-even
occurs at the point
where the total revenue and total expenses lines cross.
The Limitations of CVP Analysis
A number of limitations are commonly mentioned with respect to CVP
analysis:
The analysis assumes a linear revenue function and a linear cost function.
The analysis assumes that price, total fixed costs, and unit variable costs
can be accurately identified and
remain constant over the relevant range.
The analysis assumes that what is produced is sold.
For multiple-product analysis, the sales mix is assumed to be known.
The selling prices and costs are assumed to be known with certainty.
Break-Even Analysis: We can accomplish break-even analysis in one of two
ways. We can use the
equation method or the contribution margin method. We get the same results
regardless of the method
selected. You may prefer one method over the other. It’s a personal choice,
but be aware that there
are problems associated with either method. Some are easier to solve using
the equation method,
while others can be quickly solved using the contribution margin method.
Break-even analysis can be approached in two ways:
1. Equation method
2. Contribution margin method
Break-Even Analysis and Target Profit Analysis:-
Target profit analysis is concerned with estimating the level of sales required
to attain a specified
target profit. Break-even analysis is a special case of target profit analysis in
which the target profit is
zero.
1. Basic CVP equations. Both the equation and contribution (formula)
methods of break-even
and target profit analysis are based on the contribution approach to the
income statement. The
format of this statement can be expressed in equation form as:
Profits = Sales Variable expenses Fixed expenses
In CVP analysis this equation is commonly rearranged and expressed as:
Sales = Variable expenses + Fixed expenses + Profits
a. The above equation can be expressed in terms of unit sales as follows:
Price Unit sales = Unit variable cost Unit sales + Fixed expenses +
Profits

Unit contribution margin Unit sales = Fixed expenses + Profits

Unit sales = Fixed expenses +Profits
Unit contribution margin
b. The basic equation can also be expressed in terms of sales in Rs. using the
variable expense
ratio:
Sales = Variable expense ratio Sales + Fixed expenses + Profits

(1 Variable expense ratio) Sales = Fixed expenses + Profits

Contribution margin ratio* Sales = Fixed expenses + Profits

Sales = Fixed expenses +Profits
Contribution margin ratio
* 1 Variable expense ratio = 1Variable expenses
Sales
= Sales-Variable expenses
Sales
= Contribution margin
Sales
= Contribution margin ratio
2. Break-even point using the equation method. The break-even point is
the level of sales at
which profit is zero. It can also be defined as the point where sales total
equals total expenses
or as the point where total contribution margin equals total fixed expenses.
Break-even
analysis can be approached either by the equation method or by the
contribution margin
method. The two methods are logically equivalent.
a. The Equation Method—Solving for the Break-Even Unit Sales. This
method
involves following the steps in section (1a) above. Substitute the selling price,
unit variable
cost and fixed expense in the first equation and set profits equal to zero. Then
solve for
the unit sales.
b. The Equation Method—Solving for the Break-Even Sales in Rs.. This
method
involves following the steps in section (1b) above. Substitute the variable
expense ratio and
fixed expenses in the first equation and set profits equal to zero. Then solve
for the sales.

3. Break-even point using the contribution method. This is a short-cut

method that jumps
directly to the solution, bypassing the intermediate algebraic steps.
a. The Contribution Method—Solving for the Break-Even Unit Sales.
This method
involves using the final formula for unit sales in section (1a) above. Set profits
equal to
zero in the formula.
BUDGETARY CONTROL
No system of planning can be successful without having an effective and efficient system of control.
Budgeting is closely connected with control. The exercise of control in the organisation with the help of
budgets is known as budgetary control.
The process of budgetary control includes
(i) preparation of various budgets
(ii) continuous comparison of actual performance with budgetary performance
(iii) revision of budgets in the light of changed circumstances.
A system of budgetary control should not become rigid. There should be enough scope for flexibility to
provide for individual initiative and drive. Budgetary control is an important device for making the
organisation more efficient on all fronts. It is an important tool for controlling costs and achieving the overall
objectives.
Installing A Budgetary Control System
Having understood the meaning and significance of budgetary control in an organisation, it will be useful for
you to know how a budgetary control system can be installed in the organisation. This requires first of all,
finding answers to the
following questions in the context of an organisation:
What is likely to happen?
What can be made to happen?
What are the objectives to be achieved?
What are the constraints and to what extent their effects can be minimised?