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Cost Accounting

Cost accounting comprises all types of costs incurred during production, and it is necessary for determining future business decisions.

Cost is a crucial factor in determining the profitability of any business. Estimation of the total cost of a unit or a product or a process is critical for cost control and management. All the costs involved can be divided into batch costing, unit costing, process costing, operating costing, task costing and contract to cost. 

Output Costing

One of the methods of costing for a unit or product is called single, unit, or output costing. The cost per unit of output or production is determined using output cost accounting. The cost per unit is calculated by dividing the entire price by the total quantity generated. 

When the output is in similar quantitative units and the production process is continuous, this method of costing is used. The entire cost of production is calculated by adding all types of expenditure such as prime cost, work/factory cost, office cost, and cost of sales.

The output costing method can be divided into two categories: 

  • Cost sheet: A cost sheet or the statement of cost describes cost components at various stages
  • Production account: The production statement or account is another option for presenting cost elements in a vertical style
  • Both the cost sheet and the production account provide the same information with one exception

Components of Cost

  • Office Costs

Cost of production or administration cost means the same as office costs. All office costs add up to the manufacturing or work costs and the office and administrative overheads, excluding the sales and distribution costs. The price of goods sold is calculated by adjusting the overall manufacturing costs with the opening and closing stock of finished goods.

  • Factory Costs

Work costs, manufacturing costs and production costs describe factory costs. It is the prime costs and factory overheads, which comprise indirect materials, indirect labour, and manufacturing overheads. Factory costs include all product-related direct costs as well as factory-related indirect costs.

  • Prime Costs

Direct, flat, basic and first costs are all about the prime costs. It includes all the direct manufacturing costs, such as direct material, direct labour, and direct expenses.

  • Sales Cost

Total cost is another term for sales costs. Sales costs are calculated by multiplying the cost of items sold with the selling and distribution overheads.

  • Treatment for raw material

The cost sheet must include the actual value of the raw material consumed. The opening and closing stock of raw material is adjusted with the raw material purchased during the year to arrive at this value.

  • Treatment for work-in-progress

The part of the stock that hasn’t been made into a final product yet is known as work-in-progress or WIP. There is still some work to be done before it can be considered finished items and put up for sale. 

It can be appraised based on prime or factory costs. However, valuing it at prime cost is erroneous because commodities can incur overhead expenses. Before arriving at the real or network or factory costs, the opening stock of WIP is added, and the closing stock of WIP is deducted from the gross work cost.

  • Treatment for finished goods

Finished goods are the final products in the production line. Because no additional costs are added at the factory level, it is evaluated at the cost of manufacture. The finished product adjustment is critical for establishing the cost of goods sold. We can calculate the cost of products sold by adding the opening quantity of completed goods to the cost of production and subtracting the closing supply of finished goods.

  • Treatment for scrap

Scrap is what is leftover from the manufacturing process. It is of low value and can be sold to recoup some production costs. Scrap is created by low-quality raw materials and flaws in product design, manufacturing processes, and so on. 

The money gained from the sale of scrap should be deducted from manufacturing overheads or gross work costs. If some materials (before being used) are determined to be defective and regarded as scrap, the value of the raw material should be modified, and the total cost of the material should be lowered.


Rail and steel firms used cost accounting to control expenses and improve competitiveness. Since the early 20th century, cost accounting has been a hot topic in company management literature. 

A company’s internal management department uses cost accounting to define the variable and fixed expenses of the manufacturing process. It will first compute and report these costs on an individual basis, then compare input costs to the total output. Hence, cost accounting helps the company make better decisions, whereas outside investors or creditors use financial accounting.


Frequently asked questions

Get answers to the most common queries related to the UPSC Examination Preparation.

What is the historical cost sheet?

Answer: The historical cost sheet takes into account the real historical cost ...Read full

What is the production account approach of output cost accounting?

Answer: Another way to provide cost data for accurate calculation and analysis...Read full

What is job costing?

Answer: A job is a customised work order received from a customer with specifi...Read full

What is a bill of materials?

Answer: The bill of materials is prepared by the production and planning department which has a list of materials an...Read full