CHAPTER 1 – BASIC COST CONCEPTS
Meaning of Cost:
Cost refers to any amount of expenditure incurred / attributable to any particular thing.
The method of ascertaining the cost and thereby controlling it is referred to ascosting.
The process of accounting for cost which begins with recording of incomeand expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.
Question I: State the objectives of Cost Accounting.
Objectives of Cost Accounting:
The primary objective of study of cost is to contribute to profitability through Cost Reductionand Cost Control. The following objective of Cost Accounting can be identified.1.
Ascertainment of Cost:
This involves collection of cost information, by recording themunder suitable heads of account and reporting such information on a periodical basis.2.
Determination of selling price:
Selling price is influenced by a number of factors.However prices cannot be fixed below cost save in exceptional circumstances. Hencecost accounting is required for determination of proper selling price.3.
Cost Control and Cost Reduction:
In the long run, higher profits can be achieved onlythrough Cost Reduction and Cost Control.4.
Ascertaining the profit of each activity:
Profit of each department / activity / productcan be determined by comparing its revenue with appropriate cost. Hence CostAccounting ensures profit measurement on an objective basis.5.
Assisting management in decision-making:
Business decisions are taken after conducting Cost-Benefit Analysis. Hence Cost and benefits of various options areanalysed and the Manager chooses the least cost option. Thus Cost Accounting andreporting system assists managers in their decision making process.
Classification of costs:a. On the basis of Time period:
1.Historical Costs: Costs relating to the past period, which has already been incurred.2.Current Costs: Costs relating to the present period.3.Pre-determined Costs: Costs relating to the future period; Cost, which is computed inadvance, on the basis of specification of all factors affecting it.
b. On the basis of Behaviour / Nature / Variability: