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Cost Accounting

Cost Accounting

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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 with recording of income and expenditure and ends with preparation of statistical data. 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 costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making.

COST – MEANING: Cost means the amount of expenditure (actual or notional) incurred on, or attributable 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 for a company engaged in any industry notified in that order.  As per act each company should prepare its accounts as per Cost Accounting Records rules given for various industries.  As per section. 209(i)d the recording of cost accounts has been made legally compulsory.

 From 1st 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 cost accounts 3. Detail records are maintained for materials , labour and expense in these accounts 4. Adequate control on material, labour and expenses is maintained.

OBJECTIVE OF COST ACCOUNTS 1. Cost Ascertainment: The main object of cost accounting is to ascertain the cost of production correctly. Cost of two periods can be compared, selling price of items produced is fixed and tender or quotation price can be 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 standard cost. If real cost is higher, efforts are made it to control it. 3. Cost Reduction: In order to increase the sale every industrialist tries to avoid the wastage of various elements of cost (material, labour and other expenses) with the help of cost accounts and thus, to reduce the cost. 4. Helpful in Decision-Making: Cost accounting helps the management in providing information for managerial decisions for formulating operative policies. These policies relate to the following matters: a. Determination of cost-volume-profit relationship. b. Make or buy a component c. Shut down or continue operation at a loss

d. Continuing with the existing machinery or replacing them by improved and economical machines. 5. To Provide reliable cost data: To main objects of cost accounting is to provide reliable data for controlling business activities and for ascertaining cost of production. Essentials of a good Cost Accounting System: i. ii. iii. iv. v. vi. vii. The Cost Accounting System should be tailor made, practical, simple and capable of meeting the requirements of a business concern. The method of costing should be suitable to the industry and serve its objectives. The Costing System should receive co-operation and participation of executives from various departments. The cost of installing and operating the system should justify the results. The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details. The system should consider the organisational structure of the business and it should be designed as a sub-system of the overall organisation. There should be a harmonious relationship between costing system and financial accounts. Unnecessary duplication should be avoided. A single integrated 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 has developed through theories and accounting practices based on reasoning and common sense. These practices are not static but changing with time. Cost accounting lacks a uniform procedure. There is no stereotyped system of cost accounting applicable to all industries. There are widely recognised cost concepts but understood and applied differently by different industries. Cost accounting can be used only by big enterprises. The limitations of cost accounting are as follows: i. It is expensive because analysis, allocation and absorption of overheads require considerable amount of additional work. ii. The results shown by cost accounts differ from those shown by financial accounts. Preparation of reconciliation statements frequently is necessary to verify their accuracy. This leads to unnecessary increase in workload.

iii.

It is unnecessary because it involves duplication of work. Some industrial units are functioning efficiently without any costing system. Costing system itself does not control costs. If the management is alert and efficient, it can control cost without the help of the cost accounting. Therefore it is unnecessary

iv.

ELEMENTS OF COST

COST

MATERIALS

OTHER EXPENSES LABOUR

DIRECT

INDIRECT DIRECT

INDIRECT

DIRECT

INDIRECT

OVERHEADS
DOH

FOH

AOH

SOH

MATERIAL: The substance from which the finished product is made is known as material. DIRECT MATERIAL is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc. INDIRECT MATERIAL is one which cannot be easily identified in the product. Examples of Indirect material:

At factory level – lubricants, oil, consumables, etc. At office level – Printing & stationery, Brooms, Dusters, etc. At selling & dist. level – Packing materials, printing & stationery, etc. LABOUR: The human effort required to convert the materials into finished product is called labour. DIRECT LABOUR is one which can be conveniently identified or attributed wholly to a particular job, product or process. Eg:wages paid to carpenter, fees paid to tailor,etc. INDIRECT LABOUR is one which cannot be conveniently identified or attributed wholly to a particular job, product or process. Examples of Indirect labour: At factory level – foremen‟s salary, works manager‟s salary, gate keeper‟s salary,etc At office level – Accountant‟s salary, GM‟s salary, Manager‟s salary, etc. At selling and distribution level – salesmen salaries, Logistics manager salary, etc. OTHER EXPENSES are those expenses other than materials and labour. DIRECT EXPENSES are those expenses which can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc. INDIRECT EXPENSES are those expenses which cannot be directly allocated to particular job, process or product. Examples of other expenses: At factory level – factory rent, factory insurance, lighting, etc. At office level – office rent, office insurance, office lighting, etc. At sales & distribution level – advertising, show room expenses like rent, insurance, etc.

Cost Sheet: Cost sheet is a statement, which shows various components of total cost of a product. It classifies and analyses the components of cost of a product. Previous periods data is given in the cost sheet for comparative study. It is a statement which shows per unit cost in addition to Total Cost. Selling price is ascertained with the help of cost sheet. COST SHEET DIRECT MATERIAL DIRECT LABOUR DIRECT EXPENSES PRIME COST FACTORY OVERHEADS FACTORY COST

OFFICE OVERHEADS COST OF PRODUCTION

SELL & DIST OVERHEADS COST OF SALES PROFIT

SALES

Cost Sheet for the product……. from …….. To……………. Units produced…. Elements of costs Direct material Direct Labour Direct expenses Prime Cost Production or Works or Factory Overheads: Administration overhead of Production nature Research & development cost Quality control cost Factory Cost Add: Opening WIP Less: Closing WIP Works Cost Add: Packing cost Less: Credit for scrap Cost of production Add: Opening stock of finished goods Less: Closing stock of finished goods Cost of goods sold Marketing overheads: Administration overhead of marketing nature selling overhead Distribution overhead Cost of sales Add: Profit Estimated sales price Amount (Rs.) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx

xxxx xxxx xxxx xxxx xxxx xxxx

METHODS OF COSTING • JOB COSTING • CONTRACT COSTING • BATCH COSTING • PROCESS COSTING • UNIT COSTING • OPERATING COSTING • OPERATION COSTING • MULTIPLE COSTING JOB COSTING Job Costing is that category of basic costing method which is applicable where the work consists of separate contract jobs or batches each of which is authorized by specific order or contract. JOB COST SHEET particulars Materials Labour Direct expenses Prime cost Overheads : Variable Fixed Total cost Profit Selling price xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx amount amount xxxxx xxxxx xxxxx xxxxx

OPERATION COSTING Companies that manufacture goods that undergo some similar and some dissimilar processes use this system. Operation costing accumulates total conversion costs and determines a unit conversion cost for each operation. However, direct material costs are charged specifically to products as in joborder systems. Operating cost sheet Particulars A. Fixed Charges wages of drivers salary of office staff tax and insurance etc interest and other charge total fixed cost (A ) B. Variable charges Diesel Depreciation total variables cost(B) Total cost( A+B) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxxx xxxxx Total cost cost per km

TYPES OF COSTING • UNIFORM COSTING • MARGINAL COSTING • STANDARD COSTING • HISTORICAL COSTING • DIRECT COSTING • ABSORBTION COSTING

UNIFORM COSTING According to C.I.M.A (London), “Uniform Costing refers to a system of costing under which several under-takings use the same costing principles or practices”. MARGINAL COSTING Marginal Costing means, “The ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs.” STANDARD COSTING According to C.I..M.A (London), standard costing is defined as “The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and point of incidence”. HISTORICAL COSTING Historical Costing means, “A measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. The historical-cost method is used for assets in the U.S. under generally accepted accounting principals (GAAP)”.

DIRECT COSTING Direct Costing is a method in which the cost of a product or operation is determined by allocating to it an appropriate portion of the variable (direct)costs ABSORBTION COSTING A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base.

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