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Cost Accounting
Cost Accounting
Accounting Association wrote: ( Cost is a forgoing, measured in monetary terms, incurred or potentially to be incurred to achieve specific objective.
Costing is the technique and process of ascertaining costs. It consists of the principles and rules which are used for ascertaining the costs of products & services.
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.
Institute of Certified Management Accountants (I.C.M.A), London defines cost accounting as the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage, it includes the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned.
1. To ascertain the cost per unit of the different products manufactured by a business concern. 2. To provide a correct analysis of cost both by process or operations and by different elements of cost. 3. To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage. 4. To provide requisite data and serve as a guide to price fixing of products manufactured or services rendered. 5. To ascertain the profitability of each of the products and advise management as to how these profits can be maximized.
6. To exercise effective control of stocks of raw materials, workin-progress, consumable stores and finished goods in order to minimize the capital locked up in these stocks. 7. To reveal sources of economy by installing and implementing a system of cost control for materials, labor and overheads. 8. To advise management on future expansion policies and proposed capital projects. 9. To present and interpret data for management planning, decision-making and control. 10. To help in the preparation of budgets and implementation of budgetary control. 11. To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings.
12. To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labor by machine etc. 13. To organize the internal audit system to ensure effective working of different departments. 14. To organize cost reduction programs with the help of different departmental managers. 15. To provide specialized services of cost audit in order to prevent the errors and frauds and to facilitate prompt and reliable information to management. 16. To find out costing profit or loss.
The above objectives can be re-grouped under three heads: 1. Ascertainment and analysis of cost and income by product, function and responsibility. 2. Providing useful data to management for planning, making sound decisions. 3. Accumulation and utilization of cost data for control purposes to
Every type and kind of activity, regardless of size, in which monetary value is involved should consider the use of cost accounting concepts and techniques. Manufacturing firms, wholesale and retail business, banks and other financial enterprises, insurance companies, transportation companies, railroads, airlines, shipping companies, schools, colleges and universities, hospitals, governmental units, and welfare organizations should employ cost accounting in order to operate efficiently.
Advantage of Cost Accounting: 1. It enables a concern and public enterprises to measure the efficiency and then to maintain and improve it. This is done with the help of valuable data made available for the purpose of comparison. 2. It provides information upon which estimates and tenders are based. 3. It guides future production policies. 4. It enables a determination of profits or losses on a periodical basis, as well as per product, department and/or cost center. Thus, it helps in improving profits. The exact cause of a decrease or increase in profit or loss can be detected. Cost Accounting discloses the relative efficiencies of different workers.
6. It furnishes reliable data for comparing costs in different period, in different departments and processes 7. Helpful to the Government in price fixation, price control, tariff protection, wage level fixation, etc.
Disadvantages of Cost Accounting: 1. Cost Accounting lacks a uniform procedure as different cost accountants can give different interpretations according to their judgment. There are a large numbers of estimates based on assumptions leading to arbitrary profits. 2. It will supply future estimates but future is always uncertain.
1. Financial Accounting provides information about the business in a general way .i.e. its profit and loss & financial position to owners & outsiders. Cost Accounting provides information to management for proper planning, control and decisionmaking. 2. FA lays focus on the recording aspect without attaching any importance to control. 3. CA provides a detailed system of control for materials, labor & overhead costs with the help of standard costing & Budgetary Control. 3. Financial Accounts are the accounts for the whole business & disclose net profit or loss at the end. Cost Accounting can be done even for one part, division or unit of the business and discloses profit or loss of each product, job or service. 4. Financial Accounts relate to commercial transactions and include all expenses (manufacturing, selling & distributing, and administrative). Moreover Financial Accounts are concerned with third party transactions which form the basis for payment or receipt of cash. Cost accounts relate to transactions of manufacture only and includes only expenses for production, as well as Cost Accounts are concerned with internal transaction which do not form part of payment or receipt of cash.
5.
In FA, only monetary information is used. In addition, FA is not maintained with the object of fixation of selling prices. In CA, Non-monetary information is also used. Further, CA provides sufficient data for the fixation of selling prices.
6.
FA do not provide information on efficiency of various workers, plants and machinery. In FA, Stocks are valued at cost or market price whichever is less.
Elements of cost are materials, labor, and other expenses. MATERIAL: The substance from which the finished product is made is known as material. LABOUR: The human effort required to convert the materials into finished product is called labour. OTHER EXPENSES: are those expenses other than materials and labour.
Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are: 1. By the nature of the item(a natural classification): Manufacturing (production or factory cost) and nonmanufacturing (commercial) costs. Commercial expenses fall into two large classifications:
i. ii.
Marketing (distribution or selling) expenses: They begin at the point where the factory costs end. Marketing expenses cover the expenses of making sales and delivering products. Administrative ( general & administrative) expenses: They include expenses incurred in the direction and control, administration of the organization.
2. With respect to the accounting period to which they apply: based on this way, costs are divided into two broad classes: i. Capital expenditure is intended to benefit future periods and is classified as an asset. ii. Revenue expenditure benefits the current period and is termed an expense. 3. By their relation to the product: They are classified as direct and indirect (overhead) cost. i. Direct materials are all materials that form an integral part of the finished product and that can be included directly in calculating the cost of the product, such as the timber to make furniture, and the steel to make automobile bodies. ii. Direct labor is one which can be conveniently identified or attributed wholly to a particular job, product or process. E.g.: wages paid to carpenter, fees paid to tailor.
iii. Overhead is the cost of indirect materials, indirect labor, and all other costs that cannot conveniently be charged to specific units, jobs, or products. Indirect material is one which cannot easily be identified in the product. Indirect labor is one which cannot conveniently be identified or attributed wholly to a particular job, product or process.
At factory level lubricants, oil, consumables, etc. At office level Printing & stationery, Brooms, Dusters, etc. At selling & dist. level Packing materials, printing & stationery, etc.
At factory level foremens salary, works managers salary, gate keepers salary,etc At office level Accountants salary, GMs salary, Managers salary, etc. At selling and dist.level salesmen salaries, Logistics manager salary, etc.
ELEMENTS OF
COST
COST
MATERIALS
OTHER EXPENSES
LABOUR
DIRECT
INDIRECT DIRECT
INDIRECT
DIRECT
INDIRECT
OVERHEADS
DOH
FOH
AOH
SOH
4. By variability (their tendency to vary with volume or activity: fixed, variable, semi-variable. Variable cost are costs that vary directly in relation to change in the volume of output or activity. Fixed cost is fixed in amount i.e. does not vary with change in the volume of output or activity. Semi-variable cost containing both fixed and variable elements.
At factory level factory rent, factory insurance, lighting, etc. At office level office rent, office insurance, office lighting, etc. At sales & dist.level advertising, show room expenses like rent, insurance, etc.
Carriage
Packaging expenses
Nature Function Direct & indirect Variability Controllability Normality Financial accounting classification Time Planning and control Managerial decision making
MATERIALS
LABOUR EXPENSES
MANUFACTURING COSTS
COMMERCIAL COSTS ADM AND S&D COSTS
DIRECT COSTS
INDIRECT COSTS
FIXED COSTS
VARIABLE COSTS SEMI VARIABLE COSTS
CONTROLLABLE COSTS
UNCONTROLLABLE COSTS
NORMAL COSTS
ABNORMAL COSTS
CAPITAL COSTS
REVENUE COSTS DEFERRED REVENUE COSTS
HISTORICAL COSTS
PRE DETERMINED COSTS
BUDGETED COSTS
STANDARD COSTS
MARGINAL COSTS OUT OF POCKET COSTS SUNK COSTS IMPUTED COSTS OPPORTUNITY COSTS REPLACEMENT COSTS AVOIDABLE COSTS UNAVOIDABLE COSTS RELEVANT AND IRRELEVANT COSTS DIFFERENTIAL COSTS
JOB COSTING CONTRACT COSTING BATCH COSTING PROCESS COSTING UNIT COSTING OPERATING COSTING OPERATION COSTING MULTIPLE COSTING
UNIFORM COSTING MARGINAL COSTING STANDARD COSTING HISTORICAL COSTING DIRECT COSTING ABSORBTION COSTING