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Costing - Meaning Cost accounting is the process of determining and accumulating the cost of product or activity. It is a process of accounting for the incurrence and the control of cost. It also covers classification, analysis, and interpretation of cost. In other words, it is a system of accounting, which provides the information about the ascertainment, and control of costs of products, or services. It measures the operating efficiency of the enterprise. Cost Accounting is an essential part of accountancy which has been developed to meet the managerial needs of business organizations. Present Age is the Age of Competition. The success of a business to the large extent depends to a great extent upon his ability to reduce the cost of a production to the minimum. This would require a vigilant control of all expenses. Costing Accounting serves as a means in this direction. It indicate the cost of production, item wise and profit per unit. It helps the management in cost and control reduction. Cost Management has been developed because of the limitations of financial accounting and needs of management. The main objective of Financial Accounting is recording of business transactions and ascertaining the results. It does not give importance to cost control aspects. Where as costing, costing gives most importance to cost control aspects. In short, cost accounting deals with the cost of production, selling and distribution. Cost Accounting: It is a formal system of accounting for costs by means of which cost of products and services are ascertained and controlled Cost Accountancy: This is the widest of all the terms. It is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. Costing – Definitions: The following are some of the important definitions regarding costing. Costing is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services. – Wheldon. Cost accounting is the science of recording and presenting the business transactions pertaining to; the production of goods and services, where by these records become a method of measurement and a means of control.
A) Primary Objectives 1. iii) Linking the production to expenses: There are various techniques like absorption costing and marginal costing. ii) Measurement of production: There are various methods of costing like process costing. There are various methods to ensure cost control. Primary Objects: The main advantage of Cost Accounting is cost ascertainment Cost Ascertainment: It implies i) Collection and analysis of expenses ii) Measurement of production and iii) Linking of production to expenses. job costing. standard costs for collection of expenses. i) Collection of expenses: There are various systems of Costing like historical Costs. Setting up of standards and budgets for expenses and production performance. 3. B) Cost Ascertainment Cost Presentation Cost Control Subsidiary Objectives A) 1. 3. Cost Presentation: The second object of costing is Cost reporting. Appropriate cost information should be sent to right persons in right time in proper form. 4. 2.Objectives of Cost Accounting The objectives of Cost Accounting may be classified into two categories namely a) Primary Objectives and b) Subsidiary Objectives. for linking production with the expenses. They are: 1. Cost Control: Another important object of Costing is Cost Control. estimated costs. Comparing the actual with standards to find out variations. output costing for measuring the quantity of production. . 2. 3. Analysing the reasons for such variation Taking corrective action to eliminate variations. Different printed forms are used for efficient reporting. 2.
4. To assists the management in determining the selling price. To helps the management for formulating the operational policies such as a) b) c) d) Determination of cost volume profit relationship.. As such. 3. the benefits to be derived from Cost Accounting depend upon the need for it. Cost system: Systems and procedures are devised for proper accounting for costs. Replacing the old production methods by improved methods. Shutting down or operating at loss. 2. is the important function of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the budgeted costs and fixation of responsibility for cost increases. Hence. To help the management to carry on production with utmost efficiency. Such recording is preferably done on the basis of double entry system. . 1. products and services. 3. 5. jobs.B) Subsidiary Objectives: 1. etc. 4. principles of Cost Accounting cannot be verified with experiments. Cost comparisons: Cost accounting also includes comparisons between cost from alternative courses of action such as use of technology for production. cost of making different products and activities. planning and control. suitability of the system designed and it efficient working. services. men and machinery. Nature and Scope of Cost Accounting There is no ready made system of Cost Accounting suited to all business concerns. Cost accounting is an organized boy of knowledge. and cost of same product/ service over a period of time. Cost ascertainment: Ascertaining cost of products. Although Cost Accounting is an organized body of knowledge. To facilitate the presentation of financial and other statements very quickly. 5. 2. processes. Cost book-keeping: It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments. Hence it is necessary to devise a system suited to each type of business. Making a buying from outside suppliers. this discipline is not an exact science. As such it consists of certain principles and rules subject to which the technique of Cost Accounting should be applied. To helps the Management to prevent the wastage in material.
so that the necessary correct action may be taken. Thus. performance appraisal and managerial decision making. Aids in Price fixation By using demand and supply. by using different techniques such as Job costing and Process costing. These reports are primarily for use by the management at different levels. activity. Elimination of wastage As it is possible to know the cost of product at every stage. Cost Reports form the basis for planning and control. it becomes possible to check the forms of waste. we can state that cost is analysed to know whether the current level of costs is satisfactory in the light of standards set in advance. Cost Reports: Presentation of cost is the ultimate function of cost accounting. The advantages are as follows: Helps in ascertainment of cost Cost accounting helps the management in the ascertainment of cost of process.6. such as time and expenses etc. etc. . The producer can take necessary help from his costing records. Helps in Cost reduction Cost can be reduced in the long-run when cost reduction programme and improved methods are tried to reduce costs.. are in the use of machine equipment and material. The importance of cost accounting are as follows: 1. product. The importance of cost accounting. It involves a detailed examination of each cost in the light of benefit derived from the incurrence of the cost. Cost Control: Cost accounting is the utilisation of cost information for exercising control. contract. market condition to a great extent. also determine the price of product and cost to the producer does play an important role. Helps in identifying unprofitable activities With the help of cost accounting the unprofitable activities are identified. It is difficult to indicate where the work of cost accountant ends and managerial control begins. activities of competitors. 7. Importance to Management Cost accounting provides invaluable help to management. Job.
Advantages to the Public Cost accounts aid in reducing and controlling costs which means supplying of goods to the consumers at lower prices. including supervisors. It has become a policy of many banks that no loans will be made to industrial units unless such concerns have complete cost accounting systems which produce cost reports showing satisfactory trends.Advantages of Costing Primarily Costing is developed to meet the necessities of Management. . process or contact or any other unit of production. Industry. enterprises owned by the Government. Efficiency of Public Enterprises can be measured and maintained only through a systematic collection of costing data and its study. trade etc. It is an important tool in the hands of Management to run the business efficiently. 2. 3. They help in fixing price and in forming the price fixation policy particularly when an industry produces several commodities. clerks. 6.e. 4. The advantage of costing of various agencies can be summarized as under. Advantages to Creditors Cost Accounts help the creditors to study the financial position and strength of the business concerns to which they desire to give loans. Excise duty etc. foreign. commerce. But there are various other agencies also who are benefited by cost accounting. They assist the management in developing cost calculations for new products and designs and to determine the profitableness or otherwise of the proposed changes. Advantages to the Government Cost Accounts enable the assessment of Income Tax. It facilitates the formulation of policies with regard to public finance. 1. Advantages to the Management: a) b) c) d) Cost Accounts enable the Management to ascertain the true cost of each article. Advantages to employees The personnel of many business enterprises have benefited by the establishment of incentives in the form of piece rates and bonus plans which may be used to compensate all classes of workers. departments heads and major executives. They provide a reliable basis upon which tenders and estimates may be prepared. Advantages to the public enterprises: Cost accounts play an important role in public enterprises i. business.. 5.
selling and include only those expenses and which enter into the production. about the profit and loss and operation. But now Companies Act has made it obligatory to keep cost records in Recording some manufacturing industries.. job or service Reporting of Costs Nature of Transactions business as a whole The costs are reported aggregate in financial accounts Financial accounts relate in The costs are broken down on a unit basis in cost accounts to Cost accounts relate to commercial transactions of the transactions connected with the business and include all expenses manufacture of goods and services viz. . It tells management for proper planning. according to manner i. financial position of the business to making. the They independent in nature and discloses profit or loss of each disclose the net profit or loss of the product.e.Distinguish between Cost Accounting and Finance Accounting The main differences between financial accounting and cost accounting are given as under: Point of Distinction Purpose Financial Accounting Cost Accounting provides information an to It provides information about the It business in a general way. labour and accounts of the whole business. It classified. to meet the Companies Act and Income Tax requirements of management. according to the nature the purposes for which the costs Control of expense It lays emphasis on the recording aspect without attaching importance to control are incurred It provides a detailed system of overhead costs with the help of standard costing and budgetary Periodicity of Reporting Analysis of Profit control It reports operating results and It gives information through cost financial position usually at the end reports to management as and of the year Financial accounts are when desired the Cost accounting is only a part of financial accounts and control decision- any control for materials. records and analyses It records the expenditure in an the transaction in a subjective objective manner i.. office.e. Form of Accounts owners and other outside parties These accounts are kept in such a These accounts are generally kept way as to meet the requirements of voluntarily Act. manufacturing.
pharmaceuticals etc. This system is suitable to all types of contractors and ship builders.. Job Costing: It refers to a system of costing in which costs are ascertained in terms of specific job or orders. it deals with are recorded0 Fixation of Selling Price Financial accounts are monetary as well as non-monetary information) not Cost accounting provides sufficient maintained with the object of fixing data for fixation of selling prices. Monetary information is only used Non-monetary information like units (i. 1. constructional engineers. Contract Costing: It is a method of costing applied to ascertain the costs incurred on each contract and profit earned or less incurred on each sub-contract. This method is suitable for contractors.e. selling prices Limitations of Cost Accounting In spite of various advantages. Very expensive: As the installation cost of costing is very expensive only big business concerns use costing. and the accounts show the cost of each order. garages. two cost Accountants may arrive two different results from the same information. Lack of Uniform Procedure: As costing contains estimates. books. 4.. Different Methods of Costing: The following are the important methods of costing: 1. Absence of a ready made system: There is no stereo typed costing system applicable to all industries and even firms in the same industry. printers. Varied cost concepts: Since different costs are used for different purposes. This is also known as terminal or contract costing. only monetary transactions is also used (i. 2. builders.e. and road construction. or contract. For example. actual costs are different from standard costs and both are different from estimated costs. . The unit of cost is the job. order.Cost accounts are concerned with internal transactions which do not form the basis of payment or Information receipt of cast. costing suffers with the following limitations. municipal engineers. no one cost is suitable for all purposes. furniture manufacturer. film studios. repair shops. 2. Hence Cost accounting results can be taken as mere estimates. 3. shipbuilding.
5. This is frequently necessary because of the need of control of expenditure in a department e. the cost per unit is ascertained by dividing the total expenditure with the number of units produced in a given period. oil drilling etc. water-works. are not separately distinguishable from one another during one or more processes of manufacture. paper mills. etc. Operation Costing: This is a method of unit costing by operations in connection with mass production and repetitive production. or c) the products. Each batch is separately costed. or passenger – KM as the unit of cost. Process Costing: This is sometimes referred to as Continuous or Average Costing. process costing for another. hardware.. pottery and ready made garments etc. 7. 6. railways. Types of Costing: . power supply undertakings. while an electricity supply undertaking measures costs per kilowatt hour. is called operating costing. Unit Costing (Output or Single Costing): It is a method of costing by the unit of production where manufacture is continuous and the units are identical. 8. municipal services. Transport companies use a ton-KM. Operating Cost: The method of costing applied in the costing of service rendered like transport companies. different only in shape. This is a method of costing production by processes in which a) the product of the process becomes the material of a subsequent process. confectionery.3.g. It may be employed in conjunction with batch. cement and brick work. 4. Departmental Costing: This is a method of ascertaining the cost of operating a department or cost centre. breweries. as is usually necessary to ensure working at minimum cost.. quarries. The cost of each product will have to be ascertained by adopting different types of costing. Eg. from which unit costs are determined for the units produced. B) the different products and by products are produced simultaneously at the same process. It is used where there are a variety of component parts separately produced subsequently assembled in a complex organization. the cost of running a Research Department. road carrier.. flour-mills. It is particularly useful where the production is put in hand in large quantities of standardized units. operation or process costing. bakeries. This method is suitable for such industries as collieries. medicines. Multiple Costing: This is sometimes refereed to as composite costing. hospitals. When all the units produced are identical. Job Costing from one product. hostels. and some other method for a third. 9. steel-works. It is useful for biscuit factories. Batch Costing: It is a form of job costing in which a batch of identical products constitutes the cost unit.
Unit of Cost: A unit of cost is a small unit which is natural to the business and with which expenditure may most conveniently identified. processes. It is used to ascertain the effect of changes in volume or type of output on profit. Cost accounting is inseparably connected with cost control with the help of cost data. 5. Cost Control Cost Control has been defined as the guidance and regulation by executive action of the costs of operating and undertaking. Uniform Costing: It is called as such when all or majority of the members of the same industry adopt a particular method of costing. 3. Cost Centre: A cost centre is a location. a) b) c) Physical Cost Control Managerial Cost Control Mechanic Cost Control Control over production and distribution The use of Cost data for regulating current operations The accounting techniques which are involved in providing for cost control. Its aim is to ascertain the costs actually incurred on work done in the past.1. It is regarded as an important derivative of cost accounting. Production cost centres engage in regular production where as service cost centres engage in regular production where as service cost centres serve as aids to production centres. 2. Pearson or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of cost control. Marginal Costing: It is the ascertainment of Marginal cost by differentiating between fixed and variable cost. It is important in determining the method of costing that should be installed in a business concern. Historical Costing: Historical costing is a costing under which costs are ascertain after they have been incurred. The unit adopted must be . Standard Costing: Standard Costing is a system of costing under which the cost of a product is determined in advance on the basis of predetermined standard. jobs or products. Cost centres may be production cost centres or service cost centres. Absorption Costing: It is the practice of charging all costs both fixed and variable to operations. 4. Cost Control may be classified under three broad divisions.
Behaviour. Functions: functions. in the volume. Materials. Cost Audit: Cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan. selling and distribution. Unit of production means the unit in which a commodity or service is divided. administration. All variable cost are controllable cost. some costs will increase A business perform a number of functions like manufacturing. costs are classified according to whether they are capable control or not. The broad divisions under this are i) ii) Controllable Costs: These costs are directly regulated by Management. They are . There are various ways of classifying costs. In otherwords the cost is composed of three elements namely material. while some costs will change but not in direct proportion to the change Controllability: Under this. labour and expenses. neither tool small nor too big. Cost audit is essential where cost accounting is carried out on a large scale. labour or wages and expenses.practical i. which display the Normality characteristic.e.. Uncontrollable Costs: Uncontrollable costs are those which cannot be influenced by management action. Variable Costs Semi-variable Costs Fixed Costs With the increase or decrease in production. Classification of Costs Cost classification is the process of grouping costs according to their common characteristics. a) b) c) 4. 3. Normality: There are two types of costs. Costs are classified on the basis of these or decrease. Elements: Costs are classified primarily according to the factors upon which expenditure is incurred viz. 2. Costs may be classified according to 1. 5. All the fixed costs are generally uncontrollable. It also assists the external auditor in the verification of the cost records and statements.
Hence direct expenditure includes the elements of Direct Materials. Overhead is further sub-divided into the following. Indirect Expenditure: Indirect expenditure includes the elements of Indirect Material. Indirect Expenditure comprising the above three elements is referred to by cost accountants as overhead. Office and Administrative Overhead. 1. Direct Labour and direct chargeable expenses. For the purpose of classification. 2. These elements of cost are further analysed into different elements as shown below. Works or factory overhead.i) ii) Normal Cost: It is cost which is normally incurred at given level of output I the conditions in which that level of output is normally attained. Elements of Costs Cost is composed of three elements namely materials. Indirect Labour and Indirect Expense. Direct Expenditure: Direct expenditure comprises those expenses which can be conveniently identified wholly with a particular unit of cost. Abnormal Costs: It is a cost which is not normally incurred at a given level output in the conditions in which that level of output is normally attined. labour and other expenses. Indirect expenditures includes all other expenses incurred for the undertaking as a whole and not identifiable wholly with a particular unit of cost. . From the above chart it is very clear that each element is classified into direct expenditure and indirect expenditure.
wood in furniture etc. Direct Materials + Direct Labour + Direct Expenses Works Cost or Factory Cost or Production Cost Office Cost or Cost of Production or Gross Cost Total Cost or Cost of Sales or Selling Cost Works or Factory Overhead + Administrative Overhead Office Cost or Cost of Production + Selling and Distribution Overhead Prime Cost + Works or Factory Overhead The difference between the cost of sales and selling price represents profit or loss 1. Cotton Waste. Example: Consumable Stores. Indirect Materials: Materials which do not form part of the product are called indirect materials.3. Lubricants. leather in bricks. Service Department. the following divisions of cost are obtained 1 Prime Cost or Flat Cost or Direct Cost This comprises Direct Materials. Direct Materials directly enter the production and from a part of cost of production. Direct materials: Direct Materials are those materials which can be identified in the product and can be conveniently measured and directly charged to the product. 2. Example: Flour in the bread. clay in bricks. By grouping the above elements of cost. Selling and Distribution Overhead. . materials. Direct labour and Direct Expenses 2 Works Cost or Factory Cost or Production Cost 3 Office Cost or Cost of Production or Gross Cost 4 Total Cost or Cost of Sales or Selling Cost Prime Cost This consists of Prime Cost plus works or factory expenses This consists of works cost plus administrative overhead This is made up of cost of production plus Selling and Distribution Overhead.
a manufacturer must have a detailed information regarding cost of raw materials. Tenders.. It must. Expenses again divided into i) Direct Expenses : Direct Expenses are those which can be identified and allocated to cost centres and cost units.3. he can prepare an estimated cost sheet. 5. Quotations and Estimations: Output costing is particularly employed when Tenders. wages different overheads. 4. ii) Administrative Overheads. 6. Overheads: Overheads consists of all expenses than direct expenses. These wages can be conveniently charged to particular products or Jobs or Process. Wages of Foreman. On the basis of this information. Before submitting a tender or fixing price. overheads comprise of all expenses incurred for or in connection with general organization of the whole or part of the undertaking. Depreciation. In general terms. Direct Labour: Direct Labour consists of wages paid to workers engaged in converting raw-materials into finished products. . Expenses: All the costs other than men and material is termed as expenses. Drawings etc. Such an estimate can incorporate the likely increase or decrease in price levels of various components of production. Insurance etc. Overheads may be sub-divided into i) works or Factory Overheads. Example: Patents. Time Keepers etc. iv) Distribution Overheads. Designs. Indirect Labour: Indirect Labour is not engaged in production process but only assist production operations. Specially required for such production. Example: Wages paid to workers engage in the production of a particular article. v) Research and Development Overheads. Quotations and Estimations have to be submitted. ii) Indirect Expenses : Direct Expenses are those which can be identified and allocated to cost centres and cost units. Analysts etc. and past profit. be noted here that the amount of overheads in these cases is to be estimated on some basis. Ex. Example: Salaries paid to clerical staff. Rent. iii) Selling Overheads. Salaries of Inspectors. however. Royalties. The manufacturer has to fix a competitive price keeping in view the likely impact of the inflationary trends on the inputs. Wages of Repairers.
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