COST ACCOUNTING

WHAT IS COST ACCOUNTING :

Cost sheet is a statement prepared to show the different elements of cost. Preparation of cost sheet is
one of the functions of cost accounting.

CHARACTERISTIC 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.
5. Cost of incomplete work is also known from these accounts CHARACTERISTIC OF COST ACCOUNTS

OBJECTIVE OF COST ACCOUNTS :

1. To Know The Cost :

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. To Control The Cost :
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. 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.

TECHNIQUES OF COSTING :

1. Historical Cost: Under this method cost is ascertained on the basis of actual expenses incurred after
the production is complete. To ascertain the price of a tender or quotation , actual cost figures of
previous year are used as a basis. 2.Standard Cost: The standard cost of a commodity or a service is
estimated before actual production. After the production standard cost is compared with actual cost of
production and the amount and causes of variance are known. On the basis of actual costs necessary
adjustments are made in standard cost and future standard costs are fixed. 3. Marginal Costing: In
this technique only such expenses are included in cost which are directly related to production that is
which are variable to quantity of production. no part of fixed expenses is included in this cost. if the
production of the factory is increased in future within the production capacity, the additional cost of
production is called marginal cost. TECHNIQUES OF COSTING

METHODS OF COSTING :

1. Single Costing : This method is also known as output costing or unit costing. This method is used in
in such industries where only one item is produced in large quantities during the whole year
EXAMPLES cement, flour, sugar and coal. Under this method cost per tonne is computed. 2. Operating
Costing : In industries where no commodity is produced but public utility service is provided.
EXAMPLES railways, bus transport, and electric supply. 3. Process Costing : In the industries where
the production is completed through many processes or where the production may be sold after
completion of one or a few or all processes, this method of costing is used. EXAMPLES chemical ,
textile, and oil industries. 4. Departmental Costing : When in a factory more than one items are
manufactured , it is necessary to ascertain the cost of each item separately. For this purpose total
expenses are divided between various department on some fair basis and cost per unit of each
department is ascertained. EXAMPLES almirahs , boxes, bed, and tables. METHODS OF COSTING

ESSENTIAL FEATURE FOR THE SUCCESS OF COST ACCOUNTING :

For the success of cost accounting system the following matters are necessary 1. Necessary
information should be available to the department quickly and substantially. 2. There must be
cooperation in different production department. 3. The organization of production work must be fully
scientific. 4. Accounting work is done by qualified,, honest and efficient persons. 5. The management
of business is honest, and of good character. ESSENTIAL FEATURE FOR THE SUCCESS OF COST
ACCOUNTING

ELEMENTS OF COST :

ELEMENTS OF COSTS ELEMENTS OF COST LABOUR MATERIALS EXPENSES DIRECT MATERIAL

INDIRECT MATERIAL DIRECT COST DIRECT LABOUR INDIRECT LABOUR DIRECT EXPENSES INDIRECT
EXPENSES INDIRECT COST

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Presentation Transcript

Cost Accounting :

Cost Accounting An Introduction

Meaning of Cost,Costing andCost Accounting :

Meaning of Cost,Costing andCost Accounting Cost – The costing terminology of the Institute of Cost
and Works Accountants, London defines Cost as “the amount of expenditure (actual or notional)
incurred on or attributable to a given thing.” Thus, cost refers to something that must be sacrificed to
obtain a particular thing.

Costing :

Costing Costing – 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 :

Cost Accounting The Costing terminology of 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 centres and cost units. In its widest usage, it
embraces the preparation of statistical data, the application of cost control methods and the
ascertainment of the profitablilty of activities carried out or planned.
Cost Accounting :

Cost Accounting It has the following features- It is a process of accounting for costs. It records income
and expenditure relating to production of goods & services. It provides statistical data on the basis of
which future estimates are prepared and quotations are submitted.

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iv. It is concerned with cost ascertainment and cost control. v. It establishes budgets and standards
so that actual cost may be compared to find out deviations or variances. vi. It involves the
preparation of right information to the right person at the right time so that it may be helpful to the
management for planning, control and decision making.

Cost Accountancy :

Cost Accountancy It is the application of costing and cost accounting principles, methods and
techniques to the science, art and practice of cost control and the ascertainment of profitability. Cost
accountancy is the science, art and practice of a cost accountant.

Scope of Cost accountancy :

Scope of Cost accountancy It includes the following: i. Cost Ascertainment – It deals with the
collection and analysis of expenses, the measurement of production of the different products at the
different stages of manufacture and the linking up of production with the expenses.

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ii. Cost Accounting – It is the process of accounting for cost which begins with recording of
expenditure and ends with the preparation of statistical data. It is formal mechanism by means of
which costs of products or services are ascertained and controlled.

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iii. Cost Control – It is the guidance and regulation by executive action of the costs of operating an
undertaking. It aims at guiding the actual towards the line of targets; regulates the actuals if they
deviate or vary from the targets; this guidance and regulation is done by an executive action. The
cost can be controlled by standard costing, budgetary control, proper presentation and reporting of
cost data and cost audit.

Objectives of Cost Accounting :

Objectives of Cost Accounting To ascertain the cost per unit of the different products manufactured by
a business concern. To provide a correct analysis of cost both by process or operations and by
different elements of cost. 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.

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To provide requisite data and serve as a guide to price fixing of products manufactured or services
rendered. To ascertain the profitability of each of the products and advise management as to how
these profits can be maximised. To exercise effective control of stocks of raw materials, work-in-
progress, consumable stores and finished goods in order to minimise the capital locked up in these
stocks.

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To reveal sources of economy by installing and implementing a system of cost control for materials,
labour and overheads. To advise management on future expansion policies and proposed capital
projects. To present and interpret data for management planning, decision-making and control.

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To help in the preparation of budgets and implementation of budgetary control. To guide management
in the formulation and implementation of incentive bonus plans based on productivity and cost
savings. To supply useful data to management for taking various financial decisions such as
introduction of new products, replacement of labour by machine etc.

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To organise the internal audit system to ensure effective working of different departments. To
organise cost reduction programmes with the help of different departmental managers. To provide
specialised services of cost audit in order to prevent the errors and frauds and to facilitate prompt and
reliable information to management.

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To find out costing profit or loss. The above objectives can be re-grouped under three heads-
Ascertainment and analysis of cost and income by product, function and responsibility. Providing
useful data to management for taking decisions.

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(c) Accumulation and utilisation of cost data for control purposes to have the minimum possible cost
consistent with maintenance of quality. This objective is achieved through fixation of targets,
ascertainment of actuals, comparison of actuals with targets, analysis of reasons of deviations
between actuals and targets and reporting deviations to management for taking corrective action.

Importance & Advantages of Cost Accounting :

Importance & Advantages of Cost Accounting Profitable & unprofitable activities are disclosed and
steps can be taken to eliminate those activities from which little or no benefit is obtained. It enables a
concern to measure the efficiency and then to maintain and improve it. This is done with the help of
valuable data made available for the pupose of comparison.

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3. It provides information upon which estimates and tenders are based. It guides future production
policies. It helps in increasing profits. It enables a periodical determination of profits or losses. It
furnishes reliable data for comparing costs in different period, in different departments and processes.

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The exact cause of a decrease or increase in profit or loss can be detected. 9. Cost Accounting
discloses the relative efficiencies of different workers.

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A sound business concern with a good system of costing can attract more investors than a similar
concern without an adequate system of costing. Helpful to the Government in price fixation, price
control, tariff protection, wage level fixation, etc.

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Helpful to consumers in the form of lower prices of goods & services. 13. Helpful in judging the
efficiency of public enterprises to justify its running in the public sector.

Disadvantages of Cost Accounting :

Disadvantages of Cost Accounting Cost Accounting lacks a uniform procedure as different cost
accountants can give different interpretations according to their judgement. There are a large
numbers of estimates based on assumptions leading to arbitrary profits.

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It will supply future estimates but future is always uncertain. It is an expensive system which is
suitable only to the very large industries. It involves unnecessary paper work.

Cost Accounting Vs Financial Accounting :

Cost Accounting Vs Financial Accounting Financial Accounting It provides information about the
business in a general way .i.e. its profit and loss & financial position to owners & outsiders. Cost
Accounting It provides information to management for proper planning , control and decision-making.

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2. These financial accounts are kept in accordance with the requirements of Companies Act and
Income Tax Act. 2. These accounts are kept voluntarily to meet the requirements of management.

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3. FA lays emphasis on the recording aspect without attaching any importance to control. 3. CA
provides a detailed system of control for materials, labour & overhead costs with the help of standard
costing & Budgetory Control.
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FA reports operating results and financial position usually at the end of the year. 4. CA gives
information through cost reports to management as and when desired.

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5. Financial Accounts are the accounts for the whole business & disclose net profit or loss at the end.
5. 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.

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6. Financial Accounts relate to commercial transactions and include all expenses manufacturing,
selling,etc & are concerned with third party transactions which form the basis for payment or receipt
of cash. 6. Cost accounts relate to transactions of manufacture only and includes only expenses for
production and Cst Accounts are concerned with internal transaction which do not form part of
payment or receipt of cash.

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In FA, only monetary information is used. FA are not maintained with the object of fixation of selling
prices. In CA, Non-monetary information is also used. CA provides sufficient data for the fixation of
selling prices.

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FA deals with mainly actual facts & figures. In devising a system of FA reference can be made in case
of difficulty to the company law, case decisions, etc. CA deals partly with facts and figures and partly
with estimates. No such reference is possible. Guidance can be made only form conventions followed
by the cost Accountants.

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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. CA provide valuable information on the relative
efficiencies of various plants and machinery. In CA, Stocks are valued only at costs.

General Principles of Cost Accounting :

General Principles of Cost Accounting Cause – effect relationship should be established for each item
of cost. Charge of cost only after its incurrence. Cost accounting should give factual picture of
profitability of project. Past cost should not be set-off against future cost.

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Exclusion of abnormal cost from cost accounts. Reconciliation of Cost accounts with FA based on
double entry system is necessary.

Methods of Costing :

Methods of Costing Job Costing – ICMA London defines as ”that form of specific order costing, which
applies where work is undertaken to customer’s special requirements”. Contract Costing – For a large
job in size and in duration, this method is applied.

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3. Batch Costing – A batch contains a number of small orders passed in batches through the factory.
ICMA defines batch costing as “that form of specific order costing, which applies where similar articles
are manufactured in batches either for sale or for use within the undertaking”. In most cases, the
batch costing is similar to job costing.

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Process Costing – This method is applied in the factories where raw material is processed in different
stages to get a final product. 5. Single output / unit costing – Under this method, production is
continuous and units are identical.

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Service Costing – It is suitable for the firms that render service rather than product, such as railway,
hospital, canteens, etc. Multiple Costing – It is a combination of two or more of the above methods.
This system is adopted in the manufacturing concerns, which produces the parts of a product
separately and assemble it for a final product.

Types or Techniques of Costing :

Types or Techniques of Costing Uniform Costing – Using of same costing principles and practising by
several undertakings for common control. Standard Costing – To identify the positive or adverse
effect raised and the cause for it, by comparing the actual cost with standard cost.

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Marginal Costing – To ascertain the marginal cost by differentiating the fixed cost with variable cost.
Historical Costing – It is the ascertainment of costs after they have been incurred. It aims at
ascertaining costs actually incurred on work done in the past.

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Direct Costing – Under this practice, all direct costs i.e. variable costs and some fixed costs relating to
operations, processes or products are charged. Absorption Costing – Under this type, the practice of
charging all costs irrespective of its types is followed.
Essentials of a Good Costing System :

Essentials of a Good Costing System It should be simple, flexible, adaptable to the changing
conditions, and easy to understand by the entire firm. The system should be economically suitable to
the firm. It should facilitate the management to make comparison with experiences and or with other
concerns.

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Uniformity in maintenance of forms and statements should be followed. It should possess less clerical
work. It should have efficient material and labour control. It should have proper and sound plans for
the growth of the firm.

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The systems of cost and financial accounting must be facilitated to reconcile them in the easiest
manner. Cost accountant’s duties, liabilities and responsibilities should be defined clearly under good
costing system.

Responsibility of a Cost Accountant before installing cost system in a firm :

Responsibility of a Cost Accountant before installing cost system in a firm The system should relates
to Objectives of good costing system. Business Product manufactured. Organisation. Manufacturing
methods. Standard method to be followed in clerical work.

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7. Proper system of communication to be prepared to the management. Accounting system to be

followed. Economical conditions of the firm. Cost records. Stop Following