Cost Accounting ~~ COST ACCOUNTING shal) 20h : Areca umtin CMadam LESSON NO. 1 WHE INTRODUCTION TO COST ACCOUNTING a development of cost accounting as a specialty within the field of accounting coincided with the increased complexity of business enterprises. The rise of multiply ovined enterprises produced the need for the development of objective and equitable procedures (financial accounting) forthe determination of nel income so that owners could determine their fair share of the proceeds (rom the enterprises. But it was the large firm producing numerous products and services that created the need for cost accounting Firmuise not income no longer provided sulicient information for making operating decisions. The use of common labour and facillies to produce a wide range of products made it extremely diticult fo determing the profitability of each of the products. tn tu, decisions concerning the expansion for contraction of | product iines become dificult Traditional cost accountants concerned themselves with developing reporting systems that wi yield! costs to thatthe proftabiliy of individual produc ines could be evaluated. Uniotunately. in toe many cases the sudy of procedures became an end inet, Accountants Irequent fos! sight of the objectives fr the procedures, “Acceptable” echriques were applied whether thoy were appropiate toa parelarsiaon in trn, te $0 erticgm of cast accounling as a discipline thal provided a great del ol axgely inelevant data to management Fortunately the disciptine is changing, and cost accountants are Becoming much more concerned wilh providing information that will help management meet the firm's goals. San ‘Accounting Defined: Managers of both profit seeking business and not-lorproftarganizaions nocd detaled accounting data ta mcutor daly operations: contol costs, and evalvales performance. The inlrmation most uselul (or these managetal functions is cost accounting data. Cost accounting i the process ol determining the ust of producing some product, providing some service, or undedaking some actly. Managers therefore depend heavily on cos! accountants, which are tained to accumulate cost information and report il to managers inthe form best suited for decision making ‘Cost accounting Is the identification, accumulation, assignment and analysis of production and aciviy CES data to provide information fr exernal reposting, internal planning and contra of ongoing operations, and special decisions. Cost accounting is concerned with providing information for financial accounting and management woe mung purposes. Cost accounting provides the product cost dala needed fo” inventory valalion 9 aoe lement ol financial position and for income determination (the deduction for cost of goods <0) in the income catoment also provides the cost data needed fer budgeting, tne contol of operations, and special decisions (such as pricing)‘ t MAB COST ACCOUNTING en of Cost Accounting and Financial Accounting Financial accounting resulls in reports to extemal parties on the status of assets, liabillies, and equilys results of operations; changes in owners’ equily; and cash flow for an accounting period. Credhlors, present owners, potential owners, employees, and the public at large use financial accounting reports in decision making. On the olher hand, cost aceaunting is concerned with the accumulation and anaiysis of cost information for both external financial accounting and internal management purposes. Financial information prepared for external use by financial accounting is closely regulated by the generally accepted accounting principles and the Companies Act to protect the interest of the users of these information. Cost accounting is far less restricted by outside inlluences than financial accounting, and is more responsive fo management needs. ‘Acomparison of financial accounting and cost accounting is given in the following table: ‘TABLE — 1: COMPARISON OF FINANCIAL ACCOUNTING AND COST ACCOUNTING Basis of Comparison Finanela! Accounting Cost Accounting (2) Objective Determination of profit or toss Mainly, communication of and financial position financial information to management for planning, controlling § & evaluating resources, (©) Forwhom prepared For owners & external users Predominantly for internal users (9) Umitations Ditect regulations Indirect regulations (@) Basis of valuation Historical cost Any form of monetary and physical units (€) When prepared Periodically mostly at the end As and when needed by the ‘of accounting period management (Perspective Entice organization Department, division, unit, or any traction of the entire ‘organization (9) Time period Current Both current and future a The Role of Cost Accounting The role of cost accounting has been identified in various terms by different peoples. According to Matz and Usry, cost accounting helps management in accomplishing the folowing tasks 1. Establishing costing methods and procedures that permit control and, if possible, reduction on ot improvement of costs, : 2, Aiding and participating in the creation and execution of plans and budgels. 3. Creating inventory values for costing and pricing as described by law and at times, controling physical quantities, Determining company costs and profit for an annual or shorter accounting period, in total or by segment, as determined by management or required by governmental regulations. Providing management with cost information in connection with problems thal involve a choice trom ‘among two or more alternative courses, that is, decision making. The decision may be to enter into a ew market, develop the costs for a new product, discontinue a product line, buy or lease ‘equipment, or take other actions to increase profits or solve problems, ® Q@ : 1. Plar 2 Non /X HormareICMAB. L COST ACCOUNTING Hormgren combines the five tasks listed above Into three purposes. 1. Planning and cortioting routine operations: 2. Non-foutine decis ons, policy making and long-range planning; and 3. Inventory valuation and income determination. Regardless of the specific wording of the objectives, purposes, or roles to be performed by cost ‘accounting personnel, here is general agreement on the overall uses of this information, The most interesting and challenging task to be performed relates to the non-routine decisions where two 9F mora alternative courses of action are possible. This is most challenging because it requires the accountant fo be creative in identifying possible decision situation, proper data for analysis, he analysis techniques for the data, and the weaknesses of the analysis, including the non-quantiable factors that must be considered, VY Cost Data for Management Purpose : ‘Management is faced with a mulitude of decisions: which products should be produced or discontinued, ‘what quantity should be produced, how to plan and control product costs, and how to price goods to be sold. To be effective in making decisions, management must have a detailed knowledge ot the cost activity within the company. Cost data is, therefore, a basic tool in the decision-making process. Cost data can be accumulated and presented in many ditferent forms and in varying degrees of deta, depending pon the needs of management. The same dala and format will not serve all purposes with equal eiciency, and how the data is used will vary with management's functions in dilferent companies, However, some of man: faliowing ‘agement’s activities are common to most manufacturing companies. They are the (1). Planning (2) Contiating (3) Income measuring (4) Decision making Methods and Techniques of Cost Accounting Several methods of cost accounting have been designed to suit the needs of individual business Conditions. The basic principles underlying all these methods are the same, namely, to collect and analyze the costs and to determine the costs for each cost cenire and/or cost unit. Basically, there are two main systems of cost accounting, viz. Job Order Cost Accounting and Pracess Cost Accounting and all other types are either variants of these two systems or are just techniques which are used ior particular Purposes, under specific condilions or specific occasions. {a) Job Order Cost Accounting; It is a methad of cost accounting whereby costs are compiled for a specific quantity of products, equipment, repairs, or other services thal move through the production. process as a continuously identifiable unil, Under this method, applicable material, direct labour, direct expense and usually a calculated portion of overhead being charged to job order. A job may be small or big: it may be an individual order from a customer of it may consist of products manufactured for keeping them in stock for eventual sale, Other Variations of Job Order Cost Accounting are: |) Batch Costing: in this method, the cost of a group of products Is ascertained. The unit of cost isa batch or group of identical products, instead of a single job, order, ot contract. The method is applicable to general engineering factories, which produce components in convenient economical batches for subsequent assembly or which manufacture comparatively small tems of products on mass scale, .