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Cost Accounting

Cost Accounting

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Published by Afzal Abdulla

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Published by: Afzal Abdulla on Aug 10, 2012
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01/29/2015

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COST ACCOUNTING: AN INTRODUCTION
Cost accounting is the process of accounting for cost. This process begins withrecording of income and expenditure and ends with preparation of statisticaldata. It is an art of determining the cost. It is a mechanism by which cost of products are ascertained and controlled.
COST ACCOUNTING
 – 
MEANING
Cost accounting is concerned with recording, classifying and summarizing costsfor determination of costs of products or services, planning, controlling andreducing such costs and furnishing of information to management for decisionmaking.
COST
 – 
MEANING:
Cost means the amount of expenditure (actual or notional) incurred on, orattributable to, a given thing.
COSTING-MEANING:
Costing is the technique and process of ascertaining cost.
IMPORTANT AMENDMENTS: COMPANIES ACT, 1956
 
In 1965 the GOI was authorized to make cost accounting compulsory fora company engaged in any industry notified in that order.
 
As per act each company should prepare its accounts as per CostAccounting Records rules given for various industries.
 
As per section. 209(i)d the recording of cost accounts has been madelegally compulsory.
 
 
From 1
st
 
January, 2004 „MAOCARO‟ has been changed by „CARO‟
(Company Audit Report Order). Auditor has to submit his audit report as
 per rules given in the „CARO‟ from now onwards.
CHARACTERISTICS OF COST ACCOUNTS
1. Cost accounts are important part of financial accounts.2. The knowledge of per unit cost of production or service is obtained from costaccounts3. Detail records are maintained for materials , labour and expense in theseaccounts4. Adequate control on material, labour and expenses is maintained.
OBJECTIVE OF COST ACCOUNTS1.
 
Cost Ascertainment:
The main object of cost accounting is to ascertainthe cost of production correctly. Cost of two periods can be compared,selling price of items produced is fixed and tender or quotation price canbe ascertained with the help of cost accounting.
 
2.
 
Cost Control:
The cost of production can be controlled by cost accounts.Every producer wants that his real cost should be more than its standardcost. If real cost is higher, efforts are made it to control it.
3.
 
Cost Reduction:
In order to increase the sale every industrialist tries toavoid the wastage of various elements of cost (material, labour and otherexpenses) with the help of cost accounts and thus, to reduce the cost.
 
4.
 
Helpful in Decision-Making:
Cost accounting helps the management inproviding information for managerial decisions for formulating operativepolicies. These policies relate to the following matters:a.
 
Determination of cost-volume-profit relationship.b.
 
Make or buy a componentc.
 
Shut down or continue operation at a loss
 
d.
 
Continuing with the existing machinery or replacing them byimproved and economical machines.
 5.
 
To Provide reliable cost data
: To main objects of cost accounting is toprovide reliable data for controlling business activities and forascertaining cost of production.
Essentials of a good Cost Accounting System:
i.
 
The Cost Accounting System should be tailor made, practical, simple andcapable of meeting the requirements of a business concern.ii.
 
The method of costing should be suitable to the industry and serve itsobjectives.iii.
 
The Costing System should receive co-operation and participation of executives from various departments.iv.
 
The cost of installing and operating the system should justify the results.v.
 
The system of costing should not sacrifice the utility by introducingmeticulous and unnecessary details.vi.
 
The system should consider the organisational structure of the businessand it should be designed as a sub-system of the overall organisation.vii.
 
There should be a harmonious relationship between costing system andfinancial accounts. Unnecessary duplication should be avoided. A singleintegrated accounting system would be ideal.
LIMITATIONS OF COST ACCOUNTING:
Like other branches of accounting, cost accounting is not an exact science but is an art which hasdeveloped through theories and accounting practices based on reasoning andcommon sense. These practices are not static but changing with time. Costaccounting lacks a uniform procedure. There is no stereotyped system of costaccounting applicable to all industries. There are widely recognised costconcepts but understood and applied differently by different industries. Costaccounting can be used only by big enterprises. The limitations of costaccounting are as follows:i.
 
It is expensive because analysis, allocation and absorption of overheadsrequire considerable amount of additional work.ii.
 
The results shown by cost accounts differ from those shown by financialaccounts. Preparation of reconciliation statements frequently is necessaryto verify their accuracy. This leads to unnecessary increase in workload.

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