Introduction to Cost Accounting
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define cost accounting
➛ Distinguish between financial accounting and cost accounting
➛ Identify types of costs
➛ Classify costs | fixed, variable, direct, indirect
➛ Understand the purpose of cost accounting in business
➛ Apply basic cost classification in simple scenarios
Key Vocabulary
➛ Cost Accounting
➛ Cost
➛ Direct Cost
➛ Indirect Cost
➛ Fixed Cost
➛ Variable Cost
➛ Overhead
➛ Cost Control
What Is Cost Accounting?
Cost accounting is the process of
➛ Recording, analyzing, and controlling costs of production
It helps businesses
➛ Determine product cost
➛ Control expenses
➛ Set prices
➛ Improve efficiency
Cost Accounting vs Financial Accounting
Feature
Purpose
Users
Focus
Detail
Purpose
Users
Focus
Detail
Cost Accounting
Internal decision-making
Managers
Costs and efficiency
Detailed
Internal decision-making
Managers
Costs and efficiency
Detailed
Financial Accounting
External reporting
Investors, regulators
Profit and financial position
Summarized
External reporting
Investors, regulators
Profit and financial position
Summarized
Types of Costs
1. Direct Costs
➛ Directly linked to production
➛ Easy to trace
Examples
➛ Raw materials
➛ Direct labor
Types of Costs
2. Indirect Costs | Overhead
➛ Cannot be directly traced
➛ Shared across products
Examples
➛ Rent
➛ Electricity
➛ Factory supervisor salary
Cost Behavior Classification
1. Fixed Costs
➛ Do not change with production level
Examples
➛ Rent
➛ Salaries
Cost Behavior Classification
2. Variable Costs
➛ Change with production volume
Examples
➛ Raw materials
➛ Packaging
Summary Table
Cost Type
Direct Cost
Indirect Cost
Fixed Cost
Variable Cost
Direct Cost
Indirect Cost
Fixed Cost
Variable Cost
Description
Traceable to product
Not directly traceable
Constant
Changes with output
Traceable to product
Not directly traceable
Constant
Changes with output
Example
Raw materials
Factory rent
Rent
Materials
Raw materials
Factory rent
Rent
Materials
Importance of Cost Accounting
➛ Helps determine product pricing
➛ Improves cost control
➛ Supports budgeting and planning
➛ Enhances profitability
➛ Aids decision-making
True or False
➛ Cost accounting is mainly for internal use
➛ Financial accounting focuses on cost control
➛ Direct costs can be easily traced to products
➛ Fixed costs change with production
Fill in the Blanks
1. Costs that change with production are called __________ costs
2. Costs that remain constant are called __________ costs
3. Indirect costs are also known as __________
4. Cost accounting helps in __________ control
Cost Classification
Classify each as Direct/Indirect and Fixed/Variable
➛ Raw materials
➛ Factory rent
➛ Machine electricity | based on usage
➛ Supervisor salary
Scenario Analysis
A furniture company produces chairs.
Costs include
➛ Wood
➛ Carpenter wages
➛ Factory rent
➛ Electricity
Tasks
➛ Identify direct and indirect costs
➛ Identify fixed and variable costs
Mini Case Study
A company struggles with rising production costs and declining profits.
Questions
➛ How can cost accounting help?
➛ What type of costs should management analyze first?
➛ How can cost classification improve decision-making?
➛ Give one strategy to reduce costs
Quick Quiz
➛ What is cost accounting?
➛ Name two types of costs
➛ What is a fixed cost?
➛ What is overhead?
➛ Why is cost accounting important?
Answers ➧ Here
Job Order Costing ➧ Here