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Meaning of Cost Accounting
Previously, cost accounting was considered to be a technique for the ascertainment of costs
of products or services on the basis of historical data. In time, due to the competitive
nature of the market, it was realized that ascertaining of cost is not as important as
controlling costs. Cost accounting started to be considered more as a technique for cost
control as compared to cost ascertainment. Due to the technological developments in all
fields, cost reduction has also come within the ambit of cost accounting. Cost accounting
is, thus, concerned with recording, classifying and summarizing costs for determination of
costs of products or services, planning, controlling and reducing such costs and furnishing
of information to management for decision making.
Concept of Cost
Cost accounting is concerned with cost and therefore is necessary to understand the
meaning of term cost in a proper perspective. In general, cost means the amount of
expenditure (actual or notional) incurred on, or attributable to a given thing. However, the
term cost cannot be exactly defined. Its interpretation depends upon the following factors:
" The nature of business or industry
" The context in which it is used
1. Fixed, Variable and Semi-Variable Costs
The cost which varies directly in proportion with every increase or decrease in the volume
of output or production is known as variable cost. Some of its examples are as follows:
" Wages of laborers
" Cost of direct material
" Power
The cost which does not vary but remains constant within a given period of time and a
range of activity in spite of the fluctuations in production is known as fixed cost. Some of
its examples are as follows:
" Rent or rates
" Insurance charges
" Management salary
The cost which does not vary proportionately but simultaneously does not remain
stationary at all times is known as semi-variable cost. It can also be named as semi-fixed
cost. Some of its examples are as follows:
" Depreciation
" Repairs
Fixed costs are sometimes referred to as "period costs"“ and variable costs as "direct
costs"“ in system of direct costing. Fixed costs can be further classified into:
" Committed fixed costs
" Discretionary fixed costs
Committed fixed costs consist largely of those fixed costs that arise from the possession of
plant, equipment and a basic organization structure. For example, once a building is
erected and a plant is installed, nothing much can be done to reduce the costs such as
depreciation, property taxes, insurance and salaries of the key personnel etc. without
