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Cost Concept

Cost Concept

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Published by Hema Latha

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Published by: Hema Latha on Sep 14, 2010
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Chapter 1
Basic Cost Concepts
Learning Objectives
To understand the meaning of different costingterms
To understand different costing methods
To have a basic idea of different costingtechniques
To understand the meaning of cost sheetIn order to determine and take a dispassionate viewabout what lies beneath the surface of accountingfigures, a financial analyst has to make use of differentmanagement accounting techniques. Cost techniqueshave a precedence over the other techniques sinceaccounting treatment of cost is often both complex andfinancially significant. For example, if a firm proposesto increase its output by 10%, is it reasonable to expecttotal cost to increase by less than 10%, exactly 10% or more than 10%? Such questions are concerned with thecost behavior, i.e. the way costs change with the levelsof activity. The answers to these questions are verymuch pertinent for a management accountant or afinancial analyst since they are basic for a firm¶s projections and profits which ultimately become the basis of all financial decisions. It is, therefore, necessaryfor a financial analyst to have a reasonably goodworking knowledge about the basic cost concepts and
 patterns of cost behavior. All these come within theambit of cost accounting.
eaning of Cost Accounting
 Previously, cost accounting was merely considered to be a technique for the ascertainment of costs of productsor services on the basis of historical data. In course of time, due to competitive nature of the market, it wasrealized that ascertaining of cost is not so important ascontrolling costs. Hence, cost accounting started to beconsidered more as a technique for cost control ascompared to cost ascertainment. Due to thetechnological developments in all fields, cost reductionhas also come within the ambit of cost accounting. Costaccounting is, thus, concerned with recording,classifying and summarizing costs for determination of costs of products or services, planning, controlling andreducing such costs and furnishing of information tomanagement for decision making.According to Charles T. Horngren, cost accounting is aquantitative method that accumulates, classifies,summarizes and interprets information for the followingthree major purposes:
 perational planning and control
Special decisions
Product decisionsAccording to the Chartered Institute of ManagementAccountants, London, cost accounting is the process of accounting for costs from the point at which itsexpenditure is incurred or committed to theestablishment of the ultimate relationship with costunits. In its widest sense, it embraces the preparation of statistical data, the application of cost control methodsand the ascertainment of the profitability of theactivities carried out or planned.Cost accounting, thus, provides various information tomanagement for all sorts of decisions. It serves multiple
 purposes on account of which it is generallyindistinguishable from management accounting or so-called internal accounting. Wilmot has summarized thenature of cost accounting as ³the analyzing, recording,standardizing, forecasting, comparing, reporting andrecommending´ and the role of a cost accountant as ³ahistorian, news agent and prophet.´ As a historian, heshould be meticulously accurate and sedulouslyimpartial. As a news agent, he should be up to date,selective and pithy. As a prophet, he should combineknowledge and experience with foresight and courage.
Objectives of Cost Accounting
 The main objectives of cost accounting can besummarized as follows:1.
etermining Selling Price
 Business enterprises run on a profit-making basis. It is, thus, necessary that revenue should begreater than expenditure incurred in producinggoods and services from which the revenue is to be derived. Cost accounting provides variousinformation regarding the cost to make and sellsuch products or services.
f course, many other factors such as the condition of market, the areaof distribution, the quantity which can besupplied etc. are also given due consideration bymanagement before deciding upon the price butthe cost plays a dominating role.2.
etermining and Controlling Efficiency
 Cost accounting involves a study of variousoperations used in manufacturing a product or  providing a service. The study facilitatesmeasuring the efficiency of an organization as awhole or department-wise as well as devisingmeans of increasing efficiency.

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