cost accounting - an intro

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An introduction to Cost Accounting

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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.